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Zale Beats, but Guides Lower

It sees third-quarter earnings of 20 cents to 22 cents a share.
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second-quarter earnings slid 11% from a year ago, weighed down by a writedown and a severance charge. Excluding items, profits were ahead of estimates, but the jewelry company also guided lower for the current quarter.

Zale earned $88 million, or $1.78 a share, in the quarter, compared with $99 million, or $1.91 a share, a year ago. Excluding special items, Zale earned $97 million, or $1.96 a share, in the latest quarter, beating the Thomson First Call consensus by a nickel.

Second-quarter sales rose 2.3% from a year ago to $994 million, and were $979 million excluding stores that are being managed for liquidation. Analysts were forecasting sales of $988 million in the quarter. Zale's same-store sales rose 1.4% in the quarter, excluding the stores that are designated for closure.

"Our earnings performance did not reach our expectations for the second quarter due primarily to a sales shortfall at Zales Jewelers," the company said. "Upon review of Zales' business, we concluded that the new strategy negatively impacted our brand positioning because it de-emphasized the value component and key diamond categories of the brand's assortment."

"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. We had a 100-basis-point 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," the company said.

For the third quarter ending in April, Zale expects to earn 20 cents to 22 cents a share. Analysts were estimating 24 cents a share, according to Thomson First Call.