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Zale Corporation (NYSE:ZLC)

F1Q10 (Qtr End 10/31/09) Earnings Call

November 24, 2009 10:30 am ET

Executives

David Sternblitz - Vice President and Treasurer

Neal Goldberg - Chief Executive Officer

Matt Appel - Chief Financial Officer

Analysts

Lorraine Hutchinson - Banc of America

Bill Armstrong - CL King & Associates

Jeff Stein - Soleil Securities

David Mann - Johnson Rice & Company

Janet Kloppenburg - JJK Research

Richard Hayden - Euld Capital

Operator

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Zale Corporation first quarter fiscal 2010 earnings conference call. All lines have been place on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the conference over to David Sternblitz, Vice President and Treasurer. Please go ahead, sir.

David Sternblitz

Thank you, Stephanie. Good morning and thank you for joining us for our first quarter 2010 conference call. As Stephanie said, I'm David Sternblitz, Vice President and Treasurer. On the call today are Neal Goldberg, Chief Executive Officer; Matt Appel, Chief Financial Officer; Theo Killion, President; and Gil Hollander, Chief Sourcing and Supply Chain Officer.

Before we begin, I would 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 result 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 10-K for the year ended July 31, 2009.

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

Neal Goldberg

Thank you, David. Today, I would like to review our first quarter performance, provide additional color on our merchandise and marketing plans for holiday, as well as discuss some of the steps we've taken to improve execution. First quarter comparable store sales were negative 6.8%, compared to a negative 21% in the preceding quarter.

During the first quarter, each month reflected improvement over the prior month. Also, very encouraging was a performance was driven by improvement in several key markets that were hit hardest last year during the economic downturn. From a category perspective, bridal and diamond fashion were among our best performers, which is promising given the significance of these categories in the holiday quarter.

In addition, our e-commerce business showed particular strength with revenue growth of 17% during the quarter. These trends reinforced our cautious optimism for holiday. With the first quarter behind us, we are focusing on maintaining momentum and improving execution through holiday in the second half of fiscal 2010.

I spoke in our last call about our merchandising initiatives, specifically our big ideas and how we are creating more collections supported by impactful marketing during key selling periods. We believe our assortments this year are very compelling and a significant improvement from last year. I urge you to visit our stores and see for yourself.

As of the first week in November, all big ideas were in store signaling a readiness for the holiday season. This includes our exclusive shared heart collection, represented by over 35 SKUs. We believe this collection will have broad appeal with price points ranging from $39 to $999.

Fashion watches, including but not limited to DKNY, Diesel, Armani, G-Shock, as well as Fossil. The fashion watch assortment continues to drive excitement and traffic to our stores and is priced between $65 and $795. The Everlon Collection, consisting of over 30 SKUs, will benefit from additional support from the DeBeers' Holiday Marketing. As one of the select group of retailers partnering with DeBeers, our price points ranging from $199 to $2,499. In addition, we rolled out several other compelling proprietary collections that I encourage you to go see.

Importantly, our Celebration Diamond, which has a proprietary cut in order to enhance brilliance, is fully set in the stores to take advantage of the important holiday bridal season. Further, on top of our counters we have pre-packaged box sets which offer easy gift ideas at tremendous values.

In the past, I had spoken at length regarding the importance of upgrading our quality and the steps we have taken to ensure our standards are consistently met. This year, especially with our new collections, the quality improvements stand out. It is an important differentiator that resonates with our customer base. In addition to the sales opportunities from our proprietary collections, gross margins are significantly higher than the corporate average. This is key and underscores our commitment to achieve 50% plus gross margins.

As we look towards holiday, I'd like to give you some color on our marketing strategy, and the steps we are taking to more effectively communicate our message. We believe we must find innovative ways to reach our target customers. The answer is no longer to simply saturate TV, but to utilize multi-channel strategies that foster ongoing dialogue with customers. To accomplish this, one of the key channels we are utilizing is online marketing. Digital marketing will play a pivotal role at holiday and beyond, as we look to leverage the strength of our e-commerce business.

Importantly, this holiday, we expect 1.9 billion online advertising impressions versus 318 million last year. Overall, our holiday advertising spend will be comparable to last year, but the focus on multi-channel strategies will elevate our share of voice. Our campaigns are very focused on driving the big ideas and feature collections.

As I've stated previously, our pricing and promotional strategy this holiday will be more item-specific allowing us to recapture gross margin from the prior year. However, we will continue to be promotional at the appropriate times.

