RAPAPORT... Zale Corporation reported that its fiscal-year 2009 results were "significantly below expectations." The jeweler's revenues fell 16.8 percent to $1.78 billion and it reported a loss of $189.5 million, or $5.94 per share. For fiscal-year 2008, Zale's revenues were $2.14 billion and the jeweler restated its profits as $631,000, or one cent per share, down from the previously reported $10.8 million.
Comparable-stores sales for fiscal 2009 fell 17 percent. Zale recorded a 20.8 percent decrease for customer transactions at its fine jewelry stores; however, the average transaction price increased slightly. The jeweler's gross margins decreased by 150 basis points to approximately 48 percent due primarily to an increase in store-wide discounts during the 2008 Christmas season. The margin decrease excluded the 80-basis-point impact of the inventory impairment charges recorded in fiscal-year 2009.
Initiatives begun during the second half of fiscal-year 2008 resulted in approximately $32 million in cash flows from operating activities and reduced Zale's debt by $22 million by the time the fourth fiscal quarter of 2009 rolled to an end on July 31, 2009. "We expect to continue to realize the benefits from these initiatives during fiscal year 2010," the jeweler noted in its 10-K filing.
Zale took a loss of $89.8 million for its fourth fiscal quarter, compared with a loss of $10 million in fourth quarter of fiscal 2008. Revenues fell 21.7 percent to $357.1 million during the quarter. Comparable-store sales for the fourth quarter declined 21.2 percent, compared with an increase of 6.1 percent one year prior. Zale's gross margin was 46.4 percent in the fourth quarter of 2009, compared with 47.3 percent in 2008.
“Our financial results for fiscal 2009 reflected the most difficult year in retailing in memory," said Neal Goldberg, Zale's chief executive officer (CEO). "Nonetheless, we believe we have positioned the business for much improved performance. We have streamlined our cost structure and closed over 200 underperforming locations. We have reduced and realigned inventories and increased our proprietary products and collections. We have emphasized discipline in pricing and promotional strategies, and training for our fine jewelry consultants. We are encouraged that fiscal 2010 to date reflects improved business performance, with sales reflecting the exit of various specialty jewelry competitors, as well as a strengthening economy and our own internal efforts.”
Zale's Tough Fiscal 2009
In addition to store-closure expenses of $16.5 million, Zale's fiscal-year 2009 earnings were diminished by a $35 million impact associated with the depreciation of Canada's dollar and a decrease in the number of open stores, which were partially offset by a $10.6 million increase in revenues related to lifetime warranties. Zale recorded $70.8 million in adjustments during the fourth quarter alone. Net cash provided by operating activities as of July 31, 2009, was $2.7 million, down from $134.5 million one year prior. This cash decrease was primarily the result of operating losses generated during fiscal 2009. Zale had cash and cash equivalents of $25 million at the end of fiscal-year 2009 and approximately $136.1 million available under its revolving credit facilities. "We believe that we have sufficient capacity under our revolving credit facilities to meet our financing needs during fiscal 2010," the company noted in its filing.
Revenues for its fine jewelry stores fell 18 percent to $1.54 billion and the jeweler recorded an operating loss of $192.7 million. Kiosk sales fell 6.7 percent to $232.8 million, while Zale's recorded operating profits of $2.5 million. All other revenues came to $11.3 million, down from $12.4 million in fiscal 2008, and this category reported an operating profit of $5.7 million, up from $5.6 million one year earlier. There was an unallocated loss of $47.6 million related to store closures and impairments, leaving Zale with an operating loss of $232.1 million, compared with earnings of $7.1 million in fiscal 2008.
Fiscal-year sales at Zales and Gordon's stores fell 18.6 percent to $1.11 billion, representing approximately 63 percent of total revenues, with an average transaction value of $403 in fiscal year 2009. Internet sales for these brands, which were included in the store total, came to $56.2 million, compared with $55.7 million in fiscal 2008.
Zale's Outlet sales fell 12 percent to $168.5 million, with the average transaction value being $464. Sales at Peoples fell 20 percent to $256.7 million, while Piercing Pagoda sales fell 6.4 percent to $232.8 million. Insurance revenue dropped 8.9 percent to $11.3 million.
During fiscal-year 2009, Zale opened three Zales and Gordon's, six Zales Outlets and five Peoples and closed 153 Zales and Gordon's, nine Zales Outlets, one Peoples and 55 Piercing Pagodas. The total number of closures during fiscal 2009 totaled 218. With a net of 14 openings, Zale operated a total of 1,931 locations at the close of its fiscal year in July, which was down nearly 10 percent from one year earlier.
Zale held $71.5 million in consignment inventory at the close of its fiscal year, which was down from $114.3 million in July 2008. Zale reported assets of $1.23 billion, down from $1.42 billion in fiscal 2008.
Subsequent to Zale disclosing that it would restate certain financial statements for prior years, the Securities and Exchange Commission (SEC) office out of Fort Worth notified Zale that it had begun an investigation into its financials. Zale is cooperating with the investigation and notes that it "cannot predict the outcome or duration of the SEC investigation, but at this time, the company does not believe that the investigation will have a material effect on the company's financial condition or results of operations."
On September 17, Zale and its board of directors concluded that consolidated financial statements for prior fiscal years required restatement as a result of adjustments associated with advertising costs, intercompany accounts receivable, depository bank accounts, federal income taxes and personal property tax reserves. The cumulative impact of the adjustments totaled $35.4 million and $32.2 million after taxes as of July 31, 2008. Zale's 10-K spreadsheet restates figures for fiscal years 2008, 2007, 2006 and 2005.
Rapaport News reported that Zale's fiscal-year 2007 revenues were $2.44 billion on August 30 of that year; Zale restated its 2007 revenues as $2.15 billion and its profits were restated as comprising $57.5 million, down from $59.3 million. Rapaport News also reported revenue of $2.44 billion in fiscal 2006; Zale restated that year as reflecting a revenue of $2.15 billion and its net earnings were restated as $48.1 million, down from the $54.5 million we reported in August 2006. For fiscal-year 2005, we reported revenue of $2.4 billion and Zale restated it at $2 billion. Its net earnings for that fiscal year were nearly unchanged, but down slightly at $106.2 million.
In connection with the sale of the Bailey Banks & Biddle brand in November 2007 to Finlay Fine Jewelry, which has since gone into liquidation, Zale remains liable for the leases for the respective terms, which generally ranged from fiscal 2009 through fiscal 2017. The maximum potential liability for base rent payments under the leases totaled approximately $62 million at the close of fiscal-year 2009. But as of October 29, Zale had already finalized agreements or reached agreements in principle with the landlords to settle the contingent lease obligations for 38 of the 45 leases.
Zale is negotiating a final settlement for the remaining seven locations. Base rents for the remaining stores totaled approximately $28 million on July 31. Zale recorded a $23.2 million charge during the fourth quarter of fiscal 2009, which was associated with all 45 Bailey Banks & Biddle locations. The charge was based upon the preliminary agreements reached with the landlords and expectations of the future payments required to settle the contingent obligations for the remaining seven leases.
Fiscal 2010 Outlook
Zale reported that the current level of comparable store sales has decreased approximately 8 percent to date for the first quarter of fiscal 2010. In addition, unlike fiscal 2009, the company does not expect to recognize any U.S. tax benefits during fiscal 2010 to offset the tax expense expected with respect to earnings from its operations in Canada.
LH