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Zale Corporation (NYSE:ZLC)

F4Q2010 Earnings Call Transcript

September 27, 2010 9:00 am ET

Executives

Roxane Barry – Director, IR

Matt Appel – EVP and CFO

Theo Killion – CEO

Analysts

Rick Patel – Banc of America/Merrill Lynch

Jeff Stein – Soleil Securities Group

Dana Telsey – Telsey Advisory Group

Bill Armstrong – CL King & Associates

Operator

Good morning. My name is Christie and I will be your conference operator today. I would like to welcome everyone to Zale Corporation’s fiscal fourth quarter and full-year 2010 results conference call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, we will conduct a question-and-answer session with instructions to be given at that time.

I would now like to turn the call over to Roxane Barry, Director of Investor Relations. Please go ahead.

Roxane Barry

Thanks Christie. Good morning and thank you for joining us for the Zale Corporation’s fourth quarter 2010 conference call. I am Roxane Barry, Director of Investor Relations. On the call today are Theo Killion, Chief Executive Officer; and Matt Appel, Executive Vice President and Chief Financial Officer.

Before we begin, I will 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 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.

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 quarterly report on Form 10-Q for the fiscal quarter ended April 30th, 2010.

I will now turn the call over to Matt Appel.

Matt Appel

Thank you Roxane and good morning everyone. I will begin by discussing the results for the fourth quarter and full year. Revenues for quarter ended July 31st, 2010 were $345 million compared to $357 million for the same period in 2009, a decrease of 3.4%. Comparable store sales decreased 2.1% compared to a decrease of 21.2% in the prior year.

For the year ended July 31st, 2010, revenues were $1.62 billion, a decrease of 9.2% compared to $1.78 billion for 2009. Comparable store sales decreased 6.6% in fiscal 2010 compared with a decrease of 16.6% during the prior year. The decrease in revenues year-over-year for both the fourth quarter and the year ended July 31st, 2010 is primarily due to the decline in comparable store sales and year-over-year store closures, partially offset by an increase in recognized warranty revenue and appreciation of the Canadian dollar.

During the fourth quarter, the Canadian dollar remained strong relative to the US dollar, with an average exchange rate of $0.96. In the fourth quarter of 2009, this rate stood at $0.88, therefore year-over-year, the Canadian dollar was approximately 9% stronger. Note that in the fourth quarter of 2008, the rate was $0.99. So, on a two-year basis, there was no appreciable impact as a result of currency.

Impact on the 2010 quarter’s earnings was not significant as the rate differential almost equally impacted all P&L line items. Appreciation of the Canadian dollar also impacted the full year. The Canadian dollar average exchange rate was $0.95 in 2010. In 2009, the Canadian dollar exchange rate averaged $0.85, therefore year-over-year, the Canadian dollar was approximately 12% stronger for the year. While this appreciation resulted in an increase of $28 million in revenues for the full year, on a two-year basis, there was no material impact. Similar to the impact on the quarter, the year-over-year impact on earnings was not significant as all P&L line items were equally impacted.

Gross margin for the quarter ended July 31st, 2010 was 52.7% compared to 46.4% for the 2009 period. For the full year ended July 31st, 2010, gross margin was 50.4% compared to 46.7% for the full year of 2009. Gross margin improvement for both the quarter and the year was primarily due to lower levels of merchandise discounts and a higher level of warranty revenue recognition. In addition, in the fourth quarter of 2009, we reported a $13.5 million inventory impairment that was not required in 2010.

SG&A expenses for the fourth quarter ended July 31st, 2010 declined approximately $10 million or 5% to $197 million compared to $207 million in the 2009 period. SG&A expenses for the year ended July 31st, 2010 declined approximately $88 million or 9% to $846 million compared to $934 million in 2009. The decline in SG&A expenses for both the fourth quarter and the full year was primarily due to our continuing discipline around expense levels, in particular, field and corporate payroll costs as well as rent.

Operating loss for the fourth quarter was $31 million compared to an operating loss of $113 million in the 2009 period, an improvement of approximately $82 million. Operating margin for the quarter was negative 9.1% compared to negative 31.6% in the comparable 2009 period. Excluding special items, operating margin was negative 7.7% for the fourth quarter of 2010 compared to a negative 11.9% in the comparable period in the prior year. Please refer to today’s press release for details of the special items and the related reconciliations.

