e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2007
Commission File Number 1-04129
Zale Corporation
A Delaware Corporation
IRS Employer Identification No. 75-0675400
901 W. Walnut Hill Lane
Irving, Texas 75038-1003
(972) 580-4000
Zale Corporation (1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934, as amended, during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
Zale Corporation is a large accelerated filer.
Zale Corporation is not a shell company.
As of February 28, 2007, 48,972,552 shares of Zale Corporations Common Stock, par value $.01 per
share, were outstanding.
ZALE
CORPORATION AND SUBSIDIARIES
Index
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZALE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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January 31, |
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January 31, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenues |
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$ |
1,004,495 |
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$ |
993,749 |
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$ |
1,436,983 |
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$ |
1,421,388 |
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Costs and expenses: |
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Cost of sales |
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495,151 |
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495,094 |
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702,615 |
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703,905 |
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Selling, general and administrative |
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346,639 |
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357,155 |
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583,614 |
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594,409 |
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Cost of insurance operations |
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1,562 |
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1,591 |
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3,109 |
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3,417 |
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Depreciation and amortization |
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15,646 |
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14,569 |
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30,497 |
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29,863 |
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Derivative (gain) loss |
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(1,332 |
) |
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7,227 |
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Operating earnings |
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146,829 |
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125,340 |
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109,921 |
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89,794 |
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Interest expense |
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5,637 |
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2,881 |
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10,893 |
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5,237 |
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Earnings before income taxes |
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141,192 |
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122,459 |
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99,028 |
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84,557 |
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Income taxes |
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|
53,132 |
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|
34,644 |
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|
37,363 |
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|
20,403 |
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Net earnings |
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$ |
88,060 |
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$ |
87,815 |
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$ |
61,665 |
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$ |
64,154 |
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Earnings per common share: |
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Basic net earnings per share |
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$ |
1.81 |
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$ |
1.80 |
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$ |
1.27 |
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$ |
1.29 |
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Diluted net earnings per share |
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$ |
1.80 |
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$ |
1.78 |
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$ |
1.26 |
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$ |
1.28 |
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Weighted average number of common shares
outstanding: |
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Basic |
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48,567 |
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48,797 |
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48,389 |
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49,698 |
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Diluted |
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48,962 |
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49,301 |
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48,807 |
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50,258 |
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See notes to consolidated financial statements.
1
ZALE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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January 31, |
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July 31, |
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January 31, |
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2007 |
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2006 |
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2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
32,282 |
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$ |
42,594 |
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$ |
37,465 |
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Merchandise inventories |
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1,118,176 |
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903,294 |
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|
957,356 |
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Other current assets |
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|
95,346 |
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|
103,356 |
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80,214 |
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Total current assets |
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1,245,804 |
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1,049,244 |
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1,075,035 |
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Property and equipment |
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299,612 |
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283,721 |
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289,328 |
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Goodwill |
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93,385 |
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96,339 |
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95,533 |
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Other assets |
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37,225 |
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33,264 |
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34,529 |
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Total assets |
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$ |
1,676,026 |
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$ |
1,462,568 |
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$ |
1,494,425 |
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LIABILITIES AND STOCKHOLDERS INVESTMENT |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
408,184 |
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$ |
341,182 |
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$ |
449,333 |
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Deferred tax liability |
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|
64,190 |
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|
61,947 |
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56,068 |
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Total current liabilities |
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472,374 |
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|
403,129 |
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505,401 |
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Long-term debt |
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232,729 |
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202,813 |
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|
120,004 |
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Deferred tax liability |
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|
12,860 |
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|
3,768 |
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|
|
4,067 |
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Other liabilities |
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|
77,787 |
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51,609 |
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|
64,692 |
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Contingencies (See Notes 5 and 6) |
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Stockholders investment: |
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Common stock |
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|
490 |
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|
482 |
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|
534 |
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Additional paid-in capital |
|
|
131,836 |
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|
108,344 |
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|
95,238 |
|
Accumulated other comprehensive income |
|
|
27,426 |
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|
33,564 |
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|
|
35,098 |
|
Accumulated earnings |
|
|
870,524 |
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|
|
808,859 |
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|
|
819,391 |
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|
1,030,276 |
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|
951,249 |
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|
950,261 |
|
Treasury stock |
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|
(150,000 |
) |
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|
(150,000 |
) |
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|
(150,000 |
) |
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Total stockholders investment |
|
|
880,276 |
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|
801,249 |
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|
|
800,261 |
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Total liabilities and stockholders investment |
|
$ |
1,676,026 |
|
|
$ |
1,462,568 |
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|
$ |
1,494,425 |
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|
|
|
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|
See notes to consolidated financial statements.
