10-K 1 d646375d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended February 1, 2014

Commission file number 1-32349

 

 

SIGNET JEWELERS LIMITED

(Exact name of Registrant as specified in its charter)

 

 

 

Bermuda   Not Applicable
(State or other jurisdiction of incorporation)   (I.R.S. Employer Identification No.)

Clarendon House

2 Church Street

Hamilton HM11

Bermuda

(441) 296 5872

(Address and telephone number including area code of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on which Registered

Common Shares of $0.18 each   The New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained to the best of Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

Large accelerated filer  x         Accelerated filer  ¨        Non-accelerated filer   ¨        Smaller reporting company  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨    No  x

The aggregate market value of voting common shares held by non-affiliates of the Registrant (based upon the closing sales price quoted on the New York Stock Exchange) as of August 2, 2013 was $5,975,516,529.

Number of common shares outstanding on March 21, 2014: 80,223,851

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant will incorporate by reference information required in response to Part III, Items 10-14, from its definitive proxy statement for its annual meeting of shareholders, to be held on June 13, 2014.

 

 

 


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SIGNET JEWELERS LIMITED

FISCAL 2014 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

          PAGE  

FORWARD-LOOKING STATEMENTS

     3   
   PART I   

ITEM 1.

   BUSINESS      5   

ITEM 1A.

   RISK FACTORS      27   

ITEM 1B.

   UNRESOLVED STAFF COMMENTS      37   

ITEM 2.

   PROPERTIES      37   

ITEM 3.

   LEGAL PROCEEDINGS      39   

ITEM 4.

   MINE SAFETY DISCLOSURE      39   
   PART II   

ITEM 5.

  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     40   

ITEM 6.

   SELECTED CONSOLIDATED FINANCIAL DATA      47   

ITEM 7.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     54   

ITEM 7A.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      84   

ITEM 8.

   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA      86   

ITEM 9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     130   

ITEM 9A.

   CONTROLS AND PROCEDURES      130   

ITEM 9B.

   OTHER INFORMATION      131   
   PART III   

ITEM 10.

   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      132   

ITEM 11.

   EXECUTIVE COMPENSATION      132   

ITEM 12.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     132   

ITEM 13.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     132   

ITEM 14.

   PRINCIPAL ACCOUNTING FEES AND SERVICES      132   
   PART IV   

ITEM 15.

   EXHIBITS, FINANCIAL STATEMENT SCHEDULES      133   

 

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REFERENCES

Unless the context otherwise requires, references to “Signet” or the “Company,” refer to Signet Jewelers Limited (and before September 11, 2008 to Signet Group plc) and its consolidated subsidiaries. References to the “Parent Company” are to Signet Jewelers Limited. References to the “Predecessor Company” are to Signet Group plc prior to the reorganization that was effected on September 11, 2008, and financial and other results and statistics for Fiscal 2008 and prior periods relate to Signet prior to such reorganization.

PRESENTATION OF FINANCIAL INFORMATION

All references to “dollars,” “US dollars,” “$,” “cents” and “c” are to the lawful currency of the United States of America. Signet prepares its financial statements in US dollars. All references to “pounds,” “pounds sterling,” “sterling,” “£,” “pence” and “p” are to the lawful currency of the United Kingdom.

Percentages in tables have been rounded and accordingly may not add up to 100%. Certain financial data may have been rounded. As a result of such rounding, the totals of data presented in this document may vary slightly from the actual arithmetical totals of such data.

Throughout this Annual Report on Form 10-K, financial data has been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). However, Signet gives certain additional non-GAAP measures in order to provide increased insight into the underlying or relative performance of the business. An explanation of each non-GAAP measure used can be found in Item 6.

Fiscal year and fourth quarter

Signet’s fiscal year ends on the Saturday nearest to January 31. As used herein, “Fiscal 2015,” “Fiscal 2014,” “Fiscal 2013,” “Fiscal 2012,” “Fiscal 2011,” “Fiscal 2010” and “Fiscal 2009” refer to the 52 week periods ending January 31, 2015, February 1, 2014, the 53 week period ending February 2, 2013, and the 52 week periods ending January 28, 2012, January 29, 2011, January 30, 2010 and January 31, 2009, respectively. As used herein, “Fiscal 2007” refers to the 53 week period ending February 3, 2007, “Fiscal 2008” and “Fiscal 2006” refer to the 52 week periods ending February 2, 2008 and January 28, 2006, respectively. Fourth quarter references the 14 weeks ended February 2, 2013 (“prior year fourth quarter”) and the 13 weeks ended February 1, 2014 (“fourth quarter”).

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, based upon management’s beliefs and expectations as well as on assumptions made by and data currently available to management, appear in a number of places throughout this Annual Report on Form 10-K and include statements regarding, among other things, Signet’s results of operation, financial condition, liquidity, prospects, growth, strategies and the industry in which Signet operates. The use of the words “expects,” “intends,” “anticipates,” “estimates,” “predicts,” “believes,” “should,” “potential,” “may,” “forecast,” “objective,” “plan,” or “target,” and other similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, risks relating to Signet being a Bermuda corporation, the merchandising, pricing and inventory policies followed by Signet, the reputation of Signet and its brands, the level of competition in the jewelry sector, the cost and availability of diamonds, gold and other precious metals, regulations relating to consumer credit, seasonality of Signet’s business, financial market risks, deterioration in consumers’ financial condition, exchange rate fluctuations, changes in consumer attitudes regarding jewelry, management of social, ethical and environmental risks, security breaches and other disruptions to Signet’s information technology infrastructure and databases, inadequacy in and disruptions to internal controls and systems, changes in assumptions used in making accounting estimates relating to items such as extended service plans and pensions, the ability to

 

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complete the acquisition of Zale Corporation (“Zale”), the ability to obtain requisite regulatory approval without unacceptable conditions, the ability to obtain Zale stockholder approval, the potential impact of the announcement and consummation of the Zale acquisition on relationships, including with employees, suppliers, customers and competitors and any related impact on integration and anticipated synergies, the impact of stockholder litigation with respect to the Zale acquisition, and our ability to successfully integrate Zale’s operations and to realize synergies from the transaction.

For a discussion of these risks and other risks and uncertainties which could cause actual results to differ materially from those expressed in any forward looking statement, see Item 1A and elsewhere in this Annual Report on Form 10-K. Signet undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.

 

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PART I

 

ITEM 1. BUSINESS

OVERVIEW

Signet is the largest specialty retail jeweler by sales in the US and UK. Signet is incorporated in Bermuda and its address and telephone number are shown on the cover of this document. Its corporate website is www.signetjewelers.com, from where documents that the Company is obliged to file or furnish with the US Securities and Exchange Commission (“SEC”) may be viewed or downloaded free of charge.

On September 11, 2008, Signet Group plc became a wholly-owned subsidiary of Signet Jewelers Limited, a new company incorporated in Bermuda under the Companies Act 1981 of Bermuda, following the approval by the High Court of Justice in England and Wales under the UK Companies Act 2006. Shareholders of Signet Group plc became shareholders of Signet Jewelers Limited, owning 100% of that company. Signet Jewelers Limited is governed by the laws of Bermuda.

Effective January 31, 2010, Signet became a foreign issuer subject to the rules and regulations of the US Securities Exchange Act of 1934 (“Exchange Act”) applicable to domestic US issuers. Prior to this date, Signet was a foreign private issuer and filed with the SEC its annual report on Form 20-F.

Signet’s US division operated 1,471 stores in all 50 states at February 1, 2014. Its stores trade nationally in malls and off-mall locations as Kay Jewelers (“Kay”), and regionally under a number of well-established mall-based brands. Destination superstores trade nationwide as Jared The Galleria Of Jewelry (“Jared”). Signet acquired Ultra Stores, Inc. (“Ultra”) on October 29, 2012 (the “Ultra Acquisition”). The majority of the Ultra stores acquired were converted to the Kay brand during Fiscal 2014. In addition, on November 4, 2013, Signet acquired a diamond polishing factory in Gaborone, Botswana. This acquisition expands Signet’s long-term diamond sourcing capabilities and provides resources for Signet to cut and polish stones.

Signet’s UK division operated 493 stores at February 1, 2014, including 14 stores in the Republic of Ireland and three in the Channel Islands. Its stores trade in major regional shopping malls and prime ‘High Street’ locations (main shopping thoroughfares with high pedestrian traffic) as “H.Samuel,” “Ernest Jones,” and “Leslie Davis.”

The expression of romance and appreciation through bridal jewelry and gift giving are very important to our customers, as is self reward. Management believes customers associate our brands with high quality jewelry and an outstanding customer experience. As a result, the training of sales associates to understand the customer’s requirements, communicate the value of the merchandise selected and ensure customer needs are met remains a high priority. Management increases the attraction of Signet’s store brands to customers through the use of branded differentiated and exclusive merchandise, while offering a compelling value proposition in more basic ranges. Signet accomplishes this by utilizing its supply chain and merchandising expertise, scale and balance sheet strength. Management intends to further develop national television advertising, digital media and customer relationship marketing, which it believes are the most effective and cost efficient forms of marketing available to grow its market share. Management follows the operating principles of excellence in execution; testing before investing; continuous improvement; and disciplined investment, in all aspects of the business.

