Zale 10Q 2005 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended January 31, 2005

Zale Corporation

A Delaware Corporation
IRS Employer Identification No. 75-0675400
SEC File Number 1-04129

901 W. Walnut Hill Lane
Irving, Texas 75038-1003
(972) 580-4000

Zale Corporation (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Act”) during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

As of March 1, 2005, 50,486,740 shares of Zale Corporation’s Common Stock, par value $.01 per share, were outstanding.

Zale Corporation is an accelerated filer.

ZALE CORPORATION AND SUBSIDIARIES

Index


		Page
Part I. Financial Information

Item 1. Financial Statements (unaudited):

Consolidated Statements of Operations		3

Consolidated Balance Sheets		4

Consolidated Statements of Cash Flows		5

Notes to Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3. Quantitative and Qualitative Disclosures About Market Risk		22

Item 4. Controls and Procedures		23

Part II. Other Information		23

Item 1. Legal Proceedings		23

Item 2. Issuer Purchases of Equity Securities		23

Item 6. Exhibits		24

Signature		25

Certifications		26
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Certification of Principal Executive Officer
Certification of Principal Financial Officer

Part I. Financial Information

Item 1. Financial Statements

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
(unaudited)


	Three Months Ended				Six Months Ended
	January 31,				January 31,
	2005		2004		2005		2004
Total Revenues	$	972,332	$	949,023	$	1,395,106	$	1,365,667
Costs and Expenses:
Cost of Sales		480,229		469,936		685,509		675,626
Selling, General and Administrative Expenses		315,937		307,122		532,968		514,911
Cost of Insurance Operations		1,432		1,345		2,868		2,961
Depreciation and Amortization Expense		15,027		14,143		29,231		28,025

Operating Earnings		159,707		156,477		144,530		144,144
Interest Expense, Net		2,257		2,046		4,432		4,382

Earnings Before Income Taxes		157,450		154,431		140,098		139,762
Income Taxes		58,253		57,136		51,833		51,712

Net Earnings	$	99,197	$	97,295	$	88,265	$	88,050


Earnings Per Common Share – Basic:
Net Earnings Per Share	$	1.94	$	1.86	$	1.71	$	1.66

Earnings Per Common Share – Diluted:
Net Earnings Per Share	$	1.91	$	1.83	$	1.69	$	1.63

Weighted Average Number of Common Shares Outstanding:
Basic		51,102		52,198		51,499		52,986
Diluted		51,885		53,156		52,221		53,909

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)


	January 31,			July 31,		January 31,
	2005			2004		2004
ASSETS
Current Assets:
Cash and Cash Equivalents	$	55,541		$	63,124	$	55,643
Merchandise Inventories		956,956			826,824		872,007
Other Current Assets		55,611			63,956		48,257

Total Current Assets		1,068,108			953,904		975,907
		2
Property and Equipment, Net		280,300			266,688		261,730
Goodwill, Net		90,025			85,583		85,730
Other Assets		35,318			35,909		37,337
Deferred Tax Asset, Net		—			—		20,766

Total Assets	$	1,473,751		$	1,342,084	$	1,381,470


LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current Liabilities:
Accounts Payable and Accrued Liabilities	$	464,668		$	319,599	$	417,453
Deferred Tax Liability, Net		51,313			51,417		46,187

Total Current Liabilities		515,981			371,016		463,640

Non-current Liabilities		40,035			42,486		99,876
Deferred Tax Liability, Net		5,781			4,968		—
Long-term Debt		135,800			197,500		138,700

Commitments and Contingencies		—			—		—
Stockholders’ Investment:
Common Stock		523			521		426
Additional Paid-In Capital		69,431			63,661		600,703
Accumulated Other Comprehensive Income		21,175			13,470		15,236
Accumulated Earnings		736,727			648,462		677,172
Deferred Compensation		(1,702	)		—		—

		826,154			726,114		1,293,537
Treasury Stock		(50,000	)		—		(614,283	)

Total Stockholders’ Investment		776,154			726,114		679,254


Total Liabilities and Stockholders’ Investment	$	1,473,751		$	1,342,084	$	1,381,470

See Notes to Consolidated Financial Statements.

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)


	Six Months Ended			Six Months Ended
	January 31,			January 31,
	2005			2004
Net Cash Flows from Operating Activities:
Net earnings	$	88,265		$	88,050
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization expense		29,231			28,025
Amortization of long-term debt issuance costs		695			655
Deferred compensation expense		365			—
Loss on disposition of property and equipment		2,628			1,321
Impairment of fixed assets		1,273			2,207
Changes in assets and liabilities:
Merchandise inventories		(125,178	)		(69,457	)
Other current assets		8,642			4,372
Other assets		(1,120	)		66
Accounts payable and accrued liabilities		141,056			110,181
Non-current liabilities		(2,451	)		(3,466	)

Net Cash Provided By Operating Activities		143,406			161,954


Net Cash Flows from Investing Activities:
Additions to property and equipment		(47,318	)		(25,895	)
Proceeds from sales of fixed assets		2,252			—
Purchase of available-for-sale investments		(1,317	)		(2,890	)
Proceeds from sale of available-for-sale investments		1,496			3,891

Net Cash Used In Investing Activities		(44,887	)		(24,894	)


Net Cash Flows from Financing Activities:
Borrowings under revolving credit agreement		810,300			314,900
Payments on revolving credit agreement		(872,000	)		(360,600	)
Proceeds from exercise of stock options		3,706			33,723
Purchase of common stock		(50,000	)		(105,217	)

Net Cash Used In Financing Activities		(107,994	)		(117,194	)

Effect of Exchange Rate Changes on Cash		1,892			504
Net (Decrease)/Increase in Cash and Cash Equivalents		(7,583	)		20,370
Cash and Cash Equivalents at Beginning of Period		63,124			35,273

Cash and Cash Equivalents at End of Period	$	55,541		$	55,643


Supplemental cash flow information:

Interest paid	$	3,763		$	2,985
Interest received	$	343		$	163
Income taxes paid (net of refunds received)	$	(2,291	)	$	309

See Notes to Consolidated Financial Statements.

