ZALE CORPORATION
NYSE : ZLC

ZALE CORPORATION

August 30, 2005 07:00 ET

Zale Announces Fourth Quarter and Full Year Financial Results; Also Announces $100 Million Stock Repurchase Program

DALLAS--(CCNMatthews - Aug 30, 2005) -

Zale Corporation (NYSE:ZLC), North America's largest specialty retailer of fine jewelry, reported today net earnings of $4.1 million, or $0.08 per diluted share, for the Company's fourth quarter ended July 31, 2005. For the same period last year, the Company reported net earnings of $6.9 million, or $0.13 per diluted share.

Net earnings for fiscal year 2005 were $106.8 million, or $2.05 per diluted share. For the prior fiscal year, net earnings were $106.5 million, or $1.99 per diluted share.

For the fiscal year, total revenues increased 3.4% to $2.383 billion, compared to $2.304 billion for the prior fiscal year. On a comparable store basis, sales increased 0.3% for the year.

"During the year we made progress in the execution of our business plan, although the year proved challenging with the repositioning of the Zales brand," commented Mary L. Forte, President and Chief Executive Officer. "We achieved our square footage growth objectives with the opening of 61 stores, 50 kiosks and 71 carts during the year. Our supply chain improvements continued with direct product sourcing positively impacting our business as it is implemented throughout the organization. From a financial perspective, we generated $89 million in free operating cash flow after capital expenditures. The balance sheet was further strengthened by the reduction of $68 million in long-term debt, creating substantial flexibility as we move forward. Additionally, we repurchased 1.8 million shares of common stock for $50 million, demonstrating our continued commitment to increasing shareholder value."

Ms. Forte continued, "The increases to sales and earnings in fiscal 2005 did not meet our expectations, particularly due to the underperformance of the Zales brand and its impact on our consolidated results. With many new initiatives being implemented at Zales, significant repositioning of the brand has taken place. We remain committed to our goals of expanding market share through our differentiated portfolio of brands, improving all aspects of our supply chain and enhancing the customer experience."

The Company announced as part of its strategy to improve brand performance and profitability at Bailey Banks & Biddle, it will be closing after the upcoming Holiday season 30 to 35 stores that do not fit with its long-term positioning in the luxury goods market. This action will permit the Company to focus capital, inventory and resources on the most productive stores and will further strengthen the Bailey Banks & Biddle brand. The Company estimates a charge in fiscal year 2006 of $13 million, net of tax, or $0.25 per diluted share. Further information will be provided quarterly as the store closings begin to occur.

The Company stated that as of August 1, 2005, it adopted Statement of Financial Accounting Standards (SFAS) No.123R Share-Based Payment, using the modified prospective method. The impact of adopting SFAS No.123R, which requires the expensing of stock compensation programs, is expected to reduce earnings per diluted share by approximately $0.10 in fiscal 2006.

The Company also provided its forecast for its fiscal year ending July 31, 2006. For the full year, it currently expects revenue growth of 5.0% to 7.0%. These revenue expectations do not reflect the impact of the Bailey Banks & Biddle store closings discussed above, as the timing of the planned closings has not been finalized. Included in the revenue projections are a comparable store sales increase of 2.5% to 3.5% and square footage and other growth of 2.5% to 3.5%. The Company plans to open 65 stores and 40 kiosks during the year. Earnings per diluted share is expected to grow 5% to 7% including the impact of the $13 million charge for the Bailey Banks & Biddle store closings, an estimated $5 million stock compensation expense outlined above, each net of tax, and a potential income tax benefit of up to $10 million based on the estimated range of earnings from our Canadian subsidiary being considered for repatriation under the American Jobs Creation Act. Excluding the Bailey Banks & Biddle store closings, stock compensation expense and the tax repatriation credit, the Company anticipates earnings per diluted share to increase 12% to 14%. Free operating cash flow is expected to reach $100 million for fiscal year 2006.

Separately, as part of its ongoing strategy to return value to its shareholders, the Company announced that its Board of Directors has approved a stock repurchase program pursuant to which the Company, from time to time and at management's discretion, may purchase up to an aggregate of $100 million of Zale common stock on the open market.

