Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Roxane Barry - Director of Investor Relations

Theophlius Killion - Chief Executive Officer and Director

Thomas A. Haubenstricker - Chief Financial Officer and Senior Vice President

Matthew W. Appel - Chief Administrative Officer

Analysts

Jeffrey S. Stein - Northcoast Research

David Wu - Telsey Advisory Group LLC

Oliver Chen - Citigroup Inc, Research Division

William R. Armstrong - CL King & Associates, Inc., Research Division

Janet Kloppenburg

Steven J. Kernkraut - Berman Capital Management LP

Zale (ZLC) Q2 2013 Earnings Call February 21, 2013 9:00 AM ET

Operator

Good morning. My name is Monserat, and I will be your conference operator today. I would like to welcome everyone to the Zale Corporation's Second Quarter Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Roxane Barry, Director of Investor Relations. Ma'am, the floor is yours.

Roxane Barry

Good morning, and thank you for joining us. Participating in today's call will be Theo Killion, Chief Executive Officer; Matt Appel, Chief Administrative Officer; and Tom Haubenstricker, Chief Financial Officer. We have posted a slide presentation for today's call on the Investor Relations homepage on our website at zalecorp.com. Before we begin, I'll read our Safe Harbor statement.

Our commentary and responses to your questions on this conference call will contain forward-looking statements, including statements relating to our sales, margins, commodity costs and other expenses, operating and net earnings, and other 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. Additional information concerning other factors that could cause actual results to differ materially from those contained in the forward-looking statements is available in our quarterly report on Form 10-Q for the fiscal quarter ended October 31, 2012.

Also, please note that during this conference call, we may discuss certain non-GAAP financial measures as we review the company's performance. One of these non-GAAP measures is EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization. A second non-GAAP measure is adjusted EBITDA, which excludes charges related to store closures. We use these measurements as part of our evaluation of the performance of the company. In addition, we believe these measures provide useful information to investors. Please refer to the Appendix within the Investor Relations presentation for a reconciliation of these non-GAAP measures to the most comparable GAAP financial measures. I'll now turn the call over to Theo.

Theophlius Killion

Thank you, Roxane, and good morning to those of you joining us on the call today as we report our second quarter fiscal 2013 results. If you're following along on the slides that we posted on our website, please direct your attention to Slide 3.

The second quarter marks the ninth straight quarter of positive comps. For the quarter, comparable store sales were up 2.8% and up 8.8% on a 2-year basis. As you will recall from our holiday sales release, we reported a 2.3% comp for November and December. The 50 basis point improvement reflects strong performance during the month of January.

As we continue to focus on both top line and bottom line improvement, we're pleased to report that we achieved an operating margin of 7.8%, a 110 basis point improvement from the prior year quarter. Net earnings for the quarter were $1.02 per diluted share, an increase of $0.25 or 32%.

Our financial results for the second quarter were anchored by the strong performance of our exclusive, branded collections. The combination of great products, supported by compelling marketing and reinforced with technical and product training for our jewelry consultants, worked very well for us. In addition to the 20,000 hours of product training that we invested in, in our relaunch of the Celebration Diamond collection last fall, we also conducted training on Vera Wang, Persona and on our Watch brands.

We've already finalized our educational agenda for our selling teams for the remainder of calendar year 2013, and we will continue to focus on product training that supports our key merchandising initiatives and technical training like Diamond Council of America. We're committed to creating a guest experience, which is highlighted by positive interactions with knowledgeable jewelry consultants who build lifetime relationships.

Now I'll turn to Slide 4, where I'll talk about some of our best-performing merchandise categories over the holiday season. Exclusive, branded product now represents approximately 10% of our Fine Jewelry merchandise mix. And as we continue to expand our current collections and introduce new ones, we believe this area of the business could grow to as much as 25% of the total assortment.

In terms of specific collections, Vera Wang LOVE continues to perform extremely well. We've added 16 new bridal styles, and we're continuously testing items to keep the collection fresh and exciting. Men's wedding bands, solitaires, pendants and earrings are currently showing encouraging results, and we'll have even more new product in test in time for Mother's Day.

In addition to growing the assortment since it was introduced in 500 stores last year, we've added another 180 stores since then. By Mother's Day, the Vera Wang LOVE collection will be represented in 745 stores in each of our Fine Jewelry brands.

As I mentioned on our last call, we relaunched our successful Celebration Diamond collection by developing a good, better, best offering. The Celebration Grand, the entry point to the collection, is our good diamond, an ideal cut that has 8 hearts and arrows, and they shine bigger and bolder. Celebration 100 in Canada and 102 in the U.S. is our better collection with 100 and 102 referring to the number of facets on each stone. This particular cut, which has almost twice the facets of a typical diamond, was introduced to our stores over 4 years ago.

