Zale Management Discusses Q2 2014 Results - Earnings Call Transcript

Feb.27.14 | About: Zale Corporation (ZLC)

Zale (NYSE:ZLC)

Q2 2014 Earnings Call

February 27, 2014 9:00 am 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

Oliver Chen - Citigroup Inc, Research Division

Jeffrey S. Stein - Northcoast Research

Rick B. Patel - Stephens Inc., Research Division

David Wu - Telsey Advisory Group LLC

Operator

Good morning. My name is Tony, and I will be your conference operator today. I would like to welcome everyone to the Zale Corporation Second 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

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, 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. These factors include, but are not limited to: If the general economy performs poorly, discretionary spending on goods that are, or are perceived to be, "luxuries" may decrease; if the company does not achieve targeted sales growth; its operating results and earnings will be adversely impacted. The company operates in a highly competitive industry. The company's and Signet Jewelers Limited's ability to consummate such proposed acquisition of the company by Signet. The conditions of the completion of the proposed transaction being satisfied, including the receipt of stockholder approval and applicable regulatory approval. Operating cost, customer loss and business disruption, including without limitation, difficulties in maintaining relationships with employees, customers, competitors or suppliers may be greater than expected following the announcement of the proposed transaction. And the retention of certain key employees of the company may be difficult. Additional information concerning other factors that would 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, 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, 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 measures 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 from the most comparable GAAP financial measures.

I'll now turn the call over to Theo.

Theophlius Killion

Thank you, Roxane, and good morning to everyone joining us on the call today as we report our second quarter 2014 holiday results.

If you're following along with the slides that we posted on our website, please direct your attention to Slide 3.

I'm pleased to report that in a challenging retail environment, one with slower mall traffic and unfavorable weather, we delivered a 1.9% comparable store sales result on a constant currency basis. Notably, our national brands continue to lead the way, with Zales up 3.9% and Peoples up 2.7%. On our holiday results call last month, we communicated to you that efficiencies from our merchandise sourcing program, favorable commodity costs and fewer promotions in the holiday selling period compared to last year would result in higher margins. We're pleased to report that we delivered a gross margin expansion of 240 basis points in our fiscal second quarter. And on the operating margin side, we delivered an improvement of 150 basis points. This resulted in an increase of $10 million in net income, and an increase of $0.11 in diluted earnings per share compared to the prior-year quarter. Tom will add more color to the financials in a few minutes.

Now please turn to Slide 4, and I'll give you more detail on some of the key elements contributing to our second quarter results. Fundamental to our strategy and to our results in the second quarter is our commitment to deliver compelling assortments, anchored by increasing penetration of our exclusive branded collections. In our Wedding business, we have 3 powerful collections: Vera Wang LOVE, the Celebration Diamond Collection and Arctic Brilliance, which is in Canada, and then our Zales Outlet brand. All of these collections have compelling narratives, have strong emotional resonance for our bridal guests, and were important contributors to our second quarter results. We will continue to test additional collections during the Mother's Day selling period. In fashion, joining our successful Candy Colored Diamond and Gemstone collection is the Heart Within. I mentioned on our call last month that we successfully tested this proprietary collection in 300 stores during holiday and expanded it to 600 stores for Valentine's Day. The results exceeded our expectations and for Mother's Day, the top 4 styles will be expanded to all of our Zales and Peoples stores. Additionally, we'll be testing a variety of new SKUs during the half their -- during the Mother's Day selling period. The Heart Within test and launch process serves as a good illustration of the discipline we've introduced in the development of exclusive branded collections. It starts with the concept. In this case, it was taking an enduring symbol of love, the heart, and differentiating it from the hundreds of hearts available to consumers. We then tapped into the creative talents of merchandising and design to create a beautiful piece of jewelry. Unique because it's 2 hearts linked as 1. Our marketing team then tested the product in focus groups, along with a number of narratives intimate to add an emotional anchor to the product. Having received strong approval from consumers, and after fine-tuning the compelling narrative of, "when 2 hearts embrace, love grows stronger" we designed elements for our fall test in 300 stores and online. With extremely encouraging results, we began developing training materials for our stores that included written materials with selling tips and the features and benefits of the product along with supporting videos. Finally, as we expanded the collection for Valentine's Day, we also created a beautiful 1-page layout in our Valentine's Day catalog that had a Heart Within selling incentive for our sales teams. Discipline and rigor have characterized the work that we've done over the last 4 years, and we've been rewarded for it. The approach we're using for developing exclusive branded collections is no different. And in the case of the Heart Within, we're also being rewarded for our disciplined and rigorous approach. Our multichannel marketing efforts were concentrated on our national brands, Zales and Peoples, both at holiday and over the Valentine's Day selling period. Our blended media approach uses television, magazines, newspapers, catalogs and online display to encourage or to engage our guests.

