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Zale's Holiday Comps Perk Up

TIF ZLC

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Zale Corporation (ZLC - Snapshot Report) announced its sales and comparable store sales (comps) results for the holiday season – combined months of November and December. Moreover, the company provided the outlook for the second quarter ending Jan 31, 2013.

Zale’s comps for these two months increased 2.3% compared with 5.9% reported in the comparable year-ago period. The increase was driven by a 3.1% rise in comps at the company’s namesake stores, 2.7% increase in Canadian Fine Jewelry brands stores and a 1.7% hike in Piercing Pagoda stores.

The company’s comps result fared better than one of its peers, Tiffany & Co. (TIF - Analyst Report), which reported a flat year-over-year comps for the holiday period.

Zale’s holiday sales increased marginally year over year by $3 million to $567 million, primarily driven by increased comps, which were partially offset by a decline of revenue contribution from 50 lesser stores compared to the year-ago period.

Apart from this, the company now expects its gross margin for the second quarter to remain flat at 50.5%, while operating margin is anticipated to expand by 100 basis points to nearly 7.5% on the back of lower selling, general and administrative expenses as a percentage of sales.

Moreover, citing positive comps growth along with improvement in operating margin, the company still expects to post positive net income in fiscal 2013. Zale has been posting loss in every fiscal since 2008. Moreover, after failing to post annual profit since 2008, the company expects to post positive net income in fiscal 2013. The current Zacks Consensus Estimate for fiscal 2013 is pegged at 20 cents per share.

Our Recommendation

Since the 2008 financial crisis, the company has been struggling to overcome liquidity loss and plunging sales. Further, prevailing sluggish economic growth in the U.S. is adversely affecting the company’s operational performances. Thus, we have maintained a long-term ‘Underperform’ recommendation on the stock. Moreover, Zale holds Zacks Rank #5 (Strong Sell) rating.

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