The Celebration Fire sits at the top of the collection as the best in our good, better, best offering. With 71 facets and a perfect symmetry that reveals 10 hearts and arrows, the Celebration Diamond -- the Celebration Fire is the most brilliant diamond in the world based on independent laboratory testing. We're very pleased with the performance of the Celebration Collection, and we have new product and expansions planned for all 3 sub-brands.

Our Persona bead collection, which is now in 950 stores, continues to perform well, particularly during the peak selling periods of Christmas and Valentine's Day.

Now I'll turn to Slide 5, where I'll talk more about our holiday marketing campaign. Our marketing efforts were centered on 3 important objectives: Continue to build affinity to the Diamond Store, create compelling narratives that support and elevate our brands with an efficient and effective marketing spend, and leverage the power of social media to engage our guests whenever and wherever they'd like.

By using an integrated approach with blended media, we believe that we give our guests 24/7 access to our products on their terms. The Celebration Diamond commercial that we posted on the Zale's YouTube channel has been viewed by just under 1 million people who elected to learn the celebration story in a presentation that lasted for over 4 minutes.

Engaging in conversation with our guest, using emerging media like Youtube, Facebook, Pinterest, Instagram and Twitter, while also using more traditional media like television, magazines and newspapers, allows us to tell compelling stories about our collections in order to engage our guests.

I'll now ask Tom to go through the financials in more detail.

Thomas A. Haubenstricker

Thank you, Theo, and good morning, everyone. I'll be starting my comments on Slide 6, with an overview of our second quarter financial performance, beginning with our top line. Revenues for the second quarter were $671 million, an increase of $7 million or 1.1% compared to $664 million for the same period in the prior year. The increase in revenues is primarily due to the 2.8% same-store sales growth that Theo already mentioned. That increase was partially offset by revenues associated with the net decrease of 48 fine jewelry stores and 16 kiosks compared to last year.

Our 2.8% same-store comp this quarter represents the ninth straight quarter of positive comps and comes on top of a 5.8% comp in the prior year second quarter. I should also note, this quarter represents the third consecutive second quarter in which we produced a positive comp. The comp this quarter, consistent with the past several quarters, was highlighted by the performance of our bridal business where we experienced an increase in the average price per unit sold combined with the relatively constant volume of units sold.

We are pleased with the impact that our Vera Wang LOVE and Celebration Diamond collections have had on this merchandise category. And as Theo already mentioned, we will continue to expand these collections going forward. Our exclusive collection strategy has been concentrated in our bridal business. Therefore, it is no surprise this overall category has been leading our growth performance over the last few quarters.

In our fashion business, we continue to experience an increase in unit volume, offset by a reduction in the average price per unit sold. The metrics for the fashion business reflect both the prior year's price increases and the offsetting effect caused by the success of our lower price point beads and other entry price point merchandise. We believe this dynamic will continue in the near term as the market shifts to lower price point merchandise in this category.

Using constant exchange rates, comparable-store sales increased 2.2% for the quarter. During the quarter, the average Canadian currency rates strengthened almost 3% relative to the U.S. dollar. The impact of foreign exchange rate on our second quarter earnings was not significant, as the rate differential impacted both revenue and cost.

We achieved gross margin for the quarter of $340 million or 50.6%, compared to $336 million or 50.5% for the prior year quarter. As we stated on the past 2 calls, we expect our overall gross margin rate in fiscal 2013 to be consistent with fiscal 2012, and our performance in the second quarter is consistent with that expectation.

SG&A expenses for the quarter were $279 million or 41.6% of revenues compared to $282 million or 42.5% of revenues in the same period the last year. The reduction in SG&A expenses compared to the prior year was due to increased efficiency in our advertising and store staffing programs compared to a year ago.

For the second quarter of 2013, we posted operating earnings of $51 million compared to $43 million in the prior year's quarter. On a percent of revenue basis, our operating margin was 7.6%, up 110 basis points from the prior year period's operating margin of 6.5%. As we stated in our holiday sales press release, our priority in the quarter was to drive operating margin improvement compared to the prior year.

The discipline we maintained on our gross margin, along with the efficiencies achieved in SG&A, drove the improvement in operating profit and margin for the quarter. Interest expense for the second quarter of 2013 was $6 million compared to $10 million in the prior year. The $4 million decrease is a result of the debt refinancing completed in July 2012. We expect this reduction in interest expense relative to the prior year to continue for the remainder of the fiscal year.