Our commitment to investing in our fine jewelry consultants is an ongoing effort that is particularly important this holiday. In addition, to the 80,000 hours of education that I mentioned in our October 30th call, we also created product information tools that speak to the features and benefits of the merchandise categories that compromise our big ideas. This holiday planner that was created by the store operations team is an extensive bible that provides a daily guide to execution and logistics.

I mentioned earlier this year that we were committed to changing the full-time, part-time mix in the U.S. stores in order to improve coverage and increase flexibility. By moving from a 60%-40% full-time, part-time mix to a 50%-50% mix, we can barely respond to the ebbs and flows of the business while optimizing the guest experience during peak selling times.

Finally, over the last year, as we focused on in-store efficiency, redundant tasks have been eliminated so that our fine jewelry consultants can concentrate on elevating the guest experience. We are confident that these steps, as well as others we've taken, will improve store level execution during holiday and beyond. We are already seeing improvement in the consistency of the guest experience across our fleet. This is key, as I believe our people will be the competitive advantage that sets us apart at holiday.

One of the most promising opportunities ahead of us is in e-commerce. We have talked briefly about e-commerce in the past. But I want to underscore the significant potential of this business.

From a revenue standpoint, it has continued to gain momentum. During the first quarter, all of the key performance measures for e-commerce continued to be positive. With revenues up 17%, orders up 17%, unique visitors up 14% and our conversion rate grew as well.

We believe these results are due to several factors. We completed a site re-design in mid-October. This improved navigation as well as enlarged product images creating a cleaner, more user-friendly site. Additionally, we've expanded assortments across categories as well as added merchandise categories not carried in our stores. Some of the expanded assortments were added based on online guest input from surveys and extensive search data.

E-commerce is playing a pivotal role as a testing ground for new products. Online tests can be very useful in getting early reads on how successful product introductions will be. Data can be mined in order to refine our assortments before being tested in the field and rolled out to the entire fleet.

Unlocking synergies between the stores and our online presence will also be key. Our research shows that over half of our online visitors purchase in the store. We have used this knowledge to build a robust website that compliments our store base and allows guests to do extensive research. We will continue to invest in this business as we believe it is a major competitive advantage.

For fiscal 2010, we expect the e-commerce business to generate $65 million to $70 million in revenues, representing growth of 20% from fiscal 2009. This growth rate is significantly higher than the estimated growth in online jewelry market.

In summary, we have differentiated the collections that are supported by impactful marketing and improved store level execution, as well as an outstanding team of field leaders and fine jewelry consultants. When combined with increased discipline in our pricing strategies, we expect to grow our market share and realize gross margin expansion this holiday season.

I would now like to turn the call over to Matt to discuss our financial results. Matt?

Matt Appel

Thanks, Neal and good morning to everyone. Revenues for the quarter ended October 31, 2009 were $329 million compared to $364 million for the 2008 period, a decrease of 9.6%. Comparable store sales decreased 6.8% compared to a decrease of 3.7% in the prior year.

Gross margin for the first quarter ended October 31, 2009, was 48.6% compared to 48.5% for the 2008 period. Note that our margin trends steadily improved throughout the quarter. This trend has continued in November with gross margins currently running above 50%. This is encouraging as we focus on achieving 50% plus gross margin for holiday and for fiscal 2010 overall.

SG&A expenses for the first quarter ended October 31, 2009, were $199 million compared to $223 million in the 2008 period. The $24 million or 11% decrease includes savings related to our ongoing expense reduction initiatives, as well as costs related to stores closed over the past year.

Our operating loss for the first quarter was $54 million compared to $63 million in the 2008 period. The year-over-year improvement of $9 million was primarily a result of our rigorous expense reduction initiatives. Operating margin for the quarter was negative 16.6% compared to negative 17.4% in the 2008 period. Despite the decrease in revenue, operating leverage improved by approximately 80 basis points compared to last year, reflecting our focus of controlling costs.

For the quarter, we recorded $1 million in tax expense related to earnings from our Canadian business compared to a $19 million tax benefit for the 2008 period. As discussed on October 30, fiscal 2010 income tax expense is not expected to include any offsetting benefit from losses in the U.S. due to the three-year cumulative loss rules. However, our taxes in fiscal 2010 will be favorably impacted by the recently passed Business Assistance Act of 2009, which I'll speak about shortly.

