Zale F1Q07 (Qtr End 10/31/06) Earnings Call Transcript

Zale Corporation (ZLC)
F1Q07 Earnings Call
November 16, 2006 9:00 am ET

Executives

Betsy Burton - President and Chief Executive Officer
Rodney Carter - Group Senior Vice President and Chief Financial Officer
Cindy Gordon - Senior Vice President and Controller
David Sternblitz - Vice President and Treasurer

Analysts

Bill Armstrong - CL King & Associates
Janet Kloppenburg - JJK Research
Marc Bettinger - Stanford Group
Jeff Stein - KeyBanc Capital Markets
Evelyn Copelman - JP Morgan

Presentation

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 year 2007 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

Now, I would turn the call over to Ms. Betsy Burton, President and Chief Executive Officer.

Betsy Burton

Good morning and thank you for joining us for our first quarter conference call. I am Betsy Burton, Chief Executive Officer of Zale Corporation. With me on the call today are Rodney Carter, Chief Financial Officer; Cindy Gordon, Controller; and David Sternblitz, Treasurer.

Before we begin, Rodney will review the Safe Harbor.

Rodney Carter

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 results 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 31st, 2006.

In addition, we may present financial information on this call that would be considered non-GAAP financial information. For a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the Company's most recent sales and earnings release, which can be found on our corporate website, www.zalecorp.com, under financial information, and then news releases.

Betsy Burton

Thank you, Rodney. First, I would like to welcome Rodney to our management team. We have now completed the assembly of our executive team, and we're excited about the experience, talent and enthusiasm this group brings to the business. Also of note this quarter was the decision by the FTC to close its investigation of our accounting and other related issues. We are pleased to have this behind us.

On to Q1 results. Q1 operating results were on plan. Excluding the impact of derivative accounting, we delivered a net loss of $0.45 per share on overall revenue growth of approximately 3% excluding the Bailey Banks & Biddle store closures. Comp store sales increased 0.4%, impacted in large part by the mix of clearance sales at the Zales brand. While the number of customer transactions increased, this was offset by a lower average ticket.

This was consistent with our plan to move through as much non-program merchandise as possible in Q1, to make way for fresh assortments and selling of regular priced goods in the all-important holiday season. This resulted in the mix of clearance sales this year representing 20% of total sales, versus 5% last year. The good news is we moved through almost $20 million of clearance goods at the Zales brand, and are ahead of plan.

In terms of the other brands, both Canada and Outlet had an outstanding quarter, fueled by high single digit comp growth. Margins were also strong, with an 80 basis point improvement over last year. Canada experienced an almost 200 basis point improvement, due in large part to a new direct sourcing initiative for finished goods diamond fashion.

Here are some of the highlights for the quarter. Zales is experiencing strong growth in diamond fashion, driven still by Circles, but also now by the new Journey product. Alternative metals are hot, and we are still seeing solid sales in our exclusive Past, Present, Future collection and three-stone rings.

Also in Q1, all stores were reset with the new and expanded assortments, in particular, dominant assortments in diamond solitaires and diamond fashions. We invested over $120 million in new inventory, $47 million in bridal, and $45 million in diamond fashion, alone. Zales once again, is the diamond store.

Both Peoples and Mappins are experiencing strong growth in diamond fashion as well, driven by Circles and other new exclusive products. A nearly 25% increase in diamond fashion sales, coupled with their first direct sourcing initiative for diamond fashion, contributed to their very impressive growth in margin, as well. And on top of that, they opened all seven stores planned for Q1 on time and ahead of pro formas.

Although Gordon's performance was below plan, the team was focused on holiday training in Q1. Nearly a third of the sales force went through offsite jewelry advisor training, which focused on Gordon's selling standards.

In terms of hot categories, composite styling is still very hot, and very important to Gordon's. Gordon's exclusive Micro Pave Diamond Love collection continues to grow as well, and the newest trend appears to be in champagne diamond product.

Bailey's experienced weakness in solitaires. However, they continue to see strong double-digit growth in designer product and luxury watches. And a new palladium solitaire line, just arrived in store, shows great promise with its lower opening price point and value proposition. Diamond fashion is also beginning to benefit as we build our stocks with hot items for the holiday season.

Zales Outlet produced strong comps and nice flow-through for the quarter. Diamond fashion and bridal rings drove the business up over 20% versus last year. Diamond fashion pendant sales were up an impressive 40%, primarily due to the new Journey product, which now equals Circles as a percent of the diamond fashion mix.

Solitaires are also hot, and in particular, large carat weights are selling the best. The growth in higher ticket solitaires has contributed to Outlet achieving a new record high average ticket of $422.

Pagoda also turned in a nice performance for the quarter with positive comps and sales above plan. We are capitalizing on the success of Cubic Zirconia across all categories, which now represents almost 30% of the total business. We are also expanding on the basics.

Last year, we tested multiple facings of best-selling gold earrings, usually four of a style instead of one. Based on the results, we added a gold earring best seller assortment to all stores and added second assortment in July. The styles in this assortment are up almost 100% versus last year. Core businesses are also strong with high single-digit comps in both ear piercing and body jewelry.

And last but not least, zales.com continues to deliver near triple-digit increases, with sales and earnings substantially over plan. For the quarter, we had nearly 5 million unique visitors, and we shipped over 20,000 orders. Our opt-in email database is nearly four times the size last year. In addition, upsells, better directory information, improved customer experience and new analytics have all contributed to impressive growth.

As we had outlined before, Q1 was a quarter in which we invested for a successful Q2, our all-important holiday quarter. We brought in $120 million of fresh inventory for the new and expanded assortments in all Zales stores. We invested over $3 million in new elements for our showcases, to increase capacity, as well as to tell more focused merchandising stories.

This quarter, we processed over $43 million more through our diamond direct sourcing operation. By the end of this month, we will have opened a total of 31 new stores and 11 new kiosks. And we will have remodeled, relocated, or reconfigured another 51 stores and 27 kiosks.

This is double the number during the same period last year. And we're at our seasonal peak in the DC, which we recently reworked to increase efficiency and throughput, and we're now operating three shifts a day.

So we've got product in stores and our store line is ready. We've got our promotions in place, and our new holiday creative and TV commercials are already airing. And last but not least, we are investing over $10 million annualized in our people, competitive pay, retention of elites, as well as increased coverage in select stores.

And while Veterans Day is a relatively small event, results were basically on plan and we remain cautiously optimistic going into this holiday season. So we are reiterating guidance for Q2 of 3% to 4% positive comps and EPS in the range of $2.17 to $2.22, excluding the impact of derivative accounting.

I'd now like to ask Rodney to review the financials, and then we will open it up to questions.

Rodney Carter

Thank you, Betsy. I'm excited about joining the Zale team and helping drive long-term value for shareholders. Now I'll comment on the financial highlights of the first quarter of fiscal 2007.

As Betsy noted, comp store sales were slightly positive for the Company overall at 0.4%. The strongest performances were generated by our Peoples and Outlet brands. The results of the remaining brands ranged from low single-digit positive to slightly negative comp store sales.

Total revenues were $432.5 million, an increase of 1.1% for the quarter. Excluding revenues from the Bailey Banks & Biddle stores closed in the second quarter of fiscal 2006, revenues increased 3.4% for the quarter.

The average ticket for the quarter by brand was as follows: Zales, this year $407, last year $424; Gordon's, $471, last year $498; Bailey Banks & Biddle, this year $1,516, versus last year at $1,529; Outlet, $422 this year, last year $408; in Canadian currency, Peoples at $299, last year $279; Piercing Pagoda this year at $36, last year $35.

Gross margin for the quarter was 52% of sales versus 51.2% last year, an 80 basis point increase. The increased mix of clearance in Zales negatively impacted gross margin by 20 basis points.

However, gross margin was positively impact by the expansion of our direct sourcing across additional brands, and Canada's sourcing of finished goods, combined to improve gross margins by approximately 30 basis points, and a favorable year-over-year comparison, as prior year margins were negatively impacted by markdowns at the Bailey Banks & Biddle stores closed in the second quarter.

Merchandise inventory at October 31st of this year was $1.19 billion versus $1.01 billion last year, or a 17.8% increase to last year. The increase to last year is comprised of two primary components.

First, as Betsy commented, we have invested approximately $120 million in Zales inventory to ensure we are positioned for the holiday season. In addition, last year's inventory was $50 million below plan, due to the delay in receipts. Inventory turnover on a rolling 12-month basis was at 1.22 times, flat to last year.

SG&A, including the cost of insurance operations, was 55.2% for the quarter versus 55.9% last year as a percentage of revenues. Excluding an impairment charge of $8.4 million before taxes or $0.10 per share related to the Bailey's closed store fixed assets, SG&A was 53.9% last year.

The relative increase this year versus last year is due to investments made in payroll to improve the overall customer experience, as well as deleveraging due to modest comp store sales, in addition to higher occupancy costs as a percent of sales.

The operating loss for the quarter was $36.9 million, including an $8.6 million pre-tax loss from derivatives. This compares to $35.5 million last year, which included the $8.4 million pre-tax Bailey Banks & Biddle impairment charge.

In order to plan our inventory purchases of gold and silver, for which commodity prices have fluctuated greatly, we entered into forward hedge contracts. We believe hedge contracts to be economically effective in establishing our purchase cost of inventory, and insulating us from significant cash flow fluctuations due to changing commodity prices.

However, current accounting results reflect derivative accounting, which requires both realized and unrealized gains and losses from the contracts to be included in earnings each period the contracts are outstanding.

The offsetting increase or decrease in product costs will flow through the income statement over time as the inventory is sold. For the first quarter, we recognized $5.4 million after-tax or $0.11 per share from the derivative loss.

Our earnings estimates have been provided based upon hedge accounting. Under this method, we would have reported a derivative related charge of $0.01 per share and a net loss of $0.45 per share.

The net loss for the quarter was $26.4 million or $0.55 per share versus a $23.7 million net loss or $0.47 per share last year. These amounts reflect a loss from derivatives, net of hedge accounting, of $0.10 in fiscal 2007, and a loss from the impairment of the Bailey Banks & Biddle closed store assets of $0.10 in fiscal 2006.

During the quarter, we opened 21 stores and eight kiosks. We closed two stores and 10 kiosks. We remodeled and refurbished 42 stores and 19 kiosks in the quarter. We ended the quarter with 2,366 locations as follows: Zales 792, Gordon's 293, Bailey Banks & Biddle 73, Outlets 13, Peoples and Mappins 182, Peoples II 72, and Piercing Pagoda 819.

The capital expenditure plan remains approximately $87 million for the fiscal year with a total target of 60 new stores within the Zales, Zales Outlet, and Pagoda brands, as well as Peoples and Mappin brands in Canada.

We ended the quarter with $50 million in cash and borrowings of $397 million, compared to $40 million in cash and borrowings of $270 million last year. The increased borrowings are primarily due to the increased inventory investments in Zales and the increase to direct sourcing of product, which accelerates the acquisition of raw materials.

As Betsy mentioned, we are reiterating our second quarter outlook for comparable store sales gains of 3% to 4%, and earnings per diluted share of $2.17 to $2.22, excluding the impact of derivatives.

In addition, we are reiterating our full fiscal 2007 outlook for comparable store sales gains of 2% to 3%, and earnings per diluted share of $1.98 to $2.08, excluding the impact of derivative accounting. David and I will be available to discuss any further questions after the call. I'll now turn the call back over to Betsy.

Betsy Burton

Thank you, Rodney. Operator, we would now like to turn it back over to you, and open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions].