Operating loss for the year ended July 31st, 2010 was $113 million compared to an operating loss of $232 million in the 2009 period, an improvement of $119 million. Operating margin for the year was negative 7% compared to negative 13% in 2009. Excluding special items, operating margin was negative 5.1% for the year ended July 31st, 2010 compared to negative 8.3% in 2009. Again, please refer to today’s press release for additional details.

During the fourth quarter of 2010, May 10th specifically, is when we completed certain key changes to our capital structure. Interest expense for the quarter reflects the related cost for the first time. Interest expense for the fourth quarter of 2010 was total $10 million, of which $4 million was non-cash compared to $2 million in the prior-year quarter. Non-cash interest expense is comprised of term loan interest paid in time, and the amortization of debt issuance costs.

In the fourth quarter of fiscal 2010, we recorded a net gain of $6.6 million in other gains. The entire amount is attributable to the accounting for the B warrants issued with the term loan. These warrants were initially convertible into preferred stock until shareholder approval was obtained to permit conversion to common when exercised. As required, we revalue the warrants as of the date of shareholder approval and this resulted in a gain of $8.3 million related to a decrease in a fair value of the warrants from May 10th, and a $1.7 million charge related to the debt issuance costs attributable to the warrants.

The long-term liability associated with the warrants equaled to $13 million comprised of the original value of $21 million minus the $8 million was reclassified to stockholders’ equity and is included an additional paid in capital on the balance sheet. These were all non-cash transactions.

Now, moving to income taxes. In the fourth quarter, we recorded an income tax benefit of $6 million compared to a benefit of $25 million in the comparable period in 2009. The income tax benefit for the 2010 quarter was primarily attributable to net operating loss carrybacks identified and recognized pursuant to the Business Assistance Act of 2009. The tax benefit in the prior year fourth quarter was comprised of a $55 million benefit associated with a pretax loss for the period, partially offset by $28 million of tax adjustments or evaluation allowance on net operating loss carry-forwards and revocation of our previous election under APB 23.

For fiscal year 2010, we recorded a $29 million income tax benefit primarily attributable to net operating loss carrybacks identified and recognized during the year pursuant to the Business Assistance Act of 2009 compared to a $53 million tax benefit for 2009. The prior-year benefit consists of a $98 million benefit associated with a pre-tax loss for the period partially offset by $40 million of tax adjustments related to the valuation allowance on net operating loss carryfowards and revocation of our election under APB 23.

The net loss for the quarter ended July 31st 2010 was $29 million or $0.89 per share compared to a net loss of $90 million or $2.81 per share for the 2009 period. The net loss for the year ended July 31st, 2010 was $94 million or $2.92 per share compared to a net loss of $190 million or $5.94 per share for fiscal 2009.

We ended the fiscal year with 1,218 fine jewelry stores and 672 kiosks for a total of 1,890 retail locations compared to 1,247 fine jewelry stores and 684 kiosks for a total of 1,931 locations in the prior year.

Now, let’s turn to the balance sheet. Inventory at July 31st, 2010, was $703 million compared to $740 million at the end of the fourth quarter of 2009. The decrease of $37 million is due principally to reductions related to store closures. I want to emphasize as we approach the holiday season that we are receiving excellent support from our vendor partners with respect to payment terms and shipments of merchandise. The average payment terms during the fourth quarter of fiscal 2010 are 10% higher than a year ago and we have placed substantially all of our orders with the holiday season.

As of July 31st, 2010, the company had total outstanding debt of $296 million, net of a discount of $21 million associated with warrants issued in connection, the senior secured term loan in May 2010. In addition to the net carrying value of the term loan of $131 million, long-term debt included $165 million borrowed under the revolving credit facility. On September 24th, 2010, we amended the term loan with Golden Gate Capital to eliminate the minimum consolidated EBITDA covenant with the remaining four plus years until maturity. We took this action to eliminate any uncertainty surrounding our ability to meet this covenant when measurement was to begin on January 31st, 2011, and to provide us with more financial flexibility to execute our turnaround program.