The net loss for the first quarter was $58 million or $1.80 per share compared to a net loss of $48 million or $1.52 per share for the 2008 period. We ended the quarter with 1,251 fine jewelry stores and 683 kiosks for a total of 1,934 retail locations. During the quarter, we opened five new fine jewelry locations and closed one in Canada. In addition, we closed one kiosk during the quarter.

Now, let's turn to the balance sheet. Inventory at October 31, 2009, stood at $902 million compared to approximately $1 billion in 2008. The decrease of approximately $100 million is primarily related to the initiatives to reduce inventories and reduce store count associated with our real estate realignment.

Long-term debt as of October 31, 2009, stood at $466 million compared to $369 million in 2008. As of October 31, 2009, we had approximately $129 million of availability under our $600 million asset-backed revolving credit facility. As we talked about on October 30, due to the impact of the credit environment on our vendors and to reduce holiday delivery risk, we accelerated the payment of certain merchandise receipts.

This timing issue did have an approximate $70 million impact on our debt level at quarter end. However, we believe it was important to ensure we had the product necessary to execute holiday. Free cash flow will continue to be a priority, and debt reduction will be the primary use of our free cash flow going forward.

Capital expenditures for the first quarter totaled $5 million consistent with our annual target of $20 million. The majority of the spend was devoted to our stores.

Now, I'd like to highlight the recent developments related to taxes and the expected impact. The recently enacted Business Assistance Act of 2009, which extended the carry-back period for net operating losses from two to five years, is expected to provide a significant cash refund and tax benefit to us in fiscal 2010. This act applies specifically to net operating losses generated in 2008 or 2009.

We currently estimate that we will receive cash refunds totaling approximately $16 million during fiscal 2010, as a result of the extension and the carry-back period. In addition, we also expect to record a credit to tax expense in the second quarter of fiscal 2010 of approximately $16 million, reflecting the reversal of valuation allowances recorded against net operating losses that will now be realized.

As a result, we now expect the tax benefit for fiscal 2010 of approximately $6 million. Our financial goals for fiscal 2010 remain unchanged. We will continue to maximize gross margin, striking the right balance between sales and margin. This should allow us to realize significant margin improvement compared to the second quarter of last year, with gross margins above 50% for fiscal 2010. We also remain on target with our expense and inventory initiatives.

In conclusion, we are maintaining discipline in all areas of the business, with particular emphasis on inventory, expenses, and capital management. Importantly, as we enter the holiday period, we are committed to staying disciplined with our pricing and promotional strategies to ensure we recapture the gross margin lost last year.

I'd now like to open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Lorraine Hutchinson with Banc of America.

Lorraine Hutchinson - Banc of America

I was just hoping for an update on your SG&A goals for 2010. You had spoke been a $42 million reduction number on last quarter's conference call. Given that you've done $24 million, I was just looking for an update there.

Matt Appel

This is Matt. The $24 million that we achieved in the first quarter is part of $42 million at this point. We would expect to meet or potentially exceed that $42 million during the fiscal year. We're very pleased with what we accomplished in the first quarter and we're very much on track to meet or exceed.

Lorraine Hutchinson - Banc of America

Then if the comps turn positive for the holidays, what should we expect in terms of the relationship to variable expenses? How quickly will we see those come back?

Matt Appel

I think we'll expect to see that come back quite quickly. Our costs are primarily fixed, as you know. We've got a very good handle on with our new labor model and I would expect to see a significant amount of upside comp fall to the bottom line.

Neal Goldberg

The good thing which we discussed our staffing model, as Matt just said, gives us the flexibility both for the business was tougher to flex our staffing down and if business is good, we believe we'll have additional coverage more than possibly before with our flexibility of having our part-time, full-time mix more 50/50.

Lorraine Hutchinson - Banc of America

Do you have a debt reduction goal for year end?

Matt Appel

None that we're talking about specifically, Lorraine, but rest assured that to the extent that we generate free cash flow, we will apply it to debt. We're very focused on reducing inventories, continuing to reduce costs, driving higher margins, and applying that cash to our debt. That is our focus.

Lorraine Hutchinson - Banc of America

Finally, any commentary on comp trends November to date?

Neal Goldberg

I'm not going to give guidance. What I said in my prepared comments is we saw improvements each month in the first quarter, better improvements each month. As you know, the first quarter was our toughest comps. We were up against for the whole year and we're cautiously optimistic with assortments we have now focusing on the big ideas. We're cautiously optimistic for the quarter.

Operator

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

Bill Armstrong - CL King & Associates

I was wondering if you could give us, perhaps, the monthly cost progression during the quarter.

