Zale Management Discusses Q1 2014 Results - Earnings Call Transcript

| About: Zale Corporation (ZLC)

Zale (NYSE:ZLC)

Q1 2014 Earnings Call

November 26, 2013 5:00 pm ET

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

Rick B. Patel - Stephens Inc., Research Division

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Oliver Chen - Citigroup Inc, Research Division

Janet Kloppenburg

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

Operator

Good afternoon. My name is Jennifer, and I will be your conference operator today. I would like to welcome everyone to the Zale Corporation's First Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Roxane Barry, Director of Investor Relations. Please, go ahead.

Roxane Barry

Thanks, Jennifer. Good afternoon, and thank you for joining us today. Participating in the 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, zalecorp.com. Before we begin, I'll read our Safe Harbor statement.

Our commentary and responses to 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 annual report on Form 10-K for fiscal year ended July 31, 2013.

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 our 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 afternoon to everyone joining us on the call today as we report our first quarter fiscal 2014 results. If you're following along on the slides that we posted on our website, please direct your attention to Slide #3.

I'm very pleased to report another quarter of solid performance. In the first quarter, comps were up 5.4% on a constant-currency basis. Importantly our core national brands led the way with Zales up 7.5% and Peoples up 8.4% at constant exchange rates. These strong comps reflect the increasing penetration of our exclusive branded collections and our focus on guest engagement through their purchase journeys. This quarter marks the 12th consecutive quarter of positive comps.

And as we continue to focus on both sales and earnings improvement, we're pleased to report that we delivered a 20 basis point improvement in gross margin and an operating margin improvement of 30 basis points. In addition, our loss per quarter improved by $0.05 from the prior year quarter. Tom will provide more detail on our financials in a few minutes.

Now please turn to Slide 4 where I'll talk about the strong foundation that we've set for Holiday, beginning with our merchandise assortment. In our wedding business, the Vera Wang LOVE and Celebration Diamond collections have now grown to almost 20% of the wedding mix with improving margins. This focus on sales and margin expansion is not only important in exclusive branded collections but in our business overall. It's fundamental to the growth that we have for the future.

Let me talk more specifically about our opportunity in Vera Wang LOVE. For Holiday, we've expanded our store count by over 20% since July from 740 to 900 stores. Vera is now available in substantially all doors. And as the store count matures, the growth opportunity does not. We're expanding men's, solitaires and pendants and we're testing yellow and pink gold, fancy shapes and more. The growth of this collection is fueled by Vera's limitless creativity, the execution of our sales teams and the strong emotional engagement of our guests to the brand.

Our proprietary Celebration Diamond collection also continues to grow in importance to our business and most importantly in affinity to our guests. The Celebration Fire, a refinement of the ideal-cut diamond with extraordinary luminance, is now in 550 stores, a 200-store expansion since July.

The Celebration Grand, a diamond cut with a larger table that delivers a big look for a moderate price, is now in over 900 stores, up from 540 in July. And sitting between the Fire's best and the Grand's good is the Celebration 102, available in over 940 of our Fine Jewelry stores, representing the better part of this good, better, best collection.

Not unlike Vera, we're growing sales and margin by testing new products: fancy shapes, solitaires, pendants and earrings with expanded assortments online. As I mentioned on our last call, an important strategic decision we've made with the Celebration collection in Canada was to offer Canadian-sourced diamonds. The sales results so far have exceeded our expectations, validating our decision to make this change.

Finally, we launched Arctic Brilliance this fall in Canada and in our Zales Outlet stores. This collection, which is a stunning assortment of Canadian diamonds, complements our Vera and Celebration offerings in bridal. The collection is resonating with our Canadian guests, and we're pleased with the performance to date.

In fashion, we're capitalizing on the colored diamond trend with our Candy Colored Diamond and Gemstone collection. This carefully curated collection offers a rainbow of colors and limitless choices. It's resonated with our guests.

For Holiday, we refined our assortment in Candy Colored Diamonds and increased the colors available in Candy Colored Gemstones. During the quarter, we also began testing an exclusive branded collection in 300 stores that we call the Heart Within. The early reads, both online and in-store, are very encouraging. And as a result, we'll be doubling the store count for Valentine's Day. This collection will be prominently represented in our Valentine's Day catalog, digitally and online. We'll have more information about the Heart Within next quarter.