STRATEGY, GOALS AND OBJECTIVES

Fiscal 2014 was another record year for Signet with total sales up 5.7% and diluted earnings per share up 4.8%, driven by merchandise offerings, creative and unique advertising and our sales associates who executed with excellence, discipline and enthusiasm. Our merchandise offerings included an expansion of branded differentiated and exclusive merchandise which represented 31.1% of the US division’s merchandise sales. In Fiscal 2014, we successfully integrated stores from the Fiscal 2013 Ultra Acquisition, and continued to accelerate our real estate expansion in the US by increasing net selling space in the US by 5%. In Fiscal 2014, Signet

 

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repurchased approximately 1.6 million shares for $104.7 million, or 1.9% of our outstanding shares at the start of the fiscal year. Since the inception of our share repurchase program in January 2012, which was expanded in June 2013, we have bought back $404.6 million, or 9.5%, of our outstanding shares. We also increased our quarterly dividend by 25% to $0.15 per share during Fiscal 2014.

Our goal is to further enhance Signet’s position as a leading US and UK specialty retail jewelry retailer by helping our customers “Celebrate Life” and “Express Love” through offering a unique customer experience and driving customer loyalty. To accomplish our goal, we will drive our business into the future through the following strategic priorities:

 

   

Maximize mid-market.

 

   

Best in bridal.

 

   

Best-in-class digital ecosystem.

 

   

Expand geographic footprint.

 

   

People, purpose and passion.

These strategies continue to build profitable market share for each of Signet’s leading store brands. Maximizing the mid-market drives our competitive strengths focused on merchandise initiatives, marketing, store growth and productivity. Being the best in bridal will be achieved by continuing to develop unique differentiated bridal jewelry brands, increasing targeted marketing programs, continuing to offer our customers a unique experience via our stores, sales associates and selling systems and offering an in-house credit program in the US. Enhancing our digital ecosystem will simplify and accelerate customers’ engagement with our brands, support our physical channels of distribution and expand our geographic footprint enabling cross-collaboration among countries, which creates a global platform to support existing and possible future geographic expansion. In order to truly accomplish our core purpose of helping our customers “Celebrate Life” and “Express Love”, we must have people with high capability and passion. We will continue to attract, develop and retain the best and the brightest individuals in the jewelry and watch industry.

In setting the financial objectives for Fiscal 2015, consideration was given to the US and UK economic environments and the potential impact of the acquisition of Zale Corporation (“Zale”), which was announced on February 19, 2014. The US economy has improved slightly over the past year with decreasing unemployment, a stronger housing sector and higher consumer confidence. Growth is improving but remains below historical levels. We plan to continue to execute our strategic priorities and continue to make strategic investments for the future. The UK economic environment has improved over the past year with an increase in the GDP and unemployment decreasing but growth remains slow. Commodity pricing remains volatile. Signet’s plans are based upon favorable gold price benefits in product cost offset by carryover gold hedge losses and an unfavorable impact from lower recovery gold prices on trade-ins and inventory. Diamond pricing is currently expected to continue to increase at low-to-mid single digit rates. Credit financing will continue to support sales growth and we expect the portfolio to grow with continued strong portfolio performance. Due to growth in the receivable portfolio, we expect bad debt expense to increase slightly as a percentage of sales. We expect to maintain a leading position and plan to continue our strategy to improve results through initiatives around merchandising, real estate optimization, channel expansion and cost control.

Signet’s goal in Fiscal 2015 is to deliver strong results building on our recent performance, while making strategic investments necessary for future growth. Financial objectives for the business in Fiscal 2015 are to improve Signet’s operating profit as a percentage of sales by:

 

   

Increasing sales and gaining profitable market share.

 

   

Managing gross margin by increasing sales productivity, cost control and asset management.

 

   

Securing additional, reliable and consistent supplies of diamonds for our customers while achieving efficiencies in the supply chain through our diamond polishing factory in Gaborone, Botswana. As the factory operates at a lower gross margin than that of Signet’s US and UK division, Signet’s overall gross margin rate may be impacted slightly.

 

   

Developing unique multi-channel advertising programs and supporting new initiatives, while appropriately managing the selling, general and administrative expense to sales ratio.

 

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Investing $180 million to $200 million of capital in new stores, remodeling and enhancing our information and technology infrastructure to drive future growth.

 

   

Completing the Zale transaction and planning for a successful integration.

Our operating divisions have the opportunity to take advantage of their competitive positions to grow sales and increase store productivity. Sales growth allows the business to strengthen relationships with suppliers, facilitates the ability to develop further branded differentiated and exclusive merchandise, improves the efficiency of our supply chain, supports marketing expense and improves operating margins. Our financial flexibility and superior operating margins allow us to take advantage of investment opportunities, including space growth and strategic developments that meet our return criteria.

On February 19, 2014, we announced a definitive agreement to acquire Zale, a specialty jeweler. The addition of Zale will help us maximize the strategies discussed above in a variety of ways around merchandise, innovation and testing, new formats, service programs and geographic expansion. We expect the transaction will generate approximately $100 million in synergies by the end of the third full fiscal year of operations. While we expect the transaction to close within calendar year 2014, Signet cannot predict whether or when Zale stockholder and regulatory approval will be obtained, or if the closing conditions will be satisfied. The acquisition will result in the realization of incremental expenses prior to the close of the transaction. These expenses will primarily be transaction-related costs, i.e., legal, tax, banking and consulting expenses, which are expensed as incurred.

The transaction provides for the acquisition of all of Zale’s issued and outstanding common stock for $21.00 per share in cash consideration, or approximately $1.4 billion including net debt, which value may fluctuate depending on the timing of the closing. Signet plans to finance the proposed acquisition with approximately $1.4 billion of debt, which includes $600 million in securitization of Signet’s US accounts receivables portfolio and $800 million in other debt financing. Signet has secured fully committed financing for the transaction, which includes an $800 million 364-day unsecured bridge facility and a $400 million 5-year unsecured term loan facility. The bridge facility is expected to be replaced by permanent financing in due course. The bridge facility and the term loan facility contain customary fees which will be recorded as an expense in Fiscal 2015, with additional interest expense dependent on the timing of borrowings and closing of the transaction.

BACKGROUND

Business segment

Signet’s results principally derive from one business segment – the retailing of jewelry, watches and associated services. The business is managed as two geographical reportable segments: the US division (84% of sales and 93% of operating income) and the UK division (16% of sales and 7% of operating income). Both divisions are managed by executive committees, which report to Signet’s Chief Executive Officer, who reports to the Board of Directors of Signet (the “Board”). Each divisional executive committee is responsible for operating decisions within parameters established by the Board. In the fourth quarter of Fiscal 2014, subsequent to the November 4, 2013 acquisition of a diamond polishing factory in Gaborone, Botswana, management established a separate operating segment (“Other”), which consists of all non-reportable segments including subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones. Detailed financial information about Signet’s segment information is found in Note 2 of Item 8.

Trademarks and trade names

Signet is not dependent on any material patents or licenses in either the US or the UK. However, it 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; Kay Jewelers Outlet; Jared The Galleria Of Jewelry; JB Robinson Jewelers; Ultra Diamonds; Marks & Morgan Jewelers; Shaw’s Jewelers; Belden Jewelers; Osterman

 

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Jewelers; Weisfield Jewelers; LeRoy’s Jewelers; Rogers Jewelers; Goodman Jewelers; Jared Jewelry Boutique; Ultra Diamond & Gold Outlet; Every kiss begins with Kay; He went to Jared; Celebrate Life. Express Love.; the Leo Diamond; Peerless Diamond; Hearts Desire; and Charmed Memories. Trademarks and trade names include the following in Signet’s UK operations: H.Samuel; Ernest Jones; Leslie Davis; Forever Diamonds; and Perfect Partner.

Seasonality

Signet’s sales are seasonal, with the first and second quarters each normally accounting for slightly more than 20% of annual sales, the third quarter a little under 20% and the fourth quarter for about 40% of sales, with December being by far the most important month of the year. Sales made in November and December are known as the “Holiday Season.” Due to sales leverage, Signet’s operating income is even more seasonal; about 45% to 50% of Signet’s operating income normally occurs in the fourth quarter, comprised of nearly all of the UK division’s operating income and about 40% to 50% of the US division’s operating income.

Employees

In Fiscal 2014, the average number of full-time equivalent persons employed was 18,179. In addition, Signet usually employs a limited number of temporary employees during its fourth quarter. None of Signet’s employees in the UK and less than 1% of Signet’s employees in the US are covered by collective bargaining agreements. Signet considers its relationship with its employees to be excellent.

 

     Year ended  
     Fiscal 2014      Fiscal 2013     Fiscal 2012  

Average number of employees(1)

       

US

     14,856         14,711 (2)      13,224   

UK

     3,112         3,166        3,331   

Other(3)

     211         —         —    
  

 

 

    

 

 

   

 

 

 

Total

     18,179         17,877        16,555   
  

 

 

    

 

 

   

 

 

 

 

(1) Full-time equivalent.
(2) US average number of employees includes 830 full-time equivalents employed by Ultra.
(3) Includes employees employed at the diamond polishing plant located in Botswana.