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

Bill Armstrong - CL King & Associates

Hi, good morning. I guess a couple of questions. On the derivative accounting, you had a $0.10 net charge. Will you then see a sort of corresponding benefit, as we move through the rest of the year as -- benefiting your cost of goods sold because of lower gold prices?

Rodney Carter

Yes. That will be how it works as that inventory is worked through.

Bill Armstrong - CL King & Associates

Okay. And then secondly, I was wondering if you could give us a little more maybe clarification on the gross margin? It was up pretty strongly year-over-year, despite the clearance sales. Wondering if could you maybe give us a little more color on that?

Betsy Burton

Yes. Actually, I think we went through it -- the biggest ones were in terms of direct sourcing, which was a positive 30 basis points. And the -- and then there were just increased margins as a result of increased sales of ESAs, which are higher gross margin.

Those are our extended service agreements. Markdowns, another 40 basis points. And so it was just across the board. And, again, just a slight offset by the Zales negative due to clearance.

Bill Armstrong - CL King & Associates

So the Bailey Bank & Biddle clearance markdowns from a year ago, that was about 40 basis points?

Rodney Carter

No. The 40 -- the number that Betsy talked about is across all brands there, was improvement in the markdowns. So that was not -- that 40 basis points was not attributed to Bailey.

Bill Armstrong - CL King & Associates

Okay. Thank you.

Betsy Burton

Sure.

Operator

Your next question comes from Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Good morning.

Betsy Burton

Good morning.

Janet Kloppenburg - JJK Research

I was wondering -- I have two questions. Your inventory is up a bit, about 18%, I guess. And I thought that you were low going into the season last year. But I was wondering if you could delineate in that level, what the carryover markdowns or clearance product level is for Zales? And I think that's probably up somewhat from last year. And what the plan is to liquidate that product?

And I also wanted to know, Betsy, if you could help us understand how much of the mix of the business this holiday season would be directly sourced product -- i.e., higher margin product -- than it was last year, as we go into the holiday season? And if you could talk about your marketing expense program for this holiday season versus last year?

Thanks very much.

Betsy Burton

Okay. Let's start with the inventory question. As you know, the big jump was due to fresh assortments. And as we had indicated earlier, the Zale brand in particular, started with clearance of about $80 million of non-going forward merchandise.

We moved through about $20 million of in that Q1, and the intent is to continue to move through that, and end the fiscal year with approximately $15 million left. So in other words, move through $65 million of the clearance non-going forward merchandise by the end of July '07.

Janet Kloppenburg - JJK Research

How much will you move through in the second quarter?

Betsy Burton

In the second quarter, we have backed off. But because of the sheer volume of Q2, the dollars are roughly $15 million. And, again it's -- but a much less significant percentage of sales due to the volume.

Janet Kloppenburg - JJK Research

Can you sell some of this in the Outlet stores, or that's not the strategy?

Betsy Burton

That really isn't our strategy. First of all, the cost of bringing it in, moving it back, shipping it back out, and we don't want to do anything -- the Outlet has its own merchandising program and strategy. So we traditionally have not done that.

Janet Kloppenburg - JJK Research

Okay.

Betsy Burton

And we obviously returned to vendor what we could. And then the rest, the strategy is to clear it through. In terms of -- so in terms of direct sourcing, we've made substantive progress, and we've looked at it two ways.

In terms of what percent of our purchases is it is, and then what percent of our sales it is. So and we break it into what we call our diamond direct assembly process, and then finished goods imports. So that's -- the total of those would be our direct sourced product.

Janet Kloppenburg - JJK Research

What's the first one called, Betsy? Diamond --

Betsy Burton

Yes. We called it ZAP, Zale Assembly Process. But it's basically the purchase of loose diamond and the assembly into finished.

Janet Kloppenburg - JJK Research

Got it.

Betsy Burton

And for the quarter, for Q1, the ZAP was about 12% of our total purchases, and direct imports were about 22% of our total purchases, or a 34% total direct sourcing, or almost a -- I guess a third of our goods were direct sourced. This compares to 26% last year.