Building our new product development capability with its inherent sales and margin opportunity is fundamental to how we're developing future growth opportunities. Look for more exclusive branded products that are anchored with compelling narratives and emotional resonance, especially in the fashion space.

Now I'll turn to Slide 5, and I'll talk about our marketing strategy that not only elevates our brand as a diamond store but also underpins our exclusive branded collections and creates a call to arms during peak selling periods. I believe that our marketing team and GSD&M, our advertising agency, have done a terrific job of delivering a multipurpose engagement strategy.

On television, we're telling stories; 15- and 32-second spots that are anchored with great music by emerging artists. This year, Lord Huron provided a soundtrack for our Balloons commercial about a young man on a quest for the love of his life. Lord Huron joins Various Cruelties, Alabama Shakes, Black Keys, and Florence and The Machine as artists you may have never heard of. The good news, however, is that one of our critical target audiences for bridal, the millennials, have heard of them. The response to the music and the spots has been terrific.

Additionally we've used ads like Balloons, which promotes our Celebration Diamond collection, to create engagement across multiple media channels. A 90-second version of the ad is on YouTube. A Let Love Never Die version of the ad was aired during The Walking Dead TV show, and we've used Facebook, Instagram and Twitter to create a buzz. The results speak for themselves. Since we've put the ad online, our Balloons commercial has been viewed over 2 million times.

Our Let Love Never Die version of this ad has been viewed over 180,000 times, and we were the #3 global trending topic on Twitter for 35 minutes during The Walking Dead episode when our ad aired. I encourage you to go to Zale's YouTube channel to view spots from Vera Wang, our other TV ads and much more. We believe that the guest is playing the game differently, so we have to provide them with new opportunities to interact with our brands.

Now please turn to Slide 6. No Holiday preparation is complete without the engagement of our guest-facing teams. To ensure that our stores' teams will be ready for their busiest season, we've continued to make significant investments in training. We've refreshed our materials for Vera Wang LOVE and the Celebration Diamond collection twice over the past year. Each introduction of a new collection has been anchored with training on the features and benefits of the assortment. And each year, we improve the technical selling of our jewelry consultants using Diamond Council of America training. Our Head of Human Resources, Toyin Ogun, is on the Diamond Council of America board.

I've traveled to 6 markets so far this season, and it's clear that our selling teams are excited and prepared to deliver exceptional guest experiences during the Holiday selling period. I continue to be amazed by the great guest stories that occur in our business each and every day. We don't just consummate transactions. We create lifetime relationships.

Finally, we continue to make prudent investments in our stores to improve the overall service environment. Since our last call, we've completed point-of-sale broadband upgrades in approximately 25% of our stores. When completed next September, all of our stores will be broadband-enabled to support the work that we're doing as an omnichannel retailer. We've also invested heavily in store aesthetic upgrades to ensure that each store is maintained to a consistent brand standard. We've invested in new graphic packages in our Zales Outlet stores that highlight our exclusive branded products, and we've added new elements for our Arctic Brilliance collection. And later this year, we'll have new elements for our Celebration Diamond collection. We built a solid foundation to deliver results for the second quarter and beyond.

I'll now turn the call over to Tom to review the financial results.

Thomas A. Haubenstricker

Thank you, Theo, and good afternoon, everyone. I'll be starting my comments on Slide 7 with an overview of our first quarter financial performance, beginning with our topline results. Revenues for the first quarter were $363 million compared to $357 million for the same period in the prior year. The increase in revenues is primarily due to our reported 4.4% comparable store sales growth, partially offset by revenues associated with the net decrease of 60 Fine Jewelry stores and 27 kiosks compared to last year.

Our 4.4% same-store comp this quarter comes on top of a 3.9% comp in the prior year first quarter. As Theo already mentioned, we now have completed 12 consecutive quarters of growth in same-store comps. Using constant exchange rates, comparable store sales rose 5.4% for the first quarter. The impact from foreign exchange rate movement was more significant than normal during the first quarter, as the average Canadian currency rate weakened 5% relative to the U.S. dollar. This change in foreign exchange rate had an adverse impact on our overall bottom line for the quarter of approximately $0.01 per share.

The overall sales comp in the quarter, consistent with the past trend, was driven by the strong performance of our core national brands: Zales and Peoples. Our Zales brand, which includes Zales Jewelers and Zales Outlet, delivered a comp of 7.5%. And our Peoples brand produced a constant-currency comp of 8.4%.