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

BASIS OF PRESENTATION

Zale Corporation, along with its wholly-owned subsidiaries (the “Company”), is the largest and most diversified specialty retailer of fine jewelry in North America. At January 31, 2005, the Company operated 2,331 specialty retail jewelry stores, kiosks and carts located mainly in shopping malls throughout the United States of America (“U.S.”), Canada and Puerto Rico. The Company primarily operates under seven brands, each targeted to reach a distinct customer. Zales Jewelers® is the Company’s national brand in the U.S. which provides traditional, moderately priced jewelry to a broad range of customers. The Company has leveraged its brand strength through Zales the Diamond Store Outlet, which focuses on the brand conscious, value oriented shopper in outlet malls and neighborhood power centers. Zales Jewelers has further extended the reach of its brand to the internet shopper through its e-commerce site,zales.com.Peoples JewellersÒ, the Company’s national brand in Canada, offers traditional, moderately priced jewelry to customers throughout Canada. Gordon’s Jewelers® in the U.S. and Mappins Jewellers® in Canada target the moderate and more discerning customer with merchandise assortments designed to promote slightly higher priced purchases. Bailey Banks & Biddle Fine Jewelers® operates jewelry stores that are considered among the finest luxury jewelry stores in their markets, offering designer jewelry and watches to attract more affluent customers. Bailey Banks & Biddle Fine Jewelers has now extended the reach of its brand to the internet shopper through its e-commerce site,baileybanksandbiddle.com.The Company reaches the opening price point fine jewelry customer primarily through mall based kiosks in Piercing Pagoda® and carts operating in Canada under the name Peoples II®.

The accompanying Consolidated Financial Statements are those of the Company as of and for the three month and six month periods ended January 31, 2005 and January 31, 2004. The Company consolidates substantially all of its U.S. operations into Zale Delaware, Inc. (“ZDel”), a wholly-owned subsidiary of Zale Corporation. ZDel is the parent company for several subsidiaries, including three that are engaged primarily in providing credit insurance to credit customers of the Company. The Company consolidates its Canadian retail operations into Zale International, Inc., which is a wholly-owned subsidiary of Zale Corporation. All significant intercompany transactions have been eliminated. The Consolidated Financial Statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management’s opinion, all material adjustments and disclosures necessary for a fair presentation have been made. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes thereto included in the Company’s Form 10-K for the fiscal year ended July 31, 2004. The classifications in use at January 31, 2005, have been applied to the financial statements for July 31, 2004 and January 31, 2004.

The results of operations for the three month and six month periods ended January 31, 2005 and January 31, 2004, are not indicative of the operating results for the full fiscal year due to the seasonal nature of the Company’s business. Seasonal fluctuations in retail sales historically have resulted in higher earnings in the quarter of the fiscal year that includes the Holiday selling season.

ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (continued)

EARNINGS PER COMMON SHARE

Basic earnings per common share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. There were antidilutive common stock equivalents of 35,000 and 14,500 outstanding for the three months ended January 31, 2005 and January 31, 2004, respectively. There were antidilutive common stock equivalents of 37,250 and 44,500 outstanding for the six months ended January 31, 2005 and January 31, 2004, respectively.


	Three Months Ended				Six Months Ended
	January 31,				January 31,
	2005		2004		2005		2004
	(amounts in thousands, except per share amount)
Net earnings available to shareholders	$	99,197	$	97,295	$	88,265	$	88,050

Basic:
Weighted average number of common shares outstanding		51,102		52,198		51,499		52,986

Net earnings per common share – basic	$	1.94	$	1.86	$	1.71	$	1.66


Diluted:
Weighted average number of common shares outstanding		51,885		53,156		52,221		53,909

Net earnings per common share – diluted	$	1.91	$	1.83	$	1.69	$	1.63

STOCK REPURCHASE PLAN

On August 28, 2003, the Company announced that its Board of Directors had approved a stock repurchase program pursuant to which the Company, from time to time, at management’s discretion, and in accordance with the Company’s usual policies and applicable securities laws, could purchase up to $100 million of its Common Stock in addition to repurchase authorizations existing at the time. This approval made possible the Company’s repurchase of a total of approximately $142 million worth of its Common Stock. As of

ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (continued)

January 31, 2004, the Company had repurchased approximately 2.2 million shares of Common Stock at an aggregate cost of approximately $104 million. As of July 31, 2004, the Company had repurchased approximately 2.8 million shares at an aggregate cost of approximately $142 million, which completed its authorization under the plan.

The Company has authorized similar programs for eight consecutive years and believes that share repurchases are a prudent use of its financial resources given its cash flows and capital position, and provide value to its shareholders. The Company believes that its financial performance and cash flows will continue to provide the necessary resources to improve its operations, grow its business and provide adequate financial flexibility.

STOCK- BASED COMPENSATION

The Company accounts for its Stock Option and Employee Stock Purchase Plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under APB No. 25, if the number of options is fixed and the exercise price of employee stock options equals or exceeds the market price of the underlying stock on the date of the grant, no compensation expense is recorded. Under the provisions of the Company’s equity compensation plans, stock options cannot be granted at below market price.

The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and as allowed by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of SFAS No. 123” to stock-based employee compensation (see New Accounting Pronouncements).


	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2005			2004*			2005			2004*
	(amounts in thousands except for share amounts)
Net earnings, as reported	$	99,197		$	97,295		$	88,265		$	88,050
Add: Restricted stock which is included in net earnings, net of related tax effects		108			—			217			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,617	)		(1,458	)		(3,232	)		(2,916	)

Pro forma net earnings	$	97,688		$	95,837		$	85,250		$	85,134


Earnings Per Common Share — Basic:
Earnings Per Common Share, as reported	$	1.94		$	1.86		$	1.71		$	1.66
Earnings Per Common Share, pro forma	$	1.91		$	1.84		$	1.66		$	1.61

Earnings Per Common Share — Diluted:
Earnings Per Common Share, as reported	$	1.91		$	1.83		$	1.69		$	1.63
Earnings Per Common Share, pro forma	$	1.88		$	1.80		$	1.63		$	1.58

Weighted Average Number of Common Shares Outstanding:
Basic		51,102			52,198			51,499			52,986
Diluted		51,885			53,156			52,221			53,909

Stock-based compensation expense is shown as previously reported, as the numbers have not changed materially.

ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (continued)

COMPREHENSIVE INCOME

Comprehensive income represents the change in equity during a period from transactions and other events, except those resulting from investments by and distributions to stockholders. The components of comprehensive income for the three and six month periods ended January 31, 2005 and January 31, 2004 are as follows:


	Three Months Ended						Six Month Ended
	January 31,						January 31,
	2005			2004			2005			2004
	(amounts in thousands)
Net Earnings	$	99,197		$	97,295		$	88,265		$	88,050
Other Comprehensive Income:

Unrealized gain (loss) on investment securities, net		(125	)		315			159			598
Unrealized gain (loss) on derivative instruments		1,686			(83	)		(996	)		328
Cumulative translation adjustments		(2,603	)		(877	)		8,542			7,476


Total Comprehensive Income	$	98,155		$	96,650		$	95,970		$	96,452

Income taxes are generally not provided for foreign currency translation adjustments or such adjustments that relate to permanent investments in international subsidiaries.

LONG-TERM DEBT

The Company entered into a five year revolving credit facility (the “Revolving Credit Agreement”) on July 23, 2003, replacing its existing $225 million facility. The Revolving Credit Agreement provides the Company up to $500 million in commitments by certain lenders, including a $20 million sublimit for letters of credit. The Revolving Credit Agreement is primarily secured by the Company’s U.S. merchandise inventory.

On December 10, 2004, the Company entered into an amendment of its $500 million Revolving Credit Agreement with Bank of America, as Administrative Agent, and a syndicate of other lenders (the “Amendment,” and together with the Revolving Credit Agreement, the “Amended Revolving Credit Agreement”). The Amendment extends the term of the Revolving Credit Agreement through August 11, 2009, and reduces certain fees and the applicable interest rate margins under the Revolving Credit Agreement.

The loans made under the Amended Revolving Credit Agreement bear interest at a floating rate at either (i) LIBOR plus the applicable margin, or (ii) the Base Rate plus the applicable margin. The margin applicable to LIBOR based loans and standby letter of credit commission rates will be automatically reduced or increased from time to time based upon excess borrowing availability under the Amended Revolving Credit Agreement. The Company pays a commitment fee quarterly of .25 percent on the preceding month’s unused commitment. The Company and its subsidiaries may repay the revolving credit loans outstanding under the Amended Revolving Credit Agreement at any time without penalty prior to the maturity date. At January 31, 2005 and 2004, there was $135.8 million and $138.7 million outstanding, respectively, under the Amended Revolving Credit Agreement. The effective interest rate for the quarter

ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (continued)

ended January 31, 2005 was 4.18 percent with the applicable margin for LIBOR based loans at 1.25 percent and the applicable margin for Base Rate loans at zero percent. Based on the terms of the Amended Revolving Credit Agreement, the Company had approximately $364.2 million in available borrowings at January 31, 2005.

At any time, if remaining borrowing availability under the Amended Revolving Credit Agreement falls below $75 million, the Company will be restricted in its ability to repurchase stock or pay dividends. If remaining borrowing availability falls below $50 million, the Company will be required to meet a minimum fixed charge coverage ratio. The Amended Revolving Credit Agreement requires the Company to comply with certain restrictive covenants including, among other things, limitations on indebtedness, investments, liens, acquisitions, and asset sales. The Company is currently in compliance with all of its obligations under the Amended Revolving Credit Agreement.

COMMITMENTS AND CONTINGENCIES

The Company is involved in various legal actions and claims arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without material effect on the Company’s financial position or results of operations.

GOODWILL

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company tests goodwill for impairment annually, at the end of its second quarter, or more frequently if events occur which indicate a potential reduction in the fair value of a reporting unit’s net assets below its carrying value. An impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. In the second quarter of fiscal year 2005, the Company performed its annual review for impairment of goodwill related to its Piercing Pagoda, Inc., Peoples Jewellers and one other smaller acquisition. The Company concluded that there was no evidence of impairment related to the goodwill of approximately $19.4 million for Piercing Pagoda, Inc., $65.6 million for Peoples Jewellers and $5.0 million for the other smaller acquisition.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 123(R) eliminates the alternative to use APB’s Opinion No. 25’s intrinsic value method of accounting that was provided in SFAS 123 as originally issued. Under APB Opinion No. 25, the issuance of stock options to employees generally resulted in recognition of no compensation cost. SFAS 123(R) requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards in the financial statements during the period in which the awards vest. At each reporting period, the fair value of those awards will be remeasured and any changes in the fair value will be recognized as a change in compensation expense. In addition, SFAS 123(R) amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. Per the FASB, SFAS 123(R) is effective for fiscal years beginning after June 15, 2005. The Company will adopt SFAS 123(R) for the first quarter of fiscal year 2006. The adoption of SFAS 123(R) is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (continued)

GUARANTEE OBLIGATIONS

In accordance with FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” specific credit and product warranty programs are subject to the following disclosure in interim and annual financial statements.

Credit Programs.Citi Commerce Solutions (“Citi”), a subsidiary of CitiGroup, provides financing to the Company’s customers through the Company’s private label credit card program in exchange for payment by the Company of a merchant fee (subject to periodic adjustment) based on a percentage of each credit card sale. The receivables established through the issuance of credit by Citi are originated and owned by Citi. As defined in the agreement with Citi, losses related to a “standard credit account” (an account within the credit limit approved under the original merchant agreement between the Company and Citi) are assumed entirely by Citi without recourse to the Company, except where a Company employee violates the credit procedures agreed to in the merchant agreement.

