Letter to Shareholders

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GROUP FINANCIAL REVIEW

Income Statement

In fiscal 2009, the Group loss before income taxes was $326.5 million (fiscal 2008: income $336.2 million), including a goodwill impairment charge of $516.9 million and non-recurring relisting costs of $10.5 million, see below for further details. Before these items, the Group’s income before income taxes was $200.9 million, see note 11. Same store sales were down 8.2%. Total sales were 8.8% lower at $3,344.3 million (fiscal 2008: $3,665.3 million), down 5.7% at constant exchange rates, see note 11. The average pound sterling to US dollar exchange rate for the period was £1/$1.75 (fiscal 2008: £1/$2.00). The components of the change in sales are set out below:

Net operating income excluding goodwill impairment and relisting costs was $230.1 million (fiscal 2008: $358.7 million), see note 11, and operating margin was 6.9% (fiscal 2008: 9.8%). On a reported basis there was a net operating loss of $297.3 million. The factors influencing the lower operating margin are set out below:

(1) Includes unallocated costs, principally Group costs.

Goodwill impairment

In prior years, the Group prepared its accounts under International Financial Reporting Standards (“IFRS”) and reflected on its balance sheet only $30.6 million of goodwill relating to an acquisition made in 2000. Following the move of listing to the New York Stock Exchange (“NYSE”) and the adoption of US Generally Accepted Accounting Principles (“US GAAP”), goodwill of $486.3 million relating to acquisitions made by the Group in 1990 or earlier was also required to be reflected on the balance sheet. Under US GAAP, the Group is required to undertake an annual goodwill impairment test at its year end or when there is a triggering event. In fiscal 2009, in addition to the annual impairment review there were a number of triggering events in the fourth quarter due to a significant decline in profitability reflecting the impact of the economic downturn on the Group’s operations and an even greater decline in its share price resulting in a substantial discount of the market capitalization to tangible net asset value (that is shareholders’ funds excluding intangible assets). An evaluation of the recorded goodwill was undertaken and it was determined that it was impaired. Accordingly, to reflect the impairment, the Group recorded a non-cash charge of $516.9 million, which eliminated the value of goodwill on its balance sheet. The goodwill write-off has no impact on the Group’s borrowing agreements or the net tangible assets of the Group.

Relisting costs

On September 11, 2008 the primary listing of the Group moved to the NYSE and the parent company of the Group became Signet Jewelers Limited, a Bermuda domiciled company. The non-recurring costs associated with these changes amounted to $10.5 million.

Group central costs, financing items and taxation

Group central costs were $13.0 million in fiscal 2009 (fiscal 2008: $15.8 million), largely due to the movement in the pound sterling to US dollar exchange rate, as well as a foreign exchange gain more than offsetting an underlying increase in costs. Net financing costs rose to $29.2 million (fiscal 2008: $22.5 million), the increase being primarily due to higher levels of net debt. The income tax charge was $67.2 million (fiscal 2008: $116.4 million), an underlying effective tax rate before goodwill impairment and relisting costs of 33.5% (fiscal 2008: 34.6%). The decline of 1.1% in the underlying effective rate reflected a lower proportion of profits from the US division and a reduced level of expenditure disallowable for tax than in fiscal 2008. It is expected that, subject to the outcome of various uncertain tax positions, the Group’s underlying effective tax rate in fiscal 2010 will be approximately 36%, primarily due to an anticipated higher proportion of expenditure disallowable for tax in relation to income before tax.

Net income, earnings per share and dividends

The net loss for fiscal 2009 was $393.7 million (fiscal 2008: $219.8 million net income). Excluding the impairment to goodwill and relisting costs, net income for fiscal 2009 was $133.7 million (fiscal 2008: $219.8 million), see note 11. On a reported basis, both basic and diluted loss per share was $4.62 (fiscal 2008 earnings per share: basic $2.58 and diluted $2.55). Basic and diluted earnings per share excluding the impairment to goodwill and relisting costs were both $1.57, see note 11. In the light of economic prospects and financial market conditions, as well a focus on debt reduction, the Board concluded that it is not currently appropriate to pay dividends. This policy is reflected in the amended borrowing agreements.

