Zale's Clean-Cut Quarter

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Most of the coverage we've given to the jewelry retail sector lately has to do with bad news: Specifically, the controversy surrounding companies like Friedman's (NYSE: FRM) and Whitehall Jewellers (NYSE: JWL), which got themselves in trouble with the government and, subsequently, angry stockholders. Yesterday, however, we got a look at a company that's managed to steer clear: Zale (NYSE: ZLC).

The Dallas-based retailer announced yesterday morning fiscal second-quarter (ended Jan. 31) and first-half financial results with the exception, it should be noted, of a cash flow statement. Six-month revenues, which include the key holiday season and perhaps early Valentine's Day shopping -- if men actually do early Valentine's Day shopping -- improved 3.5% to $1.37 billion. Same-store sales rose by a similar percentage.

The income statement bears close inspection. While gross and operating margins didn't improve year over year, net margins -- helped by sales growth and a sizable reduction in the cost of insurance operations -- improved slightly, powering 6% net income growth (if a large non-cash charge taken last year is ignored). It's also worth noting that Zale's per-share growth numbers look far more impressive because of a significantly lower share count this year.

Meanwhile, the business does have less cash and more debt than it did at this time a year ago. Much of this, as well as the share count mentioned above, can be tracked to a buyback and new credit facility announced last summer. Inventories also grew more quickly than sales despite the company having fewer stores now than when it reported year-ago figures.

In short, the numbers aren't mind-blowing -- but the shares ticked up yesterday as the earnings beat consensus estimates. With management raising third-quarter guidance, shareholders can at least be happy that their company is profitable, financially strong, and out of trouble. Investors have taken note: It's the only one of the companies mentioned in this article to beat the S&P 500 over the last 12 months.

Talk about Zale's holiday performance on our Zale discussion board.

Dave Marino-Nachison doesn't own any of the companies in this article, though he does own Tiffany. He can be reached via email.