In an effort to better serve customers, the Company and Citi developed two programs that extend credit to qualifying customers beyond the standard credit account. The incremental credit extension is at the Company’s discretion and is based upon either additional down payments made at the time of sale or the total amount of the sale transaction. The Company bears a portion of customer default losses arising from these accounts as defined in the agreement with Citi.

Based on account balances for the shared risk credit programs as of January 31, 2005, the Company’s maximum potential payment would be approximately $38 million if the entire portfolio defaulted. As of January 31, 2005, the reserve for both portfolios is approximately $800,000, which the Company believes is adequate based on the historical trend of actual losses. The Company is required to pledge collateral to Citi in the form of an interest bearing depository account that will fluctuate monthly based on the account balances of the shared risk credit programs. The current collateral balance as of January 31, 2005 is approximately $6.4 million.

Product Warranty Programs.The Company sells extended service agreements (“ESAs”) to customers to cover sizing and breakage for a two year period on certain products purchased from the Company. The revenue from these agreements is recognized over the two year period in proportion to the costs expected to be incurred in performing services under the ESAs. In addition to increased sales of ESAs over the past year, the proportion of expenses incurred earlier in the two year period has increased resulting in higher revenues of approximately $1 million for the three and six month periods ended January 31, 2005. The Company also provides warranty services that cover diamond replacement costs on certain diamond merchandise sold as long as the customer follows certain inspection practices over the time of ownership of the merchandise. The Company has established a reserve for potential non-ESA warranty issues based primarily on actual historical expenses.

The changes in the Company’s product warranty liability for the reporting periods are as follows:


	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2005			2004			2005			2004
	(amounts in thousands)
Beginning Balance	$	30,703		$	31,225		$	31,794		$	32,160
Extended Service Agreements Sold		25,184			19,392			36,238			27,953
Extended Service Agreement Revenue Recognized		(21,040	)		(15,994	)		(33,185	)		(25,490	)

Ending Balance	$	34,847		$	34,623		$	34,847		$	34,623

ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – (continued)

OTHER MATTERS

American Jobs Creation Act.On October 22, 2004, the American Jobs Creation Act (the “AJCA”) was signed into law. The AJCA includes, among other provisions, a special one-time deduction of 85 percent of certain foreign earnings that are repatriated, as defined in the AJCA. The Company has a Canadian subsidiary for which it may elect to apply this provision to qualifying earnings repatriations in either the balance of fiscal year 2005 or in fiscal year 2006. Based on the Company’s initial evaluation of the potential benefits, the estimated range of potential amounts that the Company is considering for repatriation under this provision is between $30 and $45 million, but the range of expected income tax effects cannot be reasonably estimated at this time. The Company expects to complete the evaluation of the potential range of income tax benefits by the fourth quarter of fiscal year 2005.

Lease Accounting and Other.In connection with the views expressed by the Office of the Chief Accountant of the Securities and Exchange Commission (the “SEC”) on February 7, 2005 regarding certain lease accounting issues, the Company, like many retailers, began a review of its lease accounting practices.

The SEC letter clarified existing generally accepted accounting principles applicable to leases and leasehold improvements primarily related to accounting for construction allowances received from landlords and the period over which rent payments were amortized.

In prior periods, and consistent with industry practice, the Company recognized the minimum rent payments evenly across the period beginning with the commencement date of the lease through the end of the lease term, typically 120 months. This period excludes the construction period, typically two to three months, in which the Company had access to the property but which preceded the lease term. The SEC’s views clarified that the construction period should be included in the period over which the Company amortizes the minimum rent payments.

The Company, in conjunction with its independent auditors reviewed its lease portfolio. Based upon this review, the Company determined that the cumulative impact as of January 31, 2005 of commencing the amortization period earlier was additional expense related to prior periods of approximately $5.8 million before taxes, or $3.6 million and $0.07 per share after taxes. The impact to net income for the three and six month periods ending January 31, 2005 and January 31, 2004 was not material.

In addition, the Company had approximately $5.2 million of previously unrecognized deferred credits from ESAs relating to prior periods as of January 31, 2005. The Company recorded the cumulative impact on net income of $3.3 million and $0.06 per share in its quarter ending January 31, 2005. Otherwise, there was no impact to net income for the three and six month periods ending January 31, 2005 and January 31, 2004.

The net impact of the two adjustments is not material to the financial statements. Furthermore the two changes have no impact on the Company’s historical or future net cash flow, the timing of cash received or the timing of payments.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements of the Company (and the related notes thereto) included elsewhere in this report and the audited Consolidated Financial Statements of the Company (and the related notes thereto) in the Company’s Form 10-K for the fiscal year ended July 31, 2004.

Executive Overview

The Company is the largest and most diversified specialty retailer of fine jewelry in North America. At January 31, 2005, the Company operated 2,331 specialty retail jewelry stores, kiosks and carts located primarily in shopping malls throughout the U.S., Canada and Puerto Rico.

During the first half of its fiscal year, the Company continued to execute its strategic plan. The corporate initiatives included improvements to the supply chain, real estate growth, and a more targeted marketing and merchandising strategy aimed at brand differentiation. Supply chain improvements include the Company’s direct product sourcing expansion in the Peoples Jewellers, Gordon’s, and Zales the Diamond Store Outlet brands, as well as its allocation process for product through the Holiday season to improve its in-store stock position. In addition, the Gordon’s brand tailored its merchandise to each store’s customer base through an approach called versioning. The real estate initiative continued to focus on both traditional malls and off-mall growth in the U.S. The Company also extended its offerings of opening price point merchandise including charms, earrings and body jewelry by expanding in Canada with 68 Peoples II cart locations. The Company continued its marketing strategy aimed at brand differentiation by further utilizing its database and statistical modeling techniques to enhance communication with customers.

