A Message from Theo Killion
Dear Shareholders,
In fiscal 2011, our team was focused on executing the first year of our multi-year turnaround plan designed to return the Company to profitability. Our financial performance exemplifies the consistent progress we have made in stabilizing the business. In fiscal 2011, we:
- Achieved growth in comparable store sales of 8.1% and revenue growth of 7.8% to $1.74 billion;
- Posted ten consecutive months (October 2010 through July 2011) of positive comparable store sales and three consecutive quarters of positive comparable store sales for all brands;
- Achieved gross margin on sales of 50.5% after absorbing last-in, first-out (LIFO) inventory charges, related to significant increases in commodity costs, of $17 million; and
- Improved Operating Margin by $87 million over fiscal 2010.
The improvements in our business were the result of successfully executing the initiatives in our multi-year turnaround plan, including:
Rebuilding the Core merchandise assortment. In fiscal 2011, we made significant progress in rebuilding our Core merchandise assortment, which had declined to 60% of our total inventory in January 2010. Core merchandise is product that has more predictable margin and turn characteristics in line with, or above, category averages. By the end of fiscal 2011, we accomplished our goal of returning our Core assortment to 80%, while maintaining merchandise margin performance. The changes made in our Core assortment have been fundamental to our improved business performance in fiscal 2011.
Returning to The Diamond Store. During the year, we reintroduced Zales and Peoples as The Diamond Store. The re-establishment of our diamond authority is vital, as product categories that contain diamonds represent 75% of our business. From a merchandising standpoint, we focused first on the wedding businesses. During fiscal 2011, bridal, anniversary bands, diamond earrings and pendants had positive comp performance all 12 months, and solitaires had 10 months of positive comp results. We introduced two successful bridal events during the year that were supported by catalogs, in-store marketing and strong online campaigns. During Holiday, our television and online marketing were anchored by messaging that proclaimed Zales and Peoples as The Diamond Store. Finally, we made a significant investment in training our Store teams in the highly technical skills needed to sell diamonds. We partnered with the Diamond Council of America to provide 45 hours of training to our jewelry consultants in order to have them DCA certified as authorities on diamonds. We began fiscal 2011 with 15% of our full-time consultants certified and ended the year with approximately 50% certified. Returning to The Diamond Store and all that the claim implies will take time, but the financial results we have seen in the wedding categories and the positive responses that we have received in focus groups and surveys indicate that we are making significant progress.
As we worked to achieve our objective of 80% Core, Gil Hollander, our Chief Merchant and Sourcing Officer, and his team were working to develop proprietary brands that would help elevate the emotional connection our guests have with the Zale family of brands. Our three branded merchandise introductions this fall, Vera Wang LOVE, Jessica Simpson's Diamonds are a Girl's Best Friend and the expansion of our Persona bead collection in the United States, do just that.
Vera Wang is an instantly recognizable, world-class brand that is synonymous with bridal. She used her highly developed design aesthetic to create a line of engagement rings, wedding bands and solitaire bridal jewelry exclusively for Zale. The Vera Wang LOVE collection is beautiful jewelry that will add an emotional halo to our wedding business.
Jessica Simpson has worked with our team to create the Diamonds are a Girl's Best Friend collection. Jessica has successfully designed more than 22 product categories including handbags, sportswear and shoes. The collection at Zales, Zales Outlet and Peoples will feature pendants, earrings and bracelets using butterfly, heart and cross designs. With prices ranging from $79 to $1,099, Ms. Simpson's collection will be the highlight of our diamond fashion business for fiscal 2012.
By having exclusive partnerships with powerful brands like Vera Wang and Jessica Simpson, we will provide our guests with beautiful merchandise created by renowned designers that they can only get at Zale brands.
Finally, we have expanded our successful Persona collection to more than 800 Zales, Zales Outlet and Gordon's stores in the United States from our initial test of 200 stores. This bead collection will allow guests to design an affordable gift that is as individual as their feelings for their loved ones.
Our eCommerce business, led by Richard Lennox, Chief Marketing Officer, continues to grow and now includes five web stores. During the year, we effectively used the eCommerce platform to grow our diamond business through our Design Your Own ring option and through an expanded 365 day per year bridal campaign. We recently added functionality to enhance multi-channel integration by adding a ship-to-store function and by offering in-store ordering in select stores. During the fiscal year, we launched a mobile platform allowing our customers to quickly and easily interact with our brands. No matter which channel our consumers choose - in store, online or via mobile - we want to provide the best guest experience possible.