The Company also announced that it will be presenting at the Goldman Sachs Retailing Conference on Wednesday, September 7, 2005, at 2:00 p.m. Eastern Time. Ms. Forte and Sue E. Gove, the Company's Chief Operating Officer, will discuss Zale's strategic plan. The presentation will be available on the Company's Web site at www.zalecorp.com.

As previously announced, a conference call will be held today at 9:00 a.m. Eastern Time. Parties interested in participating should dial 706-643-7467, five minutes prior to the scheduled start time. The call also will be available on the Company's Web site at www.zalecorp.com. For additional information, contact Investor Relations.

Zale Corporation is North America's largest specialty retailer of fine jewelry operating approximately 2,345 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, Bailey Banks & Biddle Fine Jewelers, Peoples Jewellers, Mappins Jewellers and Piercing Pagoda. Through its ZLC Direct organization, Zale also operates online at www.zales.com and www.baileybanksandbiddle.com. Additional information on Zale Corporation and its brands is available at www.zalecorp.com.

Notice Regarding Forward-Looking Statements

This release contains forward-looking statements, including statements regarding the Company's future revenue growth, store and kiosk growth and closings plans and related charges, impact of accounting changes and income tax repatriation, margin rates, earnings per share and cash flow. 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 not grow and may even 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; 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; changes in regulatory requirements or in the Company's private label credit card arrangement with Citi may increase the cost of or adversely affect the Company's operations and its ability to provide consumer credit and write credit insurance; and acquisitions involve special risks, including the possibility that the Company may not be able to integrate acquisitions into its existing operations. For other factors, see the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended July 31, 2004. The Company disclaims any obligation to update or revise publicly or otherwise any forward-looking statements to reflect subsequent events, new information or future circumstances.

(Tables and reconciliations to follow)



ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(amounts in thousands, except per share amounts)

Three Months Ended Twelve Months Ended
July 31, July 31,
------------------- -----------------------
2005 2004 2005 2004
--------- --------- ----------- -----------

Total Revenues $472,342 $455,598 $2,383,066 $2,304,440
Costs and Expenses:
Cost of Sales 225,566 214,518 1,157,226 1,122,946
Selling, General and
Administrative
Expenses 221,356 212,511 982,113 942,796
Cost of Insurance
Operations 1,542 1,567 6,084 5,963
Depreciation and
Amortization Expense 15,656 14,394 59,840 56,381
--------- --------- ----------- -----------
Operating Earnings 8,222 12,608 177,803 176,354
Interest Expense, Net 1,735 1,643 7,725 7,528
--------- --------- ----------- -----------
Earnings Before Income
Taxes 6,487 10,965 170,078 168,826
Income Taxes 2,433 4,070 63,303 62,353
--------- --------- ----------- -----------
Net Earnings $4,054 $6,895 $106,775 $106,473


Earnings Per Common Share -
Basic:
Net Earnings Per Share $0.08 $0.13 $2.08 $2.02

Earnings Per Common Share -
Diluted:
Net Earnings Per Share $0.08 $0.13 $2.05 $1.99

Weighted Average Number of
Common Shares Outstanding:
Basic 51,216 51,987 51,280 52,650
Diluted 51,920 52,697 51,975 53,519


ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)

July 31, July 31,
2005 2004
ASSETS
Current Assets:
Cash and Cash Equivalents $55,446 $63,124
Merchandise Inventories 853,580 826,824
Other Current Assets 64,042 63,956
----------- -----------
Total Current Assets 973,068 953,904

Property and Equipment, Net 282,033 266,688
Goodwill, Net 90,774 85,583
Other Assets 35,025 35,909
Deferred Tax Asset, Net --- ---
----------- -----------
Total Assets $1,380,900 $1,342,084
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts Payable and Accrued Liabilities $326,331 $319,599
Deferred Tax Liability, Net 57,048 51,417
----------- -----------
Total Current Liabilities 383,379 371,016

Non-current Liabilities 37,325 42,486
Non-current Tax Liability, Net 12,808 4,968
Long-term Debt 129,800 197,500

Commitments and Contingencies --- ---
Stockholders' Investment:
Common Stock 531 521
Additional Paid-In Capital 88,970 63,661
Accumulated Other Comprehensive Income 24,119 13,470
Accumulated Earnings 755,237 648,462
Deferred Compensation (1,269) ---
----------- -----------
867,588 726,114
Treasury Stock (50,000) ---
----------- -----------
Total Stockholders' Investment 817,588 726,114
----------- -----------

