UPDATE 3-Zale expects to return to profit in 2013

Wed Aug 29, 2012 12:14pm EDT

* 4th-qtr loss 61 cents/share vs loss $1.02 a year ago

* Same-store sales up 8.3 pct; up 11.2 pct in U.S.

* Has not had annual profit since FY 2008

* Shares up 2.7 pct

By Phil Wahba

Aug 29 (Reuters) - Zale Corp forecast its first annual profit since 2008 as sales of pricier jewelry to prospective brides and grooms helped sales march higher in the most recent quarter.

The mall retailer, which caters to middle-class shoppers looking for affordable jewelry, on Wednesday reported a narrower quarterly loss and chalked up its seventh straight quarter of same-store sales gains. It expects that momentum to continue in the fiscal year that began this month.

On a conference call with Wall Street analysts, Zale executives said its pricier line of bridal jewelry from Vera Wang, an upscale wedding gown designer, sold particularly well in the latest quarter. One ring in the collection, launched in the fall, is made of 14 karat white gold and goes for $15,999.99.

The company said it was able broadly to raise its prices just enough to offset higher diamond costs and preserve its gross margin without alienating its budget-conscious shoppers.

"We focused on striking the right balance between the value our guests demand and taking price increases," Chief Executive Theo Killion said on the call.

Sales at stores open at least a year rose 8.3 percent in the fiscal fourth quarter, ended July 31. Last week, rival Kay Jewelers, a unit of Signet Jewelers Ltd, reported a quarterly same-store sales rise of 12.5 percent.

Those sales gains suggest U.S. consumers have resumed splurging on affordable indulgences.

Zale's U.S. fine jewelry brands unit, which accounts for about 70 percent of annual revenue and consists of Zales Jewelers, Zales Outlet and Gordon's Jewelers, posted an 11.2 percent increase in same-store sales in the quarter.

Fourth-quarter revenue increased 7.9 percent to $407 million, sending sales for the full year to their highest level since the U.S. recession sent consumer spending into a tailspin.

To fuel its momentum, ahead of the important holiday season, Zale will introduce an assortment of colored diamonds and gemstones, and expand its selection of watches at different prices.

It said its same-store sales in Canada, where it operates Peoples Jewellers and Mappins Jewellers, were up 2 percent in the quarter, hurt by unfavorable exchange rates. Excluding the impact of currency, same-store sales rose 7.1 percent.

There was improvement at its kiosks, which consist primarily of the Piercing Pagoda mall-based chain and account for 13 percent of sales. Same-store sales rose 2.7 percent after declining in recent quarters.

The company's net loss for the fourth quarter narrowed to $19.7 million, or 61 cents per share, from $32.6 million, or $1.02 per share, a year earlier.

Last month, Zale said it had restructured its loans and prepaid part of its debt, moves it said would save $17 million a year.

In 2009, Zale faced a severe liquidity crisis, canceling orders before the Christmas period and pulling back on advertising, raising concerns about its viability and prompting the loss of market share to Kay Jewelers.

But in 2010 the company got a $150 million lifeline from private equity firm Golden Gate Capital and sales began turning around.

Its shares were up 2.7 percent to $4.23 in midday trading.

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