As you know, we also actively engage our guests through emerging media: YouTube, Facebook, Instagram and Twitter. Our web stores for Zales and Peoples complement our 4 walls stores by creating access to our brands 24 hours a day. The discipline of executing our strategy, growing exclusive branded products, investing in our guest facing teams, expanding gross margin and growing our core brands hasn't changed. Now please turn to Slide 5. As I'm sure all of you know, on February 19, we signed a definitive merger agreement with Signet Jewelers for Signet to acquire all of the issued and outstanding stock of Zale for $21 per share in cash consideration. The transaction is subject to Zale shareholder approval, certain regulatory approvals and customary closing conditions. We anticipate the merger to close by the end of 2014. Signet's offer represents a premium of approximately 41% over Zale's closing price as of February 18 and a premium of over 400% from the closing price a year ago today. And we completed our multiyear turnaround program to return the company to profitability, we believe that if the merger is consummated, Signet's operating strengths will enable us to accelerate Zale's performance improvement for the benefit of our employees and, importantly, for the benefit of our guests. When we open up our Q&A session, after Tom's remarks, we will be happy to answer questions on our business and on the second quarter results. Any comments made on the proposed transaction will be limited to information that's publicly available.

I'll now turn the call over to Tom.

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 results. Revenues for the second quarter were $656 million compared to $671 million for the same period in the prior year. This $14 million decline was primarily due to the revenue impact from the net decrease of 86 retail locations versus prior year, and the impact from a decline in the Canadian currency exchange rate, partially offset by the 1.9% constant currency comp store sales growth that Theo has already mentioned. I have provided a reconciliation of our overall change in reported revenue to the 1.9% comp store growth rate on Slide 12 in the appendix section of the deck.

As we discussed in our call in January, the impact from foreign exchange rate movement was more significant than normal during the second quarter as the average Canadian currency rate weakened 7% relative to the U.S. dollar. This change in Canadian exchange-rate had an adverse impact for the quarter on our overall revenue of $8 million and our net income of approximately $1.5 million.

For the second quarter, we achieved gross margin of $348 million or 53% of revenues compared to $340 million or 50.6% of revenues for the prior-year period. The 240 basis point improvement is primarily due to the benefits generated from our sourcing initiatives, our disciplined promotional cadence throughout the holiday selling period, and a favorable commodity cost environment. Our gross margin improvement in the quarter was slightly higher than the 200 basis point improvement we had indicated on our holiday call in early January due to a strong margin in the month of January and a more favorable outcome on certain vendor settlements.

As we have stated on earlier calls, we expected the benefits from our sourcing initiative to significantly increase in the second quarter consistent with the timing of the related merchandise flow. We expect to continue to realize sourcing benefit throughout the remainder of the fiscal year.

SG&A expenses for the quarter were $280 million or 42.7% of revenue compared to $279 million or 41.6% of revenue in the same period in the prior year. This increase in SG&A rate was primarily driven by higher holiday marking expenses and overall labor related expenses compared to the prior year. As we have stated in prior calls, we expect our SG&A rate as a percent of revenue for overall fiscal 2014 to be slightly higher than the prior year due to increased investments in growth initiatives we expect to incur throughout the year.

For the second quarter of fiscal 2014, we posted operating earnings of $60 million or 9.1% of revenue compared to operating earnings of $51 million or 7.6% of revenue in the prior-year quarter. This represents a 150 basis point improvement in operating margin from the prior-year period.