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Cash flow and net debt

Set out below is a summary of the Group’s cash flows for fiscal 2009 and fiscal 2008:

In fiscal 2009, net cash flow provided by operating activities increased to $164.4 million (fiscal 2008: $140.8 million), although there was a net loss of $393.7 million (fiscal 2008: $219.8 million net income). The adjustments for non-cash items were $653.5 million (fiscal 2008: $113.8 million) and included the impairment to goodwill of $516.9 million. The adjustment for depreciation and amortization in fiscal 2009 at $114.5 million was similar to fiscal 2008. Therefore cash flow provided by operations was $259.8 million (fiscal 2008: $333.6 million).

In fiscal 2009, there was a much smaller outflow from operating assets and liabilities of $95.4 million (fiscal 2008: outflow of $192.8 million). There was a decrease in inventories of $12.7 million compared to an increase of $96.8 million in fiscal 2008, given the much reduced space growth in the US division and tight control of inventory on both sides of the Atlantic. In addition, the level of accounts receivable reduced by $20.5 million, reflecting the decline in sales in the US division partly offset by a slower collection rate of outstanding receivables (fiscal 2008: $56.2 million increase). There was also a substantial increase in the adverse impact of exchange rate changes on currency swaps of $49.6 million (fiscal 2008: $1.9 million). The Group has historically swapped pound sterling deposits into US dollars on a short term basis to reduce the level of US dollar debt. The size of such cash deposits fluctuates during the year and also reflects an historic restriction on dividend payments by the UK division. In the fourth quarter of fiscal 2009, following a ruling by the High Court of Justice in England & Wales, the Group had a greatly increased ability to reduce the size of the pound sterling cash deposits on a permanent basis by paying dividends up through the corporate structure. Advantage was taken of this to significantly reduce the future exposure of the Group’s liquidity position to changes in the pound sterling to US dollar exchange rate.

Net cash flow used in investing activities was $113.3 million (fiscal 2008: $139.4 million) as a result of reduced store investment in the US partly offset by an increased number of Ernest Jones refurbishments. Free cash inflow in fiscal 2009 was $51.1 million (fiscal 2008: $1.4 million).

Dividends of $123.8 million were paid (fiscal 2008: $123.9 million). The net change in common shares was minimal (fiscal 2008: outflow $23.0 million).

Net debt

Net debt at January 31, 2009 was $470.7 million (February 2, 2008: $374.6 million). Of the $96.1 million increase in net debt (fiscal 2008: $141.4 million increase), $23.5 million (fiscal 2008: $4.1 million decrease) was due to the effect of exchange rate changes. Group gearing (that is the ratio of net debt to shareholders' equity excluding goodwill) at January 31, 2009 was 29.2% (February 2, 2008: 21.2%). The peak level of net debt in fiscal 2009 was about $670 million (fiscal 2008: about $620 million).

Amended borrowing agreements

Discussions to make amendments to, and reduce the size of, the Group’s borrowing facilities were initiated by Signet in November 2008, in light of a significant deterioration in the economic environment. The goal of the discussions was to provide the Group with additional financial flexibility in the medium term, while more appropriately structuring the borrowing facilities required by the significantly lower level of net debt now expected, based on the Group’s revised operating and expansion strategy. A satisfactory outcome to these discussions was recently achieved and details of the amended agreements were announced on March 16, 2009. In accordance with that announcement, a prepayment of $100 million of the notes at par plus accrued interest was made on March 18, 2009. Signet was in compliance with the terms of the original agreements in respect of fiscal 2009.

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FISCAL 2009 OPERATING REVIEW

US Division (circa 76% of Group sales)

In a very challenging retail environment, US same store sales were down 9.7% and total sales were $2,536.1 million (fiscal 2008: $2,705.7 million). Sales performance was primarily driven by the difficult economic conditions with same store sales falling by 6.0% in the first three quarters. Following the sharp deterioration in consumer sentiment in mid September, and a further decline in early December, same store sales in the fourth quarter were 16.1% lower than the comparable quarter in fiscal 2008. Spending by higher income consumers was particularly weak in the fourth quarter, and this was reflected in the performance of Jared.