In consideration for the amendment, we made a $25 million payment to Golden Gate, of which $11.25 million represented a pay down of loan balance, $1.25 million was a prepayment fee and $12.5 million was a fee to secure the amendment. As a result of the amendment, $11 million of long-term debt has been reclassified to current as of July 31st, 2010. In addition, all future interest under the term loan is now payable in cash. As a result, cash interest expense under the term loan will now be $2 million per year lower due to the $11 million pay down and total cash interest will now be approximately $21 million per year compared to approximately $15 million previously.

Total available borrowing capacity as of July 31st, 2010 stood at approximately $242 million. We are very pleased to report that our latest inventory appraisal on which the revolver borrowings are based improved by approximately 40 basis points primarily due to an increase in our recent gross margins. In the fourth quarter of 2009, we established reserves related to Bailey Banks & Biddle lease obligations and for stores closed during the period, resulting in a reserve of $44 million as of July 31st, 2009.

The balance of this reserve, which is included in accrued liabilities was $11 million on July 31st, 2010 due primarily to settlements reached and paid throughout the year. Last Friday, following completion of a rigorous competitive process, we announced that the company had entered into an agreement with Citi to provide the private label credit card program for our Zales, Zales Outlet and Gordon's brands in the U.S., effective October 1st, 2010. The agreement is for a term of five years with automatic renewals for successive two-year terms. Under the new agreement, the yearly minimum volume of net credit sales has been reduced from $600 million to $315 million. In addition, Citi has agreed to provide a substantial degree of financial support of our marketing activities over the initial five-year term of the contract.

We consider this outcome an important positive milestone for the company. We have now successfully secured new proprietary credit card facilities for both our Canadian and U.S. businesses. Importantly, the contract with Citi will ensure a seamless transition for our U.S. business that we expect will have a positive impact on our holiday sales.

Our new Canadian credit program with TD has been in place since July 1st, 2010 and we are very pleased with the program’s performance since inception. Approval rates and credit mix were immediately favorable to the comparable period last year. In addition, TD has provided innovative marketing ideas and support to help us grow the customer base and to drive business.

Finally, over the past quarter, we have added significant new capability to our team. Earlier this month, we announced the addition of John Legg, as Senior Vice President of Supply Chain. John’s 25 years of retail and supply chain experience will be instrumental in improving the supply channel that extends from receded product to distribution of retail locations. We have also recently added Ken Brumfield as Vice President of Credit. In his newly reestablished position, Ken will ensure that our credit programs perform optimally to drive sales growth.

In summary, fiscal 2010 was a year in which the financial foundation for our turnaround was secured. We improved our overall liquidity and extended the maturity of our revolving credit agreement, and we secured new credit card facilities for our business. This foundation provides the runway for our employees throughout North America to execute the turnaround we began six months ago.

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

Theo Killion

Thank you Matt. I would also like to extend my sincere thanks to our Board of Directors for appointing me to the position of Chief Executive Officer of Zale Corporation. In so doing, they have acknowledged the progress we are making in executing our turnaround plan and they have shown their appreciation for the hard work and dedication of our 13,000 employees.

Over the last two quarters, we have worked diligently to improve our business, organizationally, operationally, and financially. And while have a long way to go in order to achieve our ultimate goal of profitable revenue growth, we are making progress. We have been focusing on the things that we believe will make the greatest difference. It all starts with product where our core assortment had eroded to 60% of the mix when this team began its work in January. By comparison, a healthy jewelry business typically has a core mix of between 80% to 85%. Gil Hollander, our Executive Vice President of Merchandising and Sourcing has been working with his merchant team and our vendor partners to restore the core.

Today, we are at 70% core, with a goal of getting to north of 80% by early next year. In June and July, the core assortment had positive comps, with the bridal, diamond wedding band, men’s bands, and silver categories leading the way. As we continue to grow this basic replenishable merchandise, we expect improvement in both revenue and margin. The merchant team is also beginning to introduce differentiated product in our Zale’s, Gordon's, Peoples and Mappins brands. We have greatly expanded our Canadian diamond assortment in Peoples and Mappins and we will be the only retailer in Canada with Canadian diamond fashion.