COMPETITION

Jewelry retailing is highly fragmented and competitive. We compete against other specialty jewelers as well as other retailers that sell jewelry, including department stores, mass merchandisers, discount stores, apparel and accessory fashion stores, brand retailers, shopping clubs, home shopping television channels, direct home sellers and online retailers and auction sites. The jewelry category competes for customers’ share-of-wallet with other consumer sectors such as electronics, clothing and furniture, as well as travel and restaurants. This competition for consumers’ discretionary spending is particularly relevant to gift giving. Our competitive strengths are as follows:

 

   

Strong store brands

 

   

Brand differentiated and exclusive merchandise

 

   

Outstanding customer service

 

   

Advertising effectiveness

 

   

Strong supply chain

 

   

High quality store base

 

   

In-house customer financing (US)

 

   

Financial strength and flexibility

 

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US DIVISION

US market

Calendar 2012 estimates are used by Signet to understand the size and structure of the US jewelry market as the provisional estimates for calendar 2013 available at the time of filing have historically been subject to frequent and sometimes large revisions.

Total US jewelry sales, including watches and fashion jewelry, are estimated by the US Bureau of Economic Analysis (“BEA”) to have been $73.7 billion in calendar 2012 in their January 2014 data release. The US jewelry market has grown at a compound annual growth rate of 4.2% over the last 25 years to calendar 2012 with significant variation over shorter term periods.

In calendar 2012, the US jewelry market grew by an estimated 6.3% (source: BEA, January 2014). The specialty jewelry sector is estimated to have grown by 6.0% to $31.5 billion in calendar 2012 (source: US Census Bureau, January 2014). The specialty sector of the jewelry market share in calendar 2012 was 42.7% as compared to 42.8% in calendar 2011. The Bureau of Labor Statistics estimated that, in calendar 2012, there were 22,080 specialty jewelry stores in the US (2011: 22,237), a reduction of 0.7% compared to the prior year.

The US division’s share of sales made by jewelry and watch retailers was 4.4% in calendar 2012 (calendar 2011: 4.4%), and its share of sales made by specialty jewelry retailers was 10.4% in calendar 2012 (calendar 2011: 10.2%), based on estimates by the US Census Bureau.

 

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US store brand reviews

Location of Kay, Jared and regional brand stores by state February 1, 2014:

 

     Kay      Jared      Regional brand      Total  

Alabama

     24         1         4         29   

Alaska

     3         —          1         4   

Arizona

     16         7         3         26   

Arkansas

     7         1         —          8   

California

     82         11         5         98   

Colorado

     15         6         4         25   

Connecticut

     12         1         3         16   

Delaware

     4         1         —          5   

Florida

     73         20         12         105   

Georgia

     45         8         7         60   

Hawaii

     6         —          —          6   

Idaho

     4         1         —          5   

Illinois

     38         10         11         59   

Indiana

     25         5         7         37   

Iowa

     15         1         1         17   

Kansas

     8         2         2         12   

Kentucky

     16         3         6         25   

Louisiana

     15         2         1         18   

Maine

     5         1         1         7   

Maryland

     31         6         13         50   

Massachusetts

     24         3         8         35   

Michigan

     34         6         12         52   

Minnesota

     17         4         4         25   

Mississippi

     10         —          —          10   

Missouri

     17         4         1         22   

Montana

     3         —          —          3   

Nebraska

     6         —          —          6   

Nevada

     9         3         1         13   

New Hampshire

     10         3         4         17   

New Jersey

     25         5         1         31   

New Mexico

     5         1         —          6   

New York

     51         5         8         64   

North Carolina

     40         8         3         51   

North Dakota

     4         —          —          4   

Ohio

     57         13         33         103   

Oklahoma

     8         1         1         10   

Oregon

     15         3         1         19   

Pennsylvania

     63         8         10         81   

Rhode Island

     3         —          —          3   

South Carolina

     21         2         5         28   

South Dakota

     2         —          —          2   

Tennessee

     24         7         5         36   

Texas

     67         23         6         96   

Utah

     9         3         —          12   

Vermont

     2         —          —          2   

Virginia

     38         8         10         56   

Washington

     18         3         8         29   

West Virginia

     9         —          6         15   

Wisconsin

     18         3         5         26   

Wyoming

     2         —          —          2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,055         203         213         1,471   

 

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Store activity by brand

 

     Fiscal
2014
    Fiscal
2013
    Fiscal
2012
 

Total stores opened or acquired during the year

     176        163        25   

Kay

     128 (1)       46 (3)       22 (5) 

Jared

     13        7        3   

Regional brands

     35 (2)       —          —     

Ultra

     —          110 (4)      —     
  

 

 

   

 

 

   

 

 

 

Total stores closed during the year

     (148 )     (38 )     (24 )

Kay

     (22     (17 )(3)      (10 )

Jared

     —          —          —     

Regional brands

     (16 )     (21 )     (14 )(5) 

Ultra

     (110 )(1,2)     —          —     
  

 

 

   

 

 

   

 

 

 

Total stores open at the end of the year

     1,471        1,443        1,318   

Kay

     1,055        949        920   

Jared

     203        190        183   

Regional brands

     213        194        215   

Ultra

     —          110 (4)      —     
  

 

 

   

 

 

   

 

 

 

Average sales per store in thousands(6)

   $ 2,361      $ 2,351      $ 2,250   

Kay

   $ 2,033      $ 2,002      $ 1,899   

Jared

   $ 5,299      $ 5,201      $ 5,157   

Regional brands

   $ 1,243 (7)    $ 1,292      $ 1,288   
  

 

 

   

 

 

   

 

 

 

Total selling square feet in thousands

     2,748        2,622        2,367   

Kay

     1,489        1,288        1,210   

Jared

     983        923        889   

Regional brands

     276        241        268   

Ultra

     —          170 (4)      —     
  

 

 

   

 

 

   

 

 

 

Increase in net store space

     5 %     11 %     1 %
  

 

 

   

 

 

   

 

 

 

 

(1) Includes 65 Ultra stores converted to the Kay brand in Fiscal 2014.
(2) Includes the remaining 30 Ultra stores not converted to the Kay brand in Fiscal 2014.
(3) Includes five mall stores that relocated to an off-mall location in Fiscal 2013.
(4) Excludes 33 Ultra licensed jewelry departments.
(5) Includes two regional stores rebranded as Kay in Fiscal 2012.
(6) Based only upon stores operated for the full fiscal year and calculated on a 52 week basis.
(7) The average sales per store for the regional brands was lower than Fiscal 2013 due to the inclusion of Ultra stores not converted to the Kay brand.

Sales data by brand

 

            Change from previous year  

Fiscal 2014

   Sales
(millions)
     Total
sales
    Same
store
sales(1)
 

Kay(2)

   $ 2,157.8         9.0 %     6.5

Jared

   $ 1,064.7         6.1 %     4.7

Regional brands(3)

   $ 295.1         1.2 %     (2.4 )%
  

 

 

      

US

   $ 3,517.6         7.4 %     5.2
  

 

 

      

 

(1)

The 53rd week in Fiscal 2013 resulted in a shift in Fiscal 2014, as the fiscal year began a week later than the previous fiscal year. As such, same store sales are calculated by aligning the weeks of the year to the same weeks in the prior year. Total reported sales are calculated based on the reported fiscal periods.

(2) Includes 65 Ultra stores converted to the Kay brand in Fiscal 2014.
(3) Includes the remaining 30 Ultra stores not converted to the Kay brand in Fiscal 2014.

 

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Kay Jewelers

Kay accounted for 51% of Signet’s sales in Fiscal 2014 (Fiscal 2013: 49%) and operated 1,055 stores in 50 states, which include 65 Ultra stores converted to the Kay brand, as of February 1, 2014 (February 2, 2013: 949 stores). Since 2004, Kay has been the largest specialty retail jewelry store brand in the US, based on sales, and has subsequently increased its leadership position. Kay targets households with an income of between $35,000 and $100,000, with a midpoint target of approximately $70,000. Details of Kay’s performance over the last three years are shown below:

 

     Fiscal
2014
     Fiscal
2013
     Fiscal
2012
 

Sales (million)

     $2,157.8       $ 1,953.3       $ 1,786.8   

Average sales per store (million)

     $   2.033       $ 2.002       $ 1.899   

Stores at year end

     1,055         949         920   

Total selling square feet (thousands)

     1,489         1,288         1,210   

Kay mall stores typically occupy about 1,600 square feet and have approximately 1,300 square feet of selling space, whereas Kay off-mall stores typically occupy about 2,200 square feet and have approximately 1,800 square feet of selling space. Kay operates in regional malls and off-mall stores. Off-mall stores primarily are located in outlet malls and power centers. Management believes off-mall expansion is supported by the willingness of customers to shop for jewelry at a variety of real estate locations and that increased diversification is important for growth as increasing the store count further leverages the strong Kay brand, marketing support and the central overhead.

Recent net openings (closures) and current composition are shown below:

 

     Stores at
February 1,
2014
    Net openings (closures)  
        Fiscal
2014
    Fiscal
2013
    Fiscal
2012
 

Mall

     768 (1)      5 (1)      (3 )(3)      1 (4) 

Off-mall and outlet

     287 (2)      101 (2)      32 (3)      11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1,055        106        29        12   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes one Ultra store converted to a Kay mall location in Fiscal 2014.
(2) Includes a net of 64 Ultra stores converted to a Kay brand store in Fiscal 2014.
(3) Includes five mall stores that relocated to an off-mall location in Fiscal 2013.
(4) Includes two regional stores rebranded as Kay in Fiscal 2012.

