10-Q

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ZALE CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2014

Commission File Number 1-04129

Zale Corporation

A Delaware Corporation
IRS Employer Identification No. 75-0675400

901 W. Walnut Hill Lane
Irving, Texas 75038-1003
(972) 580-4000

        Zale Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

        Zale Corporation has submitted electronically and posted on the Company's website all Interactive Data Files required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Company was required to submit and post such files).

        Zale Corporation is an accelerated filer.

        Zale Corporation is not a shell company.

        As of March 3, 2014, 33,021,621 shares of Zale Corporation's Common Stock, par value $0.01 per share, were outstanding.

ZALE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Operations—Three and Six Months Ended January 31, 2014 and 2013 (unaudited)		1
	Consolidated Statements of Comprehensive Income—Three and Six Months Ended January 31, 2014 and 2013 (unaudited)		2
	Consolidated Balance Sheets—January 31, 2014, July 31, 2013 and January 31, 2013 (unaudited)		3
	Consolidated Statements of Cash Flows—Six Months Ended January 31, 2014 and 2013 (unaudited)		4
	Notes to Consolidated Financial Statements (unaudited)		5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
Item 4.	Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		29
Item 1A.	Risk Factors		29
Item 6.	Exhibits		36

PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended January 31,				Six Months Ended January 31,
	2014		2013		2014		2013
Revenues	$	656,449	$	670,752	$	1,019,063	$	1,028,220
Cost of sales		308,830		331,101		477,656		498,234
Gross margin		347,619		339,651		541,407		529,986
Selling, general and administrative		280,148		279,064		488,306		485,529
Depreciation and amortization		7,461		8,388		15,122		17,034
Other charges (gains)		488		926		488		(847	)
Operating earnings		59,522		51,273		37,491		28,270
Interest expense		6,096		6,088		11,706		11,930
Earnings before income taxes		53,426		45,185		25,785		16,340
Income tax expense		2,640		3,977		2,305		3,396
Net earnings	$	50,786	$	41,208	$	23,480	$	12,944
Basic net earnings per common share:	$	1.54	$	1.27	$	0.72	$	0.40
Diluted net earnings per common share:	$	1.13	$	1.02	$	0.52	$	0.32
Weighted average number of common shares outstanding:
Basic		32,919		32,426		32,827		32,362
Diluted		45,022		40,305		44,837		40,470

See notes to consolidated financial statements.

1

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended January 31,						Six Months Ended January 31,
	2014			2013			2014			2013
Net earnings	$	50,786		$	41,208		$	23,480		$	12,944
Foreign currency translation adjustment		(12,763	)		(44	)		(15,996	)		470
Unrealized loss on interest rate swaps		(140	)		—			(2,676	)		—
Reclassification of loss on interest rate swaps to interest expense		65			—			85			—
Unrealized gain on securities, net		(128	)		76			(54	)		21
Comprehensive income	$	37,820		$	41,240		$	4,839		$	13,435

See notes to consolidated financial statements.

2

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	January 31, 2014			July 31, 2013			January 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	23,251		$	17,060		$	18,516
Merchandise inventories		864,275			767,540			836,624
Other current assets		48,260			53,335			51,311
Total current assets		935,786			837,935			906,451
Property and equipment		666,000			675,705			688,558
Less accumulated depreciation and amortization		(562,286	)		(570,427	)		(575,646	)
Net property and equipment		103,714			105,278			112,912
Goodwill		92,376			98,372			100,756
Other assets		41,718			38,560			50,471
Deferred tax asset		107,110			107,110			96,888
Total assets	$	1,280,704		$	1,187,255		$	1,267,478
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities	$	276,907		$	220,558		$	263,384
Deferred revenue		81,667			82,110			86,813
Deferred tax liability		107,479			107,016			97,233
Total current liabilities		466,053			409,684			447,430
Long-term debt		445,267			410,050			473,975
Deferred revenue—long-term		105,004			109,135			115,664
Other liabilities		72,307			73,057			36,504
Commitments and contingencies
Stockholders' investment:
Common stock		488			488			488
Additional paid-in capital		150,459			155,625			158,422
Accumulated other comprehensive income		28,374			47,015			53,860
Accumulated earnings		458,621			435,140			438,072
		637,942			638,268			650,842
Treasury stock		(445,869	)		(452,939	)		(456,937	)
Total stockholders' investment		192,073			185,329			193,905
Total liabilities and stockholders' investment	$	1,280,704		$	1,187,255		$	1,267,478

See notes to consolidated financial statements.

3

ZALE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended January 31,
	2014			2013
Cash Flows From Operating Activities:
Net earnings	$	23,480		$	12,944
Adjustments to reconcile net earnings to net cash used in operating activities:
Non-cash interest		1,454			1,452
Depreciation and amortization		15,122			17,034
Deferred taxes		352			614
Loss on disposition of property and equipment		690			632
Impairment of property and equipment		488			851
Stock-based compensation		2,261			1,742
Changes in operating assets and liabilities:
Merchandise inventories		(108,272	)		(94,676	)
Other current assets		3,696			(4,898	)
Other assets		536			1,192
Accounts payable and accrued liabilities		57,515			56,593
Deferred revenue		(2,258	)		(6,144	)
Other liabilities		(1,446	)		(110	)
Net cash used in operating activities		(6,382	)		(12,774	)
Cash Flows From Investing Activities:
Payments for property and equipment		(18,007	)		(12,667	)
Purchase of available-for-sale investments		(5,157	)		(1,674	)
Proceeds from sales of available-for-sale investments		959			465
Net cash used in investing activities		(22,205	)		(13,876	)
Cash Flows From Financing Activities:
Borrowings under revolving credit agreement		2,676,300			2,738,400
Payments on revolving credit agreement		(2,640,500	)		(2,717,500	)
Proceeds from exercise of stock options		311			56
Payments on capital lease obligations		(551	)		(489	)
Net cash provided by financing activities		35,560			20,467
Effect of exchange rate changes on cash		(782	)		96
Net change in cash and cash equivalents		6,191			(6,087	)
Cash and cash equivalents at beginning of period		17,060			24,603
Cash and cash equivalents at end of period	$	23,251		$	18,516

See notes to consolidated financial statements.

4

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

        References to the "Company," "we," "us," and "our" in this Form 10-Q are references to Zale Corporation and its subsidiaries. We are, through our wholly owned subsidiaries, a leading specialty retailer of fine jewelry in North America. At January 31, 2014, we operated 1,037 specialty retail jewelry stores and 623 kiosks located primarily in shopping malls throughout the United States, Canada and Puerto Rico.

        We report our operations under three segments: Fine Jewelry, Kiosk Jewelry and All Other. Fine Jewelry is comprised of our three core national brands, Zales Jewelers®, Zales Outlet® and Peoples Jewellers® and our two regional brands, Gordon's Jewelers® and Mappins Jewellers®. Each brand specializes in fine jewelry and watches, with merchandise and marketing emphasis focused on diamond products. Zales Jewelers® is our national brand in the U.S. providing moderately priced jewelry to a broad range of guests. Zales Outlet® operates in outlet malls and neighborhood power centers and capitalizes on Zale Jewelers'® national marketing and brand recognition. Gordon's Jewelers® is a value-oriented regional jeweler. Peoples Jewellers®, Canada's largest fine jewelry retailer, provides guests with an affordable assortment and an accessible shopping experience. Mappins Jewellers® offers Canadian guests a broad selection of merchandise from engagement rings to fashionable and contemporary fine jewelry.

        Kiosk Jewelry operates under the brand names Piercing Pagoda®, Plumb Gold™, and Silver and Gold Connection® through mall-based kiosks and is focused on the opening price point guest. Kiosk Jewelry specializes in gold, silver and non-precious metal products that capitalize on the latest fashion trends.

        All Other includes our insurance and reinsurance operations, which offer insurance coverage primarily to our private label credit card guests.

        We also maintain a presence in the retail market through our ecommerce sites www.zales.com, www.zalesoutlet.com, www.gordonsjewelers.com, www.peoplesjewellers.com and www.pagoda.com.

        We consolidate all of our U.S. operations into Zale Delaware, Inc. ("ZDel"), a wholly owned subsidiary of Zale Corporation. ZDel is the parent company for several subsidiaries, including three that are engaged primarily in providing credit insurance to our credit customers. We consolidate our Canadian retail operations into Zale Canada Holding, L.P., which is a wholly owned subsidiary of Zale Corporation. All significant intercompany transactions have been eliminated. The consolidated financial statements are unaudited and have been prepared by the Company in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In management's opinion, all material adjustments (consisting of normal recurring accruals and adjustments) and disclosures necessary for a fair presentation have been made. Because of the seasonal nature of the retail business, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2013 filed with the Securities and Exchange Commission ("SEC") on September 27, 2013.

        Reclassification.    Certain prior year amounts have been reclassified in the accompanying consolidated financial statements to conform to our fiscal year 2014 presentation.

5

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. FAIR VALUE MEASUREMENTS

        Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, Accounting Standards Codification ("ASC") 820, Fair Value Measurement, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair values. These tiers include:

Level 1	—	Quoted prices for identical instruments in active markets;
Level 2	—	Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and
Level 3	—	Instruments whose significant inputs are unobservable.

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

        The following tables include our assets and liabilities that are measured at fair value on a recurring basis (in thousands):

	Fair Value as of January 31, 2014
	Level 1		Level 2		Level 3
Assets
U.S. Treasury securities	$	14,306	$	—	$	—
U.S. government agency securities		—		2,074		—
Corporate bonds and notes		—		5,718		—
Corporate equity securities		2,706		—		—
	$	17,012	$	7,792	$	—
Liabilities
Interest rate swaps	$	—	$	2,591	$	—

	Fair Value as of January 31, 2013
	Level 1		Level 2		Level 3
Assets
U.S. Treasury securities	$	22,445	$	—	$	—
U.S. government agency securities		—		2,833		—
Corporate bonds and notes		—		868		—
Corporate equity securities		4,423		—		—
	$	26,868	$	3,701	$	—

        Investments in U.S. Treasury securities and corporate equity securities are based on quoted market prices for identical instruments in active markets, and therefore were classified as a Level 1 measurement in the fair value hierarchy. Investments in U.S. government agency securities and corporate bonds and

6

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. FAIR VALUE MEASUREMENTS (Continued)

notes are based on quoted prices for similar instruments in active markets, and therefore were classified as a Level 2 measurement in the fair value hierarchy (see Note 3 for additional information related to our investments).

        The fair value of our interest rate swaps is calculated using significant observable inputs including the present value of estimated future cash flows using interest rate curves, and therefore were classified as a Level 2 measurement in the fair value hierarchy (see Note 4 for additional information related to our interest rate swaps).

Assets that are Measured at Fair Value on a Nonrecurring Basis

        Impairment losses related to store-level property and equipment are calculated using significant unobservable inputs including the present value of future cash flows expected to be generated using a risk-adjusted weighted average cost of capital of 14.0 percent to 15.5 percent, and therefore are classified as a Level 3 measurement in the fair value hierarchy. For the six months ended January 31, 2014, store-level property and equipment of $0.7 million was written down to their fair value of $0.2 million, resulting in an impairment charge of $0.5 million. For the six months ended January 31, 2013, store-level property and equipment of $1.0 million was written down to their fair value of $0.1 million, resulting in an impairment charge of $0.9 million.

        At the end of the second quarter of fiscal year 2014, we completed our annual impairment testing of goodwill pursuant to ASC 350, Intangible—Goodwill and Other. Based on the test results, we concluded that no impairment was necessary for the $73.0 million of goodwill related to the Peoples Jewellers acquisition and the $19.4 million of goodwill related to the Piercing Pagoda acquisition. As of the date of the test, the fair value of the Peoples Jewellers and Piercing Pagoda reporting units would have to decline by more than 30 percent and 41 percent, respectively, to be considered for potential impairment. We calculated the estimated fair value of our reporting units using Level 3 inputs, including: (1) cash flow projections for five years; (2) terminal year growth rates of two percent based on estimates of long-term inflation expectations; and (3) discount rates of 14.0 percent to 15.5 percent based on a risk-adjusted weighted average cost of capital that reflects current market conditions. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units, it is possible a material change could occur. If our actual results are not consistent with estimates and assumptions used to calculate fair value, we may be required to recognize goodwill impairments.

Other Financial Instruments

        As cash and short-term cash investments, trade payables and certain other short-term financial instruments are all short-term in nature, their carrying amount approximates fair value. The outstanding principal of our revolving credit agreement and senior secured term loan approximates fair value as of January 31, 2014. The fair value of the revolving credit agreement and the senior secured term loan were based on estimates of current interest rates for similar debt, a Level 3 input.

7

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. INVESTMENTS

        Investments in debt and equity securities held by our insurance subsidiaries are reported as other assets in the accompanying consolidated balance sheets. Investments are recorded at fair value based on quoted market prices for identical or similar securities. All investments are classified as available-for-sale.

        Our investments consist of the following (in thousands):

	January 31, 2014				January 31, 2013
	Cost		Fair Value		Cost		Fair Value
U.S. Treasury securities	$	13,492	$	14,306	$	21,086	$	22,445
U.S. government agency securities		1,984		2,074		2,641		2,833
Corporate bonds and notes		5,616		5,718		773		868
Corporate equity securities		1,888		2,706		3,501		4,423
	$	22,980	$	24,804	$	28,001	$	30,569

        At January 31, 2014 and 2013, the carrying value of investments included a net unrealized gain of $1.8 million and $2.6 million, respectively, which is included in accumulated other comprehensive income. Realized gains and losses on investments are determined on the specific identification basis. There were no material net realized gains or losses during the three and six months ended January 31, 2014 and 2013. Investments with a carrying value of $7.4 million were on deposit with various state insurance departments at both January 31, 2014 and 2013, respectively, as required by law.

        Debt securities outstanding as of January 31, 2014 mature as follows (in thousands):

	Cost		Fair Value
Less than one year	$	3,272	$	3,299
Year two through year five		11,081		11,853
Year six through year ten		6,680		6,879
After ten years		59		67
	$	21,092	$	22,098

4. LONG—TERM DEBT

        Long-term debt consists of the following (in thousands):

	January 31,
	2014		2013
Revolving credit agreement	$	363,000	$	390,700
Senior secured term loan		80,000		80,000
Capital lease obligations		2,267		3,275
	$	445,267	$	473,975

8

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. LONG—TERM DEBT (Continued)

Amended and Restated Revolving Credit Agreement

        On July 24, 2012, we amended and restated our revolving credit agreement (the "Amended Credit Agreement") with Bank of America, N.A. and certain other lenders. The Amended Credit Agreement totals $665 million, including a $15 million first-in, last-out facility (the "FILO Facility"), and matures in July 2017. Borrowings under the Amended Credit Agreement (excluding the FILO Facility) are limited to a borrowing base equal to 90 percent of the appraised liquidation value of eligible inventory (less certain reserves that may be established under the agreement), plus 90 percent of eligible credit card receivables. Borrowings under the FILO Facility are limited to a borrowing base equal to the lesser of: (i) 2.5 percent of the appraised liquidation value of eligible inventory or (ii) $15 million. The Amended Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit card receivables and certain other assets and a second priority security interest and lien on all other assets.

        Based on the most recent inventory appraisal, the monthly borrowing rates calculated from the cost of eligible inventory range from 68 to 73 percent for the period of February through September 2014, 82 to 84 percent for the period of October through December 2014 and 71 percent for January 2015.

        Borrowings under the Amended Credit Agreement (excluding the FILO Facility) bear interest at either: (i) LIBOR plus the applicable margin (ranging from 175 to 225 basis points) or (ii) the base rate (as defined in the Amended Credit Agreement) plus the applicable margin (ranging from 75 to 125 basis points). Borrowings under the FILO Facility bear interest at either: (i) LIBOR plus the applicable margin (ranging from 350 to 400 basis points) or (ii) the base rate plus the applicable margin (ranging from 250 to 300 basis points). We are also required to pay a quarterly unused commitment fee of 37.5 basis points based on the preceding quarter's unused commitment.

        If excess availability (as defined in the Amended Credit Agreement) falls below certain levels we will be required to maintain a minimum fixed charge coverage ratio of 1.0. Borrowing availability was approximately $259 million as of January 31, 2014, which exceeded the excess availability requirement by $197 million. The fixed charge coverage ratio was 2.47 as of January 31, 2014. The Amended Credit Agreement contains various other covenants including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions and asset sales. As of January 31, 2014, we were in compliance with all covenants.

        We incurred debt issuance costs associated with the revolving credit agreement totaling $12.1 million, which consisted of $5.6 million of costs related to the Amended Credit Agreement and $6.5 million of unamortized costs associated with the prior agreement. The debt issuance costs are included in other assets in the accompanying consolidated balance sheets and are amortized to interest expense on a straight-line basis over the five-year life of the agreement.

Interest Rate Swap Agreements

        In September 2013, we executed interest rate swaps with Bank of America, N.A. to hedge the variability of cash flows resulting from fluctuations in the one-month LIBOR associated with our Amended Credit Agreement. The interest rate swaps replaced the one-month LIBOR with the fixed interest rates shown in the table below and are settled monthly. The swaps qualify as cash flow hedges and, to the extent effective, changes in their fair values are recorded in accumulated other comprehensive income in the consolidated balance sheet. The changes in fair values are reclassified from accumulated other comprehensive income to interest expense in the same period that the hedged items affect interest expense.

9

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. LONG—TERM DEBT (Continued)

        Interest rate swaps as of January 31, 2014 are as follows:

Period	Notional Amount (in thousands)		Fixed Interest Rate			Fair Value (in thousands)
October 2013 - July 2014	$	215,000		0.29	%	$	117
August 2014 - July 2016	$	215,000		1.19	%		2,474
						$	2,591

        The change in the fair value of the interest rate swaps for the three and six months ended January 31, 2014 totaled $0.1 million and $2.7 million, respectively, and is included as an unrealized loss in other comprehensive income. There were no material amounts reclassified from accumulated other comprehensive income to interest expense during the three and six months ended January 31, 2014. The current portion of the fair value of the interest rate swaps totaled $1.0 million and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheet. The current portion represents the amount that is expected to be reclassified from other comprehensive income to interest expense over the next 12 months. The non-current portion of the fair value of the interest rate swaps totaled $1.6 million and is included in other liabilities in the accompanying consolidated balance sheet.

Amended and Restated Senior Secured Term Loan

        On July 24, 2012, we amended and restated our senior secured term loan (the "Amended Term Loan") with Z Investment Holdings, LLC, an affiliate of Golden Gate Capital. The Amended Term Loan totals $80.0 million, matures in July 2017 and is subject to a borrowing base equal to: (i) 107.5 percent of the appraised liquidation value of eligible inventory plus (ii) 100 percent of credit card receivables and an amount equal to the lesser of $40 million or 100 percent of the appraised liquidation value of intellectual property minus (iii) the borrowing base under the Amended Credit Agreement. In the event the outstanding principal under the Amended Term Loan exceeds the Amended Term Loan borrowing base, availability under the Amended Credit Agreement would be reduced by the excess. As of January 31, 2014, the outstanding principal under the Amended Term Loan did not exceed the borrowing base. The Amended Term Loan is secured by a second priority security interest on merchandise inventory and credit card receivables and a first priority security interest on substantially all other assets.

        Borrowings under the Amended Term Loan bear interest at 11 percent payable on a quarterly basis. We may repay all or any portion of the Amended Term Loan with the following penalty prior to maturity: (i) the present value of the required interest payments that would have been made if the prepayment had not occurred during the first year; (ii) 4 percent during the second year; (iii) 3 percent during the third year; (iv) 2 percent during the fourth year and (v) no penalty in the fifth year. The Amended Credit Agreement restricts our ability to prepay the Amended Term Loan if the fixed charge coverage ratio is not equal to or greater than 1.0 after giving effect to the prepayment.

        The Amended Term Loan includes various covenants which are consistent with the covenants in the Amended Credit Agreement, including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions, asset sales and the requirement to maintain a minimum fixed charge coverage ratio of 1.0 if excess availability thresholds under the Amended Credit Agreement are not maintained. As of January 31, 2014, we were in compliance with all covenants.

10

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. LONG—TERM DEBT (Continued)

        We incurred costs associated with the Amended Term Loan totaling $4.4 million, of which approximately $2 million was recorded in interest expense during the fourth quarter of fiscal year 2012. The remaining $2.4 million consists of debt issuance costs included in other assets in the accompanying consolidated balance sheet and are amortized to interest expense on a straight-line basis over the five-year life of the agreement.

Warrant and Registration Rights Agreement

        In connection with the execution of the senior secured term loan in May 2010, we entered into a Warrant and Registration Rights Agreement (the "Warrant Agreement") with Z Investment Holdings, LLC ("Z Investment"). Under the terms of the Warrant Agreement, Z Investment holds 11.1 million warrants (the "Warrants") to purchase shares of our common stock, on a one-for-one basis, for an exercise price of $2.00 per share. The Warrants, which are currently exercisable and expire in May 2017, represented approximately 25 percent of our common stock on a fully diluted basis (including the shares issuable upon exercise of the Warrants and excluding certain out-of-the-money stock options) as of the date of the issuance. The number of shares and exercise price are subject to customary antidilution protection. The Warrant Agreement also entitles the holder to designate two, and in certain circumstances three, directors to our board.

        The holders of the Warrants may, at their option, request that we register all or part of the common stock issuable under the Warrant Agreement for resale. In September 2013, Z Investment exercised their right to request that we register the common stock and on October 2, 2013 we filed a shelf registration statement on Form S-3 which has been declared effective by the SEC.

Capital Lease Obligations

        We enter into capital leases related to vehicles for our field management. The vehicles are included in property and equipment in the accompanying consolidated balance sheets and are depreciated over a four-year life. Capital leases, net of accumulated depreciation, included in property and equipment as of January 31, 2014 and 2013 totaled $2.2 million and $3.2 million, respectively.

5. OTHER CHARGES (GAINS)

        During the second quarter of fiscal years 2014 and 2013, we recorded charges related to the impairment of long-lived assets for underperforming stores, primarily in Fine Jewelry, totaling $0.5 million and $0.9 million, respectively. The impairment of long-lived assets is based on the amount that the carrying value exceeds the estimated fair value of the assets. The fair value is based on future cash flow projections over the remaining lease term using a discount rate that we believe is commensurate with the risk inherent in our current business model. If actual results are not consistent with our cash flow projections, we may be required to record additional impairments.

        Beginning in June 2004, various class-action lawsuits were filed alleging that the De Beers group violated U.S. state and federal antitrust, consumer protection and unjust enrichment laws. During the six months ended January 31, 2013, we received proceeds totaling $1.9 million as a result of a settlement reached in the lawsuit.

11

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6. EARNINGS PER COMMON SHARE

        Basic earnings per common share is computed by dividing net earnings by the weighted-average number of common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted-average number of shares is increased by the dilutive effect of stock options, restricted share awards and warrants issued in connection with the senior secured term loan determined using the Treasury Stock method.

        The following table presents a reconciliation of the diluted weighted average shares (in thousands):

	Three Months Ended January 31,				Six Months Ended January 31,
	2014		2013		2014		2013
Basic weighted average shares		32,919		32,426		32,827		32,362
Effect of potential dilutive securities:
Warrants		9,597		6,759		9,495		6,921
Stock options and restricted share awards		2,506		1,120		2,515		1,187
Diluted weighted average shares		45,022		40,305		44,837		40,470

        The calculation of diluted weighted average shares excludes the impact of 0.9 million and 1.8 million antidilutive stock options for the three and six months ended January 31, 2014 and 2013.