All of the Company’s brands, with the exception of the Zales brand, had positive comparable store sales during the quarter ending January 31, 2005. The Company is seeking to expand opportunities for certain initiatives relating to the performance of its Zales brand, such as direct sourcing, brand differentiation, refining the product mix, and improving the integration of merchandising, marketing and store execution to strengthen the future direction of the brand. Furthermore, the Company’s inventory and expense structure allowed it to minimize the impact of the Zales revenue results and contributed to earnings per share growth over the same period in the prior year.

Results of Operations

The following table sets forth certain financial information from the Company’s unaudited Consolidated Statements of Operations expressed as a percentage of total revenues.


	Three Months Ended						Six Months Ended
	January 31,						January 31,
	2005			2004			2005			2004
Total Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of Sales		49.4			49.5			49.1			49.5
Selling, General and Administrative Expenses		32.5			32.4			38.2			37.7
Cost of Insurance Operations		0.1			0.1			0.2			0.2
Depreciation and Amortization Expense		1.6			1.5			2.1			2.0

Operating Earnings		16.4			16.5			10.4			10.6
Interest Expense, Net		0.2			0.2			0.3			0.3

Earnings Before Income Taxes		16.2			16.3			10.1			10.3
Income Taxes		6.0			6.0			3.7			3.8

Net Earnings		10.2	%		10.3	%		6.4	%		6.5	%

Three Months Ended January 31, 2005 Compared to Three Months Ended January 31, 2004

Total Revenues.Total revenues include sales of merchandise, repair services, Extended Service Agreements (“ESAs”) and insurance premiums. For the three months ended January 31, 2005, total revenues were $972.3 million, an increase of 2.5 percent over total revenues of $949.0 million for the same period in the prior year. During the three months ended January 31, 2005, the Company opened 20 stores, 18 kiosks, and 15 Peoples II carts. In addition, the Company closed 21 stores and 17 kiosks during the current period. The net square footage and other revenue growth contributed an increase of 3.1 percent in total revenues. Comparable store sales decreased 0.6 percent in the three months ended January 31, 2005, primarily due to the lower sales of merchandise in the more moderate price points of $500 and below in the Zales brand. Comparable store sales exclude amortization of ESAs and include sales for those stores in their thirteenth full month of operation. The results of stores that have been relocated, renovated, or refurbished are included in the calculation of comparable store sales on the same basis as other stores. Total revenues include insurance premium revenue for credit insurance operations of $3.0 million and $3.2 million for the three months ended January 31, 2005 and 2004, respectively.

Cost of Sales.Cost of sales includes cost of merchandise sold, as well as receiving and distribution costs. Cost of sales as a percentage of revenues was 49.4 for the three months ended January 31, 2005, a decrease of 0.1 percentage point compared to the same period in the prior year. The cost of sales decrease as a percent of sales was driven by a higher mix of ESA sales and the Company’s direct sourcing initiatives, which lowered costs on merchandise produced internally or purchased directly from factories, offset by increased promotions and a shift toward merchandise with lower margins at the Company’s Piercing Pagoda brand.

The Company’s last-in, first-out (“LIFO”) provision was $1.3 million and $0.5 million for the 6 months ended January 31, 2005 and 2004, respectively.

Selling, General and Administrative Expenses.Included in Selling, General and Administrative Expenses (“SG&A”) are store operating, advertising, buying and general corporate overhead expenses. SG&A increased 0.1 percentage point to 32.5 percent of revenues for the three months ended January 31, 2005, from 32.4 percent for the three months ended January 31, 2004. Store operating expenses were 0.3 percentage points higher as a percent of revenues due to investments in training, store payroll, and marketing to support our strategic initiative of an improved customer focus, offset by a reduction in proprietary credit expenses. Additionally, general overhead expenses declined by 0.2 percentage points as a percent of revenues.

Six Months Ended January 31, 2005 Compared to Six Months Ended January 31, 2004

Total Revenues.Total revenues include sales of merchandise, repair services, ESAs and insurance premiums. For the six months ended January 31, 2005, total revenues were $1.40 billion, an increase of 2.2 percent over total revenues of $1.37 billion for the same period in the prior year. During the six months ended January 31, 2005, the Company opened 43 stores, 32 kiosks and 68 Peoples II carts. In addition, the Company closed 24 stores and 22 kiosks during the six month period. The net square footage and other revenue growth contributed 2.9 percent to the increase in total revenues. Comparable store sales decreased 0.7 percent in the six months ended January 31, 2005. Comparable store sales exclude amortization of ESAs and include sales for those stores in their thirteenth full month of operation. The results of stores that have been relocated, renovated, or refurbished are included in the calculation of comparable store sales on the same basis as other stores. The decrease in revenues in the Holiday period was primarily due to the lower sales of merchandise in the more moderate price points of $500 and below in the Zales brand. In addition, the Company estimates that revenues were adversely impacted by $6.5 to $7.0 million due to the hurricanes in Florida, Puerto Rico and Alabama in August and September 2004. Total revenues include insurance premium revenue for credit insurance operations of $5.9 million and $6.4 million for the six months ended January 31, 2005 and 2004, respectively.

Cost of Sales.Cost of sales includes cost of merchandise sold as well as receiving and distribution costs. Cost of sales as a percentage of revenues was 49.1 for the six months ended January 31, 2005, a decrease of 0.4 percentage points compared to the same period in the prior year. The cost of sales decrease as a percent of sales was driven by a higher mix of ESA sales and the Company’s direct sourcing initiatives, which lowered costs on merchandise produced internally or purchased directly from factories, offset by increased promotions and a shift toward merchandise with lower margins at the Company’s Piercing Pagoda brand. In addition, the receipt of cash consideration from vendors, which was previously recorded as a reduction to SG&A, is now recorded as a reduction of inventory costs in accordance with Emerging Issues Task Force Issue 02-16 “Accounting by a Reseller (including a Retailer) for Cash Consideration Received from a Vendor” (“EITF 02-16”).

The Company’s LIFO provision was $1.3 million and $0.5 million for the three months ended January 31, 2005 and 2004, respectively.

