Comparison of fiscal 2010 to fiscal 2009
Summary of fiscal 2010
- Same store sales: down by 0.4%
- Total sales: down by 1.6% to $3,290.7 million
- Operating margin: increased to 8.4%
- Underlying operating margin 8.0%: up 110 basis points(1)
- Operating income: up to $275.8 million
- Underlying operating income: up by 14.0% to $262.4 million(1)
- Net income before income taxes: up to $241.8 million
- Underlying net income before income taxes: up by 13.7% to $228.4 million(1)
- Diluted earnings per share: up to $1.91
- Underlying diluted earnings per share: up 15.9% to $1.82(1)
(1) Non-GAAP measure.
Sales
Same store sales fell 0.4% in fiscal 2010. Total sales were down by 1.6% to $3,290.7 million (fiscal 2009: $3,344.3 million), reflecting an increase of 0.6% at constant exchange rates; non-GAAP measure. The breakdown of the sales performance was as follows:
Change in sales
US | UK | Signet | |
|---|---|---|---|
| Same store sales | 0.2 | (2.4) | (0.4) |
| Change in net new store space | 0.6 | 2.3 | 1.0 |
| Change at constant exchange rates | 0.8 | (0.1) | 0.6 |
| Exchange translation(1) | - | (9.2) | (2.2) |
| Total sales growth as reported | 0.8 | (9.3) | (1.6) |
| Sales, million | $2,557.5 | $733.2 | $3,290.7 |
| % of total | 77.7% | 22.3% | 100.0% |
(1) The average pound sterling to US dollar exchange rate for the period was £1/$1.59 (fiscal 2009: £1/$1.75).
US sales
The sales performance in fiscal 2010 was primarily influenced by the challenging economic conditions with same store sales up 0.2% and total sales up by 0.8% to $2,557.5 million (fiscal 2009: $2,536.1 million). Trading in fiscal 2010 started much stronger than the end of the fourth quarter of fiscal 2009, with the Valentine’s Day period achieving a small increase in same store sales. The balance of the first quarter, and the second quarter saw same store sales down between 4% and 6%. Spending by higher income consumers was particularly weak in the first half, and this was reflected in the performance of Jared. The rate of decrease in same store sales slowed in the third quarter to 2.4% as a result of a marked slowing in the rate of sales decline experienced in Jared. The mall brands maintained broadly stable same store sales in the first three quarters. Same store sales in the fourth quarter increased by 7.4%. In fiscal 2010, the contribution from net changes in store space was 0.6%, much less than in recent years. Sales performance by format is given in the table below.
Fiscal 2010 $million | Fiscal 2009 $million | Change % | Change in store space % | Same store sales % | Change in average % | |
|---|---|---|---|---|---|---|
| Kay | 1,508.2 | 1,439.1 | 4.8 | (0.4) | 4.4 | (7.4) |
| Regional brands | 326.8 | 370.8 | (11.9) | 7.9 | (4.0) | (4.8) |
| Mall brands | 1,835.0 | 1,809.9 | 1.4 | 1.4 | 2.8 | (7.1) |
| Jared | 722.5 | 726.2 | (0.5) | (5.5) | (6.0) | (7.3)(1) |
| US Division | 2,557.5 | 2,536.1 | 0.8 | (0.6) | 0.2 | (16.8) |
(1) Excluding charm bracelet category.
In fiscal 2010, there was a decrease in average unit selling price of 16.8%, which was due to mix changes reflecting customers’ buying patterns rather than reduced prices. The decline in average unit selling price was balanced by an increase in transaction volumes, which resulted in same store sales being little different from the prior year. During the first nine months the decrease in average unit selling price was 13%, and in the fourth quarter the decline was 19.6%. For Kay and the regional brands, the average unit selling price in fiscal 2010 fell by 7.4% and 4.8% respectively. For Jared, the average unit selling price, excluding the charm bracelet category, decreased by 7.3% in fiscal 2010.
