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Financial Reporting

Zale gains liquidity, gets $150M from investors


Dallas--Zale Corp. announced late Monday that it has received a $150 million loan from private equity firm Golden Gate Capital (GGC), gained extra liquidity by upping its existing credit facility to $650 million and renegotiated its Canadian private-label credit card program.
The slate of announcements follows several months of speculation over the fate of the struggling retailer, which has been working with New York-based investment banking firm Peter J. Solomon Co. for nearly three months to secure a new capital structure that would allow the business to regain its financial footing.  

The company said in a statement that the new developments will expand Zale's liquidity,  provide stability to restructure its retail network, help grow its Internet sales efforts and provide the working capital it needs to execute merchandising and marketing initiatives.

"The agreements announced today are important steps in positioning Zale for the future," Zale President and interim Chief Executive Officer Theo Killion said in a news release issued shortly after 5 p.m. on Monday. "With the completion of our financial restructuring, we will now be able to focus 100 percent of our time on key merchandising, in-store and marketing initiatives to grow sales and return to profitability."

According to the release, the new $150 million loan will mature in five years. In addition to interest and fees on the loan, GGC, which has a retail portfolio that includes Express, J. Jill and Eddie Bauer, will gain two seats on the company's board of directors and upon shareholder approval, warrants to gain a 25 percent equity interest in Zale Corp.

Stefan Kaluzny, a GGC managing director and the chairman of the board of directors for clothing retailer Express, will take one of the seats. The other will go to Peter Morrow, a principal at GGC.

"This is an exciting day for Zale, its employees and Golden Gate Capital," Kaluzny said in the release. "This is a great brand with great potential. We look forward to partnering with management and supporting the company as its turnaround plan is executed."

Simultaneously, Thomas Shull and David Szymanski have resigned from Zale Corp.'s board of directors and Zale's chairman of the board, John Lowe Jr., has told Zale he won't run for re-election when his current term expires at the company's next annual meeting, according to the release.

In addition, Zale announced Monday that it has closed on a new bank credit facility that amends and extends its existing asset-backed credit facility. Bank of America N.A. leads the credit line, with General Electric Capital Corp.and Wells Fargo Retail Finance as co-borrowing base agents.

The new loan facility consists of two pieces-- or "tranches"--each of which matures at different times: an extended tranche and a non-extended tranche.

The extended tranche has total commitments of $530 million, including an $88 million seasonal adjustment, and expires on April 30, 2014. The non-extended tranche has total commitments of $120 million, including a $20 million seasonal adjustment, and expires on Aug. 11, 2011.

In total, Zale's new credit facility is $650 million, including a $108 million seasonal adjustment. Previously, the company's credit facility totaled $600 million, including a $100 million seasonal adjustment, the release states.

After using the loan from Golden Gate Capital to repay its outstanding bank debt, Zale anticipates it will have $160 million in debt and $250 million in available liquidity.

Finally, Zale announced it has reached a five-year agreement with TD Financing Services, a wholly-owned subsidiary of Toronto-Dominion Bank, to offer a private-label credit card program to its Canadian customers, effective July 1.

The agreement replaces Zale's existing agreement with Citi Cards Canada, which expires June 30, 2010, and it will be used for the company's Peoples Jewellers and Mappins Jewellers stores in Canada.  

Last week, Zale announced it was entering into exclusive negotiations with Citibank (South Dakota) N.A. regarding its private-label credit card program in the United States. The program, which accounts for 40 percent of Zale's U.S. sales, was in danger of coming to an early end because Zale did not have the required volume of sales on its cards.

Zale is slated to report its financials for the third quarter ended April 30 on May 26, before the market opens.

During a call held Monday evening to announce the new capital structure, Zale Chief Financial Officer Matthew Appel gave a brief preview of the results, indicating that Zale's same-store sales were down slightly, 2.2 percent, for the third quarter 2010.

Interim CEO Killion added that new details on the company's new merchandising and marketing plans would be unveiled during the company's May 26 earnings call.