EXHIBIT 99.1
Zale Reports Fourth Quarter and Full Year Financial Results
DALLAS--(BUSINESS WIRE)--Aug. 30, 2007--Zale Corporation (NYSE:
ZLC), a leading specialty retailer of fine jewelry in North America,
today reported net earnings of $1.5 million, or $0.03 per diluted
share for the Company's fourth quarter ended July 31, 2007. Earnings
for the quarter include, on an after-tax basis, (1) a reduction of
$6.3 million, or $0.13 per diluted share due to the delay in revenue
recognized from the change to a lifetime jewelry protection plan, (2)
a benefit of $1.1 million, or $0.02 per diluted share for the net
impact of derivative versus hedge accounting on its gold and silver
contracts, and (3) a net tax benefit of $6.7 million, or $0.14 per
diluted share primarily related to a decision to indefinitely reinvest
certain undistributed foreign earnings in accordance with APB 23.
Excluding these items, the Company reported earnings of $0.0 million,
or $0.00 per diluted share.
For the same period last year, the Company reported a net loss of
$27.4 million, or $0.57 per share. This loss included a mostly
non-cash after-tax charge of $23.9 million, or $0.50 per share,
primarily consisting of impairments and store closure charges. The
Company also recorded an increase in accrued percentage rent of $1.5
million after-tax, or $0.03 per share, related to prior periods, a
$1.9 million, or $0.04 per share tax charge related primarily to
Canadian earnings and an after-tax impact of derivative versus hedge
accounting treatment of a $1.0 million loss, or $0.02 per share for
its commodities contracts. Excluding these items, the Company reported
earnings of $1.0 million, or $0.02 per diluted share.
Revenues for the quarter ended July 31, 2007 were $488 million
compared to $491 million last year, a decrease of 0.5%. Revenues
recognized were $7.5 million or 1.5% 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 fourth quarter decreased 0.5%.
"Improving sales trends post Mother's Day combined with a focus on
maximizing gross margin dollars and good expense control resulted in
earnings at the high end of expectations," commented Betsy Burton,
Chief Executive Officer.
Ms. Burton continued, "Fiscal 2007 was a year in which we focused
on going back to the basics. We tested investments in inventory
assortments as well as in payroll and marketing. While many of these
initiatives paid off, others have been pared back. We will take these
learnings as well as the opportunity to refine our pricing and
promotional strategy for this Holiday to drive meaningful earnings
improvement in our all-important second quarter of fiscal 2008.
Additionally, we believe some of the organizational changes that we
made will give us the ability to positively impact the business going
forward. For fiscal 2008, we expect earnings improvement, a
significant reduction in inventory and the continued success of our
lifetime jewelry protection plans to generate approximately $125
million to $150 million in free cash flow."
Ms. Burton concluded, "For the past year, we have looked at many
aspects of our business, from our portfolio strategy and brand
positioning to opportunities to improve the core business. We believe
we have a significant opportunity to drive shareholder value both
near-term and long-term. This strategy consists of improving
productivity of our core mall business, a growth strategy centered on
our brands that produce the highest returns on capital, and the
migration to a more centralized, streamlined organization."
Fiscal 2007 Results
Net earnings for fiscal year 2007 were $59.3 million or $1.21 per
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 extended service period
covered by plans during the year. The after-tax impact of derivative
versus hedge accounting treatment was a $0.4 million benefit, or $0.01
per share, the negative impact on revenue recognized from the sale of
jewelry protection plans was $22.3 million, or $0.46 per share and a
tax benefit of $6.7 million, or $0.14 per share primarily related to
the decision to indefinitely reinvest certain undistributed foreign
earnings in accordance with APB 23. Excluding these items, fiscal 2007
net earnings were $74.4 million, or $1.52 per share.
For the same period last year, earnings were $53.6 million, or
$1.09 per share. These prior year earnings include, on an after-tax
basis, (1) impairments and store closure charges of $45.1 million, or
$0.92 per share, (2) severance payments of $7.5 million, or $0.15 per
share, (3) a $1.0 million, or $0.02 per share impact of derivative
versus hedge accounting treatment and (4) a $1.5 million, or $0.03 per
share charge for percentage rent related to prior years; which were
partially offset by (5) a tax benefit primarily related to repatriated
Canadian earnings under the American Jobs Creation Act of $9.5
million, or $0.19 per share, and (6) an $8.4 million, or $0.17 per
share, benefit resulting from the settlement of certain retirement
benefit obligations. Excluding these items, the Company reported
earnings of $90.9 million last year, or $1.85 per share.
For the full fiscal year, revenues were flat at $2.44 billion,
compared to the same period last year. Full fiscal year comparable
store sales decreased 0.2%.
Change in Comparable Store Methodology
Beginning in fiscal 2008, the Company will include online sales in
its comparable store sales calculation. This approach is consistent
with the Company's goal of improving its multi-channel experience and
leveraging the best of its real estate footprint with the growth in
online sales. Comparable store sales for 2007, including online sales,
increased 0.5%. The quarterly breakdown of comparable store sales for
fiscal 2007 including online sales is attached as a table at the back
of the press release.
Warranty Deferred Revenue
The Company's decision to offer a lifetime jewelry protection plan
has been well received by its customers, generating an increase of $33
million in cash sales of warranties in fiscal 2007 over the prior
year. Actual cash sales of all warranty plans were $111 million in
fiscal 2007 and are projected to exceed $130 million in fiscal 2008.
Despite this cash sales increase, the amount of unrecognized, or
deferred revenues will also increase. During fiscal 2007, the Company
provided the impact of the change to a lifetime product by estimating
what revenue would have been under the prior pricing and at prior
recognition rates. This was consistent with initial guidance. Going
forward, the Company will discuss the impact on earnings relative to
the change in unrecognized revenues on the balance sheet, which also
reflects the incremental cash collected and the future positive impact
to earnings. The Company feels this will be clearer to the shareholder
and readily quantifiable.
Excluding the impact of APB 23, GAAP earnings are expected to
increase approximately 5.0% in fiscal 2008 over prior year. On an
adjusted basis, excluding the change in revenue recognition from
warranty sales, the Company's growth in fiscal 2008 is expected to be
approximately 15.0%. Earnings growth is expected to accelerate to
approximately 30% per annum in 2009 through 2011 as the Company
recognizes incremental revenues each year and the deferred revenue
continues to increase. Approximately one-half of this growth is
expected to be directly related to the change in the warranty plans
and related revenue recognition. In order to estimate a more
normalized year-over-year growth upon maturity of the product, the
Company believes the increase in the unrecognized revenue is the
appropriate measure.
The increase in unrecognized revenues on the balance sheet was $62
million in fiscal 2007 and is anticipated to be approximately $80 - 90
million in fiscal 2008. In contrast, the increase from fiscal 2005 to
fiscal 2006 prior to the product change was $4 million. Had the
product been offered for five years, the Company believes these
amounts are indicative of what would have been recognized on an
after-tax basis and the after-tax impact would be a net $0.78 per
share in 2007 and projected to be approximately $1.00 per share in
fiscal 2008. The incremental impact of these unrecognized amounts is
expected to begin to decline in fiscal 2009 through 2011, as the
amount of revenue recognized becomes comparable to cash sales of the
plans.
Fiscal 2008 Guidance
The Company also provided its annual forecast for its fiscal year
ending July 31, 2008. For the full year, the Company expects a
comparable store sales increase, including its online sales, of 1% to
2%. GAAP earnings are expected to be in the range of $1.11 to $1.16
per share. Excluding the $6.7 million or $0.14 per share impact from
the adoption of APB 23, fiscal 2007 earnings would have been $1.07 per
share. These earnings do not reflect the longer term earnings impact
of the lifetime warranties. Including the impact of the increase in
the unrecognized revenues on the balance sheet, earnings would be
expected in the range of $2.11 - $2.16 in fiscal 2008 compared to
$1.85 in fiscal 2007. This reflects earnings growth in the mid-teens,
consistent with our long-term targets. Over time, the lifetime
warranties will accelerate our GAAP earnings while the change in
unamortized revenues on the balance sheet declines.
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.
The Company also announced that it will be presenting at the
Goldman Sachs Retailing conference on Thursday, September 6, 2007 at
9:30 a.m. Eastern Time. The presentation will be available on the
Company's Web site at www.zalecorp.com.