From a merchandise perspective, our first quarter comp performance was driven by a strong increase in units sold in our exclusive bridal collections and our core fashion assortment. The growth from this increase in units sold was partially offset by a modest decline in the average price per unit sold, due in part to the success of our efforts to broaden the assortment within our exclusive product collection.

Importantly both our bridal and core fashion categories showed solid overall same-store revenue growth in the quarter. We are encouraged by this balanced performance of our merchandise portfolio as we head into the Holiday period.

For the first quarter, we achieved a gross margin of $194 million or 53.4% of revenues compared to $190 million or 53.2% of revenues for the prior-year period. The 20 basis point improvement is primarily due to the benefits received from our sourcing initiative.

As we stated in our fourth quarter call, we expect improvement in our gross margin rates throughout fiscal 2014 as a result of sourcing efficiencies and the favorable commodity cost environment.

We expect the timing of these benefits to follow the timing of the related merchandise flow into the stores, and therefore, expect the benefits to be more significant in the second, third and fourth quarters of the fiscal year.

SG&A expenses for the quarter were $208 million or 57.4% of revenues compared to $206 million or 57.8% of revenues in the same period in the prior year. As we stated on our last call, we do expect our SG&A rate as a percent of revenues for overall fiscal 2014 to be slightly higher than the prior year due to the increased investments in growth initiatives, which we expect to incur later in the year.

As you can see on our income statement and perhaps recall from last year's earnings call, our prior year first quarter included other gains of $1.8 million, which was primarily due to the $1.9 million favorable settlement resulting from the De Beers class-action lawsuit.

For the first quarter of fiscal 2014, we've posted an operating loss of $22 million or 6.1% of revenues compared to an operating loss of $23 million or 6.4% of revenues in the prior year quarter. This represents a 30 basis point improvement in operating margin from the prior year period and a 90 basis point improvement over last year when excluding the impact of the prior year's legal settlement gains.

Interest expense for the first quarter of 2014 was $5.6 million, relatively flat with the same quarter in the prior year. In the first quarter, we reported an income tax benefit of $300,000 compared to a benefit of $600,000 in the same period last year. The first quarter tax benefits in both fiscal 2013 and 2014 relate to tax credits generated in Canada.

Net loss for the first quarter of 2014 was $27 million or $0.83 per share, an improvement of $0.05 per share compared to the prior year net loss of $28 million or $0.88 per share. When excluding the prior year $1.9 million legal settlement gain, our improvement in loss per share for the quarter was $0.10.

Now please turn to Slide 8 where I've outlined the main drivers of the first quarter 2014 improvement in net loss. Starting with last year's result, which was a $28.3 million loss, the gross margin improvement was $3.5 million, driven by the topline growth and gross margin rate improvement, partially offset by the impact of currency. The increase in SG&A expense impacted the first quarter by $1.7 million. There was a $1 million favorable impact due primarily to lower depreciation as a result of the net reduction of 87 stores relative from the prior year. And the other gain change was $1.8 million primarily from the $1.9 million De Beers settlement in the prior year. This brings us to this quarter's net loss of $27.3 million and the $1 million improvement over the prior year.

On Slide 9, I will take you through our comparable store sales details. This quarter, as we stated earlier, total company comp was up 4.4% following a 3.9% rise in last year's first quarter. Comparable store sales were up 5.4% using constant exchange rates.

Now let's look at this comp performance in greater detail. As a reminder, comps on this page include sales from the associated online businesses. Zales-branded stores had an increase in comparable store sales of 7.5%. This increase follows a 4.8% rise in the same period last year. The performance of the Zales brand will continue to be the cornerstone of our future growth strategy as it represents over 60% of our revenue.

U.S. Fine Jewelry brand, including our regional brand Gordon's Jewelers, had an increase in comparable store sales of 6.3% in the first quarter of 2014. This increase follows a 3.9% rise in the same period last year. Peoples-branded stores had an increase of comparable store sales of 8.4% in the quarter at constant exchange rates on top of a 7.3% comp in the prior year period. On a U.S. dollar reported basis, comparable store sales were up 3.1% in the quarter on top of an 8.9% rise in last year's first quarter.

