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Zales Corporation (NYSE:ZLC)

F1Q09 (Qtr End 03/31/08) Earnings Call

November 25, 2008 9:00 pm ET

Executives

David Sternblitz - VP & Treasurer

Neal Goldberg - President & CEO

Rodney Carter - EVP, CAO & CFO

Analysts

Lorraine Maikis - Merrill Lynch

Adrienne Shapiro – Goldman Sachs

Bill Armstrong – CL King & Associates

Janet Kloppenburg - JJK Research

Brian Tunick – JP Morgan

Tim [Reeken] – Blue Harbor Group

Operator

I would like to welcome everyone to the Zales Corporation first quarter fiscal 2009 earnings conference call. (Operator Instructions) I'd now like to turn today’s call over to David Sternblitz, Vice President and Treasurer. Please go ahead sir.

David Sternblitz

Good morning and thank you for joining us for our first quarter 2009 conference call. I am David Sternblitz, Vice President and Treasurer of Zales Corporation. With me on the call today are Neal Goldberg, Chief Executive Officer; Rodney Carter, Executive Vice President, Chief Administrative and Chief Financial Officer; Theo Killion, President; Gil Hollander, Executive Vice President and Chief Sourcing and Supply Chain Officer and Cindy Gordon, Senior Vice President, Corporate Controller.

Before we begin, I'd like to review the Safe Harbor. Our commentary and responses to your questions on this conference call will contain forward-looking statements including statements relating to our future goals, plans and objectives.

These forward-looking statements are not guarantees of future performance and a variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in these forward-looking statements.

Information concerning some of the factors that could cause actual results to differ materially from those contained in the forward-looking statements is available in our Annual Report on Form 10K for the year ended July 31, 2008.

In addition we may present non-GAAP financial information on this call. For a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to today's earnings release which can be found on our corporate website www.zalecorp.com under Financial Information and then News Releases.

I would now like to turn the call over to Neal.

Neal Goldberg

Thank you very much David. Today I’d like to review our first quarter results, discuss progress we have made against our initiatives which resonate now more than ever given the environment and finally I would conclude with our plans to execute holiday.

For the quarter comp store sales were down 3.7%. Performance weakened as we moved through the quarter with October comps down over 9%. Q1 EPS adjusted for total margin sales was a loss of $1.33. While the trends in our U.S. mall stores were challenging, several of our businesses continued to do well including Piercing Pagoda, E-Commerce and Canada.

Though the national economic environment is challenging, we have continued to deliver strong performance on both store operations and cost control. The disciplines we began last year are more important than ever. Focusing on our value oriented customer with a price appropriate assortment, operational efficiency in our supply chain and stores and most importantly in this climate the financial rigor of aggressively managing our cash and cash expenditures positions us well for the current environment.

While we are disappointed that we have yet to realize the full contribution of these initiatives we are even more confident now these actions are right for today as well as tomorrow. Allow me to briefly review actions we have taken and their significance in the current environment.

To re-engage our core customer, our first actions were perhaps the most obvious; recognizing an improved customer experience through better merchandise presentation and selection was essential to our success in fiscal 2008 and beyond. The first step was our aggressive clearance program. We liquidated a total of $174 million in excess merchandise including $47 million in Q1. $100 million of this liquidation was a permanent reduction. This inventory decrease along with a 40% SKU reduction allows us to make a clear statement in our cases, establishing the product as the hero.

To improve the customer experience we re-designed our case elements, adding color to capture the look and feel of the season and reduced in-store signage to streamline and focus our message. Additionally, the success of the clearance strategy not only helped clear the cases of clutter in order to highlight the good, better, best differentiation, but allowed us to reposition the assortment by injecting fresh, distinctive merchandising. On average over 30% of the store assortment will be new, significantly higher than prior years.

Of the 2000 new items the bulk of the investment is in our core diamond business including the national launch of our celebration diamond. There were additional investments in diamond fashion categories and in a narrower assortment of fresh fashion product including exclusives such as Hello Kitty. The results of the new products are encouraging in terms of sales, gross margin and inventory turns. While it is still early we are excited about the initial response especially since the average ticket primarily influenced by our celebration diamonds is approximately 50% higher or over $600. We believe the new investment differentiates us against the competition and better positions us with the value customer.

