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Zale (ZLC)

Q3 2012 Earnings Call

May 23, 2012 9:00 am ET


Roxane Barry - Director of Investor Relations

Theophlius Killion - Chief Executive Officer and Director

Thomas A. Haubenstricker - Chief Financial Officer and Senior Vice President

Matthew W. Appel - Chief Administrative Officer


Rick B. Patel - BofA Merrill Lynch, Research Division

David Wu - Telsey Advisory Group LLC

Jeffrey S. Stein - Northcoast Research

William R. Armstrong - CL King & Associates, Inc.



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Good morning. My name is Christie, and I will be your conference operator today. I would like to welcome everyone to the Zale Corporation's Third Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Roxane Barry, Director of Investor Relations. Please go ahead.

Roxane Barry

Good morning, and thank you for joining us. Participating in today's call will be Theo Killion, Chief Executive Officer; Matt Appel, Chief Administrative officer; and Tom Haubenstricker, Chief Financial Officer. We have posted a slide presentation for today's call on the Investor Relations homepage on our website,

Before we begin, I'll read our Safe Harbor statement. Our commentary and responses to your questions on this conference call will contain forward-looking statements including statements relating to our future goals, plans and objectives. These forward-looking statements are not guarantees of future performance and a variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in these forward-looking statements. Additional information concerning other factors that could cause actual results to differ materially from those contained in the forward-looking statements is available in our quarterly report on Form 10-Q for the fiscal quarter ended January 31, 2012.

Also, please note that during this conference call, we may discuss certain non-GAAP financial measures as we review the company's performance. One of these non-GAAP measures is EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization. A second non-GAAP measure is adjusted EBITDA, which excludes charges related to store closures. We use these measures as part of our evaluation of the performance of the company. In addition, we believe these measures provide useful information to investors. Please refer to the appendix in the Investor Relations presentation for a reconciliation of these non-GAAP measures to the most comparable GAAP financial measures.

Now, I'll turn the call over to Theo.

Theophlius Killion

Roxane, thank you, and thank you to everyone joining us on the call today as we report our earnings for the third quarter. For those of you following along with the slides that we posted on our website, please direct your attention to Slide 3.

In our press release earlier today, we highlighted 4 important financial measures that underscore the progress we're making in executing our turnaround plan. They were a comparable store sales increase of 8%. This is our sixth consecutive quarter of comp store improvement and our sales results follow a 15% increase in the same period a year ago, resulting in a 2-year comp of plus 23%. Our plan is working. We have traction, and we're committed to not only returning the business to profitability in the near term, but returning long-term value to shareholders, who believe in our strategy and the work that we're doing to execute it.

Revenues increased $33 million for the quarter to $445 million. Gross margin improved $22 million to 51.3%. During the quarter, we implemented another price increase without adversely impacting sales. We believe that we're building equity in the Diamond Store with great product, and great guest engagement. This allows our jewelry consultants to focus on the features, benefits and quality of our assortment, not just price.

One of the significant accomplishments in our business is when a jewelry consultant sells $1 million worth of jewelry in a fiscal year. This year, for the first time, we had 4 jewelry consultants exceed $1 million by the third quarter, a tribute to their selling skills and to the improvements we're making in our merchandise offerings. And finally, operating earnings of $6 million, an improvement of $12 million compared to the prior year. This is the first time in over 5 years that we delivered positive operating earnings in the third quarter.

As a result of the 4 metrics we highlighted in the press release, net loss per share improved by $0.17. The performance highlights that I just described were driven by executing the business strategy that I referred to earlier, the first element of which is constant vigilance on the core assortment. By achieving our 80% plus goal, it allows us to continuously edit slow turning SKUs, while we methodically introduce new items, test them and expand them once that margin in turn characteristics at or above category norms. Our inventory is much more efficient as we've eliminated unproductive merchandise and reduced our clearance penetration to under 6%.

Having done so, it allows us to test and launch proprietary product, product like Vera Wang LOVE. Growing our penetration of proprietary product is a strategy that will continue to have increasing importance in the future. On our last call, I talked about the work that we're doing to tap into the emerging world of Omni-Channel retailing and marketing. The guest is not standing still and as the guest moves, so too must the way we communicate with them.

Our integrated Mother's Day campaign is an illustration of our blending traditional and new media to communicate with the guest on their terms, another important strategic imperative. And of course, none of this happens without strong execution by our customer-facing teams.

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