Operating income before goodwill impairment was $171.6 million (fiscal 2008: $265.2 million), see note 11. The operating margin was 6.8% (fiscal 2008: 9.8%), see table above for an analysis of the movement. Gross merchandise margin rate was ahead of expectations and increased by 120 basis points compared to last year, with a particularly strong performance in the fourth quarter. This reflected price increases implemented during the first quarter of fiscal 2009 and favorable changes in mix resulting from management initiatives, including the planned expansion of exclusive merchandise, which more than offset commodity cost increases. There was a negative impact of 380 basis points caused by the deleverage of the underlying cost base due to the decline in same store sales, which included the adverse movement in performance of the receivables portfolio, and an unfavorable impact of 40 basis points from new store space.

During fiscal 2009, training focused on product knowledge and developing selling skills appropriate for the more challenging marketplace. Enhanced in-store technology reduced administrative burdens and improved the efficiency of store, district and regional management. Benefits were seen in compliance monitoring, store feedback and the ability to identify store and divisional level opportunities to enhance training. Further improvements to repair services, an important driver of footfall and customer confidence, were also implemented. Reflecting lower sales volumes, store staff hours were reduced, and divisional head office staffing levels were decreased through attrition.

The average unit selling price was flat in fiscal 2009 compared to fiscal 2008. During the first nine months of fiscal 2009, the increase was 7% (mall brands up by 7% and Jared up by 5%), reflecting the price increases implemented in the first quarter. However, in the fourth quarter the consumer was seen to be trading down and the average unit selling price decreased by 10% (mall brands down by 7% and Jared down by 4%). The Jared average unit price excludes the impact of the launch of a new charm bracelet range in some stores. While all major merchandise categories were down over the year on a same store basis, the bridal category, which accounts for between 45% and 50% of sales, performed better than average, as did the proprietary Leo diamond range. The US division also successfully launched new, exclusive ranges, such as a specially designed collection by Jane Seymour and merchandise from Le Vian. The US division’s merchandising and inventory expertise enabled it to respond promptly to the rapid and substantial changes in customer buying patterns in the fourth quarter, and to realign inventory levels to plan by the end of fiscal 2009.

To reflect lower anticipated sales levels, marketing expenditure was concentrated on the most productive channels and brands. As a result of the unexpected sharp decline in fourth quarter sales, the ratio of gross marketing spend to sales during fiscal 2009 was again above planned levels, at 7.4% (fiscal 2008: 7.5%). Dollar gross marketing expenditure decreased by 7.6% to $188.4 million (fiscal 2008: $204.0 million). Marketing efforts were focused on national television advertising for Kay and Jared, resulting in their ‘share of voice’ growing. In addition, the promotional cadence was increased, particularly during the fourth quarter. In the third quarter an e-commerce capability was added to the Jared website.

The net bad debt charge at 4.9% of total sales during fiscal 2009 (fiscal 2008: 3.4%) was well above the tight range of the past ten years. The increase in net bad debt was partially offset by higher income from the receivables portfolio. Credit participation increased somewhat to 53.2% during fiscal 2009 (fiscal 2008: 52.6%), reflecting a higher level of applications offset by a significant increase in the level of credit applications rejected. The fall in credit acceptance rates followed management action to reduce exposure to particular customer attribute groups, and a lower proportion of customers satisfying the US division’s credit requirements.

Overall, the expense base in fiscal 2009 was similar to fiscal 2008, excluding the impact of new space. Tight control of costs offset the increase in net bad debt charge and inflationary cost increases in occupancy, utilities, freight and staff wage rates. Actions taken included reductions in store staff hours to partly reflect lower transaction volumes, significantly lower levels of radio advertising and savings in central costs.

Given the deteriorating environment, and the Group’s strict investment criteria, action was taken in early fiscal 2009 to sharply slow the rate of net store space growth. This was achieved by reducing the number of stores opened and increasing store closures as leases expired. Net store space in fiscal 2009 increased by a little under 4% (fiscal 2008: 10%), see table below in Fiscal 2010 Group Strategy and Objectives for details. Capital expenditure in new and existing stores was $56.3 million (fiscal 2008: $88.1 million). Working capital investment, that is inventory and receivables, associated with space growth was $66.5 million (fiscal 2008: $118.8 million).

