Q3 2011 Earnings Call
May 25, 2011 9:00 am ET
Theo Killion - Chief Executive Officer, President and Director
Matthew Appel - Chief Administrative Officer, Chief Financial Officer and Executive Vice President
Roxane Barry - Director of Investor Relations
Rick Patel - BofA Merrill Lynch
David Wu - Global Crown
William Armstrong - CL King & Associates, Inc
Previous Statements by ZLC
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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 2011 Results Conference Call . [Operator Instructions] I would now like to turn the call over to Roxane Barry, Director of Investor Relations. Please go ahead.
Good morning, and thank you for joining us on the Zale Corporation Fiscal Third Quarter 2011 Results Conference Call . I'm Roxane Barry, Director of Investor Relations. On the call today are Theo Killion, Chief Executive Officer; and Matt Appel, Chief Administrative Officer and Chief Financial Officer.
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, 2011.
Also please note that during this conference call, we will discuss certain non-GAAP financial measures as we review the company's performance. One of these non-GAAP measures is adjusted EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization adjusted to exclude charges related to store closures. We use this measurement as part of our evaluation of the performance of the company. In addition, we believe this measure provides useful information to investors. Please refer to the Investor Relations section of our website for a copy of our Form 8-K dated May 25, 2011, which contains the reconciliation of this non-GAAP measure to the most comparable GAAP financial measure. Now I'll turn the call over to Matt.
Thank you, Roxane, and good morning, everyone. The third fiscal quarter of 2011 was one in which we continued to make significant progress towards our goal of stabilizing the business and returning Zale to profitability. There were several key positive developments that Theo and I will be covering on today's call. First among these relates to the SEC investigation of the company. In April, we were informed that the commission had completed the investigation of Zale Corporation that began in September 2009 with a recommendation of no enforcement action against the company. This determination by the SEC has allowed us to redirect our resources and more sharply focus on the management of the business.
Moving now to our third quarter results. We are pleased to report the second consecutive quarter of solid progress in the recovery of the business. Revenues for the quarter ended April 30, 2011, were $412 million, an increase of $52 million or 14.5% compared to $360 million for the same period in the prior year. The increase in revenues, is primarily due to significantly higher same-store sales, an increase in revenues recognized on our lifetime warranty product and appreciation of the Canadian dollar, net of revenues attributable to 55 stores closed during the past year. Comparable store sales for the third quarter increased 15.2% compared to a decrease of 2.2% in the prior year. The increase in comparable store sales was driven by a 14% increase in the number of customer transactions accompanied by a 2% increase in average transaction price. At constant exchange rates, which exclude the effect of translating Canadian currency denominated sales into US dollars, comparable store sales increased a very healthy 14.2% for the quarter.
During the third quarter, the Canadian dollar strengthened approximately 6% relative to the US dollar with an average exchange rate of approximately $1.03 compared to approximately $0.97 in the prior year quarter. Impact on the 2011 quarter's earnings was not significant as the rate differential almost equally impacted all P&L line items.
Gross margin for the quarter ended April 30, 2011, was 50.1% compared to 50 .8% for the prior year period. The decline of 70 basis points was due primarily to the impact of higher commodity costs and a change in mix of merchandise sold in the quarter as compared to last year, partially offset by higher warranty revenues and lower inventory evaluation reserves as a result of better inventory turn. Commodity prices continue to be an area of focus as pressure on diamond, gold and silver costs continued during the third quarter. On average, diamond prices are up approximately 20%, gold prices are up approximately 25% and silver prices are up approximately 100% from a year ago. As we replenished our core inventory during the quarter, it became necessary to accept additional selective price increases. At the same time, we began multiple price tests in select markets in April. Preliminary results on these tests are promising, and we will be implementing price increases across North America during the fourth quarter. Our objective remains to maintain gross margins above 50% while continuing to regain market share. We believe this is a realistic and achievable goal.