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EXHIBIT 99.1
Q&A
OPERATIONAL:
1. Piercing Pagoda is a business that is very dependent on mall traffic,
is this an acquisition that makes sense given the current concern over
declines in consumer spending and mall traffic.
The Kiosk business is a concept we have been looking at as an attractive
business for several years. We believe the mall is still the place for this
purchase. The concerns over mall traffic are always an issue, in good times and
bad. We have based our numbers on flat to very modest top line increase, which
we hope takes into account not only our own conservative nature as to transition
issues, but a possible slowdown as well. The advantage we see is the ability to
leverage our merchandising and marketing skills to create demand and drive the
business as we have done in our other brands.
2. Piercing Pagoda caters to a younger, trendier customer, what types of
synergies does this provide with your existing brands?
The Pagoda customer is definitely younger and in the early stages of the jewelry
purchasing cycle. We will apply many of the same retailing techniques that have
been used to put our other brands in leadership position by focusing on key
items at opening price points and purchased in depth. The Pagoda customer is
very definitely similar to our current customers in that there is a huge amount
of gift-giving and self purchase. Even at this price point, it is still a
"feel-good" type of purchase. This is also a great opportunity to build loyalty
very early in the purchase life-cycle.
3. Will you implement new key items or introduce any of the current best sellers
from your other divisions?
Our initial focus will be to identify key items appropriate for the Pagoda
customer. With an average ticket of $29 these are clearly different items than
our Zale entry level price points of $99.
4. What does Piercing Pagoda do from a marketing standpoint (advertising,
promotional, etc.) and what will you all do differently? Any chance for
commercials etc?
Pagoda focuses on building loyalty through its "Club" program, its ear-piercing
specials and draws from mall traffic. Clearly we feel this is an appropriate
point of view which we believe we can leverage even further with our own
promotional campaigns.
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5. There has been a definite focus within the Corporation towards
"Branding" and building brand strength, is there any thought about
changing the name to Zales or even Gordons where the stores overlap?
The strength of our brands is clearly a point of differentiation and strength
for us. Pagoda is a recognizable name to their customer base. At this point no
decision has been made to change the name.
6. How does the average volume compare to Zales current productivity?
The average kiosk does approximately $350,000 in volume compared to an average
Zale store of approximately $1.3 million, however the kiosk is very productive
per square foot with only 127 square feet per average kiosk.
7. How does the average ticket compare to Zales' customers?
The average ticket is a great barometer of the difference between the customer
base. Zale's average ticket is $250 while the Pagoda ticket averages $29.
Clearly we are adding a new demographic profile to our portfolio.
8. How will this impact the management information systems?
The Pagoda system will interface with Zales current systems Pagoda's systems
provide the appropriate level of detail to ensure we have the appropriate
information going into the Holidays (Consistent with our existing approach, we
do not make material system conversions or adjustments leading up to the
all-important holiday season.)
9. Many of the early Zale productivity gains came from not only key items
but also remodeling and increasing inventory capacity. What
opportunities do you see at Pagoda?
Clearly we think our merchandising strategies and inventory management processes
(identify rates of sale/out of stock positions/forecast needs) are a huge
opportunity. In addition, our customer data bases can be leveraged on both sides
to create marketing opportunities. Longer term we think there are significant
gains to be made from merchandise presentation within the cases and employee
training.
10. Will there be any efficiencies gained through manager and district
manager economies of scale?
We still feel there is a need for separate management structures to focus on
individual needs of each brands customer and human resource base. Accordingly,
we feel the initial efficiencies will be more along the lines of certain
overhead based operations and our merchandise knowledge.
11. The fine jewelry business is very traditional and classic. This
business appears to be much more fashion dependent and trendy? How does
this fit with your current merchandise strategy, what additional
challenges does this pose?
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The business by its nature, opening price point gold jewelry is a perfect
extension of our Good, Better, Best strategy. This is a way to capture that
customer early on without compromising the Zale business, especially in terms of
productivity, etc. It is also synergistic with the merchandise training that
many of our buyers have, which is department store "roots" - a much more trendy,
fashion purchase.
TRANSITION ISSUES:
1. What are the plans for the corporate offices?
There are no plans for any current charges.
2. Will the current buying team and other corporate employees be relocated
to Irving?
There are currently no changes being made.
3. Will any locations be closed?
There are a handful of locations we have on a watch list (negative, cash flow,
low productivity), but no significant closings are expected. A more specific
list is likely to be established after the Holiday season.
4. What are the growth prospects? Will this be translated into Canada? The
Internet?
We have several other items on the Canadian agenda, expanding assortments,
remodeling existing stores and expanding into key locations. It may be
appropriate for Canada in the future, but certainly not the next focus. With 900
plus stores in over 600 malls they clearly have significant presence. However,
we will further evaluate this as we take over the operations, initially there
appears to be 10-15% increase in store potential. The internet is clearly a
significant opportunity.
5. Who will be responsible for this division, will it be operated as a
separate brand?
Pagoda has a great team in place that will continue to operate the brand.
