Letter to Shareholders

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We are pleased with our fiscal 2010 results, which substantially exceeded our objectives set at the start of the year. Highlights of our fiscal 2010 results are set out on the previous page.

Significant store capacity left the US specialty jewelry marketplace in calendar 2009 and we believe that many of the remaining firms are less able to compete due to financial pressures. Improving store productivity through expanding our competitive advantages in the basic retail disciplines of store operations, supply chain management, marketing and quality of real estate, remains our primary focus on both sides of the Atlantic, and supports our strategy to gain profitable market share and maintain a strong balance sheet.

We believe that our strategy remains especially appropriate in the current uncertain economic environment. Solid execution of this strategy should help us achieve a further profitable market share increase, which would build on our ten year record that has seen our US market share almost double to 9.4% in fiscal 2010.

Fiscal 2010 Strategy & Financial Objectives

Our strategy for fiscal 2010 was to:

• enhance our position as the strongest middle market specialty retail jeweler;
• focus on profit and cash flow maximization to further strengthen our balance sheet; and
• reduce business risk.

In late fiscal 2009 and early fiscal 2010, we instituted significant expense and inventory reduction programs to align both more closely with lower sales levels. We also focused on further increasing the balance sheet strength and the financial flexibility of the business. As a result of the increased economic uncertainty, and a focus on increasing cash flow, investment expenditure was substantially reduced, with decreased spending on existing operations, and new store openings being largely
eliminated. In the changed economic environment, we 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.

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.

We slightly exceeded the cost savings target of $100 million (excluding inflation, net bad debt and volume related costs on sales above plan). We achieved a $221.5 million reduction in working capital primarily through reducing inventory by $226.5 million. Net capital expenditure was $43.5 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.

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Fiscal 2011 Strategy & Financial Objectives

While the results for fiscal 2010 exceeded the financial objectives for that year, and the US and UK economies showed some initial signs of stabilizing 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, we do not anticipate that a further realignment of costs and working capital will be implemented given the stable sales performance in fiscal 2010.

Consistent with this strategy, we remain 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.

As always, profit and cash flow maximization remain a priority. Therefore we 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.

In fiscal 2011, our 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 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.

Free cash flow is net cash provided by operating activities less net cash flows used in investing activities. The objective is lower than achieved in fiscal 2010, as there is limited scope to further reduce working capital. The impact of the recently implemented amendments to the Truth in Lending Act on cash flow is uncertain. Investing activities in fiscal 2011 are budgeted to be broadly in line with maintenance capital expenditure. In accordance with our strategy and borrowing agreements, there is no intention to pay any dividends nor make any share repurchases in fiscal 2011.

Current Trading

We have had an encouraging start to fiscal 2011, with same store sales in the first seven weeks up 6.4%. In the US, same store sales were up 7.8%, with Jared especially strong, and the mall brands achieving a solid increase. In the UK, same store sales were down 0.1%, with Ernest Jones driving the better performance.

Medium Term Outlook

We believe that our two operating divisions have the opportunity to take advantage of their enhanced competitive positions to gain profitable market share and, as any improvements to the economy take place, grow sales and increase store productivity. In addition, as the economy stabilizes there is the potential for the ratio of the net bad debt charge on customer receivables to sales within the US division to return to nearer historic, lower levels. The increasing consolidation of the jewelry supply chain may allow the business to strengthen relationships with suppliers, facilitating the possibility of developing differentiated merchandise, and potentially improving the efficiency of its supply chain. We also believe that our strong balance sheet and superior operating metrics should allow our operating divisions to take advantage of investment opportunities that meet our return criteria, particularly space growth in the US, more quickly than competitors. Furthermore, we are in a position to take advantage of strategic opportunities that meet our demanding investment returns, should they arise.

Sales and operating margin performance in fiscal 2010

(1) The average pound sterling to US dollar exchange rate for the period was £1/$1.59 (fiscal 2009: £1/$1.75).

(1) Non-GAAP measure.
(2) Includes unallocated costs, principally central costs.

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US operating review

Change on previous year

(1) Excludes the charm bracelet category.

Fiscal 2010 performance
The US division’s share of the specialty jewelry market increased to 9.4% in calendar 2009 from 9.0% in calendar 2008, based on initial estimates by the US Census Bureau. 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). Net operating income was $235.8 million (fiscal 2009: loss $236.4 million), an underlying increase of 29.6%, see Item 6 in Form 10-K. Set out above are the sales performance by format for fiscal 2010.