The merchants are working closely with our vendors to reintroduce products in all categories that is back to basics and that worked well for us in the past. We have also tested new core product that is showing the kind of turn and margin characteristics that warrant introduction into the assortment for holiday. Finally, in each of our categories, we have worked to reposition unproductive inventory without sacrificing margins. As I said earlier, we are making progress, but we have a long way to go.

Rich Lennox, our EVP of Marketing and Ecommerce has also done significant work with his team to create compelling messages that support our focus on the core assortment. Our holiday strategy, our marketing spend, our price value proposition and our brand differentiation strategies are all priorities that are locked and loaded and that we will talk about on future calls. Each of these priorities has been developed by spending weeks analyzing research and talking to customers. Rich has leveraged his 10 years of creating commercially successful diamond marketing campaigns in order to build a solid foundation on which we will be able to grow.

Organizationally, we have made important changes in order to enable our planned priorities. We have added people in merchandising, marketing and planning and allocation to support our brand differentiation efforts. We have created reporting that gives us a daily view of performance in each of our brands and our monthly merchandise business review focuses on individual brand results. We have intensified our focus on Canada, with the appointment of Joann Terry as Vice President of Stores for Canada. Joann has been with the business for 16 years and she started her career as a District Manager leading the Peoples and Mappins brands.

We have been busy on the people side of our business, making strategic hires and placements. In addition to Joann who assumed her role in July, we moved Steve Massanelli, a Zale veteran of 13 years to the important role of Treasurer in January. Steve has been instrumental in working with Matt to secure many of the financial transactions we announced this year. We also promoted Becky Mick, a retail executive with 20 years of experience to the important role of Senior Vice President, Chief Stores Officer in July. Finally, we have hired talented executives from outside of the organization to augment our internal moves.

Roxane Barry who you met this morning joined us in August as Director of Investor Relations; Jay Fusaro, Vice President of Corporate Financial Planning joined that same month as did James Webb [ph], Director of Learning and Development; John Legg who Matt mentioned earlier, our Senior Vice President of Logistics joined us three weeks ago and has worked with our distribution team to make significant strides in impacting unproductive inventory in the distribution center in a very short period of time. Matt also mentioned Ken Brumfield who joined as Vice President of Credit and he will be responsible for leveraging credit as a strategic selling tool on the heels on our new credit card deals with Toronto-Dominion and Citibank.

In Stores, Becky and her team have also been busy. After completing a talent review earlier this year of all of our field leadership positions, we made changes when necessary, added talent when required, and made important investments both in people and by adding district manager positions in regions that we believe were under-resourced. She’s worked with the team to drive focus and accountability by utilizing a financial dashboard that measures every critical metrics for stores, districts and regions. And finally as mentioned in an earlier call, we have continued to invest in our jewelry consultants with Diamond Council of America Training. We have done a lot on the people side of the business, but again we have a long way to go.

Financially, our work has been pretty visible. Our secured term loan with Golden Gate, our new amend and extend bank agreement, our credit card deals with TD and Citi, and as Matt just announced, our agreement with Golden Gate Capital to reduce principal and remove the financial covenant. Less visible however, but also critical to returning us to profitability is our improved financial reporting, business planning, balance sheet management and relationship management with our banks, our vendors, and our investors. As with all of the other initiatives in our plan, we are making progress but until we are profitable again, none of us will be content.

As we focus appropriately on improving the performance of our business, it’s also important to celebrate the businesses that are performing well. Piercing Pagoda was up 3.8% in Q3 and 2.6% in Q4. Our ecommerce business which will add Peoples.com web store next month was up 13.3% for the year. The continuity of these teams, the focus and the outstanding leadership in these businesses serve as internal benchmarks of what we can and will be. Congratulations to those teams.

In closing, let me thank our vendors, many of whom are with us in June for our Vendor Summit, all of whom are shipping for their ongoing support and partnerships, to our 13,000 associates who have worked hard through this difficult time, thank you for your support and dedication. It’s an honor to serve you.

Roxane Barry

I will now turn the call back to Christie, and we are ready for the Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Rick Patel of Banc of America/Merrill Lynch.

Rick Patel – Banc of America/Merrill Lynch

Hi, good morning, everyone.