Our pace setter program of 135 stores helped us to channel our focus. Using the pay setters as laboratories for the rest of the chain we can continue to refine the customer experience. The pay setter program has been fully operational since the month of October and has out performed the rest of the fleet by approximately 6 percentage points. Importantly, the average gross margin contribution is nearly 200 basis points better than the comparable non-pay setter group. Average ticket for the pay setter was strong, showing early signs of the impact of our new inventory investment.

We believe the actions we took to improve the customer experience highlights our differentiation and make it easier for our customers to shop our stores. There will be a customer out there shopping this holiday. The research continues to show that the majority of women would prefer jewelry as the one special gift. We want our fair share of the market, whatever that may be.

Our second key objective is to enhance our operational effectiveness. The elimination of branch silos and numerous redundancies have resulted in a more nimble, quick and agile company. We have reduced our vendor base by 2/3 and will continue to partner with vendors who are focused on best quality, best cost and best delivery.

Additionally, we have spoken about the company’s need to be more planful. To that end, the company has improved communication to and from our stores, integrated calendar involving merchandising, source and marketing that adds process to the entire produce life cycle from concept to store delivery. This has resulted in more timely orders, better quality and improved pricing.

Additionally, we have improved merchandise flow and replenishment as well as improved field coordination and logistics. We are aggressively looking for efficiencies in the business in order to ensure a stronger, leaner organization focused on our core customer. Looking ahead we have a laser-like focus on executing for the holidays. In this environment every customer interaction is critical. We have a seasoned, outstanding store organization and I feel confident in our preparation for this crucial selling season.

We have reduced and diversified our marketing spend while simultaneously coming through to our core customer. We will emphasize the great value and great quality we have been offering to our customers since 1924 as the most trusted name in diamonds. Our message will communicate this trust and that we have returned back to our roots and we offer a compelling assortment at tremendous value and quality.

Our third key objective we have been speaking about is maintaining financial rigor and discipline. We have a strong financial position. We liquidated $174 million in excess inventory. We believe there are significant opportunities to go beyond the $100 million permanent reduction already achieved and we are aggressively pursuing this reduction. We have identified an additional $10 million in expense savings bringing the total program to $75 million plus and we will be relentless in looking for additional opportunities. While we have previously announced almost 50% reduction in capital expenditures for fiscal 2009 to $45 million we now intend to reduce capEx by approximately another $15 million. We will keep these tight control on expenses and inventory levels while continuing to maximize free cash flow and enhance our liquidity position.

Most importantly we are well positioned to generate cash flow even in difficult market conditions. With current sales trends we remain confident that we will still generate not less than $50 million in free cash flow for fiscal year 2009. Our strong liquidity and balance sheet allow us not only to navigate the current environment but to preserve the financial flexibility to take advantage of strategic opportunities in gaining market share.

As we stated in our press release today the weak trends in October have continued into November. We recognize that this holiday season will be one of the most challenging in decades. We have taken prudent steps to plan the business accordingly. What will not change is the extreme focus on our key objectives of re-engaging our core customer, enhancing operational effectiveness and maintaining financial rigor and discipline. Through the execution of these initiatives we have brought newness, clarity and excitement to the customer experience. This combined with our financial strength will enable us to emerge from the current environment in an even stronger competitive position.

Now I’d like to ask Rodney to review the first quarter performance and provide further financial details. Rodney?

Rodney Carter

Thanks Dale and good morning everyone. My comments will relate primarily to the financial results of the first quarter and then our financial positioning going forward.

Comp stores sales decreased 3.7%. Total revenues for the first quarter were $364 million compared to $377 million for the prior year, a decrease of 3.5%. The average transaction increased approximately 2% compared to last year. The reported revenue reflects $1.9 million increase in the recognized warranty revenues. These increases should continue as product accounting normalizes over the next 3-4 years and revenues recognized more closely reflect actual warranty sales.

Total sales of warranty products were $21 million in the first quarter 2009 compared to $24 million in 2008. The attachment rate was slightly down at 55% compared to 58%.

The net change in unrecognized revenues was $5.4 million compared to $14 million last year. This includes a $3.8 million reduction to prior year’s unrecognized Canadian revenues reflected at a lower exchange rate. The net change in unrecognized revenues represents both the incremental cash and the positive impact from future earnings. Gross margin for the quarter was 48.5% of sales versus 52.5% last year, a reduction of 400 basis points.

This decrease reflects the continuation of our clearance strategy through September. During the quarter we liquidated $47 million in excess inventory. We believe the success of our clearance strategy has better prepared us to maintain appropriate liquidity, enabled us to make a cleaner statement in our cases and allowed us to reposition the assortment by injecting a significant amount of newness.

