Win, lose, and draw -- over the past three quarters, gem master Zale (NYSE:ZLC) has done it all, beating estimates three quarters ago, meeting them in fiscal Q4 2005, and then falling short of Wall Street's expectations in Q1 2006. Tomorrow, the company will attempt to break the tie as it reports its fiscal Q2 2006 numbers. Will it be a "beat," a "miss," or something in between? Tune in tomorrow to find out.

Wall Street Wisdom:

  • General consensus. Six analysts follow Zale, with two of them rating the stock a buy, one a sell, and three a hold.
  • Revenues. The analysts predict that Zale will report barely 1% in revenue growth versus fiscal Q2 2005. $985.3 million is the target.
  • Earnings. Profits are expected to remain flat year-over-year at $1.91 per share.

Margin watch:
Watching Zale's gross margins evolve is like watching diamonds grow. They've hardly budged at all over the past 18 months. The same was true about operating and net margins up until last quarter, but then they took a real dive.

Margins %

7/04

10/04

1/05

4/05

7/05

10/05

Gross

51.0

51.2

51.2

51.3

51.2

51.1

Op.

7.7

7.5

7.6

7.7

7.5

7.0

Net

4.6

4.5

4.6

4.6

4.5

3.9

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
Zale's fiscal Q1 appears to be a seasonally weak one for the company. It lost money last quarter, just as it did the year before (note that the above numbers reflect the "rolling" margins over the 12 months preceding the quarter named). But last quarter it lost about twice as much as it did in fiscal Q1 2005. As the company noted three months ago, this came about partly because Zale took charges for restructuring its operations in fiscal Q1 2006. But it's worth pointing out that Zale also deteriorated operationally, as its selling, general, and administrative expenditures outran sales growth in each of the past two quarters.

For that reason, the two items I'd recommending paying closest attention to tomorrow are sales growth and those SG&A costs. Restructuring or no, if the company can't move more ice and keep its costs under wraps in the process, margin improvement is unlikely to result.

Fool contributor Rich Smith does not own shares of any company named above.