And the percent purchased through ZAP was actually double what it was last year. And then, in terms of a percent of sales, it's roughly 27% of our sales. And this is up 53% versus last year, Q1.

Janet Kloppenburg - JJK Research

And that's for first quarter?

Betsy Burton

Yes. This is first quarter.

Janet Kloppenburg - JJK Research

Okay.

Betsy Burton

In terms of your markdown question, we don't anticipate any difference in strategy in terms of our markdowns. Again, we've backed off a little bit of our aggressive clearance. But this is the quarter when we anticipate selling goods at their regular prices and/or promotions that we have planned.

Janet Kloppenburg - JJK Research

And in marketing?

Betsy Burton

And in marketing, we've shifted the mix of our marketing dollars. So there will be more on TV, and the strategy is to buy better spots. In other words, more visible spots. Shows like CSI and Lost and Desperate and Grey's Anatomy, as opposed to more spots and frequency. So quality of spots.

The other difference is we will be flighting around promotional events. So that again, when we have inserts or special promotions, that's when we'll be backing it up with TV exposure.

Janet Kloppenburg - JJK Research

Great. Thanks very much, and good luck for a great season.

Betsy Burton

Okay. Thank you.

Operator

[Operator Instructions].

Your next question comes from Marc Bettinger with Stanford Group.

Marc Bettinger - Stanford Group

Hi, Betsy, how are you?

Betsy Burton

Hi, Marc. I am good.

Marc Bettinger - Stanford Group

Just real quickly, can you go through the Christmas promotional cadence that we should expect?

Betsy Burton

Well, we really, because of the nature -- the competitive nature of this call, we really try not to give specifics. So again, I think I will defer to that. We've got -- it's a very exciting program. All of the brands have new programs, new events. And -- but again, I really can't give any specific color. You will, however -- all of our TV spots are already on air. So those are readily available.

Marc Bettinger - Stanford Group

Fair enough, understood. Did you say that every brand was same-store sales positive?

Betsy Burton

No, no. It was a mixed bag. We really don't go brand by brand specific. Again, I think I mentioned that the Canada and Outlet had high single-digit comps. And then there was some flattish, and then some slightly negatives. But again, we don't really go brand by brand.

Marc Bettinger - Stanford Group

Okay. But Canada and Zales Outlet was the high single-digit?

Betsy Burton

Yes. Outstanding performance.

Marc Bettinger - Stanford Group

Okay. And did you say Canada was up 200 basis points in their gross margin?

Betsy Burton

Correct. And they continue to improve. This is the first quarter they've actually -- they have a new initiative to direct import diamond fashion, which, as you know, has the potential to be huge for the corporation. Historically, when we test a new initiative, we start in Canada. So this is the very beginning of our direct import, direct sourcing initiative.

Marc Bettinger - Stanford Group

Okay. So how long before you think that would carry over to the Zales brand?

Betsy Burton

Well, again, we're making sure we've perfected it. Diamond fashion, as you know, you own it. And it is a fashion category. So we've just -- we will test it. And if, in fact, it looks like it appears to be successful, we will probably then bring it to the Zale brand for holiday next year.

Marc Bettinger - Stanford Group

Okay. And I think you said -- what was it -- the 80 basis points. About 30 of that was due to direct sourcing?

Betsy Burton

Correct. And that was the huge increase in throughput through ZAP. In other words, 50% more product moved through ZAP this year versus last.

Marc Bettinger - Stanford Group

Where did the other 50 come from?

Betsy Burton

Direct imports were also up.

Marc Bettinger - Stanford Group

Okay. So the direct sourcing and the direct imports combined equal the 80 basis points?

Betsy Burton

Well, no. Part of what we also have discovered is we are buying better in terms of the leverage. One of the benefits of direct sourcing is it gives you increased leverage. So you also have an opportunity to increase gross margin, not necessarily through direct sourcing but using direct sourcing as a leverage.

The other additional piece was the increasing importance of our extended service agreements, and that added about 20 basis points of margin.

