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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
For the fiscal year ended July 31, 2005
Zale Corporation
A Delaware Corporation
IRS Employer Identification No. 75-0675400
SEC File Number 1-04129
901 W. Walnut Hill Lane
Irving, Texas 75038-1003
(972) 580-4000
Zale Corporations common stock, par value $.01 per share, is registered pursuant to Section
12 (b) of the Securities Exchange Act of 1934 (the Act) and is listed on the New York Stock
Exchange. Zale Corporation (1) has filed all reports required to be filed by Section 13 or 15 (d)
of the Act during the preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.
Disclosure of the delinquent filers pursuant to Item 405 of Regulation S-K is contained in a
definitive proxy statement, portions of which are incorporated by reference in Part III of this
Form 10-K.
The aggregate market value of Zale Corporations common stock (based upon the closing sales
price quoted on the New York Stock Exchange) held by non-affiliates as of January 31, 2005 was
$1,338,900,968. As of September 23, 2005, 50,317,693 shares of Zale Corporations common stock were
outstanding. For this purpose, directors and officers have been assumed to be affiliates.
Zale Corporation is an accelerated filer.
Zale Corporation is not a shell company.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of Zale Corporations Proxy Statement for the 2005 Annual Meeting of Stockholders to
be held on November 11, 2005 are incorporated by reference into Part III.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
General
Zale Corporation, through its wholly owned subsidiaries (the Company), is the largest and
most diversified specialty retailer of fine jewelry in North America. At July 31, 2005, the Company
operated 1,464 specialty retail jewelry stores, 812 kiosks and 69 carts located mainly in shopping
malls throughout the United States of America (U.S.), Canada and Puerto Rico.
The Company was incorporated in Delaware in 1993. Its principal executive offices are located
at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003. Its telephone number at that address is (972)
580-4000, and its Internet address is www.zalecorp.com.
During the fiscal year ended July 31, 2005 (fiscal year 2005), the Company generated $2.4
billion of net revenues. The Company believes it is well-positioned to compete in the approximately
$27 billion, highly fragmented specialty retail jewelry industry, leveraging its established brand
names, economies of scale and geographic and demographic diversity. The Company has significant
brand name recognition as a result of each brands long-standing presence in the industry and its
national and regional advertising campaigns. The Company believes that brand name recognition is
an important advantage in jewelry retailing as jewelry products are generally unbranded and
consumers must trust in a retailers reliability, credibility and commitment to customer service.
Business Segments
Beginning in fiscal year 2005, the Company began reporting its operations under three business
segments: Fine Jewelry, Kiosk Jewelry and All Other. All corresponding items of segment
information in prior periods have been presented consistently. An overview of each business
segment follows below.
Fine Jewelry
The Companys Fine Jewelry segment operates under six brands, each targeted to reach a
distinct customer. Each brand specializes in fine jewelry and watches, with merchandise and
marketing emphasis focused on diamond products. Zales Jewelers® is the Companys national brand in
the U.S. providing traditional moderately priced jewelry to a broad range of customers. Zales
Jewelers has extended the reach of its brand to the Internet shopper through its e-commerce site,
zales.com. The Company has further leveraged the brand strength through Zales the Diamond Store
Outlet®, which focuses on the brand conscious, value-oriented shopper in outlet malls and
neighborhood power centers. Gordons Jewelers® focuses on the individual preferences of its
customers through merchandising by store, strengthening its position as a relationship jeweler.
Bailey Banks & Biddle Fine Jewelers® operates jewelry stores that are considered among the finest
luxury jewelry stores in their markets, offering designer jewelry and watches to attract more
affluent customers. Bailey Banks & Biddle Fine Jewelers has expanded its presence in the luxury
market through its e-commerce site, baileybanksandbiddle.com. Peoples JewellersÒ, the
Companys national brand in Canada, offers traditional moderately priced jewelry to customers
throughout Canada. Mappins Jewellers® in Canada targets the more discerning customer with
merchandise assortments designed to promote slightly higher priced purchases. During fiscal year
2005, the Companys Fine Jewelry segment generated $2.1 billion of net revenues.
Zales Jewelers
Zales, the Companys national flagship, is a leading brand name in jewelry retailing in the
U.S., with stores in 50 states and Puerto Rico, and accounted for 45 percent of the Companys total
revenues in fiscal year 2005. Zales average store size is 1,613 square feet with an average
transaction total of $379.
In fiscal year 2005, bridal merchandise represented 44.5 percent of merchandise sales, while
fashion jewelry and watches comprised the remaining 55.5 percent. The bridal merchandise category
consists of engagement rings, bridal sets and diamond anniversary bands. Fashion jewelry consists
generally of diamond fashion jewelry, precious and semi-precious jewelry, gold jewelry, watches and
various other
- 1 -
items. The Company believes that the prominence of diamond jewelry in its product selection
and its reputation for customer service for 80 years fosters an image of quality and trust among
consumers. While placing added emphasis on the bridal segment of its business, Zales maintains a
balance with non-bridal merchandise such as fashion jewelry and watches as well as its key item
strategy to drive sales during gift-giving occasions throughout the year.
Zales merchandise selection has historically been standardized across the nation. Beginning
in the spring of fiscal year 2005, the assortments were repositioned across the entire chain to
more appropriately target the customer preferences by analyzing customer demographics and each
stores historical sales trends.
The combination of Zales national presence and centralized replenishment allows it to use
television advertising across the nation as its primary advertising medium, supplemented by
newspaper inserts and direct mail. Zales continues to support its brand awareness through its
sponsorship of events such as the Rockefeller Center Christmas Tree Lighting. Zales serves the
Internet customer through its e-commerce site, zales.com, which accounted for less than one percent
of the Companys total revenues in fiscal year 2005 (see ZLC Direct on page 3 for further
discussion).
Zales the Diamond Store Outlet
The Company operated Zales the Diamond Store Outlet (Zales Outlet) with stores in 35 states
and Puerto Rico, that accounted for 7 percent of the Companys total revenues in fiscal year 2005.
The average store size is 2,466 square feet, with an average transaction total of $367. Zales
Outlet benefits from Zales brand recognition and national advertising programs.
The outlet concept has evolved into one of the strongest concepts in retail shopping today,
featuring key merchandise items in every major jewelry category including branded watches,
gemstones, gold merchandise, and diamond fashion and solitaire products. The merchandise
assortment in a typical Zales Outlet store caters to the brand conscious and value-oriented female
shopper, offering 20 to 70 percent off traditional retail prices every day. The Company has grown
its Zales Outlet concept over the past six years from 4 stores in 1998 to the 138 locations in
operation at the end of fiscal year 2005.
Although Zales Outlet was established as an extension of the Zales brand and capitalizes on
Zales national advertising and brand recognition, Zales Outlet has built its own customer base,
outside of the traditional Zales customer. Zales Outlet offers its own unique product line and
promotional efforts geared specifically to the outlet consumer.
Gordons Jewelers
Gordons is positioned as the Companys second national brand. As of July 31, 2005, Gordons
had stores in 35 states and Puerto Rico and accounted for 14 percent of the Companys total
revenues in fiscal year 2005. Average store size is 1,479 square feet with an average transaction
total of $411.
The Company is continuing steps to differentiate the Gordons image from that of other
moderate jewelers, including store design and improved merchandise and marketing with a focus on
leveraging its solid bridal business and market position as the relationship expert. Gordons has a
larger and more developed bridal business than the Companys other brands (48 percent) which
reflects its unique relationship with its customer.
Gordons strives to distinguish itself by understanding local and regional differences to
tailor its assortments more appropriately for each stores locale. Gordons offers a broad range of
merchandise, such as diamond solitaires, jewelry set in platinum and semi-precious gems.
Gordons utilizes a targeted approach in its marketing, consisting primarily of television and
direct mail. The marketing will continue to evolve and capitalize upon the opportunity created by
the bridal business and its 99 years of customer relationships. The Company positions Gordons as
the relationship expert, and a warm, friendly place to obtain knowledgeable guidance on a
significant jewelry purchase.
- 2 -
Bailey Banks & Biddle Fine Jewelers
At July 31, 2005, Bailey Banks & Biddle operated 104 upscale jewelry stores in 30 states and
Puerto Rico. The Company also utilizes the trade name Zell Bros.® for one location operated by the
Bailey Banks & Biddle brand. Average store size is 3,780 square feet with an average transaction
total of $1,385. Total revenue at Bailey Banks & Biddle accounted for 13 percent of the Companys
total revenues in fiscal year 2005.
On August 30, 2005, the Company announced its intention to close approximately 30 Bailey Banks
& Biddle stores after the upcoming Holiday season that do not fit with the brands long term
positioning in the luxury market.
For 172 years, Bailey Banks & Biddle has combined classic jewelry with contemporary designs,
offering a compelling shopping environment for the high-end luxury consumer. Bailey Banks & Biddle
locations are among the pre-eminent stores in their markets. They carry both exclusive and
recognized branded and designer merchandise selections to appeal to the more affluent customer. The
Bailey Banks & Biddle merchandise assortments are carefully selected to provide treasures that will
be appreciated for generations with a focus on diamonds, precious gemstones, gold and branded
designer jewelry, complemented by an extensive assortment of prestige watch brands and giftware.
Bailey Banks & Biddle has a large customer base and prospects with upscale direct-mail
catalogs and invitations to special events, enabling the stores to focus on specific products
tailored for specific customers.
Peoples Jewellers and Mappins Jewellers
In Canada, the Company operates stores in nine provinces and enjoys the largest market share
of any jewelry retailer in Canada. Peoples Jewellers and Mappins Jewellers accounted for 8 percent
of the Companys total revenues in fiscal year 2005. The average store size is 1,589 square feet
with an average transaction totaling $272.
The organization operates under two banners, Peoples Jewellers and Mappins Jewellers. The
primary banner, Peoples Jewellers, is one of the most recognized brand names in Canada. Peoples
Jewellers offers traditional jewelry at affordable prices, attracting a wide variety of Canadian
customers. Using the trademark Peoples, the Diamond Store in Canada, Peoples emphasizes its
diamond business while also offering a wide selection of gold jewelry, gemstone jewelry and
watches. Due to the similarity in marketing and store designs, Peoples Jewellers is able to
leverage opportunities with Zales Jewelers.
Since 2000, the Peoples brand has been building recognition with an aggressive television
campaign. Over the past three years, Peoples had the largest television campaign of any Canadian
jewelry retailer by a wide margin. Seasonal newspaper inserts are also a key element in the
Peoples marketing campaign. In addition, Peoples produces a seasonal bridal book, which is mailed
to customers twice a year.
Mappins Jewellers continues to be a strong second brand in Canada. Building on a history
dating from 1936, Mappins is recognized as a jeweler catering to the upscale customer in key mall
locations. The Mappins consumer selects from classic fashion styles at upper moderate price
points. Since 2000, Mappins has utilized newspaper inserts and targeted direct mail offers to reach
their customers.
ZLC Direct
For the on-line customer, the Company offers two e-commerce sites. The zales.com site has
benefited from the strong brand recognition and marketing power of Zales Jewelers. In fiscal year
2005, the Company launched a second brand e-commerce site, baileybanksandbiddle.com, under the
Bailey Banks & Biddle banner. In May 2005, the Company entered into a new strategic partnership
with GSI Commerce, Inc. (GSI), a recognized provider of website design and operations services,
which will allow the Company to leverage advanced technology and web support. Through the
partnership with GSI, the Company intends to introduce e-commerce capabilities to its other brands.
- 3 -
Kiosk Jewelry
The Kiosk Jewelry segment operates primarily under the brand names Piercing Pagoda (in the
U.S.) and Peoples II (in Canada) through mall based kiosks and carts and reaches the opening price
point fine jewelry customer. The Kiosk Jewelry segment specializes in gold and silver products that
capitalize on the latest fashion trends.
At July 31, 2005, Piercing Pagoda operated 812 locations in 41 states and Puerto Rico under
the names Piercing Pagoda, Plum Gold, Silver and Gold Connection, and Piercing Pagoda+. During
fiscal year 2005 the Company operated 69 carts in Canada under the name Peoples II, which sell
items consistent with the best selling fashion items in the Piercing Pagoda kiosks.
At the entry-level price point, the Kiosk Jewelry segment targets a young, fashion forward
customer. The kiosks and carts offer an extensive collection of popularly priced bracelets,
earrings, charms, rings, and 14 karat and 10 karat gold chains, as well as a selection of silver
and diamond jewelry, all in basic styles at moderate prices. In addition, trained associates
perform ear-piercing services on site.
Kiosks and carts are generally located in high traffic concourses of regional shopping malls.
The kiosk locations average 189 square feet in size, with an average transaction of $36, and are
easily accessible and visible within malls. In fiscal year 2005, the kiosk revenues represented 12
percent of the Companys total revenues.
In fiscal year 2006, the Company plans to continue its expanded focus on the key strategies it
implemented during fiscal year 2004. Such initiatives included an expanded offering of lower price
point merchandise and fashion-focused items, including gold earrings and body jewelry. The Kiosk
Jewelry segment will use its scale to create a competitive advantage by expanding direct sourcing
opportunities, which proved successful at improving gross margins in fiscal years 2005 and 2004.
All Other
The Company, through Zale Indemnity Company, Zale Life Insurance Company and Jewel
Re-Insurance Ltd., provides insurance and reinsurance facilities for various types of insurance
coverage, which typically are marketed to the Companys private label credit card customers. The
three companies are the insurers (either through direct written or reinsurance contracts) of the
Companys customer credit insurance coverages. In addition to providing replacement property
coverage for certain perils, such as theft, credit insurance coverage provides protection to the
creditor and cardholder for losses associated with the disability, involuntary unemployment, leave
of absence or death of the cardholder. Zale Life Insurance Company also provides group life
insurance coverage for eligible employees of the Company. Zale Indemnity Company, in addition to
writing direct credit insurance contracts, has certain discontinued business that it continues to
run off. Credit insurance operations are dependent on Company retail sales through its private
label credit cards. In fiscal year 2005, 39.4 percent of the Companys private label credit card
purchasers purchased some form of credit insurance. Under the current private label arrangement
with Citibank U.S.A., N.A. (Citi), the Companys insurance affiliates continue to provide
insurance to holders of the Companys private label credit cards and receive payments for such
insurance products. Insurance premium revenues of $12.9 million, $12.6 million, and $16.1 million
are included in total revenues for fiscal years ended July 31, 2005, 2004 and 2003, respectively.
Business Initiatives and Strategy
In fiscal year 2005, the Company remained focused on executing the strategic plan it put in
place during fiscal year 2003 designed to support the Companys long term growth. The core
strategies, increasing its market share, creating and enhancing the customer experience, and
implementing a comprehensive supply chain continue to be the blueprint for the future.
- 4 -
Capture Market Share
The Company believes that a brand management strategy is key to increasing its market share.
The focus of the Companys brand management strategy is on aligning each brands product offerings
and marketing stance with its appropriate customer segment to further differentiate the brands.
The Company believes that its brand recognition is a competitive advantage. This is especially
important because, when consumers feel they lack the expertise to evaluate the quality and value of
jewelry purchases, they rely on known brand names to ensure that quality and value. As an industry
leader, the Company continues to set the standard for delivering innovative and creatively designed
products to consumers. The Company believes its proven ability to capitalize on evolving
merchandise trends is what differentiates it from its competition. In addition, as the largest
specialty retailer of fine jewelry in North America, the Company believes it realizes economies of
scale in purchasing, distribution, real estate, advertising and administrative costs. The Company
also believes that the geographic diversity of its retail distribution network through all 50
states, Puerto Rico and Canada, and the demographic breadth of its target customer groups may serve
to reduce earnings volatility typically associated with local or regional conditions.
As part of its strategic plan to capture market share, the Company has dedicated resources to
improve the effectiveness of its marketing function. The Company believes that knowledge of its
different types of customers and their behaviors has improved the decision making capabilities with
respect to its media buys and the message it delivers to existing and potential customers. This
increased awareness has compelled the Company to further evolve the positioning of its key brands.
The growing knowledge base, along with the Companys widely differentiated portfolio of brands,
allows it to meet the needs of the jewelry-buying consumer on a more personal basis. These needs
vary in importance depending on the person. Accordingly, the communication strategy utilized for
each brand will vary as well. Each brand will emphasize different features giving each brand a
distinct look, style and feel.
Marketing research is at the core of the Companys decision to introduce a new creative
campaign for Zales Jewelers in time for the 2005 Holiday season. The Companys new direction will
focus on better quality jewelry, maintaining television as its core medium, and rely on targeted
direct mail campaigns for promotional efforts. The Company believes this approach is more
consistent with its strategy of building a stronger brand with long-term customer relationships.
The Companys goal is to establish predictive customer data to maximize the effectiveness of
its marketing efforts to its existing 19 million-customer database, and target new opportunities to
market its jewelry products to individuals demonstrating a high propensity to respond. The
database, combined with improved statistical modeling capabilities, allows the Company to interpret
the overall brand message into resonant direct mail communications. Additionally, the development
and utilization of proprietary clientele software and processes is allowing the Company to place a
personal touch on these relationship efforts.
During fiscal year 2005, the Company had square footage and other growth of over three
percent, opening 61 stores, 50 kiosks and 71 carts. A significant portion of the growth was
outside the mall in power strip centers, an urban strategy in New York and an expanded presence in
neighborhood centers. Additional growth vehicles included expansion of Piercing Pagoda in the U.S.
and introduction into Canada of a smaller cart version of the Piercing Pagoda kiosk under the brand
name Peoples II, which leverages the product strategies of Piercing Pagoda and the brand strength
of the Companys Canadian business. This new cart program is typically located in a
landlord-provided cart at the center of the mall and offers the latest trends to the opening price
point fashion forward customer in Canada.
The Company expanded its off-mall presence in fiscal year 2005. The growth plan included the
expansion of Zales the Diamond Store Outlet into value-oriented shopping centers with recognizable
tenants such as Bed Bath & Beyond, Office Depot, Target and Kohls. The off-mall venue proved
successful in New Jersey, Florida and Texas markets, but met with weaker response in Chicago.
Accordingly, the Chicago stores will be re-merchandised and branded as traditional Zales stores to
enjoy the marketing strength that the flagship brand provides. The Company reduced its original
2005 new store opening target across both the traditional outlet malls and power strip centers from
50 stores to 18 stores.
- 5 -
On August 30, 2005, the Company announced, as part of its strategy to improve brand
performance and profitability, its intention to close approximately 30 Bailey Banks & Biddle stores
after the upcoming Holiday season that do not fit with the brands long term positioning in the
luxury market. The closings are estimated to result in a charge of $13 million or $0.25 per share
after taxes related to the leasehold improvements, inventory and lease exit costs.
In fiscal year 2006, the Company plans to open approximately 65 new stores, principally under
the brand names Zales Jewelers and Gordons Jewelers, and approximately 40 Piercing Pagoda kiosks
for which it expects to incur an aggregate of approximately $32 million in capital expenditures
during fiscal year 2006. The Company also plans to refurbish, renovate or relocate approximately
172 stores and kiosks at a cost of approximately $40 million during fiscal year 2006.
As a tool to support the growth in store space, the Company implemented new software to assist
with real estate decisions regarding site selection. Additional experience with this tool is
expected to provide even greater benefit in targeting locations as the Company moves forward with
its new store opening plans.
As the Company looks toward other avenues for growth it is testing a repair store concept with
three locations scheduled to open before the Holiday season. The Company sees opportunities for
gross margin improvement in its current brand repair operations by utilizing repair stores to
improve services to the customer. The concept, if successful, also provides another avenue for top
line growth.
The Companys e-commerce business, zales.com and baileybanksandbiddle.com, grew over 30
percent this year and the Company believes there is further opportunity to grow as a complement to
its national store base. The Company has positioned itself to maximize the longer-term growth and
success of its online business through a partnership with GSI. Through the partnership with GSI,
the Company intends to introduce e-commerce capabilities to its other brands.
Create and Enhance the Customer Experience
At the center of the strategy to improve the customer experience are the Companys own sales
associates and the tools that are available to them. The Company is investing heavily in training
to ensure the associates are knowledgeable and reliable resources to customers, and that sales
transactions can be executed rapidly.
Integral to the managerial and associate training designed in fiscal year 2004 were programs
designed to strengthen management development. In fiscal year 2005, the Company further supported
the development of product knowledge through an arrangement with the Diamond Council of America
(DCA) to train key store managers and sales associates, increasing their expertise in diamonds
and colored stones. Additionally, the Company has a well-developed buyer training program to
develop and train new buyers on merchandise negotiation techniques and Company standards.
The Company is also enhancing its customers experience through the use of technology as it
designs the next generation store POS system. The goal is to accelerate transaction speed and
timely access to customer and inventory information, while reducing administrative responsibilities
in the stores. The test will be conducted across both retail segments throughout fiscal year 2006.
The Companys investments in infrastructure to support its employees include the development
of a long-term human resource vision. At the center of this vision is an investment in an
integrated human resource management and payroll system. The human resources management solution
was implemented during fiscal year 2005 and the payroll solution will be implemented in fiscal year
2006. The system is designed to provide on-line employee access, eliminate manual processes, and
provide detailed data analysis to managers, allowing the Company to continuously enhance
productivity.
- 6 -
Supply Chain Strategy
Supply chain improvements are the third prong in the Companys three-part strategy and are
designed to enhance margin and enable the Company to operate more efficiently and cost-effectively.
The centralized product sourcing organization established to coordinate the purchase and assembly
of cut and polished diamond solitaire product for the Companys Canadian fine jewelry brands
expanded to support Gordons and Outlets needs by supplying over $37 million in purchases. During
fiscal year 2005, direct sourcing of solitaire products has improved gross margins on the related
products and increased revenues. In fiscal year 2006, the Company expects to further improve
margins by increasing penetration at existing brands and by beginning to supply Zales Jewelers with
a portion of its solitaire needs. In July of 2005, the Company also expanded both production and
distribution capacity with the construction of a new integrated distribution and assembly center in
Canada.
In addition to the purchase and assembly of diamond solitaire products, direct importing of
finished product from overseas vendors also was identified as an opportunity. The Kiosk Jewelry
segment and the Fine Jewelry segment will import basic gold and diamond merchandise directly from
factories in Europe, Asia and the Middle East to be more up-to-the-moment with respect to fashion
trends while reducing product cost. In fiscal year 2005, the Kiosk Jewelry segment accelerated the
direct importing of finished goods, increasing sourced product to over 75 percent of inventory.
This allowed the Kiosk Jewelry segment to be both price competitive and to offer its customers the
latest fashion trends.
The Company expects direct sourcing to contribute additional improvements in merchandise
margin and allow the Company to be more flexible and competitive in merchandising certain items
over the next several years. Direct sourcing contributed 40 and 50 basis points of gross margin
improvement for fiscal years 2005 and 2004, respectively.
To support the Companys strategic initiatives, the Company has also established a long-term
information technology strategy linking its business needs with its technology efforts and
investments. The Company is committed to making the appropriate system investments that allow it to
adapt to new technologies, gain efficiencies and achieve a competitive business advantage. During
fiscal year 2005, the focus included supporting the human resources strategy, identifying the
technology needs of the supply chain strategy and partnering with the brand resources to select new
merchandise and point of sale software solutions.
As the Company moves into fiscal year 2006, the IT focus will be on redesigning store
processes consistent with business needs that will be enabled by new POS software to be introduced
at select pilot stores over the year. Additionally, the Company will design and implement an
integrated suite of merchandise solutions targeted to be in production in fiscal year 2008.
Additional expected benefits from the Companys system investment are improved speed to market,
increased efficiency, reduced maintenance costs and improved real time communication with its
stores, vendors and customers. It will also enable the Company to convert to cost-based accounting
and support its move to a 4-5-4 retail calendar that will provide the ability to plan and forecast
on a more consistent basis.
Current Year Capital
Stock Repurchase Plan. On August 30, 2005, the Company announced that its Board of Directors
had approved a stock repurchase program pursuant to which the Company, from time to time, at
managements discretion and in accordance with the Companys usual policies and applicable
securities laws, could purchase up to an additional $100 million of its common stock, par value
$.01 per share (common stock).
On August 5, 2004, the Company announced that its Board of Directors had approved a stock
repurchase program pursuant to which the Company, from time to time, at managements discretion and
in accordance with the Companys usual policies and applicable securities laws, could purchase up
to an additional $50 million of its common stock. During the first six months of fiscal year 2005,
the Company repurchased 1.8 million shares of common stock at an aggregate cost of approximately
$50 million, which completed its authorization under the fiscal year 2005 program.
- 7 -
The Companys Board of Directors has authorized similar programs for eight consecutive years
and believes that share repurchases are a prudent use of the Companys financial resources, given
its cash flow and capital position, and provide value to its stockholders. The Company believes
that its financial performance and cash flows will continue to provide the necessary resources to
improve its operations, grow its business and provide adequate financial flexibility while still
allowing for stock repurchase activities.
Industry and Competition
U.S. specialty retail jewelry stores (such as the Company) accounted for approximately $27
billion of sales in 2004, according to publicly available data. Historically, retail jewelry store
sales have exhibited only limited effects of cyclicality. The United States Census Bureau has
recorded only three years of negative growth in specialty retail jewelry store sales from 1984 to
2004. Other significant segments of the fine jewelry industry include national chain department
stores (such as J.C. Penney Company, Inc. and Sears, Roebuck and Co.), mass merchant discount
stores (such as Wal-Mart Stores, Inc.), other general merchandise stores and apparel and accessory
stores. The remainder of the retail jewelry industry is comprised primarily of catalog and mail
order houses, direct-selling establishments, TV shopping networks (such as QVC, Inc.) and on-line
jewelers.
The largest jewelry retailer in U.S. is believed to be Wal-Mart Stores, Inc., which includes a
wide-ranging assortment of costume jewelry, followed by the Company. The Company is the largest
specialty retail jewelry chain in North America, with approximately nine percent of the U.S.
specialty retail jewelry market share, based on estimates from the United States Census Bureau.
Only two other specialty retail jewelers had greater than three percent market share.
Jewelry retailing is highly competitive. The Company competes with a large number of
independent regional and local jewelry retailers, as well as with national jewelry chains. The
Company also competes with other types of retailers who sell jewelry and gift items, such as
department stores, discounters, direct mail suppliers, online retailers and television home
shopping programs. Certain of the Companys competitors are non-specialty retailers, which are
larger and have greater financial resources than the Company. The malls where the Companys stores
are located typically contain competing national chains, independent jewelry stores and/or
department store jewelry departments. The Company believes that it is also competing for consumers
discretionary spending dollars and, therefore, competes with retailers who offer merchandise other
than jewelry or giftware. Therefore, the Company competes primarily on the basis of its reputation
for high quality products, brand recognition, store location, distinctive and value-priced
merchandise, personalized customer service and ability to offer private label credit card programs
to customers wishing to finance their purchases. The Companys success is also dependent on its
ability to both react to and create customer demand for specific merchandise categories.
The Company holds no material patents, licenses, franchises or concessions; however, the
established trademarks and trade names of the Company are essential to maintaining its competitive
position in the retail jewelry industry.
