US Merchandising and Purchasing

Management believes that merchandise selection, availability, and value for money are critical factors to success for a specialty retail jeweler. In the US business, the range of merchandise offered and the high level of inventory availability are supported centrally by extensive and continuous research and testing. Best-selling products are identified and replenished rapidly through analysis of sales by a stock keeping unit. This approach enables the US division to deliver a focused assortment of merchandise to maximize sales and inventory turn, and minimize the need for discounting. Management believes that the US division is better able than its competitors to offer greater value and consistency of merchandise, due to its supply chain advantages.

Average unit selling price ($)

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 (find out more about the Leo Diamond). The US division also successfully launched new, exclusive ranges, such as a specially designed collection by Jane Seymour (learn more about Open Hearts 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 by the end of fiscal 2009.

Management plans to expand the range of exclusive merchandise so as to further differentiate the US division’s brands, and to assist in maximizing gross merchandise margin dollars. This latter objective will also be assisted by the US division’s expertise and understanding of the industry’s supply chain which enable it to take advantage of opportunities as they arise. Management plans to reduce inventory levels by about $90 million, reflecting the current level of sales. This will be achieved by tight control of buying additional inventory rather than discounting, as the US division’s procedures are designed to minimize clearance merchandise.

Inventory management

Sophisticated inventory management systems for merchandise testing, assortment planning, allocation and replenishment have been developed and implemented, thereby reducing the inventory risk by enabling management to identify and respond quickly to changes in consumers’ buying patterns. The majority of merchandise is common to all US division mall stores, with the remainder allocated to reflect demand in individual stores. Management believes that the merchandising and inventory management systems, as well as improvements in the productivity of the centralized distribution center, have allowed the US division to achieve inventory turns at least comparable to those of competitors, even though it has a significantly less mature store base and undertakes more direct sourcing of merchandise.

Merchandise mix

In fiscal 2009, the bridal category accounted for between 45% and 50% of merchandise sold. The table below sets out Signet’s US merchandise sales mix as a percentage of sales:

US division merchandise mix (excluding repairs, warranty and other miscellaneous sales)

Programs have been developed in conjunction with certain vendors for the provision of branded jewelry merchandise. For example, the Leo Diamond range is sold exclusively by Signet in the US and the UK; the Peerless Diamond, an Ideal Cut diamond with a superior, measured return of light, is only available in Jared stores; and exclusive ranges of Le Vian jewelry, a prestigious fashion jewelry brand with a 500 year history, are sold in all US mall and Jared stores. During fiscal 2009, a range of jewelry designed by the actress and artist Jane Seymour was successfully launched. Management believes that the US division’s merchandising process, market share and relationship with suppliers position the business as a very attractive partner to develop branded initiatives. Between 10% and 15% of sales in fiscal 2009 were from products exclusive to the US division.

Other sales

While the design and repair service represents less than 10% of sales, it accounts for approximately 30% of transactions and has been identified by management as an important opportunity to build consumers’ trust in the division. All Jared stores have a highly visible jewelry workshop, which is open the same hours as the store. The workshops meet the repair requirements of the store in which they are located as well as carrying out work for the US division’s mall brand stores. As a result, nearly all customer repairs are carried out by the US division’s own staff, unlike most other chain jewelers which carry out repairs through sub-contractors. The design and repair service has its own field management and training structure.

For over ten years, the US division has sold a lifetime repair warranty for jewelry. The warranty covers services such as ring sizing, refinishing and polishing, rhodium plating white gold, earring repair, chain soldering and the resetting of diamonds and gemstones that arise due to the normal usage of the merchandise. This work is carried out in-house. Warranties account for less than 10% of sales.

Direct sourcing of polished diamonds

Management believes that the US division has a competitive cost and quality advantage because about 43% of diamond merchandise sold is sourced through contract manufacturing. This involves Signet purchasing loose polished diamonds on the world markets and outsourcing the casting, assembly and finishing operations to third parties. By using this approach the cost of merchandise is reduced, enabling the US division to provide better value to the consumer, which helps to increase market share and achieve higher gross margins. Contract manufacturing is generally utilized on basic items with proven, non-volatile, historical sales patterns that represent a lower risk of purchasing more or fewer than required.

The contract manufacturing strategy also allows the buyers to gain a detailed understanding of the manufacturing cost structure and improves the prospects of negotiating better prices for the supply of finished products.

Rough diamond initiative

In fiscal 2006, a multi-year trial involving the purchase and contract cutting and polishing of rough diamonds was commenced by the Group to supply the US division. In the third quarter of fiscal 2009, given the current economic environment, the initiative was discontinued.

Sourcing of complete merchandise

Merchandise is also purchased complete as a finished product where the complexity of the product is great, the merchandise is considered likely to have a less predictable sales pattern or where cost can be reduced. This strategy provides the opportunity to reserve inventory held by vendors and to make supplier returns or exchanges, thereby reducing the risk of purchasing more or fewer than required.

Merchandise held on consignment

Merchandise held on consignment is used to enhance product selection and test new designs. This minimizes exposure to changes in fashion trends and obsolescence and provides the flexibility to return non-performing merchandise. At January 31, 2009, the US division held approximately $202 million (February 2, 2008: $221 million) of merchandise on consignment (see Note 11, included in Item 18 “Financial Statements” on page 136).

Suppliers

In fiscal 2009, the five largest suppliers collectively accounted for approximately 22% (fiscal 2008: 20%) of the US division’s total purchases, with the largest supplier accounting for approximately 8% (fiscal 2008: 7%). The US division’s supply chain has become increasingly integrated on a worldwide basis, with diamond cutting and jewelry manufacturing being predominantly carried out in Asia, with little of the US division’s merchandise now being manufactured in the US.

The division benefits from close commercial relationships with a number of suppliers and damage to, or loss of, any of these relationships could have a detrimental effect on results. Although management believes that alternative sources of supply are available, the abrupt loss or disruption of any significant supplier during the three month period (August to October) leading up to the Christmas season could result in a material adverse effect on performance. Therefore a regular dialogue is maintained with suppliers, particularly in the present economic climate.

The luxury and prestige watch manufacturers and distributors normally grant agencies to sell their ranges on a store by store basis. The watch brands that are sold at Jared stores help attract customers and build sales in all categories.