As disclosed in its Form 10-K filed, Zale Corporation is subject to derivative accounting for its derivative instruments under SFAS 133 “Accounting for Derivative Instruments and Hedging Activities.” SFAS 133 requires the Company to mark-to-market forward gold and silver contracts used in its hedging strategy to manage commodity cost fluctuations in inventory purchase costs.
Any changes in the fair value of derivative instruments are reported as derivative gains and losses in the Company's consolidated statement of operations. The derivative accounting treatment will not impact the cash flows of the Company. Previously issued earnings guidance does not reflect any favorable or unfavorable impact that may arise from mark-to-market accounting.
Based on existing forward contracts and current gold prices, the Company could record a derivatives loss of approximately $15 million in the first fiscal quarter but would expect to see a compensating improvement in the purchase cost of its product throughout the year.
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