- 8 -
Operations by Brand
The following table presents total revenues, average sales per location and the number of
locations for each of the Companys brands for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Total Revenues (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Zales (including ZLC Direct) |
|
$ |
1,079,230 |
|
|
$ |
1,070,576 |
|
|
$ |
1,040,537 |
|
Zales Outlet |
|
|
166,000 |
|
|
|
137,613 |
|
|
|
119,270 |
|
Gordons |
|
|
324,854 |
|
|
|
313,881 |
|
|
|
314,345 |
|
Bailey Banks & Biddle |
|
|
320,869 |
|
|
|
326,086 |
|
|
|
314,886 |
|
Peoples (a) |
|
|
204,909 |
|
|
|
174,058 |
|
|
|
150,416 |
|
Piercing Pagoda |
|
|
274,296 |
|
|
|
269,660 |
|
|
|
256,665 |
|
Insurance Revenues |
|
|
12,908 |
|
|
|
12,566 |
|
|
|
16,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,383,066 |
|
|
$ |
2,304,440 |
|
|
$ |
2,212,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales per location (b) |
|
|
|
|
|
|
|
|
|
|
|
|
Zales |
|
$ |
1,366,000 |
|
|
$ |
1,390,000 |
|
|
$ |
1,369,000 |
|
Zales Outlet |
|
|
1,249,000 |
|
|
|
1,287,000 |
|
|
|
1,261,000 |
|
Gordons |
|
|
1,112,000 |
|
|
|
1,101,000 |
|
|
|
1,084,000 |
|
Bailey Banks & Biddle |
|
|
3,030,000 |
|
|
|
2,848,000 |
|
|
|
2,702,000 |
|
Peoples |
|
|
1,140,000 |
|
|
|
1,041,000 |
|
|
|
878,000 |
|
Piercing Pagoda |
|
|
343,000 |
|
|
|
339,000 |
|
|
|
322,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Locations opened during period |
|
|
|
|
|
|
|
|
|
|
|
|
Zales |
|
|
24 |
|
|
|
9 |
|
|
|
13 |
|
Zales Outlet |
|
|
18 |
|
|
|
25 |
|
|
|
4 |
|
Gordons |
|
|
13 |
|
|
|
9 |
|
|
|
1 |
|
Bailey Banks & Biddle |
|
|
0 |
|
|
|
0 |
|
|
|
1 |
|
Peoples |
|
|
6 |
|
|
|
5 |
|
|
|
3 |
|
Piercing Pagoda |
|
|
50 |
|
|
|
24 |
|
|
|
15 |
|
Peoples II |
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182 |
|
|
|
72 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Locations closed during period |
|
|
|
|
|
|
|
|
|
|
|
|
Zales |
|
|
14 |
|
|
|
7 |
|
|
|
15 |
|
Zales Outlet |
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
Gordons |
|
|
13 |
|
|
|
9 |
|
|
|
12 |
|
Bailey Banks & Biddle |
|
|
4 |
|
|
|
8 |
|
|
|
5 |
|
Peoples |
|
|
1 |
|
|
|
9 |
|
|
|
7 |
|
Piercing Pagoda |
|
|
36 |
|
|
|
39 |
|
|
|
59 |
|
Peoples II |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71 |
|
|
|
72 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Locations at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
Zales |
|
|
767 |
|
|
|
757 |
|
|
|
755 |
|
Zales Outlet |
|
|
138 |
|
|
|
121 |
|
|
|
96 |
|
Gordons |
|
|
287 |
|
|
|
287 |
|
|
|
287 |
|
Bailey Banks & Biddle |
|
|
104 |
|
|
|
108 |
|
|
|
116 |
|
Peoples |
|
|
168 |
|
|
|
163 |
|
|
|
167 |
|
Piercing Pagoda |
|
|
812 |
|
|
|
798 |
|
|
|
813 |
|
Peoples II |
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,345 |
|
|
|
2,234 |
|
|
|
2,234 |
|
|
|
|
|
|
|
|
|
|
|
- 9 -
|
|
|
(a) |
|
Peoples (including Mappins and Peoples II carts) reflects all revenue from Canadian
operations, which constitutes all foreign operations of the Company. Long-lived assets from
foreign operations totaled approximately $27.6 million, $23.2 million, and $ 20.0 million at
July 31, 2005, 2004, and 2003, respectively. |
|
(b) |
|
Based on merchandise sales for locations open a full twelve months during the
respective year. |
Business Segment Data
Information concerning sales and segment income attributable to each of the Companys business
segments is set forth in Item 6, Selected Financial Data, in Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, and in Notes to Consolidated Financial
Statements, all of which are incorporated herein by reference.
Store Operations
The Companys stores are designed to differentiate its brands, create an attractive
environment, make shopping convenient and enjoyable, and maximize operating efficiencies, all of
which should enhance the customer experience. The Company focuses on store layout, particularly in
areas such as lighting, choice of materials and arrangement of display cases, to maximize
merchandise presentation. Promotional displays are changed periodically to provide variety or to
reflect seasonal events.
Each of the Companys stores is led by a store manager who is responsible for certain
store-level operations, including overall store sales and certain personnel matters. Administrative
matters, including purchasing, distribution and payroll, are consolidated at the corporate level in
an effort to maintain low operating costs at the store level. Each store offers standard warranties
and return policies, and provides extended warranty coverage that may be purchased at the
customers option. In order to facilitate sales, stores will hold merchandise in layaway, generally
requiring a deposit of not less than 20 percent at the inception of the layaway transaction.
The Company has implemented inventory control systems, extensive security systems and loss
prevention procedures to maintain low inventory losses. The Company screens employment applicants
and provides its store personnel with training in loss prevention. Despite such precautions, the
Company experiences losses from theft from time to time, and maintains insurance to cover such
external losses.
The Company believes it is important to provide knowledgeable and responsive customer service.
There continues to be a strong focus on connecting with the customer, both through advertising and
in-store communications and service. The goal is to service the customer from the first sale by
maintaining a customer connection through client services. The Company has a consolidated customer
service call center to more effectively address customer phone calls at lower aggregate cost.
The Company continues to focus on the level and frequency of its employee training programs,
particularly with store managers and key sales associates. The Company also provides training in
sales techniques for new employees, on-the-job training for all store personnel and management
training for store managers. Under the banner of Zale Corporation University, the Company offers
training to employees at every level of the organization.
Purchasing and Inventory
The Company purchases the majority of its merchandise in finished form from a network of
established suppliers and manufacturers located primarily in the United States, Southeast Asia and
Italy. All purchasing is done through buying offices at the Companys headquarters. As discussed in
the section Business Initiatives and Strategy, a centralized product sourcing organization has
also been established to coordinate the purchase and assembly of core diamond products such as
solitaire rings, earrings and pendants. Consignment inventory has historically consisted of test
programs, merchandise at higher price points or merchandise that otherwise does not warrant the
risk of ownership. Consignment merchandise can be returned to the vendor at any time. The Company
had approximately $150.9 million and $163.1 million
- 10 -
of consignment inventory on hand at July 31, 2005 and 2004, respectively. During fiscal years
2005 and 2004, the Company purchased approximately 26 percent and 30 percent, respectively, of its
merchandise from its top five vendors, including more than 8 percent from its top vendor in fiscal
year 2005. If supply between the Company and these top vendors were disrupted, particularly at
certain critical times during the year, the Companys sales could be adversely affected in the
short term until alternative supply arrangements could be established. In fiscal year 2005,
purchases of internally produced merchandise represented approximately 3.5 percent of total
purchases.
The Company historically has engaged in a limited amount of hedging activity with respect to
merchandise held in inventory, as commodity prices have remained relatively stable. The Company is
not subject to substantial currency fluctuations because most of its purchases are U.S.
dollar-denominated. The Company continually reviews its position on hedging and will take steps to
hedge certain commodity components or currency positions if appropriate. In fiscal year 2005, the
Company entered into foreign currency forward exchange contracts to minimize the market risk from
currency exchange rate exposure, primarily associated with its Canadian brand, Peoples Jewellers.
These contracts are used to hedge certain forecasted inventory, advertising, and purchases relating
to capital investments anticipated to be incurred during the fiscal year, denominated in foreign
currencies for periods and amounts consistent with the Companys identified exposures. In addition,
the Company entered into forward contracts for the purchase of some of its gold in order to reduce
the effects of fluctuating gold prices on inventory. These contracts are used to hedge forecasted
inventory purchases of finished goods made of gold for periods and amounts consistent with the
Companys identified exposure.
As a specialty retail jeweler, the Company could be affected by industry-wide fluctuations in
the prices of diamonds, gold, and other metals and stones. The supply and prices of diamonds in the
principle world markets are significantly influenced by a single entity, the Diamond Trading
Company, which has traditionally controlled the marketing of a substantial majority of the worlds
supply of diamonds and sells rough diamonds to worldwide diamond cutters at prices determined in
its sole discretion. The availability of diamonds to the Diamond Trading Company and the Companys
suppliers is to some extent dependent on the political situation in diamond-producing countries and
on continuation of prevailing supply and marketing arrangements for raw diamonds. Until alternate
sources could be developed, any sustained interruption in the supply of diamonds or any oversupply
from the producing countries could adversely affect the Company and the retail jewelry industry as
a whole.
Within the jewelry industry there has been continued focus on conflict diamonds, which are
allegedly extracted from war-torn regions and sold by organizations to fund insurrection. Through
an international system of certification and legislative initiatives, the diamond trade has taken
steps to ensure the exclusion from the supply chain of these diamonds, which represent a small
fraction of the worlds supply. It is not expected that such efforts, if successful, will
substantially affect the supply of diamonds. However, in the near term, efforts by non-governmental
organizations to increase consumer awareness of the issue and encourage legislative response could
affect consumer demand for diamonds.
Proprietary Credit
The Companys private label credit card program helps facilitate the sale of merchandise to
customers who wish to finance their purchases rather than use cash or other payment sources. The
Company offers revolving and interest free credit programs under its private label credit card
program. Approximately 44 percent and 45 percent, respectively, of the Companys U.S. total sales
excluding Piercing Pagoda, which does not offer proprietary credit, were generated by proprietary
credit cards in fiscal years 2005 and 2004. The Companys Canadian propriety credit card sales
represented approximately 29 percent of Canadian total sales for fiscal year 2005 and approximately
31 percent of Canadian total sales for the same period in the prior year.
In fiscal year 2005, the Company continued its proprietary credit offerings of same-as-cash,
revolving and interest free programs, all of which allowed Company sales personnel to provide the
customer additional financing options.
In July 2000, the Company entered into a ten-year agreement with Citibank U.S.A., N.A.
(Citi) whereby Citi issues private label credit cards branded with appropriate Company
trademarks, and provides
- 11 -
financing for the Companys customers to purchase merchandise in exchange for payment by the
Company of a merchant fee based on a percentage of each credit card sale. The merchant fee varies
according to the credit plan that is chosen by the customer (i.e., Revolving, Interest Free, Same
as Cash).
Employees
As of July 31, 2005, the Company had approximately 16,300 employees, less than 10 percent of
whom were Canadian employees and less than one percent of whom were represented by unions. The
Company usually hires temporary employees during each Holiday season.
Seasonality
As a specialty retailer of fine jewelry, the Companys business is seasonal in nature, with
its second quarter, which includes the months of November through January, typically generating a
proportionally greater percentage of annual sales, earnings from operations and cash flow than the
other three quarters. Management expects such seasonality to continue.
Information Technology
The Companys technology systems provide information necessary for (i) management operating
decisions; (ii) sales and margin management; (iii) inventory control; (iv) profitability monitoring
by many measures (merchandise category, buyer, store); (v) customer care and (vi) expense control
programs. Significant data processing systems include point-of-sale reporting, purchase order
management, replenishment, warehouse management, merchandise planning and control, payroll, general
ledger, sales audit, and accounts payable. Bar code ticketing and scanning are used at all
point-of-sale terminals to ensure accurate sales and margin data compilation and to provide for
inventory control monitoring. Information is made available on-line to merchandising staff on a
timely basis, thereby increasing the merchants ability to be responsive to changes in customer
behavior. The Company is also improving the connectivity between stores and the Companys corporate
headquarters to enhance operating efficiencies and speed of transmission.
The Companys information technology systems and processes allow management to monitor, review
and control operational performance on a daily, monthly, quarterly and annual basis for each store
and each transaction. Senior management can review and analyze activity by store, amount of sale,
terms of sale or employees who sell the merchandise.
The Company has a data center operations services agreement with a third party for the
management of the Companys mainframe processing operations, client server systems, Local Area
Network operations, Wide Area Network management and e-commerce hosting. The agreement expired
July 31, 2005 and was renegotiated. The new agreement, effective August 1, 2005, requires fixed
payments totaling $30.0 million over an 84-month period plus a variable amount based on usage, and
extends through 2012. The Company believes that by outsourcing its data center operations, the
Company will best focus its resources on developing and enhancing the strategic initiatives
discussed in the Business and Strategy section.
The Company has historically upgraded, and expects to continue to upgrade, its information
systems to improve operations and support future growth. The Company estimates it will make capital
expenditures of approximately $13 million in fiscal year 2006 for enhancements to its information
systems and infrastructure. Fiscal year 2006 expenditures will include: implementation of a new
payroll system designed to significantly streamline the data capture processing and utilization of
payroll and employee life-cycle information, a pilot for new point of sale software and hardware,
the design and testing of an integrated merchandising system and several technology infrastructure
projects.
- 12 -
Regulation
The Companys operations are affected by numerous federal and state laws that impose
disclosure and other requirements upon the origination, servicing and enforcement of credit
accounts and limitations on the maximum amount of finance charges that may be charged by a credit
provider. In addition to the Companys private label credit cards, credit to the Companys
customers is provided primarily through bank cards such as Visa®, MasterCard®, and Discover®. Any
change in the regulation of credit which would materially limit the availability of credit to the
Companys traditional customer base could adversely affect the Companys results of operations or
financial condition.
The Company is subject to the jurisdiction of various state and other taxing authorities.
From time to time, these taxing authorities conduct reviews or audits of the Company.
The sale of insurance products by the Company is also highly regulated. State laws currently
impose disclosure obligations with respect to the Companys sale of credit and other insurance. In
addition, the Companys sale of insurance products in connection with its private label credit
cards appears to be subject to certain disclosure and other requirements under the
Gramm-Leach-Bliley Act of 1999. The Companys and its competitors practices are also subject to
review in the ordinary course of business by the Federal Trade Commission and the Companys and
other retail companies, credit cards are subject to regulation by state and federal banking
regulators. The Company believes that it is currently in material compliance with all applicable
state and federal regulations.
Merchandise in the retail jewelry industry is frequently sold at a discount off the regular
or original price. The Company is subject to federal and state regulations requiring retailers
offering merchandise at promotional prices to offer the merchandise at regular or original prices
for stated periods of time. Additionally, the Company is subject to certain truth-in-advertising
and various other laws, including consumer protection regulations that regulate retailers generally
and/or the promotion and sale of jewelry in particular. The Company monitors changes in those laws
and believes that it is in material compliance with applicable laws with respect to such practices.
Available Information
The Company provides links to its filings with the Securities and Exchange Commission (SEC)
and to the SEC filings (Forms 3, 4 and 5) of its directors and executive officers under Section 16
of the Securities Exchange Act of 1934, as amended (the Exchange Act), free of charge, on the
Companys website at http://www.zalecorp.com, under the heading SEC Filings in the Shareholder
Information section. These links are automatically updated, so the filings also are available
immediately after they are made publicly available by the SEC. These filings also are available
through the SECs EDGAR system at http://www.sec.gov.
The Companys certificate of incorporation and bylaws as well as the charters for the
compensation, audit, nominating and corporate governance committees of its Board of Directors and
the corporate governance guidelines are available on the Companys website at
http://www.zalecorp.com, under the heading Corporate Governance.
The Company has a Code of Business Conduct and Ethics (the Code). All of its directors,
executive officers and employees are subject to the Code. The Code is available on the Companys
web site at http://www.zalecorp.com, under the heading Corporate Governance-Code of Business
Conduct and Ethics. Waivers of the Code will be disclosed in a SEC filing on Form 8-K.
- 13 -
Cautionary Notice Regarding Forward-Looking Statements
The Company makes forward-looking statements in this Annual Report on Form 10-K and in other
reports the Company files with the SEC. In addition, members of the Companys senior management
may make forward-looking statements orally in presentations to analysts, investors, the media and
others. Forward-looking statements include statements regarding the Companys objectives and
expectations with respect to sales and earnings, merchandising and marketing strategies, store
renovation, remodeling and expansion, inventory management and performance, liquidity and cash
flows, capital structure, capital expenditures, development of its information technology plan and
related management information systems, e-commerce initiatives, human resource initiatives and
other statements regarding the Companys plans and objectives. In addition, the words
anticipate, estimate, project, intend, expect, believe, forecast, can, could,
should, will, may, or similar expressions may identify forward looking statements, but some
of these statements may use other phrasing. These forward-looking statements are intended to relay
the Companys expectations about the future, and speak only as of the date they are made. 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.
Forward-looking statements are not guarantees of future performance and a variety of factors
could cause the Companys actual results to differ materially from the anticipated or expected
results expressed in or suggested by these forward-looking statements. Some of these factors are
described below. Many of these factors, both described and not described, are beyond the Companys
control.
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.
Jewelry purchases are discretionary and may be affected by adverse trends in the general
economy (and consumer perceptions of those trends). In addition, a number of other factors
affecting disposable consumer income such as employment, wages and salaries, business conditions,
energy costs, credit availability and taxation policies, for the economy as a whole and in regional
and local markets where the Company operates, can impact sales and earnings.
The concentration of a substantial portion of the Companys sales in three, relatively brief
selling seasons means that the Companys performance is more susceptible to disruptions.
A substantial portion of the Companys sales are derived from three selling seasons Holiday
(Christmas), Valentines Day, and Mothers Day. Because of the briefness of these three selling
seasons, the opportunity for sales to recover in the event of a disruption or other difficulty is
limited, and the impact of disruptions and difficulties can be significant. For instance, adverse
weather (such as a blizzard), a significant interruption in the receipt of products (whether
because of vendor or other product problems), or a sharp decline in mall traffic occurring during
one of these selling seasons, could materially impact sales for the affected season and, because of
the importance of each of these selling seasons, commensurately impact overall sales and earnings.
Most of the Companys sales are of products that include diamonds, precious metals and other
commodities, and fluctuations in the availability and pricing of commodities could impact the
Companys ability to obtain and produce products at favorable prices.
The supply and price of diamonds in the principal world markets are significantly influenced
by a single entity, which has traditionally controlled the marketing of a substantial majority of
the worlds supply of diamonds and sells rough diamonds to worldwide diamond cutters at prices
determined in its sole discretion. The availability of diamonds also is somewhat dependent on the
political conditions in diamond-producing countries and on continuing supply of arrangements for
raw diamonds. Any sustained interruption in this supply could have an adverse affect on the
Company.
The Company also is affected by fluctuations in the price of diamonds, gold and other
commodities. The Company historically has engaged in only a limited amount of hedging against
fluctuations in the costs of gold. A significant change in prices of key commodities could
adversely affect the Companys business by reducing operating margins or decreasing consumer demand
if retail prices are increased significantly.
- 14 -
The Companys sales are dependent upon mall traffic.
The Companys stores, kiosks, and carts are located primarily in shopping malls throughout the
U.S., Canada and Puerto Rico. The Companys success is in part dependent upon the continued
popularity of malls as a shopping destination and the ability of malls, their tenants and other
mall attractions to generate customer traffic. Accordingly, a significant decline in this
popularity, especially if it is sustained, would substantially harm the Companys sales and
earnings.
The Company operates in a highly competitive industry.
The retail jewelry business is highly competitive, and the Company competes with nationally
recognized jewelry chains as well as a large number of independent regional and local jewelry
retailers and other types of retailers who sell jewelry and gift items, such as department stores,
mass merchandisers and catalog showrooms. The Company also is beginning to compete with internet
sellers of jewelry. Because of the breadth and depth of this competition, the Company constantly
is under competitive pressure that both constrains pricing and requires extensive merchandising
efforts in order for the Company to remain competitive.
Any failure by the Company to manage its inventory effectively will negatively impact sales and
earnings.
The Company purchases much of its inventory well in advance of each selling season. In the
event the Company misjudges consumer preferences or demand, the Company will experience lower sales
than expected and will have excessive inventory that may need to be written down in value or sold
at prices that are less than expected.
Because of the Companys dependence upon a small number of landlords for a substantial number of
the Companys locations, any significant erosion of the Companys relationships with those
landlords would negatively impact the Companys ability to obtain and retain store locations.
The Company is significantly dependent on its ability to operate stores in desirable locations
with capital investment and lease costs that allow the Company to earn a reasonable return on its
locations. The Company depends on the leasing market and its landlords to determine supply, demand,
lease cost and operating costs and conditions. The Company cannot be certain as to when or whether
desirable store locations will become or remain available to the Company at reasonable lease and
operating costs. Further, several large landlords dominate the ownership of prime malls, and the
Company is dependent upon maintaining good relations with those landlords in order to obtain and
retain store locations on optimal terms. From time to time the Company does have disagreements
with its landlords, and a significant disagreement, if not resolved, could have an adverse impact
on the Company.
Changes in regulatory requirements relating to the extension of credit may increase the cost of or
adversely affect the Companys operations.
The Companys operations are affected by numerous federal and state laws that impose
disclosure and other requirements upon the origination, servicing and enforcement of credit
accounts and limitations on the maximum aggregate amount of finance charges that may be charged by
a credit provider. Any change in the regulation of credit (including changes in the application of
current laws) which would materially limit the availability of credit to the Companys customer
base could adversely affect the Companys sales and earnings.
Any disruption in, or changes to, the Companys private label credit card arrangement with Citi may
adversely affect the Companys ability to provide consumer credit and write credit insurance.
The Companys agreement with Citi, through which Citi provides financing for the Companys
customers to purchase merchandise through private label credit cards, enhances the Companys
ability to provide consumer credit and write credit insurance. Any disruption in, or change to,
this agreement could have an adverse effect on the Company, especially to the extent that it
materially limits credit availability to the Companys customer base.
- 15 -
Acquisitions involve special risks, including the possibility that the Company may not be able to
integrate acquisitions into its existing operations.
The Company has made significant acquisitions in the past and may in the future make
additional acquisitions. Difficulty integrating an acquisition into the Companys existing
infrastructure and operations may cause the Company to fail to realize expected return on
investment through revenue increases, cost savings, increases in geographic or product presence and
customer reach, and/or other projected benefits from the acquisition. Additionally, attractive
acquisition opportunities may not be available at the time or pursuant to terms acceptable to the
Company.
- 16 -
ITEM 2. PROPERTIES
The Company leases a 430,000 square foot corporate headquarters facility, which lease extends
through 2018. The facility is located in Las Colinas, a planned business development in Irving,
Texas, near the Dallas/Fort Worth International Airport. The Company leases approximately 40,000
square feet of warehouse space that in June 2003 was subleased to a third party through the
remainder of the lease term, which extends through March 2009. The Company expanded its Canadian
distribution and productions operations in July 2005 by leasing a 26,280 square foot facility in
Toronto, Ontario. On August 31, 2004, the Company sold a 69,000 square foot building in Bethlehem,
Pennsylvania that, prior to the Companys acquisition of Piercing Pagoda, Inc. (the Acquisition),
was used for additional distribution and warehousing functions at Piercing Pagoda. On February 28,
2005, the Company sold a 73,000 square foot building in Bethlehem, Pennsylvania that, prior to the
Acquisition, served as the primary office and distribution facility for Piercing Pagoda. The
Company also leases a 20,000 square foot distribution and warehousing facility in Irving, Texas
that serves as the Piercing Pagoda distribution center.
The Company rents most of its store retail space under leases that generally range in term
from five to ten years and may contain minimum rent escalations, while kiosk leases generally range
from three to five years and carts from 12 to 18 months. Most of the store leases provide for the
payment of base rentals plus real estate taxes, insurance, common area maintenance fees and
merchants association dues, as well as percentage rents based on the stores gross sales.
The Company leases 16 percent of its store and kiosk locations from Simon Property Group and
14 percent of its store and kiosk locations from General Growth Management, Inc. Otherwise, the
Company has no relationship with any lessor relating to 10 percent or more of its store and kiosk
locations.
The following table indicates the expiration dates of the current terms of the Companys
leases as of July 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
Term Expires |
|
Stores |
|
Kiosks |
|
Other (1) |
|
Total |
|
Of Total |
2006 and prior
|
|
|
213 |
|
|
|
375 |
|
|
|
3 |
|
|
|
591 |
|
|
|
25.0 |
% |
2007
|
|
|
199 |
|
|
|
153 |
|
|
|
|
|
|
|
352 |
|
|
|
14.9 |
% |
2008
|
|
|
190 |
|
|
|
149 |
|
|
|
|
|
|
|
339 |
|
|
|
14.4 |
% |
2009
|
|
|
133 |
|
|
|
75 |
|
|
|
3 |
|
|
|
211 |
|
|
|
8.9 |
% |
2010 and thereafter
|
|
|
729 |
|
|
|
129 |
|
|
|
11 |
|
|
|
869 |
|
|
|
36.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of leases
|
|
|
1,464 |
|
|
|
881 |
|
|
|
17 |
|
|
|
2,362 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management believes substantially all of the store leases expiring in fiscal year 2006 that it
wishes to renew (including leases which expired earlier and are currently being operated under
month-to-month extensions) will be renewed on terms not materially less favorable to the Company
than the terms of the expiring leases. Management believes its facilities are suitable and
adequate for the Companys business as presently conducted.
(1) Other includes six warehouse, distribution, and storage facilities and 11 locations that are
either not yet open, or are locations that have been closed but are still under lease obligations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims arising in the ordinary course
of business. Management believes that such litigation and claims will be resolved without any
material adverse effect on the Companys financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during the quarter
ended July 31, 2005.
