Zale Corp. (ZLC, Financial) filed Quarterly Report for the period ended 2010-10-31.
Zale Corp. has a market cap of $101.4 million; its shares were traded at around $3.16 with and P/S ratio of 0.1. ZLC is in the portfolios of Steven Cohen of SAC Capital Advisors.
Interest Expense. Interest expense as a percentage of revenues for the quarters ended October 31, 2010 and 2009 was 16.9 percent and 0.6 percent, respectively. Interest expense increased by $53.4 million to $55.3 million for the quarter ended October 31, 2010 as compared to the same period in prior year. The increase is primarily due to a charge totaling $45.8 million associated with the first amendment to our Senior Secured Term Loan (the Term Loan) on September 24, 2010. In accordance with ASC 470-50, Debt-Modifications and Extinguishments, the amendment is considered a significant modification which required us to account for the Term Loan and related unamortized costs as an extinguishment and record the amended Term Loan at fair value. The charge consisted of $20.3 million related to the unamortized discount associated with the warrants issued in connection with the Term Loan, a $12.5 million amendment fee, $10.3 million related to the unamortized debt issuance costs associated with the Term Loan and $2.7 million related to the prepayment premium and other costs associated with the amendment. The remaining $7.6 million increase in interest expense is due primarily to interest related to the Term Loan totaling $5.6 million and an increase in the weighted average effective interest rate associated with the revolving credit agreement to 3.4 percent as compared to 1.6 percent for the same period in the prior year.
On May 10, 2010, we entered into an agreement to amend and restate various terms of the revolving credit agreement with Bank of America, N.A. and certain other lenders. The Amended and Restated Revolving Credit Agreement (the Revolving Credit Agreement) consists of two tranches: (a) an extended tranche totaling $530 million, including seasonal borrowings of $88 million, maturing on April 30, 2014 and (b) a non-extending tranche totaling $120 million, including seasonal borrowings of $20 million, maturing on August 11, 2011. The commitments under the agreement from both tranches total $650 million, including seasonal borrowings of $108 million. Borrowings under the Revolving Credit Agreement 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 (less certain reserves that may be established under the agreement), plus 85 percent of eligible credit card receivables or (2) 90 percent of the appraised liquidation value of eligible inventory (less certain reserves that may be established under the agreement), plus 85 percent of eligible credit card receivables. On January 1, 2011, the rate applied to the appraised liquidation value of eligible inventory will be reduced to 87.5 percent. The Revolving Credit Agreement also contains an accordion feature that allows us to permanently increase borrowings up to an additional $100 million, subject to approval by our lenders and certain other requirements. The Revolving Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit card receivables and certain other assets and a second priority security interest and lien on all other assets. At October 31, 2010, we had borrowing availability under the Revolving Credit Agreement of $207.6 million.
On September 24, 2010, we amended the Term Loan with Z Investment Holdings, LLC. The amendment eliminated the Minimum Consolidated EBITDA covenant and our option to pay a portion of future interest payments in kind subsequent to July 31, 2010. As a result, all future interest payments will be made in cash. In consideration for the amendment, we paid Z Investment Holdings, LLC an aggregate of $25.0 million, of which $11.3 million was used to pay down the outstanding principal balance of the Term Loan, $1.2 million was a prepayment premium and $12.5 million was an amendment fee. The outstanding balance of the Term Loan after the amendment totaled $140.5 million. In accordance with ASC 470-50, DebtModifications and Extinguishments, the amendment is considered a significant modification which required us to account for the Term Loan and related unamortized costs as an extinguishment and record the amended Term Loan at fair value. As a result, we recorded a charge to interest expense totaling $45.8 million in the first quarter of fiscal year 2011. The charge consists of $20.3 million related to the unamortized discount associated with the warrants issued in connection with the Term Loan, the $12.5 million amendment fee, $10.3 million related to the unamortized debt issuance costs associated with the Term Loan and $2.7 million related to the prepayment premium and other costs associated with the amendment.
The Term Loan contains various covenants, as defined in the agreement, including maintaining minimum store contribution thresholds for Piercing Pagoda and Zale Canada, as defined, and restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions and asset sales. The Piercing Pagoda minimum store contribution threshold for the twelve month period ending January 31, 2011, April 30, 2011 and July 31, 2011 is $18 million, $19 million and $20 million, respectively. The Zale Canada minimum store contribution threshold for the twelve month period ending January 31, 2011, April 30, 2011 and July 31, 2011 is CAD $27 million, CAD $28 million and CAD $30 million, respectively. The Term Loan also requires us to maintain minimum liquidity, as defined, of $120 million through December 31, 2010 and $135 million thereafter.
During the three months ended October 31, 2010, we invested approximately $0.3 million in capital expenditures to convert three stores to different nameplates and open one store in Fine Jewelry. We also opened two stores in Kiosk Jewelry. We invested approximately $2.2 million to remodel, relocate and refurbish three stores in Fine Jewelry and to complete store enhancement projects. We also invested $0.3 million in infrastructure, primarily related to our information technology. We anticipate investing approximately $14.4 million in capital expenditures for the remainder of fiscal year 2011, including $9.0 million to open eight new kiosks and refurbish existing stores and approximately $5.4 million in capital investments related to information technology infrastructure and support operations.
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Zale Corp. has a market cap of $101.4 million; its shares were traded at around $3.16 with and P/S ratio of 0.1. ZLC is in the portfolios of Steven Cohen of SAC Capital Advisors.