UK Division (circa 24% of Group sales)

In fiscal 2009, same store sales decreased by 3.3% (H.Samuel down by 2.6% and Ernest Jones down by 4.0%). Total sales decreased by 3.8% at constant exchange rates and were $808.2 million as reported (fiscal 2008: $959.6 million). In the first nine months of fiscal 2009, same store sales increased by 0.8% (H.Samuel up by 1.1% and Ernest Jones up by 0.5%). As in the US, the fourth quarter saw a sharp deterioration in consumer sentiment with the upper end consumer being particularly weak. As a result, same store sales in the fourth quarter declined by 9.2% (H.Samuel down by 7.8% and Ernest Jones by 11.0%).

Net operating income before goodwill impairment was $71.5 million (fiscal 2008: $109.3 million), see note 11. The operating margin was 8.8% (fiscal 2008: 11.4%), see table above for an analysis of the movement. The gross merchandise margin rate was unchanged, with price increases offsetting adverse mix changes, greater promotional activity and higher commodity costs. There was a negative impact of 260 basis points reflecting the deleverage of the underlying cost base as a result of the decline in same store sales.

The average unit selling price in fiscal 2009 increased by 9%, reflecting price increases implemented in late fiscal 2008 and early fiscal 2009 and merchandise mix changes. The consumer was more cautious in the fourth quarter, with the average unit selling price in the first nine months up by 12% over the comparable period and up by only 4% in the fourth quarter. The watch category outperformed, particularly the prestige ranges in Ernest Jones. Key volume lines were increased and performed well. Good inventory management procedures and a better than expected performance in January 2009, resulted in inventory being at the planned level at year end.

Gross marketing spend was reduced to $22.1 million in fiscal 2009 (fiscal 2008: $29.2 million), the decrease at constant exchange rates was 13%, the ratio to sales being 2.8% (fiscal 2008: 3.1%). H.Samuel continued to use television advertising in the fourth quarter and also tested customer relationship marketing. For Ernest Jones, expenditure was focused on extending customer relationship marketing, which management believes has proven effective. The e-commerce capabilities of both H.Samuel and Ernest Jones were enhanced during the year.

Overall, a tight control of expenses resulted in the underlying cost base in fiscal 2009 being broadly similar to that in fiscal 2008. Actions taken included reductions in staff costs and changes in the marketing strategy for Ernest Jones.

Total store capital expenditure was $32.2 million (fiscal 2008: $18.6 million). There was a return to a more normal refit cycle for Ernest Jones following a successful test of a new store design in fiscal 2008 and an increase in store openings because of the completion of major new shopping centers in London, Liverpool and Bristol. At January 31, 2009, 60% of the UK division’s stores (February 2, 2008: 50% of stores) were trading in the open consumer oriented format. At the year end, there were 352 H.Samuel stores (February 2, 2008: 359) and 206 Ernest Jones (February 2, 2008: 204).

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FISCAL 2010 GROUP STRATEGY & OBJECTIVES

Introduction

Fiscal 2009, particularly the fourth quarter, was very challenging. As a result the Board reviewed its strategy and made significant adjustments to reflect the changed economic environment. The Group’s revised strategy is to enhance its position as the strongest operator in the middle market specialty retail jewelry sector and capitalize on the decrease in competition when consumer expenditure begins to recover.This involves maintaining a balance between the sustainable competitive advantages that the Group has established and the need to reduce risk, maximize profit and strengthen the balance sheet through cash generation.

Sales will continue to be driven by leveraging the Group’s competitive strengths with the objective of maximizing gross merchandise margin dollars. In late fiscal 2009 and early fiscal 2010, a meaningful cost saving program was implemented and significant inventory reductions are planned to align both more closely with the lower sales levels. Capital expenditure has also been substantially reduced, with decreased spending planned on both existing operations and space growth. New store openings have been largely eliminated. In the current marketplace it is preferable, and a much lower risk strategy, to grow profitable market share by focusing on sales productivity in existing stores.

