Zale Reports Fourth Quarter and Full Year Financial Results



    DALLAS, August 30 /CNW/ - Zale Corporation (NYSE:   ZLC), a leading
specialty retailer of fine jewelry in North America, today reported net
earnings of $1.5 million, or $0.03 per diluted share for the Company's fourth
quarter ended July 31, 2007. Earnings for the quarter include, on an after-tax
basis, (1) a reduction of $6.3 million, or $0.13 per diluted share due to the
delay in revenue recognized from the change to a lifetime jewelry protection
plan, (2) a benefit of $1.1 million, or $0.02 per diluted share for the net
impact of derivative versus hedge accounting on its gold and silver contracts,
and (3) a net tax benefit of $6.7 million, or $0.14 per diluted share
primarily related to a decision to indefinitely reinvest certain undistributed
foreign earnings in accordance with APB 23. Excluding these items, the Company
reported earnings of $0.0 million, or $0.00 per diluted share.

    For the same period last year, the Company reported a net loss of $27.4
million, or $0.57 per share. This loss included a mostly non-cash after-tax
charge of $23.9 million, or $0.50 per share, primarily consisting of
impairments and store closure charges. The Company also recorded an increase
in accrued percentage rent of $1.5 million after-tax, or $0.03 per share,
related to prior periods, a $1.9 million, or $0.04 per share tax charge
related primarily to Canadian earnings and an after-tax impact of derivative
versus hedge accounting treatment of a $1.0 million loss, or $0.02 per share
for its commodities contracts. Excluding these items, the Company reported
earnings of $1.0 million, or $0.02 per diluted share.

    Revenues for the quarter ended July 31, 2007 were $488 million compared
to $491 million last year, a decrease of 0.5%. Revenues recognized were $7.5
million or 1.5% less than prior year as a result of the change made in the
method of amortizing jewelry protection plan sales. Comparable store sales for
the fourth quarter decreased 0.5%.

    "Improving sales trends post Mother's Day combined with a focus on
maximizing gross margin dollars and good expense control resulted in earnings
at the high end of expectations," commented Betsy Burton, Chief Executive
Officer.

    Ms. Burton continued, "Fiscal 2007 was a year in which we focused on
going back to the basics. We tested investments in inventory assortments as
well as in payroll and marketing. While many of these initiatives paid off,
others have been pared back. We will take these learnings as well as the
opportunity to refine our pricing and promotional strategy for this Holiday to
drive meaningful earnings improvement in our all-important second quarter of
fiscal 2008. Additionally, we believe some of the organizational changes that
we made will give us the ability to positively impact the business going
forward. For fiscal 2008, we expect earnings improvement, a significant
reduction in inventory and the continued success of our lifetime jewelry
protection plans to generate approximately $125 million to $150 million in
free cash flow."

    Ms. Burton concluded, "For the past year, we have looked at many aspects
of our business, from our portfolio strategy and brand positioning to
opportunities to improve the core business. We believe we have a significant
opportunity to drive shareholder value both near-term and long-term. This
strategy consists of improving productivity of our core mall business, a
growth strategy centered on our brands that produce the highest returns on
capital, and the migration to a more centralized, streamlined organization."

    Fiscal 2007 Results

    Net earnings for fiscal year 2007 were $59.3 million or $1.21 per share.
These earnings treat forward commodity contracts as derivatives under SFAS 133
and reflect the change in revenue recognition for jewelry protection plans as
a result of the extended service period covered by plans during the year. The
after-tax impact of derivative versus hedge accounting treatment was a $0.4
million benefit, or $0.01 per share, the negative impact on revenue recognized
from the sale of jewelry protection plans was $22.3 million, or $0.46 per
share and a tax benefit of $6.7 million, or $0.14 per share primarily related
to the decision to indefinitely reinvest certain undistributed foreign
earnings in accordance with APB 23. Excluding these items, fiscal 2007 net
earnings were $74.4 million, or $1.52 per share.