Our Canadian Fine Jewelry brands, consisting of Peoples and Mappins, had an increase of comparable store sales of 7.3% at constant exchange rates on top of a 4.0% comp in the prior year period. On a U.S. dollar reported basis, comparable store sales were up 2% in the first quarter on top of a 5.5% rise in last year's first quarter.

In the first quarter, Piercing Pagoda had a comparable store sales decline of 1.8% following a 2.0% rise in the same period last year. Our Piercing Pagoda business, being principally kiosk based, is more sensitive to more traffic trend, which have been widely reported as lackluster this last quarter.

Please slide -- please, turn to Slide 10 where I'll take you through the highlights of our balance sheet and liquidity. As of October 31, 2013, the company had cash and cash equivalents of $14 million compared to $15 million at October 31, 2012. Inventory at October 31, 2013, stood at $903 million compared to $908 million at the end of the first quarter last year. This change is a result of a net reduction of 87 stores from the prior year, the impact of currency changes and efficiencies in our distribution center, offset by expansion in our successful bridal and exclusive merchandise assortment to additional stores for Holiday.

We are confident we have the appropriate level of inventory in our stores for the upcoming holiday season.

Capital expenditures in the first quarter of 2014 totaled $9 million compared to $7 million in the prior year quarter. Expenditures in the quarter were primarily devoted to store refurbishment and enhancement projects as well as technology investments in our stores. As Theo have mentioned, we have now completed the POS and connectivity upgrade in approximately 25% of our Fine Jewelry stores.

As of October 31, 2013, the company had total outstanding debt of $506 million, down $19 million compared to $524 million as of October 31, 2012. In addition to the term loan of $80 million, long-term debt included $423 million borrowed under the revolving credit facility and $3 million of capital leases.

As of the end of the quarter, the company's total net revolver availability was $231 million. Our fixed charge coverage ratio stood at 2.6, 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 cost. Maintaining this ratio above 1 provides the company with additional flexibility relating to liquidity and future capital planning.

As we mentioned on our last call, the improving strength and stability of our balance sheet will be a key enabler to driving improved business terms for the company in our future negotiations with our vendors and landlords.

I'm now going 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 first quarter with 1,057 Fine Jewelry stores and 625 kiosks for a total of 1,682 retail locations compared to the prior year first quarter count of 1,117 Fine Jewelry stores and 652 kiosks for a total of 1,769 locations.

During the quarter, we closed 7 Fine Jewelry stores and 5 kiosks. As a reminder, store closures generally occur at the end of the lease term, and while they do reduce our total revenue, they are usually accretive to our bottom line and inventory efficiency metrics; 5 out of the 7 Fine Jewelry stores that closed in the first quarter were with our regional brands, Gordon's and Mappins, and were in malls where we have a successful Zales or Peoples store. We expect future Fine Jewelry store closures to continue to be concentrated in our regional brands and in our Pagoda business.

Please turn to Slide 11 where I'll cover our expectation for fiscal year 2014. Our first quarter results that we have discussed today were in line with our expectations, therefore we have not changed our view of the fiscal year as a whole. We expect to continue to achieve positive topline growth, driven by the performance of our 2 national Fine Jewelry brands, Zales and Peoples, and by further penetration of exclusive branded products.

We expect store closures will impact our overall revenue growth by about 250 basis points and represent net closures of approximately 60 to 65 retail locations. We expect the majority of these net closures to take place in our regional brands and in Pagoda. The estimated net closures for the year is slightly higher than communicated last quarter due to a change in expected net closures in our kiosk business.

We expect to achieve a full year operating margin increase of at least 50 basis points compared to our 1.9% operating margin in fiscal 2013. This improvement will be achieved primarily from gross margin benefits from sourcing efficiencies and from the current favorable commodity cost environment. We expect this improvement in gross margin will be partially offset by a slightly higher SG&A rate due to increased investments in areas that relate to future topline growth.

From a quarterly timing perspective, we expect both the gross margin improvements and the higher SG&A investments to be more significant in the second, third and fourth quarters of the fiscal year.

Our tax expense is anticipated to be about $2 million to $3 million for the year. Interest expense will be approximately flat with fiscal year 2013. We expect our diluted share count to be approximately $45 million at our current stock price. And finally, capital expenditures will be higher in 2014 as we expand our investments in technology, store remodels and selected store openings.