In the second quarter of fiscal 2013, we recorded an income tax expense of $4 million compared to $3.8 million in the same period last year. Net earnings for the second quarter of 2013 were $41 million or $1.02 per diluted share, an improvement of $0.25 or 32% compared to the prior year net earnings of $29 million or $0.77 per diluted share.

Now please turn to Slide 7, where I've outlined the main drivers of the second quarter 2013 improvement in net earnings. Starting with last year's result, which was $28.8 million, the gross margin improvement was $4.1 million, driven by the top line growth we achieved along with the slightly improved gross margin rate. We realized $3 million of SG&A expense improvement. Interest expense improved $4.3 million as a result of the debt refinancing completed in July 2012. There was a $1 million favorable impact, primarily due to taxes and lower depreciation, and that brings us to the quarter's net earnings of $41.2 million and a $12.4 million improvement over the prior year.

On Slide 8, I will take you through the comparable store sales detail. This quarter, as we stated earlier, total company comp was up 2.8%, following a 5.8% rise in last year's second quarter. Now let's look at this comp performance in greater detail. The comps on this page all include sales from the associated online businesses. Our Zales branded stores, consisting of Zales Jewelers and Zales Outlet, had an increase in comparable store sales of 3.6%. This increase follows a 10.1% rise in the same period last year. Representing just over 60% of our business, the performance of the Zales brand will continue to be the cornerstone of our future growth strategy.

U.S. Fine Jewelry brands, including our regional brand, Gordon's Jewelers, had an increase in comparable store sales of 2.8% in the second quarter of 2013. This increase follows an 8.9% rise in the same period last year. Our Canadian Fine Jewelry brands, consisting of Peoples and Mappins, had an increase in comparable store sales of 0.5% at constant exchange rates on top of a 2.3% comp in the prior year period.

On the U.S. dollar reported basis, comparable-store sales were up 3.8% in the second quarter on top of an increase of 0.7% in last year's second quarter.

Our Piercing Pagoda segment reported a positive comp for the third consecutive quarter. In the second quarter, our Kiosk Jewelry business had a comparable store sale increase of 1% following a 3% decline in the same period last year.

Please turn to Slide 9, as I take you through our balance sheet and liquidity. As of January 31, 2013, the company had cash and cash equivalents of $18.5 million compared to $27.1 million at January 31, 2012. This change was largely due to more efficient cash management. Inventory at January 31, 2013, stood at $837 million compared to $815 million at the end of the second quarter last year. The increase of $21 million was primarily due to the impact of higher commodity costs on our inventory this year compared to last year and the overall higher level of inventory required for future sales growth, partially offset by the redistribution of inventory from closed stores.

At the end of the second quarter of fiscal 2013, the company had total outstanding debt of $474 million compared to $428 million as of January 31, 2012. In addition to the amended term loan balance of $80 million, long-term debt included $391 million borrowed under the revolving credit facility and $3 million of capital leases. The overall increase in debt year-over-year was due in part to the increase in inventory levels and the $13 million of transaction costs associated with the debt refinancing completed last July.

As of the end of the quarter, the company's total net revolver availability was $207 million. Our fixed charge coverage ratio stood at 2.0, which is significantly above the key threshold of 1.0. The fixed charge coverage ratio measures our trailing 12-month EBITDA, adjusted for LIFO charges, capital spending, taxes and certain other items, compared to our trailing 12-month cash interest costs. Maintaining this ratio above 1.0 provides the company with additional flexibility relating to liquidity and future capital planning.

For the first half of the fiscal year, capital expenditures totaled $13 million compared to $10 million in the prior year first half. Expenditures in the quarter were devoted primarily to the refurbishment of stores. For the year, we now believe our capital expenditures to be in the range of $25 million to $30 million.

I now want to cover the overall store count for the quarter. I should mention, we have again included a page in the appendix that contains the current store count by brand.

We ended the second quarter with 1,103 fine jewelry stores and 643 kiosks for a total of 1,746 retail locations compared to the prior year's second quarter count of 1,151 fine jewelry stores and 659 kiosks for a total of 1,810 locations. During the quarter, we closed 14 fine jewelry stores and 10 kiosks, we also opened 1 kiosk.

Please now turn to Slide 10, where I'll walk you through some of the year-to-date financial highlights. Revenues for the first 6 months of fiscal 2013 increased $13 million or 1.3% to 1,030,000,000. The increase in revenues is primarily due to an increase of 3.2% in same-store sales, partially offset by 64 net store closures as compared to the prior year period. We achieved gross margin for the first 6 months of $530 million or 51.5% compared to $523 million or 51.6% for the prior year period.

