RAPAPORT, AUGUST 31, 2011: Jewelry Retail Sales Soar, Confidence Drops

RAPAPORT...

Zale released results today for its fiscal fourth quarter and fiscal year, and still reported a net loss for both periods. Nonetheless, sales improved and margins remained in check.

Matt Appel, Zale's chief financial officer, told investors during a conference call this morning that gross margin performance for the fourth quarter was largely achieved without the benefit of the bulk of price increases. ''While we began taking certain price increases early in the third quarter, the majority were implemented during the month of July.''

For the fiscal year through July 31, gross margin was 50.5% compared with 50.4% in fiscal year 2010. Higher margin performance was from warranty products and lower inventory valuation charges, resulting from the year-over-year improvement in inventory quality, and was offset by higher merchandise cost including an $11 million increase in LIFO inventory charges.

''Our expectation continues to be that we will selectively open stores where the opportunity is compelling and close stores that are underperforming if the economics makes sense,'' Appel said. ''In fiscal 2012, we currently plan to close approximately 20 fine jewelry stores and five kiosks.''

Zale's chief financial officer Theo Killion explained that the retailer's objectives were designed to build a path of profit by fixing the company's poor product assortment and returning diamonds to at least 80% of the product mix and by offering a price-value proposition that recognizes the economic pressure on consumers. Killion added that the brand's strategy continues to be centered upon creating a compelling message in support of Zale as the "diamond store" and by investing in staff, particularly in the field.

''As we look back on the year, I'm pleased to say that we've made improvements in each of these objectives,'' Killion said. ''We are currently at 80% core, and importantly, each of the wedding categories: bridal, anniversary bands, men's and solitaire's all delivered double-digit comp increases for the year. Additionally, all of our brands were comp positive led by Peoples and [Zale's] Outlet. As we made progress in rebuilding the core, we also began to look for strategic partnerships in order to develop proprietary brands.''

Signet Jewellers and Tiffany & Co. both reported stronger results and double-digit gains in profits during their second fiscal quarters, which closed July 30. In other news, The Conference Board released its August consumer sentiment survey and found that shoppers remain in a deep depression. Lack of jobs, in particular, and possibly the political games being played in Washington D.C. continue to weigh on the average U.S. consumer.

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