Zale Blames Poor Earnings On Derivative Accounting For Precious Metals

Zale Corporation (ZLC) announced results at approximately 07:00 am this morning, well before market open with the conference call scheduled for 9 AM. The results are poor with net operating earnings in the negative by $26.4 million or $0.55 per share. Management points out that previous guidance had left out the impact of derivative accounting for gold and silver. This quarter the hit to investors is $5.4 million or $0.11 per share, which is 20% of this quarter's losses. Ouch!

Zale is a specialty jeweler. This means it is in the retail category. The company needs to report on the traditional metrics of a retailer. Sales per square foot, same store sales, average ticket, margins, new store openings and closings. Interested investors should not need to be experts in commodity hedges, the accounting thereof and the obvious losses in this particular instance.

The only qualitative comment made by management about operations was from Betsy Burton, President and CEO:

Earnings performance met expectations for the quarter and comparable store sales were consistent with plans as we moved through clearance and increased transactions were offset by a lower average ticket.

The derivative losses while reported on were not discussed in the press release. I would have liked to see at least the comment that management is taking steps to ensure that this does not happen again when they guess wrong about the accounting implications of their hedging strategies. Because you know what: most investors will not be able to wrap their heads around the implications of SFAS 133.

ZLC 1-yr chart: