ZLC Zale Corp.

• Comparable store sales up 1.9 percent at constant exchange rates; up 0.6 percent on a U.S. dollar reported basis
• Operating margin up 100 basis points; up 240 basis points when excluding $5.9 million of transaction costs relating to the proposed merger
• May month-to-date performance reflects negative comparable store sales of 2.2 percent at constant exchange rates and expected gross margin rate consistent with third quarter fiscal 2014 results
• Special meeting of stockholders set for May 29 to vote on proposed acquisition by Signet Jewelers

Zale Corporation (NYSE: ZLC) today reported its financial results for the third quarter ended April 30, 2014.

Third Quarter Fiscal 2014 Results

Revenues were $431 million compared to $443 million in the third quarter of fiscal 2013. The decrease in revenues is primarily due to the net decrease of 78 stores compared to last year and a decline in the Canadian exchange rate, partially offset by comparable store sales growth.

For the third quarter of fiscal 2014, comparable store sales increased 1.9 percent at constant exchange rates, or 0.6 percent on a U.S. dollar reported basis. This increase follows a 2.6 percent rise at constant exchange rates, or a 2.3 percent rise on a U.S. dollar reported basis.

Comparable Store Sales Detail (includes the associated ecommerce businesses)

  Q3 Fiscal 2014   Q3 Fiscal 2013 (1) Brand U.S. Dollar  

At ConstantExchangeRates

U.S. Dollar  

At ConstantExchangeRates

Zales/Zales Outlet 2.1 % 2.1 % 3.9 % 3.9 % Gordon's 0.4 % 0.4 % (6.8 %) (6.8 %) U.S. Fine Jewelry 2.0 % 2.0 % 2.7 % 2.7 % Peoples (4.0 %) 4.6 % 2.6 % 4.6 % Mappins (11.2 %) (3.3 %) (10.2 %) (8.4 %) Canadian Fine Jewelry (5.2 %) 3.2 % (0.1 %) 1.8 % Total Fine Jewelry 0.7 % 2.2 % 2.2 % 2.6 % Piercing Pagoda (0.1 %)   (0.1 %)   2.9 %   2.9 % Total Company 0.6 % 1.9 % 2.3 % 2.6 %   (1) Adjusted for the impact of February 29 in fiscal 2012

Gross margin on sales was $241 million, or 56.0 percent, an increase of 340 basis points compared to $233 million, or 52.6 percent, in the third quarter of fiscal 2013. The gross margin improvement is primarily due to the benefits generated from our sourcing initiatives, a more disciplined promotional cadence and a favorable commodity cost environment.

Selling, general and administrative expenses were $220 million, or 51.1 percent of revenues, including $5.9 million in professional fees and other related costs associated with the proposed merger with Signet Jewelers Limited. Excluding the $5.9 million in transaction costs, selling, general and administrative expenses were $214 million, or 49.7 percent of revenues compared to $215 million, or 48.6 percent of revenues, in the third quarter of fiscal 2013.

Operating earnings were $14 million, or 3.2 percent of revenues. Excluding the $5.9 million in transaction costs, operating earnings were $20 million, or 4.6 percent of revenues, compared to operating earnings of $10 million, or 2.2 percent of revenues, in the third quarter of fiscal 2013.

For the quarter ending April 30, 2014, interest expense was $5 million compared to $6 million in the third quarter of fiscal 2013.

In the third quarter of fiscal 2014, net earnings were $9 million, or $0.19 per diluted share. When excluding the $5.9 million in transaction costs, net earnings were $15 million, or $0.32 per diluted share, compared to net earnings of $5 million, or $0.13 per diluted share, in the third quarter of fiscal 2013.

Inventory at April 30, 2014 stood at $845 million, compared to $828 million on April 30, 2013. The Company had outstanding debt of $454 million on April 30, 2014, a reduction of $12 million compared to $466 million on April 30, 2013.

Year to Date Fiscal 2014 Results

For the nine months ended April 30, 2014, revenues were $1.5 billion, a decrease of $21 million compared to the same period last year. Comparable store sales increased 2.7 percent at constant exchange rates, or 1.5 percent on a U.S. dollar reported basis, in the first nine months of 2014. This increase follows a 2.7 percent rise at constant exchange rates, or a 2.9 percent rise on a U.S. dollar reported basis, in the same period last year.

Comparable Store Sales Detail (includes the associated ecommerce businesses)

  YTD Fiscal 2014   YTD Fiscal 2013 (1) Brand U.S. Dollar  

At ConstantExchangeRates

U.S. Dollar  

At ConstantExchangeRates

Zales/Zales Outlet 4.2 % 4.2 % 4.0 % 4.0 % Gordon's (3.1 %) (3.1 %) (4.1 %) (4.1 %) U.S. Fine Jewelry 3.5 % 3.5 % 3.1 % 3.1 % Peoples (2.4 %) 4.6 % 6.0 % 4.4 % Mappins (8.9 %) (2.5 %) (6.8 %) (8.2 %) Canadian Fine Jewelry (3.6 %) 3.3 % 3.2 % 1.7 % Total Fine Jewelry 2.1 % 3.5 % 3.1 % 2.8 % Piercing Pagoda (2.4 %)   (2.4 %)   1.9 %   1.9 % Total Company 1.5 % 2.7 % 2.9 % 2.7 %   (1) Adjusted for the impact of February 29 in fiscal 2012

Operating earnings were $51 million, or 3.5 percent of revenues. Excluding the $5.9 million in transaction costs, operating earnings were $57 million, or 4.0 percent, compared to $38 million, or 2.6 percent of revenues, in the same period last year.