Interest expense for the second quarter of 2014 was $6 million, relatively flat with the second quarter last year. In the second quarter, we reported an income tax expense of $2.6 million compared to $4 million in the same period last year. This improvement was due to lower tax expense in Canada, in part due to the currency change I've already discussed. Net earnings for the second quarter of 2014 were $51 million or $1.13 per diluted share, an improvement of $0.11 per diluted share compared to the prior year net earnings of $41 million or $1.02 per diluted share. It's important to note, our diluted share count in the second quarter was 45 million shares compared to 40.3 million shares in the prior year. The increase in the diluted shares compared to the prior year is due to the impact of our higher average share price on the diluted share calculation.

Now please turn to Slide 7 where I've outlined the main drivers of the second quarter 2014 improvement in net earnings.

Starting with last year's result, which was $41.2 million, the gross margin improvement was $8 million driven by the improvement in our gross margin rate. The increase in SG&A expense impacted the second quarter by $1.1 million. This increase was primarily driven by higher holiday marketing expenses. There was also a $2.7 million favorable impact due primarily to the lower tax expense and lower depreciation as a result of the net reduction of 86 stores in the prior year, and this brings us to the quarter's net earnings of $50.8 million and the $9.6 million improvement over the prior year.

On Slide 8, I will take you through our brand comp performance. This quarter, as we stated earlier, our total company comp was up 1.9% at constant exchange rate, or 0.6% on a U.S. dollar basis. This follows a 2.2% rise at constant exchange rate or 2.8% on a U.S. dollar basis in last year's second quarter. 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 store had an increase in comparable store sales of 3.9%. This increase follows a 3.6% 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 approximately 65% of our revenue.

U.S. Fine Jewelry brands, including our regional brand, Gordon Jewelers, had an increase in comparable store sales of 3.1% in the second quarter of 2014 and this follows a 2.8% rise in the same period last year.

Peoples branded store had an increase in comparable store sales of 2.7% in the quarter at constant exchange rates on top of a 3% comp in the prior-year period. Our Peoples brand represents approximately 14% of our overall revenue. On the U.S. dollar reported basis, comparable store sales were down 4.3% in the quarter, following a 6.4% rise in last year's second quarter.

Our Canadian Fine Jewelry brands, consisting of Peoples and Mappins, had an increase in comparable store sales of 1.3% at constant exchange rates on top of a 0.5% comp in the prior-year period. On a U.S. dollar reported basis, comparable store sales were down 5.6% in the second quarter, following a 3.8% rise in last year's second quarter. In the second quarter, Piercing Pagoda had a comparable store sales decline of 4.6% following a 1% rise in the same period last year. Our Piercing Pagoda business, being principally kiosk-based, is more sensitive to mall traffic trends, which have been widely reported as sharply down from the prior year. It's important to note we did see a significant improvement in our gross margin rate for the Pagoda business compared to the prior year, and this improvement helped mitigate some of the profit decline associated with the negative comp.

From a merchandise perspective, our second quarter comp was driven by the solid performance of our bridal business spearheaded by strong growth from our exclusive merchandise. Our overall exclusive merchandise represented over 12% of our Fine Jewelry revenue compared to 10% in the prior year. Both our bridal and core fashion business experienced a solid increase in transaction count, partially offset by a change in mix, resulting in a lower average unit price in both wedding and fashion.

Now please turn to Slide 9 where I'll take you through the highlights of our balance sheet liquidity.

As of January 31, 2014, the company had cash and cash equivalents of $23 million compared to $19 million at January 31, 2013. Inventory at January 31, 2014, stood at $864 million compared to $837 million at the end of the second quarter last year. This change in inventory is a result of the expansion of our successful bridal and exclusive merchandise, and the timing of certain other merchandise processing activities, partially offset by the redistribution of inventory from closed stores and the impact of the lower Canadian exchange rate.

Capital expenditures in the first half of 2014 totaled $18 million compared to $13 million in the same period last year. Capital expenditures in the first half were primarily devoted to store refurbishment and enhancement projects, as well as technology investments in our stores. Prior to the holiday, we had completed a POS in connectivity upgrade and approximately 25% of our Fine Jewelry stored. We are now continuing the POS in connectivity upgrade and expect to have them substantially completed by September 2014.

As of January 31, 2014, the company had total debt outstanding of $445 million, down $29 million compared to $474 million as of January 31, 2013. In addition to the term loan of $80 million, long-term debt includes $363 million filed under the revolving credit facility and $2 million of capital leases. We ended the quarter with a net debt position of $422 million compared to $456 million in the prior year.