Jared The Galleria Of Jewelry

With 203 stores in 39 states as of February 1, 2014 (February 2, 2013: 190 in 39 states), Jared is a leading off-mall destination specialty retail jewelry store chain, based on sales. Jared accounted for 25% of Signet’s sales in Fiscal 2014 (Fiscal 2013: 25%). The first Jared store was opened in 1993, and since its roll-out began in 1998, it has grown to become the fourth largest US specialty retail jewelry brand by sales. Based on its competitive strengths, particularly its scale, management believes that Jared has significant opportunity to grow. Potential customers who visit a destination store have a greater intention of making a jewelry purchase. Jared targets households with an income of between $50,000 and $150,000, with a midpoint target of approximately $100,000.

Details of Jared’s performance over the last three years are shown below:

 

     Fiscal
2014
     Fiscal
2013
     Fiscal
2012
 

Sales (million)

     $1,064.7       $ 1,003.1       $ 956.8   

Average sales per store (million)

     $   5.299       $ 5.201       $ 5.157   

Stores at year end

     203         190         183   

Total selling square feet (thousands)

     983         923         889   

 

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Jared offers superior customer service and enhanced selection of merchandise. As a result of its larger size, more specialist sales associates are available to assist customers. In addition, every Jared store has an on-site design and service center where most repairs are completed within the same day. Each store also has at least one diamond viewing room, a children’s play area and complimentary refreshments.

The typical Jared store has about 4,800 square feet of selling space and approximately 6,000 square feet of total space. Jared locations are normally free-standing sites with high visibility and traffic flow, positioned close to major roads within shopping developments. Jared stores operate in retail centers that normally contain strong retail co-tenants, including big box, destination stores such as Bed, Bath & Beyond, Dick’s Sporting Goods and Home Depot, as well as some smaller specialty units.

US regional brands

Signet also operates mall stores under a variety of established regional nameplates, including the 30 remaining Ultra stores not converted to the Kay brand. Regional brands accounted for 7% of Signet’s sales in Fiscal 2014 (Fiscal 2013: 7%) and as of February 1, 2014, include 213 regional brand stores in 36 states (February 1, 2013: 194 stores in 33 states). The leading brands include JB Robinson Jewelers, Ultra Diamonds and Marks & Morgan Jewelers. All of these regional brand stores are located where there is also a Kay location, and target a similar customer. Details of the regional brands’ performance over the last three years are shown below:

 

     Fiscal
2014
     Fiscal
2013
     Fiscal
2012
 

Sales (million)

   $ 295.1       $ 271.8       $ 290.5   

Average sales per store (million)

   $ 1.243 (1)     $ 1.292       $ 1.288   

Stores at year end

     213 (2)       194         215   

Total selling square feet (thousands)

     276         241         268   

 

(1) The average sales per store for the regional brands was lower than Fiscal 2013 due to the inclusion of the Ultra stores not converted to the Kay brand.
(2) Includes 30 Ultra stores that were not converted to the Kay brand in Fiscal 2014.

Ultra

On October 29, 2012, Signet acquired Ultra which primarily operated in outlet malls. Ultra accounted for 1% of Signet’s sales in Fiscal 2013. At February 2, 2013, there were 110 Ultra stores and 33 Ultra licensed jewelry department stores. During Fiscal 2014, a majority of these stores were converted to the Kay brand, with the remaining open stores being reflected in regional brands. In addition, all licensed jewelry departments were closed in the fourth quarter of Fiscal 2014. Details of Ultra from the date of acquisition through the end of Fiscal 2013 are shown below:

 

     Fiscal
2013
 

Sales (million)

   $ 45.7   

Stores at year end

     110   

Total selling square feet (thousands)

     170 (1)  

 

(1) Excludes 33 Ultra licensed jewelry departments.

US eCommerce sales

The Kay and Jared websites are among the most visited of the specialty jewelry retailers (source: JCK) and provide potential customers with a source of information about the merchandise available, as well as the ability to buy online. The websites are integrated with the division’s stores, so that merchandise ordered online may be picked up at a store or delivered to the customer. The websites make an important and growing contribution to

 

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the customer experience at Kay and Jared, and are an important part of the US division’s marketing programs. In Fiscal 2014, the US division’s eCommerce sales increased by 27.2% to $129.0 million (Fiscal 2013: $101.4 million), and represented 3.7% of US sales (Fiscal 2013: 3.1%).

US operating review

Operating structure

While the US division operates under the Kay, Jared and a number of regional store brands, many functions are integrated to gain economies of scale. For example, store operations have a separate dedicated field management team for the mall store brands, Jared and the in-store repair function, while there is a combined diamond sourcing function.

US customer experience and human resources

Management regards the customer experience as an essential element in the success of our business. Therefore the ability to recruit, train and retain qualified sales associates is important in determining sales, profitability and the rate of net store space growth. Accordingly, the US division has in place comprehensive recruitment, training and incentive programs and uses employee and customer satisfaction surveys to monitor and improve performance. A continual priority of the US division is to improve the quality of the customer experience. To enhance customer service, the US division is increasingly using sales-enhancing technology, including customer-assisted selling systems. These computerized tools enable a sales associate to better assist a potential customer to make a purchase decision. Investment in the digital environment such as websites, mobile applications and social media, further adds to the customer’s shopping choices.

US merchandising and purchasing

Management believes that merchandise selection, availability and value are critical success factors for its business. 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 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 to offer greater value and consistency of merchandise than its competitors, due to its supply chain strengths discussed below. In addition, in recent years management has continued to develop, refine and execute a strategy to increase the proportion of branded differentiated and exclusive merchandise sold, in response to customer demand.

The scale and information systems available to management and the gradual evolution of jewelry fashion trends allow for the careful testing of new merchandise in a range of representative stores. This enables management to make more informed investment decisions about which merchandise to select, thereby increasing the US division’s ability to satisfy customers’ requirements while reducing the likelihood of having to discount merchandise.

Merchandise mix

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

 

     Fiscal
2014
     Fiscal
2013
     Fiscal
2012
 
     %      %      %  

Diamonds and diamond jewelry

     75         74         73   

Gold and silver jewelry, including charm bracelets

     11         11         12   

Other jewelry

     8         9         8   

Watches

     6         6         7   
  

 

 

    

 

 

    

 

 

 
     100         100         100   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The celebration of life and the expression of romance and appreciation are primary motivators for the purchase of jewelry and watches. In the US division, the bridal category, which includes engagement, wedding and anniversary purchases, is estimated by management to account for about 50% of merchandise sales, and is predominantly diamond jewelry. The bridal category is believed by management to experience stable demand, but is still dependent on the economic environment as customers can trade up or down price points depending on their available budget. Outside of the bridal category, jewelry and watch purchases, including for gift giving, have a much broader merchandise mix. Gift giving is particularly important during the Holiday Season, Valentine’s Day and Mother’s Day.

A further categorization of merchandise is branded differentiated and exclusive, third-party branded and core merchandise. Core merchandise includes items and styles, such as solitaire rings and diamond stud earrings, which are uniquely designed, as well as items that are generally available from other jewelry retailers. It also includes styles such as diamond fashion bracelets, rings and necklaces. Within this category, the US division has many exclusive designs of particular styles and provides high quality merchandise with great value to customers. Third-party branded merchandise includes mostly watches, but also includes ranges such as charm bracelets produced by Pandora®. Branded differentiated and exclusive merchandise are items that are branded and exclusive to Signet within its marketplaces, or that are not widely available in other jewelry retailers.

Branded differentiated and exclusive ranges

Management believes that the development of branded differentiated and exclusive merchandise raises the profile of Signet’s stores, helps to drive sales and provides its well trained sales associates with a powerful selling proposition. National television advertisements for Kay and Jared include elements that drive brand awareness and purchase intent of these ranges. Management believes that Signet’s scale and proven record of success in developing branded differentiated and exclusive merchandise attracts offers of such programs from jewelry manufacturers, designers and others ahead of competing retailers, and enables it to achieve its supply chain strengths. Management plans to develop additional branded differentiated and exclusive ranges as appropriate and to further expand and refine those already launched.