2
ZALE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
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Six Months Ended |
|
|
|
January 31, |
|
|
|
2007 |
|
|
2006 |
|
Cash Flows from Operating Activities: |
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|
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|
|
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Net earnings |
|
$ |
61,665 |
|
|
$ |
64,154 |
|
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
31,067 |
|
|
|
30,433 |
|
Repatriation on tax provision |
|
|
|
|
|
|
(11,502 |
) |
Deferred taxes |
|
|
11,719 |
|
|
|
|
|
Loss from disposition of property and equipment |
|
|
1,571 |
|
|
|
2,482 |
|
Impairment of fixed assets |
|
|
579 |
|
|
|
9,730 |
|
Stock-based compensation expense |
|
|
3,256 |
|
|
|
4,305 |
|
Derivative gain |
|
|
(1,974 |
) |
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Merchandise inventories |
|
|
(218,493 |
) |
|
|
(98,572 |
) |
Other current assets |
|
|
7,769 |
|
|
|
(12,145 |
) |
Other assets |
|
|
(1,101 |
) |
|
|
1,264 |
|
Accounts payable and accrued liabilities |
|
|
75,849 |
|
|
|
146,121 |
|
Other liabilities |
|
|
24,918 |
|
|
|
(1,387 |
) |
|
|
|
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|
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|
Net cash (used in) provided by operating activities |
|
|
(3,175 |
) |
|
|
134,883 |
|
|
|
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Cash Flows from Investing Activities: |
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|
|
|
|
Payments for property and equipment |
|
|
(49,742 |
) |
|
|
(47,460 |
) |
Purchase of available-for-sale investments |
|
|
(9,643 |
) |
|
|
(2,149 |
) |
Proceeds from sale of available-for-sale investments |
|
|
6,044 |
|
|
|
1,704 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(53,341 |
) |
|
|
(47,905 |
) |
|
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|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Borrowings under revolving credit agreement |
|
|
1,506,688 |
|
|
|
770,704 |
|
Payments on revolving credit agreement |
|
|
(1,476,772 |
) |
|
|
(780,500 |
) |
Proceeds from exercise of stock options |
|
|
15,311 |
|
|
|
2,745 |
|
Excess tax benefit on stock options exercised |
|
|
1,171 |
|
|
|
532 |
|
Purchase of common stock |
|
|
|
|
|
|
(100,000 |
) |
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|
|
|
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|
Net cash provided by (used in) financing activities |
|
|
46,398 |
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|
|
(106,519 |
) |
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|
|
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|
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|
Effect of exchange rate changes on cash |
|
|
(194 |
) |
|
|
1,560 |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(10,312 |
) |
|
|
(17,981 |
) |
Cash and cash equivalents at beginning of period |
|
|
42,594 |
|
|
|
55,446 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
32,282 |
|
|
$ |
37,465 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
3
ZALE
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
References to the Company, we, us, and our in this Form 10-Q are references to Zale
Corporation and its subsidiaries. We are, through our wholly owned subsidiaries, a leading
specialty retailer of fine jewelry in North America. As of January 31, 2007, we operated 1,471
specialty retail jewelry stores and 882 kiosks and cart locations primarily in shopping malls
throughout the United States of America, Canada and Puerto Rico. We report our operations under
three segments: Fine Jewelry, Kiosk Jewelry and All Other.
Our Fine Jewelry segment is comprised of six brands: Zales Jewelers®; Zales Outlet;
Gordons Jewelers®; Bailey Banks & Biddle Fine Jewelers®; Peoples
Jewellers®; Mappins Jewellers®; and our e-commerce businesses which
include zales.com and baileybanksandbiddle.com.
The Kiosk Jewelry segment operates primarily under the brand names Piercing
Pagoda®; Plumb Gold; Silver and Gold Connection® (in the U.S.)
and Peoples II (in Canada).
The All Other segment includes insurance and reinsurance operations.
We consolidate substantially all of our 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 our credit customers.
We consolidate our Canadian retail operations into Zale International, Inc., which is a wholly
owned subsidiary of Zale Corporation. All significant intercompany transactions have been
eliminated. The consolidated financial statements are unaudited and have been prepared by the
Company in accordance with accounting principles generally accepted in the United States of America
for interim financial information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements.
In managements opinion, all material adjustments and disclosures necessary for a fair presentation
have been made. The accompanying consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and related notes thereto included in the
Companys Form 10-K for the fiscal year ended July 31, 2006.
Certain prior year amounts in the accompanying consolidated financial statements have been
reclassified to conform with fiscal year 2007 classifications.
2. EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the reporting period.
Diluted earnings per share reflect the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock. For the calculation
of diluted earnings per share, the basic weighted average number of shares is increased by the
dilutive effect of stock options and restricted share awards determined using the treasury stock
method. We had approximately 1.7 million and 1.9 million stock options outstanding at January 31,
2007 and 2006, respectively, which were not included in the diluted earnings per share calculation
because the effect would have been antidilutive.