- 17 -
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
The following individuals serve as executive officers or are other key employees of the
Company. Officers are elected by the Board of Directors annually, each to serve until his or her
successor is elected and qualified, or until his or her earlier resignation, removal from office
or death.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
Executive Officers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary L. Forté
|
|
|
54 |
|
|
President, Chief Executive Officer and Director |
|
|
|
|
|
|
|
Sue E. Gove
|
|
|
47 |
|
|
Executive Vice President, Chief Operating Officer and Director |
|
|
|
|
|
|
|
Mark R. Lenz
|
|
|
49 |
|
|
Group Senior Vice President, Chief Financial Officer |
|
|
|
|
|
|
|
Paul G. Leonard
|
|
|
50 |
|
|
Group Senior Vice President and President, Zales Jewelers |
|
|
|
|
|
|
|
Peter Feigenbaum
|
|
|
52 |
|
|
Senior Vice President, Upstream Supply Chain |
|
|
|
|
|
|
|
Key Employees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank C. Mroczka
|
|
|
47 |
|
|
Senior Vice President and President, Gordons Jewelers |
|
|
|
|
|
|
|
Charles E. Fieramosca
|
|
|
57 |
|
|
Senior Vice President and President, Bailey Banks & Biddle Fine
Jewelers |
|
|
|
|
|
|
|
Gilbert P. Hollander
|
|
|
52 |
|
|
Senior Vice President and President, Piercing Pagoda |
|
|
|
|
|
|
|
John A. Zimmermann
|
|
|
46 |
|
|
Senior Vice President and President, Peoples Jewellers |
|
|
|
|
|
|
|
Nancy O. Skinner
|
|
|
55 |
|
|
Senior Vice President and President, Zales the Diamond Store
Outlet |
|
|
|
|
|
|
|
E. Ashlee Aldridge
|
|
|
36 |
|
|
Senior Vice President, Chief Information Officer |
|
|
|
|
|
|
|
Mary Ann Doran
|
|
|
49 |
|
|
Senior Vice President, Human Resources |
|
|
|
|
|
|
|
Cynthia T. Gordon
|
|
|
41 |
|
|
Senior Vice President, Controller |
|
|
|
|
|
|
|
Stephen C. Massanelli
|
|
|
49 |
|
|
Senior Vice President, Real Estate |
|
|
|
|
|
|
|
Susann C. Mayo
|
|
|
53 |
|
|
Senior Vice President, Downstream Supply Chain |
|
|
|
|
|
|
|
Hilary Molay
|
|
|
51 |
|
|
Senior Vice President, General Counsel and Secretary |
|
|
|
|
|
|
|
Bernard M. Sensale, Jr.
|
|
|
43 |
|
|
Senior Vice President, Marketing |
|
|
|
|
|
|
|
George J. Slicho
|
|
|
56 |
|
|
Senior Vice President, Loss Prevention |
|
|
|
|
|
|
|
Stephen L. Strong
|
|
|
45 |
|
|
Senior Vice President, Executive Vice President, Store
Operations, Zales Jewelers |
|
|
|
|
|
|
|
Charleen R. Wuellner
|
|
|
54 |
|
|
Senior Vice President, Corporate Services |
Executive Officers
The following is a brief description of the business experience of the executive officers of
the Company for at least the past five years.
Ms. Mary L. Forté has served as President, Chief Executive Officer and a director since August
1, 2002. Before being named to such positions, Ms. Forté served as Executive Vice President and
Chief Merchandise Officer from February 2001 to July 2002. From January 1998 to February 2001, she
served as Executive Vice President and Chief Administrative Officer. Ms. Forté joined the Company
in July 1994 as the President of the Companys Gordons Jewelers brand, and served in that position
until January 1998. From January 1994 to July 1994, Ms. Forté served as Senior Vice President of
QVC Home Shopping Network. From July 1991 through January 1994, Ms. Forté served as Senior Vice
President of the Bon Marché, Home Division of Federated Department Stores, Inc. From July 1989 to
July 1991, Ms. Forté was Vice President of Richs Department Store, Housewares Division. In
addition to the above, Ms. Forté has 14 years retailing and merchandising experience with Macys,
The May Department Stores Company, Inc. and Federated Department Stores, Inc.
- 18 -
Ms. Sue E. Gove has served as a director of the Company since September 23, 2004.
Ms. Gove has served as Chief Operating Officer since August 1, 2002. She remained in the position
of Chief Financial Officer until February 2003. Prior to her appointment to Chief Operating
Officer, Ms. Gove served as Executive Vice President, Chief Financial Officer from July 1998 to
July 2002. From December 1997 to July 1998, she served as Group Vice President, Chief Financial
Officer. From January 1996 to December 1997, she served as Senior Vice President, Corporate
Planning and Analysis. From September 1996 through June 1997, Ms. Gove also served as Senior Vice
President and Treasurer, overseeing Investor Relations and the Treasury, Tax and Control functions.
Ms. Gove joined the Company in 1980 and served in numerous capacities until her appointment as
Vice President in 1989. Prior to joining the Company, Ms. Gove was an accountant at Data General
Corporation. Ms. Gove is also a director of Autozone, Inc.
Mr. Mark R. Lenz was promoted to Group Senior Vice President, Chief Financial Officer in
February 2003. Prior to this appointment, Mr. Lenz served as Senior Vice President, Controller from
November 1997 to February 2003. Mr. Lenz held various management positions in finance for the
Company until his appointment to Vice President, Controller in February 1995. Prior to joining the
Company in 1988, Mr. Lenz served in various positions in the audit division of Arthur Andersen LLP
in Dallas, Texas.
Mr. Paul G. Leonard was promoted to Group Senior Vice President and President of Zales
Jewelers in January 2005. Mr. Leonard was previously the Senior Vice President and President of
Piercing Pagoda, to which he was appointed in January 2002. From May 1999 to January 2002, Mr.
Leonard served as Executive Vice President, Chief Merchandise and Marketing Officer, for Friedmans
Jewelers. From January 1998 to May 1999, Mr. Leonard served as Senior Vice President and President
of Corporate Merchandising for the Company. From January 1995 to January 1998, Mr. Leonard served
as President of Bailey Banks and Biddle Fine Jewelers. Prior to joining the Company in 1994 as
President of Corporate Merchandising, Mr. Leonard held various positions with Macys, the May
Company, and Ames Department Stores.
Mr. Peter Feigenbaum was appointed Senior Vice President, Upstream Supply Chain in September
2005. Mr. Feigenbaum rejoined the Company as Senior Vice President, Merchandise Planning for the
Company in February 2005. Prior to this appointment, Mr. Feigenbaum served as Senior Vice
President of Filenes Department Store from 1998 through 2004. Mr. Feigenbaum was previously
employed with the Company as a Senior Vice President of Diamond Park Fine Jewelers from 1995
through 1998. Prior to joining the Company in 1995, Mr. Feigenbaum held various positions with
Famous Barr, Kaufmanns, and Macys.
Key Employees
Mr. Frank C. Mroczka was promoted to Senior Vice President and President, Gordons Jewelers in
April 2003. Mr. Mroczka was previously the Senior Vice President of Store Operations for Gordons
Jewelers, to which he was appointed in 1997. In 1993, Mr. Mroczka was promoted to Director of
Stores for Gordons West Region. Mr. Mroczka joined the Company in 1983 and served in numerous
positions until his appointment to Vice President in 1997.
Mr. Charles E. Fieramosca joined the Company in April 2001 as Senior Vice President and
President of Bailey Banks & Biddle Fine Jewelers. In the ten years prior to joining the Company,
Mr. Fieramosca founded and served as the CEO of Ascend Consulting, a product and brand development
company. Prior to his role at Ascend Consulting, Mr. Fieramosca held various positions with Jones
New York Menswear, BASCO All American Sportswear, and Macys.
Mr. Gilbert P. Hollander was promoted to Senior Vice President and President of Piercing
Pagoda in January 2005. Prior to and up until this appointment, Mr. Hollander served as Vice
President of Divisional Merchandise for Piercing Pagoda, to which he was appointed in August 2003.
Mr. Hollander served as Senior Vice President of Merchandising for Piercing Pagoda from February
2000 to August 2003. Prior to February 2000, Mr. Hollander held various management positions
within Piercing Pagoda beginning in May of 1997.
- 19 -
Mr. John A. Zimmermann joined the Company in May 2001 as Senior Vice President and President
of Peoples Jewellers. Prior to joining the Company, Mr. Zimmermann was the Senior Vice President of
Merchandising, Planning and Sales Promotion for SmarterKids.com from June 1998 to May 2001. He
served as Senior Vice President of Merchandising and Sales Promotion for Big Party from November
1996 to May 1998. Mr. Zimmermanns background in retailing includes management positions at
Federated Department Stores, where he served as Divisional Vice President for Womens Fashion
Accessories for The Bon Marché.
Ms. Nancy O. Skinner was promoted to Senior Vice President and President of Zales the Diamond
Store Outlet in August 2003. Ms. Skinner served as Vice President and Senior Vice President of
Merchandising, Zales the Diamond Store Outlet from April 2001 to July 2003. From May 1998 to April
2001, Ms. Skinner was a Diamond Buyer for Zales the Diamond Store Outlet. Ms. Skinner joined the
Company in April 1984 and has held numerous senior-buying positions in Diamond Park Fine Jewelers,
Gordons Jewelers, and Bailey Banks & Biddle Fine Jewelers. Prior to joining the Company, Ms.
Skinner held various merchandising positions with Gordons Jewelry Corporation.
Ms. E. Ashlee Aldridge was promoted to Senior Vice President, Chief Information Officer in May
2004. Ms. Aldridge joined the Company in October 2003 as Vice President of Strategic Development.
Prior to joining the Company, Ms. Aldridge served in various positions in the internal audit
division of Deloitte & Touche in Dallas, Texas from June 1999 to September 2003.
Ms. Mary Ann Doran was promoted to Senior Vice President of Human Resources in February 2005.
Ms. Doran previously held the position of Vice President of Organizational Development &
Recruitment, to which she was appointed in August 1997. Ms. Doran began her career with the
Company in October 1996 as Vice President, Personnel Development & Staffing. Prior to joining the
Company, Ms. Doran held positions with Kenzer Corporation, Bombay Company and the Jordan Marsh
Company, where she served as Vice President of Human Resources.
Ms. Cynthia T. Gordon was promoted to Senior Vice President, Controller in February 2003. From
April 2001 to February 2003, Ms. Gordon served as Vice President of Corporate Planning. From 1998
to 2001, Ms. Gordon served as Senior Director of Investor Relations. Ms. Gordon joined the Company
in October 1994 as the Director of Corporate Planning. Prior to joining the Company in 1994, Ms.
Gordon served in various positions, including Director of Investor Relations and External Reporting
for A Pea in the Pod, a maternity wear retailer, and in the audit division of Ernst & Young LLP in
Dallas, Texas.
Mr. Stephen C. Massanelli was appointed Senior Vice President, Real Estate in May 2004. Mr.
Massanelli joined the Company in June 1997 as Senior Vice President, Treasurer. From 1993 to 1997,
Mr. Massanelli was a principal and member of the Board of Directors of The Treadstone Group, Inc.,
a private merchant banking organization in Dallas. Prior to 1993, Mr. Massanelli served in various
financial roles at AMRESCO, Inc. and NationsBank of Texas.
Ms. Susann C. Mayo joined the Company in October 2005 as Senior Vice President, Downstream
Supply Chain. Prior to joining the Company, Ms. Mayo was the Vice President of Logistics &
Distribution for The Bombay Company from 2001 through February 2005. Prior to 2001, Ms. Mayo held
various positions at Sears, Roebuck & Company from 1973 through 2001.
Ms. Hilary Molay was promoted to Senior Vice President, General Counsel and Secretary of the
Company in September 2005. Prior to her most recent promotion, Ms. Molay served as Vice President,
General Counsel and Secretary of the Company from August 2002 through August 2005. Ms. Molay also
serves as Secretary to the Zale Board of Directors. Previously, Ms. Molay served as Director,
Senior Attorney for Zale Corporation when she joined the Company in February 2000. Prior to working
for the Company, Ms. Molay served in various legal positions, including Senior Attorney for J. C.
Penney Company, Inc., Trial Attorney, U.S. Department of Justice, and Judicial Law Clerk, Court of
Appeals of Maryland.
Mr. Bernard M. Sensale, Jr. was promoted to Senior Vice President, Marketing in February 2003.
Prior to this promotion, Mr. Sensale served as Vice President of Strategic Development from
September 2002 to February 2003. From April 2001 to August 2002, Mr. Sensale served as Senior Vice
President of Store Operations for Piercing Pagoda. From 1998 to April 2001, Mr. Sensale served as
Vice President of
- 20 -
Planning and Analysis. Mr. Sensale joined the Company in 1995 as Vice President of Marketing &
Planning for Bailey Banks & Biddle. Prior to joining the Company, Mr. Sensale was Vice President,
General Merchandise Manager for Ames Department Stores.
Mr. George J. Slicho was promoted to the position of Senior Vice President, Loss Prevention in
November 2000. Mr. Slicho began his career with the Company in March 1991 as Vice President of Loss
Prevention. Prior to joining the Company, Mr. Slicho held various positions in corporate security,
including Vice President of Loss Prevention and Audit for P.A. Bergner & Company. In addition, Mr.
Slicho served as a special agent in various field offices of the Federal Bureau of Investigation.
Mr. Stephen L. Strong was appointed Senior Vice President, Executive Vice President, Store
Operations of Zales Jewelers in January 2002. Prior to this appointment, Mr. Strong served as
President of Zales the Diamond Store Outlet from April 2001 to January 2002. From August 2000 to
April 2001, Mr. Strong served as Senior Vice President of Store Operations for Zales the Diamond
Store Outlet. From May 1998 to August 2000, Mr. Strong served as Vice President of Store
Operations for Zales the Diamond Store Outlet. Mr. Strong joined the Company in 1981 and has served
in numerous assignments, including Director of Stores for Zales Jewelers from 1994 to 1998.
Ms. Charleen Wuellner was appointed Senior Vice President of Corporate Services in September
2005. Prior to this appointment, Ms. Wuellner served as Senior Vice President and President of
Corporate Merchandising from April 2003 through August 2005. From April 2001 to April 2003, Ms.
Wuellner served as Senior Vice President and President, Gordons Jewelers and was previously the
President of Zales the Diamond Store Outlet, to which she was appointed in August 2000. In August
1999, Ms. Wuellner was promoted to Senior Vice President of Zales the Diamond Store Outlet. From
April 1995 to August 1999, Ms. Wuellner held senior buying positions in zales.com and Gordons
Jewelers. Prior to joining the Company in April 1995, Ms. Wuellner held various merchandising
positions with Macys.
- 21 -
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company (the common stock) is listed on the New York Stock Exchange
(NYSE) under the symbol ZLC. The following table sets forth the high and low sale prices for
the common stock for each fiscal quarter during the two most recent fiscal years. The market prices
set forth below have been adjusted to give retroactive effect to the Companys two-for-one stock
split completed on June 8, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
First |
|
$ |
29.17 |
|
|
$ |
24.59 |
|
|
$ |
26.03 |
|
|
$ |
22.05 |
|
Second |
|
|
31.25 |
|
|
|
25.50 |
|
|
|
28.05 |
|
|
|
25.14 |
|
Third |
|
|
30.96 |
|
|
|
26.15 |
|
|
|
31.30 |
|
|
|
26.85 |
|
Fourth |
|
|
34.28 |
|
|
|
26.95 |
|
|
|
28.58 |
|
|
|
25.12 |
|
As of September 23, 2005, the outstanding shares of common stock were held by approximately
720 holders of record. The Company has not paid dividends on the common stock since its initial
issuance on July 30, 1993, and does not anticipate paying dividends on the common stock in the
foreseeable future. In addition, the Companys long-term debt limits the Companys ability to pay
dividends or repurchase its common stock if borrowing availability under its $500 million revolving
credit facility (the Revolving Credit Agreement) is less than $75 million. At July 31, 2005, the
Company had borrowing availability under the Revolving Credit Agreement of approximately $370.2
million. See Managements Discussion and Analysis of Financial Condition and Results Operations
Liquidity and Capital Resources and Notes to the Consolidated Financial Statements Long Term
Debt.
- 22 -
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified in its entirety by the Consolidated
Financial Statements of the Company (and the related Notes thereto) contained elsewhere in this
Form 10-K and should be read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations. The income statement and balance sheet data for each of the
fiscal years ended July 31, 2005, 2004, 2003, 2002, and 2001 have been derived from the Companys
audited Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
|
(amounts in thousands, except per share amounts) |
|
Total revenues |
|
$ |
2,383,066 |
|
|
$ |
2,304,440 |
|
|
$ |
2,212,241 |
|
|
$ |
2,191,727 |
|
|
$ |
2,087,199 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (a) |
|
|
1,157,226 |
|
|
|
1,122,946 |
|
|
|
1,101,030 |
|
|
|
1,083,053 |
|
|
|
1,034,913 |
|
Special Inventory Charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,236 |
|
Selling, General and Administrative
expenses |
|
|
982,113 |
|
|
|
942,796 |
|
|
|
884,069 |
|
|
|
873,265 |
|
|
|
818,205 |
|
Cost of insurance operations |
|
|
6,084 |
|
|
|
5,963 |
|
|
|
8,228 |
|
|
|
8,620 |
|
|
|
5,589 |
|
Depreciation and amortization expense |
|
|
59,840 |
|
|
|
56,381 |
|
|
|
55,690 |
|
|
|
58,340 |
|
|
|
58,290 |
|
Impairment of Goodwill |
|
|
|
|
|
|
|
|
|
|
136,300 |
|
|
|
|
|
|
|
|
|
Executive transactions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,298 |
|
|
|
4,713 |
|
Retiree medical plan curtailment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings |
|
|
177,803 |
|
|
|
176,354 |
|
|
|
26,924 |
|
|
|
169,651 |
|
|
|
140,253 |
|
Interest expense, net |
|
|
7,725 |
|
|
|
7,528 |
|
|
|
6,319 |
|
|
|
7,750 |
|
|
|
6,857 |
|
Costs of Early Retirement of Debt |
|
|
|
|
|
|
|
|
|
|
5,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
170,078 |
|
|
|
168,826 |
|
|
|
14,695 |
|
|
|
161,901 |
|
|
|
133,396 |
|
Income taxes |
|
|
63,303 |
|
|
|
62,353 |
|
|
|
55,340 |
|
|
|
59,256 |
|
|
|
51,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before effect of
accounting change |
|
|
106,775 |
|
|
|
106,473 |
|
|
|
(40,645 |
) |
|
|
102,645 |
|
|
|
82,048 |
|
Effect of change in accounting
principle (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
106,775 |
|
|
$ |
106,473 |
|
|
($ |
40,645 |
) |
|
$ |
143,932 |
|
|
$ |
82,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before effect of change in
accounting principle |
|
$ |
2.08 |
|
|
$ |
2.02 |
|
|
($ |
0.63 |
) |
|
$ |
1.48 |
|
|
$ |
1.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss) Per Share |
|
$ |
2.08 |
|
|
$ |
2.02 |
|
|
($ |
0.63 |
) |
|
$ |
2.08 |
|
|
$ |
1.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before effect of change in
accounting principle |
|
$ |
2.05 |
|
|
$ |
1.99 |
|
|
($ |
0.63 |
) |
|
$ |
1.47 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss) Per Share |
|
$ |
2.05 |
|
|
$ |
1.99 |
|
|
($ |
0.63 |
) |
|
$ |
2.07 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding: (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
51,280 |
|
|
|
52,650 |
|
|
|
64,528 |
|
|
|
69,178 |
|
|
|
69,150 |
|
Diluted |
|
|
51,975 |
|
|
|
53,519 |
|
|
|
64,528 |
|
|
|
69,692 |
|
|
|
69,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
590,731 |
|
|
$ |
582,888 |
|
|
$ |
532,443 |
|
|
$ |
561,939 |
|
|
$ |
512,418 |
|
Total assets |
|
|
1,380,900 |
|
|
|
1,342,084 |
|
|
|
1,294,106 |
|
|
|
1,489,265 |
|
|
|
1,408,029 |
|
Long-Term Debt |
|
|
129,800 |
|
|
|
197,500 |
|
|
|
184,400 |
|
|
|
86,749 |
|
|
|
109,463 |
|
Total stockholders investment |
|
$ |
817,588 |
|
|
$ |
726,114 |
|
|
$ |
652,323 |
|
|
$ |
939,807 |
|
|
$ |
840,563 |
|
|
|
|
a) |
|
In fiscal year 2002, the Company changed its method of determining price indices used in the
valuation of last-in, first-out (LIFO) inventories. The effect of using the internal indices
instead of the Bureau of Labor Statistics price indices was to
increase fiscal year 2002 net income by approximately $4.8 million.
The impact on the individual prior years presented and the cumulative
effect of this change on earnings at the beginning of fiscal year
2002 is not determinable. |
|
b) |
|
Change in accounting principle for the write off of the excess of revalued net assets over
stockholders equity (negative goodwill). |
|
c) |
|
Outstanding share amounts have been adjusted to give retroactive effect to a two-for-one stock
split completed on June 8, 2004. |
Note: Data from Piercing Pagoda in 2001 includes results from September 20, 2000, the date the
Company acquired Piercing Pagoda, Inc., through July 31, 2001.
- 23 -
ITEM 6. SELECTED FINANCIAL DATA (continued)
Segment Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
Selected Financial Data by Segment |
|
(amounts in thousands, except per share amounts) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry (a) |
|
$ |
2,089,261 |
|
|
$ |
2,022,214 |
|
|
$ |
1,939,454 |
|
|
$ |
1,900,177 |
|
|
$ |
1,813,733 |
|
Kiosk (b) |
|
|
280,897 |
|
|
|
269,660 |
|
|
|
256,665 |
|
|
|
273,225 |
|
|
|
254,511 |
|
All Other |
|
|
12,908 |
|
|
|
12,566 |
|
|
|
16,122 |
|
|
|
18,325 |
|
|
|
18,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
2,383,066 |
|
|
$ |
2,304,440 |
|
|
$ |
2,212,241 |
|
|
$ |
2,191,727 |
|
|
$ |
2,087,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & Amortization Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry |
|
$ |
44,410 |
|
|
$ |
41,757 |
|
|
$ |
40,915 |
|
|
$ |
40,453 |
|
|
$ |
40,407 |
|
Kiosk |
|
|
4,708 |
|
|
|
4,199 |
|
|
|
4,653 |
|
|
|
5,618 |
|
|
|
12,069 |
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
10,722 |
|
|
|
10,425 |
|
|
|
10,122 |
|
|
|
12,269 |
|
|
|
5,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation & Amortization
Expense |
|
$ |
59,840 |
|
|
$ |
56,381 |
|
|
$ |
55,690 |
|
|
$ |
58,340 |
|
|
$ |
58,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry |
|
$ |
147,414 |
|
|
$ |
153,739 |
|
|
$ |
151,650 |
|
|
$ |
145,816 |
|
|
$ |
137,001 |
|
Kiosk (c) |
|
|
29,030 |
|
|
|
25,951 |
|
|
|
(125,629 |
) |
|
|
20,335 |
|
|
|
25,492 |
|
All Other |
|
|
6,824 |
|
|
|
6,603 |
|
|
|
7,894 |
|
|
|
9,705 |
|
|
|
13,366 |
|
Unallocated (d) |
|
|
(5,465 |
) |
|
|
(9,939 |
) |
|
|
(6,991 |
) |
|
|
(6,205 |
) |
|
|
(35,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Earnings |
|
$ |
177,803 |
|
|
$ |
176,354 |
|
|
$ |
26,924 |
|
|
$ |
169,651 |
|
|
$ |
140,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry (f) |
|
$ |
1,103,142 |
|
|
$ |
1,055,755 |
|
|
$ |
1,036,080 |
|
|
$ |
1,022,790 |
|
|
$ |
987,099 |
|
Kiosk (g) |
|
|
117,125 |
|
|
|
111,238 |
|
|
|
96,485 |
|
|
|
238,048 |
|
|
|
227,583 |
|
All Other |
|
|
35,670 |
|
|
|
37,737 |
|
|
|
38,217 |
|
|
|
38,788 |
|
|
|
45,245 |
|
Unallocated (d) |
|
|
124,963 |
|
|
|
137,354 |
|
|
|
123,324 |
|
|
|
189,639 |
|
|
|
148,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,380,900 |
|
|
$ |
1,342,084 |
|
|
$ |
1,294,106 |
|
|
$ |
1,489,265 |
|
|
$ |
1,408,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry |
|
$ |
59,587 |
|
|
$ |
42,535 |
|
|
$ |
27,064 |
|
|
$ |
41,602 |
|
|
$ |
65,427 |
|
Kiosk |
|
|
8,650 |
|
|
|
6,038 |
|
|
|
6,383 |
|
|
|
3,644 |
|
|
|
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
14,887 |
|
|
|
12,215 |
|
|
|
10,132 |
|
|
|
8,913 |
|
|
|
22,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
$ |
83,124 |
|
|
$ |
60,788 |
|
|
$ |
43,579 |
|
|
$ |
54,159 |
|
|
$ |
87,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a) |
|
Includes $198.3, $174.1 and $150.4 million in fiscal years 2005, 2004, and 2003, respectively,
related to foreign operations. |
|
b) |
|
Includes $6.6 million in fiscal year 2005 related to foreign operations.
|
|
c) |
|
Includes impairment of goodwill of $136.3 million in fiscal year 2003. |
|
d) |
|
Includes $71.0, $65.9, and $63.3 million in fiscal years 2005, 2004, and 2003,
respectively, to offset internal carrying costs charged to the segments. |
|
e) |
|
Assets allocated to segments include fixed assets, inventories and goodwill. Unallocated
assets include cash, prepaid assets such as rent, corporate office improvements, and technology
infrastructure. |
|
f) |
|
Includes $27.2, $23.2 and $20.0 million of fixed assets in fiscal years 2005, 2004, and
2003, respectively, related to foreign operations. |
|
g) |
|
Includes $390,000 of fixed assets in fiscal years 2005 related to foreign operations. There
were no foreign operations in segment prior to 2005. |
NOTE: The segments are not organized based on product differences or geographic areas and,
accordingly, it is not practicable to report revenues by such groups.
- 24 -
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
With respect to forward-looking statements made in this Managements Discussion and Analysis
of Financial Condition and Results of Operations see Business Cautionary Notice Regarding
Forward-Looking Statements.
Executive Overview
The Company is the largest and most diversified specialty retailer of fine jewelry in North
America. At July 31, 2005, the Company operated 1,464 specialty retail jewelry stores and 881
kiosks and carts.
Company highlights for fiscal year 2005 include:
|
|
|
Achieved $2.4 billion in revenues |
|
|
|
|
Expansion of internally sourced product in Peoples Jewellers, and introduction to
Gordons Jewelers and Zales the Diamond Store Outlet |
|
|
|
|
Increased direct importing of finished merchandise from overseas vendors |
|
|
|
|
Expansion of opening price point merchandise including charms, earrings, and body
jewelry in Canada with 69 Peoples II cart locations |
|
|
|
|
Focused real estate strategy on both traditional malls and off-mall growth in the U.S. |
|
|
|
|
Introduced database marketing capabilities and statistical modeling techniques to
continue to improve the effectiveness of its marketing function and enhance communication
with customers |
|
|
|
|
Implemented new Human Resources management solution |
Key Strategies for fiscal year 2006 include:
|
|
|
Enhancing the customer experience by implementing the following: |
New point of sale solution
Multi-channel initiatives
Focused and managed training
Payroll services solution
|
|
|
Increase market share through the following: |
Square footage growth of 3 percent
Targeted and customer focused marketing plan
|
|
|
Implement supply chain strategy improvements with the following: |
Product sourcing across all brands
Increase internally produced diamond products in existing brands
Design and test an integrated merchandise system
The Companys locations are divided into three business segments: Fine Jewelry, Kiosk Jewelry,
and All Other.