Selling, General and Administrative Expenses.Included in SG&A are store operating, advertising, buying and general corporate overhead expenses. SG&A increased 0.5 percentage points to 38.2 percent of revenues for the six months ended January 31, 2005, from 37.7 percent for the six months ended January 31, 2004. Approximately 0.2 percentage points of the increase was due to the result of the reclassification of certain cash consideration received from vendors previously recorded as a reduction to SG&A expenses to a reduction of inventory costs in accordance with EITF 02-16. Store operating expenses were approximately 0.5 percentage points higher as a percent of revenues due to investments in training, store payroll, and marketing to support our strategic initiative of an improved customer focus and higher fixed occupancy expense as a rate of sales primarily due to the under-performance in the Zales brand, and sales lost to the hurricanes. The increase was partially offset by a reduction in proprietary credit expenses. Additionally, general overhead expenses declined by 0.3 percentage points as a percent of revenues.

Liquidity and Capital Resources

The Company’s cash requirements consist primarily of funding inventory growth, capital expenditures primarily for new store growth and renovations of the existing portfolio, upgrades to its management information systems and debt service. As of January 31, 2005, the Company had cash and cash equivalents of $55.5 million, of which approximately $6.4 million is restricted due to an agreement with Citi Commerce Solutions (“Citi”), a subsidiary of CitiGroup. This agreement requires the Company to pledge an amount as collateral to Citi in an interest bearing depository account that will fluctuate monthly based on the account balances of the shared risk credit programs. For additional information, see “Notes to Consolidated Financial Statements – Guarantee Obligations.”

The retail jewelry business is highly seasonal, with a significant proportion of sales and operating income being generated in November and December of each year. Approximately 41 percent of the Company’s annual revenues were made during the three month periods ended January 31, 2004 and 2003, respectively, which includes the Holiday selling season. The Company’s working capital requirements fluctuate during the year, increasing substantially during the fall season as a result of higher planned seasonal inventory levels as evidenced by an increase of approximately $125 million in owned merchandise at January 31, 2005, compared to levels at July 31, 2004. A portion of this increase of inventory is also a result of the Company’s continued store growth.

On October 22, 2004, the American Jobs Creation Act (the “AJCA”) was signed into law. The AJCA includes, among other provisions, a special one-time deduction of 85 percent of certain foreign earnings that are repatriated, as defined in the AJCA. The Company has a Canadian subsidiary for which it may elect to apply this provision to qualifying earnings repatriations in either the balance of fiscal year 2005 or in fiscal year 2006. Based on the Company’s initial evaluation of the potential benefits, the estimated range of potential amounts that the Company is considering for repatriation under this provision is between $30 and $45 million, but the range of expected income tax effects cannot be reasonably

estimated at this time. The Company expects to complete the evaluation of the potential range of income tax benefits by the fourth quarter of fiscal year 2005.

Finance Arrangements

Capital Expenditures

During fiscal year 2005, the Company plans to open 64 new stores, principally under the brand names Zales Jewelers and Zales the Diamond Store Outlet, 47 new kiosks, and 70 carts, for which it expects to incur approximately $40 million in capital expenditures. During fiscal year 2005, the Company anticipates spending approximately $30 million to renovate, relocate or refurbish approximately 175 additional locations. This will allow the Company to focus on productivity of existing core store locations and enhance brand position within the marketplace. The Company also estimates that it will incur capital expenditures of approximately $11 million during fiscal year 2005 for enhancements to its management information systems and infrastructure expansion. In total, the Company anticipates making approximately $80 million in capital expenditures during fiscal year 2005. As of January 31, 2005, the Company had made $47.3 million in capital expenditures, a portion of which was used to open 43 stores, 32 kiosks and 68 Peoples II carts and to renovate, relocate or refurbish other locations.

Other Activities Affecting Liquidity

•	*Sale of Building*

On August 31, 2004, the Company sold a 69,000 square foot building in Bethlehem, Pennsylvania that was previously used for additional distribution and warehousing functions at Piercing Pagoda. The proceeds, net of commissions received, represented an estimated fair value of $2.3 million.

•	*Stock Repurchase Plan*

The Company has authorized similar programs for eight consecutive years and believes that share repurchases are a prudent use of its financial resources given its cash flows and capital position and provide value to its shareholders. The Company believes that its financial performance and cash flows will continue to provide the necessary resources to improve its operations, grow its business and provide adequate financial flexibility.

•	*Off-Balance Sheet Arrangements*

Citi provides financing to the Company’s customers through the Company’s private label credit card program in exchange for payment by the Company of a merchant fee (subject to periodic adjustment) based on a percentage of each credit card sale. The receivables established through the issuance of credit by Citi are originated and owned by Citi. As defined in the contract with Citi, losses related to a “standard credit account” (an account within the credit limit approved under the original merchant agreement between the Company and Citi) are assumed entirely by Citi without recourse to the Company, except where a Company employee violates the credit procedures agreed to in the merchant agreement.

•	*Contractual Obligations*

The Company’s Annual Report on Form 10-K provides information regarding its contractual obligations as of July 31, 2004. See “Contractual Obligations” on page 32 of the Form 10-K.

On December 10, 2004, the Company entered into the Amended Revolving Credit Agreement with Bank of America, as Administrative Agent, and a syndicate of other lenders. For additional

information, see “Finance Arrangements,” p.16. There have been no other material changes in the Company’s contractual obligations since July 31, 2004.

Management believes that operating cash flow and amounts available under the Amended Revolving Credit Agreement should be sufficient to fund the Company’s current operations, debt service and currently anticipated capital expenditure requirements for the foreseeable future.

Inflation

In management’s opinion, changes in net revenues, net earnings, and inventory valuation that have resulted from inflation and changing prices have not been material during the periods presented. The trends in inflation rates pertaining to merchandise inventories, especially as they relate to gold and diamond costs, are primary components in determining the Company’s LIFO inventory. Current market trends indicate rising diamond prices. If such trends continue, the Company’s LIFO provision could be impacted. The Company currently hedges a portion of its gold purchases through forward contracts. There is no assurance that inflation will not materially affect the Company in the future.