Charm bracelets are a successful initiative tested in some Jared stores beginning in October 2008 and rolled out to nearly all Jared stores in October 2009. The characteristics of the charm bracelet category are very different from that of the typical Jared merchandise. For example, the average unit selling price of a charm is only about 5% of the average selling price of other merchandise in Jared; however charms have a much greater frequency of purchase and a transaction often involves multiple units. If the charm bracelet category was included in the Jared average unit selling price, the trend in customer transactions in a significant majority of the business would not be demonstrated.
UK sales
In fiscal 2010, UK same store sales decreased by 2.4% and total sales declined by 9.3% to $733.2 million (fiscal 2009: $808.2 million), a fall of 0.1% at constant exchange rates; non-GAAP measure. In the first three quarters of fiscal 2010, same store sales decreased by 3.0%. The fourth quarter saw some improvement in trend with same store sales declining by 1.5%. The average unit selling price rose, reflecting price increases implemented to offset a rise in the cost of goods sold. The impact of changes in net store space was a sales increase of 2.3% reflecting a lower level of temporary store closures as a result of a reduced level of store refurbishments. The change in the average US dollar to pound sterling exchange rate from $1.75 in fiscal 2009 to $1.59 in fiscal 2010 reduced reported sales by 9.2%. Sales in pounds sterling declined in H.Samuel by 1.0% to £247.8 million (fiscal 2009: £250.3 million) and in Ernest Jones rose by 0.7% to £209.8 million (fiscal 2009: £208.3 million).
Fiscal 2010 $million | Fiscal 2009 $million | Change % | Impact of % | Change % | Change % | Same % | Change % | |
|---|---|---|---|---|---|---|---|---|
| H.Samuel | 394.0 | 438.0 | (10.0) | (9.0) | (1.0) | (0.7) | (1.7) | 7.8 |
| Ernest Jones | 333.5 | 364.5 | (8.5) | (9.2) | 0.7 | (3.9) | (3.2) | 12.5(2) |
| Other | 5.7 | 5.7 | n/a | n/a | n/a | n/a | n/a | n/a |
| UK division | 733.2 | 808.2 | (9.3) | (9.2) | (0.1) | (2.3) | (2.4) | 5.5 |
(1) Non-GAAP measure.
(2) Excluding charm bracelet category.
In fiscal 2010, the average unit selling price was up 5.5%, which was primarily due to higher prices reflecting an increase in the cost of acquiring merchandise as a result of the weakness of the pound sterling against the US dollar, and higher commodity costs. However, the increase in average unit selling prices was balanced by a decrease in transaction volumes resulting in same store sales being little different from the prior year. During the first three quarters the average unit selling price increased by 6.6%, and in the fourth quarter it rose by 3.9%. The average unit selling price in H.Samuel rose by 7.8% and in Ernest Jones, excluding the charm bracelet category, by 12.5%. The Ernest Jones average unit price excludes the charm bracelet category as its characteristics are very different from that of the typical Ernest Jones merchandise. For example, the average unit selling price of a charm is only about 10% of the average selling price of other merchandise in Ernest Jones but charms have a much greater frequency of purchase and a transaction often involves multiple units.
Cost of sales
In fiscal 2010, cost of sales was $2,213.8 million (fiscal 2009: $2,264.2 million), a decline of 2.2% as reported and 0.1% at constant exchange rates; non-GAAP measure. The decrease in cost of sales reflected lower sales, a small increase in gross merchandise margin rate, lower operating costs of retail units and a higher level of net bad debt provision on customer receivables in the US division.
Gross margin
In fiscal 2010, gross margin was $1,076.9 million (fiscal 2009: $1,080.1 million), down by 0.3% and up by 2.1% at constant exchange rates; non-GAAP measure.
Selling, general and administrative expenses
In fiscal 2010, selling, general and administrative expenses were $916.5 million (fiscal 2009: $969.2 million), down by 5.4% on a reported basis and by 3.4% at constant exchange rates; non-GAAP measure. This decrease reflected savings in employment costs and lower marketing expenditure.
