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Zale Corp. Reports Operating Results (10-Q)

June 09, 2009 | About:

Zale Corp. (ZLC) filed Quarterly Report for the period ended 2009-04-30.

Zale Corporation is a specialty retailer of fine jewelry. The company operates under four brand names: Zales Jewelers Gordon's Jewelers Bailey Banks & Biddle Fine Jewelers and Peoples Jewellers. Zales Jewelers provides traditional moderately priced jewelry. Gordon's Jewelers offers contemporary merchandise targeted to regional preferences. Bailey Banks & Biddle Fine Jewelers operates upscale jewelry stores which are considered among the finest jewelry stores in their markets. Peoples Jewellers offers traditional moderately priced jewelry to customers across Canada. Zale Corp. has a market cap of $137.2 million; its shares were traded at around $4.29 with and P/S ratio of 0.1. Zale Corp. had an annual average earning growth of 1.4% over the past 10 years.

Highlight of Business Operations:

We believe the three initiatives we implemented over the last year remain critical to our long-term success. The initiatives include (1) focusing on our core customer by providing clarity and value through compelling merchandise assortments, cleaner in-store presentation and an improved marketing message, (2) enhancing our operational effectiveness to ensure that our people and processes are aligned and focused on providing outstanding products and customer service, and (3) maintaining financial discipline with a continued focus on free cash flow generation and prudent use of capital. We believe the most important of these initiatives under the current economic environment is maintaining financial discipline. Accordingly, in February 2009 we announced inventory and cost savings initiatives expected to be realized through fiscal 2010 totaling approximately $75 million and $65 million, respectively. This is in addition to the $100 million in permanent inventory reductions and the $65 million plus in cost savings announced in February 2008. The $100 million of permanent inventory reductions associated with the February 2008 initiative was achieved in July 2008. The additional $75 million of inventory reductions is to be achieved through fiscal 2010 by reallocating inventory in closed stores and improved productivity through more efficient store level allocation at existing stores. As of April 30, 2009, the cost savings realized since inception of the February 2009 and 2008 initiatives totaled approximately $9 million and $59 million, respectively. The cost savings under both initiatives consist primarily of selling, general and administrative expenses. We continue to believe that we will achieve our goals under both initiatives.

During the nine month period ended April 30, 2009, the average Canadian currency rate decreased by approximately 18 percent relative to the U.S. dollar. Due to our Canadian operations being reported at the average U.S. dollar equivalent, the decline in the currency rate resulted in a $29.1 million decrease in reported revenues, substantially offset by a decrease in reported cost of sales and selling, general and administrative expenses of $14.4 million and $10.3 million, respectively. In addition, as a result of the decline in the Canadian currency rate we recorded losses associated with the settlement of Canadian accounts payable totaling $7.6 million during the nine months ended April 30, 2009 compared to $0.4 million during the same period in the prior year.

Selling, General and Administrative. Included in SG&A are store operating, advertising, buying and general corporate overhead expenses. SG&A was 50.1 percent of revenues for the nine months ended April 30, 2009 compared to 44.8 percent for the same period last year. On a dollar basis, SG&A decreased by $39.8 million to $713.0 million for the nine months ended April 30, 2009. The percentage increase is due to lower total revenues during the nine months compared to the same period in the prior year. The dollar decrease is the result of our expense reduction initiatives totaling $47.2 million for the nine months ended April 30, 2009, partially offset by a $5.0 million increase in legal and severance costs and a $7.2 million increase in foreign currency losses.

Our cash requirements are funded through cash flows from operations, funds available under our U.S. revolving credit facility and vendor payment terms. As of April 30, 2009, our U.S. revolving credit facility provided for borrowings up to $500 million. The borrowings under the U.S. facility are capped at the lesser of (1) 73 percent of the cost of eligible inventory during October through December and 69 percent for the remainder of the year (minus certain reserves that may be established under the credit facility), plus 85 percent of credit card receivables or (2) 90 percent of the appraised liquidation value of eligible inventory (minus certain reserves that may be established under the credit facility), plus 85 percent of credit card receivables. The U.S. facility also provides for increased seasonal borrowing capabilities of up to $100 million and contains an accordion feature that allows us to permanently increase the facility size in $25 million increments up to another $100 million. Under the terms of the U.S. credit facility, we are required to maintain $50 million of borrowing availability or satisfy a minimum fixed charge coverage ratio of 1.1:1.0 for an applicable 12 month reference period. We do not currently meet the minimum fixed charge coverage ratio. Vendor purchase order terms typically require payment within 60 days.

During the nine months ended April 30, 2009, we invested approximately $6.7 million in capital expenditures to open 14 new stores in the Fine Jewelry segment. We invested approximately $16.1 million to remodel, relocate and refurbish 29 stores in our Fine Jewelry segment, 7 stores in our Kiosk Jewelry segment and to complete store enhancement projects. We also invested $2.3 million in infrastructure, primarily related to our information technology and distribution centers. We anticipate investing approximately $4.9 million in capital expenditures for the remainder of fiscal year 2009, including $2.4 million in existing store refurbishments and approximately $2.5 million in capital investments related to information technology infrastructure and support operations.

Foreign Currency Risk. We are not subject to substantial currency fluctuations because most of our purchases are U.S. dollar-denominated. However, as a result of our Canadian operations, we are exposed to market risk from currency rate exposures which may adversely affect our financial position, results of operations and cash flows. During the nine months ended April 30, 2009, the average Canadian currency rate decreased by approximately 18 percent relative to the U.S. dollar. Due to our Canadian operations being reported at the average U.S. dollar equivalent, the decline in the currency rate resulted in a $29.1 million decrease in reported revenues, substantially offset by a decrease in reported cost of sales and selling, general and administrative expenses of $14.4 million and $10.3 million, respectively. In addition, as a result of the decline in the Canadian currency rate we recorded losses associated with the settlement of Canadian accounts payable totaling $7.6 million during the nine months ended April 30, 2009 compared to $0.4 million during the same period in the prior year.

Read the The complete ReportZLC is in the portfolios of Robert Rodriguez of FPA Capital.

Rating: 3.3/5 (11 votes)

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