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By
Reuters
Published
Aug 31, 2011
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Zale sales improve, results pressured by costs

By
Reuters
Published
Aug 31, 2011

August 31 - Zale Corp reported its third straight quarter of same-store sales gains as middle-class shoppers felt more comfortable this year about buying jewelry for Mother's Day and the bridal season.

Zale

The sales gains helped the jewelry retailer report a narrower operating loss, but higher diamond, gold and silver costs put pressure on the company's gross margin.

Zale shares were down nearly 8 percent at $4.38 on Wednesday morning.

Earlier this year, Zale said it would have little choice but to pass on a portion of those cost increases to customers, who are in the so-called middle jewelry market between discounters including Wal-Mart Stores Inc and high-end jewelers such as Tiffany & Co.

Zale's gross margin fell 1.4 percentage points to 51.3 percent.

Zale intends to keep gross margin above 50 percent, Chief Financial Officer Matt Appel said on a call with analysts. In the last year, costs rose 20 percent for diamonds, 35 percent for gold and 120 percent for silver, he said.

"It is critical that we are thoughtful about passing along price increases to our guests," Chief Executive Theo Killion said on the call.

In late 2009, Zale faced a serious liquidity crisis and canceled orders with vendors just before the holiday season, causing it to lose some shoppers to its most direct U.S. rival, Signet Jewelers Ltd's Kay Jewelers chain.

Zale has begun to recover. Sales at stores open at least a year, or same-store sales, rose 9.8 percent in the fiscal fourth quarter ended July 31. Excluding the impact of the strong Canadian dollar, the gain was 8.4 percent. In the year-earlier quarter, same-store sales declined.

The company, whose chains include Zales in the United States and Peoples Jewellers in Canada, said overall revenue rose 9.4 percent to $377.3 million. Zale derives one-sixth of its sales from Canada.

Its net loss widened to $32.6 million, or $1.02 per share, from $28.5 million, or 89 cents per share, a year earlier. The year-ago figure includes one-time gains such as a tax benefit.

Its operating loss narrowed to $24.1 million from $31.3 million.

While the results suggest Zale is winning back customers, it competes against profitable rivals that strengthened relations with vendors and were able to advertise during the recession.

Signet last week reported that quarterly same-store sales at Kay rose 13.5 percent and its U.S. gross margin rose 1.1 percentage points.

With its business and finances now on more solid footing, Zale has increased its advertising and landed deals with high-profile personalities.

On Tuesday, it said it would sell a line of diamond jewelry under entertainer Jessica Simpson's name. Earlier in August it signed a deal with designer Vera Wang for bridal jewelry, following a similar strategy of many retailers seeking to woo shoppers with exclusives.

The Simpson line will include about 65 items, with prices ranging from $79 to $1,000, while the Wang line will have prices between $650 and $17,000, Killion said on the call. Both collections will be launched in October.

(Reporting by Phil Wahba; Editing by Lisa Von Ahn, John Wallace and Matthew Lewis)

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