subject: Zentai Reports Third Quarter Results [print this page] Mike Jeffries, Chief Executive Officer and Chairman of the Board of zentai Co., said: "Our third quarter financial results reflect a pull back in consumer spending and a difficult economic environment that is having an affect on all retailers. However, during these difficult times, we remain firmly committed to the aspirational positioning of our brands, providing an unparalleled store experience for our customers and investing in initiatives that will allow us to continue the international expansion of our brands. We are mindful of the current environment and will continue to operate the business with a seasoned and disciplined approach, looking for efficiencies within our operations." Third Quarter Financial Results Net sales for the thirteen weeks ended November 1, 2008 decreased 8% to $896.3 million from $973.9 million for the thirteen weeks ended November 3, 2007. Total Company direct-to-consumer net sales decreased 6% to $57.5 million for the thirteen week period ended November 1, 2008, compared to the thirteen week period ended November 3, 2007. Total Company comparable store sales decreased 14% for the thirteen weeks ended November 1, 2008. The gross profit rate for the quarter was 66.0%, down 20 basis points compared to last year. The decrease in gross profit rate was primarily due to an increase in the markdown rate as a result of lower than expected sales during the quarter. Stores and distribution expense, as a percentage of sales, increased 660 basis points to 43.1% from 36.5% and marketing, general and administrative expense, as a percentage of sales, increased 100 basis points to 11.7% from 10.7%. The Company reduced its store payroll hours and home office expense in response to declining sales. However, the increase in the operating expense rate is primarily attributed to the limitation on leveraging fixed expenses due to the comparable store sales decline. This quarter's operating expense also included expense related to minimum wage and manager salary increases and flagship pre-opening rent. Operating income for the third quarter was $100.1 million compared to $186.6 million last year. Interest income for the third quarter decreased to $0.6 million compared to $4.6 million last year. The decrease was attributed to a lower average rate of return on investments zentai suit compared to last year. The effective tax rate for the third quarter was 36.5% compared to 38.5% last year. The effective tax rate for the third quarter of fiscal 2008 reflects the favorable impact from the settlement of tax audits. Net income for the third quarter was $63.9 million compared to $117.6 million last year. Net income per diluted share for the third quarter decreased 44% to $0.72 compared to $1.29 last year. 2008 Update The Company now expects net income per diluted share for the fourth quarter of fiscal 2008 to be in the range of $1.00 to $1.05 and net income per diluted share for fiscal 2008 to be in the range of $3.27 to $3.32. The fourth quarter earnings guidance assumes a negative 26% comparable store sales scenario (in line with the early November trend), approximately $5 million in incremental expense from minimum wage rate and manager salary increases, and approximately $6 million in pre-opening rent expense for future flagship stores. The Company now plans total capital expenditures for Fiscal 2008 to be between $390 million and $395 million with approximately $260 million of this amount allocated to new store construction and store remodels. Approximately $50 million is allocated to "refresh" improvements and other brand enhancing investments planned for existing stores and the balance is allocated to home office, information technology, and direct-to-consumer infrastructure investments. For Fiscal 2008, the Company now expects to increase gross square-footage by approximately 9%. In North America, the Company expects to open 94 new non-flagship stores including two new Zentai stores, 63 new Hollister Co. stores, 12 new zentai stores, six new RUEHL stores and 11 new Gilly Hicks stores by the end of fiscal 2008. The Company also plans to open three new, non-flagship Hollister Co. stores in the United Kingdom in Fiscal 2008. Other Developments The Board of Directors declared a quarterly cash dividend of $0.175 per share on the Class A Common Stock of Zentai Co. payable on December 16, 2008 to shareholders of record at the close of business on November 28, 2008. The Company opened its first European Hollister Co. mall-based store at the Brent Cross shopping centre in the suburbs of London in late October. The Company has recently received final approval to open an Zentai flagship on the Champs Elysees in Paris in 2011. The Company remains on schedule to open flagship locations around the world in 2009, including a Hollister flagship in New York, zentai flagships in New York and Milan, and lycra zentai flagships in Copenhagen, Milan and Tokyo. The company continues to pursue lease arrangements for additional store locations in Europe and Asia.