The Fine Jewelry segment primarily operates under six brands, each targeted to reach a
distinct customer as described below:
|
|
|
Zales Jewelers (including zales.com), the Companys national brand in the U.S.,
provides traditional, moderately priced jewelry to a broad range of customers. |
|
|
|
|
Zales the Diamond Store Outlet focuses on the brand conscious, value oriented shopper
in outlet malls and neighborhood power centers. |
|
|
|
|
Gordons Jewelers focuses on the individual preferences of its customers through
merchandising by store, strengthening its position as a relationship jeweler. |
|
|
|
|
Bailey Banks & Biddle Fine Jewelers (including baileybanksandbiddle.com) operates
jewelry stores that are considered among the finest luxury jewelry stores in their
markets, offering designer jewelry and watches to attract more affluent customers. |
|
|
|
|
Peoples Jewellers, the Companys national brand in Canada offers traditional,
moderately priced jewelry to customers throughout Canada. |
|
|
|
|
Mappins Jewellers in Canada targets the moderate and more discerning customer with
merchandise assortments designed to promote slightly higher priced purchases. |
- 25 -
The Kiosk Jewelry segment reaches the opening price point fine jewelry customer primarily
through mall based kiosks primarily under the name Piercing Pagoda in the U.S., and carts under the
name Peoples II in Canada.
See Part I. Item 1. Business for more detailed information regarding the above Executive Summary.
Results of Operations
The following table sets forth certain financial information from the Companys audited
consolidated statements of operations expressed as a percentage of total revenues and should be
read in conjunction with the Companys Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31, |
|
|
2005 |
|
2004 |
|
2003 |
Total Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of Sales |
|
|
48.6 |
|
|
|
48.7 |
|
|
|
49.8 |
|
Selling, General and Administrative Expenses |
|
|
41.2 |
|
|
|
40.9 |
|
|
|
39.9 |
|
Cost of Insurance Operations |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.4 |
|
Depreciation and Amortization Expense |
|
|
2.5 |
|
|
|
2.5 |
|
|
|
2.5 |
|
Impairment of Goodwill |
|
|
|
|
|
|
|
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings |
|
|
7.4 |
|
|
|
7.6 |
|
|
|
1.2 |
|
Interest Expense, Net |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
Costs of Early Retirement of Debt |
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
7.1 |
|
|
|
7.3 |
|
|
|
0.7 |
|
Income Taxes |
|
|
2.6 |
|
|
|
2.7 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss) |
|
|
4.5 |
% |
|
|
4.6 |
% |
|
|
(1.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31, 2005 Compared to Year Ended July 31, 2004
Total Revenues. Total revenues for fiscal year 2005 were $2.383 billion, an increase of 3.4
percent over total revenues for the prior fiscal year. The net square footage and other revenue
growth contributed 3.1 percent to the increase in total revenues. The overall increase in revenues
during the fiscal year was partially offset by a decrease in revenues in the Holiday period. In
addition, the Company estimates that revenues were adversely impacted by $6.5 to $7.0 million due
to the hurricanes in Florida, Puerto Rico, and Alabama in August and September 2004.
The Fine Jewelry brands contributed $2.089 billion of revenues in fiscal year 2005, compared
to $2.022 billion in fiscal year 2004, which represents an increase of 3.3 percent. Total revenues
include $281 million in the Kiosk Jewelry segment compared to $270 million in fiscal year 2004, an
increase of 4.2 percent over the prior year, which is primarily due to the expansion of this
segment into Canada. All Other segment operations provided $12.9 million in revenues, representing
an increase of 2.7 percent from the prior year.
Comparable store sales for the Company increased 0.3 percent for the fiscal year as compared
to the prior fiscal year. Comparable store sales exclude amortization of extended service
agreements and include sales for those stores beginning their thirteenth full month of operation.
The results of stores that have been relocated, renovated, or refurbished are included in the
calculation of comparable store sales on the same basis as other stores. For the current fiscal
year, all brands had flat to positive comparable store sales with the exception of the Zales brand,
which had negative comparable sales primarily due to poor performance over the Holiday period. Paul Leonard became the
new President of the Zales brand in January 2005 resulting in the subsequent repositioning of the brand.
During fiscal year 2005, the Company opened 61 stores and closed 33 stores in the Fine Jewelry
segment and opened 121 kiosks and carts and closed 38 kiosks and carts in the Kiosk Jewelry
segment.
- 26 -
Cost of Sales. Cost of sales includes cost of merchandise sold, as well as receiving and
distribution costs. Cost of sales as a percentage of revenues was 48.6 percent for the fiscal year
2005, a decrease of 0.1 percentage points over last fiscal year. Approximately 0.4 percent was
driven by the Companys direct sourcing initiatives, which lowered costs on merchandise produced
internally or purchased directly from factories, and 0.3 percent resulted from a higher mix of
extended service agreement (ESA) sales, which have favorable costs as a percent of revenue.
These improvements were partially offset by a product mix shift to lower margin merchandise and
higher clearance markdowns.
The Companys LIFO inventory provision was $3.8 million and $2.1 million for the fiscal years
ended July 31, 2005 and 2004, respectively.
Selling General and Administrative Expenses. Included in Selling, General, and Administrative
Expenses (SG&A) are store operating, advertising, buying and general corporate overhead expenses.
SG&A increased 0.3 percentage points to 41.2 percent of revenues for the current fiscal year, from
40.9 percent of revenues for the prior fiscal year.
Store operating expenses were approximately 1.0 percentage points higher as a percent of
revenues, principally a result of higher fixed occupancy expense as a rate of sales due to the
under-performance in the Zales Jewelers brand and sales lost to the hurricanes in the first two
months of the fiscal year. Advertising expenditures also increased by 0.3 percent of sales due to
the Companys continued investments in marketing to support its strategic initiative to increase
market share. The increase in store operating expenses was partially offset by a reduction in
proprietary credit expenses of approximately 0.7 percentage points due to a change in the mix of
the Companys credit programs.
Depreciation and Amortization Expense. Depreciation and Amortization Expense was $59.8
million in fiscal year 2005, an increase of 6.1 percent, primarily due to investments in new store
growth and IT system infrastructure.
Income Taxes. The effective tax rate for the fiscal years ended July 31, 2005 and 2004 was
37.2 percent and 36.9 percent, respectively. The increase in the effective tax rate was primarily
due to an increase in various state effective tax rates.
Year Ended July 31, 2004 Compared to Year Ended July 31, 2003
Total Revenues. Total revenues for fiscal year 2004 were $2.304 billion, an increase of 4.2
percent over total revenues for the prior fiscal year. The net square footage growth and other
revenue growth contributed 0.3 percent to the increase in total revenues. The continued development
of the core bridal business and the expansion of Italian charms and body jewelry in Piercing
Pagoda, contributed to the total revenue increase.
The Fine Jewelry segment contributed $2.022 billion of revenues in fiscal year 2004, compared
to $1.939 billion in fiscal year 2003, which represented an increase of 4.3 percent. Total
revenues included $270 million in the Kiosk Jewelry segment compared to $257 million in fiscal year
2003, an increase of 5.1 percent over the prior year, and All Other segment revenues of $12.6
million representing a decrease of 22.1 percent from the prior year.
During fiscal year 2004, the Company opened 48 stores and closed 33 stores in the Fine Jewelry
segment and opened 24 kiosks and closed 39 kiosks in the Kiosk Jewelry segment.
Comparable store sales increased 3.9 percent for the fiscal year as compared to the prior
fiscal year. Comparable store sales exclude amortization of extended service agreements and include
sales for stores in their thirteenth full month of operation. The results of stores that have been
relocated, renovated, or refurbished are included in the calculation of comparable store sales on
the same basis as other stores. For the fiscal year 2004, all brands had positive comparable store
sales with Bailey Banks & Biddle in the luxury market and Piercing Pagoda in the opening price
point venue contributing the largest percentage increases. The comparable store sales increase in
the Bailey Banks & Biddle brand was driven primarily by a strengthening bridal category and a
higher average ticket over last fiscal year. Piercing Pagodas
- 27 -
strong performance was a result of
product innovation, such as body jewelry and Italian charms, and improvements in its merchandise
assortments.
Cost of Sales. Cost of sales includes cost of merchandise sold, as well as receiving and
distribution costs. Cost of sales as a percentage of revenues was 48.7 percent for fiscal year
2004, a decrease of 1.0 percentage points over the prior fiscal year. The cost of sales decrease
was driven by the Companys direct sourcing initiatives as well as a reduction in inventory costs
related to the receipt of cash consideration from vendors that had previously been recorded as a
reduction to SG&A.
The Companys LIFO inventory provision was $2.1 million and $2.9 million for the fiscal years
ended July 31, 2004 and 2003, respectively.
Selling General and Administrative Expenses. Included in SG&A are store operations,
advertising, buying, and general corporate overhead expenses. SG&A totaled $943 million, an
increase of 6.7 percent over last fiscal year. As a percent of revenues, SG&A was 40.9 percent for
fiscal year 2004 compared to 39.9 percent for fiscal year 2003. The increase as a percentage of
total revenues is primarily due to the reclassification of cash consideration from vendors, which
was previously recorded as a reduction to SG&A to a reduction of inventory costs in accordance with
EITF 02-16, which represented an increase of approximately 0.8 percentage points.
Cost of Insurance Operations. The cost of insurance operations was $6.0 million, a decrease of
27.5 percent primarily driven by lower insurance revenue over the prior year. As a percentage of
revenues, cost of insurance operations was slightly lower at 0.3 percent for the current fiscal
year, as compared to the prior fiscal year at 0.4 percent.
Depreciation and Amortization Expense. Depreciation and Amortization Expense was $56.4
million, an increase of 1.2 percent, primarily due to the purchase of new assets for new store
openings, renovations, and refurbishments. The increase in depreciation and amortization expense
was attributed primarily to the Fine Jewelry segment of the business.
Interest Expense, Net. Interest Expense, Net was $7.5 million and $6.3 million, respectively,
for the fiscal years ended July 31, 2004 and 2003. The increase of approximately $1.2 million is
primarily a result of higher outstanding debt balance during fiscal year 2004 resulting from the
Companys tender offer executed in July 2003.
Income Taxes. The effective tax rate for the fiscal years ended July 31, 2004 and 2003 was
36.9 percent and 376.6 percent including the goodwill impairment charge of $136.3 million recorded
in the second quarter of fiscal year 2003. In fiscal year 2003, the Company did not recognize a
tax benefit associated with the goodwill impairment because the goodwill was not deductible for tax
purposes. The Company realized a cash benefit from utilization of tax net operating loss
carry-forwards (NOL) (after annual limitations of $19.5 million) against current and future tax
liabilities, and as of July 31, 2004, the Company had a remaining NOL (after limitations) of $78.7
million.
Liquidity and Capital Resources
The Companys cash requirements consist primarily of funding inventory growth, capital
expenditures for new store growth, renovations of the existing portfolio, and upgrades to its
management information systems and distribution facilities and debt service. As of July 31, 2005,
the Company had cash and cash equivalents of $55.4 million.
The retail jewelry business is highly seasonal, with a significant proportion of sales and
operating income being generated in November and December of each year. Approximately 41 percent of
the Companys annual revenues were generated during the three months ended January 31, 2005 and
January 31, 2004, respectively, which includes the Holiday selling season. The Companys working
capital requirements fluctuate during the year, increasing substantially during the fall season as
a result of higher planned seasonal inventory levels.
- 28 -
On October 22, 2004, the American Jobs Creation Act (the AJCA) was signed into law. The
AJCA includes, among other provisions, a special one-time deduction of 85 percent of certain
foreign earnings that are repatriated, as defined in the AJCA. The Company has a Canadian
subsidiary for which it may elect to apply this provision to qualifying earnings repatriations in
fiscal year 2006. Based on the Companys initial evaluation of the potential benefits, the
estimated range of potential amounts that the Company is considering for repatriation under this
provision is between $30 million and $45 million, with the expected income tax effects estimated to
be a benefit in the range of $10 to $11 million. The Company is continuing to evaluate the effects
of the AJCA and expects to make a final decision on a plan of repatriation by the second quarter of
fiscal year 2006.
Cash Flow Activities
Net cash provided by operating activities was $168.3 million, $178.1 million and $164.8
million for fiscal years 2005, 2004, and 2003, respectively. In fiscal year 2005, the decrease in
cash provided by operating activities was primarily due to direct sourcing receipts, which require
the Company to pay for inventory earlier than purchasing finished goods. At July 31, 2005, owned
inventory was approximately $27 million higher than at July 31, 2004 as a result of the Companys
continued store growth. In fiscal year 2004, the increase in cash provided by operating activities
was primarily driven by the Companys increased earnings offset by inventory investments related to
direct sourcing initiatives.
Net cash used in investing activities was $78.2 million in fiscal year 2005, related to
capital expenditures of $83.1 million for new store openings, renovations and refurbishments and
net purchases of investments. The increase in capital expenditures from the prior year is
primarily due to investments in new store growth and IT system infrastructure. The IT
infrastructure investments include the new Human Resource, Payroll and Benefits systems and the
early stages of a new Point of Sale system. Net cash used in investing activities was $60 million
in fiscal year 2004, mainly from capital expenditure for new store openings and renovations. In
fiscal year 2003, net cash used in investing activities was $42.4 million, primarily from capital
expenditures for new store openings and renovations.
Net cash used in financing activities was $100 million in fiscal year 2005, primarily related
to the repurchase of 1.8 million shares of the Companys common stock, and net payments of $68
million in borrowings under the revolving credit facility (see Finance Arrangements herein). Net
cash used in financing activities was $90.7 million in fiscal year 2004, primarily related to the
repurchase of approximately 2.8 million shares of common stock offset slightly by borrowings under
the new revolving credit facility. Net cash used in financing activities was $172.5 million in
fiscal year 2003, principally related to the called and retired Senior Notes and the repurchase of
approximately 6.4 million shares of common stock, offset by borrowing under the new revolving
credit facility.
Finance Arrangements
The Company entered into a five-year revolving credit facility (the Revolving Credit
Agreement) on July 23, 2003, replacing its then existing $225 million facility. The Revolving
Credit Agreement provides the Company up to $500 million in commitments by certain lenders,
including a $20 million sublimit for letters of credit. The Revolving Credit Agreement is primarily
secured by the Companys U.S. merchandise inventory.
On December 10, 2004, the Company entered into an amendment of its Revolving Credit Agreement
with Bank of America, as Administrative Agent, and a syndicate of other lenders (the Amendment,
and together with the Revolving Credit Agreement, the Amended Revolving Credit Agreement). The
Amendment extends the term of the Revolving Credit Agreement through August 11, 2009, and reduces
certain fees and the applicable interest rate margins under the Revolving Credit Agreement.
The loans made under the Amended Revolving Credit Agreement bear interest at a floating rate
at either (i) the applicable LIBOR plus the applicable margin, or (ii) the Base Rate plus the
applicable margin. The margin applicable to LIBOR based loans and standby letter of credit
commission rates will be automatically reduced or increased from time to time based upon excess
borrowing availability under the Amended Revolving Credit Agreement. The Company pays a quarterly
commitment fee of 0.25 percent on
- 29 -
the preceding months unused commitment. The Company and its
subsidiaries may repay the revolving credit loans outstanding under the Amended Revolving Credit
Agreement at any time without penalty prior to the maturity date. At July 31, 2005, and July 31,
2004, $129.8 and $197.5 million, respectively, were outstanding under the Amended Revolving Credit
Agreement. At July 31, 2005, the effective interest rate was 4.79 percent with the applicable
margin for LIBOR based loans at 1.25 percent and the applicable margin for Base Rate loans at zero
percent. Based on the terms of the Amended Revolving Credit Agreement, the Company had
approximately $370.2 million in available borrowings at July 31, 2005.
At any time, if remaining borrowing availability under the Amended Revolving Credit Agreement
falls below $75 million, the Company will be restricted in its ability to repurchase common stock
or pay dividends. If remaining borrowing availability falls below $50 million, the Company will be
required to meet a minimum fixed charge coverage ratio. The Amended Revolving Credit Agreement
requires the Company to comply with certain restrictive covenants including, among other things,
limitations on indebtedness, investments, liens, acquisitions, and asset sales. The Company is
currently in compliance with all of its obligations under the Amended Revolving Credit Agreement.
Capital Growth
During the fiscal year ended July 31, 2005, the Company made $83.1 million of capital
expenditures with approximately $59.6 million attributed to its Fine Jewelry segment to open 61
stores and to renovate, relocate or refurbish other locations. In addition, another $8.7 million
of capital expenditures were made in the Kiosk Jewelry segment to open 121 kiosks and carts, and to
renovate, relocate or refurbish other locations. The Company plans to open approximately 65 new
stores, principally under the brand names Zales Jewelers and Gordons Jewelers in the Fine Jewelry
segment, and approximately 40 new locations in the Kiosk Jewelry segment, for which it expects to
incur approximately $29 million and $3 million in capital expenditures, respectively, during fiscal
year 2006. During fiscal year 2006, the Company anticipates spending approximately $40 million to
renovate, relocate or refurbish approximately 72 locations in its Fine Jewelry segment and
approximately 100 additional locations in its Kiosk Jewelry segment. This will allow the Company
to focus on productivity of existing core store locations. The
Company also estimates that it will incur capital expenditures of approximately $14 million
during fiscal year 2006 for enhancements to its management information systems and infrastructure
expansion and other support operations. In total, the Company anticipates making $86 million of
capital expenditures during fiscal year 2006.
Other Activities Affecting Liquidity
On August 30, 2005, the Company announced that its Board of Directors had approved a stock
repurchase program pursuant to which the Company, from time to time, at managements discretion and
in accordance with the Companys usual policies and applicable securities laws, could purchase up
to an additional $100 million of its common stock., par value $.01 per share (common stock).
On August 5, 2004, the Company announced that its Board of Directors had approved a stock
repurchase program pursuant to which the Company, from time to time, at managements discretion and
in accordance with the Companys usual policies and applicable securities laws, could purchase up
to an additional $50 million of its common stock, par value $.01 per share. As of January 31,
2005, the Company had repurchased 1.8 million shares of common stock at an aggregate cost of
approximately $50 million, which completed its authorization under the fiscal year 2005 program.
The Companys Board of Directors has authorized similar programs for eight consecutive years
and believes that share repurchases are a prudent use of the Companys financial resources given
its cash flow and capital position and provides value to its stockholders. The Company believes
that its financial performance and cash flows will continue to provide the necessary resources to
improve its operations, grow its business and provide adequate financial flexibility while still
allowing for stock repurchase activities.
- 30 -
On August 31, 2004, the Company sold a 69,000 square foot building in Bethlehem, Pennsylvania
that was used for additional distribution and warehousing functions at Piercing Pagoda prior to the
Companys acquisition of Piercing Pagoda, Inc. (the Acquisition). The proceeds, net of
commissions received, represented an estimated fair value of $2.3 million. On February 28, 2005,
the Company sold a 73,000 square foot building in Bethlehem, Pennsylvania that served as the
primary office and distribution facility for Piercing Pagoda prior to the Acquisition. The proceeds
net of commissions received were $1.7 million, resulting in a loss on the sale of approximately
$1.1 million.
|
|
Off-Balance Sheet Arrangements |
Citibank U.S.A., N.A. (Citi), a subsidiary of Citi Group, provides financing to the
Companys customers through the Companys private label credit card program, in exchange for
payment by the Company of a merchant fee (subject to periodic adjustment) based on a percentage of
each credit card sale. The receivables established through the issuance of credit by Citi are
originated and owned by Citi. As defined in the contract with Citi, losses related to a standard
credit account (an account within the credit limit approved under the original merchant agreement
between the Company and Citi) are assumed entirely by Citi without recourse to the Company, except
where a Company employee violates the credit procedures agreed to in the merchant agreement.
In an effort to better service customers, the Company and Citi developed two programs that
extend credit to qualifying customers beyond the standard credit account. In July 2005, Citi agreed
to assume the majority of the risk associated with the larger of the two programs resulting in the
release of approximately $6.5 million of restricted cash previously held as collateral in an
interest bearing depository account. The incremental credit extension is at the Companys
discretion to accommodate larger sales transactions. The Company bears a portion of customer
default losses, as defined in the agreement with Citi, arising from these accounts.
Based on account balances of the remaining program as of July 31, 2005, the Companys maximum
potential payment would be approximately $2.4 million if the entire portfolio defaulted. Under the
shared risk program, the Company incurred approximately $54,000 of losses for the twelve months
ended July 31, 2005. As of July 31, 2005, the reserve for the portfolio is approximately $134,000,
which the Company believes is adequate based on the historical trend of actual losses.
Future liquidity will be enhanced to the extent that the Company is able to realize the cash
benefit from utilization of its NOL against current and future tax liabilities. The cash benefit
realized in fiscal year 2005 was approximately $6.8 million. As of July 31, 2005, the Company had a
NOL (after limitations) of $58.6 million, which represents up to $20.5 million in future tax
benefits. The utilization of this asset is subject to limitations. The most restrictive limitation
is the Internal Revenue Code Section 382 annual limitation of $19.5 million. The NOL can be
utilized through fiscal year 2008 .
Management believes that operating cash flow and amounts available under the Amended
Revolving Credit Agreement should be sufficient to fund the Companys current operations, debt
service and currently anticipated capital expenditure requirements for the foreseeable future.
|
|
Contractual Obligations |
Aggregate information about the Companys contractual obligations as of July 31, 2005 is
presented in the following table.
- 31 -
Contractual Obligations (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
More |
|
|
Contractual Cash |
|
|
|
|
|
than |
|
1-3 |
|
4-5 |
|
than |
|
|
Obligations ($ in millions) (e,f) |
|
Total |
|
1 Year |
|
Years |
|
Years |
|
5 Years |
|
Other |
|
|
|
Long-Term Debt (a) |
|
$ |
130 |
|
|
|
|
|
|
|
|
|
|
$ |
130 |
|
|
|
|
|
|
|
|
|
Operating Leases (b) |
|
|
1,001 |
|
|
|
191 |
|
|
|
437 |
|
|
|
104 |
|
|
|
269 |
|
|
|
|
|
Operation
Services Agreement
(c) |
|
|
30 |
|
|
|
5 |
|
|
|
13 |
|
|
|
8 |
|
|
|
4 |
|
|
|
|
|
Other Long-term Liabilities (d) |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
Total |
|
$ |
1,182 |
|
|
$ |
196 |
|
|
$ |
450 |
|
|
$ |
242 |
|
|
$ |
273 |
|
|
$ |
21 |
|
|
|
|
(a) |
|
Long-term debt relates to principal payments due under the Companys Amended Revolving Credit
Agreement. This amount does not reflect any interest, which would be based on the current
effective rate, which was 4.79 percent at July 31, 2005 and assuming no prepayments. |
|
(b) |
|
Operating lease obligations relate to minimum payments due under store lease agreements. Most
of the store operating leases provide for the payment of base rentals plus real estate taxes,
insurance, common area maintenance fees and merchant association dues. For fiscal year 2005,
these costs represented approximately 20 percent of fixed rent payments. (See Notes to
Consolidated Financial Statements-Lease Commitments for further discussion). |
|
(c) |
|
The Company has an operations services agreement with a third party for the management of the
Companys mainframe processing operations, client server systems, Local Area Network
operations, Wide Area Network management and e-commerce hosting. The current agreement expired
July 31, 2005 and was renegotiated (see Notes to Consolidated Financial Statements
Commitments and Contingencies for further discussion). |
|
(d) |
|
Other long-term liabilities reflect future payments relating to the Companys Post Retirement
Benefits Plan. (See Notes to Consolidated Financial Statements-Post Retirement Benefits for
further discussion) and loss reserves related to credit insurance. The Company has reflected
these payments under Other, as the timing of these future payments is dependent on the
actual processing of the claims. |
|
(e) |
|
Not included in the above table is the long-term portion ($16.7 million) of the incentive
payment received from Citi Commerce Solutions of $41.8 million. The incentive is amortized
over the life of the contract and is included in long-term liabilities on the accompanying
Consolidated Balance Sheet but does not impact cash payments in future periods. (See Notes to
Consolidated Financial Statements-Deferred Credit for further discussion). |
|
(f) |
|
Not included in the table above as purchase obligations are the Companys ordinary course
purchase orders for merchandise and obligations under employment agreements. |
Inflation
In managements opinion, changes in net revenues, net earnings, and inventory valuation that
have resulted from inflation and changing prices have not been material during the periods
presented. The trends in inflation rates pertaining to merchandise inventories, especially as they
relate to gold and diamond costs, are primary components in determining the Companys last-in,
first-out (LIFO) inventory. Current market trends indicate rising diamond prices. If such
trends continue, the Companys LIFO provision could be impacted. The Company currently hedges a
portion of its gold purchases through forward contracts. There is no assurance that inflation will
not materially affect the Company in the future.
- 32 -
Critical Accounting Policies and Estimates
The accounting and financial reporting policies of the Company are in conformity with U.S.
generally accepted accounting principles. The preparation of financial statements in conformity
with U.S. generally accepted accounting policies requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates. For example, unexpected changes in market conditions or a downturn in the economy could
adversely affect actual results. Estimates are used in accounting for, among other things,
inventory obsolescence, goodwill and long lived asset valuation, LIFO inventory retail method,
legal liability, credit insurance liability, product warranty, depreciation, employee benefits,
tax, and contingencies. Estimates and assumptions are reviewed periodically and the effects of
revisions are reflected in the consolidated financial statements in the period they are determined
to be necessary.
Management believes the following accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its consolidated financial
statements.
Merchandise
Inventories Merchandise Inventories are stated at the lower of cost or market.
Substantially all U.S. inventories represent finished goods which are valued using the last-in,
first-out (LIFO) retail inventory method. Merchandise inventory of Peoples Jewellers and Mappins
Jewellers of Canada is valued using the first-in, first-out (FIFO) retail inventory method. Under
the retail method, inventory is segregated into categories of merchandise with similar
characteristics at its current retail selling value. The determination of inventory at cost and the
resulting gross margins are calculated by applying an average cost to retail ratio to the retail
value of inventory.
The Company is required to determine the LIFO cost on an interim basis by estimating annual
inflation trends, annual purchases and ending inventory levels for the fiscal year. Actual annual
inflation rates and inventory balances as of the end of any fiscal year may differ from interim
estimates. The Company applies internally developed indices that the Company believes more
consistently measure inflation or deflation in the components of its merchandise (i.e., diamonds,
gold and other metals and precious stones) and its merchandise mix. The Company believes the
internally developed indices more accurately reflect inflation or deflation in its own prices than
the U.S. Bureau of Labor Statistics (BLS) producer price indices or other published indices.
The Company also writes down its inventory for discontinued, slow-moving and damaged
inventory. This write-down is equal to the difference between the cost of inventory and its
estimated market value based upon assumptions of targeted inventory turn rates, future demand,
management strategy, and market conditions. If actual market conditions are less favorable than
those projected by management, or management strategy changes, additional inventory write-downs may
be required and, in the case of a major change in strategy or downturn in market conditions, such
write-downs could be significant. For example, in fiscal year 2001, in connection with a change
in strategic direction, the Company incurred an inventory charge of $25 million.