7. ACCUMULATED OTHER COMPREHENSIVE INCOME

        The following table includes detail regarding changes in the composition of accumulated other comprehensive income (in thousands):

	Three Months Ended January 31,						Six Months Ended January 31,
	2014			2013			2014			2013
Beginning of period	$	41,340		$	53,828		$	47,015		$	53,369
Foreign currency translation adjustment		(12,763	)		(44	)		(15,996	)		470
Unrealized loss on interest rate swaps		(140	)		—			(2,676	)		—
Reclassification of loss on interest rate swaps to interest expense		65			—			85			—
Unrealized gain (loss) on securities, net		(128	)		76			(54	)		21
End of period	$	28,374		$	53,860		$	28,374		$	53,860

8. INCOME TAXES

        We are required to assess the available positive and negative evidence to estimate if sufficient future income will be generated to utilize deferred tax assets. A significant piece of negative evidence that we consider is cumulative losses (generally defined as losses before income taxes) incurred over the most recent three-year period. Such evidence limits our ability to consider other subjective evidence such as our projections for future growth. As of January 31, 2014 and 2013, cumulative losses were incurred over the applicable three-year period.

12

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. INCOME TAXES (Continued)

        Our valuation allowances totaled $82.7 million and $92.7 million as of January 31, 2014 and 2013, respectively. The valuation allowances were established due to the uncertainty of our ability to utilize certain federal, state and foreign net operating loss carryforwards in the future. The amount of the deferred tax asset considered realizable could be adjusted if negative evidence, such as three-year cumulative losses, no longer exists and additional consideration is given to our growth projections.

9. SEGMENTS

        We report our operations under three business segments: Fine Jewelry, Kiosk Jewelry, and All Other (See Note 1). All corresponding items of segment information in prior periods have been presented consistently. Management's expectation is that overall economics of each of our major brands within each reportable segment will be similar over time.

        We use earnings before unallocated corporate overhead, interest and taxes but include an internal charge for inventory carrying cost to evaluate segment profitability. Unallocated costs before income taxes include corporate employee-related costs, administrative costs, information technology costs, corporate facilities costs and depreciation and amortization. Income tax information by segment is not included as taxes are calculated at a company-wide level and not allocated to each segment.

	Three Months Ended January 31,						Six Months Ended January 31,
Selected Financial Data by Segment	2014			2013			2014			2013
	(amounts in thousands)
Revenues:
Fine Jewelry(a)	$	580,821		$	590,131		$	894,519		$	897,091
Kiosk		72,801			77,905			119,000			125,723
All Other		2,827			2,716			5,544			5,406
Total revenues	$	656,449		$	670,752		$	1,019,063		$	1,028,220
Depreciation and amortization:
Fine Jewelry	$	4,954		$	5,393		$	10,013		$	10,914
Kiosk		516			689			1,093			1,428
All Other		—			—			—			—
Unallocated		1,991			2,306			4,016			4,692
Total depreciation and amortization	$	7,461		$	8,388		$	15,122		$	17,034
Operating earnings:
Fine Jewelry	$	58,273		$	47,712		$	46,272		$	31,010
Kiosk		10,622			10,513			8,067			8,764
All Other		1,309			1,094			2,501			1,906
Unallocated(b)		(10,682	)		(8,046	)		(19,349	)		(13,410	)
Total operating earnings	$	59,522		$	51,273		$	37,491		$	28,270

(a)

Includes $111.2 million and $120.4 million for the three months ended January 31, 2014 and 2013, respectively, and $174.1 million and $183.4 million for the six months ended January 31, 2014 and 2013, respectively, related to foreign operations.

(b)

Includes credits of $17.1 million and $16.9 million for the three months ended January 31, 2014 and 2013, respectively, and $32.9 million and $32.0 million for the six months ended January 31, 2014 and 2013, respectively, to offset internal carrying costs charged to the segments. The six months ended January 31, 2013 also includes a gain totaling $1.9 million related to the De Beers settlement.

13

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. CONTINGENCIES

        The Company is a defendant in three purported class action lawsuits, Tessa Hodge v. Zale Delaware, Inc., d/b/a Piercing Pagoda which was filed on April 23, 2013 in the Superior Court of the State of California, County of San Bernardino, Naomi Tapia v. Zale which was filed on July 3, 2013 in the U.S. District Court, Southern District of California, and Melissa Roberts v. Zale Delaware, Inc. which was filed on October 7, 2013 in the Superior Court of the State of California, County of Los Angeles. All three cases include allegations that the Company violated various wage and hour labor laws. Relief is sought on behalf of current and former Piercing Pagoda and Zales employees. The lawsuits seek to recover damages, penalties and attorneys' fees as a result of the alleged violations. The Company is investigating the underlying allegations and intends to vigorously defend its position against them. The Company cannot reasonably estimate the potential loss or range of loss, if any, for the lawsuits.

        The Company and its directors have been named as defendants in four purported shareholder class action lawsuits filed in the Court of Chancery of the State of Delaware: Andrew Breyer v. Zale Corporation, et al. filed on February 24, 2014, Marc Stein v. Zale Corporation, et al. and Ravinder Singh v. Zale Corporation, et al. each filed on March 3, 2014 and Mary Smart v. Zale Corporation, et al. filed on March 6, 2014. Each lawsuit alleges that, in connection with the proposed transaction between the Company and Signet Jewelers Limited, entered into on February 19, 2014, the Company's directors breached their fiduciary duties to the Company's shareholders and that the Company, Signet Jewelers Limited and Carat Merger Sub, Inc. aided and abetted such breaches. Each lawsuit seeks injunctive relief, rescission in the event the merger is consummated, monetary damages and attorneys' and other fees and costs. The Company and its directors believe that the claims in the lawsuits are without merit, and intend to vigorously defend each pending lawsuit. The Company cannot reasonably estimate the potential loss or range of loss, if any, for the lawsuits.

        We are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established based on management's best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.

11. DEFERRED REVENUE

        We offer our Fine Jewelry guests lifetime warranties on certain products that cover sizing and breakage with an option to purchase theft protection for a two-year period. Revenues related to lifetime warranty sales are recognized in proportion to when the expected costs will be incurred, which we estimate to be over an eight-year period. A significant change in estimates related to the time period or pattern in which warranty-related costs are expected to be incurred could adversely impact our revenues and earnings. Revenues related to the optional theft protection are recognized over the two-year contract period on a straight-line basis. We also offer our Fine Jewelry guests a two-year watch warranty and our Fine Jewelry and Kiosk Jewelry guests a one-year warranty that covers breakage. The revenue from the two-year watch warranty and one-year breakage warranty is recognized on a straight-line basis over the respective contract terms.

14

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. DEFERRED REVENUE (Continued)

        The change in deferred revenue associated with the sale of warranties is as follows (in thousands):

	Three Months Ended January 31,						Six Months Ended January 31,
	2014			2013			2014			2013
Deferred revenue, beginning of period	$	183,224		$	199,239		$	191,245		$	208,516
Warranties sold(a)		43,907			44,569			69,841			69,549
Revenue recognized		(40,460	)		(41,331	)		(74,415	)		(75,588	)
Deferred revenue, end of period	$	186,671		$	202,477		$	186,671		$	202,477

(a)

Warranty sales for the three and six months ended January 31, 2014 include approximately $1.8 million and $2.3 million, respectively, related to the depreciation in the Canadian currency rate on the beginning of the period deferred revenue balance. The change in the Canadian currency rate did not have a significant impact on the beginning of the period deferred revenue balance for the three and six months ended January 31, 2013.

        Gross margin associated with warranties totaled $32.7 million and $34.2 million, respectively, during the three months ended January 31, 2014 and 2013 and $60.1 million and $62.3 million, respectively, during the six months ended January 31, 2014 and 2013.

12. SUBSEQUENT EVENTS

Merger Agreement

        On February 19, 2014, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Signet Jewelers Limited, a Bermuda corporation ("Signet"), and Carat Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Signet ("Merger Sub"). The Merger Agreement provides for, subject to the satisfaction or waiver of specified conditions, the acquisition of the Company by Signet at a price of $21 per share in cash. Subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Signet. Consummation of the Merger is subject to various customary conditions set forth in the Merger Agreement, including, among other things, the adoption of the Merger Agreement by the Company's stockholders, the absence of laws or orders prohibiting or restraining the Merger and the receipt of certain required antitrust approvals. We cannot predict with certainty whether and when any of these conditions will be satisfied. For additional information regarding the Merger and the Merger Agreement, please refer to our Current Report on Form 8-K filed with the SEC on February 19, 2014 (the "February 19^th 8-K"). The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached as Exhibit 2.1 to the February 19^th 8-K.

Voting and Support Agreement

        On February 19, 2014, and in connection with the execution of the Merger Agreement, Z Investment entered into a Voting and Support Agreement with Signet and the Company (the "Voting Agreement"). Pursuant to the Voting Agreement, Z Investment has agreed, among other things, to exercise its Warrants (see Note 4) and to vote, or cause to be voted, the shares of the Company's common stock issued upon such exercise in favor of the adoption of the Merger Agreement. The foregoing description of the Voting

15

ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

12. SUBSEQUENT EVENTS (Continued)

Agreement does not purport to be complete and is qualified in its entirety by reference to the Voting Agreement, a copy of which is attached as Exhibit 10.1 to the February 19^th 8-K.

16

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements of the Company (and the related notes thereto included elsewhere in this quarterly report), and the audited consolidated financial statements of the Company (and the related notes thereto) and Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2013.

Overview

        We are a leading specialty retailer of fine jewelry in North America. At January 31, 2014, we operated 1,037 fine jewelry stores and 623 kiosks located primarily in shopping malls throughout the United States, Canada and Puerto Rico.

        We report our business under three operating segments: Fine Jewelry, Kiosk Jewelry and All Other. Fine Jewelry is comprised of our three core national brands, Zales Jewelers®, Zales Outlet® and Peoples Jewellers® and our two regional brands, Gordon's Jewelers® and Mappins Jewellers®. Each brand specializes in fine jewelry and watches, with merchandise and marketing emphasis focused on diamond products. These five brands have been aggregated into one reportable segment. Kiosk Jewelry operates under the brand names Piercing Pagoda®, Plumb Gold™, and Silver and Gold Connection® through mall-based kiosks and is focused on the opening price point guest. Kiosk Jewelry specializes in gold, silver and non-precious metal products that capitalize on the latest fashion trends. All Other includes our insurance and reinsurance operations, which offer insurance coverage primarily to our private label credit card guests.

        Revenues for the quarter ended January 31, 2014 decreased 2.1 percent compared to the same period in the prior year. The decrease in revenues was primarily the result of 86 store closures since January 31, 2013 (net of store openings) and the depreciation in the Canadian currency rate, partially offset by an increase in comparable store sales. Comparable store sales increased 0.6 percent during the second quarter of fiscal year 2014, or 1.9 percent at constant exchange rates. Gross margin increased by 240 basis points to 53.0 percent during the second quarter of fiscal year 2014 compared to the same quarter in the prior year. The increase is due primarily to benefits realized from our sourcing initiative launched in fiscal year 2013, lower commodity costs and a more disciplined approach to our promotional programs. Net earnings for the quarter were $50.8 million compared to $41.2 million for the same period in the prior year. The $9.6 million improvement is primarily the result of the increase in gross margin.

        Revenues associated with warranties totaled $40.5 million and $41.3 million, respectively, during the three months ended January 31, 2014 and 2013 and $74.4 million and $75.6 million, respectively, during the six months ended January 31, 2014 and 2013. Gross margin associated with warranties totaled $32.7 million and $34.2 million, respectively, during the three months ended January 31, 2014 and 2013 and $60.1 million and $62.3 million, respectively, during the six months ended January 31, 2014 and 2013.

        On February 19, 2014, the Company entered into the Merger Agreement with Signet and Merger Sub, providing for, subject to the satisfaction or waiver of specified conditions, the acquisition of the Company by Signet at a price of $21 per share in cash. Subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Signet. For additional information regarding the Merger and the Merger Agreement, please refer to the February 19^th 8-K. The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached as Exhibit 2.1 to the February 19^th 8-K.

        In connection with the Merger, the Company intends to file relevant materials with the SEC, including the Company's proxy statement in preliminary and definitive form. Stockholders of the Company are urged

17

to read all relevant documents filed with the SEC, including the Company's proxy statement when it becomes available, because they will contain important information about the Merger. Investors and security holders will be able to obtain the documents (once available) free of charge at the SEC's web site, http://www.sec.gov, or for free from the Company by contacting its Investor Relations department by phone at (972) 580-4391 or by e-mail at ir@zalecorp.com.

Outlook for Fiscal Year 2014

        The fiscal year 2014 outlook excludes the impact of the Merger and other transactions contemplated by the Merger Agreement.

        In fiscal year 2014, we will continue to invest in the business to drive profitable growth and increase shareholder value. We expect to achieve this growth as a result of:

•

positive comparable store sales in our Zales and Peoples brands and the growth of our exclusive, branded merchandise, offset by net store closures and the impact of the Canadian exchange rate;

•

gross margin improvement related primarily to benefits from the sourcing initiative launched in fiscal year 2013 and a more favorable commodity cost environment;

•

slightly higher selling, general and administrative expenses, as a percent of revenues, due primarily to initiatives targeted at driving future revenue growth;

•

an improvement in operating margin of 50 basis points or more;

•

interest expense consistent with fiscal year 2013; and

•

income tax expense of $2 million to $3 million.

        We anticipate capital expenditures will be between $45 million and $50 million in fiscal year 2014. The increase in capital expenditures compared to the $21 million spent in fiscal year 2013 is primarily the result of new store openings, refurbishment of existing stores, upgrades to our point-of-sale hardware and software and improved connectivity in our stores. We expect net store closures in fiscal year 2014 of 70 to 75 locations, primarily in Gordon's, Mappins and Piercing Pagoda. The closures are expected to impact total revenues by approximately 280 basis points.

Comparable Store Sales

        Comparable store sales include internet sales and repair sales but exclude revenue recognized from warranties and insurance premiums related to credit insurance policies sold to guests who purchase merchandise under our proprietary credit programs. The sales results of new stores are included beginning with their thirteenth full month of operation. The results of stores that have been relocated, renovated or refurbished are included in the calculation of comparable store sales on the same basis as other stores. However, stores closed for more than 90 days due to unforeseen events (e.g., hurricanes, etc.) are excluded from the calculation of comparable store sales.

18

        The following table presents comparable store sales for each of our brands for the periods presented:

	Three Months Ended January 31,						Six Months Ended January 31,
	2014			2013			2014			2013
Comparable Store Sales
Zales		4.0	%		3.7	%		5.4	%		4.1	%
Zales Outlet		3.2	%		3.6	%		3.5	%		3.7	%
Peoples		(4.3	)%		6.4	%		(1.8	)%		7.2	%
Gordon's		(4.5	)%		(3.3	)%		(4.3	)%		(3.0	)%
Mappins		(11.4	)%		(5.6	)%		(8.2	)%		(5.6	)%
Piercing Pagoda		(4.6	)%		1.0	%		(3.5	)%		1.4	%
Total Company		0.6	%		2.8	%		1.9	%		3.2	%
Comparable Store Sales (in constant currency)
Peoples		2.7	%		3.0	%		4.6	%		4.4	%
Mappins		(4.9	)%		(8.6	)%		(2.2	)%		(8.1	)%
Total Company		1.9	%		2.2	%		3.0	%		2.7	%

Non-GAAP Financial Measure

        We report our consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). However, the non-GAAP performance measure of EBITDA (defined as earnings before interest, income taxes and depreciation and amortization) is presented to enhance investors' ability to analyze trends in our business and evaluate our performance relative to other companies. We use the non-GAAP financial measure to monitor the performance of our business and assist us in explaining underlying trends in the business.

        EBITDA is a non-GAAP financial measure and should not be considered in isolation of, or as a substitute for, net earnings or other GAAP measures as an indicator of operating performance. In addition, EBITDA should not be considered as an alternative to operating earnings or net earnings as a measure of operating performance. Our calculation of EBITDA may differ from others in our industry and is not necessarily comparable with similar titles used by other companies.

        The following table reconciles EBITDA to net earnings as presented in our consolidated statements of operations:

	Three Months Ended January 31,				Six Months Ended January 31,
	2014		2013		2014		2013
Net earnings	$	50,786	$	41,208	$	23,480	$	12,944
Depreciation and amortization		7,461		8,388		15,122		17,034
Interest expense		6,096		6,088		11,706		11,930
Income tax expense		2,640		3,977		2,305		3,396
EBITDA	$	66,983	$	59,661	$	52,613	$	45,304

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Results of Operations

        The following table sets forth certain financial information from our unaudited consolidated statements of operations expressed as a percentage of total revenues:

	Three Months Ended January 31,						Six Months Ended January 31,
	2014			2013			2014			2013
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		47.0			49.4			46.9			48.5
Gross margin		53.0			50.6			53.1			51.5
Selling, general and administrative		42.7			41.6			47.9			47.2
Depreciation and amortization		1.1			1.3			1.5			1.7
Other charges (gains)		0.1			0.1			—			(0.1	)
Operating earnings		9.1			7.6			3.7			2.7
Interest expense		0.9			0.9			1.1			1.2
Earnings before income taxes		8.1			6.7			2.5			1.6
Income tax expense		0.4			0.6			0.2			0.3
Net earnings		7.7	%		6.1	%		2.3	%		1.3	%

Three Months Ended January 31, 2014 Compared to Three Months Ended January 31, 2013

        Revenues.    Revenues for the quarter ended January 31, 2014 were $656.4 million, a decrease of 2.1 percent compared to revenues of $670.8 million for the same period in the prior year. The decrease in revenues was the result of a $16.9 million decrease related to 86 store closures since January 31, 2013 (net of store openings) and an $8.2 million decrease related to the depreciation in the Canadian currency rate, partially offset by an increase in comparable store sales. Comparable store sales increased 0.6 percent during the second quarter of fiscal year 2014, or 1.9 percent at constant exchange rates. The increase in comparable store sales was primarily attributable to a 7.5 percent increase in the number of units sold in Fine Jewelry, partially offset by a decrease in the average price per unit.

        Fine Jewelry contributed $580.8 million of revenues in the quarter ended January 31, 2014, a decrease of 1.6 percent compared to $590.1 million for the same period in the prior year.

        Kiosk Jewelry contributed $72.8 million of revenues in the quarter ended January 31, 2014, a decrease of 6.5 percent compared to $77.9 million in the same period in the prior year. The decrease in revenues is due to a 5.2 percent decrease in the average price per unit, partially offset by an increase in the number of units sold. The decrease in revenues is also due to 20 kiosk closures since January 31, 2013 (net of openings).

        All Other contributed $2.8 million in revenues for the three months ended January 31, 2014, an increase of 4.1 percent compared to $2.7 million for the same period in the prior year.

        During the quarter ended January 31, 2014, we closed 22 stores in Fine Jewelry and two locations in Kiosk Jewelry. In addition, we opened two stores in Fine Jewelry.

        Gross Margin.    Gross margin represents net sales less cost of sales. Cost of sales includes cost related to merchandise sold, receiving and distribution, guest repairs and repairs associated with warranties. Gross margin was 53.0 percent of revenues for the quarter ended January 31, 2014, compared to 50.6 percent for the same period in the prior year. The 240 basis point improvement was due primarily to benefits realized from our sourcing initiative launched in fiscal year 2013, lower commodity costs and a more disciplined approach to our promotional programs.

20

        Selling, General and Administrative.    Included in SG&A are store operating, advertising, buying, cost of insurance operations and general corporate overhead expenses. SG&A was 42.7 percent of revenues for the quarter ended January 31, 2014 compared to 41.6 percent for the same period in the prior year. SG&A increased by $1.1 million to $280.1 million for the quarter ended January 31, 2014. The increase is due to an $8.6 million increase in costs primarily related to higher labor and marketing costs, partially offset by the impact of 86 store closures since January 31, 2013 (net of store openings).

        Depreciation and Amortization.    Depreciation and amortization as a percentage of revenues for the quarters ended January 31, 2014 and 2013 was 1.1 percent and 1.3 percent, respectively. The decrease is primarily the result of 86 store closures (net of store openings), partially offset by additional capital expenditures.

        Other Charges (Gains).    Other charges for the quarters ended January 31, 2014 and 2013 consists of a $0.5 million and $0.9 million charge, respectively, related to the impairment of long-lived assets associated with underperforming stores.

        Interest Expense.    Interest expense remained flat at $6.1 million, or 0.9 percent of revenues, for the quarters ended January 31, 2014 and 2013.

        Income Tax Expense.    Income tax expense totaled $2.6 million for the three months ended January 31, 2014, as compared to $4.0 million for the same period in the prior year. Income tax expense for both periods was primarily associated with operating earnings related to our Canadian subsidiaries.

Six Months Ended January 31, 2014 Compared to Six Months Ended January 31, 2013

        Revenues.    Revenues for the six months ended January 31, 2014 were $1,019.1 million, a decrease of 0.9 percent compared to revenues of $1,028.2 million for the same period in the prior year. The decrease in revenues was the result of a $25.1 million decrease related to 86 store closures since January 31, 2013 (net of store openings) and an $11.4 million decrease related to the depreciation in the Canadian currency rate, partially offset by an increase in comparable store sales. Comparable store sales increased 1.9 percent during the six months ended January 31, 2014, or 3.0 percent at constant exchange rates. The increase in comparable store sales was primarily attributable to 7.7 percent increase in the number of units sold in Fine Jewelry, partially offset by a decrease in the average price per unit.

        Fine Jewelry contributed $894.5 million of revenues in the six months ended January 31, 2014, a decrease of 0.3 percent compared to $897.1 million for the same period in the prior year.

        Kiosk Jewelry contributed $119.0 million of revenues in the six months ended January 31, 2014, a decrease of 5.3 percent compared to $125.7 million in the same period in the prior year. The decrease in revenues is due to a 2.8 percent decrease in the average price per unit and a decrease in the number of units sold. The decrease in revenues is also due to 20 kiosk closures since January 31, 2013 (net of openings).

        All Other contributed $5.5 million in revenues for the six months ended January 31, 2014, an increase of 2.6 percent compared to $5.4 million for the same period in the prior year.

        During the six months ended January 31, 2014, we closed 29 stores in Fine Jewelry and seven locations in Kiosk Jewelry. In addition, we opened two stores in Fine Jewelry.

        Gross Margin.    Gross margin represents net sales less cost of sales. Cost of sales includes cost related to merchandise sold, receiving and distribution, guest repairs and repairs associated with warranties. Gross margin was 53.1 percent of revenues for the six months ended January 31, 2014, compared to 51.5 percent for the same period in the prior year. The 160 basis point improvement was due primarily to benefits realized from our sourcing initiative launched in fiscal year 2013, lower commodity costs and a more disciplined approach to our promotional programs.

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        Selling, General and Administrative.    Included in SG&A are store operating, advertising, buying, cost of insurance operations and general corporate overhead expenses. SG&A was 47.9 percent of revenues for the six months ended January 31, 2014 compared to 47.2 percent for the same period in the prior year. SG&A increased by $2.8 million to $488.3 million for the six months ended January 31, 2014. The increase is due to a $13.7 million increase in costs primarily related to higher labor, marketing and legal related costs, partially offset by the impact of 86 store closures since January 31, 2013 (net of store openings).

        Depreciation and Amortization.    Depreciation and amortization as a percentage of revenues for the six months ended January 31, 2014 and 2013 was 1.5 percent and 1.7 percent, respectively. The decrease is primarily the result of 86 store closures (net of store openings), partially offset by additional capital expenditures.