Theo Killion

Good morning.

Rick Patel – Banc of America/Merrill Lynch

Just a question on commodity costs, as you know, gold and silver costs were up significantly versus last year, and I was just wondering if you can share with us your pricing strategy in terms of handling how the environment has changed. Have you been passing along higher prices to your customers? And if so, is there any way to quantify just how much?

Theo Killion

What we have done, Rick, is to buy new merchandise, I talked about new core assortments that we will be bringing in, in the fall. Those core assortments will reflect the new commodity prices. In our inventory that’s in-store today, we are holding for the moment, we will reevaluate it as we get through the holiday season. In Piercing Pagoda, we have actually been able to mitigate against commodity costs by increasing our diamond assortments by adding bonded into the mix. So, we have been able to manage the margins well and also deal with the commodity costs. We will continue to look at it, and we will have a much better view of it as we get into the December-January timeframe.

Rick Patel – Banc of America/Merrill Lynch

Okay. And can you also update us on your gross margin targets perhaps for the first quarter of 2011 or even fiscal 2011 if you can? I am just wondering, are you aiming to stay above the 50% level that you previously highlighted, or do you have a higher expectation now, just given your fourth quarter results?

Matt Appel

Sure Rick. We are not going to give any specific guidance today about quarter one or the year ’11. However, the general expectation that our reported margins will be 50% or better is a reasonable expectation and that’s the target where we are shooting for. I don’t expect it will repeat the margin performance of the past quarter going forward.

Rick Patel – Banc of America/Merrill Lynch

Okay. Thank you very much.

Matt Appel

Thank you Rick.

Operator

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

Jeff Stein – Soleil Securities Group

Good morning guys. On the fourth quarter, can you tell us what your comps were on a constant currency basis?

Matt Appel

We generally don’t report that. So, Jeff, we have not reported that in the past.

Jeff Stein – Soleil Securities Group

I presume then would it be fair to say, Matt, that there was (inaudible) currency in the fourth quarter to your comp?

Matt Appel

There’s a benefit to the sales line that I talked about, yes, but because their currency was 8% stronger, but we don’t report the constant currency. You can assume that there was a slight benefit.

Jeff Stein – Soleil Securities Group

Okay. Can you tell us what you mean when you describe the support you are going to get in marketing from your new merchant service agreement? What exactly does that imply?

Matt Appel

Sure Jeff. Citi has agreed to establish a fund in an amount that we are not disclosing for competitive reasons. That is that we can use over the five year period to underwrite a variety of marketing programs designed for mutual benefit that is to drive credit – proprietary credit card sales. What I can tell us is that we have agreed to spend approximately 30% of the bucket on this upcoming holiday season, which we are very excited about.

Jeff Stein – Soleil Securities Group

So in other words, would this be in the form of inserts that would be included with your customers' monthly statements? Would that kind of be the nature of the marketing support?

Matt Appel

These are dollars designed to be spent directly to drive sales either through rebates or for incentives, and these are not – we are already going to have inserts and things printed on bills and that’s pretty standard. These are hard dollars designed to drive sales volume.

Theo Killion

One of the things we were confident about when we were entering into the various negotiations was that we would get to a place where we could start to think about credit, not on a daily basis, but on the long-term basis, which is why we hired Ken and brought him into the business to work with our marketing and with our stores team to think about what their strategy looks like and we are thrilled that Citi has supported us in a significant way for this fall season and we can get that work underway.

Jeff Stein – Soleil Securities Group

Okay. Matt, then just optically, I want to make sure I understand this because it sounds like the kind of marketing support you are getting would, in the form of rebates and incentives as such, that would probably be run through the gross, the cost of goods line, correct, as opposed to the SG&A line, or a credit to SG&A?

Matt Appel

No, Jeff. These are dollars that our provider is going to spend without any effect on us.

Theo Killion

We would hope it will have an effect on the topline and revenue.

Jeff Stein – Soleil Securities Group

Got it, got it.

Matt Appel

And no cost to us.

Jeff Stein – Soleil Securities Group

Okay. I understand completely now. Okay. In terms of your marketing spend for this year, I know that last year, you really did not use television that much. Is there any plan this year to become more actively involved in television marketing, or are you going to stick primarily to Internet?