While the level of expenditure on jewelry is discretionary, the expression of romance and appreciation through bridal jewelry and gift giving remain very important human needs, as is self reward. Central to the Group’s success is helping to satisfy those needs. Therefore the training of staff so that they can better understand the consumers’ requirements, communicate the value of the merchandise selected and ‘close the sale’ remains a high priority. The Group’s supply chain and merchandising expertise, combined with its size and balance sheet strength, enables it to increase differentiation in the marketplace through its exclusive merchandise, while also offering a compelling value proposition in more basic ranges. The Group’s marketing is effective and cost efficient, with its leading ‘share of voice’ leveraged through national television advertising and customer relationship marketing, both of which benefit from scale. At a time when the specialty jewelry sector is undergoing an accelerated rate of consolidation as weak competitors exit the market, these advantages become even more important.

US

The current trading environment remains extremely challenging. The prospects for same store sales remain very uncertain and will depend largely on consumer confidence and concerns about employment. For fiscal 2010, the gross merchandise margin is expected to be at least at the level achieved in fiscal 2009, with the increase in the cost of gold offset by supply chain efficiencies, particularly in the sourcing of diamonds. In the first quarter it is expected that there will be some benefit from price increases implemented in early fiscal 2009 as well as favorable mix changes.

Against the unfavorable macro-economic background, a substantial cost reduction program has been implemented, with the objective of reducing costs by $100 million in fiscal 2010. There will also be a one off benefit of $13 million due to a change in vacation policy. However, expenses will be adversely affected by underlying inflation and anticipated further increases in net bad debt. The net change in space is expected to have little impact on cost.

Action is also being taken to align inventory appropriately to the reduced level of sales by lowering the amount of merchandise purchased. The target is to decrease the investment in inventory by about $90 million during fiscal 2010.

A further slowing in the rate of new store openings will take place in fiscal 2010, and the number of store closures is anticipated to be a little higher than in fiscal 2009. This will result in a marginal decline in store space (see table below). There will also be a reduced level of store refurbishment and investment in information technology. Capital expenditure in fiscal 2010 is anticipated to be about $40 million, significantly lower than in fiscal 2009.

UK

The UK marketplace also remains very challenging. The outlook for sales in the remainder of the year is uncertain. Gross merchandise margin in fiscal 2010 is expected to be somewhat below that achieved in fiscal 2009, primarily reflecting a higher cost of gold and the weakness of sterling, partly being offset by price increases. Action has been taken with the objective of maintaining costs broadly in line with those of fiscal 2009. These initiatives, such as lower staffing levels in the divisional central functions, realigned marketing expenditure and reduced store operating expense, have offset a number of adverse factors, including higher property related charges and an increase in pension costs arising as a result of the pension deficit being amortized through the income statement. Reflecting lower sales, the objective is to reduce the investment in inventory by about $15 million during fiscal 2010.

A further small reduction in net store space is expected in fiscal 2010, with the number of store closures lower than in fiscal 2009 and one new store opening planned (see table below). Capital expenditure in fiscal 2010 is anticipated to be approximately $15 million (fiscal 2009: $38.9 million), due to a slower pace of Ernest Jones refits in the current environment.

Group cash flow objectives

It is the Group’s objective to achieve a net cash inflow during fiscal 2010 of between $175 million and $225 million. While net income is expected to be lower than in fiscal 2009, it is anticipated that working capital will be significantly reduced, with planned inventory falling by about $100 million. Capital expenditure in fiscal 2010 is budgeted to be about $55 million, compared to $114.9 million in fiscal 2009, with a small decrease in space planned in both the US and UK divisions. In line with the amended borrowing agreements, no dividends will be paid in fiscal 2010, nor will any share repurchases be made. In addition, the increase in borrowing to the seasonal peak in November will be meaningfully less than in recent years. Excluding fees and associated costs of $9.5 million arising from the negotiations of the amended borrowing agreements, net interest expense is forecast to be $3 million to $5 million higher than in fiscal 2009.