        Other Charges (Gains).    Other charges for the six months ended January 31, 2014 consists of a $0.5 million charge related to the impairment of long-lived assets associated with underperforming stores. Other gains for the six months ended January 31, 2013 includes proceeds totaling $1.9 million related to the De Beers settlement, partially offset by a $0.9 million charge related to the impairment of long-lived assets associated with underperforming stores.

        Interest Expense.    Interest expense as a percentage of revenues remained relatively flat at 1.1 percent for the six months ended January 31, 2014 compared to 1.2 percent for the same period in the prior year.

        Income Tax Expense.    Income tax expense totaled $2.3 million for the six months ended January 31, 2014, as compared to $3.4 million for the same period in the prior year. Income tax expense for both periods was primarily associated with operating earnings related to our Canadian subsidiaries.

Liquidity and Capital Resources

        Our cash requirements consist primarily of funding ongoing operations, including inventory requirements, capital expenditures for new stores, renovation of existing stores, upgrades to our information technology systems and debt service. Our cash requirements are funded through cash flows from operations and our revolving credit agreement with a syndicate of lenders led by Bank of America, N.A. We manage availability under the revolving credit agreement by monitoring the timing of merchandise purchases and vendor payments. At January 31, 2014, we had borrowing availability under the revolving credit agreement of approximately $259 million. The average vendor payment terms during the six months ended January 31, 2014 and 2013 were approximately 46 days and 54 days, respectively. As of January 31, 2014, we had cash and cash equivalents totaling $23.3 million. We believe that our operating cash flows and available credit facility are sufficient to finance our cash requirements for at least the next twelve months.

        Net cash used in operating activities improved from $12.8 million for the six months ended January 31, 2013 to $6.4 million for the six months ended January 31, 2014. The $6.4 million improvement is primarily the result of a $9.2 million increase in operating earnings.

        Our business is highly seasonal, with a disproportionate amount of sales (approximately 30 percent) occurring in the Holiday season, which encompasses November and December of each year. Other important selling periods include Valentine's Day and Mother's Day. We purchase inventory in anticipation of these periods and, as a result, have higher inventory and inventory financing needs immediately prior to these periods. Inventory owned at January 31, 2014 was $864.3 million, an increase of $27.7 million compared to January 31, 2013. The increase is primarily due to the expansion of our exclusive, branded merchandise collections, partially offset by the impact of 86 store closures (net of store openings) since January 31, 2013.

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Amended and Restated Revolving Credit Agreement

        On July 24, 2012, we amended and restated our revolving credit agreement (the "Amended Credit Agreement") with Bank of America, N.A. and certain other lenders. The Amended Credit Agreement totals $665 million, including a $15 million first-in, last-out facility (the "FILO Facility"), and matures in July 2017. Borrowings under the Amended Credit Agreement (excluding the FILO Facility) are limited to a borrowing base equal to 90 percent of the appraised liquidation value of eligible inventory (less certain reserves that may be established under the agreement), plus 90 percent of eligible credit card receivables. Borrowings under the FILO Facility are limited to a borrowing base equal to the lesser of: (i) 2.5 percent of the appraised liquidation value of eligible inventory or (ii) $15 million. The Amended Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit card receivables and certain other assets and a second priority security interest and lien on all other assets.

        Based on the most recent inventory appraisal, the monthly borrowing rates calculated from the cost of eligible inventory range from 68 to 73 percent for the period of February through September 2014, 82 to 84 percent for the period of October through December 2014 and 71 percent for January 2015.

        Borrowings under the Amended Credit Agreement (excluding the FILO Facility) bear interest at either: (i) LIBOR plus the applicable margin (ranging from 175 to 225 basis points) or (ii) the base rate (as defined in the Amended Credit Agreement) plus the applicable margin (ranging from 75 to 125 basis points). Borrowings under the FILO Facility bear interest at either: (i) LIBOR plus the applicable margin (ranging from 350 to 400 basis points) or (ii) the base rate plus the applicable margin (ranging from 250 to 300 basis points). We are also required to pay a quarterly unused commitment fee of 37.5 basis points based on the preceding quarter's unused commitment.

        If excess availability (as defined in the Amended Credit Agreement) falls below certain levels we will be required to maintain a minimum fixed charge coverage ratio of 1.0. Borrowing availability was approximately $259 million as of January 31, 2014, which exceeded the excess availability requirement by $197 million. The fixed charge coverage ratio was 2.47 as of January 31, 2014. The Amended Credit Agreement contains various other covenants including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions and asset sales. As of January 31, 2014, we were in compliance with all covenants.

        We incurred debt issuance costs associated with the revolving credit agreement totaling $12.1 million, which consisted of $5.6 million of costs related to the Amended Credit Agreement and $6.5 million of unamortized costs associated with the prior agreement. The debt issuance costs are included in other assets in the accompanying consolidated balance sheets and are amortized to interest expense on a straight-line basis over the five-year life of the agreement.

Interest Rate Swap Agreements

        In September 2013, we executed interest rate swaps with Bank of America, N.A. to hedge the variability of cash flows resulting from fluctuations in the one-month LIBOR associated with our Amended Credit Agreement. The interest rate swaps replaced the one-month LIBOR with the fixed interest rates shown in the table below and are settled monthly. The swaps qualify as cash flow hedges and, to the extent effective, changes in their fair values are recorded in accumulated other comprehensive income in the consolidated balance sheet. The changes in fair values are reclassified from accumulated other comprehensive income to interest expense in the same period that the hedged items affect interest expense.

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        Interest rate swaps as of January 31, 2014 are as follows:

Period	Notional Amount (in thousands)		Fixed Interest Rate			Fair Value (in thousands)
October 2013 - July 2014	$	215,000		0.29	%	$	117
August 2014 - July 2016	$	215,000		1.19	%		2,474
						$	2,591

        The change in the fair value of the interest rate swaps for the three and six months ended January 31, 2014 totaled $0.1 million and $2.7 million, respectively, and is included as an unrealized loss in other comprehensive income. There were no material amounts reclassified from accumulated other comprehensive income to interest expense during the three and six months ended January 31, 2014. The current portion of the fair value of the interest rate swaps totaled $1.0 million and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheet. The current portion represents the amount that is expected to be reclassified from other comprehensive income to interest expense over the next 12 months. The non-current portion of the fair value of the interest rate swaps totaled $1.6 million and is included in other liabilities in the accompanying consolidated balance sheet.

Amended and Restated Senior Secured Term Loan

        On July 24, 2012, we amended and restated our senior secured term loan (the "Amended Term Loan") with Z Investment Holdings, LLC, an affiliate of Golden Gate Capital. The Amended Term Loan totals $80.0 million, matures in July 2017 and is subject to a borrowing base equal to: (i) 107.5 percent of the appraised liquidation value of eligible inventory plus (ii) 100 percent of credit card receivables and an amount equal to the lesser of $40 million or 100 percent of the appraised liquidation value of intellectual property minus (iii) the borrowing base under the Amended Credit Agreement. In the event the outstanding principal under the Amended Term Loan exceeds the Amended Term Loan borrowing base, availability under the Amended Credit Agreement would be reduced by the excess. As of January 31, 2014, the outstanding principal under the Amended Term Loan did not exceed the borrowing base. The Amended Term Loan is secured by a second priority security interest on merchandise inventory and credit card receivables and a first priority security interest on substantially all other assets.

        Borrowings under the Amended Term Loan bear interest at 11 percent payable on a quarterly basis. We may repay all or any portion of the Amended Term Loan with the following penalty prior to maturity: (i) the present value of the required interest payments that would have been made if the prepayment had not occurred during the first year; (ii) 4 percent during the second year; (iii) 3 percent during the third year; (iv) 2 percent during the fourth year and (v) no penalty in the fifth year. The Amended Credit Agreement restricts our ability to prepay the Amended Term Loan if the fixed charge coverage ratio is not equal to or greater than 1.0 after giving effect to the prepayment.

        The Amended Term Loan includes various covenants which are consistent with the covenants in the Amended Credit Agreement, including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions, asset sales and the requirement to maintain a minimum fixed charge coverage ratio of 1.0 if excess availability thresholds under the Amended Credit Agreement are not maintained. As of January 31, 2014, we were in compliance with all covenants.

        We incurred costs associated with the Amended Term Loan totaling $4.4 million, of which approximately $2 million was recorded in interest expense during the fourth quarter of fiscal year 2012. The remaining $2.4 million consists of debt issuance costs included in other assets in the accompanying consolidated balance sheet and are amortized to interest expense on a straight-line basis over the five-year life of the agreement.

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Warrant and Registration Rights Agreement

        In connection with the execution of the senior secured term loan in May 2010, we entered into a Warrant and Registration Rights Agreement (the "Warrant Agreement") with Z Investment Holdings, LLC ("Z Investment"). Under the terms of the Warrant Agreement, Z Investment holds 11.1 million warrants (the "Warrants") to purchase shares of our common stock, on a one-for-one basis, for an exercise price of $2.00 per share. The Warrants, which are currently exercisable and expire in May 2017, represented approximately 25 percent of our common stock on a fully diluted basis (including the shares issuable upon exercise of the Warrants and excluding certain out-of-the-money stock options) as of the date of the issuance. The number of shares and exercise price are subject to customary antidilution protection. The Warrant Agreement also entitles the holder to designate two, and in certain circumstances three, directors to our board.

        The holders of the Warrants may, at their option, request that we register all or part of the common stock issuable under the Warrant Agreement for resale. In September 2013, Z Investment exercised their right to request that we register the common stock and on October 2, 2013 we filed a shelf registration statement on Form S-3 which has been declared effective by the SEC.

Capital Lease Obligations

        We enter into capital leases related to vehicles for our field management. The vehicles are included in property and equipment in the accompanying consolidated balance sheets and are depreciated over a four-year life. Capital leases, net of accumulated depreciation, included in property and equipment as of January 31, 2014 and 2013 totaled $2.2 million and $3.2 million, respectively.

Customer Credit Programs

        We have a Merchant Services Agreement ("MSA") with Citibank (South Dakota), N.A. ("Citibank"), under which Citibank provides financing for our U.S. guests to purchase merchandise through private label credit cards. The MSA can be terminated by either party upon certain breaches by the other party and also can be terminated by Citibank if our net credit card sales during any twelve-month period are less than $315 million or if net card sales during a twelve-month period decrease by 20 percent or more from the prior twelve-month period. After any termination, we may purchase or be obligated to purchase the credit card portfolio upon termination with Citibank as a result of insolvency, material breaches of the MSA or violations of applicable law related to the credit card program. As of January 31, 2014, we were in compliance with all covenants under the MSA. We currently expect to exceed the $315 million threshold for the program year ending September 30, 2014. The MSA expires in October 2015 and will automatically renew for successive two-year periods, unless either party notifies the other in writing of its intent not to renew. In July 2013, the Company provided written notice to Citibank of its intent not to renew the agreement. During the six months ended January 31, 2014 and 2013, our guests used our private label credit card to pay for approximately 34 percent and 33 percent, respectively, of purchases in the U.S.

        On July 9, 2013, we entered into a Private Label Credit Card Program Agreement (the "ADS Agreement") with an affiliate of Alliance Data Systems Corporation ("ADS") to provide financing to our U.S. guests to purchase merchandise through private label credit cards beginning no later than October 1, 2015. In addition, ADS will provide marketing, analytical and technical services and has the option to participate in certain special financing programs prior to the commencement of the agreement. The ADS Agreement will replace our current agreement with Citibank which expires on October 1, 2015. The ADS Agreement has an initial term of the later of the seventh anniversary of the commencement date of the agreement or October 1, 2022 and automatically renews for successive two-year periods, unless either party notifies the other of its intent not to renew. If ADS meets certain performance criteria during the first three years of the agreement, they will have the option to extend the initial term of the ADS Agreement by two years. In July 2013, we received a $38.0 million commencement payment upon signing the ADS

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Agreement. The commencement payment will be amortized over the initial term of the ADS Agreement as a reduction of merchant fees beginning on the commencement date of the agreement. The ADS agreement can be terminated by either party upon certain breaches by the other party.

        We have a Private Label Credit Card Program Agreement (the "TD Agreement") with TD Financing Services Inc. ("TDFS"), under which TDFS provides financing for our Canadian guests to purchase merchandise through private label credit cards. In addition, TDFS provides credit insurance for our guests and receives 40 percent of the net profits, as defined, and the remaining 60 percent is paid to us. The TD Agreement expires in June 2015 and will automatically renew for successive one-year periods, unless either party notifies the other in writing of its intent not to renew. The agreement may be terminated at any time during the 90-day period following the end of a program year in the event that credit sales are less than $50 million in the immediately preceding year. We currently expect to exceed the $50 million threshold for the program year ending June 30, 2014. During the six months ended January 31, 2014 and 2013, our guests used our private label credit card to pay for approximately 18 percent and 17 percent, respectively, of purchases in Canada.

        We have also entered into agreements with certain other lenders to offer alternative financing options to our U.S. guests who have been declined by Citibank.

Capital Expenditures

        During the six months ended January 31, 2014, we invested $11.7 million to remodel, relocate and refurbish stores and to complete store enhancement projects. We also invested $6.3 million in infrastructure, primarily related to information technology. We anticipate investing between $45 million and $50 million in capital expenditures in fiscal year 2014.

Recent Accounting Pronouncement

        In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"), which requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. To the extent the tax benefit is not available at the reporting date under the governing tax law or if the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and not combined with deferred tax assets. ASU 2013-11 is effective for annual periods, and interim periods within those years, beginning after December 15, 2013. The amendments are to be applied to all unrecognized tax benefits that exist as of the effective date and may be applied retrospectively to each prior reporting period presented. We do not expect a material impact from the adoption of this guidance on our consolidated financial statements.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Inflation.    Substantially all U.S. inventories represent finished goods, which are valued using the last-in, first-out ("LIFO") retail inventory method. We are required to determine the LIFO cost on an interim basis by estimating annual inflation trends, annual purchases and ending inventory. The inflation rates pertaining to merchandise inventories, especially as they relate to diamond, gold and silver costs, are primary components in determining our LIFO inventory. We recorded a benefit related to LIFO in cost of sales totaling $3.7 million during the six months ended January 31, 2014 primarily as a result of the sourcing initiative launched in fiscal year 2013 and lower commodity costs. We recorded LIFO charges in cost of sales totaling $2.6 million during the six months ended January 31, 2013. The LIFO inventory reserve included in the consolidated balance sheets as of January 31, 2014 and 2013 totaled $59.2 million and $60.9 million, respectively.

        Foreign Currency Risk.    We are not subject to significant gains or losses as a result of currency fluctuations because most of our purchases are U.S. dollar-denominated. However, we enter into foreign currency contracts to manage the currency fluctuations associated with purchases for our Canadian operations. The gains or losses related to the settlement of foreign currency contracts are included in SG&A in our consolidated statements of operations. The Company recognized a $0.5 million gain on the settlement of foreign currency contracts during the six months ended January 31, 2014. There were no material gains or losses recognized during the six months ended January 31, 2013. There were no outstanding foreign currency contracts as of January 31, 2014.

        We are exposed to foreign currency exchange risks through our business operations in Canada, which may adversely affect our results of operations. During the six months ended January 31, 2014 and 2013, the average Canadian currency rate depreciated by approximately six percent and appreciated by approximately two percent, respectively, relative to the U.S. dollar. The depreciation in the Canadian currency rate for the six months ended January 31, 2014 resulted in an $11.4 million decrease in reported revenues, partially offset by a $9.9 million decrease in costs. The appreciation in the Canadian currency rate for the six months ended January 31, 2013 resulted in a $4.7 million increase in reported revenues, partially offset by a $4.1 million increase in costs.

        Interest Rate Risk.    Our Amended Term Loan bears interest at a fixed rate of 11 percent and would not be affected by interest rate changes. As of January 31, 2014, we had borrowings of $363.0 million under our Amended Credit Agreement that are subject to variable interest rates.

        In September 2013, we executed interest rate swaps with Bank of America, N.A. to hedge the variability of cash flows resulting from fluctuations in the one-month LIBOR associated with our Amended Credit Agreement. The interest rate swaps replaced the one-month LIBOR with the fixed interest rates shown in the table below and are settled monthly. The swaps qualify as cash flow hedges and, to the extent effective, changes in their fair values are recorded in accumulated other comprehensive income in the consolidated balance sheet. The changes in fair values are reclassified from accumulated other comprehensive income to interest expense in the same period that the hedged items affect interest expense.

        Interest rate swaps as of January 31, 2014 are as follows:

Period	Notional Amount (in thousands)		Fixed Interest Rate			Fair Value (in thousands)
October 2013 - July 2014	$	215,000		0.29	%	$	117
August 2014 - July 2016	$	215,000		1.19	%		2,474
						$	2,591

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        The change in the fair value of the interest rate swaps for the three and six months ended January 31, 2014 totaled $0.1 million and $2.7 million, respectively, and is included as an unrealized loss in other comprehensive income. There were no material amounts reclassified from accumulated other comprehensive income to interest expense during the three and six months ended January 31, 2014. The current portion of the fair value of the interest rate swaps totaled $1.0 million and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheet. The current portion represents the amount that is expected to be reclassified from other comprehensive income to interest expense over the next 12 months. The non-current portion of the fair value of the interest rate swaps totaled $1.6 million and is included in other liabilities in the accompanying consolidated balance sheet.

        Investment Risk.    We do not use derivative financial instruments for trading or other speculative purposes and are not party to any leveraged financial instruments. The investments of our insurance subsidiaries, primarily stocks and bonds, had a market value of $24.8 million at January 31, 2014.

        Commodity Risk.    Our results are subject to fluctuations in the underlying cost of diamonds, gold, silver and other metals which are key raw material components of the products sold by us. We address commodity risk principally through retail price point adjustments.

ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

        Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in the Company's periodic SEC filings within the required time period, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

        There have been no changes in our internal controls over financial reporting during the quarter ended January 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        Information regarding legal proceedings is incorporated by reference from Note 10 to our consolidated financial statements set forth, under the heading, "Contingencies," in Part I of this report.

ITEM 1A.    RISK FACTORS

        We make forward-looking statements in this Quarterly Report on Form 10-Q and in other reports we file with the Securities and Exchange Commission ("SEC"). In addition, members of our senior management make forward-looking statements orally in presentations to analysts, investors, the media and others. Forward-looking statements include statements regarding our objectives and expectations with respect to our financial plan (including expectations for earnings, comparable store sales, gross margin, selling, general and administrative expenses, operating margin, interest expense, income tax expense and capital expenditures for fiscal year 2014), merchandising and marketing strategies, acquisitions and dispositions, share repurchases, store openings, renovations, remodeling and expansion, inventory management and performance, liquidity and cash flows, capital structure, capital expenditures, development of our information technology and telecommunications plans and related management information systems, ecommerce initiatives, human resource initiatives and other statements regarding our plans and objectives. In addition, the words "plans to," "anticipate," "estimate," "project," "intend," "expect," "believe," "forecast," "can," "could," "should," "will," "may," or similar expressions may identify forward-looking statements, but some of these statements may use other phrasing. These forward-looking statements are intended to relay our expectations about the future, and speak only as of the date they are made. We disclaim any obligation to update or revise publicly or otherwise any forward-looking statements to reflect subsequent events, new information or future circumstances.

        Forward-looking statements are not guarantees of future performance and a variety of factors, including without limitation those described below, could cause our actual results to differ materially from the anticipated or expected results expressed in or suggested by these forward-looking statements.

         The announcement and pendency of the proposed Merger with Signet could have a material and adverse effect on our business, financial results and operations.

        The announcement and pendency of the proposed acquisition of our Company by Signet could cause disruptions and create uncertainty surrounding our business, including affecting our relationships with our customers, suppliers and employees, which could have an adverse effect on our business, financial results and operations, regardless of whether the proposed Merger is completed. In particular, we could potentially lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the proposed Merger. We could also potentially lose customers or suppliers, or our supply arrangements could be disrupted. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the proposed Merger, which could have a material and adverse effect on our business, financial results and operations.

        We are also subject to restrictions on the conduct of our business prior to the consummation of the Merger as provided in the Merger Agreement, including, among other things, certain restrictions on our ability to acquire other businesses, sell, transfer or license our assets, amend our organizational documents and incur indebtedness. These restrictions could result in our inability to respond effectively to competitive pressures, industry developments and future opportunities and may otherwise have a material and adverse effect on our business, financial results and operations.

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         The failure to complete the proposed Merger with Signet may have a material and adverse effect on our business, financial results, operations and share price.

        There is no assurance that the closing of the Merger will occur. Consummation of the Merger is subject to various customary conditions set forth in the Merger Agreement, including, among other things, the adoption of the Merger Agreement by the Company's stockholders, the absence of laws or orders prohibiting or restraining the Merger and the receipt of certain required antitrust approvals. We cannot predict with certainty whether and when any of these conditions will be satisfied. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, a change in the recommendation of the board of directors of the Company or a termination of the Merger Agreement by the Company in order to enter into an agreement for a Superior Proposal (as defined in the Merger Agreement). If the Merger is not consummated, our stock price will likely decline, as our stock has recently traded at prices based on the proposed per share price for the Merger. We will have incurred significant expenses and costs in connection with the Merger and the Merger Agreement, including, among other things, the diversion of management resources, for which we will have received little or no benefit if the closing of the Merger does not occur. Furthermore, a failed transaction may result in negative publicity and a negative impression of us in the investment community. The occurrence of any of these events individually or in combination could have a material and adverse effect on our business, financial results, operations and stock price.

         If the general economy performs poorly, discretionary spending on goods that are, or are perceived to be, "luxuries" may not grow and may decrease.

        Jewelry purchases are discretionary and may be affected by adverse trends in the general economy (and consumer perceptions of those trends). In addition, a number of other factors affecting consumers such as employment, wages and salaries, business conditions, energy costs, credit availability and taxation policies, for the economy as a whole and in regional and local markets where we operate, can impact sales and earnings.

         A serious economic downturn could have a material and adverse effect on our business and financial condition.

        Declining confidence in either the U.S. or Canadian economies where we are active could adversely affect consumers' ability and willingness to purchase our products in those regions. Should either of these economies suffer a serious economic downturn, it could have a material and adverse effect on our business and financial condition.

         The concentration of a substantial portion of our sales in three relatively brief selling periods means that our performance is more susceptible to disruptions.

        A substantial portion of our sales are derived from three selling periods—Holiday (Christmas), Valentine's Day and Mother's Day. Because of the briefness of these three selling periods, the opportunity for sales to recover in the event of a disruption or other difficulty is limited, and the impact of disruptions and difficulties can be significant. For instance, adverse weather (such as a blizzard or hurricane), a significant interruption in the receipt of products (whether because of vendor or other product problems), or a sharp decline in mall traffic occurring during one of these selling periods could materially impact sales for the affected period and, because of the importance of each of these selling periods, commensurately impact overall sales and earnings.

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         Any disruption in the supply of finished goods from our largest merchandise vendors could adversely impact our sales.

        We purchase substantial amounts of finished goods from our five largest merchandise vendors. If our supply with these top vendors was disrupted, particularly at certain critical times of the year, our sales could be adversely affected in the short-term until alternative supply arrangements could be established.

         Most of our sales are of products that include diamonds, precious metals and other commodities. A substantial portion of our purchases and sales occur outside the United States. Fluctuations in the availability and pricing of commodities or exchange rates could impact our ability to obtain, produce and sell products at favorable prices.