3. COMPREHENSIVE INCOME
Comprehensive income is net earnings plus certain other items that are recorded directly to
stockholders investment and consist of currency translation adjustments and unrealized gains and
losses related to investments classified as available-for-sale. Comprehensive income was $80.6
million and $92.5 million for the three months ended January 31, 2007 and 2006, respectively, and
$55.5 million and $75.1 million for the six month periods ended January 31, 2007 and 2006,
respectively.
4
4. SEGMENTS
We report our business under three segments: Fine Jewelry, Kiosk Jewelry and All Other. We
group our brands into segments based on the similarities in commodity characteristics of the
merchandise and the product mix. The All Other segment includes insurance and reinsurance
operations. Segment revenues are not provided by product type or geographically as we believe such
disclosure would not add value and is not consistent with the manner in which we make decisions.
Operating earnings by segment are calculated before unallocated corporate overhead, interest
and taxes but include an internal charge for inventory carrying cost to evaluate segment
profitability. Unallocated costs are before income taxes and include corporate employee related
costs, administrative costs, information technology costs, corporate facilities costs and
depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(amounts in thousands) |
|
|
(amounts in thousands) |
|
Selected Financial Data by Segment |
|
|
|
|
|
|
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|
|
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|
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|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry (a) |
|
$ |
898,488 |
|
|
$ |
884,115 |
|
|
$ |
1,275,077 |
|
|
$ |
1,257,137 |
|
Kiosk (b) |
|
|
102,845 |
|
|
|
106,362 |
|
|
|
155,251 |
|
|
|
157,775 |
|
All Other |
|
|
3,162 |
|
|
|
3,272 |
|
|
|
6,655 |
|
|
|
6,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,004,495 |
|
|
$ |
993,749 |
|
|
$ |
1,436,983 |
|
|
$ |
1,421,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry |
|
$ |
11,329 |
|
|
$ |
10,752 |
|
|
$ |
22,242 |
|
|
$ |
21,755 |
|
Kiosk |
|
|
1,408 |
|
|
|
1,356 |
|
|
|
2,839 |
|
|
|
2,668 |
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
2,909 |
|
|
|
2,461 |
|
|
|
5,416 |
|
|
|
5,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and
amortization |
|
$ |
15,646 |
|
|
$ |
14,569 |
|
|
$ |
30,497 |
|
|
$ |
29,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fine Jewelry |
|
$ |
134,895 |
|
|
$ |
109,372 |
|
|
$ |
110,190 |
|
|
$ |
79,908 |
|
Kiosk |
|
|
18,525 |
|
|
|
22,706 |
|
|
|
12,373 |
|
|
|
18,889 |
|
All Other |
|
|
1,600 |
|
|
|
1,681 |
|
|
|
3,546 |
|
|
|
3,060 |
|
Unallocated (c) |
|
|
(8,191 |
) |
|
|
(8,419 |
) |
|
|
(16,188 |
) |
|
|
(12,063 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating earnings |
|
$ |
146,829 |
|
|
$ |
125,340 |
|
|
$ |
109,921 |
|
|
$ |
89,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes $111.0 million and $96.7 million for the three month periods ended January 31,
2007 and 2006, respectively, related to foreign operations. Includes $153.7 million and
$134.8 million for the six month periods ended January 31, 2007 and 2006, respectively,
related to foreign operations. |
|
(b) |
|
Includes $2.5 million and $3.0 million for the three month periods ended January 31,
2007 and 2006, respectively, related to foreign operations. Includes $4.6 million and $4.5
million for the six month periods ended January 31, 2007 and 2006, respectively, related to
foreign operations. |
|
(c) |
|
Includes $22.1 million and $19.3 million to offset internal carrying costs charged to
the segments for the three month periods ended January 31, 2007 and 2006, respectively, and
$41.0 million and $36.2 million to offset internal carrying costs charged to the segments
for the six month periods ended January 31, 2007 and 2006, respectively. Also includes
$1.3 million in derivative gains and $7.2 million in derivative losses for the three month
period ended January 31, 2007 and the six month period ended January 31, 2007,
respectively. |
Income tax information by segment has not been included as taxes are calculated on a
consolidated basis and not allocated to each segment.
5
5. CONTINGENCIES
We are named as a defendant in two lawsuits arising, in general, from matters that were the
subject of a Securities and Exchange Commission investigation that was terminated, as we announced
on September 24, 2006, with no enforcement action being recommended: In re Zale Corporation
Securities Litigation No. 3:06-CV-01470-K, filed January 29, 2007, U.S. District Court for the
Northern District of Texas; Salvato v. Zale Corp., No. 3:06-CV-1124 (SAF), filed March 5, 2007,
U.S. District Court for the Northern District of Texas, originally filed June 26, 2006 and
consolidated with Connell v. Zale Corp., originally filed August 7, 2006, U.S. District Court for
the Southern District of New York and transferred to the U.S. District Court for the Northern
District of Texas. These lawsuits are the product of the consolidation of six lawsuits that were
initially filed in New York and Texas. Various current and former officers and directors also are
defendants.