As of the end of the quarter, the company's total net revolver availability was $259 million. Our fixed charge coverage ratio stood at 2.47, which is significantly above the key threshold of 1.0, maintaining this ratio above 1.0 provides the company with additional flexibility relating to liquidity and future capital planning.

We ended the quarter with 1,037 Fine Jewelry stores and 623 kiosks for a total of 1,660 retail locations compared to the prior-year store count of 1,103 Fine Jewelry stores and 643 kiosks for a total of 1,746 retail locations. As in the past, I've included a slide in the Appendix, Slide 18, which contains the current store count by brand. I have also included a few charts on our year-to-date performance in the Appendix section of the deck, Slide 13 through 15. Now let me cover our Zales performance to date for the month of February. Our sales performance in the beginning of February was challenging, with many geographic regions clearly impacted by adverse weather condition. As we move through the month, our overall business improved with our strong sales performance experience over the Valentine's Day weekend. Currently, for the month of February, we are expecting overall positive sales comp of approximately 3.5% on a constant currency basis or approximately 2.2% on a U.S. dollar basis. We will provide additional context on our Valentine's Day performance when we report our third quarter earnings in late May.

Now please turn to Slide 10 where I'll cover our expectations for the fiscal year 2014. Please note, these expectations exclude the impact from the proposed transaction with Signet announced on February 19. We expect to have positive comps 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 280 basis points and represent net closures of 70 to 75 retail locations. We expect majority of these net closure to take place in our regional brands and in Pagoda. We also expect the impact from the change in the Canadian exchange rates to negatively impact revenue growth by approximately 120 basis points for the year. 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 the increased investments in areas that relate to future top line growth.

Tax expenses anticipated to be about $2 million to $3 million for the year. Interest expense will be approximately flat with fiscal year 2013. We now expect our diluted share count to be approximately 46 million at the current stock price. And finally, capital expenditures will be higher in 2014 as we expand our investments in technology, store remodels in selected store openings, we now anticipate capital expenditures of between $45 million and $50 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 communication infrastructure.

That concludes my comments on our second quarter. Before I turn the call back to the operator to begin the Q&A session, I want to remind everyone that we'll be pleased to take your questions on our business performance and second quarter results. However, any comments we make regarding the recently announced transaction with Signet Jewelers will be limited to the information already provided to the public. Operator, we are now ready to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Oliver Chen with Citigroup.

Oliver Chen - Citigroup Inc, Research Division

Regarding February and what you're seeing with the 3.5%, could you just help us dissect traffic versus ticket there? And also, as you continue on this journey to increase your exclusive brands and innovate there, just remind us where the mix is and if you have thoughts on where the mix can go over time and by what time? Thank you.

Thomas A. Haubenstricker

So Oliver on February, we're going to provide more detail on some of those traditional statistics on transactions and pricing when we do the third quarter call. It's a tough month to analyze just because of the disruptive factor that weather had, particularly early in the month. I think that what’s important to take away from our February performance is the overall 3.5% constant currency comp. It had a lot of volatility particularly early in the month clearly caused by weather, but we are very, very pleased with the Valentine's Day weekend results and that put us back in line to have a pretty solid performance given the overall environment for the month.

Theophlius Killion

In terms of proprietary product, as I mentioned before, we have a couple of tests that we're doing and we tend to do those during peak selling period. So we have tests both in bridal and in fashion that will be running through Mother's Day, but we're right around 12% penetration right now. We talked about being at 13% over the course of the year. We feel confident that we'll hit that number. And in terms of where we ultimately will be, we talk about 20%, 21% penetration over the next 3 years.

Oliver Chen - Citigroup Inc, Research Division

As a quick follow-up, your gross margin was very impressive. It looks like the compares get a little bit tougher. Could you help us with parameters around how we should appropriately think about the back half?

Thomas A. Haubenstricker

Sure. I think that when we look at the 240 basis point improvement we had in the second quarter, there's elements of that, particularly that related to our sourcing initiative that will carry on in the second half of the year, but there are elements that are unique to the holiday selling period in the second quarter. I think the best way to look at the second half expectation would be to look at our blended gross margin improvement for the first half of the year, which was about just over 150 basis points. And I think that's a better barometer in terms of what to expect on gross margin rate improvement in the second half.

