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Subject:  A Short Riff on Zales' Raff Date:  5/11/2000  1:13 PM
Author:  TMFSpirit Number:  15 of 31

FOOL PLATE SPECIAL

An Investment Opinion-A Short Riff on Zales' Raff

By Dave Marino-Nachison (TMF Braden) May 11, 2000

We last checked in on jewelry chain operator Zale Corp. (NYSE: ZLC) about eight months ago, when Robert DiNicola topped off a solid full-year earnings report with the news that he was turning over the business cards that read "CEO" to Beryl Raff, his president and COO. DiNicola, still the company's chairman, helped the company back from bankruptcy and Raff's job was to manage the continuing recovery.

Three quarters in, it appears the former Macy's executive is doing just fine. Zale reported fiscal third-quarter (ended April 30) numbers today, reflecting a continued strength that should impress even the most interest-rate addled retail investor. Perhaps the best testament to that, though, is the fact that the shares, though seesawing in 2000, are up slightly and ahead of the Standard & Poor's 500 index during Raff's tenure -- a difficult time for consumer stocks.

There isn't really much more you can point to as a potential catalyst for Zale's volatility except economic fears. (Click here for a recent Foolish take on competitor Tiffany (NYSE: TIF) and the consumer price index.) The analyst brigade, seemingly late as always, caught on last week when the company said third-quarter same-store sales were up 12.8%, in part reflecting a strong Valentine's Day season (they rose 14.7% for the three months ended January 30). Last year's Christmas holiday was also a winner.

The company's shares advanced a bit this morning as the company turned in fiscal Q3 EPS of $0.30, beating Wall Street's estimates by four cents and last year's mark by a stunning 76% (though shares outstanding did decrease slightly year-over-year, even using last year's sharecount the figures are impressive).

"Our sharp focus on execution across all areas of the business continues to provide significant leverage and substantial increases in profitability," said Raff in a statement. The company's approach to the consumer economics of the jewelry industry is a clever one, as it addresses various income levels through its (listed low- to high-end) Zales, Gordon's, and Bailey, Banks and Biddle chains. It's also developing an online business and moving successfully into Canada via last year's People's Jewellers acquisition.

A look at key operating numbers for the last nine months further illustrates the picture at Zale. Gross and operating margins have both improved slightly; revenues have ticked up nearly 29%, while gross and operating profits have risen even more quickly. On the balance sheet side, the company looks about in the same financial picture as in a year ago but has picked up speed operationally. Will the shares do the same, particularly given recent interest rate fears? While that's unknown, Raff certainly hasn't set investors up for disappointment during her short tenure at the top.

Related Link:
* Zale Corp. Web page: http://www.zalecorp.com/
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