Both lawsuits are purported class actions. In In re Zale Corporation Securities Litigation,
the plaintiffs allege various violations of securities laws based upon our public disclosures. In
Salvato, the plaintiffs allege various violations of the Employee Retirement Income Security Act of
1974 based upon the investment by the Zale Corporation Savings and Investment Plan in Company
stock. Both lawsuits are in preliminary stages. We intend to vigorously contest both lawsuits.
It is not possible at this time to reasonably estimate the possible loss or range of loss, if any,
that may result from these lawsuits.
We are involved in a number of other legal and governmental proceedings as part of the normal
course of our business. Reserves have been established based on managements best estimates of our
potential liability in these matters. These estimates have been developed in consultation with
internal and external counsel and are based on a combination of litigation and settlement
strategies. Management believes that such litigation and claims will be resolved without material
effect on our financial position or results of operations.
6. GUARANTEES
Credit Programs. Citibank U.S.A., N.A. (Citi), a subsidiary of CitiGroup, provides
financing to our customers through our private label credit card program in exchange for payment by
us 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. 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 us, 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 a program that
extends credit to qualifying customers above the approved credit amount (the Shared Risk
Program). The extension of incremental credit is at our discretion to accommodate larger sales
transactions. We bear the responsibility of customer default losses related to the Shared Risk
Program, as defined in the agreement with Citi.
Under the Shared Risk Program, we incurred no material losses for the three month and six
month periods ended January 31, 2007, and we believe that future losses will not have a material
impact on our financial position or results of operations.
Product Warranty Programs. We offer our customers two-year and lifetime jewelry protection
plans (JPPs) that cover sizing and breakage on certain products and a diamond commitment program
(DCP) that offers a traditional warranty to cover sizing, breakage and theft replacement for a
12-month period. The revenue from the lifetime JPPs is recognized on a straight-line basis over an
estimated service period. The revenue from the two-year JPPs and DCPs is recognized over the
service period at the rates the related costs are expected to be incurred in performing the
services covered under the agreements.
6
The change in deferred revenue associated with the sale of JPPs is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Deferred revenue, beginning of period |
|
$ |
30,466 |
|
|
$ |
27,385 |
|
|
$ |
31,784 |
|
|
$ |
28,264 |
|
Jewelry protection plans sold |
|
|
43,306 |
|
|
|
30,173 |
|
|
|
58,289 |
|
|
|
43,563 |
|
Revenue recognized |
|
|
(13,533 |
) |
|
|
(24,540 |
) |
|
|
(29,834 |
) |
|
|
(38,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, end of period |
|
$ |
60,239 |
|
|
$ |
33,018 |
|
|
$ |
60,239 |
|
|
$ |
33,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the unaudited consolidated
financial statements of the Company (and the related notes thereto) which preceded this report and
the audited consolidated financial statements of the Company (and the related notes thereto) and
Managements Discussion and Analysis of Financial Condition and Results of Operations in the
Companys Form 10-K for the fiscal year ended July 31, 2006.
Overview
We are a leading specialty retailer of fine jewelry in North America. At January 31, 2007, we
operated 1,471 fine jewelry stores and 882 kiosk and cart locations primarily in shopping malls
throughout the United States of America, Canada and Puerto Rico. Our operations are divided into
three business segments: Fine Jewelry, Kiosk Jewelry and All Other.
The Fine Jewelry segment focuses on diamond product, but differentiates its six brands through
merchandise assortments and marketing. The Kiosk Jewelry segment reaches the opening price point
fine jewelry customer primarily through mall-based kiosks under the name Piercing Pagoda in the
United States of America, and carts under the name Peoples II in Canada. The All Other segment
consists primarily of our insurance operations, which provide insurance and reinsurance facilities
for various types of insurance coverage offered primarily to our private label credit card
customers.
Comparable store sales exclude revenue recognized from jewelry protection plans (JPPs),
internet sales and insurance premiums related to credit insurance policies sold to customers who
purchase merchandise under our proprietary credit program, 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. However, stores closed for more than 90 days due to unforeseen events
(hurricanes, etc.) are excluded from the calculation of comparable store sales.
During the second quarter of fiscal year 2007, we continued to focus on rebuilding the Zales
brand and increasing market share. The brand continued to sell through clearance merchandise while
expanding the product assortment in its core diamond fashion and bridal categories. In addition,
as part of our long-term strategy of investing in our people, the brand made investments in payroll
with a focus on attracting and retaining certain jewelry sales associates in the stores.