Branded differentiated and exclusive merchandise includes:

 

   

the Leo® Diamond collection, which is sold exclusively by Signet in the US and the UK, is the first diamond to be independently and individually certified to be visibly brighter;

 

   

exclusive collections of jewelry by Le Vian®, famed for its handcrafted, unique designs;

 

   

Open Hearts by Jane Seymour®, a collection of jewelry designed by the actress and artist Jane Seymour, was successfully tested and launched in Fiscal 2009;

 

   

Love’s Embrace®, a collection of classic, timeless diamond fashion jewelry that was tested and rolled out during Fiscal 2010;

 

   

Charmed Memories®, a create your own charm bracelet collection, tested and rolled out in Fiscal 2011, sold in Kay and the regional brand stores;

 

   

Tolkowsky®, an ideal cut diamond “Invented by Tolkowsky, Perfected by Tolkowsky”®. The collection was tested in Fiscal 2011 and its availability was expanded to the majority of Kay stores during Fiscal 2012 and rolled out to Jared stores in Fiscal 2013;

 

   

Neil Lane Bridal®, a vintage-inspired bridal collection by the celebrated jewelry designer Neil Lane. The collection was tested in Fiscal 2011 and its availability was expanded to all stores during Fiscal 2012. Neil Lane Designs®, hand-crafted diamond rings, earrings and necklaces inspired by Hollywood’s glamorous past. This collection was tested in early Fiscal 2013 and expanded to all Kay, Jared and regional brand stores during Fiscal 2013;

 

   

Shades of Wonder®, rare, natural color diamonds, unique wonders of Australia in captivating fashion designs. Tested in late Fiscal 2011 and expanded to all Kay, Jared and regional brand stores during Fiscal 2013;

 

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Table of Contents
   

Artistry Diamonds®, genuine diamonds in an ultimate palette of colors, tested and successfully rolled out during Fiscal 2014, sold in Kay and regional stores;

 

   

Jared Vivid® Diamonds, the brilliance of diamonds combined with the vitality of color, tested and successfully rolled out in Jared during Fiscal 2014; and

 

   

Lois Hill®, reaches back through the centuries and across the globe to create her collection of jewelry, successfully rolled out in Jared during Fiscal 2014.

Direct sourcing of rough diamonds

Management continues to take steps to advance its rough diamond sourcing and manufacturing through its wholly owned subsidiary Signet Direct Diamond Sourcing Limited. In Fiscal 2013, Signet was appointed by Rio Tinto as a Select Diamantaire, which provides the Company with a contracted allocation of rough diamonds provided by Rio Tinto, as well as entered into other supplier agreements. In Fiscal 2014, Signet acquired a diamond polishing factory in Gaborone, Botswana and established a diamond buying office in India. These developments in Signet’s long-term diamond sourcing capabilities mean that Signet is able to buy rough diamonds directly from the miners and then have the stones marked, cut and polished in its own polishing facility. Signet’s objective with this initiative is to secure additional, reliable and consistent supplies of diamonds for our customers while achieving further efficiencies in the supply chain.

Direct sourcing of polished diamonds

The US division purchases loose polished diamonds on the world markets and from Signet’s wholly owned diamond polishing factory in Botswana, as well as outsources the majority of casting, assembly and finishing operations to third parties. In addition, Signet mounts stones in settings purchased from manufacturers. In combination, these account for 40% of Signet’s diamond merchandise. By using these approaches, the cost of merchandise is reduced, and the consistency of quality is maintained, enabling the US division to provide better value to the customer, which helps to increase market share and achieve higher gross merchandise margins. The contract manufacturing strategy also allows Signet’s buyers to gain a detailed understanding of the manufacturing cost structures and, in turn, leverage that knowledge with regard to negotiating better prices for the supply of finished products.

Sourcing of finished merchandise

Merchandise is purchased as a finished product where the item is complex, the merchandise is considered likely to have a less predictable sales pattern or where the labor cost can be reduced. This method of buying inventory provides the opportunity to reserve inventory held by vendors and to make returns or exchanges with the supplier, thereby reducing the risk of over- or under-purchasing.

Management believes that the division’s scale and strong balance sheet enables it to purchase merchandise at an advantageous price, and on favorable terms.

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. All of Signet’s consignment inventory is held in the US. At February 1, 2014, the US division held $312.6 million (February 2, 2013: $227.7 million) of merchandise on consignment, see Note 11 of Item 8.

Suppliers

In Fiscal 2014, the five largest suppliers collectively accounted for approximately 22% (Fiscal 2013: 23%) of the US division’s total purchases, with the largest supplier accounting for approximately 6% (Fiscal 2013: 6%). The US division directly transacts business with suppliers on a worldwide basis at various stages of the supply chain, with third party diamond cutting and jewelry manufacturing being predominantly carried out in Asia.

 

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Table of Contents

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 Holiday Season could result in a materially adverse effect on performance. Therefore a regular dialogue is maintained with suppliers, particularly in the present economic climate.

Luxury and prestige watch manufacturers and distributors normally grant agencies to sell their timepieces on a store by store basis. In the US, Signet sells its luxury watch brands primarily through Jared, where management believes that they help attract customers to Jared and build sales in all categories.

Raw materials and the supply chain

The jewelry industry generally is affected by fluctuations in the price and supply of diamonds, gold and, to a much lesser extent, other precious and semi-precious metals and stones. Diamonds account for about 55%, and gold about 15%, of the US division’s cost of merchandise sold, respectively.

The ability of Signet to increase retail prices to reflect higher commodity costs varies, and an inability to increase retail prices could result in lower profitability. Signet has, over time, been able to increase prices to reflect changes in commodity costs due to the visibility of cost increases and the turn of inventory.

Signet undertakes hedging for a portion of its requirement for gold through the use of options, net zero-cost collar arrangements, forward contracts and commodity purchasing. It is not possible to hedge against fluctuations in the cost of diamonds. The cost of raw materials is only part of the costs involved in determining the retail selling price of jewelry, with labor costs also being a significant factor. Management continues to seek ways to reduce the cost of goods sold and enhance the resilience of its supply chain.

The largest product category sold by Signet is diamonds and diamond jewelry. Changes in government policy in a number of African diamond producing countries have caused significant changes in the structure of the diamond supply chain in recent years. In addition, there are changes in the ownership of diamond mines and further major changes are likely.

Inventory management

Sophisticated inventory management systems for merchandise testing, assortment planning, allocation and replenishment are in place, thereby reducing inventory risk by enabling management to identify and respond quickly to changes in customers’ 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 consistent improvement in inventory turns. The vast majority of inventory is held at stores rather than in the central distribution facility.

Other sales

While custom design and repair services represent less than 10% of sales, they account for approximately 30% of transactions and have been identified by management as an important opportunity to build customer loyalty. All Jared stores have a highly visible Design and Service Center, which is open the same hours as the store. The repair centers meet the repair requirements of the store in which they are located and also provide the same service for the US division’s mall brand stores. As a result, nearly all customer repairs are performed in-house, unlike many other retailers, which do this through sub-contractors. The custom design and repair function has its own field management and training structure.

 

17


Table of Contents

The US division sells, as a separate item, a lifetime repair service plan for jewelry. These plans cover services such as ring sizing, refinishing and polishing, rhodium plating of white gold, earring repair, chain soldering and the resetting of diamonds and gemstones that arise due to the normal usage of the merchandise. Such work is performed in-house.

US digital ecosytem capabilities

In recent years, significant investments and initiatives have been completed to drive growth across all of Signet’s selling channels. New Kay and Jared websites with improved functionality in product search and navigation were re-launched in October 2012, increasing product selection by 10 times. Kay.com and Jared.com sites have further evolved from this re-launch, optimizing the customer experiences for both desktop and mobile devices. Fully transactional enhanced mobile sites for Kay and Jared, launched in October 2012, have also further evolved to allow customers to pay their credit balances from their mobile phones. Other initiatives in sales-enhancing technology included digital tablets in all Kay and Jared stores. Signet made significant investments in social media, as customer shopping practices require Signet to provide leading technology applications. The Kay and Jared fan base and followers on Facebook and Twitter continue to climb and social media outlets are driving more traffic to Signet’s eCommerce sites. In addition, Signet has also created an online education center, Jewelrywise.com, to provide a resource to customers who want to know more about jewelry.

Virtual inventory

Signet’s supplier relationships allow it to display suppliers’ inventories on the Jared and Kay websites for sale to customers without holding the items in its inventory until the products are ordered by customers, which are referred to as “virtual inventory.” Virtual inventory expands the choice of merchandise available to customers both online and in-store. Virtual inventory reduces the division’s investment in inventory while increasing the selection available to the customer.

US marketing and advertising

Management believes customers’ confidence in our retail brands, store brand name recognition and advertising of branded differentiated and exclusive ranges, are important factors in determining buying decisions in the jewelry industry where the majority of merchandise is unbranded. Therefore, the US division continues to strengthen and promote its brands by delivering superior customer service and building brand name recognition. The marketing channels used include television, digital media (desktop, mobile and social), radio, print, catalog, direct mail, telephone marketing, point of sale signage and in-store displays.

While marketing activities are undertaken throughout the year, the level of activity is concentrated at periods when customers are expected to be most receptive to marketing messages, which is ahead of Christmas Day, Valentine’s Day and Mother’s Day. A significant majority of the expenditure is spent on national television advertising, which is used to promote the Kay and Jared store brands. Within such advertisements, Signet also promotes certain merchandise ranges, in particular its branded differentiated and exclusive merchandise and other branded products. During Fiscal 2014, the US division continued to have the leading share of relevant marketing messages (“share of voice”) within the US jewelry sector.

Statistical and technology-based systems are employed to support a customer relationship marketing program that uses a proprietary database of nearly 28.5 million names to build customer loyalty and strengthen the relationship with customers through mail, telephone, eMail and social media communications. The program targets current customers with special savings and merchandise offers during key sales periods. In addition, invitations to special in-store promotional events are extended throughout the year.

