Zales Juggles Holiday Merchandise with Clearance Sales

On Zale's (ZLC) Fiscal 4Q conference call, CEO Betsy Burton discusses acquiring $120 million in holiday inventory while trying to clear existing merchandise:

Betsy Burton, President Chief Executive Officer

We are investing $120 million in new inventory, so we get a new and expanded assortment into all Zales stores, and we’re cleaning out the discontinued merchandize aggressively in the first quarter. We are projecting that comps in the first quarter will be flat in the Zales Brand, as an increase in the number of transactions is offset by a decline in average ticket due to clearance mix. So, for the entire chain we’re looking at first quarter comps of flat to up 2%...

Adrianne Shapira, Goldman Sachs

... Can you give us a sense of where you are across these many initiatives in terms of marketing and merchandizing especially as you head into the holiday season, how many of these do you think will be complete and by when?

Betsy Burton

For the most part the merchandizing, the product has flowed into stores probably around mid September. We will be resetting all of our stores to new planograms to reflect the new product assortment. All of the merchandize has flowed in on time, and we’re very comfortable that our differentiated product assortment will be in place well in time for the holiday. In terms of key events, we have planned all of our key promotional events back in this year. By the way, we actually have already shopped to production and we’re ready with new creatives, and we have modified media buying schedule, which we believe will be significantly improved and will support our promotional key events. Our people are ready, I think our leadership has made substantial changes in terms in the field and I think everybody is excited and is building momentum going into the holidays. So, I feel very good about all of the pieces being in place.

Adrianne Shapira, Goldman Sachs

Okay, and then following up on that, as you mentioned the stores are going to be reset post Labor Day, mid September, but it sounds like you’ll still be in clearance mode. It would seem that the new merchandizing is not getting a clean slate, especially as you expect a dramatic improvement in comps from the first quarter to second quarter. Can you just comment on that given the fact there will be new as well as clearance in the stores, what will be the customer perception?

Betsy Burton

Sure, we are aggressively clearing out products in the first quarter. However, we will not aggressively clear merchandize in the second quarter. We do not want to trade regular price sales for clearance sales. So, the second quarter growth is clearly from the fresh new product assortment.

Adrianne Shapira, Goldman Sachs

Right, but do you think the image at all will be tarnished given the fact that currently all the new merchandizes coming in you’re still in clearance mode?

Betsy Burton

No, clearance will have a very reduced amount of footage in the showcases...

Jeff Stein, KeyBanc Capital Market

Betsy, I’m wondering if you could give us a little bit of guidance in terms of how much of that clearance merchandize you’re budgeting to sell through during the first quarter. And then it sounds to me like whatever you don’t sell through you’re going to put away until holiday is over and resume the liquidation, I’m wondering if that’s the correct way to think about it?

Betsy Burton

Yes, I would say 25% of the clearance should be moved through in the first quarter, and then you’re right, we’ve got to put away and wait until after Christmas.

Jeff Stein, KeyBanc Capital Market

Okay, and will it all be gone by the end of the fiscal year?

Betsy Burton

No, we believe the majority will be gone, but we’re looking at probably 15 million of the existing clearance to remain in the fiscal year...

Bill Armstrong, CL King & Associates

Okay, clearance inventories are about $130 million now, you had quite a bit of write down to that merchandize in the quarter, why not just write it all down to whatever you think you can get for it?

Betsy Burton

We basically are taking aggressive mark downs but at some point there are diminishing returns to marking it down further. So, again, if you don’t have the traffic to support the increased clearance sales, it makes sense, because it’s simply just giving away gross margin dollars.

Bill Armstrong, CL King & Associates

Okay, the write down that we saw in the fourth quarter, should we think that there might be any further write downs on that inventory, or is that inventory a risk for further write downs going forward?

Betsy Burton

No, we do not believe so. There is nothing wrong with this merchandize. It is simply a non-going-forward merchandize, and as I indicated before we will again be clearing the product in the third quarter and the fourth quarter, and we expect to end the year with only about 15 million remaining.

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