Zale expecting to lower debt by $40 million in back half of fiscal 2009

By Jennifer Lanning Drey

Portland, Ore., Feb. 25 - Zale Corp. expects its debt to be about $350 million at the July 31 end of fiscal 2009, representing a $40 million decrease from the debt level at Jan. 31, Cindy Gordon, interim chief financial officer of Zale, said Wednesday during the company's conference call for the second quarter of fiscal 2009.

Gordon also said Zale believes its current liquidity is sufficient to meet its foreseeable needs.

During the second quarter, Zale posted Canadian and Puerto Rican inventory as collateral to its $500 million asset-backed credit facility in order to potentially increase availability on its U.S. revolving credit facility.

Zale had $73.1 million of cash and cash equivalents at Jan. 31.

The company previously projected it would be cash flow positive for full-year fiscal 2009, but after a difficult holiday selling season, it no longer expects to meet that goal, Gordon said during the question-and-answer portion of the call.

Same-store sales fall 18%

During the three-month period ended Jan. 31, Zale's comparable-store sales decreased more than 18%, as compared to the prior year, driven in part by lower customer traffic and transactions, Neal Goldberg, chief executive officer of the company, said during the call.

The company has since determined that in addition to macroeconomic challenges, its aggressive promotional stance, which focused on storewide discounts, also contributed to the negative performance, he said.

Zale has since taken actions to adjust for the mistake.

In addition, the company announced plans for $140 million in cost savings and inventory reductions, in addition to $175 million of savings announced last year.

Planned capital expenditures for fiscal 2009 are 65% lower than in the prior fiscal year.

"Financial rigor is critical in this environment. We will continue to focus on identifying opportunities to improve asset productivity and operational effectiveness as we focus on aggressively managing expenses in line with the business trends," Gordon said.

Zale also plans to undertake a total review of its lease portfolio to identify further opportunities for efficiency and to rationalize the size and scale of the business. The effort will include challenging rents as leases renew and renegotiating new leases, she said.

The company posted second-quarter revenue of $679 million, compared to $828 million in the prior-year period.

Zale is an Irving, Texas-based specialty retailer of fine jewelry.

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