Merchandise inventory on October 21, 2008 was $985 million versus $1 billion last year due to holiday merchandise receipts we brought in earlier this year. We are focused on maintaining $100 million reduction we achieved at the end of fiscal 2008 and are committed to further significant permanent reductions.

A more normalized comparison is anticipated at the end of the second quarter. Inventory turnover on a rolling 12-month basis was higher at 1.22 times this year versus 1.12 times last year.

SG&A was approximately $219 million for the first quarter of 2009, essentially flat compared to the prior year. As a percent of sales SG&A was 60.2% for the first quarter versus 58.2% last year primarily due to the de-leverage resulting from decline in total revenue.

SG&A included savings of approximately $5.5 million related to the expense reduction initiative announced in February 2008. This brings the to-date savings recognized to $16 million of the identified $65 million plus.

Operating loss for the quarter was $59.3 million compared to $37.5 million last year. The effective tax rate in the quarter was 27.7% versus 36.9% last year. The decrease is due primarily to a higher portion of consolidated earnings being generated in Canada where we have a lower tax rate.

The net loss for the quarter from continuing operations was $45.3 million or $1.43 per share compared to $26.7 million or $0.54 per share last year. The net loss from continuing operations as adjusted for total warranty sales was $1.33 compared to $0.36 for the last year.

The net loss per share this year was negatively impacted compared to prior year by approximately $0.18 due to the tax rate and $0.44 as a result of reduced share count from the stock repurchase program. Both items should have a favorable impact on the year.

We ended the quarter with 1,399 stores and 731 kiosks. We opened six stores. We retrofit approximately 135 stores with LED lighting and other physical improvements. These were done primarily as a result of our previously discussed pace setter initiative.

We closed three stores and eight kiosks. These locations did not provide an opportunity for longer term attractive return on capital. Our ongoing acute focus on financial rigor to enhance liquidity and optimize cash flow is even more critical given the current economic volatility. We have and will continue to manage our expenses, inventory and capital very aggressively. We will aggressively identify areas for operational efficiency and capitalize on the financial disciplines we have put in place.

In February 2008 we announced our operational efficiency program and the plan to generate $65 million plus in annual savings. We have since identified an additional $10 million in expense savings and now plan to generate $75 million plus in annualized savings. We will continue to be aggressive, driving costs out of the business and ensuring a stronger, leader organization.

Inventory control is critical to optimizing liquidity and flexibility. Our inventory liquidation strategy put in place in February 2008 eliminated $174 million in excess inventory. $100 million of which is permanent. This allowed the investment in new items to which customers are responding. We will continue to focus on significantly reducing inventory levels through the balance of fiscal 2009 with a determination to be below prior year levels and thus improve inventory turns.

We initially reduced capital spending in fiscal 2009 by $40 million to $45 million compared to fiscal 2008. We have further reduced fiscal 2009 capital spending by almost $15 million. We will continue to take a very proactive approach to evaluating our entire real estate portfolio and address the under performers regardless of economic environment. We will address individual stores and kiosks on a lease by lease basis.

Over the long term this will raise the performance of the entire portfolio as we close the under performing stores that do not provide an opportunity to generate an attractive return. Our ongoing focus on financial discipline and liquidity encompasses investment opportunities whether capital or operating as well as liabilities whether direct or contingent.

Last year we sold our Bailey Banks & Biddle brand but remained as a contingent obligor on certain leases as is traditional with lease assignments. Our SEC disclosure of this liability is the undiscounted sum of all remaining lease payments and as importantly does not assume any negotiation or mitigation. As with all liabilities we monitor our potential exposure regarding these leases and have the financial flexibility to meet any potential liability should the need arise.

On another topic there has been some inaccurate speculation reported regarding the closing of Piercing Pagoda. We are not shuttering the brand and actually Pagoda has been one of our strongest performers. At October 31, we had borrowings of $369 million under our line of credit, approximately $71 million higher than the prior year primarily due to the acceleration of inventory receipts. We had $39 million in cash at quarter end compared to $31 million last year.

Regarding our revolver, our credit facility is well structured. We renegotiated and extended the facility in advance of the downturn. The result is favorably structured and has maturity in fiscal 2012. This facility essentially has no financial covenants as long as we have inventory as collateral to support the line. Our bank partners are among the leaders in the industry with the facilities led by Bank of America, JP Morgan and Wells Fargo. We have the liquidity to weather the current economic environment both during the holiday and beyond.