Shrinkage is estimated for the period from the last inventory date to the end of the fiscal
year on a store by store basis. Such estimates are based on experience and the shrinkage results
from the last physical inventory. Physical inventories are taken at least once annually for all
store locations and for the distribution centers. The shrinkage rate from the most recent physical
inventory, in combination with historical experience and significant changes in physical inventory
results could impact the shrinkage reserve.
Long-lived
Assets and Goodwill Long-lived assets are periodically reviewed for impairment by
comparing the carrying value of the assets with their estimated undiscounted future cashflows. If the evaluation
indicates that the carrying amount of the asset may not be recoverable, the potential impairment is
measured based on a projected discounted cash flow method, using a discount rate that is considered
to be commensurate with the risk inherent in the Companys current business model. Assumptions are
made with respect to cash flows expected to be generated by the related assets based upon updated
projections. Any changes in key assumptions, particularly store performance, or market conditions
could result in an unanticipated impairment charge. For instance, in the event of a major market
downturn, individual stores may become
33
unprofitable, which could result in a write-down of the carrying value of the assets located
in those stores. Any impairment would be recognized in operating results if a permanent reduction
were to occur.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company tests
goodwill for impairment annually, at the end of its second quarter, or more frequently if events
occur which indicate a potential reduction in the fair value of a reporting units net assets below
its carrying value. An impairment is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. The Company calculates estimated fair value using the present
value of future cash flows expected to be generated using a weighted average cost of capital and
updated financial projections. Based upon the amounts currently recorded as goodwill, recent
performance and estimated projections, the Company believes the likelihood of additional impairment
would not be material. However, a significant change in the related brands performance, such as
the closing of a majority of the brands stores, could result in additional impairment. In the
second quarter of fiscal year 2005, the Company performed its annual review for impairment of
goodwill related to its Piercing Pagoda Inc., Peoples Jewellers and other smaller acquisitions.
The Company concluded that there was no evidence of impairment related to the goodwill of
approximately $19.4 million for Piercing Pagoda, $66.4 million recorded for the Peoples
acquisition and $5.0 million for other smaller acquisitions.
Revenue
Recognition The Company recognizes revenue in accordance with the Securities and
Exchange Commissions Staff Accounting Bulletin No. 104 Revenue Recognition. Revenue related to
merchandise sales, which is approximately 94 percent of total revenues, is recognized at the time
of the sale, reduced by a provision for returns. The provision for sales returns is based on
historical evidence of the Companys return rate. Repair revenues are recognized when the service
is complete and the merchandise is delivered to the customers. Total revenues include extended
service agreements that are recognized over the two year period in proportion to the costs expected
to be incurred in performing services under the agreements. Any significant change in the
proportion of costs expected to be incurred in performing services under the agreements could
result in a change in the amount of revenue recognized. For instance, a 5 percent change on an
annual basis in the timing of services under these agreements could result in a 5 percent change in
the revenue recognized. Revenues also include premiums from the Companys insurance businesses,
principally related to credit insurance policies sold to customers who purchase the Companys
merchandise under the proprietary credit program. Insurance premiums are recognized over the
coverage period.
Other
Reserves The Company is involved in a number of legal and governmental proceedings as
part of the normal course of business. Reserves are established based on managements best
estimates of the Companys potential liability in these matters. These estimates have been
developed in consultation with in-house and outside counsel and are based on a combination of
litigation and settlement strategies.
Income taxes are estimated for each jurisdiction in which the Company operates. This involves
assessing the current tax exposure together with temporary differences resulting from differing
treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax
assets are evaluated for recoverability based on estimated future taxable income. To the extent
that recovery is deemed not likely, a valuation allowance is recorded. The Company believes that
as of July 31, 2005, the realization of its gross deferred tax assets is more likely than not and
thus there was no valuation reserve recorded.
Other Matters
In connection with the views expressed by the Office of the Chief Accountant of the Securities
and Exchange Commission (the SEC) on February 7, 2005, regarding certain lease accounting issues,
the Company, like many retailers, began a review of its lease accounting practices.
The SEC letter clarified existing generally accepted accounting principles applicable to
leases and leasehold improvements primarily related to accounting for construction allowances
received from landlords and the period over which rent payments were amortized.
In prior periods, and consistent with industry practice, the Company recognized the minimum
rent payments evenly across the period beginning with the commencement date of the lease through
the end of
34
the lease term, typically 120 months. This period excludes the construction period, typically
two to three months, in which the Company had access to the property but which preceded the lease
term. The SECs views clarified that the construction period should be included in the period over
which the Company amortizes the minimum rent payments.
The Company reviewed its lease portfolio. Based upon this review, the Company determined that
the cumulative impact as of January 31, 2005, of correcting this error by commencing the
amortization period earlier was additional expense related to prior periods of approximately $5.8
million before taxes, or $3.6 million and $0.07 per share after taxes. The impact to net income
for the fiscal years ending July 31, 2005 and July 31, 2004 was not material.
In addition, the Company had approximately $5.2 million of previously unrecognized deferred
credits from ESAs relating to prior periods as of January 31, 2005. The Company recorded the
cumulative impact on net income of correcting this error of $3.3 million and $0.06 per share in its
quarter ending January 31, 2005. Otherwise, there was no impact to net income for the fiscal years
ending July 31, 2005 and July 31, 2004.
The net impact of the two adjustments is not material to the Companys financial statements.
Furthermore the two changes have no impact on the Companys historical or future net cash flow, the
timing of cash received or the timing of payments.
On August 30, 2005, the Company announced its intention to close approximately 30 Bailey Banks
and Biddle stores after the upcoming Holiday season that do not fit with the brands long term
positioning in the luxury market.
On Monday August 29, 2005, Hurricane Katrina and the subsequent flooding along the Louisiana
and Mississippi coasts resulted in the closure of several of the Companys locations. It is
anticipated that approximately 10 to 15 locations will remain closed throughout the first quarter
of fiscal year 2006, and a few of those may not reopen. At this time, the Company does not expect
the impact of the closures to have a material effect on its results of operations, cash flow or
working capital.
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates, which may adversely
affect its financial position, results of operations and cash flows. In seeking to minimize the
risks from interest rate fluctuations, the Company manages exposures through its regular operating
and financing activities. The Company does not use derivative financial instruments for trading or
other speculative purposes and is not party to any leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its borrowing activities, which
are described under Long-term Debt in the Notes to the Consolidated Financial Statements.
The investments of the Companys insurance subsidiaries, primarily stocks and bonds, had an
approximate market value at July 31, 2005 of $24 million.
Based on the Companys market risk-sensitive instruments (including variable rate debt)
outstanding at July 31, 2005, the Company has determined that there was no material market risk
exposure to the Companys consolidated financial position, results of operations or cash flows as
of such date.
Commodity
Risk The Company principally addresses commodity risk through retail price points.
The Companys commodity risk exposure to diamond price fluctuation is not currently hedged by
financial instruments.
In fiscal year 2005, the Company entered into forward contracts for the purchase of some of
its gold in order to hedge the risk of gold price fluctuations. As of July 31, 2005, the Company
did not have any outstanding forward contracts for gold.
Foreign
Currency Contracts As a result of its Canadian operations, the Company is exposed to
market risk from currency exchange rate exposure which may adversely affect the Companys financial
position, results of operations and cash flows. In seeking to minimize this risk, the Company
manages exposures through foreign currency exchange contracts. In fiscal year 2005, the Company
entered into foreign currency forward exchange contracts to reduce the effect of fluctuating
Canadian currency exchange rates. The table below provides information about the Companys
derivative financial instruments that are sensitive to Canadian currency exchange rates.
Foreign Exchange Contracts
(As of July 31, 2005)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract |
|
|
|
Contract |
|
|
Contract |
|
|
Contract |
|
|
Fair Market |
|
Currency |
|
Settlement Date |
|
|
Amount |
|
|
Exchange Rate |
|
|
Value |
|
USD |
|
|
08-05 |
|
|
$ |
3,124,834 |
|
|
|
1.3107 |
|
|
$ |
(223,430 |
) |
USD |
|
|
09-05 |
|
|
|
1,906,066 |
|
|
|
1.3111 |
|
|
|
(138,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,030,900 |
|
|
|
|
|
|
$ |
(362,074 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company generally enters into both forward gold purchase contracts and forward exchange
contracts with maturity dates not longer than twelve months.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and supplementary data are
included as pages F-1 through F-33 at the end of this Annual Report on Form 10-K:
|
|
|
|
|
|
|
Page |
Index |
|
Number |
Managements Report |
|
|
F-2 |
|
Report of Independent Registered Public Accounting Firm |
|
|
F-3 |
|
Report of Independent Registered Public Accounting Firm |
|
|
F-4 |
|
Consolidated Statements of Operations |
|
|
F-5 |
|
Consolidated Balance Sheets |
|
|
F-6 |
|
Consolidated Statements of Cash Flows |
|
|
F-7 |
|
Consolidated Statements of Stockholders Investment |
|
|
F-9 |
|
Notes to Consolidated Financial Statements |
|
|
F-11 |
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of the Companys management, including its
Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of
its disclosure controls and procedures, as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures are effective in enabling the Company to record, process,
summarize and report information required to be included in its periodic SEC filings within the
required time period. There has been no change in the Companys internal control over financial
reporting that occurred during the Companys most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting.
Internal Control Over Financial Reporting
The Companys Managements Report on Internal Control Over Financial Reporting is included on
page F-2 of this Annual Report on Form 10-K. The report of KPMG LLP, the Companys independent
registered public accounting firm, regarding managements assessment of the Companys internal
control over financial reporting and the effectiveness of the Companys internal control over
financial reporting is included on page F-3 of this Annual Report on Form 10-K.
There has been no change in the Companys internal control over financial reporting that
occurred during the Companys most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the headings Proposal No. 1: Election of Directors,
Corporate Governance and Section 16(a) Beneficial Ownership Reporting Compliance in the
Companys definitive Proxy Statement for the 2005 Annual Meeting of Stockholders is incorporated
herein by reference. In addition, the information set forth under Executive Officers and Key
Employees of the Registrant in Part I of this report is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the heading Executive and Director Compensation in the
Companys definitive Proxy Statement for the 2005 Annual Meeting of Stockholders is incorporated
herein by reference.
38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information set forth under the heading Outstanding Voting Securities of the Company and
Principal Holders Thereof in the Companys definitive Proxy Statement for the 2005 Annual Meeting
of Stockholders is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information about common stock that may be issued upon the
exercise of options and rights under all existing equity compensation plans as of July 31, 2005.
The total does not reflect the 250,000 additional shares of common stock that will be issuable
under the Zale Corporate Outside Directors 2005 Stock Incentive Plan if such plan is approved by
stockholders at the 2005 Annual Meeting of Stockholders.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares of |
|
|
|
Number of shares |
|
|
|
|
|
|
common stock remaining |
|
|
|
of common stock |
|
|
Weighted- |
|
|
available for future issuance |
|
|
|
to be issued upon |
|
|
average exercise |
|
|
under equity compensation |
|
|
|
exercise of |
|
|
price of |
|
|
plans (excluding shares |
|
|
|
outstanding |
|
|
outstanding |
|
|
reflected in 1st column) (2), |
|
Plan Category |
|
options (1), (3) |
|
|
options |
|
|
(3) |
|
|
|
|
Equity
compensation
plans approved
by
stockholders |
|
|
2,873,610 |
|
|
$ |
20.23 |
|
|
|
5,138,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation
plans not
approved by
stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,873,610 |
|
|
$ |
20.23 |
|
|
|
5,138,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes shares of common stock to be issued upon the exercise of outstanding options under
the Zale Corporation Omnibus Stock Incentive Plan, the Zale Corporation 2003 Stock Incentive
Plan and the Zale Corporation Outside Directors 1995 Stock Option Plan. |
|
(2) |
|
Includes shares of common stock available for future issuance under the Zale Corporation 2003
Stock Incentive Plan. |
|
(3) |
|
The number of shares to be issued upon exercise of outstanding options and the number of
securities available for future issuance under the equity compensation plans were
proportionally adjusted to give effect to the Companys two-for-one stock split completed on
June 8, 2004. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the heading Independent Auditor Fee Information in the
Companys definitive Proxy Statement for the 2005 Annual Meeting of Stockholders is incorporated
herein by reference.
39
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report.
1. Financial Statements
The list of financial statements required by this item is set forth in Item 8.
2. Index to Financial Statement Schedules
All other financial statements and financial statement schedules for which provision is made
in the applicable accounting regulation of the SEC are not required under the related instructions,
are not material or are not applicable and, therefore, have been omitted or are included in the
consolidated financial statements or notes thereto.
40
3. Exhibits
Each management contract or compensation plan required to be filed as an exhibit is identified
by an asterisk (*).
|
|
|
|
|
|
|
|
|
The filings referenced |
|
|
|
|
for incorporation by reference are |
Exhibit |
|
|
|
Zale Corporation filings (File No. |
Number |
|
Description of Exhibit |
|
1-04129) unless otherwise noted |
3.1
|
|
Restated Certificate of Incorporation of Zale Corporation |
|
October 31, 2001 Form 10-Q,
Exhibit 3.1 |
|
|
|
|
|
3.1b
|
|
Certificate of Amendment to Restated Certificate of
Incorporation of Zale Corporation |
|
October 31, 2004, Form 10-Q,
Exhibit 3.1 |
|
|
|
|
|
3.2
|
|
Bylaws of Zale Corporation |
|
July 31, 2000 Form 10-K,
Exhibit 3.2 |
|
|
|
|
|
4.1
|
|
Revolving Credit Agreement, dated as of July 23, 2003 |
|
July 31, 2003 Form 10-K,
Exhibit 4.1 |
|
|
|
|
|
4.2
|
|
Amendment to Revolving Credit Agreement, dated as of
December 10, 2004 |
|
December 10, 2004 Form 8-K,
Exhibit 99.1 |
|
|
|
|
|
10.1a*
|
|
Zale Corporation Savings and Investment Plan |
|
July 31, 2000 Form 11-K,
Exhibit 99
|
|
|
|
|
|
10.1b*
|
|
Amendment to Zale Corporation Savings and Investment Plan |
|
July 31, 2001 Form 11-K, Exhibit 99 |
|
|
|
|
|
10.2*
|
|
Form of Indemnification Agreement between Zale
Corporation and its directors |
|
July 31, 1995 Form 10-K
Exhibit 10.2 |
|
|
|
|
|
10.3*
|
|
Zale Corporation Omnibus Stock Incentive Plan |
|
July 31, 2000 Form 10-K,
Exhibit 10.3a |
|
|
|
|
|
10.4a*
|
|
Zale Corporation 2003 Stock Incentive Plan |
|
July 31, 2003 Form 10-K,
Exhibit 10.4 |
|
|
|
|
|
10.4b*
|
|
Form of Stock Option Award Agreement |
|
July 31, 2004 Form 10-K, Exhibit
10.4b |
|
|
|
|
|
10.4c*
|
|
Form of Restricted Stock Award
Agreement |
|
July 31, 2004 Form 10-K, Exhibit
10.4c |
|
|
|
|
|
10.5*
|
|
Outside Directors 1995 Stock Option Plan
|
|
July 31, 2001 Form 10-K,
Exhibit 10.3c |
|
|
|
|
|
10.6a*
|
|
Executive Severance Plan |
|
Form S-1 (Reg. No. 33-27225),
Exhibit 10.23 |
|
|
|
|
|
10.6b*
|
|
Amendment to Executive Severance Plan |
|
July 31, 1996 Form 10-K,
Exhibit 10.8a |
|
|
|
|
|
10.7a
|
|
Lease Agreement for Corporate Headquarters |
|
July 31, 1996 Form 10-K,
Exhibit 10.11 |
41
|
|
|
|
|
|
|
|
|
The filings referenced |
|
|
|
|
for incorporation by reference are |
Exhibit |
|
|
|
Zale Corporation filings (File No. |
Number |
|
Description of Exhibit |
|
1-04129) unless otherwise noted |
10.7b
|
|
First Amendment to Lease Agreement for Corporate
Headquarters |
|
July 31, 1996 Form 10-K,
Exhibit 10.11a |
|
|
|
|
|
10.7c
|
|
Second Amendment to Lease Agreement for Corporate
Headquarters |
|
July 31, 2004, Form 10-K, Exhibit
10.7c |
|
|
|
|
|
10.8*
|
|
Employment Agreement with Mary L. Forté, dated as of
September 21, 2005 |
|
September 27, 2005, Form 8-K,
Exhibit 10.1 |
|
|
|
|
|
10.9*
|
|
Employment Agreement with Sue E. Gove, dated as of
September 21, 2005 |
|
September 27, 2005, Form 8-K,
Exhibit 10.2 |
|
|
|
|
|
10.10*
|
|
Employment Agreement with Mark R. Lenz dated as of
August 1, 2003 |
|
July 31, 2003 Form 10-K,
Exhibit 10.12 |
|
|
|
|
|
10.11
|
|
Employment Agreement with Paul G. Leonard dated as of
January 5, 2005 |
|
January 12, 2005, Form 8-K,
Exhibit 10.1 |
|
|
|
|
|
10.12*
|
|
Zale Corporation Executive Bonus Plan |
|
July 31, 2003 Form 10-K,
Exhibit 10.15 |
|
|
|
|
|
10.13
|
|
Amendment to Citibank USA, N.A. Agreement, dated as of
April 4, 2003 |
|
April 30, 2003 Form 10-Q,
Exhibit 99.2 |
|
|
|
|
|
10.14*
|
|
Form of Change of Control Agreement of Senior Vice
Presidents without separate employment agreements |
|
July 31, 2004, Form 10-K, Exhibit
10.14 |
|
|
|
|
|
10.15*
|
|
Base Salaries of Named Executive Officers |
|
Filed herewith. |
|
|
|
|
|
10.16*
|
|
Summary of Non-Employee Director Compensation |
|
Filed herewith. |
|
|
|
|
|
10.17
|
|
Settlement and Release Agreement with Pamela J. Romano,
dated as of February 23, 2005 |
|
March 1, 2005, Form 8-K, Exhibit
10.1 |
|
|
|
|
|
10.18
|
|
Master Agreement for Information Technology Services
between Zale Delaware, Inc. and ACS Commercial Solutions,
Inc., dated as of August 1, 2005 |
|
Filed herewith. |
|
|
|
|
|
14
|
|
Code of Ethics |
|
July 31, 2003 Form 10-K,
Exhibit 14 |
|
|
|
|
|
21
|
|
Subsidiaries of the registrant
|
|
Filed herewith. |
|
|
|
|
|
23.1
|
|
Consent of KPMG LLP |
|
Filed herewith. |
|
|
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer
|
|
Filed herewith. |
|
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer
|
|
Filed herewith. |
|
|
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer
|
|
Filed herewith. |
|
|
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer
|
|
Filed herewith.
|
42
|
|
|
|
|
|
|
|
|
The filings referenced |
|
|
|
|
for incorporation by reference are |
Exhibit |
|
|
|
Zale Corporation filings (File No. |
Number |
|
Description of Exhibit |
|
1-04129) unless otherwise noted |
99.1
|
|
Audit Committee Charter
|
|
July 31, 2004 Form 10-K, Exhibit
99.1 |
|
|
|
|
|
99.2
|
|
Compensation Committee Charter
|
|
July 31, 2004 Form 10-K, Exhibit
99.2 |
|
|
|
|
|
99.3
|
|
Nominating/Corporate Governance Committee Charter
|
|
July 31, 2004 Form 10-K, Exhibit
99.3 |
43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
Managements Report on Internal Control Over Financial Reporting |
|
|
F-2 |
|
Report of Independent Registered Public Accounting Firm |
|
|
F-3 |
|
Report of Independent Registered Public Accounting Firm |
|
|
F-4 |
|
Consolidated Statements of Operations |
|
|
F-5 |
|
Consolidated Balance Sheets |
|
|
F-6 |
|
Consolidated Statements of Cash Flows |
|
|
F-7 |
|
Consolidated Statements of Stockholders Investments |
|
|
F-9 |
|
Notes to Consolidated Financial Statements |
|
|
F-11 |
|
F-1
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Stockholders of Zale Corporation:
The management of Zale Corporation and its subsidiaries (the Company) is responsible for
establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Companys
internal control over financial reporting is designed to provide reasonable assurance to management
and the Board of Directors regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of the effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies and procedures included in such
controls may deteriorate.
The Companys management has assessed the effectiveness of the Companys internal control over
financial reporting as of July 31, 2005. In making this assessment, management used criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on its assessment, management of Zale Corporation believes
that, as of July 31, 2005, the Companys internal control over financial reporting is effective
based on those criteria.
KPMG LLP, the registered public accounting firm that audited the financial statements included
in this Form 10-K filing, has issued an attestation report on managements assessment of the
Companys internal control over financial reporting. That report appears on page F-3.
|
|
|
|
|
|
|
Mary L. Forté
|
|
Mark R. Lenz |
|
|
President, Chief Executive Officer
|
|
Group Senior Vice President, |
|
|
and Director
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
October 3, 2005
|
|
October 3, 2005 |
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Zale Corporation:
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Zale Corporation maintained effective internal
control over financial reporting as of July 31, 2005, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Zale Corporations management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements assessment
and an opinion on the effectiveness of the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Zale Corporation maintained effective internal
control over financial reporting as of July 31, 2005, is fairly stated, in all material respects,
based on criteria established in Internal ControlIntegrated Framework issued by COSO. Also, in
our opinion, Zale Corporation maintained, in all material respects, effective internal control over
financial reporting as of July 31, 2005, based on criteria established in Internal
ControlIntegrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Zale Corporation as of July 31,
2005 and 2004, and the related consolidated statements of operations, stockholders investment, and
cash flows for each of the years in the three-year period ended July 31, 2005, and our report dated
October 3, 2005 expressed an unqualified opinion on those consolidated financial statements.
KPMG LLP
Dallas, TX
October 3, 2005
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Zale Corporation:
We have audited the accompanying consolidated balance sheets of Zale Corporation as of July
31, 2005 and 2004, and the related consolidated statements of operations, stockholders investment,
and cash flows for the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Zale Corporation as of July 31, 2005 and July 31,
2004, and the results of their operations and their cash flows for each of the years in the
three-year period ended July 31, 2005, in conformity with U.S. generally accepted accounting
principles.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Zale Corporations internal control over
financial reporting as of July 31, 2005, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated October 3, 2005 expressed an unqualified opinion on managements
assessment of, and the effective operation of, internal control over financial reporting.
KPMG LLP
October 3, 2005
F-4
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
July 31, |
|
|
July 31, |
|
|
July 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
2,383,066 |
|
|
$ |
2,304,440 |
|
|
$ |
2,212,241 |
|
Cost and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales |
|
|
1,157,226 |
|
|
|
1,122,946 |
|
|
|
1,101,030 |
|
Selling, General and Administrative Expenses |
|
|
982,113 |
|
|
|
942,796 |
|
|
|
884,069 |
|
Cost of Insurance Operations |
|
|
6,084 |
|
|
|
5,963 |
|
|
|
8,228 |
|
Depreciation and Amortization Expense |
|
|
59,840 |
|
|
|
56,381 |
|
|
|
55,690 |
|
Impairment of Goodwill |
|
|
|
|
|
|
|
|
|
|
136,300 |
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings |
|
|
177,803 |
|
|
|
176,354 |
|
|
|
26,924 |
|
Interest Expense, Net |
|
|
7,725 |
|
|
|
7,528 |
|
|
|
6,319 |
|
Cost of Early Retirement of Debt |
|
|
|
|
|
|
|
|
|
|
5,910 |
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
170,078 |
|
|
|
168,826 |
|
|
|
14,695 |
|
Income Taxes |
|
|
63,303 |
|
|
|
62,353 |
|
|
|
55,340 |
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss) |
|
$ |
106,775 |
|
|
$ |
106,473 |
|
|
$ |
(40,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share-Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss) Per Share |
|
$ |
2.08 |
|
|
$ |
2.02 |
|
|
$ |
(.63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share-Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss) Per Share |
|
$ |
2.05 |
|
|
$ |
1.99 |
|
|
$ |
(.63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares
Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
51,280 |
|
|
|
52,650 |
|
|
|
64,528 |
|
Diluted |
|
|
51,975 |
|
|
|
53,519 |
|
|
|
64,528 |
|
See Notes to the Consolidated Financial Statements.
F-5
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
July 31, 2005 |
|
|
July 31, 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 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,380,900 |
|
|
$ |
1,342,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS INVESTMENT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts Payable and Accrued Liabilities |
|
$ |
325,981 |
|
|
$ |
319,599 |
|
Deferred Tax Liability, Net |
|
|
56,356 |
|
|
|
51,417 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
382,337 |
|
|
|
371,016 |
|
Non-current Liabilities |
|
|
37,325 |
|
|
|
42,486 |
|
Non-current Tax Liability, Net |
|
|
13,850 |
|
|
|
4,968 |
|
Long-term Debt |
|
|
129,800 |
|
|
|
197,500 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
Stockholders Investment: |
|
|
|
|
|
|
|
|
Preferred Stock (Par value $0.01 per share, 5,000 shares authorized) |
|
|
|
|
|
|
|
|
Common Stock
(Par value $0.01 per share, 150,000 and 70,000 shares
authorized, 53,056 and 52,110 shares issued and 51,239 and 52,110
shares outstanding as of July 31, 2005 and 2004, respectively) |
|
|
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 |
|
|
|
|
|
|
|
|
See Notes to the Consolidated Financial Statements.