Operator

Your next question comes from the line of Jeff Stein with Northcoast Research.

Jeffrey S. Stein - Northcoast Research

Tom, with respect to currency, I'm wondering if you could give us some of your thoughts, assuming no further change in exchange rates, what kind of impact it might have on the back half of the year? I know I think you mentioned 120 basis points for the full year, but how will that sort out for the back half? And what kind of impact might it have on your bottom line?

Thomas A. Haubenstricker

Well, I think, Jeff, we want to couch the exchange rate on a full year basis, that's what we gave in terms of the impact. I'm assuming the second half will be pretty close to that, because we modeled it on, if the exchange rate stayed that, so I would see it being around 100 basis points, if not slightly higher, for the second half. It cost us $1.5 million of net income in the second quarter, and I think that will be a fair approximation in terms of what we see for the overall second half. The profitability in the second half, obviously, not being the Christmas season, is going to be lax on Canada, but it still could easily take $1 million to $2 million of profit if the rates remain where they're at in the second half of the year.

Jeffrey S. Stein - Northcoast Research

Got it. Was there -- in your gross margin, was there a LIFO benefit in the quarter?

Thomas A. Haubenstricker

Yes, I mean, because of our sourcing initiative focused on reducing the merchandise cost and because of what we're seeing with the price of gold, there is a LIFO benefit. The LIFO adjustment we made to our earnings was a credit in the second quarter of about $3 million and last year, the LIFO adjustment was approxed [ph] or a debit for about $2 million. But that's a function of -- mostly the work that’s being done on sourcing that is reducing the overall unit cost and to an extent, the changes in gold price.

Jeffrey S. Stein - Northcoast Research

Got it. Got it. And can you talk to us a little bit about your expectations on SG&A for the back half of the year. I know you're planning for the full year to see that up as a percent of sales, but are we expecting that rate of increase to mitigate in the back half of the year? I know it's been a bit lumpy quarter-to-quarter.

Thomas A. Haubenstricker

I think we're comfortable with a full year expectation that we set out, that we believe the SG&A rate is going to be up slightly by the time we complete the year with last year. And obviously it was up in the second quarter, it's up in the first half of the year. I think we managed our SG&A carefully quarter-on-quarter with what we see going on in the business, and what we see ahead of us in terms of growth opportunity. So I'd rather not get into detailed SG&A by quarter, but just more lay out that. We do expect it to be slightly up for the year as a whole.

Theophlius Killion

And let me remind you, as Tom said before, we have a technology investment that we think is critically important to our long-term future. We'll be doing the balance of the chain, we did a little over 200 stores last year. We'll be doing the balance of the chain in upgrading our POS platform, which will make us broadband enabled and will help our omni-channel progression as we go forward. So that's built in to those numbers and that's a strategic investment that we think is critically important to the ongoing business.

Jeffrey S. Stein - Northcoast Research

Thank you, Theo. And finally, can you talk about credit penetration in the quarter, and perhaps any help that you may have seen from ADS in terms of providing some backup support for Citi, and then in turned down spearhead, and what the approval rate was?

Matthew W. Appel

Sure, Jeff. This is Matt. That's a very good question, and let me tell you how we performed from a credit perspective. We were very, very pleased with the credit mix in the U.S. It was up almost 200 basis points year-over-year on the quarter. Our approval rates were very, very strong. They were up slightly higher than that. And it's predominantly due to the aggressive posture that ADS has taken in the second position behind our current prime lender in establishing the portfolio and learning our business. ADS actually lent significantly more than we expected for the quarter, but we've talked about that previously, and they are the bulk of the alternative layer. They sit behind our prime lender and they get first crack at everything that they decline. So ADS is proving to be a great partner. We're very excited about that relationship, and they're showing their partnerships early on. In Canada credit was slightly higher, it's not quite as important to the business there, approval rates and credit mix grew somewhat during the quarter. On overall basis, we're seeing more applications in our stores, we're seeing better approval rates and much better performance in the credit program.

Jeffrey S. Stein - Northcoast Research

And Matt, have you been able to benefit at all from some of the, I guess the CRM support that ADS is going to provide you with on a go-forward basis, and kind of how that is working its way through the store level?