Neal Goldberg

We don't do monthly comps. But suffice it to say that each month comp did get better and we also saw margin improvement each month.

Bill Armstrong - CL King & Associates

Given that that was the most difficult comparison and now you're going against very sharp negatives for the next three quarters, is there any possibility that you might actually get into positive comps territory either in this quarter or at some point in this fiscal year?

Neal Goldberg

Again, we don't give guidance, but considering as you just articulated that the first quarter was our toughest comps and we had the negative 6.8% drop, we're cautiously optimistic that we've got the right plans, the right process in place. We really encourage everyone to go see our stores. We really think they look terrific and our fine jewelry is pumped, visiting a lot of stores over the last many weeks, the whole management team. The one consensus was stores look great and the people are fired up. So if that leads to good things we will accept them.

Matt Appel

We look forward to reporting our success in the holiday season in early January, at which time the answer to this question will be clear.

Bill Armstrong - CL King & Associates

Understood. Just one follow-up for, Matt, on this tax benefit, you said you're going to see $6 million benefit for the full year. Is that just the U.S., or is that including the $10 million you expect to pay on the Canadian side?

Matt Appel

That includes both. It is the $10 million that we talked about on the last call of expense, minus a $16 million credit. It will give you a net benefit of $6 million.

Bill Armstrong - CL King & Associates

Okay. That entire $16 million will be recorded in Q2?

Matt Appel

Yes, it is a discrete item that has to be recorded basically when it is recognized. So it will all pass through the second quarter in one lump sum. So you will see that in our next P&L.

Bill Armstrong - CL King & Associates

Any estimate as to when you'll actually get that refund?

Matt Appel

We are working to receive the refund as soon as we possibly can. We will file shortly, but I wouldn't want to make a prediction on how quickly that request will be processed, but certainly during this fiscal year and hopefully very soon. We will report on that the next time we speak.

Operator

Your next question comes from the line of Jeff Stein with Soleil Securities.

Jeff Stein - Soleil Securities

I was wondering if can talk to us a little bit about how the minus 6.8% comp was achieved? In other words, what was average dollar transaction and units sold? How did those weigh into the comp?

Matt Appel

We had a slightly higher number of transactions and a slightly lower price per transaction or value per transaction that gave rise to that comp. But I think the important thing to think about in the comp is the trend that took place in the first quarter, very significant month over month improvements that we think leave us in a position where our momentum is strong as we enter this important holiday season. That's really the key in terms of comps.

Neal Goldberg

Especially because it wasn't until the really back half of October that a lot of our new collections really got fully placed in the stores and it really not till the beginning of November that our marketing campaign started. Obviously that ramps up through Black Friday and then continues on to holiday.

Jeff Stein - Soleil Securities

What percent of your ad spending this year is going to be online compared to last year? What percent will be television compared to last year?

Neal Goldberg

I am not going to give the breakdown. Suffice it to say that we have kicked up our online advertising because we both believe our e-commerce site is a real competitive advantage for us and we know that our studies show that 50% of the people who research and look online come to our stores.

So we've really kicked that up. I think in my prepared remarks, we talked about going from a level of 300 million and change to over 1.9 billion advertising impressions just online. So we really think that's going to help us a lot.

Matt Appel

And our spend in total will be equal to fiscal '09, importantly. So we have not cut that back.

Jeff Stein - Soleil Securities

I'm not sure I understand how you're planning to spend online. Are you using other websites to advertise on and link to your website? Is that where the money is going?

Neal Goldberg

It's banner advertising. It's search advertising. It's some host. Different things were (inaudible). It's basically across the gamut of the digital landscape.

Jeff Stein - Soleil Securities

Have you tested this enough to give you a high level of conviction that that is going to be as effective as TV?

Neal Goldberg

Yes.

Jeff Stein - Soleil Securities

Okay. Regarding your greater use of part-time employees this year, I am wondering, where are the vast majority of these people coming from? And to what extent do you believe that they're in a position to offer the same level of service as your full-time employees?

Neal Goldberg

Well, first of all, it wasn't just turned on the last couple of weeks. This has been that we have been talking about I believe for the last six to eight months, number one. Number two, all of these individuals, as we discussed, we had this rigorous education process that we undertook this fall, where we dedicated over 80,000 hours to really educate our people.