Other operating income
In fiscal 2010, other operating income, which is predominantly interest income from in-house customer finance, was $115.4 million (fiscal 2009: $119.2 million), down by 3.2%. This primarily reflected lower sales in fiscal 2009. In fiscal 2010, there was a lower monthly collection rate of 12.5% (fiscal 2009: 13.1%). Sales using in-house customer finance were similar to the prior year at 53.5% of total sales (fiscal 2009: 53.2%)
Operating income, net
In fiscal 2010, operating income was $275.8 million (fiscal 2009: loss $297.3 million), an underlying increase of 14.0%. The underlying increase at constant exchange rates was 16.7%; non-GAAP measure. The factors influencing the operating margin are set out below.
Operating margin movement
| US | UK | Total |
|---|---|---|---|
| Fiscal 2009 operating margin | (9.3) | (4.6) | (8.9)(2) |
| Goodwill impairment and relisting costs | 16.1 | 13.4 | 15.8 |
| Fiscal 2009 underlying operating margin(1) | 6.8 | 8.8 | 6.9(2) |
| Gross merchandise margin | 0.4 | (0.2) | 0.2 |
| Expenses leverage/(deleverage) | 1.5 | (0.9) | 0.9 |
| Fiscal 2010 underlying operating margin(1) | 8.7 | 7.7 | 8.0(2) |
| Change in US vacation entitlement policy | 0.5 | - | 0.4 |
| Fiscal 2010 operating margin | 9.2 | 7.7 | 8.4(2) |
(1) Non-GAAP measure.
(2) Includes unallocated costs, principally central costs; see page 66 of Form 10K.
US division operating income
In fiscal 2010, the US division’s operating income was $235.8 million (fiscal 2009: loss $236.4 million), an underlying increase of 29.6%; non-GAAP measure. See table above for an analysis of the movement in operating margin.
Gross merchandise margin rate was in-line with management’s expectations at the start of fiscal 2010 and increased by 40 basis points compared to fiscal 2009. There was a broadly neutral impact from commodity costs, with lower diamond prices offsetting a higher cost of gold. The growth in differentiated merchandise was balanced by higher sales of value items. A lower average selling price, the growth in sales by Kay and price increases implemented in the first quarter of fiscal 2009 were beneficial. In the fourth quarter, a decline of 30 basis points in gross merchandise margin reflected a planned increase of more promotional value items in the sales mix.
A $100 million cost saving program was an important initiative in fiscal 2010. Prompt action was taken at the start of the year to realign the cost base to the lower level of sales, without weakening the division’s competitive position. Store staff hours and divisional head office staffing levels were both reduced. The $100 million target was slightly exceeded and some of the additional savings were reinvested in national television advertising in the fourth quarter. The net change in space had little impact on expenses in fiscal 2010. The cost reduction program more than offset the combined effect of cost inflation and an adverse net bad debt performance, delivering a net positive impact of 150 basis points to US operating margin from expenses.
As part of the cost reduction program, it was planned that the ratio of gross marketing spend to sales should be realigned to a range typical of the period before fiscal 2008, that is 6.4% to 7.0%, from 7.4% in fiscal 2009. However, as a result of a better than anticipated performance in fourth quarter sales, the ratio was 6.0%. Marketing expenditure was concentrated on the most productive channels and brands, that is national television advertising for Kay and Jared, and direct marketing for all brands. Gross marketing expenditure was $153.0 million (fiscal 2009: $188.4 million).
The largest element of the central cost reductions related to the dismantling of the infrastructure previously required to support annual space growth of 8% to 10%. It is anticipated that future changes in store hours are likely to be proportionate to changes in sales; while the advertising to sales ratio is expected to return over time to historic levels, subject to unexpected changes in fourth quarter sales performance. The infrastructure to support space growth will only begin to be reinstated when the US division identifies new opportunities that satisfy the required investment returns.
The net bad debt charge at 5.6% of total US sales during fiscal 2010 (fiscal 2009: 4.9%) continued well above the 2.8% to 3.4% range of the ten years prior to fiscal 2009. Some initial signs of stabilization in the ratio were seen in the fourth quarter. Credit participation was little changed at 53.5% during fiscal 2010 (fiscal 2009: 53.2%).