8
Results of Operations
The following table sets forth certain financial information from our unaudited consolidated
statements of operations expressed as a percentage of total revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
January 31, |
|
January 31, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
49.2 |
|
|
|
49.8 |
|
|
|
49.0 |
|
|
|
49.5 |
|
Selling, general and administrative |
|
|
34.5 |
|
|
|
35.9 |
|
|
|
40.6 |
|
|
|
41.9 |
|
Cost of insurance operations |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Depreciation and amortization |
|
|
1.6 |
|
|
|
1.5 |
|
|
|
2.1 |
|
|
|
2.1 |
|
Derivative (gain) loss |
|
|
(0.1 |
) |
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings |
|
|
14.6 |
|
|
|
12.6 |
|
|
|
7.6 |
|
|
|
6.3 |
|
Interest expense |
|
|
0.6 |
|
|
|
0.3 |
|
|
|
0.8 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
14.0 |
|
|
|
12.3 |
|
|
|
6.8 |
|
|
|
5.9 |
|
Income taxes |
|
|
5.2 |
|
|
|
3.5 |
|
|
|
2.5 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
8.8 |
% |
|
|
8.8 |
% |
|
|
4.3 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, 2007 Compared to Three Months Ended January 31, 2006
Revenues. Revenues for the three months ended January 31, 2007 were $1.004 billion, an
increase of approximately 1.1 percent over total revenues of $993.7 million for the same period in
the prior year. Excluding the impact of the sales in the Bailey Banks & Biddle stores closed in
fiscal year 2006, revenues increased approximately 2.6 percent over the same period last year. Our
comparable store sales increased approximately 1.4 percent in the three months ended January 31,
2007 as compared to the same period in the prior year, as most of our brands had positive
comparable store sales with the exception of Gordons and Piercing Pagoda. The increase was
partially offset by an $11.0 million, or 1.1 percent, decrease in revenues recognized related to a
change in our jewelry protection plans (JPPs). Prior to the second quarter of fiscal 2007, we
only offered a two-year JPP. Revenue from the two-year JPP is recognized over the service period
at the rates the related costs are expected to be incurred. During the second quarter of fiscal
2007, certain brands began offering a lifetime JPP. Due to the lack of historical data associated
with the lifetime JPP, revenue is recognized on a straight-line basis over the estimated service
period.
The Fine Jewelry segment contributed $898.5 million of revenues in the three months ended
January 31, 2007, compared to $884.1 million for the same period in the prior year, which
represents an increase of approximately 1.6 percent. Excluding the impact of the Bailey Banks &
Biddle stores closed in fiscal year 2006, the Fine Jewelry segment had increased revenues of
approximately 3.4 percent. The Peoples and Outlet brands had sales increases particularly in the
diamond fashion and solitaire categories. The increased focus on diamond assortments in the Zales
brand fueled increases in the diamond fashion category which were partially offset by sales
declines in the Gordons brand. The Gordons sales decline was partially due to the aggressive
promotional pricing in the Zales brand.
Revenues include $102.8 million in the Kiosk Jewelry segment compared to $106.4 million in the
prior year, representing a decrease of approximately 3.3 percent.
All Other segment operations provided approximately $3.2 million in revenues for the quarter
ended January 31, 2007 and approximately $3.3 million for the same period in the prior year, which
represents a decrease of approximately 3.4 percent.
9
During the quarter ended January 31, 2007, we opened ten stores in the Fine Jewelry segment
and three kiosks in the Kiosk Jewelry segment. In addition, we closed 14 stores in the Fine
Jewelry segment and 12 locations in the Kiosk Jewelry segment during the quarter.
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 49.2 percent for the three
months ended January 31, 2007, compared to 49.8 percent for the same period in the prior year.
Excluding the 140 basis point impact related to the Bailey Banks & Biddle store closings in fiscal
year 2006, cost of sales was higher due primarily to an aggressive pricing strategy and a higher
mix of lower-margin Brilliant Buys in the Zales brand. The increase was partially offset by our
continued focus on direct sourcing of product and finished goods across the Company.
Selling, General and Administrative. Included in selling, general and administrative (SG&A)
are store operating, advertising, buying and general corporate overhead expenses. SG&A was 34.5
percent of revenues for the three months ended January 31, 2007 compared to 35.9 percent for the
same period in the prior year. Excluding lease settlement costs related to the closed Bailey Banks
& Biddle stores and executive severance in fiscal year 2006, SG&A as a percent of revenues was 33.8
percent. The relative increase in SG&A as a percent of revenues is primarily due to investments
made in payroll and higher occupancy costs as a percent of sales.
Depreciation and Amortization. Depreciation and amortization as a percent of revenues for the
three month periods ended January 31, 2007 and 2006 was 1.6 percent and 1.5 percent, respectively.
Derivative (Gain) Loss. We recognize all derivative instruments measured at fair value, as
either assets or liabilities in the accompanying consolidated balance sheets. Any changes in the
fair value of derivative instruments are reported in derivative (gain) loss in the consolidated
statements of operations. The fair market value of these instruments is subject to the changes in
the underlying commodity. During the quarter ended January 31, 2007, we recognized a derivative
gain before taxes in the amount of $1.3 million, representing 0.1 percent of revenues.
