Zale Corporation Announces Third Quarter Earnings Results

DALLAS--(BUSINESS WIRE)--Zale Corporation (NYSE: ZLC), a leading specialty retailer of fine jewelry in North America, today announced a net loss of $3.1 million or $0.06 per share for the Company’s third quarter ended April 30, 2007. This loss includes, on an after-tax basis, a reduction of $6.9 million, or $0.14 per share due to the decline in revenue recognized from the change to a lifetime jewelry protection plan and a benefit of $1.6 million, or $0.03 per share for the net impact of derivative versus hedge accounting on its gold and silver contracts. Excluding these items, the Company reported earnings of $2.2 million, or $0.05 per diluted share.

“We believe retail in general is showing signs of weakness, and higher gas prices have directly impacted the discretionary income of the moderate customer. Given these overall macro trends, we are lowering our sales projections and, while cautious, we are maintaining our current earnings guidance for fourth quarter.”

For the same period last year, the Company reported net earnings of $16.8 million, or $0.35 per diluted share. This included, on an after-tax basis, (1) a benefit of $8.4 million, or $0.17 per diluted share, resulting from the settlement of certain retirement benefit obligations partially offset by (2) a charge for severance of $2.2 million, or $0.04 per diluted share and (3) a charge of $0.9 million, or $0.02 per diluted share, related to the closing of certain Bailey Banks & Biddle locations. Excluding these items, third quarter earnings in 2006 amounted to $11.6 million, or $0.24 per diluted share.

Revenues for the quarter ended April 30, 2007 were $511.9 million compared to $526.9 million last year, a decrease of 2.9%. Revenues recognized were $8.7 million or 1.7% less than prior year as a result of the change made in the method of amortizing jewelry protection plan sales. Comparable store sales for the third quarter decreased 3.4%.

Year-to-date revenues were flat at $1.95 billion, compared to the same period last year. Excluding revenues of $24.3 million related to Bailey Banks & Biddle store closures in the second quarter of last year, year-to-date revenues increased 1.3%. Year-to-date comparable store sales decreased 0.1%. Year-to-date earnings totaled $58.6 million or $1.20 per diluted share. These earnings treat forward commodity contracts as derivatives under SFAS 133 and reflect the change in revenue recognition for jewelry protection plans as a result of the change in the product sold during the year. The after-tax impact of derivative versus hedge accounting treatment was a $0.6 million loss, or $0.01 per diluted share and the negative impact on revenue recognized from the sale of jewelry protection plans was $16.0 million or $0.33 per diluted share. Excluding these items, year-to-date net earnings were $75.3 million, or $1.54 per diluted share. For the same period last year, earnings were $81.0 million, or $1.63 per diluted share. These prior year earnings include, on an after-tax basis, (1) costs related to the closing of Bailey Banks & Biddle stores of $21.4 million, or $0.43 per diluted share, and (2) severance payments of $7.6 million, or $0.16 per diluted share; this was partially offset by (3) a tax benefit from repatriated Canadian earnings under the American Jobs Creation Act of $11.5 million, or $0.23 per diluted share and (4) an $8.4 million, or $0.17 per diluted share, benefit resulting from the settlement of certain retirement benefit obligations. Excluding these items, the Company reported year-to-date earnings of $90.1 million last year, or $1.82 per diluted share.

“While comp store sales decreased 3.4%, a focus on maximizing gross margin dollars and good expense control contributed to earnings in-line with expectations for the quarter,” commented Betsy Burton, Chief Executive Officer.

Ms. Burton continued, “We believe retail in general is showing signs of weakness, and higher gas prices have directly impacted the discretionary income of the moderate customer. Given these overall macro trends, we are lowering our sales projections and, while cautious, we are maintaining our current earnings guidance for fourth quarter.”