We anticipate capital expenditures of between $40 million and $45 million. The majority of 2014 technology-related capital spending will be focused on better enabling our stores through an enhanced point-of-sale system and supporting communicating -- communication infrastructure.

That concludes my comments on our first quarter. I will now turn the call over to the operator to begin our Q&A session.

Question-and-Answer Session

Operator

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

Jeffrey S. Stein - Northcoast Research

A couple of things. First of all, I'm wondering if you could talk about how you kind of are planning strategically the business for Holiday from the standpoint you've got fewer shopping days between Thanksgiving and Christmas, fewer trips to the mall. Are you thinking more in terms of the comping driven by transactions or higher average unit retail given that you do have fewer shopping days?

Theophlius Killion

Well, Jeff, this is Theo. We've had improvement in the last quarter in both transactions and average dollar sales, so we certainly expect that, that will continue as we go into the all-important Holiday selling period. In terms of strategic planning, we've adjusted our merchandising, our promotional and our staffing to line up with the shorter selling days, and we still feel good about how we're positioned to be able to deliver a great Holiday.

Jeffrey S. Stein - Northcoast Research

Great. And Theo, I'm wondering, your competitor this morning indicated that they're off to a pretty good start for November. I'm wondering if you might care to comment on how your sales are trending so far?

Thomas A. Haubenstricker

So Jeff, this is Tom. Our November performance so far is in line with our expectations. Clearly the quarter as a whole will be driven by the performance of the period yet to come. But so far, what we're seeing is very consistent with our expectations.

Jeffrey S. Stein - Northcoast Research

Okay. And just one modeling question. Depreciation and amortization, it was down about $1 million. What should we be thinking about for the full year on D&A?

Thomas A. Haubenstricker

So I think we'll see the depreciation being continued down against last year but will start to creep up towards the second half as we start to see the effect of the higher capital spending.

Jeffrey S. Stein - Northcoast Research

Okay, very good. And, Tom, have you guys given any thought to locking in lower rates at this point with some of your floating rate debt?

Thomas A. Haubenstricker

Yes. So Jeff, I didn't mention it on the call because we had disclosed it quite thoroughly in the 10-K, but we did institute fixed rates, swaps back in mid-September both for the rest of this fiscal 2014 and for 2015 and 2016 to the extent of $215 million of the ABL. So obviously, the rate environment continues to be volatile, up and down, but we feel that we've locked into to very good rates for the business all the way now until the end of fiscal 2016. And there's more information on that in the K that we filed awhile back.

Operator

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

David Wu - Telsey Advisory Group LLC

First, in terms of the comp performance, can you talk about perhaps sort of the complexion with respect to get unit and traffic trends?

Thomas A. Haubenstricker

Well what we're -- we don't -- Dave, as you know, we don't have traffic counters in our store. But what we do see, and I talked about, is very favorable performance in the number of units sold both in our bridal, which has been a mainstay for us over the last several quarters, and importantly as we move into Holiday, in our core fashion business. So we feel good about what we're seeing in terms of the transactions and the number of units sold in the store, and that's been a big factor in driving the comps in our Zales and Peoples areas. The area of the business that we have that's probably most exposed to mall traffic is our Pagoda business. It's a kiosk business. There's not a lot of promotional dollars in terms of marketing. And so that's the business that we probably have seen impacted the most by what everyone has read as being the downward trend in mall traffic. I think the Fine Jewelry business is held up better clearly represented by the good comps we reported.

David Wu - Telsey Advisory Group LLC

And would you say ticket [ph] was the strongest comp driver just given the strength of bridal?

Thomas A. Haubenstricker

In terms of the -- we saw -- as I've said before, we saw unit increases both in bridal and fashion. Bridal was a little bit greater so that probably drove the majority of the growth in the quarter.

David Wu - Telsey Advisory Group LLC

Great. And can you talk about any of the initial outcomes so far from the sourcing project with A.T. Kearney and perhaps if you can quantify at all sort of the savings that you think you could achieve with the program?

