Zale Reports Fiscal Year Numbers

August 30, 2005

Zale Reports Fiscal Year Numbers

Zale Corp. reported net earnings for fiscal year ended July 31, 2005, of $106.8 million. For the prior fiscal year, net earnings were $106.5 million. For the fiscal year, total revenues increased 3.4% to $2.383 billion, compared to $2.304 billion for the prior fiscal year. On a comparable store basis, sales increased 0.3% for the year.

"During the year we made progress in the execution of our business plan, although the year proved challenging with the repositioning of the Zales brand," said Mary L. Forté, president and CEO. "We achieved our square footage growth objectives with the opening of 61 stores, 50 kiosks and 71 carts during the year. Our supply chain improvements continued with direct product sourcing positively impacting our business as it is implemented throughout the organization. From a financial perspective, we generated $89 million in free operating cash flow after capital expenditures. The balance sheet was further strengthened by the reduction of $68 million in long-term debt, creating substantial flexibility as we move forward.

"The increases to sales and earnings in fiscal 2005 did not meet our expectations, particularly due to the underperformance of the Zales brand and its impact on our consolidated results. With many new initiatives being implemented at Zales, significant repositioning of the brand has taken place. We remain committed to our goals of expanding market share through our differentiated portfolio of brands, improving all aspects of our supply chain and enhancing the customer experience," said Forté.

Zale announced as part of its strategy to improve brand performance and profitability at Bailey Banks & Biddle, it will be closing 30 to 35 stores that do not fit with its long-term positioning in the luxury goods market after the upcoming holiday season. This action will permit the company to focus capital, inventory and resources on the most productive stores and will strengthen the Bailey Banks & Biddle brand, Zale said in a press release.

Zale also provided its forecast for its fiscal year ending July 31, 2006. For the full year, it currently expects revenue growth of 5%-7%. Zale says these revenue expectations do not reflect the impact of the Bailey Banks & Biddle store closings, as the timing of the planned closings has not been finalized. Included in the revenue projections are a comparable store sales increase of 2.5% to 3.5% and square footage and other growth of 2.5%-3.5%. The company plans to open 65 stores and 40 kiosks during the year. Earnings per diluted share is expected to grow 5%-7% including the impact of the $13 million charge for the Bailey Banks & Biddle store closings, an estimated $5 million stock compensation expense outlined above, each net of tax, and a potential income tax benefit of up to $10 million based on the estimated range of earnings from its Canadian subsidiary being considered for repatriation under the American Jobs Creation Act. Excluding the Bailey Banks & Biddle store closings, stock compensation expense and the tax repatriation credit, Zale anticipates earnings per diluted share to increase 12%-14%. Free operating cash flow is expected to reach $100 million for fiscal year 2006.

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