In summary, we are committed to continued financial rigor and discipline. Inclusive of the initial reductions identified in areas of inventory management, expense management and capital. This commitment combined with our financial strength and flexibility will position us to take market share in the near term and bring broad shareholder value in the long-term.

As stated in the press release in view of the uncertainties surrounding the national economy and consumer spending the company does not believe its previously issued earnings guidance for 2009 should be relied upon. Sales trends since mid-October show declines in the mid-teens. While we are focused one executing and capturing market share over the holiday period we are also comfortable even in an economic environment that would result in comparable store sales declines in the mid teens we can still generate free cash flow of $50 million for the year ending July 31, 2009.

This free cash flow is generated primarily by operating cash flow, reduced inventory levels, reduced capEx and working capital reductions.

I will now open the call to questions.

Question-And-Answer Session

Operator

(Operator Instructions) The first question comes from Lorraine Maikis - Merrill Lynch.

Lorraine Maikis - Merrill Lynch

You have been talking about this SG&A reduction plan for a while and SG&A dollars this quarter were flat despite the decline in sales so can you just talk about what the increase in SG&A dollars was that was partially offset by the cost reduction plan and what we should expect for the rest of the year?

Neal Goldberg

SG&A initiative we had talked about last year was described in the form of a run rate reduction. We had normal escalation in terms of rent inflationary increases and store payroll increases. This is really driven by a variety of overall savings. The restructuring we had previously announced in terms of the alignment of brands, both field management and support center management, marketing, administrative, SG&A costs, inventory, interest expense savings from the programs that we had initiated in terms of inventory reductions. So there is continued refinement in a variety of categories throughout the business that are a driving force there.

Rodney Carter

We also said we planned originally $65 million plus. We have now taken that up to $75 million plus and as importantly we are still aggressively looking at different things we can do to make our company run much more efficiently, nimble and quick and help us get even additional expense saves.

Neal Goldberg

To kind of give you some magnitude as the expense savings to date will be more than doubled at the end of Q2 as this program builds momentum.

Lorraine Maikis - Merrill Lynch

Can you just talk about priorities for cash flow going forward? Are you expecting to start paying down debt or will you continue the share repurchase?

Neal Goldberg

I think we will continue to pay down debt.

Operator

The next question comes from Adrienne Shapiro – Goldman Sachs,

Adrienne Shapiro – Goldman Sachs

Following up on the cost savings comment could perhaps Rodney or Neal share with us where the incremental $10 million of cost savings are coming from?

Rodney Carter

I think it is a refinement of each category whether it is some things to refine in distribution costs, whether it is some efficiency in some of the operating expense here as well as continued refinement in process and organizational structure. It is a variety of bits and pieces from a lot of things.

Neal Goldberg

Part of what we have been doing as we talked about the operational efficiency we put in the business is we come down to this busy holiday season we are starting to see opportunities to have greater expense saves based on running the business more efficiently whether it is adjustments to holiday bill based on the business trend, whether it is how logistically we are running the business or on the pipeline. We are confident there is additional save there just being more efficient and with laser like focus the entire team has of eking out everything we can to run the business successfully not only in this holiday season but it is important to lay the foundation for the future.

Adrienne Shapiro – Goldman Sachs

Turning to the inventory, you talked about the $174 million in inventory liquidation. Are we complete with the liquidation? Where are we in that process? You had talked about further permanent reductions of the $100 million. Perhaps you can give us a sense how much higher you would expect that to go to?

Neal Goldberg

First of all clearly with the current economic conditions we are going to make sure we move our inventory as efficiently as possible. We also are saying that we run a fleet of stores and we think there are major opportunities to reduce our permanent inventory by laser like focus on our assortment by store, making sure with the turn as slow as ours we know we have the opportunity to make major impact on that turn. We would like to make sure the goods that are in our smallest stores reflect what that consumer wants. A small store may do high ticket items but just has low traffic and still makes a significant contribution. Conversely, stores that are high volume stores we want to make sure we can push the goods out to them quickly but they don’t own them. Part of the work we have done is working on our supply chain to get efficiency from our vendors to our DC to the store so we don’t have to own as much. So we figure significant opportunity to reduce our permanent inventory and we will continue to talk about and refine what that number is. We do think it is significant.

On the total clearance we are going to be reactive to what we see in trends in the business. We want to make sure we keep our focus on cash flow and make sure we keep our inventory to a level that will be right based on the macro economics.

