Zale Corporation (ZLC)
March 12, 2013 2:50 pm ET
Executives
Matthew W. Appel - Chief Administrative Officer
Thomas A. Haubenstricker - Chief Financial Officer and Senior Vice President
Analysts
Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division
Presentation
Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division
Very happy today to have the management team for Zale here. We have Tom Haubensticker and Matt Appel. I'm going to pass the microphone over to Matt first who will give a quick overview of Zale. Tom will chime in with some financial metrics, and then we'll turn it over to the audience for questions.
Matthew W. Appel
Thanks, Lorraine. Thanks to everybody who's here today and who's listening to us on the web. Apologies for my voice. If you can't make out what I'm saying, we'll have Tom repeat it when he gets up here right after me. First, I'd like to draw your attention to the Safe Harbor statement. I'm not going to read, in fact, any of it, let alone every word, customary cautions about forward-looking statements and non-GAAP measurements.
Moving ahead to #3, Slide #3, I'd like to talk a little bit about Zale at a high level. We're one of the leading specialty retailers of fine jewelry in North America. We operate 6 brands, throughout the United States, Canada and Puerto Rico. We have just over 1,100 Fine Jewelry stores that operate under the Zales Jewelers, Zales Outlet, Gordon's Jewelers, Peoples Jewellers and Mappins Jewellers brands, and then we operate slightly more than 640 kiosks, principally under the Piercing Pagoda name, and located principally in shopping malls and we have web stores for all the brands, except for Mappins. So we operate 5 different web stores. Of course, we trade on the New York Stock Exchange under the symbol of ZLC.
A little bit of our financial profile for fiscal '12. This is our sales breakdown out of the $1.9 billion that we reported for the fiscal year that ended July 31, 2012. Just over 61% of the business constitutes the Zale brand, so Zales and Zales Outlet, with Zales Jewelers constituting just slightly more than 50%. Our U.S. regional brand, which is Gordon's, adds 9% so a total of 70% in mall-based and outlet-based in the U.S. Our Canadian brands, Peoples and Mappins, contribute 17% and Piercing Pagoda, the Kiosk business, contributes about 13% of our sales volume. For those of you who have been following Zale during our 3-year turnaround, this is the third year of the turnaround. This is a familiar chart to you. What this chart does is characterize the initiatives that we worked through in order to bring Zale's back from the position that we found ourselves in at the beginning of calendar 2010 to where we are today, about to record our first fiscal year profit in quite a number of years. First act was stabilizing the business, which we did through a series of initiatives that included hiring, a capable executive team. We pooled together our corporate -- our multiyear turnaround strategy rather. We secured some financing that was required in order to invest in turning around the business and began working through our inventory issues in order to record, to restore our core merchandise assortment.
During the ensuing 2 years, we managed to restore the inventory back from a 60% core to 85%. We posted 7 consecutive quarters of positive comps, which are now 9 consecutive quarters of positive comps. We posted our first annual operating profit in the last fiscal year at $19 million, and we once again improved our capital structure beyond the 2010 capital raise. More relevant is what you see in the right-hand column, what we are doing this year, expanding our exclusive and branded collections, principally Vera and Celebration, which now represents 10% of our product mix and we have an objective to grow to 20%, building on our Omni-Channel strengths, which I'll talk to you about in a minute, driving store productivity a little harder, significantly investing in expanded training for our stores and store personnel, stabilizing a growing Pagoda and beginning a very important multiyear implementation to improve our sourcing framework, which is really focused on a wide range of elements in the supply chain to lower -- both lower our costs and drive higher margins.
Turning to Page -- to Slide 6. I'd like to briefly review the key drivers that we're relying on for growth. First and foremost, our strong brand equity. Capitalizing on the traction of our core brands, our core national brands, the Zales brand in the U.S. and the Peoples brand in Canada. Merchandise, I'll talk to you about on the next slide.
In terms of the Omni-Channel business model, leveraging the already strong web presence that we have, an e-business that constitutes between 4% and 5% of our sales, but in adding the dimensions of Ship-to-Store and leveraging social media, embracing mobile. For example, over the past holiday season, over 23% of our online orders that's in November and December were through the Ship-to-Store model, and over 42% of our traffic during the holiday season was mobile, and in the last week leading up to Christmas, that grew to 50%. And so this is a very important integration point for us and one that we've worked very hard on. In terms of credit, warranty and repair, we're talking about as customer credit, and we've expanding those capabilities by adding in alternative financing program that sits under our prime U.S. program, and has expanded the reach of our proprietary program, but also by focusing on higher margin service oriented programs such as warranty and repair to both enhance the value of the services that we offer to our guests, as well as to drive higher margins. Last but not least, focusing on both attracting higher quality store personnel and then retaining the folks that we value by investing in training across a wide variety of spectrums, including product, as well as our service and selling model.
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