    For the same period last year, earnings were $53.6 million, or $1.09 per
share. These prior year earnings include, on an after-tax basis, (1)
impairments and store closure charges of $45.1 million, or $0.92 per share,
(2) severance payments of $7.5 million, or $0.15 per share, (3) a $1.0
million, or $0.02 per share impact of derivative versus hedge accounting
treatment and (4) a $1.5 million, or $0.03 per share charge for percentage
rent related to prior years; which were partially offset by (5) a tax benefit
primarily related to repatriated Canadian earnings under the American Jobs
Creation Act of $9.5 million, or $0.19 per share, and (6) an $8.4 million, or
$0.17 per share, benefit resulting from the settlement of certain retirement
benefit obligations. Excluding these items, the Company reported earnings of
$90.9 million last year, or $1.85 per share.

    For the full fiscal year, revenues were flat at $2.44 billion, compared
to the same period last year. Full fiscal year comparable store sales
decreased 0.2%.

    Change in Comparable Store Methodology

    Beginning in fiscal 2008, the Company will include online sales in its
comparable store sales calculation. This approach is consistent with the
Company's goal of improving its multi-channel experience and leveraging the
best of its real estate footprint with the growth in online sales. Comparable
store sales for 2007, including online sales, increased 0.5%. The quarterly
breakdown of comparable store sales for fiscal 2007 including online sales is
attached as a table at the back of the press release.

    Warranty Deferred Revenue

    The Company's decision to offer a lifetime jewelry protection plan has
been well received by its customers, generating an increase of $33 million in
cash sales of warranties in fiscal 2007 over the prior year. Actual cash sales
of all warranty plans were $111 million in fiscal 2007 and are projected to
exceed $130 million in fiscal 2008. Despite this cash sales increase, the
amount of unrecognized, or deferred revenues will also increase. During fiscal
2007, the Company provided the impact of the change to a lifetime product by
estimating what revenue would have been under the prior pricing and at prior
recognition rates. This was consistent with initial guidance. Going forward,
the Company will discuss the impact on earnings relative to the change in
unrecognized revenues on the balance sheet, which also reflects the
incremental cash collected and the future positive impact to earnings. The
Company feels this will be clearer to the shareholder and readily
quantifiable.

    Excluding the impact of APB 23, GAAP earnings are expected to increase
approximately 5.0% in fiscal 2008 over prior year. On an adjusted basis,
excluding the change in revenue recognition from warranty sales, the Company's
growth in fiscal 2008 is expected to be approximately 15.0%. Earnings growth
is expected to accelerate to approximately 30% per annum in 2009 through 2011
as the Company recognizes incremental revenues each year and the deferred
revenue continues to increase. Approximately one-half of this growth is
expected to be directly related to the change in the warranty plans and
related revenue recognition. In order to estimate a more normalized
year-over-year growth upon maturity of the product, the Company believes the
increase in the unrecognized revenue is the appropriate measure.

    The increase in unrecognized revenues on the balance sheet was $62
million in fiscal 2007 and is anticipated to be approximately $80 - 90 million
in fiscal 2008. In contrast, the increase from fiscal 2005 to fiscal 2006
prior to the product change was $4 million. Had the product been offered for
five years, the Company believes these amounts are indicative of what would
have been recognized on an after-tax basis and the after-tax impact would be a
net $0.78 per share in 2007 and projected to be approximately $1.00 per share
in fiscal 2008. The incremental impact of these unrecognized amounts is
expected to begin to decline in fiscal 2009 through 2011, as the amount of
revenue recognized becomes comparable to cash sales of the plans.

    Fiscal 2008 Guidance

    The Company also provided its annual forecast for its fiscal year ending
July 31, 2008. For the full year, the Company expects a comparable store sales
increase, including its online sales, of 1% to 2%. GAAP earnings are expected
to be in the range of $1.11 to $1.16 per share. Excluding the $6.7 million or
$0.14 per share impact from the adoption of APB 23, fiscal 2007 earnings would
have been $1.07 per share. These earnings do not reflect the longer term
earnings impact of the lifetime warranties. Including the impact of the
increase in the unrecognized revenues on the balance sheet, earnings would be
expected in the range of $2.11 - $2.16 in fiscal 2008 compared to $1.85 in
fiscal 2007. This reflects earnings growth in the mid-teens, consistent with
our long-term targets. Over time, the lifetime warranties will accelerate our
GAAP earnings while the change in unamortized revenues on the balance sheet
declines.

