Zale Fiscal Year Comp Sales Up 3.9%; Upscale Division Gets Kudos

September 1, 2004

Zale Fiscal Year Comp Sales Up 3.9%; Upscale Division Gets Kudos

Zale Corp., North America's largest specialty retailer of fine jewelry, reports net earnings for fiscal year 2004, which ended July 31, are $106.5 million. For the prior fiscal year, net earnings, before unusual items, were $99.4 million. For fiscal 2004, total revenues increased 4.2% to $2.304 billion, compared to $2.212 billion for the prior fiscal year. On a comparable store basis, sales increased 3.9% for the year.

"We are very pleased with these financial results," says Mary L. Forté, Zale president and CEO. "Earnings per share rose 30% for the year while operating margins improved by 30 basis points. For the third consecutive year we generated in excess of $100 million in free operating cash flow as we generated $117 million in 2004 after capital expenditures. We continue to maintain a healthy balance sheet that provides substantial flexibility to pursue opportunities to extend our market leadership.

The company also provided its forecast for its fiscal year ending July 2005. For the full year, it expects revenue growth of 5%-7%, which includes a comparable store sales increase of 2%-3%. Zale plans to open 85 stores and 50 kiosks during the year. Operating margins are anticipated to increase 40 basis points with earnings per share growing12%-14% for the year. Free operating cash flow is again expected to reach $100 million for fiscal 2005.

In other Zale news, Womens Wear Daily reports that Zale's upscale division, Bailey Banks & Biddle, is transforming its image from simply a bridal jeweler to one which carries a greater range of fashion styles in colored gems, plus expanded home and gift areas. Citing its newly opened branch in the Houston Galleria, WWD says the store features softer, more residential decor, a seating area with cushioned armchairs and a coffee table that displays semiprecious jewelry and Daum crystal ornaments under its glass top.

"We want to take Bailey's, with its 172-year history of great service, quality and value, and update it and present it to the target customer, who is 35 to 45 years old," explains Charles Fieramosca, president of BB&B. "She has changed over the years, and we need to tell her that we are the store for her."

BB&B's 109 stores span 31 states and Puerto Rico, mostly located in malls in the mid-Atlantic and Southeast and on the West Coast, plus Texas.

When Fieramosca joined BB&B in April 2001, the chain's only designer jewelry was a smattering of David Yurman. Fieramosca's first move was to bring in color with Laura Gibson's faceted semiprecious beaded styles. Instantly successful, it was rolled out dramatically to all stores. Today, leading designer resources include Yurman and Gibson as well as John Hardy and Roberto Coin. "As important as bridal is to us, so is fashion, because today's modern woman has a need for day-into-evening jewelry," Fieramosca notes. "It's refreshing because it is luxury elegance. What we try to do is develop our product mix carefully so we donšt have duplication. Wešre careful about who we partner with and how we allocate our space so we can make this co-branding statement the right way."

"Bailey's sales have improved this year, and it's been one of the best-performing divisions at Zale's," observes William Armstrong, senior analyst with C.L King & Associates, a brokerage firm in Albany, NY. "They have more differentiated product in the stores and have benefited from the overall trend that seems to be favoring luxury."

With its neutral palette of cherry wood, fawn suede and brushed nickel, the Houston Galleria store is what Fieramosca deems a "10th-generation" leap over a smaller 3,000-sq.-ft. prototype unveiled last year at Las Vegas' Fashion Show Mall. "The Houston store has state-of-the-art fiber optics lighting, lower-profile display cases and a softer palette so it would be all about the jewelry," says Fieramosca. "What we're trying to create here is a very high-touch environment." He's considering opening a similar unit next spring at King of Prussia Mall outside Philadelphia, the city where BB&B originated in 1832 as Bailey & Kitchen.

BB&B stores average 4,000 square feet and roughly $3 million in annual sales, he says. Houston got the first big unit because its one of BB&B's best markets, with a total of five stores. "Where we have the opportunity to take a larger space in an established trading area that has the potential to justify it, then we certainly will do it," says Fieramosca.

Sign me up for