Letter to Shareholders

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Fiscal 2011 was an outstanding year for Signet with same store sales up 6.7%, adjusted income before tax⁽¹⁾ increasing 50.9% and free cash flow⁽²⁾ of $315.8 million before the Make Whole Payment. We would like to thank all members of the Signet team that contributed to this great performance.

We believe that Signet is well positioned to gain profitable market share and improve operating margins as a result of our competitive strengths in the bridal category, the further development of brands that differentiate us from our competitors, our long term focus on best in class customer service, and traffic generating marketing campaigns that leverage our leading share of voice. These strengths are increasingly setting us apart in the retail marketplace.

We have had an encouraging start to Fiscal 2012, with same store sales in the first seven weeks up by 8.5%, compared with 6.6% for the comparable period last year. The US division increased by 11.4%, against 8.2% last year, and the UK division was down by 4.6%, compared to a decrease of 0.1% last year.

Fiscal 2012 strategy

The results for Fiscal 2011 exceeded our financial objectives for the year. In Fiscal 2012, profit growth and generation of strong cash flow remain priorities. Therefore the strategy in Fiscal 2012 is broadly similar to that of Fiscal 2011. Both the US and the UK divisions are specialty jewelry industry leaders and continue to endeavor to meet customer expectations by further enhancing our 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, merchandising, marketing and quality retail estate. Signet’s strategy in Fiscal 2012 is to:

• further enhance Signet’s position as the world’s largest specialty retail jeweler, through superior execution;
• improve store productivity;
• increase investment to strengthen the competitive position of the business; and
• maintain a strong balance sheet and financial flexibility.

Accordingly, we plan to invest in our sales associates to drive improvements in customer service; continue to develop and expand distribution of branded differentiated and exclusive merchandise; increase adver tising expenditure; invest in information systems, including internet technology that will assist the business to execute more efficiently and effectively; seek ways to improve the supply chain; and increase the number of store refurbishments and openings. The goal is to deliver a superior customer experience by being best in class in all areas of the business, as is appropriate for the industry leader.

In setting the financial objectives for Fiscal 2012, consideration was given to the current operating environment, which remains challenging with the developments in the US and UK economies becoming increasingly divergent. There is stabilization in the US economy and growth in the jewelry market. The UK economy is being impacted by pressure on discretionary spending due to the government’s austerity program, which includes an increase in the value added tax rate implemented on January 4, 2011, and higher consumer inflation at a time of limited growth in personal disposable income.

^{(1) Excluding $47.5 million Make Whole Payment; non-GAAP measure, see Item 6, Form 10-K.
(2) Non-GAAP measure, see Item 6, Form 10-K.}

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Fiscal 2012 financial objectives

• gain profitable market share;
• improve gross margin ratio;
• maintain selling, general and administrative expenses to sales ratio broadly similar to the level of Fiscal 2011, flexing primarily with expenses which vary with sales;
• capital expenditure of $110 million to $130 million; and
• positive free cash flow(2) of between $150 million and$200 million.

Management anticipates that the gross margin ratio will benefit from improved store productivity, which is expected to offset the impact of changes in the cost of commodities, in particular the cost of diamonds and gold and provide leverage of occupancy costs and net bad debt expense.

Investment will be directed, where prudent, to both inventory and capital projects, which are intended to build competitive advantage and support sales growth. It is planned to carry out 105 major store refurbishments and relocations (Fiscal 2011: 64 stores), and increase the number of stores openings in the US to 25 (Fiscal 2011: 7). The UK division plans to open two and close 22 stores in Fiscal 2012 (Fiscal 2011: opened 0 and closed 12). It is therefore expected that net square footage in the US division will be unchanged and that in the UK division it will decrease by approximately 3%.

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Medium Term Outlook

The strategy continues to be to build profitable market share for each of Signet’s leading store brands by focusing on best in class customer service, great marketing campaigns that build on the store brands’ leading share of voice, further development of branded products that differentiate our store brands from our competitors, and in the US, the provision of proprietary customer finance programs particularly tailored to the needs of a jewelry customer.

Management believes that Signet’s operating divisions have the opportunity to take advantage of their enhanced competitive positions to grow sales and increase store productivity. Sales growth allows the business to strengthen relationships with suppliers, facilitates the ability to develop further branded differentiated and exclusive merchandise, improves the efficiency of its supply chain, lifts marketing expenditure and improves operating margins. Management also believes that Signet’s strong balance sheet, financial flexibility and superior operating margins allow us to take advantage of investment opportunities, including space growth and strategic developments, that meet management’s demanding return criteria.