    A conference call will be held today at 9:00 a.m. Eastern Time. Parties
interested in participating should dial 706-643-7467 five minutes prior to the
scheduled start time. A webcast of the call, as well as a replay, will be
available on the Company's Web site at www.zalecorp.com. For additional
information, contact Investor Relations at 972-580-5047.

    The Company also announced that it will be presenting at the Goldman
Sachs Retailing conference on Thursday, September 6, 2007 at 9:30 a.m. Eastern
Time. The presentation will be available on the Company's Web site at
www.zalecorp.com.

    Zale Corporation is a leading specialty retailer of fine jewelry in North
America operating approximately 2,250 retail locations throughout the United
States, Canada and Puerto Rico, as well as online. Zale Corporation's brands
include Zales Jewelers, Zales Outlet, Gordon's Jewelers, Bailey Banks & Biddle
Fine Jewelers, Peoples Jewellers, Mappins Jewellers and Piercing Pagoda. Zale
also operates online at www.zales.com, www.gordonsjewelers.com and
www.baileybanksandbiddle.com. Additional information on Zale Corporation and
its brands is available at www.zalecorp.com.

    This release contains forward-looking statements, including statements
regarding the Company's turnaround initiatives and their effects, sales and
earnings guidance for fiscal year 2008 and the anticipated impact of deferred
revenue recognition. Forward-looking statements are not guarantees of future
performance and a variety of factors could cause the Company's actual results
to differ materially from the results expressed in the forward-looking
statements. These factors include, but are not limited to: if the general
economy performs poorly, discretionary spending on goods that are, or are
perceived to be, "luxuries" may not grow and may even decrease; the
concentration of a substantial portion of the Company's sales in three,
relatively brief selling seasons means that the Company's performance is more
susceptible to disruptions; most of the Company's sales are of products that
include diamonds, precious metals and other commodities, and fluctuations in
the availability and pricing of commodities could impact the Company's ability
to obtain and produce products at favorable prices; the Company's sales are
dependent upon mall traffic; the Company operates in a highly competitive
industry; changes in regulatory requirements or in the Company's private label
credit card arrangement with Citi may increase the cost of or adversely affect
the Company's operations and its ability to provide consumer credit and write
credit insurance; acquisitions involve special risks, including the
possibility that the Company may not be able to integrate acquisitions into
its existing operations. For other factors, see the Company's filings with the
Securities and Exchange Commission, including its Annual Report on Form 10-K
for the fiscal year ended July 31, 2006. The Company disclaims any obligation
to update or revise publicly or otherwise any forward-looking statements to
reflect subsequent events, new information or future circumstances.

    
                      ZALE CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED SELECTED FINANCIAL INFORMATION
         (Unaudited, Dollars in thousands, except per share amounts)

                             Three Months Ended      Twelve Months Ended
                                  July 31,                July 31,
                           ----------------------- -----------------------
                              2007        2006        2007        2006
                           ----------- ----------- ----------- -----------

    Revenues                 $488,226    $490,695  $2,437,075  $2,438,977
       Comparable Store
        Sales %                  -0.5%        3.5%       -0.2%        1.6%
    Cost of Sales             234,051     257,370   1,187,601   1,215,636
                           ----------- ----------- ----------- -----------
    Gross Margin              254,175     233,325   1,249,474   1,223,341
       % of Revenue              52.1%       47.5%       51.3%       50.2%
    Selling, General and
     Administrative
     Expenses                 241,226     251,700   1,070,478   1,087,458
       % of Revenue              49.4%       51.3%       43.9%       44.6%
    Cost of Insurance
     Operations                 1,619       1,684       6,798       6,699
    Depreciation and
     Amortization Expense      15,940      14,973      61,887      59,771
    Benefit from
     Settlement of
     Retirement Plan              ---         ---         ---     (13,403)
    Derivative Loss               111       1,681       7,184       1,681
                           ----------- ----------- ----------- -----------
    Operating (Loss)
     Earnings                  (4,721)    (36,713)    103,127      81,135
       % of Revenue              -1.0%       -7.5%        4.2%        3.3%
    Interest Expense            3,730       3,500      18,969      11,185
                           ----------- ----------- ----------- -----------
    (Loss)/Earnings Before
     Income Taxes              (8,451)    (40,213)     84,158      69,950
    Income Taxes               (9,988)    (12,851)     24,906      16,328
                           ----------- ----------- ----------- -----------
    Net Earnings/(Loss)        $1,537    $(27,362)    $59,252     $53,622
                           ----------- ----------- ----------- -----------