We believe a competitive advantage is making sure you have people who are highly educated who are very focused, the reduction of the tasks that we may have given them years previous. One of the things we did is using a joint team from the store support center in the field as reduction on how long it takes to process receipts coming in. We have cut that time to 50%. That labor now will be able to be focus more on taking care of our guests.

So we are very confident that part-time and full-time will be able to give people a great experience. I encourage you as I said earlier to go visit our stores. Where they're coming from is varied backgrounds; from teachers, from people who need work, to across the board. And what we are finding as you would expect, we are looking for part-time based on employment situation that we are able to get some very top level candidates to be fine jewelry consultants for us.

Jeff Stein - Soleil Securities

Got it. What percent of your merchandise for holiday would you say will be [gallop] exclusive versus the prior year?

Neal Goldberg

I would say 25% thereabouts.

Jeff Stein - Soleil Securities

Versus last year?

Neal Goldberg

I would say last year we were probably by 15% or 10%, much less.

Operator

Your next question comes from the line of David Mann with Johnson Rice.

David Mann - Johnson Rice & Company

Can you give us comps by division for the quarter?

Matt Appel

We don't, David, disclose those by division or by brand.

David Mann - Johnson Rice & Company

Any general comment on variances there that you would call out?

Matt Appel

Well, other than what Neal talked about in our e-business, which we're very proud of and that we think that is a very significant and important differentiator as we build that and grow that. No further comments beyond that.

Neal Goldberg

And the other thing I will say is we saw Canada really respond coming back [some two], which was especially throughout the quarter. So we think that's a good sign.

David Mann - Johnson Rice & Company

Great. Then in terms of some of the audit and professional fees in the quarter, can you break out any sort of one-time costs that you had to incur for all of the issues that you're dealing with?

Matt Appel

They are really not significant. They weren't material. And we are, therefore, not going to break them out certainly.

David Mann - Johnson Rice & Company

Okay. In terms of granting a credit, can you give us any data on how that's going in terms of penetration, ability to grant?

Matt Appel

Sure. As credit conditions have changed in the marketplace, the requirements have tightened some. As you know, our credit operation is outsourced to Citi our partners at Citi and so our credit mix is virtually unchanged from the prior year quarter. On an approval basis, the thresholds have gone up. Credit requirements are more stringent and they're down approximately 9% year-over-year. We don't think that that's a trend. We think it's reflective of the business mix in the first quarter and we would expect that gap to get a little tighter as we get to second quarter.

It's very clear that with our lowered approval rate the folks that were selected out would have opted for lower value transactions anyway. So we really don't think it had a pro-rata impact on our business.

Neal Goldberg

The other thing is we spend a lot of time in the field communicating with our field leadership, and we are very cognizant of what other competitors are offering in their credit plans and we feel ours are extremely competitive to our competition.

Operator

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

Janet Kloppenburg - JJK Research

Forgive me if I'm redundant, but Neal, a lot of the companies are talking about contingency plans for this holiday, should competitors become very aggressive, should the consumer be very resistant, and I'm wondering if you have built into your pricing policies some cushion so that if you needed to move lower, you could? If there were some additional value oriented products, you could flow in, maybe if you could talk to us a little bit about your tactical strategies for the season? Thanks.

Neal Goldberg

First, we feel very confident that we have got a promotional [cadence] for the holiday season that will be extremely effective. Last year, I probably don't have to remind anyone, we took our margins down quite a bit and we did not see the corresponding lift in sales, and we certainly lost margin dollars with that.

We have no intention of doing that this year. We believe that our offering is unique. We have increased our proprietary goods. We think we've got compelling assortments, and we really feel the pace of our marketing and promotional activity is something that we really believe that we will be in good shape.

The other thing that we are confident is our pricing bands. We really look to make sure we can service all of the guests that come in our stores. So our package for perfection, which I mentioned, which is the top of counter boxes, gives customers who come in, they can get pre-packaged gifts anywhere from $39 to $199. The opportunity to come in, they are in beautiful boxes from pearls to diamonds to even a DKNY watch, that really gives the customer the chance for the entry level as well as all the way up to our Celebration Diamonds and assortments like that.

So, we really think we have concentrated more on pricing brands, making sure we have value. Shared Hearts starts at [$3.99 but goes to $9.99]. So I think we're in good shape. And we have no intention we will not get into the overall store markdown scenario we had last year, which we believe cost us 500 to 600 basis points in margin.

Janet Kloppenburg - JJK Research

Neal, I'm sure you have taken a run through some of your competitors' stores and department stores included and looked at their assortments and inventory levels. After that review, do you feel that your assortments are as strong as they should be?

