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, 2012.

Overview

We are a leading specialty retailer of fine jewelry in North America. At January 31, 2013, we operated 1,103 fine jewelry stores and 643 kiosk locations 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 five brands, Zales Jewelers®, Zales Outlet®, Gordon's Jewelers®, Peoples Jewellers® and Mappins Jewellers®, and is predominantly focused on the value-oriented guest. 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.

Comparable store sales increased by 2.8 percent during the second quarter of fiscal year 2013. At constant exchange rates, which excludes the effect of translating Canadian currency denominated sales into U.S. dollars, comparable store sales increased by 2.2 percent for the quarter. Gross margin increased by 10 basis points to 50.6 percent during the second quarter of fiscal year 2013 compared to the same quarter in the prior year. The increase is due to a decrease in the cost of merchandise sold, primarily related to a lower last-in, first-out ("LIFO") inventory charge, partially offset by an increase in inventory reserves. Net earnings for the quarter were $41.2 million compared to $28.8 million for the same period in the prior year. The $12.4 million improvement is the result of higher sales, a decrease in selling, general and administrative expenses ("SG&A") related primarily to lower promotional costs and a decrease in interest expense.

Net earnings associated with warranties totaled $62.3 million for the six months ended January 31, 2013 compared to $61.8 million for the same period in the prior year. The increase is primarily the result of improved sales.

Outlook for Fiscal Year 2013

We expect to generate positive net earnings in fiscal year 2013. We believe this will be achieved as a result of positive comparable store sales (partially offset by closed stores), maintaining gross margin rates consistent with fiscal year 2012, realizing leverage on selling, general and administrative expenses based on top line growth while making selective investments in the business and interest expense savings estimated at approximately $17 million as a result of the debt refinancing transactions completed on July 24, 2012. Total interest expense is expected to be between $23 million and $25 million in fiscal year 2013 compared to $44.6 million in fiscal year 2012, which included $5 million of costs associated with the debt refinancing transactions. In addition, we expect store closures to be in line with fiscal year 2012.

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.

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 (loss) 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 (loss) 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 earnings (loss) from continuing operations as presented in our consolidated statements of operations:

                                               Three Months Ended       Six Months Ended
                                                  January 31,             January 31,
                                                2013         2012       2013        2012

Earnings (loss) from continuing operations   $    41,208   $ 28,930   $  12,944   $ (2,792 )
Depreciation and amortization                      8,605      9,293      17,477     19,182
Interest expense                                   6,088     10,429      11,930     20,360
Income tax expense                                 3,977      3,833       3,396      3,138
EBITDA                                       $    59,878   $ 52,485   $  45,747   $ 39,888

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           Six Months Ended
                                       January 31,                 January 31,
                                    2013          2012          2013          2012
Revenues                              100.0 %       100.0 %       100.0 %       100.0 %
Cost of sales                          49.4          49.5          48.5          48.4
Gross margin                           50.6          50.5          51.5          51.6
Selling, general and
administrative                         41.6          42.5          47.2          47.5
Depreciation and amortization           1.3           1.4           1.7           1.9
Other charges (gains)                   0.1           0.2          (0.1 )         0.2
Operating earnings                      7.6           6.5           2.7           2.0
Interest expense                        0.9           1.6           1.2           2.0
Earnings before income taxes            6.7           4.9           1.6             -
Income tax expense                      0.6           0.6           0.3           0.3
Earnings (loss) from
continuing operations                   6.1           4.4           1.3          (0.3 )
Loss from discontinued
operations, net of taxes                  -          (0.1 )           -             -
Net earnings (loss)                     6.1 %         4.3 %         1.3 %        (0.3 )%

Three Months Ended January 31, 2013 Compared to Three Months Ended January 31, 2012

Revenues. Revenues for the quarter ended January 31, 2013 were $670.8 million, an increase of 1.1 percent compared to revenues of $663.8 million for the same period in the prior year. Comparable store sales increased 2.8 percent as compared to the same period in the prior year. The increase in comparable store sales was attributable to a 5.1 percent increase in the average price per unit in our bridal product lines, partially offset by a decrease in the number of units sold in Fine Jewelry's core fashion product lines. The increase in revenue was also due to a $0.5 million increase in revenues related to warranties. The increase was partially offset by a decrease in revenues related to 64 store closures (net of store openings) since January 31, 2012.

Fine Jewelry contributed $590.3 million of revenues in the quarter ended January 31, 2013, an increase of 1.1 percent compared to $583.8 million for the same period in the prior year.

Kiosk Jewelry contributed $77.9 million of revenues in the quarter ended January 31, 2013 compared to $77.5 million in the same period in the prior year. The increase in revenues is due to a 3.9 percent increase in the average price per unit, partially offset by a 2.8 percent decrease in the number of units sold.

All Other contributed $2.5 million in revenues for the quarters ended January 31, 2013 and 2012.

During the quarter ended January 31, 2013, we closed 14 stores in Fine Jewelry and 10 locations in Kiosk Jewelry. In addition, we opened one location in Kiosk 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 50.6 percent of revenues for the quarter ended January 31, 2013, compared to 50.5 percent for the same period in the prior year. The 10 basis point improvement was due to a decrease in the cost of merchandise sold, primarily related to a lower LIFO inventory charge, partially offset by an increase in inventory reserves.

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 41.6 percent of revenues for the quarter ended January 31, 2013 compared to 42.5 percent for the same period in the prior year. SG&A decreased by

$3.0 million to $278.8 million for the quarter ended January 31, 2013. The decrease is related to a $7.4 million decline in promotional costs and a $1.7 million decrease in proprietary credit fees. The decrease was partially offset by a $5.9 million increase in costs associated primarily with our special events program that began in the second quarter of the prior year and performance-based compensation related to improved earnings.

Depreciation and Amortization. Depreciation and amortization as a percentage of revenues for the quarters ended January 31, 2013 and 2012 was 1.3 percent and 1.4 percent, respectively. The decrease is primarily the result of 64 store closures (net of store openings) and an increase in the number of fully depreciated assets compared to the same period in the prior year, partially offset by additional capital expenditures.

Other Charges (Gains). Other charges for the quarters ended January 31, 2013 and 2012 consists primarily of a $0.9 million and $1.0 million charge, respectively, related to the impairment of long-lived assets associated with underperforming stores.

Interest Expense. Interest expense as a percentage of revenues for the quarters ended January 31, 2013 and 2012 was 0.9 percent and 1.6 percent, respectively. Interest expense decreased by $4.3 million to $6.1 million for the three months ended January 31, 2013. The decrease is due primarily to the debt refinancing transactions completed in July 2012 which resulted in an effective interest rate of 3.7 percent for the three months ended January 31, 2013, compared to 7.2 percent for the same period in the prior year. The decrease was partially offset by an increase in the average borrowings compared to the same period in the prior year.

Income Tax Expense. Income tax expense totaled $4.0 million for the three months ended January 31, 2013, as compared to $3.8 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, 2013 Compared to Six Months Ended January 31, 2012

Revenues. Revenues for the six months ended January 31, 2013 were $1,028.2 million, an increase of 1.3 percent compared to revenues of $1,014.7 million for the same period in the prior year. Comparable store sales increased 3.2 percent as compared to the same period in the prior year. The increase in comparable store sales was attributable to a 4.9 percent increase in the average price per unit in our bridal product lines, partially offset by a decrease in the number of units sold in Fine Jewelry's core fashion product lines. The increase in revenue was also due to a $1.3 million increase in revenues related to warranties. The increase was partially offset by a decrease in revenues related to 64 store closures (net of store openings) since January 31, 2012.

Fine Jewelry contributed $897.3 million of revenues in the six months ended January 31, 2013, an increase of 1.3 percent compared to $885.6 million for the same period in the prior year.

Kiosk Jewelry contributed $125.7 million of revenues in the six months ended January 31, 2013, an increase of 1.2 percent compared to $124.2 million in the same period in the prior year. The increase in revenues is due to a 4.3 percent increase in the average price per unit, partially offset by a 2.8 percent decrease in the number of units sold.

All Other contributed $5.2 million in revenues for the six months ended January 31, 2013, an increase of 5.7 percent compared to $4.9 million for the same period in the prior year.

During the six months ended January 31, 2013, we closed 21 stores in Fine Jewelry and 12 locations in Kiosk Jewelry. In addition, we opened one location in Kiosk 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 51.5 percent of revenues for the six months ended January 31, 2013, compared to 51.6 percent for the same period in the prior year. The 10 basis point decrease was due to an increase in inventory reserves, partially offset by a decrease in the cost of merchandise sold primarily related to a lower LIFO inventory charge.

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 47.2 percent of revenues for the six months ended January 31, 2013 compared to 47.5 percent for the same period in the prior year. SG&A increased by $3.4 million to $485.1 million for the six months ended January 31, 2013. The increase is related to a $12.0 million increase in costs associated primarily with our special events program that began in the second quarter of the prior year and performance-based compensation related to improved earnings, partially offset by an $8.3 million decrease in promotional costs.

Depreciation and Amortization. Depreciation and amortization as a percentage of revenues for the six months ended January 31, 2013 and 2012 was 1.7 percent and 1.9 percent, respectively. The decrease is primarily the result of 64 store closures (net of store openings) and an increase in the number of fully depreciated assets compared to the same period in the prior year, partially offset by additional capital expenditures.

Other Charges (Gains). 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 and a $0.2 million charge associated with store closures. Other charges for the six months ended January 31, 2012 includes a $1.0 million charge related to the impairment of long-lived assets associated with underperforming stores and a $0.6 million charge associated with store closures.

Interest Expense. Interest expense as a percentage of revenues for the six months ended January 31, 2013 and 2012 was 1.2 percent and 2.0 percent, respectively. Interest expense decreased by $8.4 million to $11.9 million for the six months ended January 31, 2013. The decrease is due primarily to the debt refinancing transactions completed in July 2012 which resulted in an effective interest rate of 3.7 percent for the six months ended January 31, 2013, compared to 7.3 percent for the same period in the prior year. The decrease was partially offset by an increase in the average borrowings compared to the same period in the prior year.

Income Tax Expense. Income tax expense totaled $3.4 million for the six months ended January 31, 2013, as compared to $3.1 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 distribution facilities, 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, 2013, we had borrowing availability under the revolving credit agreement of approximately $207 million. The average vendor payment terms during the six months ended January 31, 2013 and 2012 were approximately 54 days and 50 days, respectively. As of January 31, 2013, we had cash and cash equivalents totaling $18.5 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 $23.7 million for the six months ended January 31, 2012 to $12.8 million for the six months ended January 31, 2013. The $10.9 million improvement is primarily the result of an $8.8 million reduction in cash paid for interest as a result of the debt refinancing transactions completed in July 2012 and an 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, 2013 was $836.6 million, an increase of $21.2 million compared to January 31, 2012. The increase is primarily the result of additional merchandise purchased as a result of increased sales and higher merchandise cost, partially offset by the impact of 64 store closures (net of store openings) since January 31, 2012.

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 67 to 72 percent for the period of February through September 2013, 81 to 83 percent for the period of October through December 2013 and 70 percent for January 2014.

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 $207 million as of January 31, 2013, which exceeded the excess availability requirement by $147 million. The fixed charge coverage ratio was 2.03 as of January 31, 2013. The Amended Credit Agreement contains various other covenants including restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions and asset sales. As of January 31, 2013, 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.

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, 2013, 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 of 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, 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, 2013, 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. Under the terms of the Warrant Agreement, we issued 6.4 million A-Warrants and 4.7 million B-Warrants (collectively, 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 seven years after issuance, represented 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 A-Warrants were exercisable immediately; however, the B-Warrants were not exercisable until the shares of common stock to be issued upon exercise of the B-Warrants were approved by our stockholders, which occurred on July 23, 2010. 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 for resale all or part of the common stock issuable under the Warrant Agreement.

The fair value of the Warrants totaled $21.3 million as of the date of issuance and was recorded as a long-term liability, with a corresponding discount to the carrying value of the prior term loan. On July 23, 2010, the stockholders approved the shares of common stock to be issued upon exercise of the B-Warrants. The long-term liability associated with the Warrants was . . .