F-6
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
July 31, |
|
|
July 31, |
|
|
July 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
106,775 |
|
|
$ |
106,473 |
|
|
$ |
(40,645 |
) |
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
59,840 |
|
|
|
56,381 |
|
|
|
55,690 |
|
Amortization of long-term debt issue costs |
|
|
1,306 |
|
|
|
1,329 |
|
|
|
463 |
|
Deferred compensation expense |
|
|
660 |
|
|
|
|
|
|
|
115 |
|
Impairment of Goodwill |
|
|
|
|
|
|
|
|
|
|
136,300 |
|
Impairment of Fixed Assets |
|
|
1,497 |
|
|
|
2,627 |
|
|
|
2,092 |
|
Loss from dispositions of property & equipment |
|
|
4,388 |
|
|
|
2,429 |
|
|
|
6,194 |
|
Deferred taxes |
|
|
12,993 |
|
|
|
30,976 |
|
|
|
46,286 |
|
Tax benefit associated with stock option exercises |
|
|
5,665 |
|
|
|
7,955 |
|
|
|
2,292 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventories |
|
|
(20,968 |
) |
|
|
(24,431 |
) |
|
|
(9,073 |
) |
Other current assets |
|
|
261 |
|
|
|
(11,150 |
) |
|
|
2,419 |
|
Other assets |
|
|
(2,194 |
) |
|
|
(315 |
) |
|
|
(5,114 |
) |
Accounts payable and accrued liabilities |
|
|
3,216 |
|
|
|
12,113 |
|
|
|
(26,011 |
) |
Non-current liabilities |
|
|
(5,161 |
) |
|
|
(6,309 |
) |
|
|
(6,188 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities |
|
|
168,278 |
|
|
|
178,078 |
|
|
|
164,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(83,124 |
) |
|
|
(60,788 |
) |
|
|
(43,579 |
) |
Proceeds from sales of fixed assets |
|
|
3,971 |
|
|
|
|
|
|
|
|
|
Purchase of available for sale investments |
|
|
(3,480 |
) |
|
|
(4,980 |
) |
|
|
(12,964 |
) |
Proceeds from sale of available for sale investments |
|
|
4,440 |
|
|
|
5,751 |
|
|
|
14,190 |
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities |
|
|
(78,193 |
) |
|
|
(60,017 |
) |
|
|
(42,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on revolving credit agreement |
|
|
(1,456,600 |
) |
|
|
(704,300 |
) |
|
|
(169,154 |
) |
Borrowings under revolving credit agreement |
|
|
1,388,900 |
|
|
|
717,400 |
|
|
|
353,554 |
|
Senior notes repurchase |
|
|
|
|
|
|
|
|
|
|
(86,787 |
) |
Proceeds from exercise of stock options |
|
|
17,725 |
|
|
|
39,565 |
|
|
|
14,711 |
|
Loan origination costs on new revolving credit agreement |
|
|
|
|
|
|
|
|
|
|
(6,563 |
) |
Purchase of common stock |
|
|
(50,000 |
) |
|
|
(143,358 |
) |
|
|
(278,236 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Financing Activities |
|
|
(99,975 |
) |
|
|
(90,693 |
) |
|
|
(172,475 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash |
|
|
2,212 |
|
|
|
483 |
|
|
|
394 |
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
(7,678 |
) |
|
|
27,851 |
|
|
|
(49,614 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
63,124 |
|
|
|
35,273 |
|
|
|
84,887 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
55,446 |
|
|
$ |
63,124 |
|
|
$ |
35,273 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-7
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
July 31, 2005 |
|
|
July 31, 2004 |
|
|
July 31, 2003 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
6,602 |
|
|
$ |
5,559 |
|
|
$ |
9,767 |
|
Interest received |
|
$ |
644 |
|
|
$ |
409 |
|
|
$ |
1,368 |
|
Income taxes paid (net of refunds received) |
|
$ |
31,110 |
|
|
$ |
19,914 |
|
|
$ |
33,302 |
|
See Notes to the Consolidated Financial Statements.
F-8
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Number of |
|
|
|
|
|
Additional |
|
Other |
|
|
Common Shares |
|
Common |
|
Paid-In |
|
Comprehensive |
|
|
Outstanding |
|
Stock |
|
Capital |
|
Income (Loss) |
Balance July 31, 2002 |
|
|
67,138 |
|
|
$ |
671 |
|
|
$ |
549,584 |
|
|
$ |
(6,559 |
) |
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Securities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(243 |
) |
Unrealized Gain on Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259 |
|
Cumulative Translation Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,377 |
|
Exercise of Stock Options, including
related tax benefit |
|
|
445 |
|
|
|
8 |
|
|
|
16,995 |
|
|
|
|
|
Purchase of Common Stock |
|
|
(6,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Contribution to 401(k) plan |
|
|
29 |
|
|
|
|
|
|
|
(154 |
) |
|
|
|
|
Deferred Compensation Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Stock Split |
|
|
(5,958 |
) |
|
|
(127 |
) |
|
|
127 |
|
|
|
|
|
|
|
|
Balance July 31, 2003 |
|
|
55,222 |
|
|
$ |
552 |
|
|
$ |
566,552 |
|
|
$ |
6,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Securities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163 |
) |
Release of Pre-Bankruptcy Tax Reserve |
|
|
|
|
|
|
|
|
|
|
54,547 |
|
|
|
|
|
Unrealized Loss on Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(292 |
) |
Cumulative Translation Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,091 |
|
Exercise of Stock Options, including
related tax benefit |
|
|
1,202 |
|
|
|
13 |
|
|
|
47,506 |
|
|
|
|
|
Purchase of Common Stock |
|
|
(2,762 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Contribution to 401(k) plan |
|
|
|
|
|
|
|
|
|
|
302 |
|
|
|
|
|
Restricted Stock Issued |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Stock Split |
|
|
(1,627 |
) |
|
|
(44 |
) |
|
|
(605,246 |
) |
|
|
|
|
|
|
|
Balance July 31, 2004 |
|
|
52,110 |
|
|
$ |
521 |
|
|
$ |
63,661 |
|
|
$ |
13,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Securities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(474 |
) |
Unrealized Loss on Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(338 |
) |
Cumulative Translation Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,461 |
|
Exercise of Stock Options, including
related tax benefit |
|
|
946 |
|
|
|
10 |
|
|
|
23,380 |
|
|
|
|
|
Purchase of Common Stock |
|
|
(1,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Issued/Cancelled |
|
|
(5 |
) |
|
|
|
|
|
|
1,929 |
|
|
|
|
|
Deferred Compensation Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 31, 2005 |
|
|
51,239 |
|
|
$ |
531 |
|
|
$ |
88,970 |
|
|
$ |
24,119 |
|
|
|
|
See Notes to the Consolidated Financial Statements.
F-9
ZALE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT (continued)
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Deferred |
|
Treasury |
|
Total |
|
Comprehensive |
|
|
Earnings |
|
Compensation |
|
Stock |
|
Investment |
|
Income (Loss) |
Balance July 31, 2002 |
|
$ |
629,767 |
|
|
$ |
(115 |
) |
|
$ |
(233,541 |
) |
|
$ |
939,807 |
|
|
$ |
139,728 |
|
Net Loss |
|
|
(40,645 |
) |
|
|
|
|
|
|
|
|
|
|
(40,645 |
) |
|
|
(40,645 |
) |
Unrealized Loss on Securities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(243 |
) |
|
|
(243 |
) |
Unrealized Gain on Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259 |
|
|
|
259 |
|
Cumulative Translation Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,377 |
|
|
|
13,377 |
|
Exercise of Stock Options,
including related tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,003 |
|
|
|
|
|
Purchase of Common Stock |
|
|
|
|
|
|
|
|
|
|
(278,236 |
) |
|
|
(278,236 |
) |
|
|
|
|
Contribution to 401(k) plan |
|
|
|
|
|
|
|
|
|
|
1,040 |
|
|
|
886 |
|
|
|
|
|
Deferred Compensation Amortization |
|
|
|
|
|
|
115 |
|
|
|
|
|
|
|
115 |
|
|
|
|
|
Effect of Stock Split |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 31, 2003 |
|
$ |
589,122 |
|
|
$ |
|
|
|
$ |
(510,737 |
) |
|
$ |
652,323 |
|
|
$ |
(27,252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings |
|
|
106,473 |
|
|
|
|
|
|
|
|
|
|
|
106,473 |
|
|
|
106,473 |
|
Unrealized Loss On Securities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163 |
) |
|
|
(163 |
) |
Release of Pre-Bankruptcy Tax
Reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,547 |
|
|
|
|
|
Unrealized Loss on Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(292 |
) |
|
|
(292 |
) |
Cumulative Translation Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,091 |
|
|
|
7,091 |
|
Exercise of Stock Options,
including related tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,519 |
|
|
|
|
|
Purchase of Common Stock |
|
|
|
|
|
|
|
|
|
|
(143,358 |
) |
|
|
(143,358 |
) |
|
|
|
|
Contribution to 401(k) plan |
|
|
|
|
|
|
|
|
|
|
1,672 |
|
|
|
1,974 |
|
|
|
|
|
Restricted Stock Issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Stock Split |
|
|
(47,133 |
) |
|
|
|
|
|
|
652,423 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 31, 2004 |
|
$ |
648,462 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
726,114 |
|
|
$ |
113,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings |
|
|
106,775 |
|
|
|
|
|
|
|
|
|
|
|
106,775 |
|
|
|
106,775 |
|
Unrealized Loss on Securities, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(474 |
) |
|
|
(474 |
) |
Unrealized Loss on Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(338 |
) |
|
|
(338 |
) |
Cumulative Translation Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,461 |
|
|
|
11,461 |
|
Exercise of Stock Options,
including related tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,390 |
|
|
|
|
|
Purchase of Common Stock |
|
|
|
|
|
|
|
|
|
|
(50,000 |
) |
|
|
(50,000 |
) |
|
|
|
|
Restricted Stock Issued/Cancelled |
|
|
|
|
|
|
(1,929 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation Amortization |
|
|
|
|
|
|
660 |
|
|
|
|
|
|
|
660 |
|
|
|
|
|
|
|
|
Balance July 31, 2005 |
|
$ |
755,237 |
|
|
$ |
(1,269 |
) |
|
$ |
(50,000 |
) |
|
$ |
817,588 |
|
|
$ |
117,424 |
|
|
|
|
See Notes to the Consolidated Financial Statements.
F-10
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
Zale Corporation, through its wholly owned subsidiaries (the Company), is the largest and
most diversified specialty retailer of fine jewelry in North America. At July 31, 2005, the Company
operated 1,464 specialty retail jewelry stores, 812 kiosks, and 69 carts located mainly in shopping
malls throughout the United States of America (U.S.), Canada and Puerto Rico. Beginning in
fiscal year 2005, the Company began reporting its operations under three segments: Fine Jewelry,
Kiosk Jewelry and All Other. All corresponding items of segment information in prior periods are
presented consistently.
The Fine Jewelry segment consists of six brands, each targeted to reach a distinct customer.
Zales Jewelers® is the Companys national brand in the U.S., which provides traditional, moderately
priced jewelry to a broad range of customers. The Company has further leveraged the brand through
Zales the Diamond Store Outlet®, which focuses on the brand conscious, value oriented shopper in
outlet malls and neighborhood power centers. Zales Jewelers has further extended the reach of its
brand to the internet shopper through its e-commerce site, zales.com. Peoples JewellersÒ, the
Companys national brand in Canada, offers traditional, moderately priced jewelry to customers
throughout Canada. Gordons Jewelers® focuses on the individual preferences of its customers
through merchandising by store, strengthening its position as a relationship jeweler. Mappins
Jewellers® in Canada targets the moderate and more discerning customer with merchandise assortments
designed to promote slightly higher priced purchases. Bailey Banks & Biddle Fine Jewelers®
operates jewelry stores that are considered among the finest luxury jewelry stores in their
markets, offering designer jewelry and watches to attract more affluent customers. Bailey Banks &
Biddle Fine Jewelers has expanded its presence in the luxury market through its e-commerce site,
baileybanksandbiddle.com.
The Kiosk Jewelry segment reaches the opening price point fine jewelry customer primarily
through mall based kiosks operated by its Piercing Pagoda® brand and carts operating in Canada
under the name Peoples II. The All Other segment includes insurance and reinsurance operations,
which offer various types of insurance coverage primarily to the Companys private label credit
card customers.
The accompanying Consolidated Financial Statements and related notes are those of the Company
as of and for the twelve month periods ended July 31, 2005 and July 31, 2004. The Company
consolidates substantially all of its U.S. operations into Zale Delaware, Inc. (ZDel), a wholly
owned subsidiary of Zale Corporation. ZDel is the parent company for several subsidiaries,
including three that are engaged primarily in providing credit insurance to credit customers of the
Company. The Company consolidates its Canadian retail operations into Zale International, Inc.,
which is a wholly owned subsidiary of Zale Corporation. All significant intercompany transactions
have been eliminated.
Summary of Significant Accounting Policies
Use of Estimates. The accounting and financial reporting policies of the Company are in
conformity with U.S. generally accepted accounting principles. The preparation of financial
statements in conformity with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. For example, unexpected changes in market conditions or a downturn in the
economy could adversely affect actual results. Estimates are used in accounting for, among other
things, inventory obsolescence, goodwill and long lived asset valuation, last-in, first-out
(LIFO) inventory retail method, legal liability, credit insurance liability, product warranty,
depreciation, employee benefits, tax, and contingencies. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated financial statements in
the period they are determined to be necessary.
F-11
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cash and Cash Equivalents. Cash and Cash Equivalents includes cash on hand, deposits in banks
and short-term marketable securities at varying interest rates with maturities of three months or
less. The carrying amount approximates fair value because of the short-term maturity of those
instruments.
Merchandise Inventories. Merchandise Inventories are stated at the lower of cost or market.
Substantially all U.S. inventories represent finished goods which are valued using the LIFO retail inventory method. Merchandise inventory of Peoples Jewellers and Mappins
Jewellers of Canada is valued using retail inventory method.
Under the retail method, inventory is segregated into categories of merchandise with similar
characteristics at its current retail selling value. The determination of inventory at cost and
the resulting gross margins are calculated by applying an average cost to retail ratio to the
retail value of inventory.
The Company is required to determine the LIFO cost on an interim basis by estimating annual
inflation trends, annual purchases and ending inventory levels for the fiscal year. Actual annual
inflation rates and inventory balances as of the end of any fiscal year may differ from interim
estimates. The Company applies internally developed indices that the Company believes more
consistently measure inflation or deflation in the components of its merchandise (i.e., diamonds,
gold and other metals and precious stones) and its merchandise mix than the BLS producer indices or
other published indices.
The Company also writes down its inventory for discontinued, slow-moving and damaged
inventory. This write-down is equal to the difference between the cost of inventory and its
estimated market value based upon assumptions of targeted inventory turn rates, future demand,
management strategy and market conditions. If actual market conditions are less favorable than
those projected by management, or management strategy changes, additional inventory write-downs may
be required and, in the case of a major change in strategy or downturn in market conditions, such
write-downs could be significant.
Shrinkage is estimated for the period from the last inventory date to the end of the fiscal
year on a store by store basis. Such estimates are based on experience and the shrinkage results
from the last physical inventory. Physical inventories are taken at least once annually for all
store locations and for the distribution centers. The shrinkage rate from the most recent physical
inventory, in combination with historical experience, is the basis for providing a shrinkage
reserve.
Long-lived Assets and Goodwill. Long-lived assets are periodically reviewed for impairment by
comparing the carrying value of the assets with their estimated undiscounted future cashflows. If the evaluation
indicates that the carrying amount of the asset may not be recoverable, the potential impairment is
measured based on a projected discounted cash flow method, using a discount rate that is considered
to be commensurate with the risk inherent in the Companys current business model. Assumptions are
made with respect to cash flows expected to be generated by the related assets based upon updated
projections. Any changes in key assumptions or market conditions could result in an unanticipated
impairment charge. For instance, in the event of a major market downturn, individual stores may
become unprofitable, which could result in a write-down of the carrying value of the assets located
in those stores. Any impairment would be recognized in operating results if a permanent reduction
were to occur. See Property and Equipment herein for the impairment charges recorded in the
periods presented.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, the Company
tests goodwill for impairment annually, at the end of its second quarter, or more frequently if
events occur which indicate a potential reduction in the fair value of a reporting units net
assets below its carrying value. An impairment is deemed to exist if the net book value of a
reporting unit exceeds its estimated fair value. The Company calculates estimated fair value using
the present value of future cash flows expected to be generated using a weighted average cost of
capital and updated financial projections. Based upon the amounts currently recorded as goodwill,
recent performance and estimated projections, the Company believes the likelihood of additional
impairment would not be material. However, a significant change in the related brands
performance, such as the closing of a majority of the brands stores, could result in
additional impairment. In the second quarter of fiscal year 2005, the Company performed its
annual review for impairment of goodwill related to its Piercing Pagoda, Inc., Peoples
Jewellers and other smaller
F-12
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
acquisitions. The Company concluded that there was no evidence of impairment related to the
goodwill of approximately $19.4 million for Piercing Pagoda, $66.4 million recorded for the
Peoples Jewellers acquisition and $5.0 million for other smaller acquisitions.
Cost of Sales. Cost of sales includes cost of merchandise sold, as well as receiving and
distribution costs.
Selling General and Administrative Expenses. Included in Selling, General and Administrative
Expenses (SG&A) are store operating, advertising, buying and general corporate overhead expenses.
Depreciation and Amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets or remaining lease life,
whichever is shorter. Estimated useful lives of the assets range from three to twelve years.
Original cost and related accumulated depreciation or amortization are removed from the
accounts in the year assets are retired. Gains or losses on dispositions of property and equipment
are included in operations in the year of disposal. Computer software costs related to the
development of major systems are capitalized and amortized over their useful lives.
Stock Based Compensation. The Company accounts for its Stock Option and Employee Stock
Purchase Plans under the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Under APB No. 25, if the number of options is fixed and the exercise price of employee stock
options equals or exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recorded. Under the applicable provisions of the Companys equity
compensation plans, stock options cannot be granted at below market price.
The following table illustrates the effect on net earnings (loss) and earnings (loss) per
share if the Company had applied the fair value recognition provisions of recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and as allowed by
SFAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS
No. 123 to stock based employee compensation (see New Accounting Pronouncements for additional
information).
F-13
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Based Compensation (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31 |
|
|
2005 |
|
2004 |
|
2003 |
|
|
(amounts in thousands) |
Net earnings (loss), as reported |
|
$ |
106,775 |
|
|
$ |
106,473 |
|
|
$ |
(40,645 |
) |
Add: Restricted stock which is included in net
earnings, net of related tax effects |
|
|
414 |
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects |
|
|
(6,509 |
) |
|
|
(6,205 |
) |
|
|
(5,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings (loss) |
|
$ |
100,680 |
|
|
$ |
100,268 |
|
|
$ |
(45,852 |
) |
|
|
|
|
Earnings (Loss) Per Common ShareBasic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share, as reported |
|
$ |
2.08 |
|
|
$ |
2.02 |
|
|
$ |
(.63 |
) |
Earnings (Loss) Per Common Share, pro forma |
|
$ |
1.96 |
|
|
$ |
1.90 |
|
|
$ |
(.71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share, as reported |
|
$ |
2.05 |
|
|
$ |
1.99 |
|
|
$ |
(.63 |
) |
Earnings (Loss) Per Common Share, pro forma |
|
$ |
1.94 |
|
|
$ |
1.87 |
|
|
$ |
(.71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares
Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
51,280 |
|
|
|
52,650 |
|
|
|
64,528 |
|
Diluted |
|
|
51,975 |
|
|
|
53,519 |
|
|
|
64,528 |
|
The fair value of each option grant is estimated on the date of grant using the Black Scholes
option pricing model with the following weighted-average assumptions used for options granted in
fiscal years 2005, 2004 and 2003, respectively: risk-free interest rate of 3.7 percent, 3.6
percent, and 3.0 percent, expected dividend yield of zero (all three fiscal years), expected life
of five years (all three fiscal years), and expected volatility of 37.8 percent, 40.2 percent, and
38.8 percent. The weighted average fair value of options granted for fiscal years 2005, 2004 and
2003 is $10.74, $10.93, and $8.57, respectively.
Revenue Recognition. The Company recognizes revenue in accordance with the Securities and
Exchange Commissions Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104).
Revenue related to merchandise sales, which is approximately 94 percent of total revenues, is
recognized at the time of the sale, reduced by a provision for returns. The provision for sales
returns is based on historical evidence of the Companys return rate. Repair revenues are
recognized when the service is complete and the merchandise is delivered to the customers. Total
revenues include extended service agreements (ESAs) and are recognized over the two-year period
in proportion to the costs expected to be incurred in performing services under the agreements. Any
significant change in the proportion of costs expected to be incurred in performing services under
the agreements could result in a change in the amount of revenue recognized. For instance, a 5
percent change on an annual basis in the timing of services under these agreements could result in
a 5 percent change in the revenue recognized. Revenues also include premiums from the Companys
insurance business, principally related to credit insurance policies sold to customers who purchase
the Companys merchandise under the proprietary credit program. Insurance premiums are recognized
over the coverage period.
F-14
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Credit Insurance Operations. Insurance premium revenue from credit insurance subsidiaries was
$12.9 million, $12.6 million and $16.1 million for the fiscal years ended July 31, 2005, 2004, and
2003, respectively. These revenues are included in total revenues on the accompanying consolidated
statement of operations.
The associated cost of insurance operations was $6.1 million, $6.0 million and $8.2 million
for the fiscal years ended July 31, 2005, 2004 and 2003, respectively.
Advertising Expenses. Advertising expenses are charged against operations when incurred and
are a component of SG&A in the accompanying
consolidated statements of operations. Amounts charged against operations were $93.2 million, $83.7
million and $64.0 million for the fiscal years ended July 31, 2005, 2004 and 2003, respectively,
net of amounts contributed by vendors to the Company. In fiscal year 2004, the Company adopted
Emerging Issues Task Force (EITF) 02-16 which resulted in a reclassification of amounts previously recorded as reductions to
SG&A to reductions of inventory costs. See Vendor Allowances herein for further information. The
amounts of prepaid advertising at July 31, 2005 and 2004, are $9.8 million and $12.9 million,
respectively, and are classified as components of other current assets in the accompanying
consolidated balance sheets.
Vendor Allowances. The Company receives cash or allowances from merchandise vendors primarily
in connection with cooperative advertising programs and reimbursements for markdowns taken to sell
the vendors products. The Company has agreements in place with each vendor setting forth the
specific conditions for each allowance or payment. The majority of these agreements are entered
into or renewed annually at the beginning of each fiscal year. The Company adopted EITF 02-16,
Accounting by a Reseller (including a Retailer) for Cash Consideration Received from a Vendor in
fiscal year 2003, which was required to be applied to new vendor arrangements entered into after
January 1, 2003. Accordingly, for fiscal years 2004 and 2003, qualifying vendor reimbursements of
costs incurred to specifically advertise vendors products are recorded as a reduction of
advertising expense, which is a component of SG&A. For fiscal year 2004, $18.7 million of vendor
arrangements, which would have been recorded in SG&A prior to the adoption of EITF 02-16 were
recorded as a reduction to the cost of the product purchased.
Reclassifications. The classifications in use at July 31, 2005 have been applied to the
financial statements for July 31, 2004 and 2003.
Foreign Currency. Translation adjustments result from translating foreign subsidiaries
financial statements into U.S. dollars. Balance sheet accounts are translated at exchange rates in
effect at the balance sheet date. Income statement accounts are translated at average exchange
rates during the year. Resulting translation adjustments are included as a component of
comprehensive income (loss) in the accompanying consolidated statements of stockholders
investment.
Derivative Financial Instruments. The Company recognizes all derivative instruments as either
assets or liabilities in the statement of financial position measured at fair value. The Company
does not utilize derivative financial instruments for trading or speculative purposes.
The Company enters into foreign currency forward exchange contracts solely to reduce the
effects of fluctuating foreign currency exchange rates. The Company enters into forward exchange
contracts with terms that are no longer than twelve months. These contracts are used to hedge
certain forecasted inventory, advertising, and purchases relating to real estate activities
anticipated to be incurred each fiscal year, denominated in foreign currencies for periods and
amounts consistent with the Companys identified exposures. The purpose of the hedging activities
is to minimize the effect of foreign exchange rate movements on cash flows. All foreign exchange
contracts are denominated in Canadian dollars and are currently with one financial institution
rated as investment grade by a major rating agency. No fees or up front payments are required when
using these foreign exchange contracts.
F-15
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company enters into forward contracts for the purchase of some of its gold in order to
reduce the effects of fluctuating gold prices on the cost of inventory. The Company generally
hedges certain planned inventory purchases covering a designated period of no longer than twelve
months. These contracts are used to hedge forecasted inventory purchases of finished goods made of
gold for periods and amounts consistent with the Companys identified exposure.
The purpose of the hedging activities is to minimize the effect of gold price movements on
cash flows. All forward contracts are currently with one financial institution rated as investment
grade by a major rating agency. No fees or up front payments are required when using these
commodity forwards. These contracts settle on a net basis.
The Company documents all relationships between hedging instruments and hedged items, as well
as its risk-management objective and strategy for undertaking various hedge transactions. The
Company also assesses, both at the hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting changes in
cash flows and changes in expense relating to hedged items. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge,
the Company discontinues hedge accounting prospectively.
Changes in the fair value of derivatives that are designated and qualify as cash flow hedges
are recorded in Accumulated Other Comprehensive Income (Loss) to the extent that they are
effective. The amounts are relieved from Other Comprehensive Income (Loss) during the same period
the hedged transaction is recorded in earnings. Any hedge ineffectiveness and changes in the fair
value of instruments that do not qualify as hedges are reported in current period earnings.
As of July 31, 2005 the Company had no outstanding forward contracts to purchase gold. The
gains and losses on forward contracts realized for the fiscal years ended July 31, 2005 and July
31, 2004 were immaterial to the Companys consolidated statement of operations. As of July 31,
2005, the Company had $5.03 million of foreign currency forward exchange contracts outstanding. The
fair value of these foreign currency forward exchange contracts recorded on the accompanying
consolidated balance sheet at July 31, 2005, was a loss of $362,000. The estimated unrealized gains
and losses as of July 31, 2005 included in Accumulated Other Comprehensive Income (Loss) for the
currency forward exchange contracts was immaterial.
Merchandise Inventories
The Companys U.S. operations use the LIFO retail method of accounting for inventory. The
LIFO provision was $3.8 million, $2.1 million and $2.9 million for the years ended July 31, 2005,
2004 and 2003, respectively. The cumulative LIFO provision reflected on the accompanying
consolidated balance sheets was $24.9 million and $21.2 million at July 31, 2005 and 2004,
respectively. Domestic inventories on a FIFO basis were $805.9 million and $779.8 million at July
31, 2005 and 2004, respectively.
The Companys Canadian operations use the FIFO retail method of accounting for inventory.
Inventory, net of reserves, was approximately $72.6 million and $68.2 million at July 31, 2005 and
2004, respectively.
Consigned inventory and related contingent obligations are not reflected in the Companys
consolidated financial statements. Consignment inventory has historically consisted of test
programs, merchandise at higher price points, or merchandise that otherwise does not warrant the
risk of outright ownership. Consignment merchandise can be returned to the vendor at any time. At
the time consigned inventory is sold, the Company records the purchase liability in accounts
payable and the related cost of merchandise in cost of sales. The Company maintained consolidated
consigned inventory at its retail locations of approximately $150.9 million and $163.1 million at
July 31, 2005 and 2004, respectively.
To calculate the value of inventory on a LIFO basis, the Company applies internally
developed indices to its inventory value that it believes more consistently measures inflation or
deflation in the components of
F-16
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
its merchandise (i.e., the proper weighting of diamonds, gold and other metals and precious stones)
and the Companys merchandise mix. The Company believes the internally developed indices more
accurately reflect inflation or deflation in its own prices than the BLS producer price indices.
Investments
Investments in debt and equity securities are reported as Other Assets in the accompanying
consolidated balance sheets. Investments are recorded at fair value based on quoted market prices.
All long-term debt securities outstanding at July 31, 2005 will contractually mature within 1 to
29 years.