SG&A expenses were $485 million or 47.2% of revenues compared to $482 million or 47.5% of revenues in the same period last year. For the first half of fiscal 2013, we posted operating earnings of $28 million compared to operating earnings of $21 million in the first half of the prior year. On a percent of revenue basis, our operating margin was 2.7%, up 70 basis points from the prior year period's operating margin of 2.0%.

Interest expense for the first half was $12 million compared to $20 million in the prior year period with this $8 million decrease being the result of the debt refinancing completed last July. And net earnings for the first half was $13 million or $0.32 per diluted share compared to the prior year net loss of $3 million or $0.09 per diluted share.

Now please turn to Slide 11, where I've outlined the main drivers of our first half 2013 improvement in net earnings. Starting with last year's net loss of $3 million, gross margin improvement contributed $6.8 million, primarily due to top line growth. The net increase in SG&A expenses impacted the period by $3.4 million. The primary driver of this increase was higher investments made for the holiday selling season in the first quarter. Interest expense improved $8.4 million as a result of the debt refinancing.

Other gains and charges improvement was $2.5 million, primarily from the $1.9 million De Beers settlement received in the first quarter and lower charges related to store closures this year compared to last. And there was a $1.6 million favorable impact, primarily due to taxes and lower depreciation. That brings us to this quarter's positive net income -- or this first half results positive net income of $12.9 million and the $16 million improvement over the prior year.

Next, I want to make some comments on our February month-to-date performance and our expected full year performance. Our month of February started off very soft, particularly in the first 10 days of the month. Our sales were clearly impacted by the weather in the Northeast during this period and quite likely, by the delay in IRS tax refunds and the higher payroll taxes which were implemented in mid-January.

Sales around Valentine's Day were significantly stronger than the sales trend experienced in the early part of February. As to our February month-to-date result, we are still recovering from the slow start and are currently reflecting a mid-single digit negative comp, but with an improved trend clearly visible over the Valentine's Day sales period and the days afterwards.

For the second half of the year, we will continue to focus not only on our top line performance, but also in maintaining gross margins, driving SG&A leverage, and as previously stated, we expect to achieve positive net income in fiscal 2013.

I would now like to turn the call over to the operator to begin our Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jeff Stein with Northcoast Research.

Jeffrey S. Stein - Northcoast Research

Question on Valentine's Day, first of all. Were your customers just not celebrating Valentine's Day or were they not celebrating it with you? We did conduct a survey of independent jewelers and it's pretty clear that the momentum has decelerated for the -- in the last 2 quarters. But it seems that independents, for the most part, did okay. They we're relatively flat or up slightly. So do you believe that there were any execution-related issues that perhaps maybe you didn't -- you weren't in the right price point ranges or might there be other factors?

Thomas A. Haubenstricker

So Jeff, this is Tom. Let me just, again, start out and reiterate some of the comments I made about February and what we're seeing. As I said, at this point, 20 days into the month, we do have a negative comp in that mid-single digit range. But when we look at the details of that month, the drivers for that really is -- what we saw is a very, very slow start to the first week, 10 days of the month. And I don't know if traditionally we would look at that as the peak -- from our revenue flows, as being the peak Valentine's Day season. As we got in closer to Valentine's Day, the trend significantly improved. And if we look at that period of time of what we would think as the 3 or 4 days before Valentine's Day period, the actual day, and the periods afterwards, we had a pretty stable performance. Unfortunately, the start of the month, which I'm not sure I would, again, associate with the Valentine's Day buying, but perhaps to other macroeconomic issues, is what has caused the our overall performance at this time. So I think we feel, when we look at what we see as a traditional period of Valentine's Day, it wasn't a negative comp performance. That was the days before that in early February that are creating the current status for us.

Theophlius Killion

In fact, if you look at Valentine's Day, year-over-year, we were comp positive. So certainly our guests were continuing to shop with us and more than they did a year ago. And that -- the momentum that we've had after Valentine's Day has continued to build. It's operated a little bit like, frankly, like Christmas where there was a strong acceleration during the Christmas period and the days after Christmas. So these holidays are operating the same. And as Tom said, the pressure that we think is largely in the macros from the early part of the month are things that we can't control. So we'll control what we can control and absolutely the guests showed up and shopped with us over the Valentine's Day selling period.

Jeffrey S. Stein - Northcoast Research

Got it. Your competitor has -- your major competitors indicated that they are going to have an earlier Mother's Day promotion, which is going to accelerate some of their second quarter sales into Q1. And I'm wondering, are you planning a similar type of event shift that would affect your business as well? And if so, can you give us some thoughts in terms of how much revenue shift we might expect from such an event change?