Sales and operating income

In Fiscal 2011, Signet’s same store sales increased by 6.7%, compared to a decline of 0.4% in Fiscal 2010. Total sales rose by 5.0% to $3,437.4 million (Fiscal 2010: $3,273.6 million). The breakdown of the sales performance is set out in the table below.

^{(1) The average US dollar to pound sterling exchange rate in Fiscal 2011 was $1.55 (Fiscal 2010: $1.59).
(2) Non-GAAP measure, see Item 6, Form 10-K.}

In Fiscal 2011, Signet’s gross margin was $1,242.9 million (Fiscal 2010: $1,065.6 million), an increase of 16.6%. The gross margin rate increased by 360 basis points to 36.2% (Fiscal 2010: 32.6%). The gross merchandise margin improved by 80 basis points, driven by price increases, lower diamond costs, less discounting, and favorable mix changes, which more than offset the impact of higher gold costs and the weakness of the pound sterling against the US dollar. The net bad debt to total US sales ratio improved compared to Fiscal 2010 and leverage on store occupancy costs, particularly in the US, also benefited gross margin.

Selling, general and administrative expenses for Fiscal 2011 were $980.4 million (Fiscal 2010: $916.5 million), up by 7.0%. The increase primarily reflected higher incentive payments, the non-recurrence of the Fiscal 2010 benefit due to the change in US vacation entitlement policy, management transition costs and higher advertising expenditure.

In Fiscal 2011, other operating income was $110.0 million (Fiscal 2010: $115.4 million), down by 4.7%. This reflected the impact of the amendments to the Truth in Lending Act that were implemented during the year and were largely offset by a higher level of outstanding customer finance balances and an increase in rate of interest charged.

In Fiscal 2011, net operating income increased by 40.8% to $372.5 million (Fiscal 2010: $264.5 million, after a $13.4 million non-recurring, favorable impact from a change in US vacation entitlement policy). Operating margin was 10.8% (Fiscal 2010: 8.1%). The net direct adverse impact on operating income from the amendments to the Truth in Lending Act was estimated by management to be $11.9 million.

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Interest income and expense

In Fiscal 2011, interest income was $0.7 million (Fiscal 2010: $0.8 million). Interest expense was $72.8 million (Fiscal 2010: $34.8 million), the majority of which related to the $47.5 million Make Whole Payment incurred as a result of prepaying the Private Placement Notes (the “Notes”) in full during the fourth quarter. The Notes incurred a blended fixed rate of interest of 8.11%. Management believes that interest expense in Fiscal 2012 will be $6 million to $7 million, primarily reflecting facility fees and bank service charges.

Income before income taxes

For Fiscal 2011, income before income taxes was up 30.3% to $300.4 million (Fiscal 2010: $230.5 million), and income before income taxes excluding the Make Whole Payment was up 50.9% to $347.9 million (Fiscal 2010: $230.5 million); non-GAAP measure, see Item 6, Form 10-K.

Income taxes

The charge to income taxes for Fiscal 2011 was $100.0 million (Fiscal 2010: $73.4 million), an effective tax rate of 33.3% (Fiscal 2010: 31.8%), the increase reflecting a higher proportion of profits earned in the US where the tax rate is higher, offset by the benefit from intra-group financing arrangements and the favorable resolution of certain prior year tax issues. It is expected by management that, subject to the geographic mix of taxable income and the outcome of uncertain tax positions, Signet’s effective tax rate in Fiscal 2012 will be approximately 36%.

Net income
Net income for Fiscal 2011 was up 27.6% to $200.4 million (Fiscal 2010: $157.1 million), and net income excluding the Make Whole Payment was up 46.3% to $229.9 million; non-GAAP measure, see Item 6, Form 10-K.

Earnings per share

For Fiscal 2011, basic and diluted earnings per share were $2.34 and $2.32 (Fiscal 2010: $1.84 and $1.83) an increase of 27.2% and 26.8% respectively. Excluding the Make Whole Payment, basic and diluted earnings per share were $2.68 and $2.66, up 45.7% and 45.4% respectively; non-GAAP measures, see Item 6, Form 10-K.

Liquidity and capital resources

In Fiscal 2011, positive free cash flow, excluding the Make Whole Payment, was $315.8 million (Fiscal 2010: $471.9 million); non-GAAP measure, see Item 6, Form 10-K. At January 29, 2011, Signet had no long term debt (January 30, 2010: $280.0 million). On March 9, 2010, Signet made a prepayment at par of $50.9 million of Notes. On November 26, 2010, Signet exercised its right to prepay in full the remaining $229.1 million of outstanding Notes. This resulted in a reduction in interest expense of $101.7 million over the remaining term of the Notes. The prepayment required the payment of all accrued interest up to the Prepayment Date plus a premium, the Make Whole Payment, which amounted to $47.5 million. At January 29, 2011, Signet had cash and cash equivalents of $302.1 million (January 30, 2010: $316.2 million).

