On Wednesday, February 24, Zale Corporation released its financial statements for the quarter ended January 31, 2010.  We take a close look at these statements.

Some notable changes:

Revenues fell 14 percent.   The revenues for the quarter fell from $679 million for the quarter ending 1/31/2009 to $582 million for the quarter ending 1/31/2010, a reduction of revenues of $97 million.  Comparable same-store sales were down 11 percent.

Stockholders’ equity drops 29 percent.  The equity of the stockholders of the company fell from $459 million as of 1/31/2009 to $326 million as of 1/31/2010, a loss of $133 million of book equity.  The market value of the stock of the company has fallen by 60 percent since the beginning of the fiscal year, from $5.92 per share to $2.37 share as of 2/26/2010.

Cash and cash equivalents fell by 52 percent.  Cash balances fell from $68 million as of 1/31/2009 to $32 million as of 1/31/2010, a loss of $16 million.  Cash as a percentage of current liabilities fell from 20 percent to 10 percent, a 50 percent loss of available liquidity to pay current debt.

Merchandise inventories were reduced by 13 percent.   Inventories were slashed from $848 as of 1/31/2009 to $738 million as of 1/31/2010, resulting in $150 less millions in available stock.  Zales took the very unusual step of asking diamond merchants and other vendors to buy back old jewelry, including products they didn’t manufacture, in exchange for a pledge of future orders.  It is not known how many vendors complied with this unpalatable request.

Net property and equipment fell 27 percent.  The book value of net property and equipment fell from $271 million as of 1/31/2009 to $198 million as of 1/31/2010, a reduction of $73 million of the company’s fixed assets. 

This is a picture of a company being significantly contracted.  To preserve funds, Zale canceled much of the advertising it had planned for Valentine’s Day as well as Mother’s Day, said people close to the company. These are the two biggest jewelry sales holidays after Christmas.  Zales has not reported sales for February but market watchers expect a significant decline in revenues from the previous year.

Zales needs a white knight to save it.  Private-equity firm Centerbridge Partners LP has expressed an interest in Zales; as has Gordon Brothers Group, a Boston-based financial firm with a large liquidation business.  Some firms have recently signed confidentiality agreements in order to look at Zale’s books, according to people familiar with the company.  On Monday, February 22, 2010, it was reported that the private-equity firm Apollo Management submitted a proposal to buy a stake in Zales.  Apollo would bring in its own management team, headed by former Zale chief executive Robert DiNicola. The team would most likely include Pamela Romano, a former president of the Zale division.

See previous posts on Zales:

Who Killed Zales     http://www.johnbrianfastcpa.com/1376/who-killed-zales/

Tarnished Icon     http://www.johnbrianfastcpa.com/884/tarnished-icon/

No Gems Here    http://www.johnbrianfastcpa.com/623/no-gems-here-zales-financial-reporting-is-erroneous/