Critical Accounting Policies and Estimates

The accounting and financial reporting policies of the Company are in conformity with U.S. generally accepted accounting principles. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s Annual Report on Form 10-K includes information regarding its critical accounting policies and estimates as of July 31, 2004. See “Critical Accounting Policies and Estimates” on page 34 of the Form 10-K. The Company’s critical accounting estimates have not changed in any material respect nor has it adopted any new critical accounting policies since July 31, 2004.

Other Matters

In connection with the views expressed by the Office of the Chief Accountant of the Securities and Exchange Commission (the “SEC”) on February 7, 2005 regarding certain lease accounting issues, the Company, like many retailers, began a review of its lease accounting practices.

was no impact to net income for the three and six month periods ending January 31, 2005 and January 31, 2004.

Cautionary Notice Regarding Forward-Looking Statements

The Company makes forward-looking statements in this Quarterly Report on Form 10-Q and in other reports the Company files with the SEC. In addition, members of the Company’s senior management may make forward-looking statements orally in presentations to analysts, investors, the media and others. Forward-looking statements include statements regarding the Company’s objectives and expectations with respect to sales and earnings, merchandising and marketing strategies, store renovation, remodeling and expansion, inventory management and performance, liquidity and cash flows, capital structure, capital expenditures, development of its information technology plan and related management information systems, e-commerce initiatives, human resource initiatives and other statements regarding the Company’s plans and objectives. In addition, the words “anticipate,” “estimate,” “project,” “intend,” “expect,” “believe,” “forecast,” “can,” “could,” “should,” “will,” “may,” or similar expressions may identify forward-looking statements, but some of these statements may use other phrasing. These forward-looking statements are intended to relay the Company’s expectations about the future, and speak only as of the date they are made. 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.

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 anticipated or expected results expressed in or suggested by these forward-looking statements. Some of these factors are described below. Many of these factors, both described and not described, are beyond the Company’s control.

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.

Jewelry purchases are discretionary and may be affected by adverse trends in the general economy (and consumer perceptions of those trends). In addition, a number of other factors affecting disposable consumer income such as employment, wages and salaries, business conditions, credit availability and taxation policies, for the economy as a whole and in regional and local markets where the Company operates, can impact sales and earnings.

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.

A substantial portion of the Company’s sales are derived from three selling seasons – Holiday (Christmas), Valentine’s Day, and Mother’s Day. Because of the brevity of these three selling seasons, the opportunity for sales to recover in the event of a disruption or other difficulty is limited, and the impact of disruptions and difficulties can be significant. For instance, adverse weather (such as a blizzard), a significant interruption in the receipt of products (whether because of vendor or other product problems), or a sharp decline in mall traffic occurring during one of these selling seasons could materially impact sales for the affected season and, because of the importance of each of these selling seasons, commensurately impact overall sales and earnings.

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 supply and price of diamonds in the principal world markets are significantly influenced by a single entity, which has traditionally controlled the marketing of a substantial majority of the world’s supply of diamonds and sells rough diamonds to worldwide diamond cutters at prices determined in its sole discretion. The availability of diamonds also is somewhat dependent on the political conditions in diamond-producing countries and on the continuing supply of raw diamonds. Any sustained interruption in this supply could have an adverse affect on the Company.

The Company also is affected by fluctuations in the price of diamonds, gold and other commodities. The Company historically has engaged in only a limited amount of hedging against fluctuations in the cost of gold. A significant change in prices of key commodities could adversely affect the Company’s business by reducing operating margins or decreasing consumer demand if retail prices are increased significantly.

The Company’s sales are dependent upon mall traffic.

The Company’s stores and kiosks are located primarily in shopping malls throughout the U.S., Canada and Puerto Rico. The Company’s success is in part dependent upon the continued popularity of malls as a shopping destination and the ability of malls, their tenants and other mall attractions to generate customer traffic. Accordingly, a significant decline in this popularity, especially if it is sustained, would substantially harm the Company’s sales and earnings.

The Company operates in a highly competitive industry.

The retail jewelry business is highly competitive, and the Company competes with nationally recognized jewelry chains as well as a large number of independent regional and local jewelry retailers and other types of retailers who sell jewelry and gift items, such as department stores, mass merchandisers and catalog showrooms. The Company also competes with internet sellers of jewelry. Because of the breadth and depth of this competition, the Company is constantly under competitive pressure that both constrains pricing and requires extensive merchandising efforts in order for the Company to remain competitive.

Any failure by the Company to manage its inventory effectively will negatively impact sales and earnings.

The Company purchases much of its inventory well in advance of each selling season. In the event the Company misjudges consumer preferences or demand, the Company will experience lower sales than expected and will have excessive inventory that may need to be written down in value or sold at prices that are less than expected.

Because of the Company’s dependence upon a small number of landlords for a substantial number of the Company’s locations, any significant erosion of the Company’s relationships with those landlords would negatively impact the Company’s ability to obtain and retain store locations.

The Company is significantly dependent on its ability to operate stores in desirable locations with capital investment and lease costs that allow the Company to earn a reasonable return on its locations. The Company depends on the leasing market and its landlords to determine supply, demand, lease cost and operating costs and conditions. The Company cannot be certain as to when or whether desirable store locations will become or remain available to the Company at reasonable lease and operating costs. Further, several large landlords dominate the ownership of prime malls, and the Company is dependent upon maintaining good relations with those landlords in order to obtain and retain store locations on optimal terms. From time to time the Company does have disagreements with its landlords and a significant disagreement, if not resolved, could have an adverse impact on the Company.

Changes in regulatory requirements relating to the extension of credit may increase the cost of or adversely affect the Company’s operations.

The Company’s operations are affected by numerous federal and state laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum aggregate amount of finance charges that may be charged by a credit provider. Any change in the regulation of credit (including changes in the application of current laws) which would materially limit the availability of credit to the Company’s customer base could adversely affect the Company’s sales and earnings.

Any disruption in, or changes to, the Company’s private label credit card arrangement with Citi may adversely affect the Company’s ability to provide consumer credit and write credit insurance.