Thomas A. Haubenstricker

Sure. So we're very pleased with the progress that we're making on our sourcing program. I think the savings we saw in the first quarter were really just the start of what we expect to be more significant savings as we work through the year. We can see the extent of the savings in the merchandise that we've ordered for the Holiday. We ordered it back in June and July, and we could see the favorable cost comparison to the similar price last year. And now that those goods are starting to work their way through the distribution center and into our stores, and that gives us great confidence that as we work through the year, the second, third, fourth quarter, the extent of the savings that we see from our sourcing efficiency will be significantly greater than what we reported with the 20 basis point improvement in the first quarter. We're also making progress on the second label of sourcing that will be key to enabling further margin expansion in 2015. You've got to keep ahead of this game in terms of being several quarters ahead of when you want to place the order. And the team at A.T. Kearney are working through what are the additional actions we'll take and strategies we'll implement to sustain these sourcing savings, not just in '14 but in the years to come.

Theophlius Killion

And we haven't talked about it on this call, but I think it is important to mention that while we have been certainly using A.T. Kearney, we've also been building our internal capabilities and our team here at the store support center. So we're very pleased with the people that we've been able to bring in, the strength of the team and the contribution that they're making so that we'll be able to be self-sustaining over a long period of time.

David Wu - Telsey Advisory Group LLC

Excellent. And you mentioned completing the tech upgrades in 25% of the Fine Jewelry stores, and can you perhaps talk about the initial customer response to those upgrades and if it has translated to stronger conversion?

Matthew W. Appel

Sure, David. The upgrades that we've implemented are primarily -- the efficiencies are primarily reflected in the work of our jewelry consultants. And so this allows us to transact faster, to communicate with our stores more efficiently, to drive training and messaging into the stores, and for them to do their work more efficiently. They're not -- at the moment, they're not guest facing. But that is the plan for our omnichannel retailing initiative. As we complete this implementation, as we complete the 75% of the stores that we will complete between now and August of 2014, that will provide the foundation for us to drive technology-enabled work towards -- focus towards the guests in the form of tablet enablements and opening up the full assortment of the company to each and every store so that we can serve the guests most effectively in the brick-and-mortar environment.

Theophlius Killion

Yes, as Matt mentioned, one of the primary benefits in the near term is just ready and easy access to information for our jewelry consultants and for our store seams [ph]. There's a tremendous amount of enthusiasm to have that access. Over time, we'll also be able to use the system with broadband capabilities to do training.

David Wu - Telsey Advisory Group LLC

Great. And in terms of the store closures, it looks like you did increase the number of net store closures for this year at 60 to 65. And I was wondering what that was related to, if there's any particular store concept?

Thomas A. Haubenstricker

Yes, yes. I think it was mostly just adjusting the -- some activity that we had planned for the fourth quarter relating to the Pagoda, the kiosk business. So it's not going to affect -- it didn't affect the revenue guidance we gave for net store closures because they'll all be things that will happen relatively late in the year. But it's all on the kiosk business, the change.

David Wu - Telsey Advisory Group LLC

Great. And then just lastly, can you talk about perhaps the credit participation levels that you've seen during the quarter? Any meaningful changes there to call out and also just any updates on the upcoming partnership with ADS?

Matthew W. Appel

Sure. The credit performance during the quarter was very strong. On a year-over-year basis, our prime program saw enhancements both to approval rates, significant enhancements to approval rate as well as credit mix. And it's all coming from the prime program. I should mention that during the quarter, we did implement the first steps of the Alliance agreement. Alliance, you'll recall, when we announced it, Alliance is taking secondary position to Citi so they get the first crack at any decline that Citi -- any application that Citi declines. And Alliance has been fairly aggressive in lending to this group. The costs are quite modest. The costs that will incur when the Alliance data goes prime in the program. It occurred late in October, so it didn't have a material impact on the first quarter. But we have expectations for the rest of the year that we think will be -- this will be a strong addition both to our ability to lend and to the cost of that lending.

Operator

And your next question comes from the line of Rick Patel with Stephens Incorporated.

Rick B. Patel - Stephens Inc., Research Division

Can you talk about monthly comp trends within the quarter? I'm just curious what kind of impact the government shutdown or the other macro noise we had in September affected -- how that affected your business?

Thomas A. Haubenstricker

So Rick, we did -- we're not going to get into monthly detail other than to say that the overall quarter was strong as we reported on that from that standpoint. We just don't think it's helpful to get into that small of a slice of time.

Rick B. Patel - Stephens Inc., Research Division

And then can you talk a bit about your promotional cadence and your thoughts going forward? I'm curious, if you're going through a very promotional Holiday season, what your strategy will be whether you will respond accordingly or look to prioritize margin and -- margin preservation?