        The supply and price of diamonds in the principal world market are significantly influenced by the Diamond Trading Company ("DTC"), which has traditionally controlled the marketing of a substantial majority of the world's supply of diamonds and sells rough diamonds to worldwide diamond cutters at prices determined in its sole discretion. The DTC's share of the diamond supply chain has decreased over recent years, which may result in more volatility in rough diamond prices. The availability of diamonds is also somewhat dependent on the political conditions in diamond-producing countries and on the continuing supply of raw diamonds. Any sustained interruption in this supply could have an adverse affect on our business.

        We are affected by fluctuations in the price of diamonds, gold and other commodities. A significant change in prices of key commodities could adversely affect our business by reducing operating margins or decreasing consumer demand if retail prices are increased significantly. In the past, our vendors have experienced significant increases in commodity costs, especially diamond, gold and silver costs. If significant increases in commodity prices occur in the future, it could result in higher merchandise costs, which could materially impact our earnings. In addition, foreign currency exchange rates and fluctuations impact costs and cash flows associated with our Canadian operations and the acquisition of inventory from international vendors.

        A substantial portion of our raw materials and finished goods are sourced in countries generally described as having developing economies. Any instability in these economies could result in an interruption of our supplies, increases in costs, legal challenges and other difficulties.

        In August 2012, the SEC issued rules that require companies that manufacture products using certain minerals, including gold, to determine whether those minerals originated in the Democratic Republic of Congo ("DRC") or adjoining countries. If the minerals originate in the DRC, or if companies are not able to establish where they originated, extensive disclosure regarding the sources of those minerals, and in some instances an independent audit of the supply chain, is required. The costs of complying with the new rules are not expected to be material. The Company will be required to file its first disclosure report by May 31, 2014 for the calendar year ending December 31, 2013.

        There may also be reputational risks with guests and other stakeholders if, due to the complexity of the global supply chain, we are unable to sufficiently verify the origin for the relevant metals. Also, if the responses of portions of our supply chain to the verification requests are adverse, it may harm our ability to obtain merchandise and add to compliance costs. Other minerals, such as diamonds, could be added to those currently covered by these rules.

         Our sales are dependent upon mall traffic.

        Our stores and kiosks are located primarily in shopping malls throughout the U.S., Canada and Puerto Rico. Our success is in part dependent upon the continued popularity of malls as a shopping destination and the ability of malls, their tenants and other mall attractions to generate customer traffic. Accordingly, a significant decline in this popularity, especially if it is sustained, would substantially harm our sales and

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earnings. In addition, even assuming this popularity continues, mall traffic can be negatively impacted by mall renovations, weather, gas prices and similar factors.

         We operate in a highly competitive and fragmented industry.

        The retail jewelry business is highly competitive and fragmented, and we compete with nationally recognized jewelry chains as well as a large number of independent regional and local jewelry retailers and other types of retailers who sell jewelry and gift items, such as department stores and mass merchandisers. We also compete with internet sellers of jewelry. Because of the breadth and depth of this competition, we are constantly under competitive pressure that both constrains pricing and requires extensive merchandising efforts in order for us to remain competitive.

         Any failure by us to manage our inventory effectively, including judgments related to consumer preferences and demand, will negatively impact our financial condition, sales and earnings.

        We purchase much of our inventory well in advance of each selling period. In the event we do not stock merchandise consumers wish to purchase or misjudge consumer demand, we will experience lower sales than expected and will have excessive inventory that may need to be written down in value or sold at prices that are less than expected, which could have a material adverse impact on our business and financial condition.

         Omnichannel retailing is rapidly evolving and our inability to keep pace with consumer preferences and expectations could adversely affect our financial performance.

        Our guests are increasingly using computers, tablets, mobile phones and other devices to shop in our stores and online for our products. There are various risks relating to omnichannel retailing, including the need to keep pace with rapid technological change, internet security risks, risks of systems failure or inadequacy and increased competition. If we are unable to timely and appropriately respond to these risks, including through maintenance of customer service and guest relationships, demand for our products and services and our financial performance could be adversely affected. Further, governmental regulation of internet-based commerce continues to evolve in areas such as taxation, privacy, data protection and mobile communications. Unfavorable changes to regulations in these areas could have a negative effect on our business.

         Unfavorable consumer responses to price increases or misjudgments about the level of markdowns could have a material adverse impact on our sales and earnings.

        From time to time, and especially in periods of rising raw material costs, we increase the retail prices of our products. Significant price increases could impact our earnings depending on, among other factors, the pricing by competitors of similar products and the response by the guest to higher prices. Such price increases may result in lower unit sales and a subsequent decrease in gross margin and adversely impact earnings. In addition, if we misjudge the level of markdowns required to sell our merchandise at acceptable turn rates, sales and earnings could be negatively impacted.

         Any failure of our pricing and promotional strategies to be as effective as desired will negatively impact our sales and earnings.

        We set the prices for our products and establish product specific and store-wide promotions in order to generate store traffic and sales. While these decisions are intended to maximize our sales and earnings, in some instances they do not. For instance, promotions, which can require substantial lead time, may not be as effective as desired or may prove unnecessary in certain economic circumstances. Where we have implemented a pricing or promotional strategy that does not work as expected, our sales and earnings will be adversely impacted.

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         Any inability to recruit, train, motivate and retain suitably qualified sales associates could adversely impact sales and earnings.

        In specialty jewelry retailing, the level and quality of customer service is a key competitive factor as nearly every in-store transaction involves the sales associate taking a piece of jewelry or a watch out of a display case and presenting it to the potential guest. Competition for suitable individuals or changes in labor and healthcare laws could require us to incur higher labor costs. Therefore an inability to recruit, train, motivate and retain suitably qualified sales associates could adversely impact sales and earnings.

         Because of our dependence upon a small concentrated number of landlords for a substantial number of our locations, any significant erosion of our relationships with those landlords or their financial condition would negatively impact our ability to obtain and retain store locations.

        We are significantly dependent on our ability to operate stores in desirable locations with capital investment and lease costs that allow us to earn a reasonable return on our locations. We depend on the leasing market and our landlords to determine supply, demand, lease cost and operating costs and conditions. We cannot be certain as to when or whether desirable store locations will become or remain available to us at reasonable lease and operating costs. Several large landlords dominate the ownership of prime malls, and we are dependent upon maintaining good relations with those landlords in order to obtain and retain store locations on optimal terms. From time to time, we do have disagreements with our landlords and a significant disagreement, if not resolved, could have an adverse impact on our business. In addition, any financial weakness on the part of our landlords could adversely impact us in a number of ways, including decreased marketing by the landlords and the loss of other tenants that generate mall traffic.

         Any disruption in, or changes to, our private label credit card arrangements may adversely affect our ability to provide consumer credit and write credit insurance.

        We rely on third party credit providers to provide financing for our guests to purchase merchandise and credit insurance through private label credit cards. Any disruption in, or changes to, our credit card agreements could adversely affect our sales and earnings.

         Significant restrictions in the amount of credit available to our guests could negatively impact our business and financial condition.

        Our guests rely heavily on financing provided by credit lenders to purchase our merchandise. The availability of credit to our guests is impacted by numerous factors, including general economic conditions and regulatory requirements relating to the extension of credit. Numerous federal and state laws impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum amount of finance charges that may be charged by a credit provider. Regulations implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 imposed restrictions on credit card pricing, finance charges and fees, customer billing practices and payment application. Future regulations or changes in the application of current laws could further impact the availability of credit to our guests. If the amount of available credit provided to our guests is significantly restricted, our sales and earnings would be negatively impacted.

         We are dependent upon our revolving credit agreement, senior secured term loan and other third party financing arrangements for our liquidity needs.

        We have a revolving credit agreement and a senior secured term loan that contain various financial and other covenants. Should we be unable to fulfill the covenants contained in these loans, we would be in default, all outstanding amounts would be immediately due, and we would be unable to fund our operations without a significant restructuring of our business.

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         If the credit markets deteriorate, our ability to obtain the financing needed to operate our business could be adversely impacted.

        We utilize a revolving credit agreement to finance our working capital requirements, including the purchase of inventory, among other things. If our ability to obtain the financing needed to meet these requirements was adversely impacted as a result of a deterioration in the credit markets, our business could be significantly impacted. In addition, the amount of available borrowings under our revolving credit agreement is based, in part, on the appraised liquidation value of our inventory. Any declines in the appraised value of our inventory could impact our ability to obtain the financing necessary to operate our business.

         Any security breach with respect to our information technology systems could result in legal or financial liabilities, damage to our reputation and a loss of guest confidence.

        During the course of our business, we regularly obtain and transmit through our information technology systems customer credit and other data. If our information technology systems are breached due to the actions of outside parties, or otherwise, an unauthorized third party may obtain access to confidential guest information. Any breach of our systems that results in unauthorized access to guest information could cause us to incur significant legal and financial liabilities, damage to our reputation and a loss of customer confidence. In each case, these impacts could have an adverse effect on our business and results of operations.

         Acquisitions and dispositions involve special risk, including the risk that we may not be able to complete proposed acquisitions or dispositions or that such transactions may not be beneficial to us.

        We have made significant acquisitions and dispositions in the past and may in the future make additional acquisitions and dispositions. Difficulty integrating an acquisition into our existing infrastructure and operations may cause us to fail to realize expected return on investment through revenue increases, cost savings, increases in geographic or product presence and guest reach or other projected benefits from the acquisition. In addition, we may not achieve anticipated cost savings or may be unable to find attractive investment opportunities for funds received in connection with a disposition. Additionally, attractive acquisition or disposition opportunities may not be available at the time or pursuant to terms acceptable to us and we may be unable to complete the acquisition or disposition.

         Our net operating loss carryforwards could be subject to limitations under the Internal Revenue Code.

        If we were to experience an "ownership change" under Section 382 of the Internal Revenue Code, our net operating loss carryforwards ("NOLs") would be subject to annual limitations that could impact the timing of the utilization of our NOLs as well as our ability to fully utilize our NOLs prior to their expiration. The determination of whether an ownership change has occurred is complex and depends upon a number of factors, including new issuances of shares by the Company and purchases and sales of shares by large stockholders, including the exercise of the outstanding warrants.

         Litigation and claims can adversely impact us.

        We are involved in various legal proceedings as part of the normal course of our business. Where appropriate, we establish reserves based on management's best estimates of our potential liability in these matters. While management believes that all current litigation and claims will be resolved without material effect on our financial position or results of operations, as with all litigation it is possible that there will be a significant adverse outcome.

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         Ineffective internal controls can have adverse impacts on the Company.

        Under Federal law, we are required to maintain an effective system of internal controls over financial reporting. Should we not maintain an effective system, it would result in a violation of those laws and could impair our ability to produce accurate and timely financial statements. In turn, this could result in increased audit costs, a loss of investor confidence, difficulties in accessing the capital markets, and regulatory and other actions against us. Any of these outcomes could be costly to both our shareholders and us.

         Changes in estimates, assumptions and judgments made by management related to our evaluation of goodwill and other long-lived assets for impairment could significantly affect our financial results.

        Evaluating goodwill and other long-lived assets for impairment is highly complex and involves many subjective estimates, assumptions and judgments by our management. For instance, management makes estimates and assumptions with respect to future cash flow projections, terminal growth rates, discount rates and long-term business plans. If our actual results are not consistent with our estimates, assumptions and judgments made by management, we may be required to recognize impairments.

         Changes in estimates related to the recognition of revenue associated with lifetime warranty sales could significantly affect our financial results.

        We recognize revenue related to lifetime warranty sales in proportion to when the expected costs will be incurred, which we estimate will be over an eight-year period. A significant change in estimates related to the time period or pattern in which warranty-related costs are expected to be incurred could adversely affect our revenues and earnings.

         Our share price may be volatile.

        Our share price may fluctuate substantially as a result of variations in our actual or anticipated results and financial condition. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail shares and other shares in a manner unrelated, or disproportionate to, the operating performance of those companies. In addition, our share price could fluctuate substantially in the future in response to sales of our common stock, including the sale of common stock issuable under the Warrant Agreement.

         Additional factors may adversely affect our financial performance.

        Increases in expenses that are beyond our control including items such as increases in interest rates, inflation, fluctuations in foreign currency rates, higher tax rates and changes in laws and regulations (such as the Patient Protection and Affordable Care Act), may negatively impact our operating results.

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ITEM 6.    EXHIBITS

        The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

Exhibit Number			Description of Exhibit
	10.1	*	First Amendment to Private Label Credit Card Program Agreement with Alliance Data Systems Corporation
	10.2		Agreement and Plan of Merger, dated as of February 19, 2014, among Zale Corporation, Signet Jewelers Limited and Carat Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated February 19, 2014, File No. 1-04129)
	10.3		Voting and Support Agreement dated as of February 19, 2014, among Signet Jewelers Limited, Zale Corporation and Z Investment Holdings, LLC. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 19, 2014, File No. 1-04129)
	10.4	*	Amended and Restated Executive Severance Plan for Zale Corporation and its Affiliates
	31.1	*	Rule 13a-14(a) Certification of Principal Executive Officer
	31.2	*	Rule 13a-14(a) Certification of Chief Administrative Officer
	31.3	*	Rule 13a-14(a) Certification of Principal Financial Officer
	32.1	*	Section 1350 Certification of Principal Executive Officer
	32.2	*	Section 1350 Certification of Chief Administrative Officer
	32.3	*	Section 1350 Certification of Principal Financial Officer
	101.INS	**	XBRL Instance Document
	101.SCH	**	XBRL Taxonomy Extension Schema
	101.CAL	**	XBRL Taxonomy Extension Calculation Linkbase
	101.DEF	**	XBRL Taxonomy Extension Definition Linkbase
	101.LAB	**	XBRL Taxonomy Extension Label Linkbase
	101.PRE	**	XBRL Taxonomy Extension Presentation Linkbase

*

Filed herewith.

**

These exhibits are furnished herewith. In accordance with Rule 406T of Regulation S-T, these exhibits are not deemed to be filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are not deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

36

SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ZALE CORPORATION
	(Registrant)
Date: March 7, 2014	By:	/s/ THOMAS A. HAUBENSTRICKER Thomas A. Haubenstricker Chief Financial Officer (principal financial officer of the registrant)

EX-10.1

Exhibit 10.1

Execution Copy

FIRST AMENDMENT TO PRIVATE LABEL CREDIT CARD PROGRAM AGREEMENT

This First Amendment to the Private Label Credit Card Program Agreement (“Amendment”) is entered into as of the 14th day of November, 2013 (“Effective Date”) by and between Zale Delaware, Inc. (“Zale Delaware”), a Delaware corporation with its principal office at 901 W. Walnut Hill Lane, Irving, TX 75038-1003, Zale Puerto Rico, Inc. (“Zale PR” and together with Zale Delaware, “Zale”), a Puerto Rico corporation with its principal office at 901 W. Walnut Hill Lane, Irving, TX 74038-1003, and Comenity Capital Bank (“Bank”), with its principal office at 2795 E. Cottonwood Parkway, Suite 100, Salt Lake City, Utah 84121.

RECITALS:

WHEREAS, Zale and Bank entered into a Private Label Credit Card Program Agreement dated as of July 9, 2013 (the “Agreement”);

WHEREAS, Zale and Bank now desire to amend the Agreement as set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows:

1.Definitions;  References. Each term used herein which is not defined herein shall have the meaning assigned to such term in the Agreement. Each reference to “hereof”, “hereunder”, “herein” and “hereby” and each other similar reference and each reference to “this Agreement” and each other similar reference contained in the Agreement shall from and after the date hereof refer to the Agreement amended hereby.

2.Section 2.13 – Stretch Account Program. Section 2.13 shall be added as follows:

2.13 Stretch Account Program.  See Schedule 2.13.

3.Schedule 2.13 – Stretch Account Program. Schedule 2.13 is attached hereto and made a part hereof by reference, and is added to the Agreement.

4.Governing Law.The governing law provisions of this Amendment shall be the same as those of the Agreement.

5.Counterparts;  Effectiveness.  This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all of such counterparts shall together constitute one and the same instrument.  The provisions included in this Amendment shall be effective as of the Effective Date set forth above.

6.Entire Agreement.  As hereby amended and supplemented, the Agreement shall remain in full force and effect.

	Zale Delaware/Zale Puerto Rico/Comenity Capital Bank
Confidential	Ist Amendment to PLCCPA

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IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers.

ZALE DELAWARE, INC.		ZALE PUERTO RICO, INC.
By:	/s/ Matt Appel	By:	/s/ Matt Appel
Name:	MATT APPEL	Name:	MATT APPEL
Title:	CAO	Title:	CAO
COMENITY CAPITAL BANK
By:	/s/ Ronald J. Ostler
Name:	Ronald J. Ostler
Title:	President

	Zale Delaware/Zale Puerto Rico/Comenity Capital Bank
Confidential and Proprietary	Ist Amendment to PLCCPA

2

SCHEDULE 2.13

STRETCH ACCOUNT PROGRAM

1.General

Subject to Section 2.13, Bank agrees to provide a “Stretch Account Program” per the provisions of this Schedule 2.13.

2.Bank’s Issuance of Stretch Accounts

(a)To the extent requested by Company and the provisions of this Schedule 2.13, Bank shall issue Accounts to certain Applicants that do not meet the general standards of Bank Underwriting Criteria, which Accounts shall be referred to herein as  “Stretch Accounts”, provided (i) the Application submitted by the Applicant (or prescreening of such individual) meets all of Bank’s security and fraud verifications; and (ii) Bank has not become aware of facts (through a credit bureau report or otherwise) that cause Bank to conclude it necessary to deny granting a Stretch Account based on Bank’s adherence to good banking practices and Applicable Law (which includes but is not limited to safety and soundness and reputational considerations).

(b)The parties recognize that there are special terms and conditions under this Schedule 2.13 between Company and Bank with regard to Stretch Accounts, as compared to non-Stretch Accounts.

However, except as specifically and expressly provided otherwise, there will be no special terms and conditions between Bank and Applicants and/or Accountholders of Stretch Accounts as distinct from those related to non-Stretch Accounts. By way of clarification, the Stretch Account Program does not constitute one of the special credit programs referenced in Section 2.10.

3.Stretch Account Purchases.  Purchases made on Stretch Accounts shall be referred to herein as “Stretch Account Purchases”. Company shall pay to Bank an amount equal to (i) the “Stretch Account Discount Rate” multiplied by (ii) Net Sales on Stretch Account Purchases.  Initially, the Stretch Account Discount Rate shall be the Discount Rate plus 10% (1,000 basis points). Periodically, Bank shall review the amount of the Stretch Account Discount Rate and provide Company with a commercially reasonable amount of written notice before making any changes to it.

4.Termination Events of the Stretch Account Program

(a)Termination Events.  Company can terminate the Stretch Account Program at any time, for any reason or no reason at all, provided it gives Bank sufficient prior written notice such that Bank can complete any operational and other necessary tasks related to same.

(b)Bank can terminate the Stretch Account Program at any time if necessitated by Applicable Law as referenced above and/or in consideration of good banking practices. In such case, Bank shall provide Company with no less than 60 days’ prior written notice unless a

3

shorter time is necessitated to comply with Applicable Law, in which case Bank shall provide such written notice as soon as it can reasonably do so. Under any circumstances, Bank shall make itself available to address any concerns Company has regarding the matter.

(c)The Stretch Account Program shall also terminate as part of termination of the overall Program, and the Stretch Accounts shall be treated the same as non-Stretch Accounts.

(d)The Stretch Account Program shall terminate upon the Launch of the Program that is the material subject of this Agreement.

5.Upon Termination of the Stretch Account Program

Upon termination the Stretch Account Program, Bank shall cease issuing Stretch Accounts.

4

EX-10.4

Exhibit 10.4

EXECUTION COPY

THE EXECUTIVE SEVERANCE PLAN

FOR ZALE CORPORATION AND ITS AFFILIATES

As Amended and Restated Effective September 25, 2013

TABLE OF CONTENTS

THE EXECUTIVE SEVERANCE PLAN
FOR ZALE CORPORATION AND ITS AFFILIATES

		Page
ARTICLE I PREAMBLE AND PURPOSE		1
1.1	Preamble	1
1.2	Purpose	1
ARTICLE II DEFINITIONS AND CONSTRUCTION		2
2.1	Definitions	2
2.2	Construction	6
2.3	409A Compliance	6
ARTICLE III SEVERANCE BENEFITS		7
3.1	Severance Benefits	7
3.2	Distributions on Account of Death of the Covered Executive During the Severance Period	9
3.3	Alternate Plan Terms	9
3.4	Conditions to Payment of Severance Benefits	9
3.5	Reemployment of Covered Executive	10
ARTICLE IV ADMINISTRATION		11
4.1	The Plan Administrator	11
4.2	Powers of Plan Administrator	11
4.3	Appointment of Daily Administrator	11
4.4	Duties of Daily Administrator	11
4.5	Indemnification of Plan Administrator and Daily Administrator	13
4.6	Claims for Benefits	13
4.7	Receipt and Release of Necessary Information	15
4.8	Overpayment and Underpayment of Benefits	15
ARTICLE V OTHER BENEFIT PLANS OF THE COMPANY		17
5.1	Other Plans	17
ARTICLE VI AMENDMENT AND TERMINATION OF THE PLAN		18
6.1	Continuation	18
6.2	Amendment of Plan	18
6.3	Termination of Plan	18
6.4	Termination of Affiliate’s Participation	18
ARTICLE VII MISCELLANEOUS		19
7.1	No Reduction of Employer Rights	19
7.2	Successor to the Company	19
7.3	Provisions Binding	19

i

THE EXECUTIVE SEVERANCE PLAN
FOR ZALE CORPORATION AND ITS AFFILIATES

ARTICLE I
PREAMBLE AND PURPOSE

1.1Preamble

Zale Corporation (the “Company”) previously established The Executive Severance Plan for Zale Corporation (the “Plan”) to provide “Covered Executives” of the Company and its “Affiliates” with certain cash severance payments and/or other benefits in the event of a termination of the employee’s employment as a result of a “Qualifying Termination,” as such terms are defined herein.

By this instrument, the Company amends and restates the Plan effective September 25, 2013 to comply with applicable changes in the law and make certain other changes.

The Company may adopt one or more trusts to serve as a possible source of funds for the payment of benefits under the Plan.

1.2Purpose

Through the Plan, the Company intends to provide severance benefits within the meaning of Department of Labor Regulation section 2510.3-2.  Accordingly, it is intended that the Plan will not constitute a “qualified plan” subject to the limitations of section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”), nor will it constitute a “funded plan,” for purposes of such requirements.  It also is intended that the Plan will not qualify as a pension plan within the meaning of section 3(2) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”); but, rather, will constitute a welfare plan within the meaning of section 3(1) of ERISA.

End of Article I

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ARTICLE II
DEFINITIONS AND CONSTRUCTION

2.1Definitions

When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase will generally be a term defined in this Section 2.1.  The following words and phrases with the initial letter capitalized will have the meaning set forth in this Section 2.1, unless a different meaning is required by the context in which the word or phrase is used.

(a)“Affiliate” means a corporation that is a member of a controlled group of corporations (as defined in section 414(b) of the Code) that includes the Company, any trade or business (whether or not incorporated) that is in common control (as defined in section 414(c) of the Code) with the Company, or any entity that is a member of the same affiliated service group (as defined in section 414(m) of the Code) as the Company.