Investments, principally related to the Companys insurance subsidiaries as of July 31, 2005
and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2005 |
|
|
July 31, 2004 |
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
|
U.S. government
obligations |
|
$ |
14,085 |
|
|
$ |
14,036 |
|
|
$ |
14,882 |
|
|
$ |
15,115 |
|
Corporate bonds and notes |
|
|
5,047 |
|
|
|
5,071 |
|
|
|
5,188 |
|
|
|
5,289 |
|
Corporate equity
securities |
|
|
4,373 |
|
|
|
4,533 |
|
|
|
4,211 |
|
|
|
3,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,505 |
|
|
$ |
23,640 |
|
|
$ |
24,281 |
|
|
$ |
24,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All investments are classified as available for sale. At July 31, 2005 and 2004, the carrying
value of investments included net unrealized losses of approximately ($500,000) and ($100,000),
respectively, which are included in other comprehensive income (loss). The net realized gain
(loss) on investments totaled $400,000 in fiscal year 2005, $300,000 in fiscal year 2004 and
$300,000 in fiscal year 2003, as determined on a specific identification basis. Investments with a
carrying value of $4.3 million and $4.1 million were on deposit with various state insurance
departments at July 31, 2005 and 2004, respectively, as required by law.
Property And Equipment
The Companys property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31, 2005 |
|
|
July 31, 2004 |
|
|
|
(amounts in thousands) |
|
Building and Leasehold Improvements |
|
$ |
231,274 |
|
|
$ |
209,738 |
|
Furniture and Fixtures |
|
|
399,583 |
|
|
|
359,894 |
|
Construction in Progress |
|
|
17,722 |
|
|
|
15,824 |
|
|
|
|
|
|
|
|
Total Property and Equipment |
|
|
648,579 |
|
|
|
585,456 |
|
Less: Accumulated Amortization and Depreciation |
|
|
(366,546 |
) |
|
|
(318,768 |
) |
|
|
|
|
|
|
|
Total Net Property and Equipment |
|
$ |
282,033 |
|
|
$ |
266,688 |
|
|
|
|
|
|
|
|
Depreciation expense of $59.8 million, $56.4 million and $55.7 million, respectively, was
recorded at July 31, 2005, 2004 and 2003. Property and equipment are depreciated over the
estimated useful lives of the assets. Useful lives for leasehold improvements and furniture and
fixtures are the remaining term of the lease and three to twelve years, respectively.
The Company recorded impairment charges of $1.5 million, $0.9 million, and $1.3 million
for the fiscal years ended July 31, 2005, 2004, and 2003, respectively, related to unproductive
assets. These impairment charges, primarily in the Fine Jewelry segment, are included in SG&A and
resulted from the Companys ongoing process to evaluate the productivity of its asset base.
F-17
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On August 31, 2004, the Company sold a 69,000 square foot building in Bethlehem, Pennsylvania
that was, prior to the acquisition of Piercing Pagoda, Inc. (the Acquisition), used for
additional distribution and warehousing functions at Piercing Pagoda. In fiscal year 2003, the
Company recorded an impairment charge of approximately $0.8 million to reflect the write-down to
the estimated fair value. In fiscal year 2004, the Company recorded an impairment charge of
approximately $1.8 million to reflect the write-down to the estimated fair value. The proceeds,
net of commissions received, represented an estimated fair value of $2.3 million.
On February 28, 2005, the Company sold a 73,000 square foot building in Bethlehem,
Pennsylvania that, prior to the Acquisition, served as the primary office and distribution facility
for Piercing Pagoda. The proceeds net of commissions received were $1.7 million resulting in a
loss on the sale of approximately $1.1 million.
Accounts Payable and Accrued Liabilities
The Companys accounts payable and accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31, 2005 |
|
|
July 31, 2004 |
|
|
|
(amounts in thousands) |
|
Accounts Payable |
|
$ |
133,300 |
|
|
$ |
138,800 |
|
Accrued Payroll |
|
|
37,882 |
|
|
|
42,596 |
|
Accrued Taxes |
|
|
49,116 |
|
|
|
31,529 |
|
Extended Service Agreement Deferred Revenue |
|
|
24,617 |
|
|
|
28,146 |
|
Accrued Rent |
|
|
42,178 |
|
|
|
31,337 |
|
Other Accruals |
|
|
38,888 |
|
|
|
47,191 |
|
|
|
|
|
|
|
|
Total Accounts Payable and Accrued
Liabilities |
|
$ |
325,981 |
|
|
$ |
319,599 |
|
|
|
|
|
|
|
|
Non-Current Liabilities
The Companys non-current liabilities consist principally of the accumulated obligation for
postretirement benefits under SFAS No. 106, Employers Accounting for Postretirement Benefits
Other Than Pensions, loss reserves for insurance subsidiaries, reserves for tax contingencies and
the long-term portion of the incentive payment received from Citi described below, recognized as
deferred income.
Deferred Credit. In connection with the sale of its customer receivables in fiscal year 2000,
the Company entered into a ten year merchant services agreement whereby Citi will issue private
label credit cards branded with appropriate Company trademarks. Citi provides financing for the
Companys customers to purchase merchandise in exchange for payment by the Company of a merchant
fee based upon a percentage of each credit card sale. The merchant fee is a flat percentage per
credit sale for standard revolving accounts and varies for certain special interest free or
deferred payment credit sales, depending on the credit program. The Company received a $41.8
million incentive for entering into the agreement, the non-current portion of which is classified
as a non-current liability on the accompanying consolidated balance sheet. Portions of this
payment are subject to refund for early termination of the agreement. This incentive payment is
recognized ratably over the term of the agreement. Deferred credits of $20.9 million and $25.1
million are included in the accompanying consolidated balance sheets at July 31, 2005, and 2004,
respectively. The long-term portion of the deferred credits is $16.7 million and $20.9 million at
July 31, 2005 and 2004, respectively.
Postretirement Benefits. The Company provides medical, dental, and vision insurance benefits
for all eligible retirees and spouses with benefits to the latter continuing after the death of the
retiree. In January 2002, the Company amended its Retiree Medical Plan to limit retiree health
coverage to only those retirees who were already participants in the plan and to those otherwise
eligible employees who elected to retire
F-18
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
prior to April 1, 2002. In January 2003, the Company amended the plan to set retiree rates in such
a way that all future cost increases are to be paid by the retirees.
Retiree health benefits are no longer available to those current employees who were previously
in the eligible class of employees (i.e., those hired prior to November 15, 1994, if they retired
at age 55 or older with ten or more years of continuous service). In fiscal year 2002, the Company
recorded a $3.5 million gain related to the curtailment of its Retiree Medical Plan. Effective
fiscal year 2004, the medical and dental benefits are provided under two plans. The lifetime
maximum on medical benefits is $500,000. These benefits include deductibles, retiree contributions
and co-insurance provisions that are assumed to grow with the health care cost trend rate. The
costs of the continued postretirement benefits are recognized in SG&A in the accompanying
consolidated statements of operations over an employees active career on an accrual basis. The
Company funds actual claims as they occur.
F-19
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Postretirement Benefits (continued)
|
|
|
|
|
|
|
|
|
|
|
July 31, 2005 |
|
|
July 31, 2004 |
|
|
|
(amounts in thousands) |
|
Change in Benefit Obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
4,983 |
|
|
$ |
5,745 |
|
Service cost |
|
|
|
|
|
|
|
|
Interest cost |
|
|
280 |
|
|
|
349 |
|
Plan participant contributions |
|
|
1,217 |
|
|
|
1,272 |
|
Curtailments |
|
|
|
|
|
|
|
|
Amendments |
|
|
|
|
|
|
|
|
Actuarial loss (gain) |
|
|
(921 |
) |
|
|
(50 |
) |
Benefits Paid |
|
|
(1,947 |
) |
|
|
(2,333 |
) |
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
3,612 |
|
|
$ |
4,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets: |
|
|
|
|
|
|
|
|
Market value at beginning of year |
|
$ |
|
|
|
$ |
|
|
Employer contributions |
|
|
730 |
|
|
|
1,061 |
|
Plan participant contributions |
|
|
1,217 |
|
|
|
1,272 |
|
Benefit payments |
|
|
(1,947 |
) |
|
|
(2,333 |
) |
|
|
|
|
|
|
|
Market value at end of year |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of fiscal year assumptions (for Annual
Expense) Discount Rate |
|
|
6.00 |
% |
|
|
6.50 |
% |
|
|
|
|
|
|
|
|
|
End of fiscal year assumptions (for Year-End
Benefit Obligation) Discount Rate |
|
|
5.21 |
% |
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
Projected Cash Flows: |
|
|
|
|
|
|
|
|
Net Contributions |
|
|
|
|
|
|
|
|
Current Fiscal Year |
|
$ |
730 |
|
|
$ |
1,061 |
|
Fiscal Year +1 |
|
|
425 |
|
|
|
600 |
|
Net Benefit Payments |
|
|
|
|
|
|
|
|
Current Fiscal Year |
|
$ |
730 |
|
|
$ |
1,061 |
|
Fiscal Year +1 |
|
|
425 |
|
|
|
600 |
|
Fiscal Year +2 |
|
|
386 |
|
|
|
571 |
|
Fiscal Year +3 |
|
|
361 |
|
|
|
541 |
|
Fiscal Year +4 |
|
|
341 |
|
|
|
513 |
|
Fiscal Year +5 |
|
|
323 |
|
|
|
483 |
|
|
Sum of next 5 fiscal years |
|
|
1,306 |
|
|
|
1,964 |
|
|
|
|
|
|
|
|
|
|
Reconciliation of Funded Status: |
|
|
|
|
|
|
|
|
Benefit Obligation |
|
$ |
(3,612 |
) |
|
$ |
(4,983 |
) |
Unrecognized net actuarial gain |
|
|
(5,821 |
) |
|
|
(5,304 |
) |
Unrecognized prior service cost |
|
|
(3,440 |
) |
|
|
(3,756 |
) |
|
|
|
|
|
|
|
Net Amount Recognized |
|
$ |
(12,873 |
) |
|
$ |
(14,043 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development of Prepaid (Accrued ) Benefit Cost: |
|
|
|
|
|
|
|
|
Prepaid (accrued) last year |
|
$ |
(14,043 |
) |
|
$ |
(15,481 |
) |
Plus: Net employer contributions last year |
|
|
730 |
|
|
|
1,061 |
|
Plus: Net periodic benefit income expense last
year |
|
|
440 |
|
|
|
377 |
|
Less: Cost of special SFAS 106 events last year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued) this year |
|
$ |
(12,873 |
) |
|
$ |
(14,043 |
) |
|
|
|
|
|
|
|
F-20
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The measurement date used to determine the benefit obligations was July 31, 2005 and 2004.
The health care cost trend rates remain as of July 31, 2005 at 0.0 percent, as dictated by the plan
design change in January 2003. Because retiree contributions will now be annually increased to
shift all cost increases to participants, the expected health care cost trend rate is not relevant.
As such, the effect of a one percent point increase or decrease in the assumed healthcare cost
trend rates is no longer relevant.
Components of net periodic (benefit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
July 31, 2005 |
|
July 31, 2004 |
|
July 31, 2003 |
|
|
|
|
|
|
(amounts in thousands) |
Service Cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest Cost |
|
|
280 |
|
|
|
349 |
|
|
|
508 |
|
Amortization of Prior Service Cost and Gain |
|
|
(720 |
) |
|
|
(726 |
) |
|
|
(607 |
) |
Settlement / Curtailment / Termination of
Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic (Benefit) Cost |
|
$ |
(440 |
) |
|
$ |
(377 |
) |
|
$ |
(99 |
) |
|
|
|
The plan amendment in January 2003 has effectively frozen the plan and changes in the
trend are no longer relevant. Claims experience will impact the plan from year to year, but the
Company does not anticipate any general change due to medical trend rates.
Non-Qualified Retirement Plan
The Company has a Supplemental Executive Retirement Plan (the Plan). The Plan provides
eligible executives with the opportunity to receive payments each year after retirement equal to a
portion of their final average pay as defined by the Plan. Effective August 1, 2000, the
eligibility requirements were changed to include corporate vice-presidents, division presidents,
and division senior vice-presidents. The benefits provided by this plan are funded by
corporate-owned life insurance policies. There is no material impact to the financial statements
from this Plan.
Long-Term Debt
Payoff of Senior Notes. In the fourth quarter of fiscal year 2003, the Company called and
retired the remaining $87 million of its 8 1/2 percent Senior Notes (the Senior Notes). The
Company recognized a $5.9 million loss related to this early retirement of debt.
Revolving Credit Agreement. The Company entered into a five-year revolving credit facility
(the Revolving Credit Agreement) on July 23, 2003, replacing its then existing $225 million
facility. The Revolving Credit Agreement provides the Company up to $500 million in commitments by
certain lenders, including a $20 million sublimit for letters of credit. The Revolving Credit
Agreement is primarily secured by the Companys U.S. merchandise inventory.
On December 10, 2004, the Company entered into an amendment of its Revolving Credit Agreement
with Bank of America, as Administrative Agent, and a syndicate of other lenders (the Amendment,
and together with the Revolving Credit Agreement, the Amended Revolving Credit Agreement). The
Amendment extends the term of the Revolving Credit Agreement through August 11, 2009, and reduces
certain fees and the applicable interest rate margins under the Revolving Credit Agreement.
The loans made under the Amended Revolving Credit Agreement bear interest at a floating
rate at either (i) the applicable LIBOR plus the applicable margin, or (ii) the Base Rate plus the
applicable margin. The margin applicable to LIBOR based loans and standby letter of credit
commission rates will be automatically reduced or increased from time to time based upon excess
borrowing availability under the Amended Revolving Credit Agreement. The Company pays a quarterly
commitment fee of 0.25 percent on
F-21
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the preceding months unused commitment. The Company and its subsidiaries may repay the revolving
credit loans outstanding under the Amended Revolving Credit Agreement at any time without penalty
prior to the maturity date. At July 31, 2005, and July 31, 2004, $129.8 and $197.5 million,
respectively, were outstanding under the Amended Revolving Credit Agreement. At July 31, 2005, the
effective interest rate was 4.79 percent with the applicable margin for LIBOR based loans at 1.25
percent and the applicable margin for Base Rate loans at zero percent. Based on the terms of the
Amended Revolving Credit Agreement, the Company had approximately $370.2 million in available
borrowings at July 31, 2005.
At any time, if remaining borrowing availability under the Amended Revolving Credit Agreement
falls below $75 million, the Company will be restricted in its ability to repurchase common stock
or pay dividends. If remaining borrowing availability falls below $50 million, the Company will be
required to meet a minimum fixed charge coverage ratio. The Amended Revolving Credit Agreement
requires the Company to comply with certain restrictive covenants including, among other things,
limitations on indebtedness, investments, liens, acquisitions, and asset sales. The Company is
currently in compliance with all of its obligations under the Amended Revolving Credit Agreement.
Lease Commitments
The Company rents most of its retail space under leases that generally range from five to ten
years and may contain minimum rent escalations, while kiosk leases generally range from three to
five years and carts from 12-18 months. The Company recognizes the minimum rent payments evenly
across the period, including the construction period, through the end of the lease term. In fiscal
year 2004, the Company amended and extended its corporate headquarters lease for thirteen and
three-fourths years beginning in July 2004. Lease incentives of $1.6 million for reimbursement of
certain leasehold improvement expenditures are being amortized against lease payments over the life
of the lease. All existing real estate leases are treated as operating leases. Sublease rental
income under noncancelable leases is not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense is as follows: |
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
July 31, |
|
July 31, |
|
July 31, |
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
Retail Space: |
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Rentals |
|
$ |
196,647 |
|
|
$ |
182,520 |
|
|
$ |
175,193 |
|
Rentals Based on Sales |
|
|
11,589 |
|
|
|
12,212 |
|
|
|
10,767 |
|
|
|
|
|
|
|
208,236 |
|
|
|
194,732 |
|
|
|
185,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and Corporate Headquarters |
|
|
1,773 |
|
|
|
2,823 |
|
|
|
2,757 |
|
|
|
|
Total Rent Expense |
|
$ |
210,009 |
|
|
$ |
197,555 |
|
|
$ |
188,717 |
|
|
|
|
Rent expense is included in SG&A in the accompanying consolidated statements of operations.
Contingent rentals paid to lessors of certain store facilities are determined principally on
the basis of a percentage of sales in excess of contractual limits.
Future minimum rent commitments as of July 31, 2005, for all noncancelable leases of ongoing
operations were as follows: 2006 $191.1 million; 2007 $168.4 million; 2008 $144.5 million;
2009 $124.0 million; 2010 $104.3 million; thereafter¾$268.8 million; for a total of $1.001
billion.
F-22
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Interest
Interest expense for the fiscal years ended July 31, 2005, 2004 and 2003 was $8.4 million,
$8.3 million and $7.7 million, respectively.
Interest income for the fiscal years ended July 31, 2005, 2004 and 2003 was $0.6 million, $0.8
million and $1.4 million, respectively.
In fiscal year 2003, the Company called and retired the remaining $87 million of its Senior
Notes. The Company recognized a $5.9 million loss related to this early retirement of debt. This
loss is reported as cost of early retirement of debt in the accompanying consolidated statements of
operations.
Income Taxes
Currently, the Company files a consolidated income tax return. The effective income tax rate
varies from the federal statutory rate of 35 percent as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
July 31, |
|
July 31, |
|
July 31, |
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
(amounts in thousands) |
|
|
|
|
Federal Income Tax Expense at Statutory Rate |
|
$ |
59,527 |
|
|
$ |
59,089 |
|
|
$ |
5,143 |
|
Impairment of Goodwill |
|
|
|
|
|
|
|
|
|
|
47,705 |
|
State Income Taxes, Net of Federal Income Tax
Benefit |
|
|
2,634 |
|
|
|
2,657 |
|
|
|
2,205 |
|
Other |
|
|
1,142 |
|
|
|
607 |
|
|
|
287 |
|
|
|
|
Total Income Tax Expense |
|
$ |
63,303 |
|
|
$ |
62,353 |
|
|
$ |
55,340 |
|
|
|
|
Effective Income Tax Rate |
|
|
37.2 |
% |
|
|
36.9 |
% |
|
|
376.6 % |
(1) |
|
|
|
(1) For the year ended July 31, 2003, the effective income tax rate includes the effect of the
goodwill impairment charge of $136.3 million recorded in the second quarter of fiscal year 2003
that was not deductible for tax purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|
July 31, |
|
July 31, |
|
July 31, |
|
|
2005 |
|
2004 |
|
2003 |
|
|
(amounts in thousands) |
Current Provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
36,771 |
|
|
$ |
29,375 |
|
|
$ |
7,347 |
|
Foreign |
|
|
9,015 |
|
|
|
1,786 |
|
|
|
3,823 |
|
State |
|
|
4,524 |
|
|
|
216 |
|
|
|
(2,116 |
) |
|
|
|
Total Current Provision |
|
|
50,310 |
|
|
|
31,377 |
|
|
|
9,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
14,154 |
|
|
|
22,768 |
|
|
|
39,016 |
|
Foreign |
|
|
(286 |
) |
|
|
5,606 |
|
|
|
2,817 |
|
State |
|
|
(875 |
) |
|
|
2,602 |
|
|
|
4,453 |
|
|
|
|
Total Deferred Provision |
|
|
12,993 |
|
|
|
30,976 |
|
|
|
46,286 |
|
|
|
|
Total Income Tax Provision |
|
$ |
63,303 |
|
|
$ |
62,353 |
|
|
$ |
55,340 |
|
|
|
|
F-23
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of July 31, 2005, the Company has a tax net operating loss carryforward (NOL) (after
limitations) of $58.6 million. The utilization of this asset is subject to limitations. The most
restrictive is the Internal Revenue Code Section 382 annual limitation of $19.5 million. The NOL
carry forward can be utilized through fiscal year 2008.
Deferred tax assets and liabilities are determined based on estimated future tax effects of
the difference between the financial statement and tax basis of assets and liabilities using
enacted tax rates. Tax effects of temporary differences that give rise to significant components
of the deferred tax assets and deferred tax liabilities at July 31, 2005 and 2004, respectively,
are presented below.
|
|
|
|
|
|
|
|
|
|
|
July 31, 2005 |
|
July 31, 2004 |
|
|
(amounts in thousands) |
Current Deferred Taxes: |
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Customer
receivables |
|
$ |
467 |
|
|
$ |
642 |
|
Accrued
liabilities |
|
|
30,886 |
|
|
|
37,866 |
|
State and local
taxes |
|
|
|
|
|
|
4,152 |
|
Net operating loss
carryforward |
|
|
6,821 |
|
|
|
7,601 |
|
Inventory reserves |
|
|
10,766 |
|
|
|
9,163 |
|
Other |
|
|
2,078 |
|
|
|
|
|
|
|
|
Total Assets |
|
|
51,018 |
|
|
|
59,424 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Merchandise inventories,
principally due to LIFO
reserve |
|
|
(98,453 |
) |
|
|
(102,586 |
) |
Accrued
liabilities |
|
|
(8,921 |
) |
|
|
(8,255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Current Tax
Liability, Net |
|
$ |
(56,356 |
) |
|
$ |
(51,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current Deferred Taxes: |
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Net operating loss
carryforward |
|
|
13,749 |
|
|
|
23,061 |
|
Postretirement
benefits |
|
|
5,020 |
|
|
|
5,477 |
|
Accrued
liabilities |
|
|
7,563 |
|
|
|
9,678 |
|
State and local taxes |
|
|
9,784 |
|
|
|
|
|
Other |
|
|
8,694 |
|
|
|
4,905 |
|
|
|
|
Total Assets |
|
|
44,810 |
|
|
|
43,121 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Property and
equipment |
|
|
(44,755 |
) |
|
|
(36,188 |
) |
Other |
|
|
(1,380 |
) |
|
|
(881 |
) |
Goodwill |
|
|
(12,525 |
) |
|
|
(11,020 |
) |
|
|
|
Deferred Non-Current Tax
(Liability), Net |
|
$ |
(13,850 |
) |
|
$ |
(4,968 |
) |
|
|
|
A valuation allowance must be provided when it is more likely than not that the deferred
income tax asset will not be realized. The Company believes that, as of July 31, 2005 and 2004,
the realization of its gross deferred income tax assets is more likely than not, and thus, there
was no valuation reserve recorded.
F-24
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Capital Stock
Common Stock. At July 31, 2005, 150,000,000 shares of common stock, par value $.01 per share
(common stock) were authorized, 53,055,799 shares of common stock were issued and 51,238,543
shares of common stock were outstanding. At July 31, 2004, 70,000,000 shares of common stock were
authorized and 52,109,590 shares were issued and outstanding.
Stock Split. On May 18, 2004, the Company announced its Board of Directors had approved a
two-for-one split of the common stock. The stock split was effected by issuing an additional share
of common stock for each outstanding share of that common stock. The additional shares were
distributed June 8, 2004 to shareholders of record at the close of business on May 28, 2004.
Accordingly the Company has restated its earnings (loss) per share calculations, as well as
reclassified amounts between common stock and additional-paid-in-capital to reflect the impact of
the stock split of the outstanding common stock for all periods presented. In accounting for the
stock split, 16.3 million shares of treasury stock were deemed reissued and an additional 9.6
million shares were issued. As the treasury shares that were reissued as part of the stock split
had been purchased by the Company during fiscal year 2004 and previous fiscal years, treasury stock
has only been reclassified to show the effect of the stock split as of July 31, 2004.
Preferred Stock. At July 31, 2005 and 2004, 5,000,000 shares of Preferred Stock, par value of
$0.01, were authorized. None was issued or outstanding.
Treasury Stock. The Company uses the par value method of accounting for treasury stock. At
July 31, 2005, the Company held 1,817,256 shares of treasury stock. The Company held no treasury
shares at July 31, 2004.
In July 2002, the Company announced that its Board of Directors had approved a stock
repurchase program pursuant to which the Company, from time to time at managements discretion, and
in accordance with the Companys usual policies and applicable securities laws, could purchase up
to an aggregate of $50 million of its common stock on the open market through July 31, 2003. Under
this program, the Company purchased 0.2 million shares at an aggregate cost of $4.4 million through
July 31, 2002. In October 2002, the Company completed this program, having repurchased 3.4 million
shares at an aggregate cost of $50 million. The Company repurchased 1.5 million of these shares, at
an aggregate cost of $45.6 million, during the first quarter of fiscal year 2003.
On March 18, 2003, the Company announced that its Board of Directors had approved a stock
repurchase program pursuant to which the Company, from time to time at managements discretion, and
in accordance with the Companys usual policies and applicable securities laws could purchase up to
an aggregate of $50 million of its common stock on the open market. Under this program, the
Company purchased 0.2 million shares at an aggregate cost of $7.5 million through July 31, 2003.
On July 1, 2003, the Company entered into a modified Dutch Auction tender offer (the Tender
Offer) to purchase up to 6.4 million shares of its outstanding common stock at a price per share
of not less than $21.00 nor in excess of $24.00 per share, for an aggregate purchase price of up to
$307.2 million. The Tender Offer enabled the Company to repurchase approximately 4.7 million shares
of common stock at an aggregate cost of approximately $225 million.
On August 28, 2003, the Company announced that its Board of Directors had approved a stock
repurchase program pursuant to which the Company, from time to time at managements discretion and
in accordance with the Companys usual policies and applicable securities laws could purchase up to
an additional $100 million of its common stock. This approval, combined with repurchase
authorizations existing at the time, made possible the Companys repurchase of a total of
approximately $142 million worth of its common stock. As of July 31, 2004, the Company had
purchased approximately 2.8 million shares at an aggregate cost of $142 million, which completed
its authorization under the program.
F-25
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On August 5, 2004, the Company announced that its Board of Directors had approved a stock
repurchase program pursuant to which the Company, from time to time, at managements discretion and
in accordance with the Companys usual policies and applicable securities laws, could purchase up
to an additional $50 million of its common stock, par value $.01 per share. As of January 31,
2005, the Company had repurchased 1.8 million shares of common stock at an aggregate cost of
approximately $50 million, which completed its authorization under the current year program.
On August 30, 2005, the Company announced that its Board of Directors had approved a stock
repurchase program pursuant to which the Company, from time to time, at managements discretion and
in accordance with the Companys usual policies and applicable securities laws, could purchase up
to an additional $100 million of its common stock.
The Companys Board of Directors has authorized similar programs for eight consecutive years
and believes that share repurchases are a prudent use of the Companys financial resources given
its cash flow and capital position and provides value to its stockholders. The Company believes
that its financial performance and cash flows will continue to provide the necessary resources to
improve its operations, grow its business and provide adequate financial flexibility while still
allowing for stock repurchase activities.