Marc Bettinger - Stanford Group

Okay. Great. Good luck through the holiday season. Sounds great.

Betsy Burton

Okay. Thank you, Marc.

Operator

Your next question comes from Jeff Stein with KeyBanc Capital Markets.

Jeff Stein - KeyBanc Capital Markets

Betsy, a question on the -- you just mentioned the extended service agreements. Is this kind of a new initiative? In terms of -- I know you've always done it. But are you pushing it a lot harder now? And is it something that will roll through the gross margin for the next, let's say, 12 months, as you get more aggressive on this?

Betsy Burton

Actually, interesting question. It's more -- it's just a matter of emphasis, I think, in terms of training, and we have tweaked our pricing offering. The other thing of note is effective literally today, we have been testing the -- a lifetime ESA, as opposed to a two-year ESA in the Zale brand, in particular. And we are very excited about the results. And we are actually rolling chain-wide with a lifetime ESA, effective today.

What that does is, in our test if you hold the attachment rate constant, which we think is conservative, our average ticket is up 35%. Now, one dynamic, though, that you need to be aware of, is because of -- our accountants are convinced that until we collect enough data, which might be as much as three years, we will only be able to record into income the same amount as the two-year ESA.

What that means is there will be this deferred income sitting on the balance sheet, which after three years, could be a substantive number that will get released back into income. But again, we will have the cash. So the cash goes to pay down debts. You save the interest costs.

We're giving up a slight bit of -- very small amount of profit from our -- we're switching -- we're actually trading sales as a result of the test from our Diamond Commitment Plus program, which included an insurance component where we took actual fees that were 100% were recorded into income.

But we believe that that can be more than offset by the increased attachment rate and increased average ticket. So that is a change that we are making effective today, which the benefit will be long-term. It could be as much as 20 to $30 million of additional income per year.

Jeff Stein - KeyBanc Capital Markets

Okay. But what you're doing is you're amortizing that extended service agreement on, what, on a monthly basis over the course of two years?

Betsy Burton

Well, now, it will be over the course of a lifetime. And we have to collect data for that. The way -- if you will recall, the way we -- a long time ago, we used to straight line. And then we started collecting data so that what you do is you try to align your income, the recording of income, with the expenses that are incurred.

And because when you sell an ESA, typically ring sizing is one of the things that is used -- one of the advantages of buying an ESA, because you get your ring sizing for free if you buy an ESA. And that occurs typically in the first month. So again, we have enough data where we actually attach expenses to the actual income and record it on a schedule.

Again, it's based off of monthly, and currently, is over two years. But because we don't have the data with regard to a lifetime, we'll record the income as we currently do for the two-year ESA. In other words, the same dollar amount, not percentage.

Jeff Stein - KeyBanc Capital Markets

Got it. Okay. Great. And a couple of questions on just some of the smaller businesses. I know your dot-com business is small. You haven't talked about it much. But what kind of average dollar transaction do you see on the web?

Betsy Burton

As you know, it's basically the Zales.com, right now. And it's in the low 200s, $240.

Jeff Stein - KeyBanc Capital Markets

Okay. So if you did over 20,000 transactions, we can just do the math and come up with a rough guesstimate in terms of what…

Betsy Burton

Yes, you got ahead of me there. Yes, you're right.

Jeff Stein - KeyBanc Capital Markets

Great. Thank you.

Betsy Burton

Okay. Thanks, Jeff.

Jeff Stein - KeyBanc Capital Markets

And as far as Peoples -- not Peoples, Pagoda. You talked about Cubic Zirconia. I haven't heard that mentioned for a while. Is this kind of a new fashion trend item for that customer?

Betsy Burton

Well, it's always been about 20%, 25% of our mix. But this year -- this holiday, we believe it will be close to 30%. And while we've gotten pretty aggressive, I think, again, the price points are very attractive. We've got new display materials.

But again, it's just our -- that core customer, who is what I call a lower moderate customer, this is their fine jewelry store. So -- and it's just an attractive alternative. But it is becoming increasingly important. And I think that's one of the advantages when you've got a weakening economy. It's a very attractive price point.