Neal Goldberg

Janet, I spend a lot of time in stores and we have looked from A to Z, and we feel our assortments are great. One of the best things we are seeing early on is the calls we are getting from the jewelry community, from vendors, in many cases, we don't even do business with. (Inaudible) some of my colleagues in the company how great our stores look and they looked better than ever. Certainly, we will be glad, as Matt has said, to report to you when we do our second quarter numbers to tell you the successes we've had.

Operator

Your next question comes from the line of [Richard Hayden with Euld Capital].

Richard Hayden - Euld Capital

My questions will convince you I know a little about the company, but could you tell me why the second quarter comps were down last year?

Neal Goldberg

The second quarter was down 20%, something in the high teens, low -- what's that?

Matt Appel

Second quarter comps for last year, I don't have them here.

Neal Goldberg

18.1, down for the second quarter.

Richard Hayden - Euld Capital

Second question. Am I correct that you indicated that there is spread of roughly $40 million between CapEx and D&A?

Neal Goldberg

I don't recall saying that. I said that we were going to spend $20 million of CapEx, so if that's our D&A is 60, yes.

Richard Hayden - Euld Capital

And third and perhaps the most important question, is you have so much movement in this balance sheet over a short period of time. You almost have a life step reduction in inventory relative to accounts payable and you have a big increase in debt. Can you tell me how those three major items that you expect to play out over the next year or so?

Neal Goldberg

Sure. I will tell you why you've noticed the change. How they will play out over the next year or so I won't predict. But in this season, our vendors had issues to some extent with the availability of credit insurance and credit generally. And so in order to get the product that we felt was necessary for a successful holiday season, we chose to accelerate the movement of those goods in as well as the payment to those vendors to ensure that we received the goods, and that they were around to ship to us.

So what you see is a higher debt balance, basically a transfer between payables and debt, which by the end of the second quarter will wash out. Because by that time, the inventory has cleared through our sales and we're back to post-holiday norms for debt inventory and payables.

Richard Hayden - Euld Capital

What sort of coupon do you pay on your debt?

Matt Appel

We don't pay a coupon. We have LIBOR-based debt.

Richard Hayden - Euld Capital

LIBOR plus?

Matt Appel

You can check our 10-K, it's fully disclosed.

Operator

Your next question comes from Bill Armstrong with CL King & Associates.

Bill Armstrong - CL King & Associates

Just a housekeeping question, could you give us the breakout of the store base at the end of the quarter, the 1,251 stores, by brand?

Matt Appel

The 1,251 stores are 693 Zales, 202 Gordon's, 140 outlet, and 216 in Canada.

Bill Armstrong - CL King & Associates

216?

Matt Appel

Yes.

Operator

Your next question comes from the line of Jeff Stein with Soleil Securities.

Jeff Stein - Soleil Securities

Could you talk about the impact of cost of goods on your merchandised margin for the quarter?

Neal Goldberg

What's going on with gold certainly is, we've looked at, as we made our purchases, in all of those goods are in, prior to the gold hitting the levels it has right now. We have done surgical increases where we think necessary. We will continue to look as gold stabilizes here. It goes up, as we do future purchases. Again, the retails that we have to make sure that we're still maximizing our gross margins, we are very focused on getting gross margin.

As we've talked about, all year, is we really worked on reducing our vendor base, so we worked with fewer vendors where we can get more leverage, getting them orders earlier so we get more advantageous pricing, so they can plan their labor and scheduling and make purchases earlier.

So all of those things we believe have helped us some and will help us a lot more as we move forward as we fully develop our plan. As everyone else, we are watching the markets. Gold is a smaller percentage of our product than diamonds. Diamond prices have pretty much stabilized now. We are seeing little benefits, but we don't see the huge downward trend in diamond prices anymore, but it's again your relationships with right vendors and proper planning.

Jeff Stein - Soleil Securities

Are you hedging on gold?

Matt Appel

We're not hedging on gold.

Jeff Stein - Soleil Securities

And how much of the $24 million SG&A decline you experienced in the quarter was from store closings?

Matt Appel

Approximately $15 million of that $24 was from store closings.

Operator

At this time, there are no further questions. Gentlemen, do you have any closing remarks?

Neal Goldberg

Yes. I just would like to thank our shareholders, our suppliers, all of our associates for their continued support. Have a great Thanksgiving, a great holiday, and a good day. Thanks everyone.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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