(b)“Base Salary” means the Covered Executive’s annual gross rate of pay including amounts reduced from the Employee’s compensation and contributed on the Employee’s behalf as deferrals under any qualified or other employee benefit plans sponsored by the Employer in effect immediately prior to a Qualifying Termination.

(c)“Board” means the Compensation Committee of the Board of Directors of the Company, unless the Charter of the Compensation Committee does not authorize the Compensation Committee to act with respect to a matter, in which event it will mean the full Board of Directors of the Company.

(d)“Cause” means the Covered Executive’s:

(i)Violation of the Company’s general work or conduct rules, policies or procedures or local rules;

(ii)Indictment for a felony or crime involving moral turpitude;

(iii)Commission of an act constituting fraud, deceit or material misrepresentation with respect to the Company;

(iv)Recurrent use of alcohol or prescribed medications at work or otherwise such that, in the Company’s sole discretion, the Covered Executive’s job performance is impaired;

(v)Embezzlement of the Company’s or its Affiliates’ assets or funds; or

(vi)Commission of any negligent or willful act or omission that causes material detriment (by reason, without limitation, of financial exposure or loss, damage to reputation or goodwill, or exposure to civil damages or criminal penalties or other prosecutorial action by any governmental authority) to the Company or any Affiliate.

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(e)“Change of Control” means any of the following occurrences:

(i)any “person” as such term is used in Sections 3(a)(9) and 13(d)) of the Securities Exchange Act of 1934 (“Person”) becomes a “beneficial owner”, as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of thirty percent (30%) or more of the voting stock of the Company;

(ii)the majority of the Board of Directors of the Company consists of individuals other than “incumbent” directors, which term means members of the Board of Directors of the Company as of the Effective Date; provided that any person becoming a director after such date whose election or nomination for election was supported by two-thirds (2/3) of the directors who then comprised the incumbent directors will be considered to be an incumbent director;

(iii)the Company adopts any plan of liquidation providing for distribution of all or substantially all of Company’s assets;

(iv)all or substantially all of the assets or business of Company is disposed of pursuant to a merger, consolidation or other transaction (unless the stockholders of Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the voting stock of Company immediately prior to such merger, consolidation or other transaction, all of the voting stock or other ownership interests of the entity or entities, if any, that succeed to the business of Company); or

(v)the Company combines with another company and is the surviving corporation but, immediately after the combination, the stockholders of Company immediately prior to the combination hold, directly or indirectly, fifty percent (50%) or less of the voting stock of the combined company (there being excluded from the number of shares held by such stockholders, but not from the voting stock of the combined company, any shares received by affiliates of such, other company in exchange for stock of such other company).

For purposes of the Change of Control definition, “Company” will include any entity that succeeds to all or substantially all, of the business of the Company and “voting stock” will mean securities or any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation.

(f)“COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

(g)“Code” means the Internal Revenue Code of 1986, as amended from time to time.

(h)“Company” means Zale Corporation.

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(i)“Covered Executive” means each Employee who is employed at the director level, or an equivalent position, or above, or in any position deemed covered by either the Plan Administrator or Daily Administrator in his sole and absolute discretion.  The term Covered Executive will not include an Employee who is covered by another severance plan sponsored by the Company or an Affiliate or who is a party to an agreement with the Company or an Affiliate that provides for the payment of severance in the event of a Qualifying Termination in an amount that, in the aggregate, is greater than the amount provided in Section 3.1(a).

(j)“Daily Administrator” means the individual, department or committee appointed by the Plan Administrator to handle the day-to-day administration of the Plan.

(k)“Effective Date” means September 25, 2013 except as specifically provided otherwise herein.

(l)“Employee” means each employee receiving remuneration, or who is entitled to remuneration, for services rendered to the Employer, in the legal relationship of employer and employee on a regular full-time or part-time basis.  The term “Employee” does not include a temporary employee (i.e., an individual employed for a period that is not expected to exceed six (6) months) or a consultant, an independent contractor or a leased employee even if such consultant, independent contractor or leased employee is subsequently determined by the Employer, the Internal Revenue Service, the Department of Labor or a court of competent jurisdiction to be a common law employee of the Employer.  Further, the term “Employee” does not include a person who is receiving severance pay from the Employer.

(m)“Employer” means the Company and each Affiliate that has adopted the Plan as a participating employer.  Unless provided otherwise by the Company, all Affiliates will be deemed to have adopted the Plan.  An entity will cease to be a participating employer as of the date such entity ceases to be an Affiliate or otherwise terminates its participation in the Plan.

(n)“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

(o)“Good Reason” means a substantial and material reduction, as determined by the Plan Administrator in its sole discretion, in the Covered Executive’s Base Salary, duties, responsibilities or level or authority or responsibility, but will not include a reduction in duties, responsibilities or level of authority or responsibility resulting from gradual store closures.

If the Covered Executive believes that an event constituting Good Reason has occurred, the Covered Executive must notify the Daily Administrator of that belief within ninety (90) days of the occurrence of the Good Reason event, which notice will set forth the basis for that belief.  The Daily Administrator will have thirty (30) days after receipt of such notice (the “Determination Period”) in which to either rectify such event, determine that an event constituting Good Reason does not exist, or determine that an event constituting Good Reason exists.  If the Daily Administrator does not take any of such actions within the Determination Period, the Covered Executive may terminate his employment with the Employer for

4

Good Reason during the fourteen (14) day period following the end of the Determination Period by giving written notice to the Employer.  If the Daily Administrator determines that Good Reason does not exist, then (A) the Covered Executive will not be entitled to rely on or assert such event as constituting Good Reason, and (B) the Covered Executive may file a claim contesting such determination and seeking benefits pursuant to Article IV within thirty (30) days after the Covered Executive’s receipt of written notice of the Daily Administrator’s determination.  A termination of employment for Good Reason will be treated as a Qualifying Termination for purposes of the Plan.

(p)“Plan” means The Executive Severance Plan for Zale Corporation and its Affiliates set forth herein and as the same may be amended from time to time.

(q)“Plan Administrator” means the Human Resources Department of the Company or any other person, committee or entity, appointed by the Board to hold such position.

(r)“Plan Year” means the fiscal year of the Plan, which will commence on January 1 each year and end on December 31 of such year.

(s)“Qualifying Termination” means:

(i)the involuntary Termination of Employment of a Covered Executive by the Employer for a reason other than Cause;

(ii)the Covered Executive’s Termination of Employment for Good Reason; or

(iii)the involuntary Termination of Employment a Covered Executive by the Employer due to the liquidation of the assets of the Company or any line of business for which the Covered Executive is employed.

Further, a Qualifying Termination will not occur by reason of the Termination of Employment by the Covered Executive by reason of a sale or disposition by the Company of a unit or facility in which the Covered Executive is employed if (A) the purchaser or successor extends an offer of employment to the Covered Executive on terms that include substantially the same (or greater) Base Salary and which would not require a commute to work that is twenty-five (25) miles longer than the commute of the Covered Executive as of the date of the sale or disposition, (B) the Covered Executive accepts other employment with the purchaser or successor or with any other entity related to such purchaser or successor, (C) the Termination of Employment is caused by death or disability of the Covered Executive, or (D) the Termination of Employment occurs in connection with a transfer from one Affiliate to another Affiliate if the Covered Executive refuses to make the transfer and, if the transfer requires the Covered Executive to be based at a location that requires the Covered Executive to commute more than fifty (50) miles more than his current commute, the Employer or Affiliate has agreed to pay relocation costs consistent with its general policy.

(t)“Senior Executive Officer” means a Senior Vice President of the Company and/or any officer above a Senior Vice President.

5

(u)“Severance Pay” means the Covered Executive’s Base Salary as of the date of the Qualifying Termination or, in the case of a Termination of Employment for Good Reason, the Covered Executive’s Base Salary as of the date of the event giving rise to Good Reason if greater.

(v)“Severance Period” means the period described in Section 3.1(a).

(w)“Termination of Employment” means, the date on which a Covered Executive ceases to perform services for the Employer.  If the Covered Executive ceases to perform services for the Employer but continues to perform services for another Affiliate, he will not incur a Termination of Employment even if such other Affiliate has not adopted the Plan as an Employer.  Further, any additional transfer of employment between Affiliates will not constitute a Termination of Employment.

(x)“Year of Service” means a twelve (12) month period of time for which the Covered Executive has been employed by the Company or its Affiliates as of the date of the Qualifying Termination, including periods of time during which the Covered Executive was paid for reasons other than the performance of duties.  Years of Service must be consecutive to be counted under the Plan.

2.2Construction

If any provision of the Plan is determined to be for any reason invalid or unenforceable, the remaining provisions of the Plan will continue in full force and effect.  All of the provisions of the Plan will be construed and enforced in accordance with the laws of the State of Texas and will be administered according to the laws of such state, except as otherwise required by ERISA, the Code or other applicable federal law. When delivery to the Plan Administrator, Daily Administrator or the Covered Executive is required under this Plan, such delivery requirement will be satisfied by delivery to a person or persons designated by the Plan Administrator, Daily Administrator or the Covered Executive, as applicable.  Delivery will be deemed to have occurred only when the form or other communication is actually received.  Headings and subheadings are for the purpose of reference only and are not to be considered in the construction of the Plan.  The pronouns “he,” “him” and “his” used in the Plan will also refer to similar pronouns of the female gender unless otherwise qualified by the context.

2.3409A Compliance

The Plan is intended to be exempt from the requirements of section 409A of the Code.  The provisions of the Plan will be construed and administered in a manner that enables the Plan to satisfy the severance plan exemption under section 409A of the Code.

End of Article II

6

ARTICLE III
SEVERANCE BENEFITS

3.1Severance Benefits

A Covered Executive who incurs a Qualifying Termination will, subject to the limitations contained in the Plan, receive the following severance benefits.

(a)Severance Period.  The Covered Executive will be entitled to the payment of Severance Pay (i.e., the continuation of his Base Pay) over the Severance Period set forth below:

COVERED EXECUTIVE	SEVERANCE PERIOD
Senior Executive Officers	Six (6) months if less than One Year of Service and One (1) Year following one year of service
All other Covered Executives	One (1) week per Year of Service up to a maximum of twenty-six (26) weeks, with a minimum of twelve (12) weeks

Such Severance Pay will be paid in installments commencing as of the date of the Qualifying Termination pursuant to the Employer’s ordinary payroll schedule for the duration of the Severance Period; provided, however, that if the Covered Executive’s Qualifying Termination occurs within twenty-four (24) months following a Change of Control, such Severance Pay will be paid in a single lump sum.  Further, in the event a Covered Executive has incurred Qualifying Termination and is receiving Severance Pay pursuant to this Section 3.1 and a Change of Control occurs, the remainder of such payments will be accelerated and paid to Executive in a lump sum on the next scheduled pay date.  All payments pursuant to the Plan will be taxable as ordinary income when received and subject to appropriate withholding of income taxes and reported on Form W-2.

The total Severance Payment amount will be reduced to recover any outstanding financial obligations the Covered Executive has to the Employer or any Affiliate. For this purpose, financial obligations include, but are not limited to, advances, loans, paid time off deficits, credit card balances, and replacement costs for unreturned Employer property, materials and records.  Further the payment of Severance Pay is expressly contingent upon the return of all Employer property and, if requested in writing by the Employer, confirmation in writing of such return by the Covered Executive.

Except as otherwise provided herein, a Covered Executive who incurs a Qualifying Termination will have formally terminated his employment relationship with the Employer as of the date of such Termination of Employment and will not be deemed to be an Employee at any time during the Severance Period or thereafter.

(b)Other Accrued Obligations.  The Covered Executive will be entitled to payment of all accrued Base Salary, accrued time off which is payable upon termination, if

7

any, and any other accrued and unpaid obligations as of the date of the Qualifying Termination.  Such accrued obligations will be included and paid as part of the Covered Executive’s final paycheck from the Employer.

(c)Continued Medical Benefits.  During the Severance Period, the Covered Executive and his dependents will be entitled to Employer-provided continued coverage under any medical, dental, vision and life insurance benefit programs maintained by the Employer in which such persons were participating immediately prior to the date of the Termination of Employment subject, in the case of insurance benefits to the permissibility of such continuation of coverage under any applicable insurance, stop-loss or similar policies (which the Employer will use reasonable efforts to obtain).  During the Severance Period, the Employer will be responsible for paying the cost of such continuation coverage subject to the Covered Executive’s payment of the customary employee premiums for such coverage; provided, however, that that to the extent required to comply with the applicable nondiscrimination requirements under the Code, including, but not limited to section 105(h) of the Code, all or a portion of the cost of such coverage will be imputed to the Covered Executive as wages and reported on Form W-2.  At the end of the Severance Period, the Covered Executive and his dependents will be eligible to elect to continue such coverages pursuant to COBRA but will be responsible for paying the entire cost of such coverage on an after-tax basis pursuant to COBRA in accordance with the applicable administrative procedures under such benefit programs for the payment of premiums.  Any coverage provided pursuant to this Section 3.1(c) will be terminated or limited to the extent substantially comparable coverage is otherwise provided by (or available from or under) any other employer of the Covered Executive or his spouse.  The Covered Executive must notify the Daily Administrator of the availability of any such other employer benefit coverages within thirty (30) days following availability.

The provisions of this Section 3.1(c) will not prohibit the Company from changing the terms of such medical, dental, vision or life insurance benefit programs provided that any such changes apply generally to the senior management of the Company and its Affiliates (e.g., the Company may switch insurance carriers or preferred provider organizations).

(d)Outplacement Services.  For a period of three (3) months following the date of the Qualifying Termination, the Covered Executive will be entitled to receive outplacement services, such as resume preparation, presentation skill assessment and career counseling.  No cash payment will be made in lieu of outplacements services under this Plan.

(e)Benefits Are Not Duplicative.  To the extent that a Covered Executive is entitled to severance pay or similar benefits as a result of a Covered Termination pursuant to another agreement with, or plan of, the Company or an Affiliate, a court order, an arbitration award or other arrangement, the Severance Pay provided for hereunder shall be reduced on a dollar-for-dollar basis by any severance pay or similar benefits received, or to be received, by the Covered Employee pursuant to such other agreement, plan, order, award or other arrangement.

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3.2Distributions on Account of Death of the Covered Executive During the Severance Period

If a Covered Executive dies during the Severance Period specified in Section 3.1(a), the following benefits will be payable:

(a)Severance Pay.  Any remaining Severance Pay payable to the Covered Executive as of the date of his death will continue to be paid to the Covered Executive’s estate pursuant to Section 3.1(a).

(b)Other Accrued Obligations.  Any unpaid Base Salary, time off and any other accrued and unpaid obligations that remain outstanding as of the date of the Covered Executive’s death will be paid to the Covered Executive’s estate pursuant to Section 3.1(b).

(c)Continued Medical Benefits.  The Covered Executive’s dependents will be entitled to continue their coverage under any medical, dental, vision and life insurance benefit programs maintained by the Employer in which such persons were participating immediately prior to the date of the Covered Executive’s death pursuant to the provisions of Section 3.1(c) (i.e., to the extent that the Covered Executive dies within the Severance Period, such Employer provided coverage will continue to be provided to the Covered Executive’s dependents for the remainder of the Severance Period).  Such dependents also will be entitled to elect to continue their medical, dental or vision benefits coverages pursuant COBRA following the end of the Severance Period.

(d)Outplacement Services.  Any outplacement service benefits payable to the Covered Executive pursuant to Section 3.1(d) will cease as of the date of the Covered Executive’s death.

3.3Alternate Plan Terms

In connection with a Qualifying Termination, the Chief Executive Officer or Head of the Human Resources Department of the Company reserve the right to modify the terms of this Plan with respect to any Covered Executive (e.g., to provide different benefits than those set forth herein).  Such modified terms will be set forth in the Covered Executive’s Severance Agreement and General Release described in Section 3.4 or in such other form as determined by the Chief Executive Officer or Head of Human Resources Department in their sole and absolute discretion.

3.4Conditions to Payment of Severance Benefits

As a condition of obtaining severance benefits under the Plan, the Employer may require the Covered Executive to execute a Severance Agreement and General Release in a form customarily used by the Employer.  Such Severance Agreement and General Release may to the extent permitted by applicable law contain restrictive covenants regarding non-competition, confidentiality, non-disparagement and non-solicitation as well as a general release of claims against the Employer and its Affiliates.

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3.5Reemployment of Covered Executive.

If the Covered Executive is reemployed by the Employer, during the Severance Period and the amount of the Employee’s Base Pay for such new position is less than his Severance Pay, then such Employee will continue to receive Severance Pay equal to the amount of the difference between the Base Pay for the new position and the Severance Pay for the remainder of the Severance Period.  Conversely, if the Covered Executive is reemployed by the Employer, during the Severance Period and the Base Pay for such new position is more than his Severance Pay, then payment of such Severance Pay will cease.

In all cases, the continued medical benefits and outplacement services described in Sections 3.1(c) and 3.1(d) will cease upon the Covered Executive’s reemployment with the Employer.

End of Article III

10

ARTICLE IV
ADMINISTRATION

4.1The Plan Administrator

The overall administration of the Plan will be the responsibility of the Plan Administrator.

4.2Powers of Plan Administrator

The Plan Administrator will have sole and absolute discretion regarding the exercise of its powers and duties under the Plan.  In order to effectuate the purposes of the Plan, the Plan Administrator will have the following powers and duties:

(a)To appoint the Daily Administrator;

(b)To review and render decisions respecting a denial of a claim for benefits under the Plan;

(c)To construe the Plan and to make equitable adjustments for any mistakes or errors made in the administration of the Plan; and

(d)To determine and resolve, in its sole and absolute discretion, all questions relating to the administration of the Plan and any trust established to secure the assets of the Plan:

(i)when differences of opinion arise between the Company, an Affiliate, the Daily Administrator, the trustee, a Covered Executive, or any of them, and

(ii)whenever it is deemed advisable to determine such questions in order to promote the uniform and nondiscriminatory administration of the Plan for the greatest benefit of all parties concerned.

The foregoing list of express powers is not intended to be either complete or conclusive, and the Plan Administrator will, in addition, have such powers as it may reasonably determine to be necessary or appropriate in the performance of its powers and duties under the Plan.

4.3Appointment of Daily Administrator

The Plan Administrator will appoint the Daily Administrator, who will have the responsibility and duty to administer the Plan on a daily basis.  The Plan Administrator may remove the Daily Administrator with or without cause at any time.  The Daily Administrator may resign upon written notice to the Plan Administrator.  If the Plan Administrator does not appoint an individual, department or committee to serve as the Daily Administrator, the Plan Administrator will be the Daily Administrator.

4.4Duties of Daily Administrator

The Daily Administrator will have sole and absolute discretion regarding the exercise of its powers and duties under the Plan.  The Daily Administrator will have the following powers and duties:

11

(a)To direct the administration of the Plan in accordance with the provisions herein set forth;

(b)To adopt rules of procedure and regulations necessary for the administration of the Plan, provided such rules are not in consistent with the terms of the Plan;

(c)To determine all questions with regard to rights of Covered Executives and dependents under the Plan including, but not limited to, questions involving eligibility of an Employee to participate in the Plan and the amount of a Covered Executive’s benefits;

(d)To make all final determinations and computations concerning the benefits to which the Covered Executive or his estate is entitled under the Plan;

(e)To enforce the terms of the Plan and any rules and regulations adopted by the Plan Administrator;

(f)To review and render decisions respecting a claim for a benefit under the Plan;

(g)To furnish the Employer with information that the Employer may require for tax or other purposes;

(h)To engage the service of counsel (who may, if appropriate, be counsel for the Employer), actuaries, and agents whom it may deem advisable to assist it with the performance of its duties;

(i)To prescribe procedures to be followed by Covered Executives in obtaining benefits;

(j)To receive from the Employer and from Covered Executives such information as is necessary for the proper administration of the Plan;

(k)To create and maintain such records and forms as are required for the efficient administration of the Plan;

(l)To make all initial determinations and computations concerning the benefits to which any Covered Executive is entitled under the Plan;

(m)To give the trustee of any trust established to serve as a source of funds under the Plan specific directions in writing with respect to:

(i)making distribution payments, giving the names of the payees, specifying the amounts to be paid and the time or times when payments will be made; and

(ii)making any other payments which the trustee is not by the terms of the trust agreement authorized to make without a direction in writing by the Daily Administrator;

(n)To comply with all applicable lawful reporting and disclosure requirements of ERISA;

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(o)To comply (or transfer responsibility for compliance to the trustee) with all applicable federal income tax withholding requirements for benefit distributions; and

(p)To construe the Plan, in its sole and absolute discretion, and make equitable adjustments for any errors made in the administration of the Plan.

The foregoing list of express duties is not intended to be either complete or conclusive, and the Daily Administrator will, in addition, exercise such other powers and perform such other duties as it may deem necessary, desirable, advisable or proper for the supervision and administration of the Plan.

4.5Indemnification of Plan Administrator and Daily Administrator

To the extent not covered by insurance, or if there is a failure to provide full insurance coverage for any reason, and to the extent permissible under corporate charters, by-laws and other applicable laws and regulations, the Company agrees to hold harmless and indemnify the Plan Administrator and Daily Administrator against any and all claims and causes of action by or on behalf of any and all parties whomsoever, and all losses therefrom, including, without limitation, costs of defense and reasonable attorneys’ fees, based upon or arising out of any act or omission relating to or in connection with the Plan other than losses resulting from the Plan Administrator’s, or any such person’s commission of fraud or willful misconduct.

4.6Claims for Benefits.

(a)Initial Claim.  In the event that a Covered Executive or his estate claims (a “claimant”) to be eligible for benefits, or claims any rights under the Plan or seeks to challenge the validity or terms of the Severance Agreement and General Release described in Section 3.4, such claimant must file a written claim with the Daily Administrator.  Likewise, any claimant who feels unfairly treated as a result of the administration of the Plan must file a written claim, setting forth the basis of the claim, with the Daily Administrator.  In connection with the determination of a claim, or in connection with review of a denied claim, the claimant may examine the Plan and any other pertinent documents generally available to Covered Executives that are specifically related to the claim.

A written notice of the disposition of any such claim will be delivered to the claimant within ninety (90) days after the claim is filed with the Daily Administrator.  Such notice will refer, if appropriate, to pertinent provisions of the Plan, will set forth in writing the reasons for denial of the claim if a claim is denied (including references to any pertinent provisions of the Plan) and, where appropriate, will describe any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary.  If the claim is denied, in whole or in part, the claimant will also be notified of the Plan’s claim review procedure and the time limits applicable to such procedure, including the claimant’s right to arbitration following an adverse benefit determination on review as provided below.  All benefits provided in the Plan as a result of the disposition of a claim will be paid as soon as practicable following receipt of proof of entitlement, if requested.

13

(b)Request for Review.  Within ninety (90) days after delivery of written notice of the Daily Administrator’s disposition of the claim, the claimant may file with the Plan Administrator a written request for review of his claim.  In connection with the request for review, the claimant will be entitled, at the claimants’ expense, to be represented by counsel and will be given, upon request and free of charge, reasonable access to all pertinent documents for the preparation of his claim.  If the claimant does not file a written request for review within ninety (90) days after receiving written notice of the Daily Administrator’s disposition of the claim, the claimant will be deemed to have accepted the Daily Administrator’s written disposition, unless the claimant was physically or mentally incapacitated so as to be unable to request review within the ninety (90) day period.

(c)Decision on Review.  After delivery to the Plan Administrator of a written application for review of his claim, the Plan Administrator will review the claim taking into account all comments, documents, records and other information submitted by the claimant regarding the claim without regard to whether such information was considered in the initial benefit determination.  The Plan Administrator will notify the claimant of its decision by personal delivery or by certified or registered mail to his last known address in the records of the Employer.