Theo Killion

We will be a presence on television. We will have bigger spin this holiday and importantly the way we have strategized our presence in terms of weight will be significantly heavier than it was a year ago. We will talk about that in more specifics as we get through the quarter. For obvious reasons, we sort of don’t want to talk about our hand yet before we get into holiday, but Rich Lennox and his team have been working on it for the better part of this year, and we feel confident that people will know we are in business that we are promoting jewelry over the important holiday season.

Jeff Stein – Soleil Securities Group

Okay. Then, just a couple more real quickly, guys, if I might.

Matt Appel

Sure.

Jeff Stein – Soleil Securities Group

Can you talk about just your planned levels of inventories for the current holiday season? Relative to last year, you are going to be operating fewer stores, I presume. So on a comp store basis, inventories up, down, or about flat, and then, can you also talk about your store opening and closing plans for this year?

Matt Appel

Inventories will be flat as you take out the comp store impact, but there will be of much higher quality, and as Theo was talking about, as we move through our sell-down and strengthen the core. From a store standpoint, we plan to open approximately 10 kiosks during the year, approximately more than half of which will be open for holiday. And from a closing standpoint, no material impact out of the ordinary of course, where our store closure programs are complete and we will continue to look at our retail locations one at a time on a performance basis where the opportunity arises to either extend or make a different decision, but nothing significant.

Theo Killion

And if the opportunity presents itself, we would look to add even more kiosks on a strategic basis. We feel very good about that business and think we have some opportunity.

Jeff Stein – Soleil Securities Group

Got it. Okay, thank you very much.

Matt Appel

Thank you Jeff.

Operator

Your next question comes from the line of Dana Telsey of Telsey Advisory Group.

Dana Telsey – Telsey Advisory Group

Good morning, everyone. After the – in the last quarter when you mentioned the Mother's Day weekend sales were a bit soft due to less promotions, not enough low-priced product, it seems as if the business changed a little bit as you went through this fourth quarter. Anything with silver or some of the opening price point products or the bridal assortment that you see continuing going forward? Thank you.

Theo Killion

Thanks Dana. Yes, the assortment has started to solidify in the part to the business that we think are foundational to jewelry business. So, bridal as you mentioned is performing quite well and is comping positive. Our men’s business is doing well, our diamond band business is doing well, our silver business is doing well. When we thought about the turnaround strategy, we really focused on the business that defines the fine jewelry business which is bridal, and we have started to get paid back. So, yes, we are starting to see some progress there and things have improved sort of month-over-month as we continue to increase the core assortment.

Dana Telsey – Telsey Advisory Group

And you are all done liquidating the unproductive SKUs?

Theo Killion

It’s going to be an ongoing process, we are not all done. We talked about roughly 70% right now being core. That means we have about 10% to 15% more to go. That 10% to 15% is underproductive inventory that will be working through. One of the things that’s important to understand, when we define unproductive inventory is we also talk about merchandise that’s sitting in the distribution center, things that are what we term broken and damaged. In many cases, that’s merchandised that if it’s repurpose and reposition can go back into the bins, a lot of it is high-valued diamond products.

What I mentioned about John Legg coming and making an impact in the distribution team in a very short period of time, he has been able to extricate about $10 million that before we would have termed as unproductive, that’s now sitting back in the bin. So, we still have work to do, we will continue to go through it over the next couple of months, and we believe that by January, February, we will be in that 80% to 85% range on productive. So, we still have some work to do.

Matt Appel

Dana, you used the term liquidating, and I just want to be clear that we are selling through it in an orderly fashion to support 50% plus margins, and there are no liquidations per se going on here.

Dana Telsey – Telsey Advisory Group

Okay. Thank you very much. Best of luck.

Theo Killion

Thank you.

Operator

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

Bill Armstrong – CL King & Associates

Good morning. You mentioned you will open 10 kiosks this coming year. Will you be opening no in-line stores?

Matt Appel

Yes, we don’t have any plans at the moment to open any new in-line stores, but we may change those plans as business progresses.

Theo Killion

We are doing some remodels and refurbs. We have a wonderful story that we are doing a grand opening actually this week in Calgary, Alberta. Bill, so if you are in Calgary, feel free to stop by.