Adrienne Shapiro – Goldman Sachs

Again, is that liquidation mode behind us? How much of that is permanent and how much is seasonal versus cyclical mark down we are seeing in this environment?

Neal Goldberg

I’d say that the liquidation mode right now is behind us. That said depending on how the macro economics go we will make adjustments but we are going to keep on being reflective of what our customer is telling us and what is going on in the market place but right now we are not in clearance mode at all. Right now we think we have great assortment. We think our newness really differentiates ourselves a lot and we got [inaudible] from a promotional stance to bring customers in the store so we are confident with what we see. That said we also live in the same world as everyone else and we have to be reactive to what is necessary in running our business.

Adrienne Shapiro – Goldman Sachs

Lastly on the cash flow it seems like a big swing from the $150 to $50 million if current trends continue especially in light of your cutting capEx by $15 million and an additional $10 million in cost savings. Rodney maybe walk us through that pretty big delta in cash flow?

Rodney Carter

I think the two biggest changes are the slow down in sales volumes relative to what we expected and that put pressure on margins as well. Those are the two biggest drivers when you swing from very positive comps to negative comps.

Adrienne Shapiro – Goldman Sachs

So a negative mid teen’s continuation is sort of where you get those $50 million in cash?

Rodney Carter

Correct.

Neal Goldberg

Our assortment we think because of the work we have been doing over the last 12 months of getting fresh inventory to make sure we have the newness gives us the ability if the customer chooses if she is going to come we can address that and our comps will be a lot better. That said, we are running the business and battening down the hatches to make sure we are running this business as efficiently as possible to weather us through this storm and position us extremely well for the future.

Adrienne Shapiro – Goldman Sachs

Lastly, we are seeing a lot of going out of business, the Whitehall liquidation. Could you perhaps part out store performance where they are going up against those types of store closures?

Rodney Carter

There is not a meaningful change in that either positive or negative. I think there is market share to be gained over time and we look forward to that. I think there is a promotional aspect they add but I think again on a lot of the key products would you wish to buy an engagement or wedding ring and then not be able to take it back and say I got this for you dear and I hope you like it because we can’t take it back?

Operator

The next question comes from Bill Armstrong – CL King & Associates.

Bill Armstrong – CL King & Associates

The reduction in capEx budget, is that coming from fewer new stores or other projects?

Rodney Carter

Some fewer new stores and some delays on some other projects. Just a refinement and tightening down of that spend.

Bill Armstrong – CL King & Associates

Just to update, how many new stores and new kiosks should we be modeling for this year?

Rodney Carter

There will be no new kiosks this year and there will be about half a dozen new stores.

Bill Armstrong – CL King & Associates

Getting back to SG&A, maybe looking at it from a different angle. Your SG&A for the last three years has run around $970 million. It was flat year-over-year in the first quarter. You have a $75 million reduction you have identified. Should we be looking at something in the neighborhood of $900 million in total SG&A this year or is that being offset by increases elsewhere?

Rodney Carter

I think that there are a number of increases elsewhere. We had, if you recall, a big flux of store renewals about 10 years ago or new stores. So we have those lapping with some of the rent renewals. Obviously some of those renewals are not coming in as much as one would have expected prior to the economic downturn so a lot of it is some of the inflation in some of the bigger categories but I think it will be lower than the prior year level. It will not be all the way down to the $900 million level.

Bill Armstrong – CL King & Associates

So we should see a dollar reduction though going forward of something anyway?

Rodney Carter

Yes and also remember part of the savings program we had announced some of it is in interest expense and some in gross margin as well.

Bill Armstrong – CL King & Associates

You mentioned lease renewals. We are hearing from other retailers, at least ones that are well positioned, they are getting some meaningful rent reductions from landlords who are just very eager to keep good solid tenants in place. Are you seeing that also?

Rodney Carter

Our rents are certainly reflecting the competitiveness and nature of the environment so yes. A lot of those savings will be realized in future deals because renewals are done in advance. We are definitely seeing as the year has rolled out a different stance with negotiations with our landlords and we have the ability because there aren’t as many people who are going to take corner locations so we have the ability of when we re-negotiate to be much more aggressive and our expectation is leases should be going down significantly.

Operator

The next question comes from Janet Kloppenburg - JJK Research.

Janet Kloppenburg - JJK Research

I was just wondering Neal in light of what is going on and how challenging the environment is if you are making any changes in your pricing strategy or marketing strategy for the holiday season? If you could talk a little bit about consumer preferences right now. Are they skewing to lower price points or skewing to a higher quality product that is discounted? If you could just detail that for us a bit, thanks.