Change in US vacation entitlement policy
In fiscal 2010, there was a $13.4 million benefit from a change in the US division’s vacation entitlement policy that will not be repeated in future years. Previously employees became entitled to their full annual vacation allowance if they were employed on the first day of the year. Commencing in fiscal 2010, holiday entitlement is accrued over the fiscal year broadly in line with employment.
UK division operating income
In fiscal 2010, the UK division’s operating income was $56.5 million (fiscal 2009: loss $37.4 million), an underlying decrease of 21.0%, and of 13.1% at constant exchange rates; non-GAAP measure. See table above for an analysis of the movement in operating margin.
Gross merchandise margin percentage was a little better than management’s expectations at the start of fiscal 2010 and decreased by 20 basis points compared to fiscal 2009. Price increases largely offset the impact of higher gold costs and the weakness of pound sterling against the US dollar.
Despite a broadly stable pound sterling cost base, there was a negative impact of 90 basis points on the operating margin due to sales deleverage as a result of the decline in same store sales. The cost base was a little higher than originally targeted, as additional property closure expenses were incurred in the fourth quarter. While UK management undertook a cost reduction exercise, there was less opportunity to reduce costs than in the US division as a similar review had already occurred in the UK in fiscal 2007. In addition, inflationary cost pressures were greater in the UK than in the US from property rental expenses and pension costs. Gross marketing spend was reduced to $16.3 million in fiscal 2010 (fiscal 2009: $22.1 million), the decrease at constant exchange rates was 19.1%. The marketing spend to sales ratio declined to 2.2% (fiscal 2009: 2.8%). H.Samuel continued to use television advertising in the fourth quarter, but at a reduced level. Customer relationship marketing was increased for both H.Samuel and Ernest Jones.
Unallocated costs
Unallocated costs principally relate to costs that are not allocated to the US and UK divisions in Signet’s management accounts (“central costs”), and were $16.5 million in fiscal 2010 (fiscal 2009: $23.5 million), the decrease due to the absence of $10.5 million relisting costs. The underlying increase mainly reflected higher costs relating to staff and advisors.
Interest income and expense
In fiscal 2010, interest income fell to $0.8 million (fiscal 2009: $3.6 million), as a result of lower interest rates.
Interest expense rose to $34.8 million (fiscal 2009: $32.8 million). While there were lower levels of variable debt and a $100 million prepayment at par to note holders made in March 2009, the rate of interest on the outstanding notes increased by 200 basis points, and there was a charge of $3.4 million in the first quarter in respect of fees associated with the amendment of Signet’s borrowing agreements. Further costs of $5.9 million were capitalized and $0.9 million of the capitalized amount was amortized in fiscal 2010.
Income/(loss) before income taxes
In fiscal 2010, income before income taxes was $241.8 million (fiscal 2009: loss $326.5 million), an underlying increase of 13.7%, and an underlying increase at constant exchange rates of 16.9%; non-GAAP measures.
Provision for income taxes
In fiscal 2010, the charge to income taxes was $77.7 million (fiscal 2009: $67.2 million), an effective tax rate of 32.1% (fiscal 2009: (20.6%)). The underlying effective tax rate in fiscal 2010, excluding the US vacation entitlement policy adjustment was 31.8% (fiscal 2009: 33.5% underlying effective tax rate excluding goodwill impairment and relisting costs). The decline of 170 basis points in the underlying effective tax rate primarily related to the benefit of changes in intra-group financing arrangements and the favorable resolution of certain prior year tax issues. Subject to the geographic mix of taxable income and the outcome of various uncertain tax positions (see Note 6 of Item 8 of Form 10K), the effective tax rate in fiscal 2011 is expected to be approximately 33%.
Net income/(loss)
In fiscal 2010, net income was $164.1 million (fiscal 2009: net loss $393.7 million) reflecting an underlying increase of 16.5%, and an underlying increase at constant exchange rates of 19.9%; non-GAAP measure.
Earnings/(loss) per share
In fiscal 2010, basic and diluted earnings per share were $1.92 and $1.91 respectively (fiscal 2009: loss per share basic and diluted: $4.62), an underlying increase in basic and diluted earnings per share of 16.6% and 15.9%, and an underlying increase at constant exchange rates of 20.4% and 19.7% respectively; non-GAAP measure.