Bill Armstrong – CL King & Associates

Okay. You have mentioned bridal is comping positive, and you mentioned some other categories that are doing well. What categories would you say are doing the most poorly, and what can we look for as far as those categories going forward?

Theo Killion

So, I wouldn’t term it most poorly. I would term it as the ones that in terms of our priorities and what we are focusing on and where we were from a productive, unproductive mix, which ones took the greatest amount of time to get traction, probably the one that comes to mind the most is diamond fashion which includes things like bracelets and hearts and those categories, about 50% or more of that inventory when we started this work back in January, we would term as unproductive. So, it’s taken us a while to thoughtfully move our way through that. As we get into our October floor set, which will be around to mid to late October when you will start to see our inventory for the holiday season, you will see some new product introductions. I talked about the diamond fashion that we are adding in Canada, we will be adding a promise ring collection in the United States. So, we think we will be able to augment and add some new categories, that will bring that business back. It’s a real important category for us, particularly in November and December, where people are looking for slightly lower price points.

I would also add that on a category-by-category basis, even though we have it gone way low, the entry point for each one of the categories will be lower than it was a year ago, and bracelets for instance a year ago, our entry point was $599. We will be significantly lower than that this year, so that guests can come in and buy something at a reasonable price across all categories.

Bill Armstrong – CL King & Associates

Okay. That sounds good. And did you say you will be increasing your TV ad impressions this year, or did I misunderstand that?

Theo Killion

We will be spending a little more money, but getting significantly more weight and we will talk about that on our next call, Bill.

Bill Armstrong – CL King & Associates

Okay. Fair enough. And then just two quick financial questions, what was the – can you just remind us what was the minimum EBITDA covenants that you have now eliminated?

Matt Appel

Sure. The minimum consolidated EBITDA covenant was to begin on January 31st, 2011, and be measured every fiscal quarter thereafter until the expiration of the term loan. The first measurement period, January 31st, we had the clear threshold of negative $10 million of EBITDA, and the covenant increased by $10 million each quarter until it reached $100 million positive and it stayed there.

Bill Armstrong – CL King & Associates

And that was on a trailing 12-month basis or –?

Matt Appel

Yes, correct. That’s right.

Bill Armstrong – CL King & Associates

Okay. And then just lastly, what was your earnings per share in the fourth quarter, adjusting for the items?

Matt Appel

We don’t report it, adjusted for the items, Bill. What we have done this time, it’s different in our reconciliations is the focus on the impact on operating income of the special items. With all of our tax situation being confusing for the most, we thought that was the best way to look at it. And so, we are not reporting earnings per share on that basis, on that special basis.

Bill Armstrong – CL King & Associates

Okay. For taxes – income taxes going forward, should we assume that you are not going to be paying income taxes, or have a benefit? In other words, I think at the beginning of last year, you were pretty much expecting zero taxes more or less.

Matt Appel

Yes, the carrybacks are exhausted under the Act. We have taken great use of those and received refunds in excess of $30 million in the past year. We are not a current taxpayer in the U.S. We do pay taxes in Canada based on the income that we earn there, but it's rather minimal.

Bill Armstrong – CL King & Associates

Right. Okay.

Matt Appel

That's what you would expect going forward.

Bill Armstrong – CL King & Associates

Great, okay. Thank you.

Matt Appel

Thank you.

Operator

Ladies and gentlemen, that is all the questions queued up for today. I will turn the call back to management for closing remarks.

Theo Killion

As we think about the incredible amount of work that’s been done and back half of our fiscal year, I think it only serves as a foundation for the work that we have to do. Obviously we are not pleased with where we are in the comp store basis and we have to start getting back in the game from a revenue standpoint. We are through the SG&A reductions, we are through some of the Draconian things that we have had to do over the past two years and it really is about building the business, focusing on our people, doing the right things, getting back in touch with our core customer, and that really is the work that’s ahead of this. Thank all of you for sticking with us as investors. We look forward to delivering better results.

Operator

Ladies and gentlemen, that concludes Zale Corporation’s fiscal fourth quarter and full-year 2010 results conference call. We appreciate your time. You may now disconnect.

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