Matthew W. Appel

Yes, we are, Jeff, starting to benefit from that. We're testing during this fiscal year those capabilities, but a lot of those -- a lot of the larger and long-term capabilities that we built off the infrastructure that we're putting into our stores. So we're doing a lot of preparatory work and testing during fiscal 2014 to position us to really leverage that in '15 and '16.

Theophlius Killion

The final point I would add to that is ADS has funded fuel trainers for us that we have deployed in the United States to help us at point-of-sale and in the field to continue to build our credit muscle along the way.

Operator

Your next question comes from the line of Rick Patel with Stephens.

Rick B. Patel - Stephens Inc., Research Division

Can you talk to us about or rather update us on your NOLs, just how much you had at the end of the quarter on an after-tax basis and also what that means for how much pre-tax income you can shelter down the road?

Thomas A. Haubenstricker

So we'll put the updated NOL information in the Q that we filed. So obviously, as we continue to generate income, we are utilizing that NOL, so it goes down every time we generate a profit. The NOL is broken down between federal NOL, state NOL and NOL that's in Puerto Rico. I think the best thing to do is really file the Q next week, it will have detail in there in terms of what is now available post this quarter's results.

Rick B. Patel - Stephens Inc., Research Division

Got it. And then can you talk to us about your marketing initiatives for the rest of the year. I think you typically buy ads well ahead of major events. I'm just curious, are you looking to plan marketing up for the next few quarters or should we expect that to flatten. And then a follow-up to that question, which products are you looking to highlight throughout your marketing this year?

Theophlius Killion

The marketing spend will be essentially flat to a year ago. As you know, we have a peak around holiday selling period. So Mother's Day is essentially put to bed. We will have all of our marketing as it has increasingly been shift into supporting our proprietary brand. So as the penetration of proprietary brand increases so will, the support that we have from a marketing standpoint I talked about, really terrific what I think, cross functional collaboration to stand up the Heart Within, and it's paying for itself. So as we're thinking about not only new launches we supported with marketing and cross functional efforts, and the great products that we have out already like Vera Wang LOVE and Celebration will be the primary focus of our marketing. That said, if you were to look at YouTube Zale and look at our Celebration Ad over holiday, you'd see that there were 2.5 million people who are in continuous conversation with our brand and with our collections on an ongoing basis. So while there is a television point of view that happens and peaks at holiday, there's an ongoing conversation that we have with our guests that really takes place across multiple media, and then I think keeps our guests engaged, particularly the wedding guest.

Rick B. Patel - Stephens Inc., Research Division

Great. And then just last question on SG&A. Labor expense was up year-over-year, but you have 86 fewer locations. So how should we think about that? Does that reflect field or corporate personnel, do you feel like you are where you need to be longer-term in terms of personnel, and do you expect labor expense to continue trending higher for the remainder of the fiscal year?

Thomas A. Haubenstricker

I think the labor cost being higher as a percent of revenue is related to more of the corporate function, the stores tend to be pretty flat because the SG&A comes out along with store closure. But within the corporate office, as we've talked about in the past, we are ramping up some of the competencies that are related to future growth initiatives in the company, and we think it's very important to do that in order to give us the best chance of continue to drive the business going forward. So when you have a lower revenue in absolute terms, which we did in this quarter, you end up with a higher labor rate because of that.

Operator

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

David Wu - Telsey Advisory Group LLC

It sounds like Valentine's Day, obviously, healthy, but I want to know if you could comment perhaps on just the overall competitive landscape, and if you did see any pullback at all in terms of the promotional environment?

Theophlius Killion

Yes. I think the new normal, particularly with non-jewelry businesses is to be highly promotional during holiday selling periods. As I look at what's going on and some of the folks who reported in holiday, it clearly was a very difficult November and December for some of the other brands. I think that for us, we've maintained our promotional posture. We've looked for opportunities to actually pull back as we go-forward to reinforce this focus that Tom talked about in increasing our gross margins. So while there continues to be a heavy, heavy drumbeat of promotions in the mall, we think that if we do our jobs well, which is to rely on our jewelry consultants to build relationships, I was amazed this year that one of our jewelry consultants in Modesto, California actually had sold $1 million worth of jewelry by the second week in January. Now as you probably know, Modesto is not a high-traffic area and that was really driven by the quality of the interaction of our Jewelry consultant out there. We have the capability we think of driving some of our own traffic if we have the right relationship. So as we continue to invest in the field organization, as we continue to invest in proprietary products, so that they have something that they can sell against, we would hope to be able to push against some of the traffic issues and some of the promotional issues in the mall and rely on the investment that we make in our teams, and in our proprietary products. So highly promotional in February in general. As Tom said, first week, a little bit challenging and the next couple of weeks, we really pulled out of what was a negative trend in Valentine's Day and so forth through the rest of the month.