 

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Table of Contents

Given the size of the marketing budgets for Kay and Jared, management believes this has increased the US division’s competitive marketing advantage. The ability to advertise branded differentiated and exclusive merchandise on national television continues to be of growing importance. The US division’s three year record of gross advertising spending is shown below:

 

     Fiscal
2014
     Fiscal
2013(1) 
     Fiscal
2012
 

Gross advertising spending (million)

   $ 233.6       $ 224.3       $ 188.4   

Percent of US sales (%)

     6.6         6.9         6.2   

 

(1)

Includes $12.4 million impact from the 53rd week. Excluding this week, gross advertising expense as a percentage of US sales would have been 6.5%.

US real estate

Management has specific operating and financial criteria that have to be satisfied before investing in new stores or renewing leases on existing stores. Substantially all the stores operated by Signet in the US are leased. In Fiscal 2014, net store space increased 5% due to new store growth (Fiscal 2013: increase 11%, due to the Ultra Acquisition and new store growth). The greatest opportunity for new stores is in locations outside traditional covered regional malls.

Recent investment in the store portfolio is set out below:

 

     Fiscal
2014
    Fiscal
2013
    Fiscal
2012
 
(in millions)       

New store capital investment

   $ 54.0 (1)   $ 29.1      $ 10.9   

Remodels and other store capital investment

     46.3 (2)     48.3        40.1   
  

 

 

   

 

 

   

 

 

 

Total store capital investment

   $ 100.3      $ 77.4 (3)     $ 51.0   
  

 

 

   

 

 

   

 

 

 

 

(1) Excludes the 65 Ultra stores converted to the Kay brand and the remaining 30 included within regional brands.
(2) Includes the 65 Ultra stores converted to the Kay brand and the remaining 30 included within regional brands.
(3) Excludes the Ultra Acquisition.

US customer finance

Management believes that in the US jewelry market, offering finance facilities benefits our customers and that managing the process in-house is a strength of Signet’s US division. The US division:

 

   

establishes credit policies that take into account the overall impact on the business. In particular, the US division’s objective is to facilitate the sale of jewelry and to collect the outstanding credit balance as quickly as possible, minimizing risk and enabling the customer to make additional jewelry purchases using the credit facility. In contrast, management believes that many financial institutions focus on earning interest by maximizing the outstanding credit balance;

 

   

utilizes proprietary authorization and collection models, which consider information on the behavior of the division’s customers;

 

   

allows management to establish and implement service standards appropriate for the business;

 

   

provides a database of regular customers and their spending patterns;

 

   

facilitates investment in systems and management of credit offerings appropriate for the business; and

 

   

maximizes cost effectiveness by utilizing in-house capability.

The various customer finance programs assist in establishing and enhancing customer loyalty and complement the marketing strategy by enabling a greater number of purchases, higher units per transaction and greater value sales.

 

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Table of Contents

In addition to interest-bearing transactions that involve the use of in-house customer finance, a portion of credit sales are made using interest-free financing for one year, subject to certain conditions. In most US states, customers are offered optional third-party credit insurance.

The customer financing operation is centralized and fully integrated into the management of the US division and is not a separate operating division nor does it report separate results. All assets and liabilities relating to customer financing are shown on the balance sheet and there are no associated off-balance sheet arrangements. Signet’s balance sheet and access to liquidity do not constrain the US division’s ability to grant credit, which is a further competitive strength in the current economic environment. The US division’s customer finance facility may only be used for purchases from the US division.

Allowances for uncollectible amounts are recorded as a charge to cost of goods sold in the income statement. The allowance is calculated using factors such as delinquency rates and recovery rates. A 100% allowance is made for any amount that is more than 90 days aged on a recency basis and any amount associated with an account the owner of which has filed for bankruptcy, as well as an allowance for those amounts 90 days aged and under based on historical loss information and payment performance. The calculation is reviewed by management to assess whether, based on economic events, additional analyses are required to appropriately estimate losses inherent in the portfolio.

Each individual application for credit is evaluated centrally against set lending criteria. The risks associated with the granting of credit to particular groups of customers with similar characteristics are balanced against the gross merchandise margin earned by the proposed sales to those customers. Management believes that the primary drivers of the net bad debt to total US sales ratio are the accuracy of the proprietary customer credit models used when granting customer credit, the procedures used to collect the outstanding balances, credit sales as a percentage to total US sales and the overall macro-economic environment. Cash flows associated with the granting of credit to customers of the individual store are included in the projections used when considering store investment proposals.

Customer financing statistics(1)

 

    Fiscal
2014
    Fiscal
2013
    Fiscal
2012
 

Total sales (million)

  $ 3,517.6      $ 3,273.9      $ 3,034.1   

Credit sales (million)

  $ 2,028.0      $ 1,862.9      $ 1,702.3   

Credit sales as % of total US sales(2)

    57.7     56.9     56.1 %

Net bad debt expense (million)(3)

  $ 138.3      $ 122.4      $ 103.1   

Net bad debt to total US sales

    3.9     3.7     3.4 %

Net bad debt to US credit sales

    6.8     6.6     6.1 %

Opening receivables (million)

  $ 1,280.6      $ 1,155.5      $ 995.5   

Closing receivables (million)

  $ 1,453.8      $ 1,280.6      $ 1,155.5   

Number of active credit accounts at year end(4)

    1,256,003        1,173,053        1,107,043   

Average outstanding account balance at year end

  $ 1,175      $ 1,110      $ 1,068   

Average monthly collection rate

    12.1     12.4     12.7 %

Period end bad debt allowance to period end receivables(1)

    6.7     6.8     6.8 %

Credit portfolio net income

     

Net bad debt expense (million)(3)

  $ 138.3      $ 122.4      $ 103.1   

Late charge income (million)(5)

  $ 29.4      $ 27.5      $ 23.2   

Interest income from in-house customer finance programs (million)(6)

  $ 186.4      $ 159.7      $ 125.4   
 

 

 

   

 

 

   

 

 

 
  $ 77.5      $ 64.8      $ 45.5   
 

 

 

   

 

 

   

 

 

 

 

(1) See Notes 2 and 10, Item 8.
(2) Including any deposits taken at the time of sale.
(3) Net bad expense is defined as the charge for the provision for bad debt less recoveries.
(4) The number of active accounts is based on credit cycle end date closest to the fiscal year end date.
(5) Late charge income represent fees charged to customers for late payments and is recorded within gross margin on the consolidated income statement.
(6) See Note 3, Item 8. Primary component of other operating income, net, on the consolidated income statement.

 

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Customer financing administration

Authorizations and collections are performed centrally at the US divisional head office. The majority of credit applications are processed and approved automatically after being initiated via in-store terminals or online through the US division’s websites. The remaining applications are reviewed by the division’s credit authorization personnel. All applications are evaluated by proprietary credit scoring models. Collections focus on a quality customer experience using risk-based calling and strategic account segmentation. Investments are geared towards best in class technology, system support and strategy analytics with the objective of maximizing effectiveness.

US management information systems

The US division’s integrated and comprehensive information systems provide detailed, timely information to support, monitor and evaluate all key aspects of the business including finance, merchandise, marketing, multi-channel retailing, field support and private label credit.

All stores are supported by the internally developed Store Information System, which includes point of sale (“POS”) processing, in-house credit authorization and support, a district manager information system and constant broadband connectivity for all retail locations for data communications including eMail. The POS system updates sales, in-house credit and perpetual inventory replenishment systems throughout the day for each store.

The US division plans to invest approximately $49 million in information systems in Fiscal 2015 (Fiscal 2014: $27.0 million). The planned increase reflects investments in sales-enhancing technology, both in-store and in the digital environment and in information technology designed to improve the effectiveness and efficiency of the division’s operations.

Management believes that the US division has the most sophisticated management information systems among jewelry retailers.

US regulation

The US division is required to comply with numerous US federal and state laws and regulations covering areas such as consumer protection, consumer privacy, data protection, consumer credit, consumer credit insurance, health and safety, waste disposal, supply chain integrity, truth in advertising and employment legislation. Management monitors changes in these laws to endeavor to comply with applicable requirements.

UK DIVISION

The UK division is managed in pounds sterling, as sales and the majority of operating expenses are both incurred in that currency, and its results are then translated into US dollars for external reporting purposes. The following information for the UK division is given in pounds sterling as management believes that this presentation assists in the understanding of the performance of the UK division. Movements in the US dollar to pound sterling exchange rate therefore may have an impact on the results of Signet (as reflected in the table below), particularly in periods of exchange rate volatility. See Item 6 for analysis of results at constant exchange rates; non-GAAP measures.

 

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UK market

The UK market includes specialty retail jewelers and general retailers who sell jewelry and watches, such as catalog showrooms, department stores, supermarkets, mail order catalogs and internet based retailers. The retail jewelry market is very fragmented and competitive, with a substantial number of independent specialty jewelry retailers. Management believes there are approximately 4,030 specialty retail jewelry stores in the UK as of December 2013, a decrease from approximately 4,070 specialty retail jewelry stores in December 2012 (source: IBISWorld).

Ernest Jones and H.Samuel compete with a large number of independent jewelry retailers, as well as catalog showroom operators, discount jewelry retailers, supermarkets, apparel and accessory fashion stores, online retailers and auction sites.