Highlight of Business Operations:
in the prior year. SG&A decreased by $7.9 million to $195.2 million for the quarter ended October 31, 2010. The decrease is the result of a decrease in rent and occupancy costs of $2.0 million due to store closures and rent reductions negotiated with our landlords, a $1.7 million decrease in payroll costs primarily due to lower head count, a $1.5 million decrease related to the timing of promotional costs and a $4.1 million decrease in professional fees associated with the fiscal year 2009 financial statement restatement and the related SEC investigation. The decrease was partially offset by a $2.2 million increase in healthcare costs.Interest Expense. Interest expense as a percentage of revenues for the quarters ended October 31, 2010 and 2009 was 16.9 percent and 0.6 percent, respectively. Interest expense increased by $53.4 million to $55.3 million for the quarter ended October 31, 2010 as compared to the same period in prior year. The increase is primarily due to a charge totaling $45.8 million associated with the first amendment to our Senior Secured Term Loan (the Term Loan) on September 24, 2010. In accordance with ASC 470-50, Debt-Modifications and Extinguishments, the amendment is considered a significant modification which required us to account for the Term Loan and related unamortized costs as an extinguishment and record the amended Term Loan at fair value. The charge consisted of $20.3 million related to the unamortized discount associated with the warrants issued in connection with the Term Loan, a $12.5 million amendment fee, $10.3 million related to the unamortized debt issuance costs associated with the Term Loan and $2.7 million related to the prepayment premium and other costs associated with the amendment. The remaining $7.6 million increase in interest expense is due primarily to interest related to the Term Loan totaling $5.6 million and an increase in the weighted average effective interest rate associated with the revolving credit agreement to 3.4 percent as compared to 1.6 percent for the same period in the prior year.
On May 10, 2010, we entered into an agreement to amend and restate various terms of the revolving credit agreement with Bank of America, N.A. and certain other lenders. The Amended and Restated Revolving Credit Agreement (the Revolving Credit Agreement) consists of two tranches: (a) an extended tranche totaling $530 million, including seasonal borrowings of $88 million, maturing on April 30, 2014 and (b) a non-extending tranche totaling $120 million, including seasonal borrowings of $20 million, maturing on August 11, 2011. The commitments under the agreement from both tranches total $650 million, including seasonal borrowings of $108 million. Borrowings under the Revolving Credit Agreement 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 (less certain reserves that may be established under the agreement), plus 85 percent of eligible credit card receivables or (2) 90 percent of the appraised liquidation value of eligible inventory (less certain reserves that may be established under the agreement), plus 85 percent of eligible credit card receivables. On January 1, 2011, the rate applied to the appraised liquidation value of eligible inventory will be reduced to 87.5 percent. The Revolving Credit Agreement also contains an accordion feature that allows us to permanently increase borrowings up to an additional $100 million, subject to approval by our lenders and certain other requirements. The Revolving Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit card receivables and certain other assets and a second priority security interest and lien on all other assets. At October 31, 2010, we had borrowing availability under the Revolving Credit Agreement of $207.6 million.
On September 24, 2010, we amended the Term Loan with Z Investment Holdings, LLC. The amendment eliminated the Minimum Consolidated EBITDA covenant and our option to pay a portion of future interest payments in kind subsequent to July 31, 2010. As a result, all future interest payments will be made in cash. In consideration for the amendment, we paid Z Investment Holdings, LLC an aggregate of $25.0 million, of which $11.3 million was used to pay down the outstanding principal balance of the Term Loan, $1.2 million was a prepayment premium and $12.5 million was an amendment fee. The outstanding balance of the Term Loan after the amendment totaled $140.5 million. In accordance with ASC 470-50, DebtModifications and Extinguishments, the amendment is considered a significant modification which required us to account for the Term Loan and related unamortized costs as an extinguishment and record the amended Term Loan at fair value. As a result, we recorded a charge to interest expense totaling $45.8 million in the first quarter of fiscal year 2011. The charge consists of $20.3 million related to the unamortized discount associated with the warrants issued in connection with the Term Loan, the $12.5 million amendment fee, $10.3 million related to the unamortized debt issuance costs associated with the Term Loan and $2.7 million related to the prepayment premium and other costs associated with the amendment.
The Term Loan contains various covenants, as defined in the agreement, including maintaining minimum store contribution thresholds for Piercing Pagoda and Zale Canada, as defined, and restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions and asset sales. The Piercing Pagoda minimum store contribution threshold for the twelve month period ending January 31, 2011, April 30, 2011 and July 31, 2011 is $18 million, $19 million and $20 million, respectively. The Zale Canada minimum store contribution threshold for the twelve month period ending January 31, 2011, April 30, 2011 and July 31, 2011 is CAD $27 million, CAD $28 million and CAD $30 million, respectively. The Term Loan also requires us to maintain minimum liquidity, as defined, of $120 million through December 31, 2010 and $135 million thereafter.
During the three months ended October 31, 2010, we invested approximately $0.3 million in capital expenditures to convert three stores to different nameplates and open one store in Fine Jewelry. We also opened two stores in Kiosk Jewelry. We invested approximately $2.2 million to remodel, relocate and refurbish three stores in Fine Jewelry and to complete store enhancement projects. We also invested $0.3 million in infrastructure, primarily related to our information technology. We anticipate investing approximately $14.4 million in capital expenditures for the remainder of fiscal year 2011, including $9.0 million to open eight new kiosks and refurbish existing stores and approximately $5.4 million in capital investments related to information technology infrastructure and support operations.
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