David Wu - Telsey Advisory Group LLC

Excellent. And in terms of ADS, are they providing pretty strong incentives for their consumer right now?

Thomas A. Haubenstricker

No, not really, David. It's not about incentives, it's about their ability to really understand in their model who to lend to, and they’re a vast experience with over 100 retailers. So it's not about incentives. It's really about their expertise, and I think that's only going to get better over time as they learn about our guests. They're just building their initial portfolio as the experience, the performance of that portfolio. I think their lending will get sharper and sharper.

David Wu - Telsey Advisory Group LLC

Got it. And in terms of the lower average ticket in bridal and fashion that you saw in the quarter, even though the exclusives outperform, which tends to have higher ticket. Can you perhaps sort of talk about, sort of what you saw and how the consumer is sort of responding to the overall macro environment?

Thomas A. Haubenstricker

I think what we saw is within the individual categories, what we saw that the best performing SKUs within those categories tended to be those at the more opening price points, again, within the category. So we had very strong transaction increases in our exclusive branded collection. But within those categories, the areas that did best were the items that were at the lower end of the price points within that specific collection. So it really was a function of the mix within the SKUs, within these categories, that brought slightly down the average price in that area. We are very pleased clearly, with the overall volume of units sold within the quarter and that's what's the main thrust on the, let's say, part of the growth.

Theophlius Killion

And one of the things that's happening in the businesses is, as we start to gain traction in our fashion areas and had incredible acceleration right before holiday and after holiday, and it's continued into Valentine's Day, you're talking about a lower ticket, but you're also talking about higher margins. So we've been working hard over the past several years, as you know, to make sure that we got fashion up and running and it's now starting to take hold in the overall business and that will lower the overall average ticket.

David Wu - Telsey Advisory Group LLC

Great. And then just on higher CapEx spending for the full year, can you perhaps just talk about the store openings and remodels that you're planning, and sort of what the opportunity is going forward?

Thomas A. Haubenstricker

So the big drivers of the increased capital are not new store openings. There are going to be more than we've had in the past, but the big drivers are going to be the upgrade of the point-of-sale system and the communications connectivity of the structure in the store, as well as additional capital spend in the existing stores around remodeling and upgrading from that standpoint. Those are the core drivers of why we're spending more capital. There is a layer for new stores, but it would be wrong to think of that as the key driver to the increase.

David Wu - Telsey Advisory Group LLC

That's great. And then in terms of the remodels, can you maybe talk about sort of the opportunity there over time and how many of your fleet do you think requires a remodel in order to improve productivity?

Matthew W. Appel

David, we will not quote how many we require, but what we'll tell you is that we're taking more aggressive posture in terms of the look of our stores with additional capital we've been able to invest in the business. We're going to devote more and more to making our stores as presentable as possible. And so over time, we will spend more money in an appropriate way on remodels in stores. But to quote the number of stores and the dollars at this time would be premature.

David Wu - Telsey Advisory Group LLC

Great. And then just lastly, I know that you won’t comment on many of the terms of the acquisition, but I'm just wondering if you could perhaps just talk about sort of the timing of when you do expect to receive your shareholder approval?

Thomas A. Haubenstricker

So as we said, David, Theo talked about some of the conditions to close, and there's no update that we can provide at this time, other than what was in the press release last week.

Theophlius Killion

Yes, we've talked about by the end of 2014, and that's the best information that we have at this point, David.

Operator

And there are no further questions at this time.

Theophlius Killion

So on behalf of the management team, our support team here in Dallas, and importantly our selling teams both online and in stores, I'd like to thank everyone for joining us on the call today and for your continued support of our business. Thank you.

Operator

Thank you for your participation. This does conclude today's conference call. You may now disconnect.

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Zale Corporation (ZLC): FQ2 EPS of $1.13 beats by $0.09. Revenue of $656.45M (-2.1% Y/Y) in-line.