    Basic Earnings Per
     Common Share:
       Net Earnings Per
        Share                   $0.03      $(0.57)      $1.22       $1.10
                           ----------- ----------- ----------- -----------

    Diluted Earnings Per
     Common Share:
       Net Earnings Per
        Share                   $0.03      $(0.57)      $1.21       $1.09
                           ----------- ----------- ----------- -----------

    Weighted Average Number of Common Shares Outstanding:
       Basic                   49,031      48,131      48,694      48,808
       Diluted                 49,210      48,427      48,995      49,211
    

    
    Reconciliation of GAAP Information to Non-GAAP basis 4th Quarter and
     full year FY07, diluted:
                                   Three Months Ended  Twelve Months Ended
                                      July 31, 2007       July 31, 2007
                                   ------------------- -------------------
                                    Amount   Per Share  Amount   Per Share
                                   --------- --------- --------- ---------
    Net GAAP Earnings Per Above      $1,537     $0.03   $59,252     $1.21
       Impact of Derivatives (1)     (1,051)    (0.02)     (411)    (0.01)
       Change in Revenue
        Recognition                   6,276      0.13    22,296      0.46
       Tax Adjustments (2)           (6,742)    (0.14)   (6,742)    (0.14)
                                   --------- --------- --------- ---------
    Net Earnings                        $20     $0.00   $74,395     $1.52
                                   --------- --------- --------- ---------


    (1) The Company does not utilize hedge accounting for its derivatives.
     As a result, changes in the fair market value of derivatives and the
     settlement of derivative contracts are recorded directly to earnings.
     This adjustment shows the impact on net earnings had hedge accounting
     been utilized.
    (2) The tax adjustments include a benefit of $6.7 million primarily
     associated with our decision to indefinitely reinvest certain
     undistributed foreign earnings in accordance with APB 23.

    Reconciliation of GAAP Information to Non-GAAP basis 4th Quarter and
     full year FY06, diluted:
                                   Three Months Ended  Twelve Months Ended
                                      July 31, 2006       July 31, 2006
                                   ------------------- -------------------
                                    Amount   Per Share  Amount   Per Share
                                   --------- --------- --------- ---------
    Net GAAP (Loss) Earnings Per
     Above                         $(27,362)   $(0.57)  $53,622     $1.09
       Impairments and Store
        Closure Charges              23,879      0.50    45,105      0.92
       Settlement of Retirement
        Benefit Obligation              ---       ---    (8,350)    (0.17)
       CEO and COO Severance
        Charges                         ---       ---     7,518      0.15
       Impact of Derivatives          1,047      0.02     1,047      0.02
       Accrued Rent                   1,475      0.03     1,475      0.03
       Tax Charges/(Benefits)         1,920      0.04    (9,545)    (0.19)
                                   --------- --------- --------- ---------
    Net Earnings                       $959     $0.02   $90,872     $1.85
                                   --------- --------- --------- ---------
    

    
                      ZALE CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED BALANCE SHEET DATA
                      (Unaudited, Dollars in thousands)

                                                         Difference
                            July 31,    July 31,   July 2007 vs July 2006
                              2007        2006       Amount      Percent
                           ----------- ----------- ----------- -----------
    ASSETS
    Current Assets:
      Cash and cash
       equivalents            $37,643     $42,594     $(4,951)      -11.6%
      Merchandise
       inventories          1,021,164     903,294     117,870        13.0%
      Other current assets    113,511     103,356      10,155         9.8%
                           ----------- ----------- ----------- -----------
    Total current assets    1,172,318   1,049,244     123,074        11.7%