Interest Expense. Interest expense as a percent of revenues for the three month periods ended
January 31, 2007 and 2006 was 0.6 percent and 0.3 percent, respectively. The increase in interest
expense was a result of an increase in the weighted average effective interest rate from 5.78
percent last year to 6.93 percent this year and increased borrowings during the quarter.
Income Taxes. The effective tax rate for the three month periods ended January 31, 2007 and
2006 was 37.6 percent and 37.7 percent, respectively, excluding the impact of repatriated earnings
last year under the American Jobs Creation Act. Including the impact of the repatriated earnings,
the effective tax rate for the fiscal year 2006 period was 28.3 percent.
Six Months Ended January 31, 2007 Compared to Six Months Ended January 31, 2006
Revenues. Revenues for the six months ended January 31, 2007 were $1.437 billion, an increase
of approximately 1.1 percent over revenues of $1.421 billion for the same period in the prior year.
Excluding the impact of sales in the Bailey Banks & Biddle stores closed in fiscal year 2006,
revenues increased approximately 2.2 percent over the same period last year. Our comparable store
sales increased approximately 1.1 percent in the six months ended January 31, 2007 as compared to
the same period in the prior year. The increase was partially offset by a $9.0 million, or 0.6
percent, decrease in revenues recognized related to the previously mentioned change in our JPPs.
The Fine Jewelry segment contributed $1.275 billion of revenues in the six months ended
January 31, 2007, compared to $1.257 billion for the same period in the prior year, which
represents an increase of approximately 1.4 percent. Excluding the impact of the Bailey Banks &
Biddle stores closed in fiscal year 2006, the Fine Jewelry segment had increased revenues of
approximately 2.7 percent. The increase in revenues is largely the result of solid growth in the
diamond fashion categories in several brands.
Revenues include $155.3 million in the Kiosk Jewelry segment compared to $157.8 million in the
prior year, representing a decrease of approximately 1.6 percent.
10
All Other segment operations provided approximately $6.7 million and $6.5 million in revenues
for the six month periods ended January 31, 2007 and 2006, respectively.
During the six month period ended January 31, 2007, we opened 31 stores in the Fine Jewelry
segment and 11 kiosks in the Kiosk Jewelry segment. In addition we closed 16 stores in the Fine
Jewelry segment and 22 locations in the Kiosk Jewelry segment during the six month period.
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 49.0 percent for the six months
ended January 31, 2007, compared to 49.5 percent for the same period in the prior year. Excluding
the 100 basis point impact related to the Bailey Banks & Biddle store closings in fiscal year 2006,
cost of sales was higher due to an aggressive pricing strategy and a higher mix of lower-margin
Brilliant Buys and increased clearance sales in the Zales brand. The increase was partially offset
by our continued focus on direct sourcing of product and finished goods across the Company and
enhanced markdown procedures.
Selling, General and Administrative. Included in selling, general and administrative (SG&A)
are store operating, advertising, buying and general corporate overhead expenses. SG&A was 40.6
percent of revenues for the six months ended January 31, 2007 compared to 41.9 percent for the same
period in the prior year. Excluding impairment charges and lease settlement costs related to the
closed Bailey Banks & Biddle stores and executive severance in fiscal year 2006, SG&A as a percent
of revenues was 39.8. The relative increase in SG&A as a percent of revenues is primarily due to
investments made in payroll and higher occupancy costs as a percent of sales.
Depreciation and Amortization. Depreciation and amortization as a percent of revenues for the
six month periods ended January 31, 2007 and 2006 was 2.1 percent.
Derivative (Gain) Loss. We recognize all derivative instruments measured at fair value, as
either assets or liabilities in the accompanying consolidated balance sheets. Any changes in the
fair value of derivative instruments are reported in derivative (gain) loss on the consolidated
statements of operations. The fair market value of these instruments is subject to the changes in
the underlying commodity. During the six month period ended January 31, 2007, we recognized a
derivative loss before taxes in the amount of $7.2 million, representing 0.5 percent of revenues.
Interest Expense. Interest expense as a percent of revenues for the six month periods ended
January 31, 2007 and 2006 was 0.8 percent and 0.4 percent, respectively. The increase in interest
expense was a result of an increase in the weighted average effective interest rate from 5.33 percent last year to 6.77 percent this year and increased borrowings during the year.
Income Taxes. The effective tax rate for the six month periods ended January 31, 2007 and
2006 was 37.7 percent, excluding the impact of repatriated earnings last year under the American
Jobs Creation Act. Including the impact of the repatriated earnings, the effective tax rate for
the fiscal year 2006 period was 24.1 percent.