The Company projects a fourth quarter comparable store sales decrease of 2% to 3% and GAAP earnings per share in the range of ($0.11) to ($0.15). The guidance includes an estimated ($0.12) impact due to the decline in revenue recognized from the change to its jewelry protection plan offering and approximately $0.02 for the net impact of derivative versus hedge accounting. Excluding these items, the Company continues to expect earnings per share in the range of ($0.01) to ($0.05) per share.

A conference call will be held today at 9:00 a.m. Eastern Time. Parties interested in participating should dial 706-643-7467 five minutes prior to the scheduled start time. A webcast of the call, as well as a replay, will be available on the Company’s Web site at www.zalecorp.com. For additional information, contact Investor Relations at 972-580-5047.

Zale Corporation is a leading specialty retailer of fine jewelry in North America operating approximately 2,300 retail locations throughout the United States, Canada and Puerto Rico, as well as online. Zale Corporation’s brands include Zales Jewelers, Zales Outlet, Gordon’s Jewelers, Bailey Banks & Biddle Fine Jewelers, Peoples Jewellers, Mappins Jewellers and Piercing Pagoda. Zale also operates online at www.zales.com, www.gordonsjewelers.com and www.baileybanksandbiddle.com. Additional information on Zale Corporation and its brands is available at www.zalecorp.com.

This release contains forward-looking statements, including statements regarding the Company's turnaround initiatives and their effects, and sales and earnings guidance for the fourth quarter of fiscal year 2007. Forward-looking statements are not guarantees of future performance and a variety of factors could cause the Company's actual results to differ materially from the results expressed in the forward-looking statements. These factors include, but are not limited to: if the general economy performs poorly, discretionary spending on goods that are, or are perceived to be, "luxuries" may not grow and may even decrease; the concentration of a substantial portion of the Company's sales in three, relatively brief selling seasons means that the Company's performance is more susceptible to disruptions; most of the Company's sales are of products that include diamonds, precious metals and other commodities, and fluctuations in the availability and pricing of commodities could impact the Company's ability to obtain and produce products at favorable prices; the Company's sales are dependent upon mall traffic; the Company operates in a highly competitive industry; changes in regulatory requirements or in the Company’s private label credit card arrangement with Citi may increase the cost of or adversely affect the Company's operations and its ability to provide consumer credit and write credit insurance; acquisitions involve special risks, including the possibility that the Company may not be able to integrate acquisitions into its existing operations. For other factors, see the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended July 31, 2006. The Company disclaims any obligation to update or revise publicly or otherwise any forward-looking statements to reflect subsequent events, new information or future circumstances.

ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED SELECTED FINANCIAL INFORMATION
(Unaudited, Dollars in thousands, except per share amounts)
	Three Months Ended		Nine Months Ended
	April 30,		April 30,
	2007	2006	2007	2006
Revenues	$ 511,866	$ 526,895	$ 1,948,850	$ 1,948,283
Comparable Store Sales %	3.4%	2.5%	-0.1%	1.1%
Cost of Sales	250,935	254,361	953,550	958,266
Gross Margin	260,931	272,534	995,300	990,017
% of Revenue	51.0%	51.7%	51.1%	50.8%
Selling, General and Administrative Expenses	244,188	241,348	827,802	835,758
% of Revenue	47.7%	45.8%	42.5%	42.9%
Cost of Insurance Operations	2,070	1,598	5,179	5,014
Depreciation and Amortization Expense	15,450	14,935	45,947	44,798
Benefit from Settlement of Retirement Plan	---	(13,403)	---	(13,403)
Derivative (Gain)/Loss	(155)	---	7,072	---
Operating Earnings	(622)	28,056	109,300	117,850
% of Revenue	-0.1%	5.3%	5.6%	6.0%
Interest Expense, Net	4,346	2,449	15,239	7,685
Earnings(Loss) Before Income Taxes	(4,968)	25,607	94,061	110,165
Income Taxes	(1,902)	8,776	35,461	29,180
Net (Loss)Earnings	$ (3,066)	$ 16,831	$ 58,600	$ 80,985
Basic Earnings Per Common Share:
Net Earnings Per Share	$ (0.06)	$ 0.35	$ 1.21	$ 1.65
Diluted Earnings Per Common Share:
Net Earnings Per Share	$ (0.06)	$ 0.35	$ 1.20	$ 1.63
Weighted Average Number of Common
Basic	48,975	47,914	48,580	49,066
Diluted	48,975	48,342	48,994	49,578
Reconciliation of GAAP Information to Non-GAAP basis 3rd Quarter FY07, diluted:
	Three Months Ended		Nine Months Ended
	April 30, 2007		April 30, 2007
	Amount	Per Share	Amount	Per Share
GAAP Net Earnings(Loss)	$ (3,066)	(0.06)	$ 58,600	1.20
Impact of Derivatives (1)	(1,568)	(0.03)	641	0.01
Change in Revenue Recognition	6,903	0.14	16,041	0.33
Non-GAAP Net Earnings(Loss)	$ 2,269	0.05	$ 75,282	1.54

