Group financial review

for the 52 weeks ended 2 February 2008

  2007/08
$m		   2007/08
%		 2006/07*
$m		 2006/07
%		 2005/06
$m		 2005/06
%
Sales              
US 2,705.7   73.8 2,652.1 74.5 2,308.8 73.2
UK 959.6   26.2 907.1 25.5 845.3 26.8
Total 3,665.3   100.0 3,559.2 100.0 3,154.1 100.0
Operating profit              
US 262.2   78.6 326.7 81.5 300.7 83.4
UK 105.1   31.5 103.4 25.8 88.4 24.5
Group function (16.0)   (4.8) (13.9) (3.5) (14.4) (4.0)
  351.3   105.3 416.2 103.8 374.7 103.9
Net finance charge (17.8)   (5.3) (15.4) (3.8) (14.0) (3.9)
Profit before tax 333.5   100.0 400.8 100.0 360.7 100.0

*53 week year

Reporting currency

Over 70% of the Group’s sales, operating profit and net assets, including predominantly all of its borrowings, are denominated in US dollars. Therefore from the start of its fiscal year on 4 February 2007 the Group commenced reporting in US dollars (including comparatives and the five year record), to better reflect its underlying performance. The functional currency of the Company changed to US dollars on 5 February 2007.

Introduction

The Group’s sales are seasonal with the first and second quarter both normally slightly more than 20% of annual sales, the third quarter a little under 20% and the fourth quarter accounting for about 40% of sales, with December being by far the most important month of the year. Due to operating leverage the operating profit of the Group is even more seasonal, with nearly all the UK division’s, and a little over 50% of the US division’s, operating profit occurring in the fourth quarter. Group costs occur broadly evenly during the year, while net financing costs are higher in the second half of the year reflecting the peak in working capital requirements ahead of the key Christmas trading period.

The key drivers of operating profitability are the:

  • rate of sales growth;
  • balance between like for like sales growth and sales from new store space;
  • achieved gross margin;
  • level of cost increases experienced by the Group; and
  • movements in the US dollar to pound sterling exchange rate, as the minority of the Group’s profits are generated in the UK and the Group has reported its results in US dollars.

The gross margin percentage in retail jewellery is above the average for speciality retailers, reflecting the slow inventory turn. The trend in gross margin depends on Signet’s pricing policy, movements in the cost of goods sold, changes in sales mix and the direct cost of providing services such as repairs.

In general, the gross margin percentage on gold jewellery is above that of diamond jewellery, whilst that of watches and gift products is normally below that of diamond jewellery. Within the diamond jewellery category the gross margin percentage varies depending on the proportion of the merchandise cost accounted for by the value of the diamonds; the greater the proportion, the lower the gross margin percentage. In addition, the gross margin percentage of a Jared is slightly below the mall brands, although at maturity the store contribution percentage of a Jared site is similar to that of a mall store. A change in merchandise mix will therefore have an impact on the Group’s UK and US division’s gross margin percentage and a change in the proportion of sales from Jared will have an impact on the gross margin percentage of both the US division and Group. In the US division the growth of Jared and the increase in sales of higher value diamonds, both of which are helping to drive like for like sales growth, means that the US gross margin percentage is expected to show a small decline in most years.

The cost of goods sold used to arrive at gross profit takes into account all costs incurred in the purchase, processing and distribution of the merchandise and all costs directly incurred in the operation and support of the retail outlets. The classification of distribution and selling costs under IFRS varies from company to company and therefore the gross profit percentage may not be comparable from one company to another.

To maintain the operating profit margin, the Group needs to achieve like for like sales growth sufficient to offset any adverse movement in gross margin, the increase in operating costs (including the net bad debt charge) and the impact of immature selling space. Like for like sales growth above the level required to offset the factors outlined above, allows the Group to achieve leverage of its fixed cost base and improve operating margin; slower sales growth results in reduced operating margin. There are not any known trends or uncertainties in future rent or amortisation expenses that could materially affect operating results or cash flows.

Signet’s target of 8% – 10% net new store space growth in the US, with a slight decline in space in the UK, means lower like for like sales growth is required in the UK than in the US to maintain operating margin. As the planned new space growth of about 5% in the US in 2008/09 is below that achieved in 2006/07 and 2007/08, a lower rate of like for like sales growth would be required to maintain the US operating margin than has recently been the case.

The impact on operating profit of sales variances (either adverse or favourable) is less in the US division than the UK, as certain variable expenses such as turnover-related rent and staff incentives account for a higher proportion of costs in the US business than in the UK division. The impact on operating profit of a sharp increase or decrease in like for like sales performance is marked. This is particularly the case if the change in sales growth is unexpected and occurs in the fourth quarter.

A key factor in driving operating margin is the level of average sales per store, with higher productivity allowing leverage of expenses both in store and in central functions.

Movements in the US dollar to pound sterling exchange rate have an impact on the reported results of the Group as the UK division’s results are translated into US dollars. A one cent movement in the exchange rate impacts profit before tax by some $0.4 million. The Board believes it is inappropriate to hedge this exposure as the UK division’s sales and costs are denominated in pounds sterling.

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