Description of property
Property, plant and equipment
Trademarks and trade names
Signet attributes great importance to the location and appearance of its stores. Accordingly, in both Signet’s US and UK operations, investment decisions on selecting sites and refurbishing stores are made centrally, and strict real estate criteria are applied.
US property
Substantially all of Signet’s US stores are leased. In addition to a minimum annual rental, the majority of mall stores are also liable to pay turnover related rent based on sales above a specified base level. In fiscal 2009, most of the division’s mall stores only made base rental payments. Under the terms of a typical lease, the US business is required to conform and maintain its usage to agreed standards, including meeting required advertising expenditure as a percentage of sales, and is responsible for its proportionate share of expenses associated with common area maintenance, utilities and taxes of the mall. The initial term of a mall store lease is generally ten years. Towards the end of a lease, management evaluates whether to renew a lease and refit the store, using the same operational and investment criteria as for a new store. Where management is uncertain whether the location will meet the Group’s required return on investment, but the store is profitable, the leases may be renewed for one to three years during which time the store’s performance is further evaluated. There are typically about 200 such mall brand stores at any one time. Jared stores are normally opened on 20 year leases with options to extend the lease. Their rents are not turnover related. A refurbishment of a Jared store is normally undertaken every ten years. At January 31, 2009 the average unexpired lease term of US leased premises was six years and about half of leases had terms expiring within five years. The cost of refitting a store is similar to the cost of fitting out a new store which is about $450,000 for a mall location and about $900,000 for a Jared store. In fiscal 2010 and fiscal 2011, management expects the level of new store openings and refits to be substantially below recent years (see page 26). The investment will be financed by cash flow from operating activities.
The US division leases 15% of its store locations from Simon Property Group and 14% from General Growth Management, Inc. The division has no other relationship with any lessor relating to 10% or more of its store locations.
During the past five financial years, the US business generally has been successful in renewing its store leases as they expire and has not experienced difficulty in securing suitable locations for its stores. No store lease is individually material to the Group’s US operations.
A 340,000 square foot head office and distribution facility is leased in Akron, Ohio. On February 2, 2007 a new 25 year lease was entered into for this facility. On January 1, 2007 a 25 year lease was entered into for a 86,000 square foot office building next door to the head office. Space surplus to the Group’s requirements in this building is currently sublet or is available to be sublet. A 19,000 square foot repair center was opened during fiscal 2006 and is owned by the Group. There are no plans for any major capital expenditure related to the head office and distribution facilities.
UK property
At January 31, 2009, Signet’s UK division traded from seven freehold premises, five premises where the lease had a remaining term in excess of 25 years and 546 other leasehold premises. The division’s stores are generally leased under full repairing and insuring leases (equivalent to triple net leases in the US). Wherever possible Signet is shortening the length of new leases that it enters into, or including break clauses in order to improve the flexibility of its lease commitments. At January 31, 2009, the average unexpired lease term of UK premises with lease terms of less than 25 years was six years, and a majority of leases had either break clauses or terms expiring within five years. Rents are usually subject to upward review every five years if market conditions so warrant. An increasing proportion of rents are related to sales of the store, subject to a minimum annual value. For details of assigned leases and sublet premises see page 62.
At the end of the lease period, subject to certain limited exceptions, UK leaseholders generally have statutory rights to enter into a new lease of the premises on negotiated terms. As current leases expire, Signet believes that it will be able to renew leases, if desired, for present store locations or to obtain leases in equivalent or improved locations in the same general area. Signet has not experienced difficulty in securing leases for suitable locations for its UK stores. No store lease is individually material to the Group’s UK operations.
A typical H.Samuel store has historically been refurbished every seven years and an Ernest Jones store every ten years. When a store is refurbished it is normally converted to a more customer oriented design. At January 31, 2009, 71% of H.Samuel stores and 40% of Ernest Jones stores traded in the converted format. It is anticipated that by the end of fiscal 2014 nearly all the UK stores will trade in the converted format. The Group is currently reviewing the refurbishment cycle for the converted H.Samuel stores as the customer oriented format 39 has proven to have a greater durability than the former design. Once a store has been converted to the customer oriented format the cost of subsequent refurbishments is expected to be less. The investment will be financed by cash from operating activities. The cost of refitting an H. Samuel store is typically about £225,000 and for Ernest Jones is about £300,000.
Signet owns a 255,000 square foot warehouse and distribution center in Birmingham, where certain of the UK division’s central administration functions are based as well as e-commerce fulfilment. The remainder are situated in a 36,200 square foot office in Borehamwood, Hertfordshire held on a 15 year lease entered into in 2005. The holding company functions are located in a 7,200 square foot office in central London, on a ten year lease which was entered into in 2005. There are no plans for any major capital expenditure related to offices or the distribution center in the UK.
Distribution capacity
The capacity of the US distribution center was increased in fiscal 2009. As a result of the increased capacity and lower sales volume experienced in fiscal 2009, it is anticipated that there will be sufficient capacity to support medium term sales growth. The UK distribution center has sufficient capacity for the anticipated future requirements of the business.
Signet is not dependent on any material patents or licenses in either the US or the UK. However, Signet 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; and Open Hearts by Jane Seymour. 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 the Group’s trademarks and trade names are material but are not reflected on the Group’s balance sheet. Their value is maintained and increased by the Group’s expenditure on staff training, marketing and store investment.