The Company’s agreement with Citi, through which Citi provides financing for the Company’s customers to purchase merchandise through private label credit cards, enhances the Company’s ability to provide consumer credit and write credit insurance. Any disruption in, or change to, this agreement could have an adverse effect on the Company, especially to the extent that it materially limits credit availability to the Company’s customer base.

Acquisitions involve special risks, including the possibility that the Company may be unable to integrate new acquisitions into its existing operations.

The Company has made significant acquisitions in the past and may in the future make additional acquisitions. Difficulty integrating an acquisition into the Company’s existing infrastructure and operations may cause the Company to fail to realize expected return on investment through revenue increases, cost savings, increases in geographic or product presence and customer reach, and/or other projected benefits from the acquisition. Additionally, attractive acquisition opportunities may not be available at the time or pursuant to terms acceptable to the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Commodity Risk —The Company principally addresses commodity risk through retail price points. The Company’s commodity risk exposure to diamond market price fluctuation is not currently hedged by financial instruments.

In fiscal year 2005, the Company entered into forward contracts for the purchase of some of its gold in order to hedge the risk of gold price fluctuations. The table below provides information about the Company’s derivative financial instruments that are sensitive to gold prices.

Forward Commodity Agreements
(As of January 31, 2005)


	Contract Settlement	Fine Troy Ounces of	Contract Gold Price	Contract Fair
Commodity	Date	Gold	Per Ounce	Market Value
Gold	2-07-05	741	$426.020	$(3,127)
Gold	2-21-05	741	426.466	(3,051)
Gold	3-07-05	400	426.913	(1,654)
Gold	3-21-05	400	427.359	(1,666)
Gold	4-08-05	349	427.933	(1,446)
Gold	4-22-05	349	428.379	(1,452)
Gold	5-06-05	546	428.825	(2,216)
Gold	5-20-05	546	429.271	(2,216)
Gold	6-07-05	401	429.845	(1,562)
Gold	6-21-05	401	430.291	(1,555)
Gold	7-07-05	363	430.801	(1,400)
Gold	7-21-05	359	431.248	(1,378)

In fiscal year 2005, the Company entered into foreign currency forward exchange contracts to reduce the effects of fluctuating Canadian currency exchange rates. The table below provides information about the Company’s derivative financial instruments that are sensitive to Canadian currency exchange rates.

Foreign Exchange Contracts
(As of January 31, 2005)


	Contract		Contract		Contract		Contract
Currency	Settlement Date		Amount		Exchange Rate		Fair Value
USD		02-16-05	$	4,578,155	$	1.3081	$	(252,312	)
USD		03-16-05		3,207,264		1.3086		(178,172	)
USD		04-18-05		2,097,033		1.3090		(117,512	)
USD		05-17-05		2,434,750		1.3094		(137,955	)
USD		06-16-05		2,398,546		1.3099		(137,864	)
USD		07-19-05		2,521,790		1.3103		(147,005	)
USD		08-16-05		3,124,834		1.3107		(184,518	)
USD		09-19-05		1,906,066		1.3111		(114,185	)

The Company generally enters into both forward gold purchase contracts and forward exchange contracts with maturity dates not longer than twelve months.

Otherwise, the Company believes that the market risk of the Company’s financial instruments as of January 31, 2005 has not materially changed since July 31, 2004. The market risk profile as of July 31, 2004 is disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004.

Item 4. Controls and Procedures

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective in enabling the Company to record, process, summarize and report information required to be included in its periodic SEC filings within the required time period. There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

Item 2. Issuer Purchases of Equity Securities

During the second quarter of fiscal year 2005, the Company repurchased its Common Stock in the open market as follows:


					Total Number of		Maximum Number (or
					Shares (or Units)		Approximate Dollar
	Total Number				Purchased as Part		Value) of Shares (or
	of Shares (or		Average Price		of Publicly		Units) that May Yet
	Units)		Paid per Share		Announced Plans		Be Purchased Under
Period	Purchased		(or Unit)		or Programs		the Plans or Programs
Nov 1 – Nov 30		493,024	$	29.57		1,128,424	$	18,148,687
Dec 1 – Dec 31		—		—		—		18,148,687
Jan 1 – Jan 31		683,832		26.51		1,812,256		0

Total		1,176,856	$	27.79		1,812,256	$	0

On August 5, 2004, the Company announced that its Board of Directors had approved a stock repurchase program pursuant to which the Company from time to time, at management’s discretion and in accordance with the Company’s usual policies and applicable securities laws could purchase up to an additional $50 million of its Common Stock. As of January 31, 2005, the Company had repurchased 1.8 million shares of Common Stock at an aggregate cost of approximately $50 million, which completed its authorization under the current year program. The Company has authorized similar programs for eight consecutive years and believes that share repurchases are a prudent use of its financial resources given its cash flows and capital position and provide value to its shareholders. The Company believes that its financial performance and cash flows will continue to provide the necessary resources to improve its operations, grow its business and provide adequate financial flexibility.

Item 6. Exhibits


4.1	(a)	Second Amendment to Revolving Credit Agreement Dated as of December 10, 2004 (Incorporated by reference to the Company’s filing on Form 8-K dated December 10, 2004, File No. 1-04129, as Exhibit 99.1)

10.15		Employment Agreement dated as of January 5, 2005 between Zale Corporation and Paul G. Leonard (Incorporated by reference to the Company’s filing on Form 8-K dated January 5, 2005, File No. 1-04129, as Exhibit 10.1)

31.1		Certification of Principal Executive Officer

31.2		Certification of Principal Financial Officer

32.1		Certification of Principal Executive Officer

32.2		Certification of Principal Financial Officer

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Zale Corporation

		(Registrant)


Date: March 10, 2005		/s/ Cynthia T. Gordon

		Cynthia T. Gordon
		Senior Vice President, Controller
		(principal accounting officer of the registrant)

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Zale (ZLC) Inactive 10-Q2005 Q2 Quarterly report

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