* Zale Q1 loss/shr $3.05 vs loss/shr $1.87 year-earlier
* Zale Q1 same store sales down 1.1 pct
* Signet US same-store sales up 9.7 pct; up 8.6 pct at Kay
* Zale shares down 4.8 pct; Signet shares up 6.6 pct (Adds details from calls, Signet CEO comment, updates shares)
By Phil Wahba
NEW YORK, Nov 23 Zale Corp's ZLC.N sales continued to decline in its fiscal quarter, presaging the tough battle the mid-tier jeweler faces with rival Kay Jewelers during the holiday season to reclaim shoppers.
Sales at Zale's stores open at least a year, or same-store sales, fell 1.1 percent during the quarter, while at Signet Jewelers Ltd (SIG.N) SIG.L U.S. same-stores sales soared, fueled by an 8.6 percent jump at Kay, continuing a streak of gains that have come at Zale's expense. [ID:nN22289372]
Zale shares were down down 16 cents, or 4.8 percent, at $3.20 in morning trading, while Signet shares soared $2.48, or 6.6 percent, to $39.96.
Last holiday season, Zale faced severe liquidity problems, forcing it to cancel orders, delay payments to vendors and cut back on ads, harming its ability to compete with Signet.
Zale Chief Financial Officer Matt Appel said on a call that this year, inventory levels "reflect the full support of our vendor partners" and that advertising budgets were up.
Heading into the holiday shopping season, which accounts for as much as 40 percent of annual sales for some jewelers, Zale's inventory was down a bit due to operating fewer stores.
Zale's Chief Executive Theo Killion acknowledged how important the upcoming weeks will be, calling the holiday quarter "an important barometer of the progress we're making in our turnaround."
While the rate of Zale's same-store sales declines has slowed, the market-share losses during Zale's liquidity crisis may prove hard to undo.
Signet CEO Terry Burman, who is stepping down in January to be replaced by Michael Barnes, said "many competitors remain under financial pressure," without naming Zale.
Burman said the economy is still "challenging" but that rivals' woes would help Signet win sales. He also said price increases and less discounting had helped its gross margin, which reflect profit generated directly from sales.
Signet also has the advantage of operating a more upscale chain, Jared, where same-store sales rose 14.3 percent during the quarter, and which accounts for 25 percent of sales.
Upscale Tiffany & Co (TIF.N) is set to report its results on Wednesday.
Jewelers have had to contend with higher gold and diamond costs, which threaten their gross margins. [ID:nN18284128]
Zale's Appel told analysts that there were no plans yet to pass those costs on to shoppers, but that Zale would re-evaluate that after the holidays.
Zale, whose chains include Zales in the United States and Peoples Jewellers in Canada, reported a net loss of $97.9 million, or $3.05 per share, for the quarter that ended Oct. 31, compared with a loss of $59.7 million, or $1.87 per share, a year earlier.
Much of that increase stems from a $46 million interest expense linked to a five-year, $150 million loan it obtained in May from private equity firm Golden Gate Capital.
Zale's operating loss narrowed largely because of store closures and cost cutting, while its gross margin rose 1.9 percentage points to 50.5 percent, mostly due to higher warranty revenue.
The company said its revolving credit facility will increase to $650 million during this year's holiday season, allowing it buy more items as needed.
Its shares have risen 40 percent between May and Monday's $3.50 closing price. (Reporting by Phil Wahba; additional reporting by Abhishek Takle; Editing by Derek Caney and Maureen Bavdek)