Zale Corporation is a leading specialty retailer of fine jewelry
in North America operating approximately 2,250 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, sales and earnings guidance for fiscal year 2008 and the
anticipated impact of deferred revenue recognition. 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 Twelve Months Ended
July 31, July 31,
----------------------- -----------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Revenues $488,226 $490,695 $2,437,075 $2,438,977
Comparable Store
Sales % -0.5% 3.5% -0.2% 1.6%
Cost of Sales 234,051 257,370 1,187,601 1,215,636
----------- ----------- ----------- -----------
Gross Margin 254,175 233,325 1,249,474 1,223,341
% of Revenue 52.1% 47.5% 51.3% 50.2%
Selling, General and
Administrative
Expenses 241,226 251,700 1,070,478 1,087,458
% of Revenue 49.4% 51.3% 43.9% 44.6%
Cost of Insurance
Operations 1,619 1,684 6,798 6,699
Depreciation and
Amortization Expense 15,940 14,973 61,887 59,771
Benefit from
Settlement of
Retirement Plan --- --- --- (13,403)
Derivative Loss 111 1,681 7,184 1,681
----------- ----------- ----------- -----------
Operating (Loss)
Earnings (4,721) (36,713) 103,127 81,135
% of Revenue -1.0% -7.5% 4.2% 3.3%
Interest Expense 3,730 3,500 18,969 11,185
----------- ----------- ----------- -----------
(Loss)/Earnings Before
Income Taxes (8,451) (40,213) 84,158 69,950
Income Taxes (9,988) (12,851) 24,906 16,328
----------- ----------- ----------- -----------
Net Earnings/(Loss) $1,537 $(27,362) $59,252 $53,622
=========== =========== =========== ===========
Basic Earnings Per
Common Share:
Net Earnings Per
Share $0.03 $(0.57) $1.22 $1.10
=========== =========== =========== ===========
Diluted Earnings Per
Common Share:
Net Earnings Per
Share $0.03 $(0.57) $1.21 $1.09
=========== =========== =========== ===========
Weighted Average Number of Common Shares Outstanding:
Basic 49,031 48,131 48,694 48,808
Diluted 49,210 48,427 48,995 49,211
Reconciliation of GAAP Information to Non-GAAP basis 4th Quarter and
full year FY07, diluted:
Three Months Ended Twelve Months Ended
July 31, 2007 July 31, 2007
------------------- -------------------
Amount Per Share Amount Per Share
--------- --------- --------- ---------
Net GAAP Earnings Per Above $1,537 $0.03 $59,252 $1.21
Impact of Derivatives (1) (1,051) (0.02) (411) (0.01)
Change in Revenue
Recognition 6,276 0.13 22,296 0.46
Tax Adjustments (2) (6,742) (0.14) (6,742) (0.14)
--------- --------- --------- ---------
Net Earnings $20 $0.00 $74,395 $1.52
========= ========= ========= =========
(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.
(2) The tax adjustments include a benefit of $6.7 million primarily
associated with our decision to indefinitely reinvest certain
undistributed foreign earnings in accordance with APB 23.