Thomas A. Haubenstricker

Jeff, I don't want to get into the timing of various promotions. I mean, we're not on a retail calendar. As you know, we're on a more traditional monthly calendar. When I look at the change in Mother's Day being 1 day earlier, I don't think it's going to have a material effect on the third, fourth quarter comp split for us.

Jeffrey S. Stein - Northcoast Research

Okay. I'm wondering if you could talk a little bit about the trend in SG&A over the balance of the year. I know that at the beginning, you talked about the fact that you expected it to be a bit lumpy and I know that you invested significant number of hours in training for the relaunch of Celebration in Q1. Might we see -- and I think, Theo, you did allude to the fact that there are some training programs planned for the back half of the year. So on an apples-to-apples basis, should we expect a lift in the back half of the year compared to prior year because of new training programs, or how should we think about that?

Thomas A. Haubenstricker

I think if you look at -- the SG&A can be lumpy as we've stated. And I think if you look at the first half, the first 6 months and you see that SG&A was $3 million higher than what it was last year, I think that would be the type of trend, I would say, you would see. So for the second half in total, I don't expect SG&A to be significantly different than what it was the prior year. Obviously, some of that is going to depend on the revenue growth because there's a portion of SG&A that is directly linked to what the revenue and comps are. But I think overall, it was $3 million higher in the first half and it's probably going to be somewhere flat to slightly higher in the second half compared to the prior year.

Jeffrey S. Stein - Northcoast Research

Okay, and final question. Can you talk a little bit about your online sales for the holiday selling season? And how they compare to prior year and what effect they may have had on the comp for the quarter?

Theophlius Killion

So we, increasingly, Jeff, think about online in the same way that our guests think about online as Zales and not zales.com and not Zales brick-and-mortar. So we think about the leverage that comes on the Omni-Channel platform as being very much similar. But we had a strong double-digit comp in online. And beyond that, as I said, we continue to think about those things as one thing and not 2 things.

Operator

Your next question comes from the line of David Wu with Telsey Advisory Group.

David Wu - Telsey Advisory Group LLC

Just on the current trends, Theo, I believe you mentioned that the comp turned positive as you approached Valentine's Day, and was wondering if the comp was still positive post Valentine's Day.

Theophlius Killion

It is.

David Wu - Telsey Advisory Group LLC

Great. And on the warranty business, can you talk about sort of how sales there have trended, whether it's been helping the gross margin at all and if you're still seeing a benefit from better employee training and also expanding that program to more categories?

Matthew W. Appel

David, this is Matt. Let me comment on the warranty. The warranty -- the recognized revenue on warranty is relatively flat on a year-over-year basis in the quarter, while the sales were a bit stronger on a cash basis. The recognized revenue was quite similar to the prior year. So no significant earnings impact related to that.

David Wu - Telsey Advisory Group LLC

Great. And just given that engagement, obviously, did well for you during the quarter, did credit sales -- did that represent a greater share of your total sales? And what would you say is sort of the credit sales mix right now between the program that you have with Citi versus the new alternative financing arrangements?

Matthew W. Appel

We don't disclose Citi versus alternative finance. What I can say about credit, David, is that our credit mix was similar on a year-over-year basis to -- in the second quarter. We had a slightly stronger approval rate and a slightly lower credit mix, but it's important to note that we offset some of this with significantly higher net credit sales. We saw very strong single-digit growth in both the U.S. and in Canada. In fact, in Canada, it was a double -- it was a double-digit growth. So we're -- we have higher tickets, but very slightly lower mix, and I think that's a net positive.

David Wu - Telsey Advisory Group LLC

Great. And just lastly, can you just update us on your store closure strategy? I think you've had about 64 net store closures over the past year, and that's obviously helped you lower your occupancy cost, improved that margin. I just to know how many stores that currently don't meet your profitability threshold and sort of what's an appropriate store closure run rate to assume as more leases come up for renewal.

Matthew W. Appel

We're not going to predict the longer-term trend, but what we will say, as we've said before, David, is that we'll continue to close stores that underperform and look for opportunities that are accretive and that make sense to offset those closures. And so when we close stores, as we recapture inventory, as Tom talked about, and we help our overall bottom line.

Operator

Next question comes from the line of Oliver Chen with Citibank.

Oliver Chen - Citigroup Inc, Research Division

Regarding your commentary on February and the slower start, was the comp primarily driven by traffic in terms of the lesser-than-expected comp that you wanted at the beginning of every February? Could you just help us understand from that?