Theophlius Killion

No. Our promotional cadence is set, and we'll be executing to the plan. That's what we've done for the last 3 or 4 Holidays. We don't intend to do anything that is being responsive to some of the promotional nature of what might be going on in different sectors of business. We have a high consideration purchase. People who are buying engagement rings are thinking about it over a long period of time. We think our best strategy is to make sure that we keep our powder dry and rely on our selling teams to deliver the result.

Rick B. Patel - Stephens Inc., Research Division

Great. And then just lastly, can you talk about your longer term outlook for marketing? It looks like you're going to be very visible in the marketplace this year, and I'm curious, as you think about the upcoming quarters, if you're considering spending more on marketing during noncritical shopping periods?

Thomas A. Haubenstricker

So I think -- we're not going to get into the detail in terms of long term on the marketing side. Theo has talked about strategically where we see -- where we want to make an impact and how we want to reach our guests. I mean it's possible we'll spend more in the second quarter on our marketing than we did last year. I mean that's consistent with some of our growth ambitions that we have going forward. But we're -- our focus is on really the effectiveness and efficiency of our marketing programs and ensuring that what we do spend has the appropriate ROI, and we'll continue to focus on those areas.

Theophlius Killion

Yes, I think it's important to understand that we really never go dark with the ability to be able to use things like Instagram and Twitter and Facebook and YouTube. We're telling stories about our merchandise on a 360-degree basis. So television is only one application of how we think about communicating with our guests. The others are equally important.

Operator

And your next question comes from the line of Lorraine Hutchinson with Bank of America Merrill Lynch.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

I just wanted to follow up on Rick's question on the promotional environment. Given how sensitive Piercing Pagoda is to mall traffic, is that a place where you may need to up the ante on promotions this Holiday season?

Theophlius Killion

No. We're committed to staying the course. What we found over a very long period of time with the work that we've done in the Zales and Peoples brands is staying the course is the better way to go, having some consistency in your promotional messaging. Pagoda's important to us strategically because we think there's lots of opportunity to grow it in the future, but also the margins there are very, very good. And we don't want to give away those margins. We think it's an important add to the overall company.

Rick B. Patel - Stephens Inc., Research Division

Thanks. And then on the Alliance agreement, it sounds like that could be a nice incremental sales driver over the next few quarters. But when will you get access to some of the data that they're able to provide to help you plan for the upcoming years?

Matthew W. Appel

Lorraine, this is Matt. We're working on that right now. We'll have better access to data in about 6 to 9 months. But keep in mind that under the contract, unless something changes, they won't become the prime lender until October of 2015. That's when we'll get the most benefit out of that relationship. But we're working hard on all of the ancillary items to prepare for when they are the prime lender and to better our understanding of our customer in the meantime.

Operator

And your next question comes from the line of Oliver Chen with Citi.

Oliver Chen - Citigroup Inc, Research Division

Regarding your earlier comments on price per units and the trends there as you brought on the assortment, could you just clarify what's happening there in order to put that incremental pressure there? And is there any particular trend with customer response to certain price points that ties into the cautious atmosphere at all? Also regarding your guidance for the full year, what's incorporated in terms of your view on the March margin within the GM line? Thank you.

Thomas A. Haubenstricker

So Oliver, the point we made about our first quarter comps was that they were generated by an increase in the units sold, both in our bridal and in our core fashion assortment, and that was the driver for the growth. And there was a slight -- a very slight offset in a reduction in the average price coming out of those businesses. And as I stated, some of that, a big piece of that we can see is that as we've expanded the assortment in some of our exclusive products, some of that new assortment is at the lower price point within that price band for the exclusive product collection. And as those have become successful, it brought down the average price for those areas. But the composition of what we're seeing on the units sold combined with the average price we are getting is something we're very, very comfortable with as a good recipe for driving continued comp growth.

Theophlius Killion

Yes. We expect this. We're bringing in new tests to continue margin expansion, and we have not gotten resistance on the part of our guests. They've been very responsive, particularly in our proprietary brands, to new introduction of products. And I think that excitement is mirrored by the excitement of our jewelry consultants who love getting in new product and talking about it. So we feel pretty good about where we are.