Reconciliation of GAAP Information to Non-GAAP basis 4th Quarter and
full year FY06, diluted:
Three Months Ended Twelve Months Ended
July 31, 2006 July 31, 2006
------------------- -------------------
Amount Per Share Amount Per Share
--------- --------- --------- ---------
Net GAAP (Loss) Earnings Per
Above $(27,362) $(0.57) $53,622 $1.09
Impairments and Store
Closure Charges 23,879 0.50 45,105 0.92
Settlement of Retirement
Benefit Obligation --- --- (8,350) (0.17)
CEO and COO Severance
Charges --- --- 7,518 0.15
Impact of Derivatives 1,047 0.02 1,047 0.02
Accrued Rent 1,475 0.03 1,475 0.03
Tax Charges/(Benefits) 1,920 0.04 (9,545) (0.19)
--------- --------- --------- ---------
Net Earnings $959 $0.02 $90,872 $1.85
========= ========= ========= =========
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET DATA
(Unaudited, Dollars in thousands)
Difference
July 31, July 31, July 2007 vs July 2006
2007 2006 Amount Percent
----------- ----------- ----------- -----------
ASSETS
Current Assets:
Cash and cash
equivalents $37,643 $42,594 $(4,951) -11.6%
Merchandise
inventories 1,021,164 903,294 117,870 13.0%
Other current assets 113,511 103,356 10,155 9.8%
----------- ----------- ----------- -----------
Total current assets 1,172,318 1,049,244 123,074 11.7%
Property and equipment 304,396 283,721 20,675 7.3%
Goodwill 100,740 96,339 4,401 4.6%
Other assets 35,187 33,264 1,923 5.8%
----------- ----------- ----------- -----------
Total Assets $1,612,641 $1,462,568 150,073 10.3%
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable and
accrued liabilities $300,929 $341,182 $(40,253) -11.8%
Deferred tax
liability, Net 61,875 61,947 (72) -0.1%
----------- ----------- ----------- -----------
Total current
liabilities 362,804 403,129 (40,325) -10.0%
Long-term debt 227,306 202,813 24,493 12.1%
Deferred tax liability 10,349 3,768 6,581 174.7%
Other liabilities 109,609 51,609 58,000 112.4%
Contingencies
Stockholders'
Investment:
Common stock 487 482 5 1.0%
Additional paid-In
capital 138,036 108,344 29,692 27.4%
Accumulated other
comprehensive
income 45,939 33,564 12,375 36.9%
Accumulated earnings 868,111 808,859 59,252 7.3%
----------- ----------- ----------- -----------
1,052,573 951,249 101,324 10.7%
Treasury stock (150,000) (150,000) 0 0.0%
----------- ----------- ----------- -----------
Total stockholders'
investment 902,573 801,249 101,324 12.6%
----------- ----------- ----------- -----------
Total liabilities and
stockholders'
investment $1,612,641 $1,462,568 $150,073 10.3%
=========== =========== =========== ===========
Comparable Store Sales as Reported and Including On-Line Sales for
Fiscal Year 2007:
Including
On-Line
As Reported Sales
----------- -----------
Quarter 1 0.4% 1.0%
Quarter 2 1.4% 2.3%
Quarter 3 -3.4% -2.8%
Quarter 4 -0.5% 0.1%
Year-to-Date FY 07 -0.2% 0.5%
Impact on GAAP Information from Deferred Revenue and APB 23
Estimated Twelve Months Twelve Months Ended
Ended July 31, 2008 July 31, 2007
Amount Per Share Amount Per Share
----------- ----------- ----------- -----------
Net GAAP Earnings $55,500 $1.13 $59,252 $1.21
Tax Adjustments - 0.00 (6,742) (0.14)
Change in Deferred
Revenue 49,105 1.00 38,123 0.78
----------- ----------- ----------- -----------
Net Earnings $104,605 $2.13 $90,633 $1.85
=========== =========== =========== ===========
Non-GAAP Financial Measures
Free operating cash flow is a non-GAAP financial measure and is
defined as cash provided by operating activities (in accordance with
GAAP) less net capital expenditures. The Company considers cash
provided by operating activities to be the most comparable GAAP
financial measure, and has included below a reconciliation of cash
flows from operating activities to free operating cash flow.
Free operating cash flow should not be considered as an
alternative to cash flows from operating, financing or investing
activities or as a measure of liquidity. Further, free operating cash
flow does not represent the total increase or decrease in the cash
balance for the period. Readers are encouraged to review the Statement
of Cash Flows regarding the Company's cash flows from operating,
financing and investing activities under GAAP.
In addition, management has presented a projection of free
operating cash flow of approximately $125 to $150 million for fiscal
year 2008. This projection is based on projected cash provided by
operating activities of approximately $230 to $255 million for fiscal
year 2008, less projected net capital expenditures of approximately
$105 million for fiscal year 2008. Such projections represent
management's current expectations and are subject to a number of risks
and uncertainties that could cause actual amounts to differ materially
from these projections. Please refer to the "Notice Regarding
Forward-Looking Statements" included in this press release.
CONTACT: Zale Corporation
David H. Sternblitz, 972-580-5047
Vice President and Treasurer