Zale Faces Shareholder Lawsuits, Announces Q4 Results

August 3, 2006

Zale Faces Shareholder Lawsuits, Announces Q4 Results

Zale Corporation is facing class-action lawsuits filed in the United States District Court for the Southern District of New York by eight different law firms on behalf of shareholders who purchased stock in the company between February 18, 2005 and May 5, 2006.

The lawsuits were filed against the corporation as well as against former president and CEO Mary L. Forte, former CFO Mark R. Lenz, former Senior Director of Investor Relations Cynthia T. Gordon, and former COO Sue E. Gove.

The suits claim that Zale violated Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 by issuing material representations to the market to artificially inflate the market price of Zale stock. The suit says those representations in the company's reported results overstated Zale's net cash flows and free operating cash flows, and that Zale improperly accounted for extended service agreements, leases and accrued payroll.

Some of the suits refer to April 10, 2006, when Zale announced that the SEC was conducting a non-public investigation into accounting for extended service agreements, leases and accrued payroll, among other issues. Shares of Zale's stock dropped 9.5%, to close that day at $25.16 per share, on heavy trading volume. Then, when the company announced on May 5 that it was placing its CFO on administrative leave for failing to disclose mishandled timing of vendor payments, the company's stock dropped an additional 1.8% and continued to fall the next day. Plaintiffs are seeking recovery of those financial losses in the lawsuits.

Meanwhile, Zale announced Thursday that its fourth quarter comparable store sales rose 3.5% and that total revenues increased 3.7% to $490 million. Revenues for the fiscal year increased 2.3% to $2.438 billion.

The company also announced it would record a pre-tax, largely non-cash charge of approximately $38 million to $40 million in the fourth quarter, or approximately $0.50 to $0.52 per share. The charge primarily consists of inventory markdowns, write-off of capital investments for an information technology initiative that the company isn't moving ahead with, and an asset impairment charge of approximately $4 million relating to certain test stores in the Gordon's and Zales brands as well as discontinued retail repair operations. Including the fourth quarter charge, the estimated loss per share is expected to be $0.48 to $0.52 compared to prior guidance of $0.00 to $0.02 earnings per diluted share.

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