(1) The Company does not utilize hedge accounting for its derivatives. As a result, changes in the fair market value of derivatives and the settlement of derivative contracts are recorded directly to earnings. This adjustment shows the impact on net earnings had hedge accounting been utilized.

Reconciliation of GAAP Information to Non-GAAP basis 3rd Quarter FY06, diluted:
	Three Months Ended		Nine Months Ended
	April 30, 2006		April 30, 2006
	Amount	Per Share	Amount	Per Share
GAAP Net Earnings Per Above	$ 16,831	0.35	$ 80,985	1.63
Benefit from Settlement of Retirement Plan	(8,417)	(0.17)	(8,417)	(0.17)
CEO and COO Severance Charges	2,240	0.04	7,578	0.16
Bailey Banks & Biddle Store Closing Charges	912	0.02	21,397	0.43
Earnings before Tax Repatriation	$ 11,566	0.24	$ 101,543	2.05
Benefit from Tax Repatriation	---	---	(11,465)	(0.23)
Non-GAAP Net Earnings	$ 11,566	0.24	$ 90,078	1.82

ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET DATA
(Unaudited, Dollars in thousands)
			Difference
	April 30,	April 30,	April 2007 vs April 2006
	2007	2006	Amount	Percent
ASSETS
Current Assets:
Cash and cash equivalents	$ 52,621	$ 59,920	$ (7,299)	-12.2%
Merchandise inventories	1,086,487	938,050	148,437	15.8%
Other current assets	111,494	83,968	27,526	32.8%
Total current assets	1,250,602	1,081,938	168,664	15.6%
Property and equipment	301,814	290,433	11,381	3.9%
Goodwill	97,901	97,014	887	0.9%
Other assets	35,883	34,824	1,059	3.0%
Total Assets	$ 1,686,200	$ 1,504,209	$ 181,991	12.1%
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities	$ 320,341	$ 359,356	$ (39,015)	-10.9%
Deferred tax liability	70,073	52,059	18,014	34.6%
Total current liabilities	390,414	411,415	(21,001)	-5.1%
Long-term debt	290,050	204,859	85,191	41.6%
Deferred tax liability	19,125	4,538	14,587	321.4%
Other liabilities	95,121	51,791	43,330	83.7%
Contingencies
Stockholders’ Investment:
Common stock	492	538	(46)	-8.6%
Additional paid-In capital	136,015	107,454	28,561	26.6%
Accumulated other comprehensive income	37,524	37,392	132	0.4%
Accumulated earnings	867,459	836,222	31,237	3.7%
	1,041,490	981,606	59,884	6.1%
Treasury stock	(150,000)	(150,000)	0	0.0%
Total stockholders’ investment	891,490	831,606	59,884	7.2%
Total liabilities and stockholders’ investment	$ 1,686,200	$ 1,504,209	$ 181,991	12.1%