A decision on review of the claim will be made by the Plan Administrator within sixty (60) days.  If special circumstances require an extension of the ninety (90) day period, the Plan Administrator will so notify the claimant and a decision will be rendered within one hundred twenty (120) days of receipt of the request for review.

The decision of the Plan Administrator will be in writing and will include the reasons for the decision presented in a manner calculated to be understood by the claimant and will contain references to all relevant Plan provisions on which the decision was based.  Such decision will also advise the claimant that he may receive upon request, and free of charge, reasonable access to and copies of all documents, records and other information relevant to his claim and will inform the claimant of his right to file arbitration in the case of an adverse decision regarding his appeal.  Subject to the right to arbitration, the decision of the Plan Administrator will be final and conclusive.

(d)Arbitration.  In the event that the claims procedure described in this Section 4.6 does not result in an outcome thought by the claimant to be in accordance with the Plan document, he may appeal to a third party neutral arbitrator.  The claimant must appeal to an arbitrator within sixty (60) days after receiving the Plan Administrator’s denial or deemed denial of his request for review and before bringing suit in court.  The arbitration will be conducted pursuant to the American Arbitration Association (“AAA”) Rules on Employee Benefit Claims.

The arbitrator will be mutually selected by the claimant and the Plan Administrator from a list of arbitrators who are experienced in severance plan benefit matters that is provided by the AAA.  If the parties are unable to agree on the selection of an arbitrator within ten (10) days of receiving the list from the AAA, the AAA will appoint an arbitrator.  The arbitrator’s review will be limited to interpretation of the Plan document in the context of the particular facts involved.

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The claimant, the Plan Administrator and the Employer agree to accept the award of the arbitrator as binding, and all exercises of power by the arbitrator hereunder will be final, conclusive and binding on all interested parties, unless found by a court of competent jurisdiction, in a final judgment that is no longer subject to review or appeal, to be arbitrary and capricious.  The claimant, Plan Administrator and the Employer agree that the venue for the arbitration will be in Dallas, Texas.  The costs of arbitration will be paid by the Employer; the costs of legal representation for the claimant or witness costs for the claimant will be borne by the claimant; provided, that, as part of his award, the arbitrator may require the Employer to reimburse the claimant for all or a portion of such amounts.

The following discovery may be conducted by the parties: interrogatories, demands to produce documents, requests for admissions and oral depositions.  The arbitrator will resolve any discovery disputes by such pre-hearing conferences as may be needed.  The Employer, Plan Administrator and claimant agree that the arbitrator will have the power of subpoena process as provided by law.  Disagreements concerning the scope of depositions or document production, its reasonableness and enforcement of discovery requests will be subject to agreement by the Employer and the claimant or will be resolved by the arbitrator.  All discovery requests will be subject to the proprietary rights and rights of privilege and other protections granted by applicable law to the Employer and the claimant and the arbitrator will adopt procedures to protect such rights.  With respect to any dispute, the Employer, Plan Administrator and the claimant agree that all discovery activities will be expressly limited to matters directly relevant to the dispute and the arbitrator will be required to fully enforce this requirement.

The arbitrator will have no power to add to, subtract from, or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan.  Nonetheless, the arbitrator will have absolute discretion in the exercise of its powers in the Plan.  Arbitration decisions will not establish binding precedent with respect to the administration or operation of the Plan.

4.7Receipt and Release of Necessary Information

In implementing the terms of the Plan, the Plan Administrator and Daily Administrator, as applicable, may, without the consent of or notice to any person, release to or obtain from any insuring entity or other organization or person any information, with respect to any person, that the Plan Administrator or Daily Administrator deems to be necessary for such purposes.  Any Covered Executive or estate claiming benefits under the Plan will furnish to the Plan Administrator or Daily Administrator, as applicable, such information as may be necessary to determine eligibility for and amount of benefit, as a condition of claiming and receiving such benefit.

4.8Overpayment and Underpayment of Benefits

The Daily Administrator may adopt, in its sole and absolute discretion, whatever rules, procedures and accounting practices are appropriate in providing for the collection of any overpayment of benefits.  If a Covered Executive or his estate receives an

15

underpayment of benefits, the Daily Administrator will direct that payment be made as soon as practicable to make up for the underpayment.  If an overpayment is made to a Covered Executive or his estate, for whatever reason, the Daily Administrator may, in its sole and absolute discretion, withhold payment of any further benefits under the Plan until the overpayment has been collected or may require repayment of benefits paid under the Plan without regard to further benefits to which the Covered Executive or his estate may be entitled.

End of Article IV

16

ARTICLE V
OTHER BENEFIT PLANS OF THE COMPANY

5.1Other Plans

Nothing contained in the Plan will prevent a Covered Executive prior to his death, or a Covered Executive’s estate, spouse or dependents after such Covered Executive’s death, from receiving, in addition to any payments provided for under the Plan, any payments provided for under any other plan or benefit program of the Employer, or which would otherwise be payable or distributable to him, his estate, surviving spouse or dependents under any plan or policy of the Employer or otherwise.  Nothing in the Plan will be construed as preventing the Company or any of its Affiliates from establishing any other or different plans providing for current or deferred compensation for employees and/or members of the Board.

End of Article V

17

ARTICLE VI
AMENDMENT AND TERMINATION OF THE PLAN

6.1Continuation

The Company intends to continue the Plan indefinitely, but nevertheless assumes no contractual obligation beyond the promise to pay the benefits described in the Plan.

6.2Amendment of Plan

The Company reserves the right in its sole and absolute discretion to amend the Plan in any respect at any time.

6.3Termination of Plan

The Company may terminate or suspend the Plan in whole or in part at any time.

6.4Termination of Affiliate’s Participation

The Company may terminate an Affiliate’s participation in the Plan at any time by providing written notice to the Affiliate.  The effective date of any such termination will be the later of the date specified in the notice of the termination of participation or the date on which the Daily Administrator can administratively implement such termination.

6.5Limitation on Termination Right

Notwithstanding the foregoing or any other provision hereof, the Company and its Affiliates may not reduce the benefits payable upon a Qualifying Termination subsequent to its occurrence.

End of Article VI

18

ARTICLE VII
MISCELLANEOUS

7.1No Contract of Employment

Nothing contained in the Plan will be construed as a contract of employment between the Employer and a Covered Executive, or as a right of any Covered Executive to continue in the employment of the Employer, or as a limitation of the right of the Employer to discharge any of its Covered Executives, with or without cause.

7.2Successor to the Company

The Company will require any successor or assign (whether direct or indirect, by purchase, exchange, lease, merger, consolidation, or otherwise) to all or substantially all of the property and assets of the Company and its Affiliates taken as a whole to expressly assume the Plan and to agree to perform under this Plan in the same manner and to the same extent that the Company and its Affiliates would be required to perform it if no such succession had taken place.  This Section 7.2 will not require any successor or assign of an Affiliate (whether direct or indirect, by purchase, exchange, lease, merger, consolidation or otherwise) to all or substantially all of the property and assets of such Affiliate to continue the Plan.

7.3Provisions Binding

All of the provisions of the Plan will be binding upon the Company and its Affiliates and any successor to the Company or any such Affiliate.  Likewise, the provisions of the Plan will be binding upon all persons who will be entitled to any benefit hereunder, their heirs and personal representatives.

End of Article VII

19

IN WITNESS WHEREOF, this Plan has been executed effective as of September 25, 2013, except as specifically provided otherwise herein.

ZALE CORPORATION
By:	/s/ Theo Killion
	Chief Executive Officer

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EX-31.1

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EXHIBIT 31.1

CERTIFICATION

I, Theo Killion, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q of Zale Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a—15(f) and 15d—15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 7, 2014 By: /s/ THEO KILLION
Theo Killion
Chief Executive Officer
(principal executive officer of the registrant)

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EXHIBIT 31.1

CERTIFICATION

EX-31.2

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EXHIBIT 31.2

CERTIFICATION

I, Matthew W. Appel, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q of Zale Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 7, 2014 By: /s/ MATTHEW W. APPEL
Matthew W. Appel
Chief Administrative Officer

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EXHIBIT 31.2

CERTIFICATION

EX-31.3

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EXHIBIT 31.3

CERTIFICATION

I, Thomas A. Haubenstricker, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q of Zale Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a—15(f) and 15d—15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 7, 2014 By: /s/ THOMAS A. HAUBENSTRICKER
Thomas A. Haubenstricker
Chief Financial Officer
(principal financial officer of the registrant)

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EXHIBIT 31.3

CERTIFICATION

EX-32.1

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EXHIBIT 32.1

Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

        The undersigned, as the Chief Executive Officer of Zale Corporation, certifies, to the best of his knowledge, that the Quarterly Report on Form 10-Q for the quarter ended January 31, 2014, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Zale Corporation at the dates and for the periods indicated. The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose.

Date: March 7, 2014 By: /s/ THEO KILLION
Theo Killion
Chief Executive Officer
(principal executive officer of the registrant)

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EXHIBIT 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

EX-32.2

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EXHIBIT 32.2

Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

        The undersigned, as the Chief Administrative Officer of Zale Corporation, certifies, to the best of his knowledge, that the Quarterly Report on Form 10-Q for the quarter ended January 31, 2014, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Zale Corporation at the dates and for the periods indicated. The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose.

Date: March 7, 2014 By: /s/ MATTHEW W. APPEL
Matthew W. Appel
Chief Administrative Officer

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EXHIBIT 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

EX-32.3

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EXHIBIT 32.3

Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

        The undersigned, as the Chief Financial Officer of Zale Corporation, certifies, to the best of his knowledge, that the Quarterly Report on Form 10-Q for the quarter ended January 31, 2014, which accompanies this certification fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Zale Corporation at the dates and for the periods indicated. The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose.

Date: March 7, 2014 By: /s/ THOMAS A. HAUBENSTRICKER
Thomas A. Haubenstricker
Chief Financial Officer
(principal financial officer of the registrant)

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EXHIBIT 32.3

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

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DEFERRED REVENUE (Details) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
Change in deferred revenue associated with the sale of warranties
Deferred revenue, beginning of period	$ 183,224,000	$ 199,239,000	$ 191,245,000	$ 208,516,000
Warranties sold	43,907,000	44,569,000	69,841,000	69,549,000
Revenue recognized	(40,460,000)	(41,331,000)	(74,415,000)	(75,588,000)
Deferred revenue, end of period	186,671,000	202,477,000	186,671,000	202,477,000
Translation adjustment for fluctuation in Canadian currency rate (amounts included in warranties sold)	1,800,000		2,300,000
Gross margin	$ 32,700,000	$ 34,200,000	$ 60,100,000	$ 62,300,000
Optional theft protection | Fine Jewelry
DEFERRED REVENUE
Contract period of arrangement			2 years
Revenue recognition period			2 years
Lifetime warranty
DEFERRED REVENUE
Contract period of arrangement			8 years
Watch warranty | Fine Jewelry
DEFERRED REVENUE
Contract period of arrangement			2 years
Breakage warranty | Fine Jewelry
DEFERRED REVENUE
Contract period of arrangement			1 year
Breakage warranty | Kiosk
DEFERRED REVENUE
Contract period of arrangement			1 year

XML

OTHER CHARGES (GAINS) (Details) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
OTHER CHARGES (GAINS)
Store impairments	$ 500,000	$ 900,000	$ 488,000	$ 851,000
De Beers settlement				$ 1,900,000

XML

DEFERRED REVENUE (Tables)

6 Months Ended

Jan. 31, 2014

DEFERRED REVENUE

Schedule of change in deferred revenue associated with the sale of warranties

The change in deferred revenue associated with the sale of warranties is as follows (in thousands):

	Three Months Ended January 31,						Six Months Ended January 31,
	2014			2013			2014			2013
Deferred revenue, beginning of period	$	183,224		$	199,239		$	191,245		$	208,516
Warranties sold(a)		43,907			44,569			69,841			69,549
Revenue recognized		(40,460	)		(41,331	)		(74,415	)		(75,588	)
Deferred revenue, end of period	$	186,671		$	202,477		$	186,671		$	202,477

(a)

Warranty sales for the three and six months ended January 31, 2014 include approximately $1.8 million and $2.3 million, respectively, related to the depreciation in the Canadian currency rate on the beginning of the period deferred revenue balance. The change in the Canadian currency rate did not have a significant impact on the beginning of the period deferred revenue balance for the three and six months ended January 31, 2013.

XML

SEGMENTS (Details) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014 item	Jan. 31, 2013
SEGMENTS
Number of business segments			3
SEGMENTS
Total revenues	$ 656,449,000	$ 670,752,000	$ 1,019,063,000	$ 1,028,220,000
Total depreciation and amortization	7,461,000	8,388,000	15,122,000	17,034,000
Total operating earnings	59,522,000	51,273,000	37,491,000	28,270,000
De Beers settlement				1,900,000
Unallocated
SEGMENTS
Total depreciation and amortization	1,991,000	2,306,000	4,016,000	4,692,000
Total operating earnings	(10,682,000)	(8,046,000)	(19,349,000)	(13,410,000)
Internal carrying costs offset	17,100,000	16,900,000	32,900,000	32,000,000
De Beers settlement				1,900,000
Fine Jewelry
SEGMENTS
Total revenues	580,821,000	590,131,000	894,519,000	897,091,000
Total depreciation and amortization	4,954,000	5,393,000	10,013,000	10,914,000
Total operating earnings	58,273,000	47,712,000	46,272,000	31,010,000
Fine Jewelry | Foreign operations
SEGMENTS
Revenue related to foreign operations	111,200,000	120,400,000	174,100,000	183,400,000
Kiosk
SEGMENTS
Total revenues	72,801,000	77,905,000	119,000,000	125,723,000
Total depreciation and amortization	516,000	689,000	1,093,000	1,428,000
Total operating earnings	10,622,000	10,513,000	8,067,000	8,764,000
All Other
SEGMENTS
Total revenues	2,827,000	2,716,000	5,544,000	5,406,000
Total operating earnings	$ 1,309,000	$ 1,094,000	$ 2,501,000	$ 1,906,000

XML

LONG-TERM DEBT

6 Months Ended

Jan. 31, 2014

LONG-TERM DEBT

LONG-TERM DEBT

4. LONG—TERM DEBT

        Long-term debt consists of the following (in thousands):

	January 31,
	2014		2013
Revolving credit agreement	$	363,000	$	390,700
Senior secured term loan		80,000		80,000
Capital lease obligations		2,267		3,275
	$	445,267	$	473,975

• Amended and Restated Revolving Credit Agreement

        On July 24, 2012, we amended and restated our revolving credit agreement (the "Amended Credit Agreement") with Bank of America, N.A. and certain other lenders. The Amended Credit Agreement totals $665 million, including a $15 million first-in, last-out facility (the "FILO Facility"), and matures in July 2017. Borrowings under the Amended Credit Agreement (excluding the FILO Facility) are limited to a borrowing base equal to 90 percent of the appraised liquidation value of eligible inventory (less certain reserves that may be established under the agreement), plus 90 percent of eligible credit card receivables. Borrowings under the FILO Facility are limited to a borrowing base equal to the lesser of: (i) 2.5 percent of the appraised liquidation value of eligible inventory or (ii) $15 million. The Amended Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit card receivables and certain other assets and a second priority security interest and lien on all other assets.

        Based on the most recent inventory appraisal, the monthly borrowing rates calculated from the cost of eligible inventory range from 68 to 73 percent for the period of February through September 2014, 82 to 84 percent for the period of October through December 2014 and 71 percent for January 2015.

        Borrowings under the Amended Credit Agreement (excluding the FILO Facility) bear interest at either: (i) LIBOR plus the applicable margin (ranging from 175 to 225 basis points) or (ii) the base rate (as defined in the Amended Credit Agreement) plus the applicable margin (ranging from 75 to 125 basis points). Borrowings under the FILO Facility bear interest at either: (i) LIBOR plus the applicable margin (ranging from 350 to 400 basis points) or (ii) the base rate plus the applicable margin (ranging from 250 to 300 basis points). We are also required to pay a quarterly unused commitment fee of 37.5 basis points based on the preceding quarter's unused commitment.

        If excess availability (as defined in the Amended Credit Agreement) falls below certain levels we will be required to maintain a minimum fixed charge coverage ratio of 1.0. Borrowing availability was approximately $259 million as of January 31, 2014, which exceeded the excess availability requirement by $197 million. The fixed charge coverage ratio was 2.47 as of January 31, 2014. The Amended Credit Agreement contains various other covenants including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions and asset sales. As of January 31, 2014, we were in compliance with all covenants.

        We incurred debt issuance costs associated with the revolving credit agreement totaling $12.1 million, which consisted of $5.6 million of costs related to the Amended Credit Agreement and $6.5 million of unamortized costs associated with the prior agreement. The debt issuance costs are included in other assets in the accompanying consolidated balance sheets and are amortized to interest expense on a straight-line basis over the five-year life of the agreement.

• Interest Rate Swap Agreements

        In September 2013, we executed interest rate swaps with Bank of America, N.A. to hedge the variability of cash flows resulting from fluctuations in the one-month LIBOR associated with our Amended Credit Agreement. The interest rate swaps replaced the one-month LIBOR with the fixed interest rates shown in the table below and are settled monthly. The swaps qualify as cash flow hedges and, to the extent effective, changes in their fair values are recorded in accumulated other comprehensive income in the consolidated balance sheet. The changes in fair values are reclassified from accumulated other comprehensive income to interest expense in the same period that the hedged items affect interest expense.

        Interest rate swaps as of January 31, 2014 are as follows:

Period	Notional Amount (in thousands)		Fixed Interest Rate			Fair Value (in thousands)
October 2013 - July 2014	$	215,000		0.29	%	$	117
August 2014 - July 2016	$	215,000		1.19	%		2,474
						$	2,591

        The change in the fair value of the interest rate swaps for the three and six months ended January 31, 2014 totaled $0.1 million and $2.7 million, respectively, and is included as an unrealized loss in other comprehensive income. There were no material amounts reclassified from accumulated other comprehensive income to interest expense during the three and six months ended January 31, 2014. The current portion of the fair value of the interest rate swaps totaled $1.0 million and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheet. The current portion represents the amount that is expected to be reclassified from other comprehensive income to interest expense over the next 12 months. The non-current portion of the fair value of the interest rate swaps totaled $1.6 million and is included in other liabilities in the accompanying consolidated balance sheet.

• Amended and Restated Senior Secured Term Loan

        On July 24, 2012, we amended and restated our senior secured term loan (the "Amended Term Loan") with Z Investment Holdings, LLC, an affiliate of Golden Gate Capital. The Amended Term Loan totals $80.0 million, matures in July 2017 and is subject to a borrowing base equal to: (i) 107.5 percent of the appraised liquidation value of eligible inventory plus (ii) 100 percent of credit card receivables and an amount equal to the lesser of $40 million or 100 percent of the appraised liquidation value of intellectual property minus (iii) the borrowing base under the Amended Credit Agreement. In the event the outstanding principal under the Amended Term Loan exceeds the Amended Term Loan borrowing base, availability under the Amended Credit Agreement would be reduced by the excess. As of January 31, 2014, the outstanding principal under the Amended Term Loan did not exceed the borrowing base. The Amended Term Loan is secured by a second priority security interest on merchandise inventory and credit card receivables and a first priority security interest on substantially all other assets.

        Borrowings under the Amended Term Loan bear interest at 11 percent payable on a quarterly basis. We may repay all or any portion of the Amended Term Loan with the following penalty prior to maturity: (i) the present value of the required interest payments that would have been made if the prepayment had not occurred during the first year; (ii) 4 percent during the second year; (iii) 3 percent during the third year; (iv) 2 percent during the fourth year and (v) no penalty in the fifth year. The Amended Credit Agreement restricts our ability to prepay the Amended Term Loan if the fixed charge coverage ratio is not equal to or greater than 1.0 after giving effect to the prepayment.

        The Amended Term Loan includes various covenants which are consistent with the covenants in the Amended Credit Agreement, including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions, asset sales and the requirement to maintain a minimum fixed charge coverage ratio of 1.0 if excess availability thresholds under the Amended Credit Agreement are not maintained. As of January 31, 2014, we were in compliance with all covenants.

        We incurred costs associated with the Amended Term Loan totaling $4.4 million, of which approximately $2 million was recorded in interest expense during the fourth quarter of fiscal year 2012. The remaining $2.4 million consists of debt issuance costs included in other assets in the accompanying consolidated balance sheet and are amortized to interest expense on a straight-line basis over the five-year life of the agreement.

• Warrant and Registration Rights Agreement

        In connection with the execution of the senior secured term loan in May 2010, we entered into a Warrant and Registration Rights Agreement (the "Warrant Agreement") with Z Investment Holdings, LLC ("Z Investment"). Under the terms of the Warrant Agreement, Z Investment holds 11.1 million warrants (the "Warrants") to purchase shares of our common stock, on a one-for-one basis, for an exercise price of $2.00 per share. The Warrants, which are currently exercisable and expire in May 2017, represented approximately 25 percent of our common stock on a fully diluted basis (including the shares issuable upon exercise of the Warrants and excluding certain out-of-the-money stock options) as of the date of the issuance. The number of shares and exercise price are subject to customary antidilution protection. The Warrant Agreement also entitles the holder to designate two, and in certain circumstances three, directors to our board.

        The holders of the Warrants may, at their option, request that we register all or part of the common stock issuable under the Warrant Agreement for resale. In September 2013, Z Investment exercised their right to request that we register the common stock and on October 2, 2013 we filed a shelf registration statement on Form S-3 which has been declared effective by the SEC.

• Capital Lease Obligations

        We enter into capital leases related to vehicles for our field management. The vehicles are included in property and equipment in the accompanying consolidated balance sheets and are depreciated over a four-year life. Capital leases, net of accumulated depreciation, included in property and equipment as of January 31, 2014 and 2013 totaled $2.2 million and $3.2 million, respectively.

XML

INVESTMENTS (Details) (USD $)	Jan. 31, 2014	Jan. 31, 2013
INVESTMENTS
Net unrealized gain	$ 1,800,000	$ 2,600,000
Carrying value of investments on deposit with various state insurance departments	7,400,000	7,400,000
Debt securities outstanding maturities at cost
Less than one year	3,272,000
Year two through year five	11,081,000
Year six through year ten	6,680,000
After ten years	59,000
Total debt securities outstanding amortized, cost	21,092,000
Debt securities outstanding maturities measured at fair value
Less than one year	3,299,000
Year two through year five	11,853,000
Year six through year ten	6,879,000
After ten years	67,000
Total debt securities outstanding measured at fair value	22,098,000
Cost
INVESTMENTS
Available for Sale Securities, Amortized Cost	22,980,000	28,001,000
Fair Value
INVESTMENTS
Available for Sale Securities Noncurrent, Fair Value	24,804,000	30,569,000
U.S. Treasury securities | Cost
INVESTMENTS
Available for Sale Securities, Amortized Cost	13,492,000	21,086,000
U.S. Treasury securities | Fair Value
INVESTMENTS
Available for Sale Securities Noncurrent, Fair Value	14,306,000	22,445,000
U.S. government agency securities | Cost
INVESTMENTS
Available for Sale Securities, Amortized Cost	1,984,000	2,641,000
U.S. government agency securities | Fair Value
INVESTMENTS
Available for Sale Securities Noncurrent, Fair Value	2,074,000	2,833,000
Corporate bonds and notes | Cost
INVESTMENTS
Available for Sale Securities, Amortized Cost	5,616,000	773,000
Corporate bonds and notes | Fair Value
INVESTMENTS
Available for Sale Securities Noncurrent, Fair Value	5,718,000	868,000
Corporate equity securities | Cost
INVESTMENTS
Available for Sale Securities, Amortized Cost	1,888,000	3,501,000
Corporate equity securities | Fair Value
INVESTMENTS
Available for Sale Securities Noncurrent, Fair Value	$ 2,706,000	$ 4,423,000

XML

FAIR VALUE MEASUREMENTS (Details 2) (USD $)	6 Months Ended
	Jan. 31, 2014	Jul. 31, 2013	Jan. 31, 2013
FAIR VALUE MEASUREMENTS
Impairment of goodwill	$ 0
GOODWILL
Goodwill	92,376,000	98,372,000	100,756,000
Level 3
GOODWILL
Cash flow projection period used as an input in calculating fair value of goodwill	5 years
Terminal year growth rates used as an input in calculating fair value of goodwill (as a percent)	2.00%
Level 3 | Minimum
GOODWILL
Discount rates based on a weighted average cost of capital used as an input in calculating fair value of goodwill (as a percent)	14.00%
Level 3 | Maximum
GOODWILL
Discount rates based on a weighted average cost of capital used as an input in calculating fair value of goodwill (as a percent)	15.50%
Peoples Jewellers
GOODWILL
Goodwill	73,000,000
Peoples Jewellers | Minimum
GOODWILL
Percentage of excess of fair value of goodwill over carrying value, to be considered for potential impairment	30.00%
Piercing Pagoda
GOODWILL
Goodwill	$ 19,400,000
Piercing Pagoda | Minimum
GOODWILL
Percentage of excess of fair value of goodwill over carrying value, to be considered for potential impairment	41.00%

XML

LONG-TERM DEBT (Details) (USD $)				3 Months Ended	6 Months Ended					6 Months Ended		1 Months Ended	6 Months Ended		6 Months Ended						1 Months Ended		6 Months Ended						1 Months Ended	6 Months Ended									1 Months Ended	3 Months Ended	6 Months Ended		6 Months Ended
	Jan. 31, 2014	Jul. 31, 2013	Jan. 31, 2013	Jan. 31, 2014 Interest rate swaps Cash flow hedges	Jan. 31, 2014 Interest rate swaps Cash flow hedges	Jan. 31, 2014 Interest rate swaps Cash flow hedges Accounts payable and accrued liabilities	Jan. 31, 2014 Interest rate swaps Cash flow hedges Other liabilities	Jan. 31, 2014 Interest rate swaps October 2013 - July 2014 Cash flow hedges	Jan. 31, 2014 Interest rate swaps August 2014 - July 2016 Cash flow hedges	Jan. 31, 2014 Revolving credit agreement	Jan. 31, 2013 Revolving credit agreement	Jul. 31, 2012 Amended Credit Agreement	Jan. 31, 2014 Amended Credit Agreement	Jul. 24, 2012 Amended Credit Agreement	Jan. 31, 2014 Amended Credit Agreement Minimum	Jan. 31, 2014 Amended Credit Agreement February through September 2014 Minimum	Jan. 31, 2014 Amended Credit Agreement February through September 2014 Maximum	Jan. 31, 2014 Amended Credit Agreement October through December 2014 Minimum	Jan. 31, 2014 Amended Credit Agreement October through December 2014 Maximum	Jan. 31, 2014 Amended Credit Agreement January 2015	Jul. 31, 2012 FILO Facility	Jul. 24, 2012 FILO Facility	Jan. 31, 2014 FILO Facility LIBOR	Jan. 31, 2014 FILO Facility Base rate	Jan. 31, 2014 FILO Facility Minimum LIBOR	Jan. 31, 2014 FILO Facility Minimum Base rate	Jan. 31, 2014 FILO Facility Maximum LIBOR	Jan. 31, 2014 FILO Facility Maximum Base rate	Jul. 31, 2012 Amended Credit Agreement (excluding the FILO Facility)	Jan. 31, 2014 Amended Credit Agreement (excluding the FILO Facility) LIBOR	Jan. 31, 2014 Amended Credit Agreement (excluding the FILO Facility) Base rate	Jan. 31, 2014 Amended Credit Agreement (excluding the FILO Facility) Minimum LIBOR	Jan. 31, 2014 Amended Credit Agreement (excluding the FILO Facility) Minimum Base rate	Jan. 31, 2014 Amended Credit Agreement (excluding the FILO Facility) Maximum LIBOR	Jan. 31, 2014 Amended Credit Agreement (excluding the FILO Facility) Maximum Base rate	Jan. 31, 2014 Revolving credit prior to amended and restated revolving credit agreement	Jan. 31, 2014 Senior Secured Term Loan	Jan. 31, 2013 Senior Secured Term Loan	Jul. 31, 2012 Senior secured term loan amended July 24, 2012	Jul. 31, 2012 Senior secured term loan amended July 24, 2012	Jan. 31, 2014 Senior secured term loan amended July 24, 2012	Jul. 24, 2012 Senior secured term loan amended July 24, 2012	Jan. 31, 2014 Senior secured term loan amended July 24, 2012 Minimum	Jan. 31, 2014 Capital lease obligations	Jan. 31, 2013 Capital lease obligations
Long-term debt
Long-term debt	$ 445,267,000	$ 410,050,000	$ 473,975,000							$ 363,000,000	$ 390,700,000																										$ 80,000,000	$ 80,000,000						$ 2,267,000	$ 3,275,000
Maximum borrowing capacity														665,000,000								15,000,000
Maturity date												Jul. 24, 2017
Borrowing capacity description												Borrowings under the Amended Credit Agreement (excluding the FILO Facility) are limited to a borrowing base equal to 90 percent of the appraised liquidation value of eligible inventory (less certain reserves that may be established under the agreement), plus 90 percent of eligible credit card receivables. Borrowings under the FILO Facility are limited to a borrowing base equal to the lesser of: (i) 2.5 percent of the appraised liquidation value of eligible inventory or (ii) $15 million. The Amended Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit card receivables and certain other assets and a second priority security interest and lien on all other assets. Based on the most recent inventory appraisal, the monthly borrowing rates calculated from the cost of eligible inventory range from 68 to 73 percent for the period of February through September 2014, 82 to 84 percent for the period of October through December 2014 and 71 percent for January 2015.
Percentage of appraised liquidation value of eligible inventory used to calculate cap amount																					2.50%								90.00%										107.50%
Percentage of eligible credit card receivables																													90.00%										100.00%
Percentage of cost of eligible inventory used to calculate monthly borrowing rates																68.00%	73.00%	82.00%	84.00%	71.00%
Variable interest rate base																							LIBOR	Base rate						LIBOR	Base rate
Variable interest rate margin (as a percent)																									3.50%	2.50%	4.00%	3.00%				1.75%	0.75%	2.25%	1.25%
Quarterly unused commitment fee (as a percent)												0.375%
Covenant terms of revolving credit facility												If excess availability (as defined in the Amended Credit Agreement) falls below certain levels we will be required to maintain a minimum fixed charge coverage ratio of 1.0. Borrowing availability was approximately $259 million as of January 31, 2014, which exceeded the excess availability requirement by $197 million. The fixed charge coverage ratio was 2.47 as of January 31, 2014. The Amended Credit Agreement contains various other covenants including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions and asset sales. As of January 31, 2014, we were in compliance with all covenants.
Fixed charge coverage ratio													2.47		1.0																												1.0
Remaining borrowing capacity													259,000,000
Remaining borrowing capacity in excess of minimum availability requirement													197,000,000
Debt issuance costs										12,100,000			5,600,000																											4,400,000
Unamortized debt issuance costs																																				6,500,000					2,400,000
Life of the credit agreement													5 years																												5 years
Interest rate swaps disclosures
Notional Amount								215,000,000	215,000,000
Fixed interest rate (as a percent)								0.29%	1.19%
Fair Value				2,591,000	2,591,000	1,000,000	1,600,000	117,000	2,474,000
Change in the fair value of the interest rate swaps				100,000	2,700,000
Principal amount of debt issued																																										80,000,000
Term loan restrictions on revolving credit agreement																																							The Amended Term Loan totals $80.0 million, matures in July 2017 and is subject to a borrowing base equal to: (i) 107.5 percent of the appraised liquidation value of eligible inventory plus (ii) 100 percent of credit card receivables and an amount equal to the lesser of $40 million or 100 percent of the appraised liquidation value of intellectual property minus (iii) the borrowing base under the Amended Credit Agreement. In the event the outstanding principal under the Amended Term Loan exceeds the Amended Term Loan borrowing base, availability under the Amended Credit Agreement would be reduced by the excess. As of January 31, 2014, the outstanding principal under the Amended Term Loan did not exceed the borrowing base.
Borrowing cap amount attributable to appraised liquidation value of intellectual property																																										40,000,000
Percentage of appraised liquidation value of intellectual property used to calculate cap amount																																							100.00%
Interest rate (as a percent)																																									11.00%
Penalty on repayment of debt during the second year (as a percent)																																									4.00%
Penalty on repayment of debt during the third year (as a percent)																																									3.00%
Penalty on repayment of debt during the fourth year (as a percent)																																									2.00%
Penalty on repayment of debt during the fifth year (as a percent)																																									0.00%
Covenant terms of senior secured term loan																																							The Amended Term Loan includes various covenants which are consistent with the covenants in the Amended Credit Agreement, including restrictions on the incurrence of certain indebtedness, payment of dividends, liens, investments, acquisitions, asset sales and the requirement to maintain a minimum fixed charge coverage ratio of 1.0 if excess availability thresholds under the Amended Credit Agreement are not maintained. As of January 31, 2014, we were in compliance with all covenants.
Interest expense																																								$ 2,000,000

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LONG-TERM DEBT (Details 2) (Warrant, Z Investment Holdings, LLC, USD $)	1 Months Ended
	May 31, 2010 item
Warrant | Z Investment Holdings, LLC
Warrant and Registration Rights Agreement
Number of warrants held by Z Investment Holdings, LLC (in shares)	11,100,000
Number of common shares that can be purchased by converting each warrant	1
Exercise price of warrants (in dollars per share)	$ 2.00
Warrants as a percentage of common stock on a fully diluted basis	25.00%
Number of directors designated by the warrant holders under first scenario	2
Number of directors designated by the warrant holders under second scenario	3

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INVESTMENTS

6 Months Ended

Jan. 31, 2014

INVESTMENTS

INVESTMENTS

3. INVESTMENTS

        Investments in debt and equity securities held by our insurance subsidiaries are reported as other assets in the accompanying consolidated balance sheets. Investments are recorded at fair value based on quoted market prices for identical or similar securities. All investments are classified as available-for-sale.

        Our investments consist of the following (in thousands):

	January 31, 2014				January 31, 2013
	Cost		Fair Value		Cost		Fair Value
U.S. Treasury securities	$	13,492	$	14,306	$	21,086	$	22,445
U.S. government agency securities		1,984		2,074		2,641		2,833
Corporate bonds and notes		5,616		5,718		773		868
Corporate equity securities		1,888		2,706		3,501		4,423
	$	22,980	$	24,804	$	28,001	$	30,569

        At January 31, 2014 and 2013, the carrying value of investments included a net unrealized gain of $1.8 million and $2.6 million, respectively, which is included in accumulated other comprehensive income. Realized gains and losses on investments are determined on the specific identification basis. There were no material net realized gains or losses during the three and six months ended January 31, 2014 and 2013. Investments with a carrying value of $7.4 million were on deposit with various state insurance departments at both January 31, 2014 and 2013, respectively, as required by law.

        Debt securities outstanding as of January 31, 2014 mature as follows (in thousands):

	Cost		Fair Value
Less than one year	$	3,272	$	3,299
Year two through year five		11,081		11,853
Year six through year ten		6,680		6,879
After ten years		59		67
	$	21,092	$	22,098

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LONG-TERM DEBT (Details 3) (USD $) In Thousands, unless otherwise specified				6 Months Ended
	Jan. 31, 2014	Jul. 31, 2013	Jan. 31, 2013	Jan. 31, 2014 Capital lease obligations Vehicles	Jan. 31, 2013 Capital lease obligations Vehicles
Long-term debt
Useful life of vehicle				4 years
Capital leases	$ 103,714	$ 105,278	$ 112,912	$ 2,200	$ 3,200

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SUBSEQUENT EVENTS (Details) (Subsequent Events, Signet, Zale Corporation, Forecast, USD $)	Feb. 19, 2014
Subsequent Events | Signet | Zale Corporation | Forecast
Subsequent events
Share price (in dollars per share)	$ 21

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues	$ 656,449	$ 670,752	$ 1,019,063	$ 1,028,220
Cost of sales	308,830	331,101	477,656	498,234
Gross margin	347,619	339,651	541,407	529,986
Selling, general and administrative	280,148	279,064	488,306	485,529
Depreciation and amortization	7,461	8,388	15,122	17,034
Other charges (gains)	488	926	488	(847)
Operating earnings	59,522	51,273	37,491	28,270
Interest expense	6,096	6,088	11,706	11,930
Earnings before income taxes	53,426	45,185	25,785	16,340
Income tax expense	2,640	3,977	2,305	3,396
Net earnings	$ 50,786	$ 41,208	$ 23,480	$ 12,944
Basic net earnings per common share: (in dollars per share)	$ 1.54	$ 1.27	$ 0.72	$ 0.40
Diluted net earnings per common share: (in dollars per share)	$ 1.13	$ 1.02	$ 0.52	$ 0.32
Weighted average number of common shares outstanding:
Basic (in shares)	32,919	32,426	32,827	32,362
Diluted (in shares)	45,022	40,305	44,837	40,470

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BASIS OF PRESENTATION

6 Months Ended

Jan. 31, 2014

BASIS OF PRESENTATION

BASIS OF PRESENTATION

1. BASIS OF PRESENTATION

        References to the "Company," "we," "us," and "our" in this Form 10-Q are references to Zale Corporation and its subsidiaries. We are, through our wholly owned subsidiaries, a leading specialty retailer of fine jewelry in North America. At January 31, 2014, we operated 1,037 specialty retail jewelry stores and 623 kiosks located primarily in shopping malls throughout the United States, Canada and Puerto Rico.

        We report our operations under three segments: Fine Jewelry, Kiosk Jewelry and All Other. Fine Jewelry is comprised of our three core national brands, Zales Jewelers®, Zales Outlet® and Peoples Jewellers® and our two regional brands, Gordon's Jewelers® and Mappins Jewellers®. Each brand specializes in fine jewelry and watches, with merchandise and marketing emphasis focused on diamond products. Zales Jewelers® is our national brand in the U.S. providing moderately priced jewelry to a broad range of guests. Zales Outlet® operates in outlet malls and neighborhood power centers and capitalizes on Zale Jewelers'® national marketing and brand recognition. Gordon's Jewelers® is a value-oriented regional jeweler. Peoples Jewellers®, Canada's largest fine jewelry retailer, provides guests with an affordable assortment and an accessible shopping experience. Mappins Jewellers® offers Canadian guests a broad selection of merchandise from engagement rings to fashionable and contemporary fine jewelry.

        Kiosk Jewelry operates under the brand names Piercing Pagoda®, Plumb Gold™, and Silver and Gold Connection® through mall-based kiosks and is focused on the opening price point guest. Kiosk Jewelry specializes in gold, silver and non-precious metal products that capitalize on the latest fashion trends.

        All Other includes our insurance and reinsurance operations, which offer insurance coverage primarily to our private label credit card guests.

        We also maintain a presence in the retail market through our ecommerce sites www.zales.com, www.zalesoutlet.com, www.gordonsjewelers.com, www.peoplesjewellers.com and www.pagoda.com.

        We consolidate all of our U.S. operations into Zale Delaware, Inc. ("ZDel"), a wholly owned subsidiary of Zale Corporation. ZDel is the parent company for several subsidiaries, including three that are engaged primarily in providing credit insurance to our credit customers. We consolidate our Canadian retail operations into Zale Canada Holding, L.P., which is a wholly owned subsidiary of Zale Corporation. All significant intercompany transactions have been eliminated. The consolidated financial statements are unaudited and have been prepared by the Company in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In management's opinion, all material adjustments (consisting of normal recurring accruals and adjustments) and disclosures necessary for a fair presentation have been made. Because of the seasonal nature of the retail business, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2013 filed with the Securities and Exchange Commission ("SEC") on September 27, 2013.

        Reclassification.    Certain prior year amounts have been reclassified in the accompanying consolidated financial statements to conform to our fiscal year 2014 presentation.

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ACCUMULATED OTHER COMPREHENSIVE INCOME (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
Changes in the composition of accumulated other comprehensive income
Balance at the beginning of the period	$ 41,340	$ 53,828	$ 47,015	$ 53,369
Foreign currency translation adjustment	(12,763)	(44)	(15,996)	470
Unrealized loss on interest rate swaps	(140)		(2,676)
Reclassification of loss on interest rate swaps to interest expense	65		85
Unrealized gain (loss) on securities, net	(128)	76	(54)	21
Balance at the end of the period	$ 28,374	$ 53,860	$ 28,374	$ 53,860

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EARNINGS PER COMMON SHARE (Tables)

6 Months Ended

Jan. 31, 2014

EARNINGS PER COMMON SHARE

Schedule of reconciliation of the diluted weighted average shares

The following table presents a reconciliation of the diluted weighted average shares (in thousands):

	Three Months Ended January 31,				Six Months Ended January 31,
	2014		2013		2014		2013
Basic weighted average shares		32,919		32,426		32,827		32,362
Effect of potential dilutive securities:
Warrants		9,597		6,759		9,495		6,921
Stock options and restricted share awards		2,506		1,120		2,515		1,187
Diluted weighted average shares		45,022		40,305		44,837		40,470

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INCOME TAXES (Details) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013
INCOME TAXES
Most recent period for which cumulative losses incurred is to be considered	3 years
Valuation allowances related to deferred tax assets	$ 82.7	$ 92.7

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SEGMENTS (Tables)

6 Months Ended

Jan. 31, 2014

SEGMENTS

Schedule of selected financial data by segment

	Three Months Ended January 31,						Six Months Ended January 31,
Selected Financial Data by Segment	2014			2013			2014			2013
	(amounts in thousands)
Revenues:
Fine Jewelry(a)	$	580,821		$	590,131		$	894,519		$	897,091
Kiosk		72,801			77,905			119,000			125,723
All Other		2,827			2,716			5,544			5,406
Total revenues	$	656,449		$	670,752		$	1,019,063		$	1,028,220
Depreciation and amortization:
Fine Jewelry	$	4,954		$	5,393		$	10,013		$	10,914
Kiosk		516			689			1,093			1,428
All Other		—			—			—			—
Unallocated		1,991			2,306			4,016			4,692
Total depreciation and amortization	$	7,461		$	8,388		$	15,122		$	17,034
Operating earnings:
Fine Jewelry	$	58,273		$	47,712		$	46,272		$	31,010
Kiosk		10,622			10,513			8,067			8,764
All Other		1,309			1,094			2,501			1,906
Unallocated(b)		(10,682	)		(8,046	)		(19,349	)		(13,410	)
Total operating earnings	$	59,522		$	51,273		$	37,491		$	28,270

(a)

Includes $111.2 million and $120.4 million for the three months ended January 31, 2014 and 2013, respectively, and $174.1 million and $183.4 million for the six months ended January 31, 2014 and 2013, respectively, related to foreign operations.

(b)

Includes credits of $17.1 million and $16.9 million for the three months ended January 31, 2014 and 2013, respectively, and $32.9 million and $32.0 million for the six months ended January 31, 2014 and 2013, respectively, to offset internal carrying costs charged to the segments. The six months ended January 31, 2013 also includes a gain totaling $1.9 million related to the De Beers settlement.

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FAIR VALUE MEASUREMENTS

6 Months Ended

Jan. 31, 2014

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

2. FAIR VALUE MEASUREMENTS

        Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In determining fair value, Accounting Standards Codification ("ASC") 820, Fair Value Measurement, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair values. These tiers include:

Level 1	—	Quoted prices for identical instruments in active markets;
Level 2	—	Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and
Level 3	—	Instruments whose significant inputs are unobservable.

• Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

        The following tables include our assets and liabilities that are measured at fair value on a recurring basis (in thousands):

	Fair Value as of January 31, 2014
	Level 1		Level 2		Level 3
Assets
U.S. Treasury securities	$	14,306	$	—	$	—
U.S. government agency securities		—		2,074		—
Corporate bonds and notes		—		5,718		—
Corporate equity securities		2,706		—		—
	$	17,012	$	7,792	$	—
Liabilities
Interest rate swaps	$	—	$	2,591	$	—

	Fair Value as of January 31, 2013
	Level 1		Level 2		Level 3
Assets
U.S. Treasury securities	$	22,445	$	—	$	—
U.S. government agency securities		—		2,833		—
Corporate bonds and notes		—		868		—
Corporate equity securities		4,423		—		—
	$	26,868	$	3,701	$	—

        Investments in U.S. Treasury securities and corporate equity securities are based on quoted market prices for identical instruments in active markets, and therefore were classified as a Level 1 measurement in the fair value hierarchy. Investments in U.S. government agency securities and corporate bonds and notes are based on quoted prices for similar instruments in active markets, and therefore were classified as a Level 2 measurement in the fair value hierarchy (see Note 3 for additional information related to our investments).

        The fair value of our interest rate swaps is calculated using significant observable inputs including the present value of estimated future cash flows using interest rate curves, and therefore were classified as a Level 2 measurement in the fair value hierarchy (see Note 4 for additional information related to our interest rate swaps).

• Assets that are Measured at Fair Value on a Nonrecurring Basis

        Impairment losses related to store-level property and equipment are calculated using significant unobservable inputs including the present value of future cash flows expected to be generated using a risk-adjusted weighted average cost of capital of 14.0 percent to 15.5 percent, and therefore are classified as a Level 3 measurement in the fair value hierarchy. For the six months ended January 31, 2014, store-level property and equipment of $0.7 million was written down to their fair value of $0.2 million, resulting in an impairment charge of $0.5 million. For the six months ended January 31, 2013, store-level property and equipment of $1.0 million was written down to their fair value of $0.1 million, resulting in an impairment charge of $0.9 million.

        At the end of the second quarter of fiscal year 2014, we completed our annual impairment testing of goodwill pursuant to ASC 350, Intangible—Goodwill and Other. Based on the test results, we concluded that no impairment was necessary for the $73.0 million of goodwill related to the Peoples Jewellers acquisition and the $19.4 million of goodwill related to the Piercing Pagoda acquisition. As of the date of the test, the fair value of the Peoples Jewellers and Piercing Pagoda reporting units would have to decline by more than 30 percent and 41 percent, respectively, to be considered for potential impairment. We calculated the estimated fair value of our reporting units using Level 3 inputs, including: (1) cash flow projections for five years; (2) terminal year growth rates of two percent based on estimates of long-term inflation expectations; and (3) discount rates of 14.0 percent to 15.5 percent based on a risk-adjusted weighted average cost of capital that reflects current market conditions. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units, it is possible a material change could occur. If our actual results are not consistent with estimates and assumptions used to calculate fair value, we may be required to recognize goodwill impairments.

• Other Financial Instruments

        As cash and short-term cash investments, trade payables and certain other short-term financial instruments are all short-term in nature, their carrying amount approximates fair value. The outstanding principal of our revolving credit agreement and senior secured term loan approximates fair value as of January 31, 2014. The fair value of the revolving credit agreement and the senior secured term loan were based on estimates of current interest rates for similar debt, a Level 3 input.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net earnings	$ 50,786	$ 41,208	$ 23,480	$ 12,944
Foreign currency translation adjustment	(12,763)	(44)	(15,996)	470
Unrealized loss on interest rate swaps	(140)		(2,676)
Reclassification of loss on interest rate swaps to interest expense	65		85
Unrealized gain on securities, net	(128)	76	(54)	21
Comprehensive income	$ 37,820	$ 41,240	$ 4,839	$ 13,435

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SUBSEQUENT EVENTS

6 Months Ended

Jan. 31, 2014

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

12. SUBSEQUENT EVENTS

Merger Agreement

        On February 19, 2014, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Signet Jewelers Limited, a Bermuda corporation ("Signet"), and Carat Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Signet ("Merger Sub"). The Merger Agreement provides for, subject to the satisfaction or waiver of specified conditions, the acquisition of the Company by Signet at a price of $21 per share in cash. Subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Signet. Consummation of the Merger is subject to various customary conditions set forth in the Merger Agreement, including, among other things, the adoption of the Merger Agreement by the Company's stockholders, the absence of laws or orders prohibiting or restraining the Merger and the receipt of certain required antitrust approvals. We cannot predict with certainty whether and when any of these conditions will be satisfied. For additional information regarding the Merger and the Merger Agreement, please refer to our Current Report on Form 8-K filed with the SEC on February 19, 2014 (the "February 19^th 8-K"). The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached as Exhibit 2.1 to the February 19^th 8-K.

Voting and Support Agreement

        On February 19, 2014, and in connection with the execution of the Merger Agreement, Z Investment entered into a Voting and Support Agreement with Signet and the Company (the "Voting Agreement"). Pursuant to the Voting Agreement, Z Investment has agreed, among other things, to exercise its Warrants (see Note 4) and to vote, or cause to be voted, the shares of the Company's common stock issued upon such exercise in favor of the adoption of the Merger Agreement. The foregoing description of the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to the Voting Agreement, a copy of which is attached as Exhibit 10.1 to the February 19^th 8-K.

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Document and Entity Information	6 Months Ended
	Jan. 31, 2014	Mar. 03, 2014
Document and Entity Information
Entity Registrant Name	ZALE CORP
Entity Central Index Key	0000109156
Document Type	10-Q
Document Period End Date	Jan. 31, 2014
Amendment Flag	false
Current Fiscal Year End Date	--07-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		33,021,621
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2

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BASIS OF PRESENTATION (Policies)

6 Months Ended

Jan. 31, 2014

BASIS OF PRESENTATION

Reclassification

Reclassification.    Certain prior year amounts have been reclassified in the accompanying consolidated financial statements to conform to our fiscal year 2014 presentation.

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Jan. 31, 2014	Jul. 31, 2013	Jan. 31, 2013
Current assets:
Cash and cash equivalents	$ 23,251	$ 17,060	$ 18,516
Merchandise inventories	864,275	767,540	836,624
Other current assets	48,260	53,335	51,311
Total current assets	935,786	837,935	906,451
Property and equipment	666,000	675,705	688,558
Less accumulated depreciation and amortization	(562,286)	(570,427)	(575,646)
Net property and equipment	103,714	105,278	112,912
Goodwill	92,376	98,372	100,756
Other assets	41,718	38,560	50,471
Deferred tax asset	107,110	107,110	96,888
Total assets	1,280,704	1,187,255	1,267,478
Current liabilities:
Accounts payable and accrued liabilities	276,907	220,558	263,384
Deferred revenue	81,667	82,110	86,813
Deferred tax liability	107,479	107,016	97,233
Total current liabilities	466,053	409,684	447,430
Long-term debt	445,267	410,050	473,975
Deferred revenue - long-term	105,004	109,135	115,664
Other liabilities	72,307	73,057	36,504
Commitments and contingencies
Stockholders' investment:
Common stock	488	488	488
Additional paid-in capital	150,459	155,625	158,422
Accumulated other comprehensive income	28,374	47,015	53,860
Accumulated earnings	458,621	435,140	438,072
Total stockholders' investment before treasury stock	637,942	638,268	650,842
Treasury stock	(445,869)	(452,939)	(456,937)
Total stockholders' investment	192,073	185,329	193,905
Total liabilities and stockholders' investment	$ 1,280,704	$ 1,187,255	$ 1,267,478

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ACCUMULATED OTHER COMPREHENSIVE INCOME

6 Months Ended

Jan. 31, 2014

ACCUMULATED OTHER COMPREHENSIVE INCOME

ACCUMULATED OTHER COMPREHENSIVE INCOME

7. ACCUMULATED OTHER COMPREHENSIVE INCOME

        The following table includes detail regarding changes in the composition of accumulated other comprehensive income (in thousands):

	Three Months Ended January 31,						Six Months Ended January 31,
	2014			2013			2014			2013
Beginning of period	$	41,340		$	53,828		$	47,015		$	53,369
Foreign currency translation adjustment		(12,763	)		(44	)		(15,996	)		470
Unrealized loss on interest rate swaps		(140	)		—			(2,676	)		—
Reclassification of loss on interest rate swaps to interest expense		65			—			85			—
Unrealized gain (loss) on securities, net		(128	)		76			(54	)		21
End of period	$	28,374		$	53,860		$	28,374		$	53,860

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EARNINGS PER COMMON SHARE

6 Months Ended

Jan. 31, 2014

EARNINGS PER COMMON SHARE

EARNINGS PER COMMON SHARE

6. EARNINGS PER COMMON SHARE

        Basic earnings per common share is computed by dividing net earnings by the weighted-average number of common shares outstanding for the reporting period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted-average number of shares is increased by the dilutive effect of stock options, restricted share awards and warrants issued in connection with the senior secured term loan determined using the Treasury Stock method.

        The following table presents a reconciliation of the diluted weighted average shares (in thousands):

	Three Months Ended January 31,				Six Months Ended January 31,
	2014		2013		2014		2013
Basic weighted average shares		32,919		32,426		32,827		32,362
Effect of potential dilutive securities:
Warrants		9,597		6,759		9,495		6,921
Stock options and restricted share awards		2,506		1,120		2,515		1,187
Diluted weighted average shares		45,022		40,305		44,837		40,470

        The calculation of diluted weighted average shares excludes the impact of 0.9 million and 1.8 million antidilutive stock options for the three and six months ended January 31, 2014 and 2013.

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ACCUMULATED OTHER COMPREHENSIVE INCOME (Tables)

6 Months Ended

Jan. 31, 2014

ACCUMULATED OTHER COMPREHENSIVE INCOME

Schedule of composition of accumulated other comprehensive income

The following table includes detail regarding changes in the composition of accumulated other comprehensive income (in thousands):

	Three Months Ended January 31,						Six Months Ended January 31,
	2014			2013			2014			2013
Beginning of period	$	41,340		$	53,828		$	47,015		$	53,369
Foreign currency translation adjustment		(12,763	)		(44	)		(15,996	)		470
Unrealized loss on interest rate swaps		(140	)		—			(2,676	)		—
Reclassification of loss on interest rate swaps to interest expense		65			—			85			—
Unrealized gain (loss) on securities, net		(128	)		76			(54	)		21
End of period	$	28,374		$	53,860		$	28,374		$	53,860

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FAIR VALUE MEASUREMENTS (Tables)

6 Months Ended

Jan. 31, 2014

FAIR VALUE MEASUREMENTS

Schedule of assets and liabilities that are measured at fair value on a recurring basis

The following tables include our assets and liabilities that are measured at fair value on a recurring basis (in thousands):

	Fair Value as of January 31, 2014
	Level 1		Level 2		Level 3
Assets
U.S. Treasury securities	$	14,306	$	—	$	—
U.S. government agency securities		—		2,074		—
Corporate bonds and notes		—		5,718		—
Corporate equity securities		2,706		—		—
	$	17,012	$	7,792	$	—
Liabilities
Interest rate swaps	$	—	$	2,591	$	—

	Fair Value as of January 31, 2013
	Level 1		Level 2		Level 3
Assets
U.S. Treasury securities	$	22,445	$	—	$	—
U.S. government agency securities		—		2,833		—
Corporate bonds and notes		—		868		—
Corporate equity securities		4,423		—		—
	$	26,868	$	3,701	$	—

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CONTINGENCIES

6 Months Ended

Jan. 31, 2014

CONTINGENCIES

CONTINGENCIES

10. CONTINGENCIES

        The Company is a defendant in three purported class action lawsuits, Tessa Hodge v. Zale Delaware, Inc., d/b/a Piercing Pagoda which was filed on April 23, 2013 in the Superior Court of the State of California, County of San Bernardino, Naomi Tapia v. Zale which was filed on July 3, 2013 in the U.S. District Court, Southern District of California, and Melissa Roberts v. Zale Delaware, Inc. which was filed on October 7, 2013 in the Superior Court of the State of California, County of Los Angeles. All three cases include allegations that the Company violated various wage and hour labor laws. Relief is sought on behalf of current and former Piercing Pagoda and Zales employees. The lawsuits seek to recover damages, penalties and attorneys' fees as a result of the alleged violations. The Company is investigating the underlying allegations and intends to vigorously defend its position against them. The Company cannot reasonably estimate the potential loss or range of loss, if any, for the lawsuits.

        The Company and its directors have been named as defendants in four purported shareholder class action lawsuits filed in the Court of Chancery of the State of Delaware: Andrew Breyer v. Zale Corporation, et al. filed on February 24, 2014, Marc Stein v. Zale Corporation, et al. and Ravinder Singh v. Zale Corporation, et al. each filed on March 3, 2014 and Mary Smart v. Zale Corporation, et al. filed on March 6, 2014. Each lawsuit alleges that, in connection with the proposed transaction between the Company and Signet Jewelers Limited, entered into on February 19, 2014, the Company's directors breached their fiduciary duties to the Company's shareholders and that the Company, Signet Jewelers Limited and Carat Merger Sub, Inc. aided and abetted such breaches. Each lawsuit seeks injunctive relief, rescission in the event the merger is consummated, monetary damages and attorneys' and other fees and costs. The Company and its directors believe that the claims in the lawsuits are without merit, and intend to vigorously defend each pending lawsuit. The Company cannot reasonably estimate the potential loss or range of loss, if any, for the lawsuits.

        We are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established based on management's best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.

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INCOME TAXES

6 Months Ended

Jan. 31, 2014

INCOME TAXES

INCOME TAXES

8. INCOME TAXES

        We are required to assess the available positive and negative evidence to estimate if sufficient future income will be generated to utilize deferred tax assets. A significant piece of negative evidence that we consider is cumulative losses (generally defined as losses before income taxes) incurred over the most recent three-year period. Such evidence limits our ability to consider other subjective evidence such as our projections for future growth. As of January 31, 2014 and 2013, cumulative losses were incurred over the applicable three-year period.

        Our valuation allowances totaled $82.7 million and $92.7 million as of January 31, 2014 and 2013, respectively. The valuation allowances were established due to the uncertainty of our ability to utilize certain federal, state and foreign net operating loss carryforwards in the future. The amount of the deferred tax asset considered realizable could be adjusted if negative evidence, such as three-year cumulative losses, no longer exists and additional consideration is given to our growth projections.

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SEGMENTS

6 Months Ended

Jan. 31, 2014

SEGMENTS

SEGMENTS

9. SEGMENTS

        We report our operations under three business segments: Fine Jewelry, Kiosk Jewelry, and All Other (See Note 1). All corresponding items of segment information in prior periods have been presented consistently. Management's expectation is that overall economics of each of our major brands within each reportable segment will be similar over time.

        We use earnings before unallocated corporate overhead, interest and taxes but include an internal charge for inventory carrying cost to evaluate segment profitability. Unallocated costs before income taxes include corporate employee-related costs, administrative costs, information technology costs, corporate facilities costs and depreciation and amortization. Income tax information by segment is not included as taxes are calculated at a company-wide level and not allocated to each segment.

	Three Months Ended January 31,						Six Months Ended January 31,
Selected Financial Data by Segment	2014			2013			2014			2013
	(amounts in thousands)
Revenues:
Fine Jewelry(a)	$	580,821		$	590,131		$	894,519		$	897,091
Kiosk		72,801			77,905			119,000			125,723
All Other		2,827			2,716			5,544			5,406
Total revenues	$	656,449		$	670,752		$	1,019,063		$	1,028,220
Depreciation and amortization:
Fine Jewelry	$	4,954		$	5,393		$	10,013		$	10,914
Kiosk		516			689			1,093			1,428
All Other		—			—			—			—
Unallocated		1,991			2,306			4,016			4,692
Total depreciation and amortization	$	7,461		$	8,388		$	15,122		$	17,034
Operating earnings:
Fine Jewelry	$	58,273		$	47,712		$	46,272		$	31,010
Kiosk		10,622			10,513			8,067			8,764
All Other		1,309			1,094			2,501			1,906
Unallocated(b)		(10,682	)		(8,046	)		(19,349	)		(13,410	)
Total operating earnings	$	59,522		$	51,273		$	37,491		$	28,270

(a)

Includes $111.2 million and $120.4 million for the three months ended January 31, 2014 and 2013, respectively, and $174.1 million and $183.4 million for the six months ended January 31, 2014 and 2013, respectively, related to foreign operations.

(b)

Includes credits of $17.1 million and $16.9 million for the three months ended January 31, 2014 and 2013, respectively, and $32.9 million and $32.0 million for the six months ended January 31, 2014 and 2013, respectively, to offset internal carrying costs charged to the segments. The six months ended January 31, 2013 also includes a gain totaling $1.9 million related to the De Beers settlement.

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DEFERRED REVENUE

6 Months Ended

Jan. 31, 2014

DEFERRED REVENUE

DEFERRED REVENUE

11. DEFERRED REVENUE

        We offer our Fine Jewelry guests lifetime warranties on certain products that cover sizing and breakage with an option to purchase theft protection for a two-year period. Revenues related to lifetime warranty sales are recognized in proportion to when the expected costs will be incurred, which we estimate to be over an eight-year period. A significant change in estimates related to the time period or pattern in which warranty-related costs are expected to be incurred could adversely impact our revenues and earnings. Revenues related to the optional theft protection are recognized over the two-year contract period on a straight-line basis. We also offer our Fine Jewelry guests a two-year watch warranty and our Fine Jewelry and Kiosk Jewelry guests a one-year warranty that covers breakage. The revenue from the two-year watch warranty and one-year breakage warranty is recognized on a straight-line basis over the respective contract terms.

        The change in deferred revenue associated with the sale of warranties is as follows (in thousands):

	Three Months Ended January 31,						Six Months Ended January 31,
	2014			2013			2014			2013
Deferred revenue, beginning of period	$	183,224		$	199,239		$	191,245		$	208,516
Warranties sold(a)		43,907			44,569			69,841			69,549
Revenue recognized		(40,460	)		(41,331	)		(74,415	)		(75,588	)
Deferred revenue, end of period	$	186,671		$	202,477		$	186,671		$	202,477

(a)

Warranty sales for the three and six months ended January 31, 2014 include approximately $1.8 million and $2.3 million, respectively, related to the depreciation in the Canadian currency rate on the beginning of the period deferred revenue balance. The change in the Canadian currency rate did not have a significant impact on the beginning of the period deferred revenue balance for the three and six months ended January 31, 2013.

        Gross margin associated with warranties totaled $32.7 million and $34.2 million, respectively, during the three months ended January 31, 2014 and 2013 and $60.1 million and $62.3 million, respectively, during the six months ended January 31, 2014 and 2013.

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EARNINGS PER COMMON SHARE (Details)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
Reconciliation of the diluted weighted average shares
Basic weighted average shares	32,919,000	32,426,000	32,827,000	32,362,000
Effect of potential dilutive securities:
Warrants (in shares)	9,597,000	6,759,000	9,495,000	6,921,000
Stock options and restricted share awards	2,506,000	1,120,000	2,515,000	1,187,000
Diluted weighted average shares	45,022,000	40,305,000	44,837,000	40,470,000
Stock Options
Effect of potential dilutive securities:
Antidilutive securities (in shares)	900,000	1,800,000	900,000	1,800,000

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LONG-TERM DEBT (Tables)

6 Months Ended

Jan. 31, 2014

LONG-TERM DEBT

Schedule of long-term debt

Long-term debt consists of the following (in thousands):

	January 31,
	2014		2013
Revolving credit agreement	$	363,000	$	390,700
Senior secured term loan		80,000		80,000
Capital lease obligations		2,267		3,275
	$	445,267	$	473,975

Schedule of interest rate swaps

Interest rate swaps as of January 31, 2014 are as follows:

Period	Notional Amount (in thousands)		Fixed Interest Rate			Fair Value (in thousands)
October 2013 - July 2014	$	215,000		0.29	%	$	117
August 2014 - July 2016	$	215,000		1.19	%		2,474
						$	2,591

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BASIS OF PRESENTATION (Details)	6 Months Ended
	Jan. 31, 2014 item
Basis of Presentation
Number of reportable segments	3
Number of subsidiaries engaged in providing credit insurance to credit customers	3
Fine Jewelry
Basis of Presentation
Number of core national brands	3
Number of regional brands	2
Specialty retail jewelry stores
Basis of Presentation
Number of stores	1,037
Kiosk stores
Basis of Presentation
Number of stores	623

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013
Cash Flows From Operating Activities:
Net earnings	$ 23,480	$ 12,944
Adjustments to reconcile net earnings to net cash used in operating activities:
Non-cash interest	1,454	1,452
Depreciation and amortization	15,122	17,034
Deferred taxes	352	614
Loss on disposition of property and equipment	690	632
Impairment of property and equipment	488	851
Stock-based compensation	2,261	1,742
Changes in operating assets and liabilities:
Merchandise inventories	(108,272)	(94,676)
Other current assets	3,696	(4,898)
Other assets	536	1,192
Accounts payable and accrued liabilities	57,515	56,593
Deferred revenue	(2,258)	(6,144)
Other liabilities	(1,446)	(110)
Net cash used in operating activities	(6,382)	(12,774)
Cash Flows From Investing Activities:
Payments for property and equipment	(18,007)	(12,667)
Purchase of available-for-sale investments	(5,157)	(1,674)
Proceeds from sales of available-for-sale investments	959	465
Net cash used in investing activities	(22,205)	(13,876)
Cash Flows From Financing Activities:
Borrowings under revolving credit agreement	2,676,300	2,738,400
Payments on revolving credit agreement	(2,640,500)	(2,717,500)
Proceeds from exercise of stock options	311	56
Payments on capital lease obligations	(551)	(489)
Net cash provided by financing activities	35,560	20,467
Effect of exchange rate changes on cash	(782)	96
Net change in cash and cash equivalents	6,191	(6,087)
Cash and cash equivalents at beginning of period	17,060	24,603
Cash and cash equivalents at end of period	$ 23,251	$ 18,516

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OTHER CHARGES (GAINS)

6 Months Ended

Jan. 31, 2014

OTHER CHARGES (GAINS)

OTHER CHARGES (GAINS)

5. OTHER CHARGES (GAINS)

        During the second quarter of fiscal years 2014 and 2013, we recorded charges related to the impairment of long-lived assets for underperforming stores, primarily in Fine Jewelry, totaling $0.5 million and $0.9 million, respectively. The impairment of long-lived assets is based on the amount that the carrying value exceeds the estimated fair value of the assets. The fair value is based on future cash flow projections over the remaining lease term using a discount rate that we believe is commensurate with the risk inherent in our current business model. If actual results are not consistent with our cash flow projections, we may be required to record additional impairments.

        Beginning in June 2004, various class-action lawsuits were filed alleging that the De Beers group violated U.S. state and federal antitrust, consumer protection and unjust enrichment laws. During the six months ended January 31, 2013, we received proceeds totaling $1.9 million as a result of a settlement reached in the lawsuit.

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FAIR VALUE MEASUREMENTS (Details) (USD $)	3 Months Ended		6 Months Ended
	Jan. 31, 2014	Jan. 31, 2013	Jan. 31, 2014	Jan. 31, 2013
Liabilities
Impairments related to goodwill and property and equipment	$ 500,000	$ 900,000	$ 488,000	$ 851,000
Store-level property and equipment
Liabilities
Impairments related to goodwill and property and equipment			500,000	900,000
Cost | Store-level property and equipment
Liabilities
Store-level property and equipment	700,000	1,000,000	700,000	1,000,000
Fair Value
Assets
Investments	24,804,000	30,569,000	24,804,000	30,569,000
Fair Value | U.S. Treasury securities
Assets
Investments	14,306,000	22,445,000	14,306,000	22,445,000
Fair Value | U.S. government agency securities
Assets
Investments	2,074,000	2,833,000	2,074,000	2,833,000
Fair Value | Corporate bonds and notes
Assets
Investments	5,718,000	868,000	5,718,000	868,000
Fair Value | Corporate equity securities
Assets
Investments	2,706,000	4,423,000	2,706,000	4,423,000
Level 3 | Minimum
Liabilities
Weighted average cost of capital (as a percent)			14.00%
Level 3 | Maximum
Liabilities
Weighted average cost of capital (as a percent)			15.50%
Level 3 | Store-level property and equipment | Minimum
Liabilities
Weighted average cost of capital (as a percent)			14.00%
Level 3 | Store-level property and equipment | Maximum
Liabilities
Weighted average cost of capital (as a percent)			15.50%
Recurring basis | Level 1
Assets
Total assets	17,012,000	26,868,000	17,012,000	26,868,000
Recurring basis | Level 1 | U.S. Treasury securities
Assets
Investments	14,306,000	22,445,000	14,306,000	22,445,000
Recurring basis | Level 1 | Corporate equity securities
Assets
Investments	2,706,000	4,423,000	2,706,000	4,423,000
Recurring basis | Level 2
Assets
Total assets	7,792,000	3,701,000	7,792,000	3,701,000
Recurring basis | Level 2 | Interest rate swaps
Liabilities
Derivative	2,591,000		2,591,000
Recurring basis | Level 2 | U.S. government agency securities
Assets
Investments	2,074,000	2,833,000	2,074,000	2,833,000
Recurring basis | Level 2 | Corporate bonds and notes
Assets
Investments	5,718,000	868,000	5,718,000	868,000
Nonrecurring basis | Level 3 | Store-level property and equipment
Liabilities
Store-level property and equipment	$ 200,000	$ 100,000	$ 200,000	$ 100,000

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CONTINGENCIES (Details)	6 Months Ended	0 Months Ended
	Oct. 07, 2013 Purported class-action lawsuits item	Mar. 06, 2014 Purported shareholder class action lawsuits item
CONTINGENCIES
Number of lawsuits filed	3	4

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INVESTMENTS (Tables)

6 Months Ended

Jan. 31, 2014

INVESTMENTS

Schedule of investments

Our investments consist of the following (in thousands):

	January 31, 2014				January 31, 2013
	Cost		Fair Value		Cost		Fair Value
U.S. Treasury securities	$	13,492	$	14,306	$	21,086	$	22,445
U.S. government agency securities		1,984		2,074		2,641		2,833
Corporate bonds and notes		5,616		5,718		773		868
Corporate equity securities		1,888		2,706		3,501		4,423
	$	22,980	$	24,804	$	28,001	$	30,569

Schedule of debt securities outstanding by maturity date

Debt securities outstanding as of January 31, 2014 mature as follows (in thousands):

	Cost		Fair Value
Less than one year	$	3,272	$	3,299
Year two through year five		11,081		11,853
Year six through year ten		6,680		6,879
After ten years		59		67
	$	21,092	$	22,098