UK store brand reviews

Sales data by brand

 

            Change from previous year  

Fiscal 2014

   Sales
(millions)
     Total
sales
    Total sales at
constant
exchange
rates(1)(2)
    Same
store
sales(3)
 

H.Samuel

   £ 233.1         (4.7 )%     (4.2 )%      (0.3 )%

Ernest Jones(4)

   £ 200.3         (1.8 )%     (1.1 )%      2.6
  

 

 

        

UK

   £ 433.4         (3.4 )%     (2.8 )%      1.0
  

 

 

        

 

(1) Non-GAAP measure, see Item 6.
(2) The exchange translation impact on the total sales of H.Samuel was (0.5)%, and for Ernest Jones (0.7)%.
(3)

The 53rd week in Fiscal 2013 resulted in a shift in Fiscal 2014, as the fiscal year began a week later than the previous fiscal year. As such, same store sales are calculated by aligning the weeks of the year to the same weeks in the prior year. Total reported sales are calculated based on the reported fiscal periods.

(4) Includes stores selling under the Leslie Davis nameplate.

H.Samuel

H.Samuel accounted for 9% of Signet’s sales in Fiscal 2014 (Fiscal 2013: 10%), and is the largest specialty retail jewelry store brand in the UK by number of stores. H.Samuel has 150 years of jewelry heritage and its customers typically have an annual household income of between £15,000 and £40,000. The typical store selling space is 1,100 square feet.

H.Samuel continues to focus on larger store formats in regional shopping centers, and the number of H.Samuel stand alone ‘High Street’ locations has therefore declined as leases expire.

 

     Fiscal
2014
     Fiscal
2013
     Fiscal
2012
 

Sales (million)

   £ 233.1       £ 243.4       £ 243.1   

Average sales per store (million)(1)

   £ 0.742       £ 0.713       £ 0.719   

Stores at year end

     304         318         337   

Total selling square feet (thousands)

     328         344         361   

 

(1) Including only stores operated for the full fiscal year and calculated on a 52 week basis.

 

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H.Samuel store data

 

     Fiscal
2014
    Fiscal
2013
    Fiscal
2012
 

Number of stores:

      

Opened during the year

     —         —          2 (2) 

Closed during the year

     (14     (19 )(1)      (3

Open at year end

     304        318        337   

 

(1) Includes one H.Samuel store rebranded as Ernest Jones.
(2) Includes one Ernest Jones store rebranded as H.Samuel.

Ernest Jones

Ernest Jones accounted for 8% of Signet’s sales in Fiscal 2014 (Fiscal 2013: 8%), and is the second largest specialty retail jewelry store brand in the UK by number of stores. It serves the upper middle market and its customers typically have an annual household income of between £30,000 and £65,000. The typical store selling space is 900 square feet.

Ernest Jones also continues to focus on larger store formats in regional shopping centers that drive higher traffic as compared to stand alone ‘High Street’ locations and offers a wider range of jewelry and prestige watch agencies. The number of Ernest Jones stores in ‘High Street’ locations has therefore declined as leases expire.

 

     Fiscal
2014
     Fiscal
2013
     Fiscal
2012
 

Sales (million)

   £ 200.3       £ 202.8       £ 203.8   

Average sales per store (million)(1)

   £ 1.033       £ 1.003       £ 1.026   

Stores at year end

     189         193         198   

Total selling square feet (thousands)

     175         172         172   

 

(1) Including only stores operated for the full fiscal year and calculated on a 52-week basis.

Ernest Jones store data(1)

 

     Fiscal
2014
    Fiscal
2013
    Fiscal
2012
 

Number of stores:

      

Opened during the year

     2        1 (2)      2   

Closed during the year

     (6 )     (6 )     (6 )(3) 

Open at year end

     189        193        198   

 

(1) Including Leslie Davis stores.
(2) Includes one H.Samuel store rebranded as Ernest Jones.
(3) Includes one Ernest Jones store rebranded as H.Samuel.

UK eCommerce sales

As of the end of the year, H.Samuel’s website, www.hsamuel.co.uk, continues to be the most visited UK specialty jewelry website and Ernest Jones’ website, www.ernestjones.co.uk, continues to be the second most visited (source: Hitwise). The websites provide potential customers with a source of information on merchandise available, as well as the ability to buy online. The websites are integrated with the division’s stores, so that merchandise ordered online may be picked up at a store or delivered to the customer. The websites make an important and growing contribution to the customer experience of H.Samuel and Ernest Jones, as well as to the UK division’s marketing programs. In the third quarter of Fiscal 2013, the Ernest Jones website had a full

 

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creative redesign. In Fiscal 2014, the UK division’s eCommerce sales increased by 23.5% to £22.1 million (Fiscal 2013: £17.9 million), and represented 5.1% of UK sales (Fiscal 2013: 4.0%). In addition, the UK division made significant investments in social media, as customer shopping practices require Signet to provide leading technology applications.

UK operating review

Operating structure

Signet’s UK division operates as two brands with a single support structure and distribution center.

UK customer experience and human resources

Management regards the customer experience as an essential element in the success of its business, and the division’s scale enables it to invest in industry-leading training and in the digital environment. The Signet Jewellery Academy, a multi-year program and framework for training and developing standards of capability, is operated for all sales associates. It utilizes a training system developed by the division called the “Amazing Customer Experience” (“ACE”). An ACE Index customer feedback survey gives a reflection of customers’ experiences and forms part of the monthly performance statistics that are monitored on a store by store basis. In addition to capability, we know that the customer experience is dependent on staff engagement.

UK merchandising and purchasing

Management believes that the UK division’s leading position in the UK jewelry sector is an advantage when sourcing merchandise, enabling delivery of better value to the customer. An example of this is its capacity to contract with jewelry manufacturers to assemble products, utilizing directly sourced gold and diamonds. In addition, the UK division has the scale to utilize sophisticated merchandising systems to test, track, forecast and respond to customer preferences. The vast majority of inventory is held at stores rather than in the central distribution facility. The UK division and the US division seek to coordinate their merchandising and purchasing activities where appropriate, and are working to identify opportunities to further such coordination.

Merchandise mix

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

 

     Fiscal
2014
     Fiscal
2013
     Fiscal
2012
 
     %      %      %  

Diamonds and diamond jewelry

     30         28         27   

Gold and silver jewelry, including charm bracelets

     19         20         22   

Other jewelry

     13         13         13   

Watches

     33         33         31   

Gift category

     5         6         7   
  

 

 

    

 

 

    

 

 

 
     100         100         100   
  

 

 

    

 

 

    

 

 

 

The UK division has a different merchandise weighting to that of the US division, with watches representing 33% of merchandise sales. Bridal jewelry is estimated by management to account for approximately 27% (Fiscal 2013: 25%) of the UK division’s merchandise sales, with gold wedding bands being an important element.

Direct sourcing

The UK division employs contract manufacturers for about 16% (Fiscal 2013: 20%) of the diamond merchandise sold, thereby achieving cost savings. Approximately 15% of the UK business’ gold jewelry is manufactured on a contract basis through a buying office in Vicenza, Italy.

 

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Suppliers

Merchandise is purchased from a range of suppliers and manufacturers and economies of scale and efficiencies continue to be achieved by combining the purchases of H.Samuel and Ernest Jones. In Fiscal 2014, the five largest of these suppliers (three watch and two jewelry) together accounted for approximately 31% of total UK division purchases (Fiscal 2013: approximately 30%), with the largest accounting for around 10%.

Foreign exchange and merchandise costs

Fine gold and loose diamonds account for about 15% and 10%, respectively, of the merchandise cost of goods sold. The prices of these are determined by international markets and the pound sterling to US dollar exchange rate. The other major category of goods purchased is watches, where the pound sterling cost is influenced by the Swiss franc exchange rate. In total, about 20% of goods purchased are made in US dollars. The pound sterling to US dollar exchange rate also has a significant indirect impact on the UK division’s cost of goods sold for other merchandise.

Signet undertakes hedging for a portion of its requirement for US dollars and gold through the use of options, net zero-cost collar arrangements, forward contracts and commodity purchasing. It is not possible to hedge against fluctuations in the cost of diamonds. The cost of raw materials is part of the costs involved in determining the retail selling price of jewelry, with labor costs also being a significant factor. Management continues to seek ways to reduce the cost of goods sold by improving the efficiency of its supply chain.

UK marketing and advertising

The UK division has strong, well-established brands and leverages them with advertising (television, print and online), catalogs and the development of customer relationship marketing techniques. Few of its competitors have sufficient scale to utilize all these marketing methods efficiently. Marketing campaigns are designed to reinforce and develop further the distinct brand identities and to expand the overall customer base and improve customer loyalty. H.Samuel used television advertising in the fourth quarter and during Fiscal 2013 expanded customer relationship marketing. For Ernest Jones, expenditure is focused on print and customer relationship marketing. Print and online advertising are important marketing tools for both H.Samuel and Ernest Jones. The UK division’s three year record of gross advertising spending is shown below:

 

     Fiscal
2014
     Fiscal
2013
     Fiscal
2012
 

Gross advertising spending (million)

   £ 12.8       £ 13.5       £ 12.6   

Percent of UK sales (%)

     3.0         3.0         2.8   

UK real estate

In Fiscal 2014, total store capital expenditure was £7.4 million (Fiscal 2013: £8.7 million), as a result of an increased investment in two new stores, remodels and expansions.