DEAL AND ONGOING FINANCIAL ISSUES:
1. Will Zales be writing down any inventory or other assets and if so what
type of goodwill is being created?
There will be purchase accounting adjustments which include establishing
inventory reserves, other general business reserves they currently do not
account for, and the necessary write-offs
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for assets we will not utilize in the operations going forward. In addition the
premium we paid will result in goodwill. We estimate the total to be
approximately $180 million.
2. What is the Company's expected Return on Investment, previously you
have indicated a 20% hurdle rate for Investments of all kinds? As
always, we have been evaluating this alternative for some time. We
believe that with the benefits we expect to see in productivity through
our merchandising and marketing focus we will meet our long term return
rates over a five year period.
3. Does this acquisition impact the company's previously stated growth
plans for its existing divisions?
No, we will continue to open 80 - 85 stores throughout our existing brands.
4. How many of these locations overlap with your existing portfolio (i.e.
what is the overlap) and what is the expectation for any impact to your
existing business?
Approximately 500 locations are in malls where we have a Zales or Gordons. We do
not anticipate any impact to the existing business due to the distinct customer
base.
5. Piercing Pagoda operates several "in-line" Diamond Isle locations, how
do these overlap with your existing portfolio and how do they compete
against your Zales stores?
Pagoda operates 30 in-line locations, and 11 Diamond Isle locations only a
handful of these overlap with Zales. Once again however, the price point is
still significantly lower than a Zales store.
6. Will there be any reserves for inventory, severance and transition
issues?
There will be reserves for such items, however they will be accounted for as
part of the purchase price.
7. How long will it take to make this acquisition accretive to earnings?
Clearly as evidenced by the Peoples transaction, we try to be conservative. We
anticipate breakeven impact for fy2001 and $0.10 for fy2002.
8. The Peoples acquisition was positioned as breakeven for the first year
but has subsequently contributed approximately 10 cents according to
company guidance, does this acquisition have similar potential?
As always we try to plan conservatively and anticipate the types of transition
issues that typically occur with an acquisition. The Peoples transition went
extremely smoothly resulting in the upside to earnings. In addition, Peoples was
closed in early June and provided us time to prepare for the Holiday season.
Based on the current timing, we will be able to only have a minor impact on the
Holiday season. As always we will focus on execution, but again there is
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always an unknown factor that leads us to be comfortable with a breakeven
projection for the first year. Please note this does take into account the
incremental amortization and the offsetting loss of interest income resulting
from the cash purchase.
9. How was the acquisition evaluated. It appears you paid 7.5 to 8 times
EBITDA (Cash Flow), how does that compare to Peoples? Why do you think
it warrants such a premium?
Based on March 31, 2000 fiscal year numbers we paid 7.5 to 8 times EBITDA. This
is fairly similar to the Peoples transaction on that basis.
10. Does this impact Piercing Pagoda gold lease program or increase Zale
Corporation's exposure to fluctuations in the gold price.
It is our current intent to cease the gold leasing program and bring Piercing
Pagoda's vendor terms more in line with our current agreements. As with our
existing businesses, we are in the markets constantly throughout the year to
take advantage opportunistically of gold price fluctuations and minimize the
impact to the consumer. In addition, we are retailers first (i.e. 'customer'
driven in our merchandising focus) with out being distracted by what increases
and decreases in forward prices of gold mean to our current inventory position.
We will continue to follow this pattern, adapting the product to the customers
taste at a price that is appropriate for their budget.
11. What types of liabilities and debt will Zale be assuming?
Pagoda has a gold consignment arrangement which we will be retiring in
conjunction with the purchase. Pagoda also has a small amount (approx. $10
Million) outstanding in working capital loans.
12. What would be the cost of entering this business through internal
expansion?
Clearly one of the biggest costs is the opportunity or time value of building a
900 plus store base. The actual cost of the build out and the inventory would be
in the neighborhood of $175 to 200 million based on our estimates.
13. Should we expect to see economics of scale from a lease
perspective/rent expense?
Certainly we have great relationships with the landlords throughout the United
States and hope this translates into additional opportunities for both parties
through increased tenancy, productivity, and efficiencies.
14. Does Pagoda offer credit? If not, is that something you will add to
their operations?
Pagoda does not offer credit and due to the nature of the average ticket it is
not something we feel presents an immediate or near term opportunity.
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15. Does the ear piercing cause any additional risk factor?
Some states do regulate piercing, however Pagoda only pierces ears and we will
continue that practice. We do not see this as a significant or out-of-the
ordinary risk.
16. Pagoda made over $1.40 per share, how does this translate to breakeven
in your projections?
That equates to about $13 million dollars after taxes and on our share base
$0.36 per share. The lost interest income resulting in the cash outlay for the
purchase ($212 million plus $60 million in debt) and working capital needs
equates to $18 million before taxes or $11 million after taxes, the remaining
difference comes from slightly increased productivity offset by amortization of
the goodwill arising from the transaction, a net of 3.5 million before taxes or
$2 million after tax.