Liquidity and Capital Resources
Our cash requirements consist primarily of funding ongoing operations, including seasonal
inventory requirements, capital expenditures for new stores, renovations of existing stores,
upgrades to our information technology systems and distribution facilities, and debt service. In
addition, from time-to-time in the past we have repurchased shares of our common stock.
Our business is highly seasonal, with a disproportionate amount of sales (approximately 41
percent) and substantially all of our operating income occurring in November and December of each
year, the Holiday season. Other important periods include Valentines Day and Mothers Day. We
purchase inventory in anticipation of these periods and, as a result, have higher inventory and
inventory financing needs immediately prior to these periods. Our maximum inventory level
typically occurs prior to the Holiday season. Owned inventory at January 31, 2007 was $1.1
billion, an increase of $215 million and $161 million compared to inventory levels at July 31,
11
2006 and January 31, 2006, respectively. The increases were primarily due to remaining
clearance inventory, increased inventory in our internal assembly organization and inventory
investments made in holiday sales.
Our cash requirements are funded through cash flows from operations, funds available under our
revolving credit facilities, and vendor payment terms. Under our revolving credit facilities we
may borrow an aggregate of approximately $530 million. Vendor purchase order terms typically
require payment within 60 days.
As of January 31, 2007, we had cash and cash equivalents of $32.3 million and had
approximately $295 million available under our revolving credit facilities. We believe that we
have sufficient capacity under our revolving credit facilities to meet our foreseeable financing
needs.
Capital Expenditures
In fiscal year 2007, we plan to invest a total of approximately $27 million in capital
expenditures to open approximately 55 new stores in the Fine Jewelry segment, and approximately ten
new kiosks in the Kiosk Jewelry segment. We anticipate spending approximately $49 million to
remodel, relocate and refurbish approximately 106 locations in our Fine Jewelry segment and
approximately 65 additional locations in our Kiosk Jewelry segment. We also estimate that we will
incur capital expenditures of approximately $17 million for enhancements to our information
technology portfolio, infrastructure expansion and other support services. As of January 31, 2007,
we had invested approximately $50 million in capital expenditures, of which approximately $36
million was used to open, relocate, remodel and refurbish stores and kiosks.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48 Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN
48). FIN 48 requires companies to determine whether it is more likely than not that a tax
position will be sustained upon examination by the appropriate taxing authorities before any part
of the benefit can be recorded in the financial statements. This interpretation also provides
guidance on derecognition, classification, accounting in interim periods and expanded disclosure
requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are
currently in the process of assessing the impact that FIN 48 will have on our consolidated
financial statements. At this time, we do not anticipate this will result in a material
adjustment to the Companys financial condition, results of operations or liquidity.
In June 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-3 (EITF
06-3) Disclosure Requirements for Taxes Assessed by a Governmental Authority on Revenue-Producing
Transactions. The consensus allows an entity to choose between two acceptable methods of
collecting taxes from customers on behalf of a governmental authority, such as sales taxes. Under
the gross method, taxes collected are accounted for as revenue with an offsetting amount in
operating expenses. Under the net method, taxes are excluded from revenues and instead are
recorded as a liability until they are remitted to the appropriate taxing authority. EITF 06-3 is
effective for interim and annual reporting periods beginning after December 15, 2006. The Company
has presented revenue net of taxes collected and will disclose this policy in its future annual
financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157). This standard defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The
adoption of SFAS 157 is not expected to have a material impact on the Companys financial
condition, results of operations or liquidity.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB
Statement No. 115 (SFAS 159). This standard permits entities to choose to value certain
financial instruments at fair value. Entities shall report unrealized gains and losses on items
for which the fair value option has been elected in earnings at each subsequent reporting date.
SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently in the
process of assessing the impact that SFAS 159 will have on our consolidated financial statements.
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Inflation
In managements opinion, changes in 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 our last-in, first-out (LIFO)
inventory. Historically, we have hedged a portion of our gold and silver purchases through forward
contracts. There is no assurance that inflation will not materially affect us in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At January 31, 2007, there had not been a material change in any of the market risk
information disclosed by us in our Annual Report on Form 10-K for the fiscal year ended July 31,
2006. More detailed information concerning market risk can be found under the sub-caption
Quantitative and Qualitative Disclosures about Market Risk of the caption Managements
Discussion and Analysis of Financial Condition and Results of Operations on page 35 of our Annual
Report on Form 10-K for the fiscal year ended July 31, 2006.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated
the effectiveness of our 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 us to record,
process, summarize and report information required to be included in the Companys periodic SEC
filings within the required time period. There have been no changes in our internal controls over
financial reporting that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding legal proceedings is incorporated by reference from Note 5 to our
consolidated financial statements set forth in Part I of this report.