Neal Goldberg

Sure. As I said in my prepared comments, one of the things we are seeing which we are very pleased with is the consumer is clearly voting for newness. She is voting for our differentiation in our assortment. Within that newness we are actually seeing a higher ticket. We talked about over $600 as well as higher gross margin. That said we have said all along we will be promotional at the times that are promotional periods of the calendar year. We are very confident that through our holiday black Friday period and on we will be as aggressive as necessary to make sure the customer’s are coming into the malls, see what we have and will vote with their wallets. We really think by doing the work we have done, by making a much more compelling offer, by offering newness and really highlighting we are the value player in diamonds we will get our fair share of that. It is very interesting. We as a management team were in stores yesterday morning as we are every Monday morning through the holiday season to make sure we see what we are doing as well as what other people in the mall are doing and we feel very confident that whatever we have set up will get us that fair share whatever it means.

Operator

The next question comes from Brian Tunick – JP Morgan.

Brian Tunick – JP Morgan

Our question is around gross margin. Can we see gross margin up with mid teen comp declines?

Neal Goldberg

I think you can see them flattish. It is very difficult to predict what that blend will be between comps and margin. I think there will be some promotional pressure.

Rodney Carter

Why what we have been doing what we have over the last year we feel we have set up for the future based on a much more streamlined supply chain based on more differentiated assortments and putting a lot more process into the business. As the business turns we believe in a favorable way we will be able to really enjoy gross margin improvement in a really significant way. Clearly this is the holiday season and we will manage the business appropriately to make sure we are able to move our inventory to maintain our financial strength and cash flow.

Brian Tunick – JP Morgan

Can you also comment on the recent price declines we have seen in both diamond prices and metal prices?

Gil Hollander

With demand decreasing it is reasonable to [inaudible] further declines especially in the diamond market as we move into the back end of the year. Obviously we will be very cautious with our inventory purchases given the current uncertainty. We will take advantage of all opportunities to lower cost without sacrificing our quality.

Brian Tunick – JP Morgan

If the Canadian dollar stays around current levels versus the U.S. dollar what do you expect for warrant sales for fiscal 2009?

Rodney Carter

Warranty sales will still be up; the attachment rate is so compelling there. Part of the thing on warranty sales to keep in mind is there is a balance sheet aspect as well as a P&L aspect right now. We are seeing the Canadian exchange rate at a 16-18% discount to prior years. So that is offset by the exchange rate.

Neal Goldberg

One of the things with the warranty program both in the U.S. and Canada, though we have seen a rapid drop off the attachment rate is still very high and we are pleased with that and we think that is again kind of a good sign that shows when the consumer is spending she is willing to spend. Our fine jewelry consultants in the field are making sure they are selling their warranty attachment which is a big part of our financial picture.

Operator

The next question comes from Tim [Reeken] – Blue Harbor Group.

Tim [Reeken] – Blue Harbor Group

Could I just get you to clarify something on the inventory? I’m having trouble following the clearance timing. July 31 this year what do you expect your inventories to be year-over-year?

Rodney Carter

They will be down.

Tim [Reeken] – Blue Harbor Group

To what magnitude?

Rodney Carter

They will be down somewhere in the $50-100 million range.

Neal Goldberg

We actually see the inventories being down at the end of the year at least $100 million.

Tim [Reeken] – Blue Harbor Group

That is included in the free cash flow guidance?

Rodney Carter

Yes.

Neal Goldberg

Remember the $100 million of savings we talked about was already realized by the end of the fiscal year last year.

Tim [Reeken] – Blue Harbor Group

I’m asking July 31, 2008 to July 31, 2009 what was the inventory number.

Rodney Carter

They will still be down somewhere in the $50-100 million range. Again, a big chunk of that was fiscal 2008 was down dramatically from prior year.

Operator

At this time there are no further questions. Gentlemen are there any closing remarks?

Neal Goldberg

We wish everyone a happy and healthy Thanksgiving. We want to thank all of our associates throughout the country and throughout the world. Have a great holiday season.

Operator

Thank you for participating in today’s Zales Corporation conference call. This call will be available for replay beginning at 12 p.m. ET today through 11:59 p.m. ET on December 2, 2008. The conference ID number is 74830502. The number to dial for the replay is *706) 645-9291. Thank you. You may now disconnect.

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