----------- -----------
Total Liabilities and Stockholders' Investment $1,380,900 $1,342,084
----------- -----------
----------- -----------


ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(amounts in thousands)

Twelve Months Twelve Months
Ended Ended
July 31, 2005 July 31, 2004
-------------- -------------

Net Cash Flows from Operating Activities:
Net earnings $106,775 $106,473
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization expense 59,840 56,381
Amortization of long-term debt
issuance costs 1,306 1,329
Deferred taxes 12,643 30,976
Deferred compensation expense 660 ---
Loss on dispositions of property and
equipment 4,388 2,429
Impairment of fixed assets 1,497 2,627
Tax benefit associated with stock
option exercises 5,665 7,955
Changes in assets and liabilities:
Merchandise inventories (20,968) (24,431)
Other current assets 261 (11,150)
Other assets (2,194) (315)
Accounts payable and accrued
liabilities 3,566 12,113
Non-current liabilities (5,161) (6,309)
-------------- -------------
Net Cash Provided by Operating Activities 168,278 178,078
-------------- -------------

Net Cash Flows from Investing Activities:
Additions to property and equipment (83,124) (60,788)
Proceeds from sales of fixed assets 3,971 ---
Purchase of available-for-sale-
investments (3,480) (4,980)
Proceeds from sale of available-for-
sale-investments 4,440 5,751
-------------- -------------
Net Cash Used in Investing Activities (78,193) (60,017)
-------------- -------------

Net Cash Flows from Financing Activities:
Borrowings under revolving credit
agreement 1,388,900 717,400
Payments on revolving credit agreement (1,456,600) (704,300)
Proceeds from exercise of stock options 17,725 39,565
Purchase of common stock (50,000) (143,358)
-------------- -------------
Net Cash Used in Financing Activities (99,975) (90,693)
-------------- -------------

Effect of Exchange Rate Changes on Cash 2,212 483

Net (Decrease)/Increase in Cash and Cash
Equivalents (7,678) 27,851
Cash and Cash Equivalents at Beginning of
Period 63,124 35,273
----------- -------------
Cash and Cash Equivalents at End of
Period $55,446 $63,124
------------- -----------
------------- -----------



Non-GAAP Financial Measures

This press release includes a presentation of "free operating cash flow" for the fiscal year ended July 31, 2005. Free operating cash flow is a non-GAAP financial measure and is defined as cash provided by operating activities (in accordance with GAAP) less net capital expenditures. Net capital expenditures includes additions to property and equipment and proceeds from the sales of fixed assets, including in 2005 the sale of an unused Piercing Pagoda warehouse. The Company considers cash provided by operating activities to be the most comparable GAAP financial measure, and has included below a reconciliation of cash flows from operating activities to free operating cash flow.



Reconciliation of Free Operating Cash Flows To
Cash Provided by Operating Activities
(amounts in thousands)

For the Fiscal Year Ended

July 31, 2005 July 31, 2004

Cash flows from operating activities $168,278 $178,078

Less: Net capital expenditures 79,153 60,788
--------------- -------------

Free operating cash flow $89,125 $117,290



Free operating cash flow should not be considered as an alternative to cash flows from operating, financing or investing activities or as a measure of liquidity. Further, free operating cash flow does not represent the total increase or decrease in the cash balance for the period. Readers are encouraged to review the Statement of Cash Flows included in this press release for information regarding the Company's cash flows from operating, financing and investing activities under GAAP.

In addition, management has presented a projection of free operating cash flow of approximately $100 million for fiscal year 2006. This projection is based on projected cash provided by operating activities of approximately $185 million for fiscal year 2006, less projected net capital expenditures of approximately $85 million for fiscal year 2006. Such projections represent management's current expectations and are subject to a number of risks and uncertainties that could cause actual amounts to differ materially from these projections. Please refer to the "Notice Regarding Forward-Looking Statements" included in this press release.

Contact Information

  • Zale Corporation, Dallas
    David H. Sternblitz, 972-580-5047
    Vice President and Treasurer