Item 1A. Risk Factors
Cautionary Notice Regarding Forward-Looking Statements
We make forward-looking statements in the Annual Report on Form 10-K and in other reports we
file with the SEC. In addition, members of our senior management make forward-looking statements
orally in presentations to analysts, investors, the media and others. Forward-looking statements
include statements regarding our objectives and expectations with respect to our financial plan,
sales and earnings, merchandising and marketing strategies, store opening, renovation, remodeling
and expansion, inventory management and performance, liquidity and cash flows, capital structure,
capital expenditures, development of our information technology and telecommunications plans and
related management information systems, e-commerce initiatives, human resource initiatives and
other statements regarding our plans and objectives. In addition, the words plans to,
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
our expectations about the future, and speak only as of the date they are made. We disclaim 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 our actual results to differ materially from the anticipated or expected results
expressed in or suggested by these forward-looking statements.
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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 consumers 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 we operate, can impact sales and earnings.
The concentration of a substantial portion of our sales in three relatively brief selling periods
means that our performance is more susceptible to disruptions.
A substantial portion of our sales are derived from three selling periods Holiday
(Christmas), Valentines Day, and Mothers Day. Because of the briefness of these three selling
periods, 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 or hurricane), 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 periods could materially impact sales for the affected period and,
because of the importance of each of these selling periods, commensurately impact overall sales and
earnings.
Most of our sales are of products that include diamonds, precious metals and other commodities.
Fluctuations in the availability and pricing of commodities could impact our ability to obtain and
produce products at favorable prices, and consumer awareness regarding the issue of conflict
diamonds may affect consumer demand for diamonds.
The supply and price of diamonds in the principal world market 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 the continuing supply of raw diamonds.
Any sustained interruption in this supply could have an adverse affect on our business. In the
near term, efforts by non-governmental organizations to encourage legislative response could
increase consumer awareness of the issue and could affect consumer demand for diamonds.
We are also affected by fluctuations in the price of diamonds, gold and other commodities. We
historically have engaged in hedging against fluctuations in the cost of gold. A significant change
in prices of key commodities could adversely affect our business by reducing operating margins or
decreasing consumer demand if retail prices are increased significantly.
Our sales are dependent upon mall traffic.
Our stores, kiosks, and carts are located primarily in shopping malls throughout the U.S.,
Canada and Puerto Rico. Our 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 our sales and earnings.
We operate in a highly competitive and fragmented industry.
The retail jewelry business is highly competitive and fragmented, and we compete 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. We also compete with Internet sellers of
jewelry. Because of the breadth and depth of this competition, we are constantly under competitive
pressure that both constrains pricing and requires extensive merchandising efforts in order for us
to remain competitive.
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Any failure by us to manage our inventory effectively will negatively impact sales and earnings.
We purchase much of our inventory well in advance of each selling period. In the event we
misjudge consumer preferences or demand, we 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 our dependence upon a small concentrated number of landlords for a substantial number of
our locations, any significant erosion of our relationships with those landlords would negatively
impact our ability to obtain and retain store locations.
We are significantly dependent on our ability to operate stores in desirable locations with
capital investment and lease costs that allow us to earn a reasonable return on our locations. We
depend on the leasing market and our landlords to determine supply, demand, lease cost and
operating costs and conditions. We cannot be certain as to when or whether desirable store
locations will become or remain available to us at reasonable lease and operating costs. Further,
several large landlords dominate the ownership of prime malls, and we are dependent upon
maintaining good relations with those landlords in order to obtain and retain store locations on
optimal terms. From time to time, we do have disagreements with our landlords and a significant
disagreement, if not resolved, could have an adverse impact on our business.
Changes in regulatory requirements relating to the extension of credit may increase the cost of or
adversely affect our operations.
Our operations are affected by numerous U.S. and Canadian federal and state or provincial 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 our
customer base could adversely affect our sales and earnings.
Any disruption in, or changes to, our private label credit card arrangement with Citi may adversely
affect our ability to provide consumer credit and write credit insurance.
Our agreement with Citi, through which Citi provides financing for our customers to purchase
merchandise through private label credit cards, enhances our ability to provide consumer credit and
write credit insurance. Any disruption in, or change to, this agreement could have an adverse
effect on our business, especially to the extent that it materially limits credit availability to
our customer base.
Acquisitions involve special risk, including the possibility that we may be unable to integrate new
acquisitions into our existing operations.
We have made significant acquisitions in the past and may in the future make additional
acquisitions. Difficulty integrating an acquisition into our existing infrastructure and
operations may cause us 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 us.
Item 6. Exhibits
10.1 |
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Settlement and Release Agreement with Sue E. Gove (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K, filed with the SEC on December 15, 2006) |
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10.2 |
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Settlement and Release Agreement with Mary L. Forté (incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K, filed with the SEC on December 15, 2006) |
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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 |
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SIGNATURE
Pursuant to the requirements 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.
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Zale Corporation |
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(Registrant) |
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Date: March 9, 2007
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/s/ Cynthia T. Gordon |
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Cynthia T. Gordon |
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Senior Vice President, Controller |
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(principal accounting officer of the registrant) |
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