Net earnings were $32 million, or $0.71 per diluted share. Excluding the $5.9 million in transaction costs, net earnings were $38 million, or $0.84 per diluted share, compared to net earnings of $18 million, or $0.45 per diluted share, in the same period last year.

May Month-to-Date Financial Update

Zale Corporation also reported that for the first 18 days of May, which included the Mother’s Day selling period, comparable store sales were down 2.2 percent on a constant currency basis, or down 3.4 percent on a U.S. dollar reported basis. Gross margin rate performance for this period is expected to be consistent with third quarter fiscal 2014 results.

Additional Earnings Information

Zale management is not holding a conference call to discuss third quarter earnings; however, the company has posted a slide presentation with additional written commentary regarding the Company’s third quarter results on the Investor Relations section of the company’s web site at www.zalecorp.com.

Other Recent Developments

On February 19, 2014, Signet Jewelers Limited and Zale Corporation announced they have entered into a definitive agreement for Signet to acquire all of the issued and outstanding stock of Zale for $21.00 per share in cash consideration. On April 7, 2014 the Company announced the expiration of the HSR Act waiting period. The transaction is subject to Zale stockholder approval and customary closing conditions with the special meeting of stockholders set for May 29, 2014.

About Zale Corporation

Zale Corporation is a leading specialty retailer of diamond and other jewelry products in North America, operating approximately 1,630 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, Peoples Jewellers, Mappins Jewellers and Piercing Pagoda. Zale also operates webstores at www.zales.com, www.zalesoutlet.com, www.gordonsjewelers.com, www.peoplesjewellers.com, and www.pagoda.com. Additional information on Zale Corporation and its brands is available at www.zalecorp.com.

Forward Looking Statements

This release and related presentations contain forward-looking statements, including statements regarding future sales, expected operating performance, expenses, margins, profitability, earnings, interest expense, effective tax rate, merchandising and marketing initiatives and industry growth forecasts. 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 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; if the Company does not achieve targeted sales growth its operating results and earnings will be adversely impacted; 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; the financing market remains difficult, and if we are unable to meet the financial commitments in our current financing arrangements it will be difficult to replace or restructure these arrangements; changes in regulatory requirements may increase the cost or adversely affect the Company’s operations and its ability to provide consumer credit and write credit insurance; the Company's and Signet Jewelers Limited's ("Signet") ability to consummate the proposed acquisition of the Company by Signet; the conditions to the completion of the proposed transaction being satisfied, including the receipt of stockholder approval; operating costs, customer loss and business disruption (including difficulties in maintaining relationships with employees, customers, competitors or suppliers) may be greater than expected following the announcement of the proposed transaction; and the retention of certain key employees of the Company may be difficult. Additional information and other factors are contained in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2013, and subsequent reports on Form 10-Q and 8-K filed with the Securities and Exchange Commission. Because the factors referred to above could cause actual results or outcomes to differ materially from those expressed or implied in any forward-looking statements made by the Company, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date of this communication, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after such date.

  ZALE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited)     Three Months Ended Nine Months Ended April 30, April 30,   2014 2013 2014 2013   Revenues $ 431,029 $ 442,708 $ 1,450,092 $ 1,470,927 Cost of sales   189,820     209,861     667,476     708,095   Gross margin 241,209 232,847 782,616 762,832 % of Revenue 56.0 % 52.6 % 54.0 % 51.9 %   Selling, general and administrative 220,066 (a) 215,037 708,372 (a) 700,565 % of Revenue 51.1 % 48.6 % 48.9 % 47.6 % Depreciation and amortization 7,203 8,131 22,325 25,165 Other charges (gains)   23     (249 )   512     (1,096 ) Operating earnings 13,917 9,928 51,407 38,198 % of Revenue 3.2 % 2.2 % 3.5 % 2.6 % Interest expense   5,401     5,668     17,106     17,598   Earnings before income taxes 8,516 4,260 34,301 20,600 Income tax (benefit) expense   (306 )   (792 )   1,999     2,604   Net earnings $ 8,822   $ 5,052   $ 32,302   $ 17,996     Basic net earnings per common share: $ 0.23 $ 0.16 $ 0.94 $ 0.56   Diluted net earnings per common share: $ 0.19 $ 0.13 $ 0.71 $ 0.45   Weighted average number of common shares outstanding: Basic 38,017 32,480 34,519 32,401 Diluted 45,875 39,277 45,209 40,139  

(a) Selling, general and administrative expenses for the three and nine month periods ending April 30, 2014 includes $5.9 million in professional fees and other related costs associated with the proposed merger with Signet Jewelers Limited.

 

  ZALE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands)       April 30,   2014   2013   ASSETS Current assets: Cash and cash equivalents $ 21,895 $ 25,693 Merchandise inventories 845,428 828,197 Other current assets   50,261     48,862   Total current assets 917,584 902,752   Property and equipment 667,743 679,065 Less accumulated depreciation and amortization   (561,300 )   (570,827 ) Net property and equipment 106,443 108,238   Other assets   238,287     243,163   Total assets $ 1,262,314   $ 1,254,153     LIABILITIES AND STOCKHOLDERS’ INVESTMENT Current liabilities: Accounts payable and accrued liabilities $ 241,193 $ 260,608 Deferred revenue 80,934 84,190 Deferred tax liability   106,579     97,110   Total current liabilities 428,706 441,908   Long-term debt 454,002 466,480 Deferred revenue – long-term 102,947 113,924 Other liabilities 70,926 33,922   Stockholders’ investment   205,733     197,919     Total liabilities and stockholders’ investment $ 1,262,314   $ 1,254,153  

Zale CorporationInvestor RelationsRoxane Barry, 972-580-4391Director of Investor Relations