More Change at Zale

A mixed quarter and a new president.
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Zale

(ZLC)

posted a drop in second-quarter earnings and shook up management for the second time in a month.

The Dallas-based jeweler made $88 million, or $1.78 a share, for the quarter ended Jan. 31, down from the year-ago $99 million, or $1.91 a share. Revenue rose 2.3% from a year ago to $994 million including some stores to be closed. Excluding the store closures, total revenues were $979 million, an increase of 2.8%. Excluding certain items, latest-quarter earnings were $1.96 a share, a nickel better than the Thomson Financial estimate.

The company also announced that John A. Zimmermann, formerly president of Zale Canada, will take the newly created position of president, Zale North America, overseeing merchandising and store operations of Zales Jewelers, Peoples Jewellers and Mappins Jewellers. Paul Leonard, former president of Zales Jewelers, has resigned.

"Our earnings performance did not reach our expectations for the second quarter due primarily to a sales shortfall at Zales Jewelers," said interim chief Betsy Burton, who took over Jan. 30 after Mary Forte resigned. "Upon review of Zales' business, we concluded that the new strategy negatively impacted our brand positioning because it deemphasized the value component and key diamond categories of the brand's assortment.

"John has 25 years of retail experience, the last five with Zale Corporation, and has consistently improved performance at our Canadian brands," she added. "We look forward to leveraging John's talents in addressing the challenges at the Zales brand."

"Even with the challenges at Zales and Piercing Pagoda, the strength of our other brands helped drive a 1.4% increase in comparable store sales for the quarter," Zale said. "We had a 100 basis points improvement in gross margins due to continued adoption of direct sourcing and supply chain management, excluding the impact of the Bailey Banks & Biddle closures. So in our critical quarter we delivered strong cash flow, which enabled us to complete our $100 million share repurchase. The net effect was earnings per share growth for the quarter above last year before the store closures, repatriation and management change items."

Zale said it expects to make about 21 cents a share for the third quarter, shy of the 24-cent Wall Street estimate, on flat to slightly positive comparable store sales.