US operating review

In Fiscal 2011, the US division’s same store sales increased by 8.9%, and its market share of the specialty jewelry market increased by 30 basis points to 9.3% in calendar 2010 from 9.0% in calendar 2009, based on initial estimates by the US Census Bureau.

In Fiscal 2011, both the bridal category and branded differentiated and exclusive products increased their share of the US division’s sales. In the bridal category, the convergence of superior customer service, supply chain expertise and the ability to offer in-house customer finance resulted in an outstanding customer experience, giving the US division a significant competitive sales advantage. Within the bridal category, Neil Lane Bridal™ and the Tolkowsky® Diamond were tested successfully. Branded differentiated and exclusive merchandise, such as The Leo Diamond®, Open Hearts by Jane Seymour®, Loves Embrace® , Le Vian® and Charmed Memories®, increased their participation by about 300 basis points to 22% of the US division’s merchandise sales. In addition, Jared also benefited from a recovery in spending among US households with above average incomes, and the continued expansion of the Pandora® range.

In Fiscal 2011, average unit selling price for the US division, excluding the charm bracelet category, rose by 8.0%, reflecting changes in the store brand sales mix, customers trading up the US division’s pricing structure, merchandising initiatives, and selective price increases made during Fiscal 2011. Including the charm bracelet category, the average unit selling price decreased, but was more than compensated for by the volume of units sold, which increased significantly. In Fiscal 2011, the US division’s gross merchandise margin was up by 120 basis points compared to Fiscal 2010 and benefited from selective price increases implemented in the first and  third quarters of Fiscal 2011, lower average diamond inventory costs, and reduced price discounting, which more than offset a higher cost of gold.

In-house customer finance participation in the US division was 54.2% (Fiscal 2010: 53.9%) and the net bad debt to total US sales ratio was 4.2% (Fiscal 2010: 5.6%). Management believes this reduction reflected the quality of credit authorization and collection procedures, and a more stable rate of unemployment. The average monthly collection rate was 12.6% (Fiscal 2010: 12.5%). Net US customer in-house finance receivables at January 29, 2011 were $927.7 million (January 30, 2010: $849.3 million).

Selling, general and administrative expenses were tightly controlled in Fiscal 2011, but variable expenses rose due to the level of sales and operating income growth achieved. Also in Fiscal 2011, gross advertising expenditure increased by 5.6% to $161.5 million (Fiscal 2010: $153.0 million), a marketing to sales ratio of 5.9% (Fiscal 2010: 6.0%). The higher level of gross advertising expenditure mainly reflected fourth quarter activity, with both an increased level of television advertising impressions and media cost inflation. Television adverting impressions in the fourth quarter of Fiscal 2011 were up 5% for Kay and 10% for Jared.

UK operating review

In Fiscal 2011, net operating income for the UK division increased by 0.9% to $57.0 million (Fiscal 2010: $56.5 million), an increase of 3.4% at constant exchange rates; non-GAAP measure, see Item 6, Form 10-K. The UK division’s operating margin increased by 50 basis points to 8.2% (Fiscal 2010: 7.7%), reflecting a tight control of costs, which more than offset lower sales and a decrease in gross merchandise margin.

In Fiscal 2011, the charm bracelet category continued to perform well, as did fashion watches and the bridal category, including gold rings. Average unit selling price, excluding the charm bracelet category, increased by 9.2% in Fiscal 2011, primarily reflecting price increases implemented to counter pressure on gross merchandise margin. The UK division’s gross merchandise margin rate was down by 40 basis points in Fiscal 2011 compared to Fiscal 2010. The impact of a weak pound sterling to US dollar exchange rate, an increase in the cost of gold and a higher rate of value added tax were largely offset by price increases. Store occupancy costs were tightly controlled. Selling, general and administrative expenses were also closely managed. In Fiscal 2011, gross advertising expenditure increased by 1.8% to $16.6 million (Fiscal 2010: $16.3 million), a marketing to sales ratio of 2.4% (Fiscal 2010: 2.2%), an increase of 4.5% in pounds sterling. The higher level of gross advertising expenditure reflected fourth quarter activity, with both an increased level of television advertising impressions and media inflation.