    Property and equipment    304,396     283,721      20,675         7.3%
    Goodwill                  100,740      96,339       4,401         4.6%
    Other assets               35,187      33,264       1,923         5.8%
                           ----------- ----------- ----------- -----------
    Total Assets           $1,612,641  $1,462,568     150,073        10.3%
                           ----------- ----------- ----------- -----------

    LIABILITIES AND STOCKHOLDERS' INVESTMENT
    Current liabilities:
      Accounts payable and
       accrued liabilities   $300,929    $341,182    $(40,253)      -11.8%
      Deferred tax
       liability, Net          61,875      61,947         (72)       -0.1%
                           ----------- ----------- ----------- -----------
    Total current
     liabilities              362,804     403,129     (40,325)      -10.0%

    Long-term debt            227,306     202,813      24,493        12.1%
    Deferred tax liability     10,349       3,768       6,581       174.7%
    Other liabilities         109,609      51,609      58,000       112.4%

    Contingencies

    Stockholders'
     Investment:
      Common stock                487         482           5         1.0%
      Additional paid-In
       capital                138,036     108,344      29,692        27.4%
      Accumulated other
       comprehensive
       income                  45,939      33,564      12,375        36.9%
      Accumulated earnings    868,111     808,859      59,252         7.3%
                           ----------- ----------- ----------- -----------
                            1,052,573     951,249     101,324        10.7%
      Treasury stock         (150,000)   (150,000)          0         0.0%
                           ----------- ----------- ----------- -----------
    Total stockholders'
     investment               902,573     801,249     101,324        12.6%
                           ----------- ----------- ----------- -----------

    Total liabilities and
     stockholders'
     investment            $1,612,641  $1,462,568    $150,073        10.3%
                           ----------- ----------- ----------- -----------
    

    
    Comparable Store Sales as Reported and Including On-Line Sales for
     Fiscal Year 2007:

                                        Including
                                         On-Line
                           As Reported    Sales
                           ----------- -----------
    Quarter 1                     0.4%        1.0%
    Quarter 2                     1.4%        2.3%
    Quarter 3                    -3.4%       -2.8%
    Quarter 4                    -0.5%        0.1%
    Year-to-Date FY 07           -0.2%        0.5%
    

    
    Impact on GAAP Information from Deferred Revenue and APB 23

                           Estimated Twelve Months   Twelve Months Ended
                             Ended July 31, 2008        July 31, 2007

                             Amount     Per Share    Amount     Per Share
                           ----------- ----------- ----------- -----------
    Net GAAP Earnings          $55,500       $1.13    $59,252       $1.21
    Tax Adjustments                  -        0.00     (6,742)      (0.14)
    Change in Deferred
     Revenue                    49,105        1.00     38,123        0.78
                           ----------- ----------- ----------- -----------
    Net Earnings              $104,605       $2.13    $90,633       $1.85
                           ----------- ----------- ----------- -----------
    

    Non-GAAP Financial Measures

    Free operating cash flow is a non-GAAP financial measure and is defined
as cash provided by operating activities (in accordance with GAAP) less net
capital expenditures. The Company considers cash provided by operating
activities to be the most comparable GAAP financial measure, and has included
below a reconciliation of cash flows from operating activities to free
operating cash flow.

    Free operating cash flow should not be considered as an alternative to
cash flows from operating, financing or investing activities or as a measure
of liquidity. Further, free operating cash flow does not represent the total
increase or decrease in the cash balance for the period. Readers are
encouraged to review the Statement of Cash Flows regarding the Company's cash
flows from operating, financing and investing activities under GAAP.

    In addition, management has presented a projection of free operating cash
flow of approximately $125 to $150 million for fiscal year 2008. This
projection is based on projected cash provided by operating activities of
approximately $230 to $255 million for fiscal year 2008, less projected net
capital expenditures of approximately $105 million for fiscal year 2008. Such
projections represent management's current expectations and are subject to a
number of risks and uncertainties that could cause actual amounts to differ
materially from these projections. Please refer to the "Notice Regarding
Forward-Looking Statements" included in this press release.




For further information:

For further information: Zale Corporation David H. Sternblitz,
972-580-5047 Vice President and Treasurer

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ZALE CORPORATION

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