Jeff Stein - KeyBanc Capital Markets

Great. And final question, back to direct sourcing. What is your capacity to take this up to, let's say, 50%, 60%? Your major competitor out there is kind of in that range. And wondering how -- what are the constraints within your organization for getting there and what kind of timeline may we be looking at? Or may you not even have a desire to get there?

Betsy Burton

Well, I think if you include direct imports, which I believe our competitor does, I feel very good about the 50% as a goal. I think, you know, clearly, in terms of the diamond direct sourcing operation, we are -- we started with solitaire and studs and some of the logicals.

We still have an opportunity in bridal with center-stone bridal. So we still have additional opportunity. And if you look at the difference between brands, Zales and Peoples are way ahead of Gordon's and Outlet where -- and also, we believe we have an opportunity in diamond sourcing for Bailey's.

So, you know, I still see opportunity -- substantial opportunity for growth over the next couple of years in the diamond direct assembly and significant opportunity in direct imports.

Again, we're starting with diamond assembly, because we believe the margin opportunity is the greatest there. It's not really a physical limitation, and so we clearly have the capacity. In fact, right now we've got excess capacity in our Canadian facility. And so we are actually processing some of the US assembly in Canada.

Jeff Stein - KeyBanc Capital Markets

Got it. Thank you very much.

Betsy Burton

Sure.

Operator

Your next question comes from Brian Tunick of JP Morgan.

Evelyn Copelman - JP Morgan

Hi. It's Evelyn Copelman for Brian. I had a few questions. First, is around the promotions during some of the holiday weekends that you've brought back this year. I know you said Veterans Day was on plan, and I was curious what the comp plan was for that weekend and how the performance was for some of the other weekends?

And if you tested some of the new product that's going to be in the Zale's stores for holiday? And also kind of if you can tell us what was the marketing spend gross for those weekends?

Betsy Burton

Okay. Again, for competitive reasons, we really don't disclose the spends by weekend. In terms of our Veterans Day weekend, we were exactly on plan. But again, we don't give numbers for events. And it's way too early to know in terms of holiday. As you know, the real holiday weekend starts Thanksgiving weekend.

But we have very exciting promotions planned, probably more aggressive and more exciting. And we've got a lot more new product, too. I think if you were to look at our circulars and some of our mailers, there's a lot better looking product, a lot sharper pricing, a lot everyday brilliant buy pricing.

So I think our product assortment is substantially improved, and our promotions are very exciting. But again, for competitive reasons, we really don't talk about that. And in terms of testing product, if you were to look at our product assortment, the strategy was to build upon the successful SKUs.

So we obviously did not test, because we needed to roll out the new planogram. But we feel confident that it's a relatively low-risk assortment, based off of, again, what sells in our stores currently.

Evelyn Copelman - JP Morgan

Okay. Do you expect the comp for holiday at the Zale division to be driven by traffic, or do you expect AUR pressure?

Betsy Burton

We actually expect both to increase.

Evelyn Copelman - JP Morgan

Okay. And finally, on the balance sheet, thinking about what are the thoughts around the new share buyback authorization? What it will take for the Board to consider a new program?

Betsy Burton

Well, the Board -- I think we've been fairly consistent in our approach. Which is, let's get through holiday, let's assess our cash flow situation, and we will make a decision after holiday, post holiday.

Evelyn Copelman - JP Morgan

Great. Thank you.

Betsy Burton

Thank you.

Operator

At this time, there are no further questions.

Betsy Burton

Okay. Thank you all. And we'll speak next quarter. Let's have a great holiday. Thanks. Bye.

Operator

Thank you for participating in today's conference call. This call will be available for replay beginning at 12:00 P.M. Eastern time today, through 11:59 P.M. Eastern time on November 23rd, 2006.

The conference ID number for the replay is 1310149. Again, the conference ID number for the replay is 1310149. The number to dial for the replay is 706-645-9291.

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