Thomas A. Haubenstricker

We believe it was driven by traffic in the malls. And we look across the indicators we have and some of the barometers that we use for the -- what usually closely matches mall traffic. Those were down very sharply. And so in our view, it was the people in the mall. And as Theo mentioned, it was -- the trends improved for us as we got into what we consider more the Valentine's Day period and continued to stay steady after that. But for the early part of February, it was a challenging environment.

Oliver Chen - Citigroup Inc, Research Division

And regarding the adverse weather event and the month before Valentine's Day, the weekends, was that estimatable in terms of how that impacted you negatively?

Thomas A. Haubenstricker

Yes, I mean, by the time we get to the end of the quarter, I mean, I think what we're doing as of February 20, when you have only 20 days and you have that weather, it's a significant effect. And so it played a role in the comp number I gave out for the first 20 days. I think by the time we get to the end of the quarter, because a lot of that spending hopefully will come back, it probably won't be significant to the quarter's comp by the time we get to the end of Q3. But sure it -- on a 20-day period, when you have that type of weather pattern in one of your major selling areas, that was a factor in why we're at that negative comp after 20 days.

Oliver Chen - Citigroup Inc, Research Division

Okay. And your earlier comments regarding the fashion jewelry category, it sounded like customers are gravitating towards the lower price points. What's happening there? And does that mean that your comp going forward -- how do we think about the AUR in your comp going forward? Are we going to see that trend kind of factor into your overall comp algorithm?

Thomas A. Haubenstricker

Well, I think, to a certain extent, it has affected our comp over the last few quarters. We are getting volume increases in our fashion, the transactions that we're generating, but we are seeing that the market right now is moving toward those entry point areas and that does bring down the average price from that point. To a certain extent, we want to take advantage of that buying that does take place on those lower points. And I think some of the product set and the merchandise we've had out there has allowed us to do that, but we still are focused on our fashion business as a whole, and we may see some improvements in that over time. It's just right now, over the last couple of quarters, it's definitely been something that is affected the comps in that area.

Theophlius Killion

We do have products and tests right now, that we're not going to go into a great detail about, that have shown some very, very encouraging AURs and that will be continuing to refine and expand as we go forward. We have a couple of things that we feel very, very good about and that we'll be able to talk about likely in the next quarter as we expand some of those collections. But we have some really nice things that are going on right now that we feel good about.

Oliver Chen - Citigroup Inc, Research Division

Okay. And finally, could you just update us on your outlook in terms of what you're seeing with respect to commodity costs and how you may be preparing your portfolio in light of what you're seeing in the marketplace there?

Thomas A. Haubenstricker

So, clearly, when we look at the -- through our supply chain and the merchandise and inventory receipts, the commodity costs to us have been -- I would characterize as flat for the last year, if not slightly longer. Obviously, with the -- there's some speculation with the price of gold being so low, but that may have a factor on cost reductions, but realistically gold is very small in terms of percent of the overall materials in our merchandise. So that probably won't have a major factor. So given that, we're dealing with a flat cost curve than -- there really isn't anything we have to do in terms of market pricing changes in order to keep our margin stable. And that's very different than, say, a year or 15 months ago, when if we looked at our supply chain, we knew that we had to take some actions to stabilize gross margins because of the cost pressure building up. So we don't see that at this point in time.

Theophlius Killion

We took price increases last July. And as we look at the business right now, we think that we're well situated for the balance of the year.

Operator

Next question comes from the line of Lorraine Hutchinson with Bank of America.

Unknown Analyst

It's [indiscernible] for Lorraine. Can you talk a little bit about the promotional environment in the current quarters in your stores and maybe the jewelry industry in general? Also, do you anticipate making any changes in your promotional strategy due to the softer start to the quarter?

Theophlius Killion

Thank you for the question. We talked on our last call about being able to weather the promotional environment by holding onto our promotional posture. So we didn't change in the month of December when I think the temptation in a lot of retailers was to have a lot of promotions in the mall. That paid off for us on the earnings side of the business. So what we're going to continue to do is toggle between driving revenue on the top line, but also delivering the kind of profitability that we need to return to profitability this year. We do not see having any radical changes to our promotional posture. We will continue to test ideas and thoughts about when and how we can promote, but that will be a strategic and that won't be a reactionary kind of point of view.

Unknown Analyst

Good. And then maybe as a follow-up. With the customer shopping closer and closer to events we saw around Valentine's Day, do you expect any shifts related to Mother's Day from a marketing perspective in your business?

Theophlius Killion

No, we don't, we don't. But that's an accurate observation. The holidays are continuing to be more and more compressed, but we have that factored in as we think about our posture for this season.

Operator

The next question comes from the line of Bill Armstrong with CL King & Associates.

William R. Armstrong - CL King & Associates, Inc., Research Division

Most of my questions have been answered, but I just want to ask about the Celebration Diamond. How many stores do you have that distributed in at this point?

Theophlius Killion

The Celebration 102 and 100 is in almost all brands. The Celebration Fire, which we just started last fall is in about a tenth of our stores right now, a little bit higher. And the Celebration Grand is in almost half of our stores. So we think there is tremendous opportunity as we not only expand stores, but also continue to introduce new product lines.

William R. Armstrong - CL King & Associates, Inc., Research Division

Got it. Persona, you're in about 950 stores. Are you selling that in Pagoda also or just in the inline stores?

Theophlius Killion

Pagoda has actually been in the bead business for about 7 years there for product category called My Beads. That's performed well for us. So they have their own proprietary bead collection that we have -- as I said, for 7 years, they were ahead of the trend and they continue to sell it well.

William R. Armstrong - CL King & Associates, Inc., Research Division

Okay. And then finally, Vera, you're going to be in about 745 stores by Mother's Day. You've got 1,100 fine jewelry stores. Why not roll it out to all the stores?

Theophlius Killion

Well, as you know, the opportunity to be able to put in an expensive product before you have it thoroughly tested over time tends to come back and bite you. So we are doing it in a thoughtful way. We're going into a test and invest mode as opposed to putting it out there because we like it. But I think we've been pretty aggressive. 245 store increase since last year is the right thoughtful way we think to do it. And what you will see, as you travel our stores in the future, is you'll see it having more and more space in the cases. We think it has lots of expandability, new ideas, new products, but it will be done in a thoughtful way and in a way that doesn't put undue pressure on our supply chain and on the rate of sale that we expect to get.

William R. Armstrong - CL King & Associates, Inc., Research Division

Okay, great. And then finally just on inventory levels, any opportunities to maybe trim inventory levels a little bit, or are you comfortable where you are right now?

Thomas A. Haubenstricker

Well, I think we always want to ensure we have the most efficient inventory out there, but also want to ensure that we have the right collections, right merchandise in the stores. As I mentioned before, we do think, one of the things we are seeing is that through some of the store closures that are being done, that gives us the opportunity to redistribute that inventory into some of the additional stores or some of the additional areas that Theo mentioned. So we're very focused on it. We're comfortable where the inventory is right now. Obviously, as of the end of January, balance sheet date, you still have Valentine's Day and Mother's Day in front of you. And so we usually take another look at the inventory after we get through those 2 holiday periods, and we'll continue to manage it very thoughtfully.

William R. Armstrong - CL King & Associates, Inc., Research Division

And with the Valentine's Day start off slow, did that cause any undue pressure to lower prices to move?

Thomas A. Haubenstricker

No. I think we -- as we saw, during the second quarter -- well, the second quarter started out slowly as well. We were very clear on maintaining the discipline on a promotional strategy that undermines the revenue, the gross margin forecast.

Operator

Next question comes from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg

I do have a question about Valentine's Day. Generally in the past, your comp that you give us here on this call generally reflects the comp that you report for the third quarter. So I was just hoping you could help me understand whether or not you think you can move into positive territory. I know you've been very proud of that trend, and I've been assuming that it would continue. I was wondering whether you thought that was reasonable given that the biggest holiday is behind you for this quarter.

Theophlius Killion

Yes, we do think it's reasonable.

Janet Kloppenburg

Okay. So you could build business as you go forward?

Theophlius Killion

Absolutely. Absolutely.

Thomas A. Haubenstricker

I think it's important to note that we still have almost 2/3 -- I mean, Valentine's Day is a big holiday in the quarter, but we still have almost 2/3 of the revenue in front of us. And as we've talked about the trends and what was driving the negative comp today, we absolutely still believe it's possible.

Theophlius Killion

Yes. I mean, if you think about coming out of December at a relatively small positive comp basis and then having a 50 basis point improvement in the month of January, that lifted our overall comp by the 50 basis points. Yes, we feel good about the opportunity that's sitting in front of us.

Janet Kloppenburg

Okay, great. And Theo, on Piercing Pagoda's performance during the holiday period, was that in line with your expectation? I wonder if that consumer is a little bit constrained. You had a negative comp in the prior year period. You've made a lot of upgrades in the assortments and the marketing. And I was just wondering if you could comment on the performance of that business.

Theophlius Killion

Yes, we feel good about the performance of Piercing Pagoda. We've had a 3-point shift year-over-year in the quarter. We had 3 quarters now of positive comps in Pagoda, and we think we're building on something there that could be exciting for the overall business going forward. As you know, we brought in Jamie Singleton last March, and Jamie is very focused on making sure that we have the right talent in the team and the right product, and I expect big things out of Pagoda in the future.