Differentiated merchandise performed very well and increased as a share of sales to about 20% in fiscal 2010 (fiscal 2009: 10% to 15%).

The US division further developed the Open Hearts by Jane Seymour® selection and successfully launched the Love’s Embrace™ range. There was continued success with the Leo Diamond® and merchandise from Le Vian®. By planning ahead and using its expertise in the loose, polished diamond market and the jewelry manufacturing sector, the US division engineered value items that appealed to the more cost conscious consumer, and these items also performed well. As a result of superior systems and a very experienced inventory management team, together with Signet’s strong balance sheet and liquidity, the US division was able to quickly respond to better than expected demand in the fourth quarter.

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.

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.

Staff training, which centered on product knowledge and selling skills, remained a priority. In a difficult year, employees remained motivated, focused on maintaining excellence in execution, and were well, and appropriately, incentivized.

In fiscal 2010, 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 net bad debt charge at 5.6% of total 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%).

Given the challenging environment, and management’s strict investment criteria, action was taken in early fiscal 2009 to sharply slow the rate of store space growth and the level of store refurbishments. This was achieved by reducing the number of stores opened and increasing store closures as leases expired. Net store space in fiscal 2010 decreased by 1% (fiscal 2009: increase 4%). Capital expenditure in new and existing stores was $20.4 million (fiscal 2009: $56.3 million). Working capital investment, that is inventory and receivables, associated with new stores was $28.2 million (fiscal 2009: $66.5 million).

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Fiscal 2011 outlook
For fiscal 2011, the gross merchandise margin is expected to be at least at the level achieved in fiscal 2010, with a decrease in diamond costs and selective price increases offsetting a rise in the cost of gold.

Controllable expenses are expected to be broadly flat, with some benefit from store closures largely balancing inflation. However, two factors will have an adverse impact. First, the non-recurring benefit recognized in fiscal 2010 of $13.4 million arising from the change in vacation entitlement policy; and second, an anticipated net direct adverse impact on operating income in the range of $15 million to $20 million in fiscal 2011 resulting from amendments to the Truth in Lending Act. There may be a further indirect impact to sales arising from these amendments as a result of changes in consumer behavior. Expenses will also vary with sales to the extent they are above or below budgeted levels. In the US, these variable expenses account for 12% to 15% of sales. The net bad debt charge is uncertain and the primary driver of its performance is the economic environment.

A further slowing in the rate of new store openings will take place in fiscal 2011, with the number of store closures anticipated to be a little lower than in fiscal 2010. This will result in a small decline in store space (see table below). However, there will be an increased level of store refurbishment and investment in information technology. Capital expenditure in fiscal 2011, is anticipated to be about $60 million (fiscal 2010: $31.1 million).

(1) A Jared store is equivalent in size to just over four mall stores.
(2) Includes two stores rebranded to Kay.

UK operating review

(1) Excludes the charm bracelet category.

Fiscal 2010 performance
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). The average unit selling price rose, reflecting price increases implemented to offset a rise in the cost of goods sold. Value items and the charm bracelet category performed well. Net 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). Set out above are the sales performance by format for fiscal 2010.

Gross merchandise margin rate 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.

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.

In fiscal 2010, total store capital expenditure was $10.7 million (fiscal 2009: $32.2 million), as a result of a lower level of store refurbishment. At the year end, there were 347 H.Samuel stores (January 31, 2009: 352) and 205 Ernest Jones (January 31, 2009: 206).

Fiscal 2011 outlook
Gross merchandise margin in fiscal 2011 is expected to be somewhat below that achieved in fiscal 2010, primarily reflecting a higher cost of gold and a rise in value added tax, partly offset by price increases. Action has been taken to improve staff scheduling and to reduce property costs, with the objective of slightly reducing pound sterling costs compared with those of fiscal 2010.

As part of the long term strategy of focusing on major shopping centers, rather than traditional, less profitable, high street locations, a further small reduction in net store space is expected in fiscal 2011 (see table below). As a result of higher expenditure on store maintenance and information technology, capital expenditure in fiscal 2011 is anticipated to be approximately $20 million (fiscal 2010: $12.5 million).

(1) Includes stores trading as Leslie Davis.