Thomas A. Haubenstricker

And then to follow up on your other question on -- the gross margin improvements that we expect to see throughout the year, you saw a little bit in Q1, we expect that to grow as far as the improvement in the rest of the year. That will be reflected in the merch margin. So effectively, since sourcing is driving the lion's share of that benefit, what we see in gross margin would also be reflected in the core merch margin of the company.

Oliver Chen - Citigroup Inc, Research Division

Okay. And just on a broader perspective, what are your thoughts on the health of the consumer out there, and if people are being hesitant or if you're more encouraged or is this mixed signals with the state of the health and potentially where consumers sit in the spectrum with regards to how healthy they are?

Theophlius Killion

Oliver, we don't have any greater insight than I think anyone else has. We read all the reports about consumer sentiment. We look at where people are. What we try to do is keep our heads down, focus on what we do well, which is service our guests and build relationships, and not get distracted by some of those things that are going on in the media.

Thomas A. Haubenstricker

There's been uncertainty, obviously, over the last several quarters, and we think we've made a lot of progress in that period.

Operator

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

Janet Kloppenburg

Theo, I had a question on marketing. It sounds like you're investing more in some of the social media venues, and it sounds like you're also increasing your marketing spend. But I was wondering if, going forward, there was an opportunity to perhaps reduce your dependency on television and other more expensive venues and to divert funds into electronic or digital marketing and perhaps get some savings there. And also on the sourcing side, I was wondering if like some other retailers that -- some other jewelers that I follow, if you're seeing some advantage coming from lower gold prices and if that may help the gross margin in the next couple of quarters and what your viewpoint is there?

Theophlius Killion

Thanks, Janet. On marketing, we are not coming at it with a preconceived notion about where we need to be. What we're doing is we're tracking where our customers are going to look for merchandise, how they want to access our brands, and we're trying to have availability across a variety of venues. So there's not a specific plan that says we will be reducing television. Certainly television is very, very important this time of year. It's one of the things that helps to drive the fashion business in particular as we get closer to Holiday. So television is still important to the mix. However as we continue this ongoing engagement with our guests on places like YouTube, we feel really good that they are spending lots and lots of time with 2 million views of the Balloon ad. That's pretty incredible. Those are people who are opting in to see us and us not interrupting a football game or whatever they're watching over the course of their television viewing. So we feel very good about our television approach. We also feel good about new media, and we'll continue to play with the mix as the customer dictates.

Thomas A. Haubenstricker

And then on the sourcing question, we are seeing some benefit begin to flow through associated with lower gold prices. When you look at the Fine Jewelry business, gold doesn't represent a large portion of our overall cost structure. It ranges from about 12% to 15%. But we are seeing lower prices, taking advantage of those, and that is part of the savings that will be the catalyst for driving higher gross margin improvement later in the year.

Operator

And your last question comes from the line of Bill Armstrong with CL King & Associates.

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

Just on sourcing and maybe a little longer term, as you know Signet is expanding its efforts in rough diamond sourcing. I was wondering if you guys have spent any time looking at rough diamond sourcing as a possible initiative for improving your supply chain and what the future might hold for Zale in that regard?

Thomas A. Haubenstricker

So, Bill, it's certainly not something that we're looking at in any critical way for near-term sourcing savings. As I've mentioned before, we've laid out our sourcing strategy in a series of ways. And what we're focused on now is around the business contract terms with the vendors and ensuring we've got good competitive prices on what we're buying in a finished good environment. That's where our focus is. As I've said, we're looking through what's going to be the catalyst for some of the additional savings later on, but it wouldn't be appropriate to speculate on what those strategies would be at this point in time.

Theophlius Killion

Yes, we have a pretty specific plan over the next 3 years of the kind of savings we can get out of sourcing, and we don't want to get ahead of ourselves. We think there's lots of opportunity over the next couple of years in the areas that Tom has talked about.

Operator

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

Thank you. And on behalf of the management team and our all-important guest-facing teams, I'd like to thank everyone for joining us on the call today and for your continued support. We'd like to wish everybody a happy Thanksgiving and a great holiday season. We look forward to speaking to you again in February when we report our second quarter results. Thank you.

Operator

Ladies and gentlemen, this concludes the Zale Corporation First Quarter Fiscal Year 2014 Earnings Conference Call. We appreciate your time. You may now disconnect.

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