Incentive Stock Plan. During the fiscal year ended July 31, 2005, the Company had three stock
incentive plans under which there were outstanding awards: the Zale Corporation Omnibus Stock
Incentive Plan (the Omnibus Plan), the Zale Corporation Outside Directors 1995 Stock Option Plan
(the Directors Plan), and the Zale Corporation 2003 Stock Incentive Plan (the 2003 Stock
Incentive Plan). The Omnibus Plan expired with respect to new grants on July 30, 2003, and was
replaced by the 2003 Stock Incentive Plan, which was approved in November 2003. The 2003 Stock
Incentive Plan was designed to enable the Company to attract, retain and motivate officers and key
employees by providing for proprietary interest of such individuals in the Company. Stock awards
to purchase an aggregate of 6,000,000 shares of common stock, including previously granted shares,
are available for grant under the 2003 Stock Incentive Plan to eligible employees. The 2003 Stock
Incentive Plan allows for the granting of restricted stock, stock options, stock bonuses and stock
appreciation rights subject to the provisions of the 2003 Stock Incentive Plan. The Company is
seeking shareholder approval of an amendment that would authorize the grant of performance
restricted stock rights under the 2003 Stock Incentive Plan. Restricted stock granted under the
2003 Stock Incentive Plan vests on the third anniversary of the grant date and is non-transferable
prior to vesting. Options granted under the 2003 Stock Incentive Plan (i) are granted at an
exercise price not less than the fair market value of the shares of common stock into which such
options are exercisable, (ii) vest ratably over a four-year vesting period and (iii) expire ten
years from the date of grant.
In July 2004, 75,300 shares of restricted common stock valued at approximately $2 million as
of the grant date were granted to certain key employees. These shares vest on the third anniversary
of the grant date and are subject to restrictions on sale or transfer. The total cost of restricted
common stock is amortized to income as compensation expense ratably over the vesting period and
amounted to $0.7 million, $0.0 million, and $0.1 million for the twelve month periods ended July
31, 2005, 2004, and 2003 respectively. Compensation expense is included in selling, general and
administrative expense in the accompanying consolidated statements of operations.
On November 2, 2005, the Directors Plan expires with respect to new stock option grants. The
Directors plan authorized the Company to grant options to non-employee directors at the fair
market value of the common stock on the date of grant. Options issued under the Directors Plan
vest over a four year period and expire ten years from the date of grant. The Company has
submitted the Zale Corporation Outside Directors 2005 Stock Incentive Plan (the 2005 Plan) to
its stockholders for approval at the 2005 Annual Meeting of Stockholders. If approved by
stockholders, the 2005 Plan will replace the Directors Plan and will authorize the Company to
grant options to non-employee directors under terms and conditions substantially similar to those
under the Directors Plan. In addition, the plan will authorize the grant of shares of restricted
stock. The maximum number of shares that may be granted under the 2005 Plan is 250,000, with no
more than 100,000 shares to be issued as restricted stock.
F-26
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock option transactions are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Exercise |
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
|
|
|
Grant Price |
|
|
|
|
|
|
|
|
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
Fiscal |
|
Fiscal |
|
|
Fiscal 2005 |
|
Fiscal 2004 |
|
Fiscal 2003 |
|
Fiscal 2005 |
|
Fiscal 2004 |
|
Fiscal 2003 |
|
2005 |
|
2004 |
|
2003 |
Outstanding,
beginning of year |
|
|
3,922,132 |
|
|
|
5,578,852 |
|
|
|
6,050,906 |
|
|
$ |
10.9129.57 |
|
|
$ |
4.50-23.23 |
|
|
$ |
4.50-22.78 |
|
|
$ |
20.81 |
|
|
$ |
18.05 |
|
|
$ |
17.17 |
|
Granted |
|
|
128,250 |
|
|
|
813,600 |
|
|
|
1,169,000 |
|
|
|
25.50-30.65 |
|
|
|
23.94-29.57 |
|
|
|
14.50-23.23 |
|
|
|
27.13 |
|
|
|
27.32 |
|
|
|
22.10 |
|
Exercised |
|
|
(946,209 |
) |
|
|
(2,336,370 |
) |
|
|
(887,104 |
) |
|
|
10.91-26.70 |
|
|
|
4.50-21.75 |
|
|
|
4.50-21.75 |
|
|
|
18.54 |
|
|
|
16.68 |
|
|
|
16.83 |
|
Canceled |
|
|
(230,563 |
) |
|
|
(133,950 |
) |
|
|
(753,950 |
) |
|
|
14.15-30.03 |
|
|
|
4.50-26.55 |
|
|
|
4.87-22.78 |
|
|
|
22.02 |
|
|
|
17.65 |
|
|
|
18.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of
year |
|
|
2,873,610 |
|
|
|
3,922,132 |
|
|
|
5,578,852 |
|
|
$ |
13.11-30.65 |
|
|
$ |
10.91-29.57 |
|
|
$ |
4.50-23.23 |
|
|
$ |
21.74 |
|
|
$ |
20.81 |
|
|
$ |
18.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding at July 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
Range of Exercise |
|
|
Number |
|
|
Remaining Life |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
Prices |
|
|
Outstanding |
|
|
(Years) |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
$ 10.20 |
|
|
13.60 |
|
|
|
2,500 |
|
|
|
3.3 |
|
|
|
13.11 |
|
|
|
2,500 |
|
|
|
13.11 |
|
13.60 |
|
|
17.00 |
|
|
|
821,474 |
|
|
|
6.7 |
|
|
|
14.57 |
|
|
|
523,724 |
|
|
|
14.74 |
|
17.00 |
|
|
20.40 |
|
|
|
3,000 |
|
|
|
5.1 |
|
|
|
17.38 |
|
|
|
3,000 |
|
|
|
17.38 |
|
20.40 |
|
|
23.80 |
|
|
|
1,177,599 |
|
|
|
6.9 |
|
|
|
22.67 |
|
|
|
727,349 |
|
|
|
22.41 |
|
23.80 |
|
|
27.20 |
|
|
|
171,500 |
|
|
|
8.9 |
|
|
|
26.26 |
|
|
|
17,125 |
|
|
|
26.11 |
|
27.20 |
|
|
30.60 |
|
|
|
696,537 |
|
|
|
9.0 |
|
|
|
27.55 |
|
|
|
166,896 |
|
|
|
27.47 |
|
$ 30.60 |
|
$ |
34.00 |
|
|
|
1,000 |
|
|
|
9.4 |
|
|
|
30.65 |
|
|
|
0 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,873,610 |
|
|
|
7.5 |
|
|
$ |
21.74 |
|
|
|
1,440,594 |
|
|
$ |
20.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2005, 2004 and 2003, 1,440,594, 1,457,457, and 2,777,702 of options
outstanding were exercisable at a weighted average exercise price of $20.23, $19.52, and $17.55,
respectively.
Earnings (Loss) Per Common Share
Basic earnings (loss) per share is computed by dividing net earnings (loss) available to
common stockholders by the weighted average number of common shares outstanding for the reporting
period. Diluted earnings (loss) per share of common stock reflect the potential dilution that
could occur if securities or other contracts to issue common stock were exercised or converted into
common stock. Outstanding stock options issued by the Company represent the only dilutive effect
reflected in diluted weighted average shares. After giving effect to the stock split in fiscal
year 2004, for the fiscal years ended July 31, 2005, 2004 and 2003, there were antidilutive common
stock equivalents of 27,119, 26,530, and 1,180,299 respectively.
F-27
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Earnings (Loss) Per Common Share (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31, |
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
(amounts in thousands, except per share amounts) |
|
Net earnings (loss) available to stockholders |
|
$ |
106,775 |
|
|
$ |
106,473 |
|
|
$ |
(40,645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
51,280 |
|
|
|
52,650 |
|
|
|
64,528 |
|
|
|
|
Net earnings (loss) per share basic |
|
$ |
2.08 |
|
|
$ |
2.02 |
|
|
$ |
(0.63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares
outstanding |
|
|
51,280 |
|
|
|
52,650 |
|
|
|
64,528 |
|
Effect of dilutive stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
695 |
|
|
|
869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of common shares
outstanding as adjusted |
|
|
51,975 |
|
|
|
53,519 |
|
|
|
64,528 |
|
Net earnings (loss) per share diluted |
|
$ |
2.05 |
|
|
$ |
1.99 |
|
|
$ |
(0.63 |
) |
|
|
|
Comprehensive Income (Loss)
Comprehensive income (loss) represents the change in equity during a period from transactions
and other events, except those resulting from investments by and distributions to stockholders. The
components of comprehensive income (loss) are reported in the accompanying consolidated statements
of stockholders investment. Income taxes are generally not provided for foreign currency
translation adjustments, as such adjustments relate to permanent investments in international
subsidiaries.
Segments
Beginning in fiscal year 2005, the Company began reporting its operations under three business
segments: Fine Jewelry, Kiosk Jewelry, and All Other. All corresponding items of segment
information in prior periods have been presented consistently.
The Fine Jewelry segment consists of six principal brands, which sell diamonds, gemstone, gold
jewelry and watches. These six brands have been aggregated into one reportable segment. The Kiosk
Jewelry segment includes two merchandise brands, Piercing Pagoda and Peoples II, which sell
primarily gold and silver jewelry. The All Other segment includes credit insurance operations,
which provide offerings of insurance coverage primarily to the Companys private label credit card
customers. Managements expectation is that overall economics of each of our major concepts within
each reportable segment will be similar over time.
The reportable segments are groups of brands that offer merchandise with similar commodity
characteristics and merchandise mix. Segment revenues are not provided by product type or
geographically as the Company believes such disclosure would not add meaningful value and is not
consistent with the manner in which the Company makes decisions.
The Company uses earnings before unallocated corporate overhead, interest and taxes but
including an internal charge for inventory carrying cost to evaluate segment profitability.
Unallocated costs before income taxes include corporate employee related costs, administrative
costs, information technology costs, corporate facilities and depreciation expense.
Income tax information by segment has not been included as taxes are calculated at a
company-wide level and not allocated to each segment.
F-28
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Selected Financial Data by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(amounts in thousands, except per share amounts) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry (a) |
|
$ |
2,089,261 |
|
|
$ |
2,022,214 |
|
|
$ |
1,939,454 |
|
Kiosk (b) |
|
|
280,897 |
|
|
|
269,660 |
|
|
|
256,665 |
|
All Other |
|
|
12,908 |
|
|
|
12,566 |
|
|
|
16,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
2,383,066 |
|
|
$ |
2,304,440 |
|
|
$ |
2,212,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & Amortization Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry |
|
$ |
44,410 |
|
|
$ |
41,757 |
|
|
$ |
40,915 |
|
Kiosk |
|
|
4,708 |
|
|
|
4,199 |
|
|
|
4,653 |
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
10,722 |
|
|
|
10,425 |
|
|
|
10,122 |
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation & Amortization Expense |
|
$ |
59,840 |
|
|
$ |
56,381 |
|
|
$ |
55,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry |
|
$ |
147,414 |
|
|
$ |
153,739 |
|
|
$ |
151,650 |
|
Kiosk (c) |
|
|
29,030 |
|
|
|
25,951 |
|
|
|
(125,629 |
) |
All Other |
|
|
6,824 |
|
|
|
6,603 |
|
|
|
7,894 |
|
Unallocated (d) |
|
|
(5,465 |
) |
|
|
(9,939 |
) |
|
|
(6,991 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Earnings |
|
$ |
177,803 |
|
|
$ |
176,354 |
|
|
$ |
26,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry (f) |
|
$ |
1,103,142 |
|
|
$ |
1,055,755 |
|
|
$ |
1,036,080 |
|
Kiosk (g) |
|
|
117,125 |
|
|
|
111,238 |
|
|
|
96,485 |
|
All Other |
|
|
35,670 |
|
|
|
37,737 |
|
|
|
38,217 |
|
Unallocated (d) |
|
|
124,963 |
|
|
|
137,354 |
|
|
|
123,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,380,900 |
|
|
$ |
1,342,084 |
|
|
$ |
1,294,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry |
|
$ |
59,587 |
|
|
$ |
42,535 |
|
|
$ |
27,064 |
|
Kiosk |
|
|
8,650 |
|
|
|
6,038 |
|
|
|
6,383 |
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
14,887 |
|
|
|
12,215 |
|
|
|
10,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
$ |
83,124 |
|
|
$ |
60,788 |
|
|
$ |
43,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a) |
|
Includes $198.3, $174.1 and $150.4 million in fiscal years 2005, 2004, and 2003, respectively, related to foreign operations. |
|
b) |
|
Includes $6.6 million in fiscal year 2005 related to foreign operations. |
|
c) |
|
Includes impairment of goodwill of $136.3 million in fiscal year 2003. |
|
d) |
|
Includes $71.0, $65.9, and $63.3 million in fiscal years 2005, 2004, and 2003, respectively, to offset internal carrying costs charged to
the segments. |
|
e) |
|
Assets allocated to segments include fixed assets, inventories and goodwill. Unallocated assets include cash, prepaid assets such as rent,
corporate office improvements, and technology infrastructure. |
|
f) |
|
Includes $27.2, $23.2 and $20.0 million of fixed assets in fiscal years 2005, 2004, and 2003, respectively, related to foreign operations. |
|
g) |
|
Includes $390,000 of fixed
assets in fiscal years 2005 related to foreign operations.
There were no foreign operations in this segment prior to 2005. |
F-29
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commitments and Contingencies
The Company is involved in a number of legal and governmental proceedings as part of the
normal course of business. Reserves are established based on managements best estimates of the
Companys potential liability in these matters. These estimates have been developed in
consultation with internal and outside counsel and are based on a combination of litigation and
settlement strategies.
The Company has a data center operations services agreement with a third party for the
management of the Companys mainframe processing operations, client server systems, Local Area
Network operations, Wide Area Network management and e-commerce hosting. The agreement expired
July 31, 2005 and was renegotiated. The new agreement, effective August 1, 2005 requires fixed
payments totaling $30.0 million over an 84-month period plus a variable amount based on usage, and
extends through 2012. The Company believes that by outsourcing its data center operations, the
Company will best focus its resources on developing and enhancing the strategic initiatives
discussed in the Business and Strategy section.
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123(R)), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123). SFAS 123(R) eliminates the alternative to use APB Opinion No. 25s intrinsic value method
of accounting that was provided in SFAS 123 as originally issued. Under APB Opinion No. 25, the
issuance of stock options to employees generally resulted in recognition of no compensation cost.
SFAS 123(R) requires entities to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards in the financial
statements throughout the period in which the awards vest. In addition, SFAS 123(R) amends SFAS
No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing
cash inflow rather than as a reduction of taxes paid. Per the FASB, SFAS 123(R) is effective for
fiscal years beginning after June 15, 2005. The Company will adopt SFAS 123(R) for the first
quarter of fiscal year 2006. The adoption of SFAS 123(R) is not expected to have a material impact
on the Companys financial position, results of operations, or cash flows.
Guarantee Obligations
In accordance with Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, specific credit and
product warranty programs are subject to the following disclosure in interim and annual financial
statements.
Credit Programs. Citi provides financing to the Companys customers through the Companys
private label credit card program, in exchange for payment by the Company of a merchant fee
(subject to periodic adjustment) based on a percentage of each credit card sale. The receivables
established through the issuance of credit by Citi are originated and owned by Citi. As defined in
the contract with Citi, losses related to a standard credit account (an account within the credit
limit approved under the original merchant agreement between the Company and Citi) are assumed
entirely by Citi without recourse to the Company, except where a Company employee violates the
credit procedures agreed to in the merchant agreement.
In an effort to better service customers, the Company and Citi developed two programs
that extend credit to qualifying customers beyond the standard credit account. In July 2005, Citi
agreed to assume the majority of the risk associated with the larger of the two programs, resulting
in the release of approximately $6.5 million of restricted cash previously held as collateral in an
interest bearing depository account. The incremental credit extension is at the Companys
discretion to accommodate larger sales transactions. The Company bears a portion of customer
default losses, as defined in the agreement with Citi, arising from these accounts.
F-30
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Based on account balances of the remaining program as of July 31, 2005, the Companys maximum
potential payment would be approximately $2.4 million if the entire portfolio defaulted. Under the
shared risk program, the Company incurred approximately $54,000 of losses for the twelve months
ended July 31, 2005. As of July 31, 2005, the reserve for the portfolio is approximately $134,000,
which the Company believes is adequate based on the historical trend of actual losses.
Product Warranty Programs. The Company sells ESAs to customers to cover sizing and breakage
for a two-year period on certain products purchased from the Company. The revenue from these
agreements is recognized over the two-year period in proportion to the costs expected to be
incurred in performing services under the ESAs. The Company also provides warranty services that
cover diamond replacement costs on certain diamond merchandise sold as long as the customer follows
certain inspection practices over the time of ownership of the merchandise. The Company has
established a reserve for potential non-ESA warranty issues based on actual historical expenses.
The changes in the Companys product warranty liability for the reporting periods is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
July 31, 2005 |
|
|
July 31, 2004 |
|
|
July 31, 2003 |
|
|
|
(amounts in thousands) |
|
Beginning Balance |
|
$ |
31,794 |
|
|
$ |
32,160 |
|
|
$ |
32,541 |
|
Extended Service Agreements Sold |
|
|
59,415 |
|
|
|
50,183 |
|
|
|
38,866 |
|
Extended Service Agreements
Revenue Recognized |
|
|
(62,945 |
) |
|
|
(50,549 |
) |
|
|
(39,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
28,264 |
|
|
$ |
31,794 |
|
|
$ |
32,160 |
|
|
|
|
|
|
|
|
|
|
|
Benefit Plans
Defined Contribution Retirement Plan
The Company maintains the Zale Corporation Savings & Investment Plan (the Investment Plan).
Substantially all employees who are at least age 21 are eligible to participate in the Investment
Plan. New employees are required to complete one year of continuous service with the Company to be
eligible to participate in the Investment Plan. Each employee can contribute from one percent to
fifteen percent of his or her annual salary. Effective August 1, 2002, the maximum amount
employees can contribute was raised to 30 percent of his or her annual salary, subject to IRS
limitations. Through February 2002, the Company matched one dollar in common stock for every dollar
an employee contributes to the plan up to four percent of annual compensation, subject to Internal
Revenue Service (IRS) limitations. Effective March 1, 2002, the Company matches $0.50 in common
stock or cash for every dollar an employee contributes to the plan up to four percent of annual
compensation subject to IRS limitations.
Through February 2002, matching contributions were made on a monthly basis. Effective March
1, 2002, matching contributions are made on an annual basis, and employees must be employed with
the Company on the last day of the plan year to receive the Company match contributions. Employees
vest in the Company match contribution immediately. The Companys provisions for matching
contributions were $2.1 million, $2.7 million and $2.2 million for fiscal years 2005, 2004 and
2003, respectively.
F-31
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Financial Instruments
As cash and short-term cash investments, trade payables and certain other short-term financial
instruments are all short-term in nature, their carrying amount approximates fair value.
For fiscal year 2005, the carrying amount of $129.8 million related to the Amended Revolving
Credit Agreement approximates fair value of the underlying investments at July 31, 2005.
The investments of the Companys insurance subsidiaries, primarily stocks and bonds in the
amount of $23.6 million and $24.3 million, approximate market value at July 31, 2005 and July 31,
2004, respectively, and are reflected in Other Assets on the accompanying consolidated balance
sheets. Investments are classified as available for sale and are carried at fair value.
Concentrations of Business and Credit Risk. During fiscal years 2005 and 2004, the Company
purchased approximately 26 percent and 30 percent, respectively, of its merchandise from its top
five vendors, including more than 8 percent from its top vendor in fiscal year 2005. If supply
between the Company and these top vendors were disrupted, particularly at certain critical times
during the year, the Companys sales could be adversely affected in the short term until
alternative supply arrangements could be established. As of July 31, 2005 and 2004, the Company
had no significant concentrations of credit risk.
Other Matters
American Jobs Creation Act. On October 22, 2004, the American Jobs Creation Act (the AJCA)
was signed into law. The AJCA includes, among other provisions, a special one-time deduction of 85
percent of certain foreign earnings that are repatriated, as defined in the AJCA. The Company has
a Canadian subsidiary for which it may elect to apply this provision to qualifying earnings
repatriations in fiscal year 2006. Based on the Companys initial evaluation of the potential
benefits, the estimated range of potential amounts that the Company is considering for repatriation
under this provision is between $30 million and $45 million, with the expected income tax effects
estimated to be a benefit in the range of $10 to $11 million. The Company is continuing to
evaluate the effects of the AJCA and expects to make a final decision on a plan of repatriation by
the second quarter of fiscal year 2006.
Lease Accounting and Other. In connection with the views expressed by the Office of the Chief
Accountant of the Securities and Exchange Commission (the SEC) on February 7, 2005 regarding
certain lease accounting issues, the Company, like many retailers, began a review of its lease
accounting practices.
The SEC letter clarified existing generally accepted accounting principles applicable to
leases and leasehold improvements primarily related to accounting for construction allowances
received from landlords and the period over which rent payments were amortized.
In prior periods, and consistent with industry practice, the Company recognized the minimum
rent payments evenly across the period beginning with the commencement date of the lease through
the end of the lease term, typically 120 months. This period excludes the construction period,
typically two to three months, in which the Company had access to the property but which preceded
the lease term. The SECs views clarified that the construction period should be included in the
period over which the Company amortizes the minimum rent payments.
The Company reviewed its lease portfolio and based upon this review, the Company determined
that the cumulative impact as of January 31, 2005 of correcting this error by commencing the
amortization period earlier was additional expense related to prior periods of approximately $5.8
million before taxes, or $3.6 million and $0.07 per share after taxes. The impact to net income
for the fiscal years ending July 31, 2005 and July 31, 2004 was not material.
F-32
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In addition, the Company had approximately $5.2 million of previously unrecognized deferred
credits from extended service agreements (ESAs) relating to prior periods as of January 31, 2005.
The Company recorded the cumulative impact on net income of correcting this error of $3.3 million
and $0.06 per share in its quarter ending January 31, 2005. Otherwise, there was no impact to net
income for the fiscal years ending July 31, 2005 and July 31, 2004.
The net impact of the two adjustments is not material to the financial statements.
Furthermore the two changes have no impact on the Companys historical or future net cash flow, the
timing of cash received or the timing of payments.
Subsequent Events
Hurricane Katrina. On Monday August 29, 2005, Hurricane Katrina and the subsequent flooding
along the Louisiana and Mississippi coasts resulted in the closure of several of the Companys
locations. It is anticipated that approximately 10 to 15 locations will remain closed throughout
the first quarter of fiscal year 2006, and a few of those may not reopen. At this time, the
Company does not expect the impact of the closings to have a material on its results of operations,
cash flow or working capital.
Bailey, Banks and Biddle. On August 30, 2005, the Company announced, as part of its strategy
to improve brand performance and profitability, its intention to close approximately 30 Bailey
Banks & Biddle stores after the upcoming Holiday season that do not fit with the brands long term
positioning in the luxury market. The closings are estimated to result in a charge of $13 million
or $0.25 per share after taxes related to the leasehold improvements, inventory and lease exit
costs.
F-33
ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Quarterly Results Of Operations (Unaudited)
Unaudited quarterly results of operations for the fiscal years ended July 31, 2005 and 2004
were as follows (amounts in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2005 |
|
|
|
|
|
|
For the Three Months Ended |
|
|
July 31, 2005 |
|
April 30, 2005 |
|
January 31, 2005 |
|
October 31, 2004 |
Total
Revenues |
|
$ |
472,343 |
|
|
$ |
515,618 |
|
|
$ |
972,332 |
|
|
$ |
422,773 |
|
Cost of Sales |
|
|
225,566 |
|
|
|
246,151 |
|
|
|
480,229 |
|
|
|
205,280 |
|
Net Earnings
(Loss) |
|
|
4,055 |
|
|
|
14,456 |
|
|
|
99,197 |
|
|
|
(10,933 |
) |
Net earnings (loss) per diluted
share |
|
$ |
0.08 |
|
|
$ |
0.28 |
|
|
$ |
1.91 |
|
|
$ |
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2004 |
|
|
|
|
|
|
For the Three Months Ended |
|
|
July 31, 2004 |
|
April 30, 2004 |
|
January 31, 2004 |
|
October 31, 2003 |
Total
Revenues |
|
$ |
455,598 |
|
|
$ |
483,175 |
|
|
$ |
949,023 |
|
|
$ |
416,644 |
|
Cost of Sales |
|
|
214,518 |
|
|
|
232,802 |
|
|
|
469,936 |
|
|
|
205,690 |
|
Net Earnings
(Loss) |
|
|
6,894 |
|
|
|
11,528 |
|
|
|
97,295 |
|
|
|
(9,244 |
) |
Net earnings (loss) per diluted
share |
|
$ |
0.13 |
|
|
$ |
0.22 |
|
|
$ |
1.83 |
|
|
$ |
(0.17 |
) |
F-34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, as of the 29th day of September, 2005.
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ZALE CORPORATION |
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By:
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/s/ Mary L. Forté |
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Mary L. Forté
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President
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and Chief Executive Officer |
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KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Mary L. Forté and Sue E. Gove, and each of them, as his or her true and lawful
attorneys-in-fact and agents, with full powers and substitution and resubstitution for him or her,
in his or her name place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do perform each and every act and thing
requisite and necessary to be done in and about the premises as fully and to all intents and
purposes as he or she might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature |
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Title |
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/s/ Mary L. Forté
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President, Chief Executive Officer and |
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Mary L. Forté
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Director (principal executive officer of |
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the registrant)
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September 29, 2005 |
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/s/ Sue E. Gove
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Executive Vice President, Chief |
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Sue E. Gove
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Operating Officer and Director
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September 29, 2005 |
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Group Senior Vice President |
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/s/ Mark R. Lenz
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and Chief Financial Officer (principal |
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Mark R. Lenz
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financial officer of the registrant)
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September 29, 2005 |
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Senior Vice President, Controller |
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/s/ Cynthia T. Gordon
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(principal accounting officer of the |
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Cynthia T. Gordon |
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registrant)
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September 29, 2005 |
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/s/ Richard C. Marcus
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Chairman of the Board
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September 29, 2005 |
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Richard C. Marcus |
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/s/ J. Glen Adams
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Director
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September 29, 2005 |
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J. Glen Adams |
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/s/ A. David Brown
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Director
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September 29, 2005 |
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A. David Brown |
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/s/ Mary E. Burton
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Director
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September 29, 2005 |
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Mary E. Burton |
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/s/ John B. Lowe, Jr.
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Director
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September 29, 2005 |
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John B. Lowe, Jr. |
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/s/ Thomas C. Shull
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Director
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September 29, 2005 |
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Thomas C. Shull |
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/s/ David M. Szymanski
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Director
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September 29, 2005 |
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David M. Szymanski |
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F-35
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Exhibit |
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Number |
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Description of Exhibit |
10.15
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Base Salaries of Named Executive Officers |
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10.16
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Summary of Director Compensation |
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10.18
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Master Agreement for Information Technology Services
between Zale Delaware, Inc. and ACS Commercial
Solutions, Inc. |
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21
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Subsidiaries of the registrant. |
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23.1
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Consent of KPMG LLP. |
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31.1
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Rule 13a-14(a) Certification of Chief Executive Officer. |
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31.2
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Rule 13a-14(a) Certification of Chief Financial Officer. |
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32.1
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Section 1350 Certification of Chief Executive Officer. |
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32.2
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Section 1350 Certification of Chief Financial Officer. |
The above list reflects all exhibits filed herewith. See Item 15 for a complete list of
the Companys exhibits, including exhibits incorporated by reference from previous
filings.
F-36