Re-establish the price/value proposition. In fiscal 2011, we experienced significant cost increases in our key commodities of gold, silver and diamonds. While we implemented price increases at several points during our spring season, the most significant increases took place in early July. The volatility in these commodity markets is an issue we will closely monitor during 2012. In recognition of the economic pressures many of our guests are facing, we have been careful to offer opening price points in every merchandise category to keep our brands accessible. The Jessica Simpson collection, with price points beginning at $79, and the Persona bead collection, with beads as low as $25, are just two examples of this work.
Making strategic investments in people to enhance capabilities. We are committed to making deliberate, thoughtful investments in people to support and accelerate our strategy of returning to profitability. Investing in the Zale team included strategic hiring in the field as well as our Store Support Center. In August 2010, John Legg joined Zale as Senior Vice President, Supply Chain. John is responsible for warehousing, logistics, quality, manufacturing and indirect sourcing at the Company. John's 25 years of retail supply chain experience has been instrumental in improving functions under his management. In March 2011, Jeannie Barsam, a retail leader with more than 20 years of experience, joined Zale as Senior Vice President, Merchandise Planning and Allocation. Since joining, Jeannie has built a team focused on driving inventory efficiency in order to improve sales and grow profitability. Also in March 2011, Toyin Ogun joined Zale as Senior Vice President, Human Resources and Customer Service. Toyin brings more than 25 years of diverse human resources experience to his assignment and brings in-depth knowledge in the areas of recruitment, performance management and organizational development. In July 2011, Toyin became a board member of the Diamond Council of America, reinforcing our commitment to the education and development of our Store teams. In September 2011, Brad Furry joined Zale as Senior Vice President, Chief Information Officer. Brad brings more than 28 years of information technology and applications development experience to Zale. These appointments exemplify the strategic investments we have made in organizational capability to drive our turnaround initiatives.
In the Stores area, we completed a rigorous talent review of our leadership team at the District Manager level before the last Holiday season. This year, we completed a similar review of talent at the Store Manager level. Delivering a great guest experience begins with strong leadership. Becky Mick, our Chief Stores Officer, has successfully raised the bar on talent, financial accountability and driving results.
Improving our financial foundation. Having secured the liquidity necessary to execute our turnaround program in fiscal 2010, our focus in 2011 was on improving this foundation. In April, we extended the maturity of $120 million of our asset-backed credit facility, which was scheduled to mature in August 2011. With this extension, all commitments under our credit facility now mature on April 30, 2014, under the same terms.
In September 2010, the Company entered into an agreement with Citibank to provide the private label credit card program for the Zales, Zales Outlet and Gordon's brands in the United States. In August 2011, we announced the launch of a new credit program that provides our customers with financing options that are additive to our current credit program. Select customers, whose credit applications have been declined by Citibank, will be offered credit under this program providing them with an affordable option to finance merchandise. Monterey Financial Services, a nationally recognized consumer finance company servicing the retail community, is our first partner. This new offering is available in Zales, Zales Outlet and Gordon's stores in the United States.
Strengthening retail expertise on our Board of Directors. During 2011, we added considerable retail breadth and experience to our Board of Directors. In September 2010, Ken Gilman joined our Board. Mr. Gilman brings deep retail experience with 25 years at Limited Brands, serving in numerous capacities including Chief Financial Officer and Chief Administrative Officer. In February 2011, David Dyer joined our Board. Mr. Dyer is President and Chief Executive Officer of Chico's. He has 37 years of experience and visionary leadership in retail, including Tommy Hilfiger, Lands' End, Home Shopping Network and J. Crew Catalog. These new Board members have already added significant value to our Company.
Finally, in May 2011 Matt Appel assumed the additional role of Chief Administrative Officer. In this role, Matt is responsible for real estate, merchandise planning and allocation, information technology, financial products, supply chain and logistics, as well as ongoing management of the Company's finance and control functions. Matt's leadership over the past two years has been instrumental in creating the financial foundation to execute the business turnaround. We look forward to his continued contributions in his new role.
In summary, we have made significant progress across the Company that positions us for improved performance. As we move forward, we will continue to be methodical and deliberate in the execution of our plans. We intend to strike the appropriate balance between sales and margin to allow us to continue to deliver gross margins above 50% to fuel the recovery of the business.
On behalf of your Board of Directors, officers and the more than 12,600 employees at Zale Corporation, we are grateful for your continuing support of our efforts to grow our business and increase profitability.
Sincerely,
Theo Killion
Chief Executive Officer