Janet Kloppenburg

And just lastly on the exclusive brands. Are they as penetrated in Canada as they are in the domestic market? And secondly, would you be considering adding additional lines? I know you'll be expanding the colored gemstone line going forward, but I wondered if there were the possibility of additional brands coming on.

Theophlius Killion

We do have our exclusive brands in both Peoples and Mappins. They are performing well there. We have a couple of things up there that we don't have in the U.S., and we continue to test whether or not there are other brands that could work better in Canada, and we learned from that. We have absolutely tests that are happening right now, some of which are very, very encouraging. As I said before, we think we have a 15% assortment opportunity in total penetration in this whole exclusive branded product area. So we will continue to test, we will continue to test not just SKUs but real ideas and concepts, and we have some things right now that we feel pretty good about.

Janet Kloppenburg

And just lastly, the Canadian consumer then is responding well to the higher price point out of the Vera Wang line.

Theophlius Killion

Yes, very, very well.

Janet Kloppenburg

Yes, because it looked like -- okay. Perfect.

Theophlius Killion

Very, very well. And as you know, there's a high concentration of Asian consumers, particularly in Western Canada, and it has performed very well for us there.

Operator

Next question comes from the line of David Berman with Berman Capital.

Steven J. Kernkraut - Berman Capital Management LP

It's Steven Kernkraut. The question I wanted to ask is the way you guys have -- you have a masterful recovery and you're saying you're going to make money this year. But if you kind of review in terms of going forward, I know you don't want to give a long-term plan and numbers. But you guys -- for you to earn significant money, I mean, your gross margins are in the 50% plus range. It really is all about getting comp store sales, sales growth in your existing stores and then leveraging your SG&A. So could you kind of review for us what your sales per square foot is now in the stores and kind of what the peak was in some of the division so we could see what the opportunity is?

Matthew W. Appel

Steve, no, we're not going to review that on this call. We don't disclose that data. And if you want to, you can probably calculate it yourself from the 10-K and look at our square footage. But no. We'll stick to speaking in terms of the guidance that Tom reiterated on this call, which is that we believe at this point that we'll post positive net income for the year, and we will go back in time to 4 or 5 years and then start going to comparisons.

Theophlius Killion

Yes. I mean, what you could expect is continued growth of our proprietary brands, which you can expect is a continued investment in our people on the front lines and what you can expect is continually looking at our supply chain to be able to look for efficiencies going forward. So we think that there are both top line and margin opportunities as we go forward and that's really our focus.

Operator

Your final question is a follow-up question from the line of Jeff Stein with Northcoast Research.

Jeffrey S. Stein - Northcoast Research

In Canada, can you give a little bit of insight into what's going on up there relative to the U.S, perhaps why Peoples was a bit weaker than the Zale brands?

Theophlius Killion

I think there's a couple of things. One is we've had a fairly significant leadership change in the Canadian business. Our leader for the Canadian business has been with us for now just a little over a year. We have 2 brand-new regionals that we've just named there. So we believe that we needed to have some focus from people who understood the market in a deep and meaningful way there. We now have that. The early signs were very encouraging as the new team has taken over and added a different level of focus and accountability for those brands. So while there is certainly a different promotional cadence than we have in the U.S., we think that we have a lot of upside based on the quality and the caliber of the people that we've brought into that business and the leadership that we have there now.

Jeffrey S. Stein - Northcoast Research

Okay. And a follow-up for Tom. Tom, is there any possibility that you guys would look at resetting your interest rates and credit deal come July, August, which would, I guess, be the one-year anniversary of the last reset?

Thomas A. Haubenstricker

Jeff, as you know, from the refinancing discussion that we had last year, we were locked into the term debt for the first year. As a normal course, we will look at our capital structure as we get through the Mother's Day holiday period and look at what our options are from that standpoint. But I don't want to speculate and rule out anything or say if there's any possibility on it. It's just a part of our normal management practice that once we get to the last holiday to evaluate the performance, the cash situation and what options the company has.

Operator

And ladies and gentlemen, that is all the questions queued up for today. I will turn the call back to management for closing remarks.

Theophlius Killion

I'd like to thank everyone who is on the call today for their attention to the business that we're running and the progress that we're making. Thank you all. I wish you a good finish to the quarter, and we look forward to talking to you in 3 or 4 months.

Operator

Ladies and gentlemen, that concludes the Zale Corporation's First Quarter Fiscal Year 2013 Earnings Conference Call. We appreciate your time. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Zale Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts