Overview

Signet is the world’s largest specialty retail jeweler by sales, with stores in the US, UK, Republic of Ireland and Channel Islands.

Business segment

Signet’s results derive from one business segment – the retailing of jewelry, watches and associated services. The business is managed as two geographical operating divisions: the US division (approximately 78% of sales) and the UK division (approximately 22% of sales). Both divisions are managed by executive committees, which report through divisional Chief Executives to Signet’s Chief Executive to the Board of Directors of Signet (the “Board”). Each divisional executive committee is responsible for operating decisions within parameters established by the Board.

The following tables set forth Signet's sales and operating performance in each of the its geographical markets for each of the past three fiscal years:

(1) Includes sales made in the Republic of Ireland and Channel Islands, and other sales of $5.7 million.

US

In the US, for calendar 2009 Signet had an approximate 4.4% share of the $58.8 billion total jewelry market (source: U.S. Bureau of Economic Analysis (“BEA”)). The specialty retail jewelry market was provisionally estimated to be $27.2 billion (source: US Census Bureau). During calendar 2008 and calendar 2009, the US specialty jewelry sector underwent an accelerated rate of consolidation, as weak competitors exited the market. Three of the top ten middle market brands by sales at January 1, 2008 liquidated, and a fourth has been in Chapter 11 for over a year. Management estimates that the number of US specialty jewelry outlets has declined by between 10% and 15% since January 1, 2008, and believes that financial and liquidity issues are reducing the ability of many other specialty jewelers to compete effectively.

UK

In the UK, for calendar 2008, the most recent year for which data is available, Signet had an approximate 11% share of the £4.9 billion total jewelry market (source: Office for National Statistics). Data for 2009 is due for publication on March 30, 2010. While similar specialty retail jewelry data is not available for the UK market as for the US market, management believes that the economic environment has also resulted in an acceleration of the rate at which other jewelry stores are leaving the market and a weakening of many competitors.

The performance of the UK jewelry market can also be judged from the volume of jewelry items containing gold hallmarked by Assay Offices in the UK. Hallmarking volumes grew at a compound rate of 2.2% from 1997 to 2008. The volume declined in 2008 by 34.2% and in 2009 by 32.6% (source: Assay Offices of Great Britain).

Seasonality

Signet’s sales are seasonal, with the first and second quarters each normally accounting for slightly more than 20% of annual sales, the third quarter a little under 20% and the fourth quarter for about 40% of sales, with December being by far the most important month of the year. Due to sales leverage, Signet’s operating income is even more seasonal, with nearly all of the UK division’s, and a little over 50% of the US division’s operating income normally occurring in the fourth quarter. Selling, general and administrative costs occur broadly evenly during the year, while net financing expenses are usually higher in the second half of the year reflecting the normal peak in working capital requirements just ahead of the key holiday trading period.

Operating principles

Management aims to build long term value by focusing on the customer and providing a superior merchandise selection in high quality real estate locations. Effective advertising draws consumers into our stores, where the objective is to provide outstanding service. The operating principles that help management achieve these aims are:

• excellence in execution;
• test before investing;
• continuous improvement; and
• disciplined investment.

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Operational execution

Management recognizes that while the level of expenditure on jewelry is discretionary and consumers may trade down in a more challenging economic environment, the expression of romance and appreciation, for example through bridal jewelry and gift giving, remain very important human needs, as is self reward. Therefore, helping to satisfy those needs is central to driving sales. As a result, the training of staff to better understand the shopper’s requirements, communicate the value of the merchandise selected and ‘close the sale,’ remains a high priority. Management also aims to increase the attraction of Signet's store brands to consumers through the use of differentiated merchandise, while also offering a compelling value proposition in more basic ranges, including increased use of “value items”, by utilizing its supply chain and merchandising expertise, scale and balance sheet strength. In addition, management intends to leverage national television advertising and customer relationship marketing, which it believes are the most effective and cost efficient forms of marketing available, to at least maintain its leading share of relevant marketing messages (“share of voice”).

Strategy and objectives

In the more buoyant economic conditions experienced between fiscal 2002 and mid fiscal 2009, management’s strategy had been to:

• maintain a strong balance sheet;
• continue the achievement of sector leading performance standards on both sides of the Atlantic;
• maximize store productivity in the US and the UK; and
• grow new store space in the US.

Fiscal 2010 strategy

Reflecting the dramatic change in economic and financial market conditions in the second half of fiscal 2009, same store sales declined by 14.9% in the fourth quarter of fiscal 2009 and underlying operating margin was materially reduced. As a result management reviewed and amended Signet’s strategy to:

• enhance Signet’s position as the strongest middle market specialty retail jeweler;
• focus on profit and cash flow maximization to maintain a strong balance sheet; and
• reduce business risk.

In the changed economic environment, management judged that it was preferable, and a much lower risk strategy, to aim to maximize sales by gaining profitable market share in existing stores by focusing on enhancing competitive strengths rather than opening additional locations. 

Fiscal 2010 financial objectives

For fiscal 2010, this strategy resulted in the following financial objectives being set:

• $100 million US cost saving program;
• significantly reduce working capital;
• lower capital expenditure by about 50%, to approximately $55 million; and
• achieve a positive free cash flow of between $175 million and $225 million.

The US division slightly exceeded the cost savings target of $100 million (excluding inflation, net bad debt and volume related costs on sales above plan). Signet achieved a $221.5 million reduction in working capital primarily through reducing inventory by $226.5 million. Capital expenditure was $43.6 million, $11 million below the target level. The positive free cash flow (non-GAAP measure) in fiscal 2010 was $471.9 million, more than twice the objective, reflecting the reduction in working capital and a better than expected trading performance.

Fiscal 2011 strategy

While the results for fiscal 2010 exceeded the financial objectives for that year, and the US and UK economies showed some initial signs of stabilization in late fiscal 2010, activity remains below former levels and the outlook continues to be uncertain, particularly in the UK. The strategy in fiscal 2011 is therefore broadly similar to that of fiscal 2010. However, it is not anticipated that a further realignment of costs and working capital will be implemented given the stable sales performance in fiscal 2010.

Consistent with Signet’s strategy, management remains focused on improving store productivity, primarily by gaining profitable market share. Both the US and UK divisions entered the downturn as industry leaders and continue to endeavor to better meet customer requirements by further enhancing their competitive advantages.

This is expected to increase the performance gap between Signet and others in the sector in the basic retail disciplines of store operations, supply chain management and merchandising, marketing and quality of real estate. Over the last decade, the US division’s share of the US specialty jewelry market has increased from 5.2% to 9.4%; the aim is to achieve a further profitable increase in 2010. Significant store capacity exited the US specialty jewelry marketplace in calendar 2009 and management believes that many of the remaining firms are less able to compete due to financial pressures.

As always, profit and cash flow maximization remain a priority. Therefore management will continue to keep a tight control of gross merchandise margin, costs and inventory.

The strategy also encompasses maintaining a strong balance sheet and financial flexibility. These are significant advantages within the specialty jewelry sector when negotiating with landlords and suppliers. The business is able to invest in new merchandise ranges to drive sales and in information technology to improve productivity. In addition, a strong balance sheet enables the US division to provide credit to customers that meet consistent authorization standards at a time when other sources of consumer finance are contracting and many specialty jewelry competitors are finding third party provision of credit to be increasingly expensive.

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Fiscal 2011 financial objectives

In fiscal 2011, management’s financial objectives for the business are the following:

• Controllable costs to be little changed from fiscal 2010 at constant exchange rates, that is costs excluding net bad debt charge, expenses that vary with sales, the US vacation entitlement policy change and the impact from the amendments to the Truth in Lending Act;
• Capital expenditure of about $80 million; and
• Positive free cash flow of between $150 million and $200 million.

Trademarks and trade names

Signet is not dependent on any material patents or licenses in either the US or the UK. However, it does have several well-established trademarks and trade names which are significant in maintaining its reputation and competitive position in the jewelry retailing industry. These registered trademarks and trade names include the following in Signet’s US operations: Kay Jewelers; Jared The Galleria Of Jewelry; JB Robinson Jewelers; Marks & Morgan Jewelers; Belden Jewelers; Weisfield Jewelers; Osterman Jewelers; Shaw’s Jewelers; Rogers Jewelers; LeRoy’s Jewelers; Goodman Jewelers; Friedlander’s Jewelers; Every kiss begins with Kay; Peerless Diamond; Hearts Desire; Perfect Partner; Open Hearts by Jane Seymour; and Love’s Embrace. Trademarks and trade names include the following in Signet’s UK operations: H.Samuel; Ernest Jones; Leslie Davis; Forever Diamond; and Perfect Partner.

The value of Signet’s trademarks and trade names are material but are not reflected on its balance sheet. Their value is maintained and increased by Signet’s expenditure on staff training, marketing and store investment.

Maintaining our competitive edge

Our strengths lie in our superior staff, processes and systems accross all retail disciplines. These have been built up over time and developed according to the above objectives and philosophies.

Excellence in customer service

• Continuous training in customer service & product knowledge
• Highly motivated staff 
• Sales-facilitating customer finance programs

     Superior merchandise selection

• Demand-driven merchandising systems
• Value adding supply chain capabilities
• Increasingly differentiated product ranges

Leading brands

• Sales growth driving marketing leverage
• Largest marketing budgets in specialty jewelry sector
• Building brand values
• Repair service building trust & customer visits

     High quality real estate

• Prime store locations
• Service oriented design
• Improved customer experience through consistent store investment