UK customer finance

In Fiscal 2014, approximately 5% (Fiscal 2013: 5%) of the division’s sales were made through a customer finance program provided through a third party. Signet does not provide this service itself in the UK due to low demand for customer finance.

UK management information systems

POS equipment, retail management systems, purchase order management systems and merchandise planning processes are in place to support financial management, inventory planning and control, purchasing, merchandising, replenishment and distribution. The UK division uses third-party suppliers to support the operation of its information systems.

 

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A perpetual inventory process allows store managers to check inventory by product category. These systems are designed to assist in the control of shrinkage, fraud prevention, financial analysis of retail operations, merchandising and inventory control.

The UK division plans to invest approximately £3 million in information systems in Fiscal 2015 (Fiscal 2014: £3.4 million). The planned expenditure reflects investments in sales-enhancing technology, both in-store and in the digital environment, and in information technology designed to improve the effectiveness and efficiency of the division’s execution.

UK regulation

Various laws and regulations affect Signet’s UK operations. These cover areas such as consumer protection, consumer credit, consumer privacy, data protection, health and safety, waste disposal, employment legislation and planning and development standards. Management monitors changes in these laws to endeavor to comply with legal requirements.

OTHER

Other consists of all non-reportable segments and is aggregated with unallocated corporate administrative functions. This separate operating segment was established in the fourth quarter of Fiscal 2014 upon the acquisition of a diamond polishing factory in Gaborone, Botswana. The factory acquisition continues to advance Signet’s long-term diamond sourcing capabilities and enables Signet to buy rough diamonds directly and then have the stones marked, cut and polished in its own polishing facility. Other sales consist of wholesale sales to third parties of rough and polished diamonds deemed not suitable for Signet’s needs. Sales of rough and polished diamonds in the Other non-reportable segment although minimal, will have the effect of reducing the Company’s overall gross margins. The majority of the sales and expenses relating to the factory are transacted in US dollars. See also Note 14 of Item 8.

AVAILABLE INFORMATION

Signet files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the SEC. Prior to February 1, 2010, Signet filed annual reports on Form 20-F and furnished other reports on Form 6-K with the SEC. Such information, and amendments to reports previously filed or furnished, is available free of charge from our corporate website, www.signetjewelers.com, as soon as reasonably practicable after such materials are filed with or furnished to the SEC.

 

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ITEM 1A.    RISK FACTORS

Spending on goods that are, or are perceived to be “luxuries,” such as jewelry, is discretionary and is affected by general economic conditions. Therefore, a decline in consumer spending, whether due to adverse changes in the economy, changes in tax policy or other factors that reduce our customers’ demand for our products, may unfavorably impact Signet’s future sales and earnings.

Jewelry purchases are discretionary and are dependent on consumers’ perceptions of general economic conditions, particularly as jewelry is often perceived to be a luxury purchase. Adverse changes in the economy and periods when discretionary spending by consumers may be under pressure could unfavorably impact sales and earnings.

The success of Signet’s operations depends to a significant extent upon a number of factors relating to discretionary consumer spending. These include economic conditions, and perceptions of such conditions by consumers, consumer confidence, employment, the rate of change in employment, the level of consumers’ disposable income and income available for discretionary expenditure, the savings ratio, business conditions, interest rates, consumer debt and asset values, availability of credit and levels of taxation for the economy as a whole and in regional and local markets where we operate. Signet’s success also depends upon its reputation for integrity in sourcing its merchandise, which, if adversely affected could impact consumer sentiment and willingness to purchase Signet’s merchandise.

As 16% of Signet’s sales are accounted for by its UK division, economic conditions in the eurozone have a significant impact on the UK economy even though the UK is not a member of the eurozone. Therefore, developments in the eurozone could adversely impact trading in the UK division. In addition, developments in the eurozone could also adversely impact the US economy.

We depend on shopping malls and other retail centers to attract customers to many of our stores.

Many of our stores are located in shopping malls and other retail centers that benefit from the ability of “anchor” retail tenants, generally large department stores, and other attractions, to generate sufficient levels of consumer traffic in the vicinity of our stores. Any decline in the volume of consumer traffic at shopping centers, whether because of the economic slowdown, a decline in the popularity of shopping centers, the closing of anchor stores or otherwise, could result in reduced sales at our stores and excess inventory. We may respond by increasing discounts or initiating marketing promotions to reduce excess inventory, which could have a material adverse effect on our margins and operating results.

More than half of US sales are made utilizing customer finance provided by Signet. Therefore any deterioration in the consumers’ financial position could adversely impact sales, earnings and the collectability of accounts receivable.

Any significant deterioration in general economic conditions or increase in consumer debt levels may inhibit consumers’ use of credit and decrease the consumers’ ability to satisfy Signet’s requirement for access to customer finance and could in turn have an adverse effect on the US division’s sales. Furthermore, any downturn in general or local economic conditions, in particular an increase in unemployment in the markets in which the US division operates, may adversely affect its collection of outstanding accounts receivable, its net bad debt charge and hence earnings.

Changes to the regulatory requirements regarding the granting of credit to customers could adversely impact sales and operating income.

More than half of Signet’s US sales utilize its in-house customer financing programs and about a further 34% of purchases are made using third party bank cards. Signet’s ability to extend credit to customers and the terms on which it is achieved depends on many factors, including compliance with applicable state and federal laws and

 

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regulations, any of which may change from time to time, and such changes in law relating to the provision of credit and associated services could adversely affect sales and income. In addition, other restrictions arising from applicable law could cause limitations in credit terms currently offered or a reduction in the level of credit granted by the US division, or by third parties, and this could adversely impact sales, income or cash flow, as could any reduction in the level of credit granted by the US division, or by third parties, as a result of the restrictions placed on fees and interest charged.

The US Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010. Among other things, the US Dodd-Frank Act creates a Bureau of Consumer Financial Protection with broad rule-making and supervisory authority for a wide range of consumer financial services, including Signet’s customer finance programs. The Bureau’s authority became effective in July 2011. Any new regulatory initiatives by the Bureau could impose additional costs and/or restrictions on credit practices on the US division, which could adversely affect its ability to conduct its business.

Signet’s share price may be volatile.

Signet’s share price may fluctuate substantially as a result of variations in the actual or anticipated results and financial conditions of Signet and other companies in the retail industry and the stock market’s view of the potential Zale transaction. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other shares in a manner unrelated, or disproportionate to, the operating performance of these companies.

The concentration of a significant proportion of sales and an even larger share of profits in the fourth quarter means results are dependent on performance during that period.

Signet’s business is highly seasonal, with a significant proportion of its sales and operating profit generated during its fourth quarter, which includes the Holiday Season. Management expects to continue to experience a seasonal fluctuation in its sales and earnings. Therefore, there is limited ability to compensate for shortfalls in fourth quarter sales or earnings by changes in its operations and strategies in other quarters, or to recover from any extensive disruption, for example, due to sudden adverse changes in consumer confidence, inclement weather conditions having an impact on a significant number of stores in the last few days immediately before Christmas Day or disruption to warehousing and store replenishment systems. A significant shortfall in results for the fourth quarter of any fiscal year would therefore be expected to have a material adverse effect on the annual results of operations. Disruption at lesser peaks in sales at Valentine’s Day and Mother’s Day would be expected to impact the results to a lesser extent.

Signet is dependent on a variety of financing resources to fund its operations and growth which may include equity, cash balances and debt financing.

While Signet has a strong balance sheet with significant cash balances and available lines of credit, it is dependent upon the availability of equity, cash balances and debt financing to fund its operations and growth. If Signet’s access to capital were to become significantly constrained, its financing costs would likely increase, its financial condition would be harmed and future results of operations could be adversely affected. The changes in general credit market conditions also affect Signet’s ability to arrange, and the cost of arranging, credit facilities.

Management prepares annual budgets, medium term plans and risk models which help to identify the future capital requirements, so that appropriate facilities can be put in place on a timely basis. If these models are inaccurate, adequate facilities may not be available.

Signet’s borrowing agreements include various financial covenants and operating restrictions. A material deterioration in its financial performance could result in a covenant being breached. If Signet were to breach, or believed it was going to breach, a financial covenant it would have to renegotiate its terms with current lenders or find alternative sources of finance if current lenders required cancellation of facilities or early repayment.

 

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In addition, Signet’s reputation in the financial markets and its corporate governance practices can influence the availability of capital, the cost of capital and its share price.

As Signet has material cash balances, it is exposed to counterparty credit risks.

At February 1, 2014, Signet had cash and cash equivalents of $247.6 million (February 2, 2013: $301.0 million). Signet holds its cash and cash equivalents predominantly in ‘AAA’ rated liquidity funds and in various bank accounts. If an institution or fund in which Signet invests its cash and cash equivalents were to default or become insolvent, Signet may be unable to recover these amounts or obtain access to them in a timely manner.

Movements in the pound sterling to US dollar exchange rates impact the results and balance sheet of Signet.

Signet publishes its consolidated annual financial statements in US dollars. It held approximately 88% of its total assets in entities whose functional currency is the US dollar at February 1, 2014 and generated approximately 84% of its sales and 93% of its operating income in US dollars for the fiscal year then ended. Nearly all the remaining assets, sales and operating income are in UK pounds sterling. Therefore, its results and balance sheet are subject to fluctuations in the exchange rate between the pound sterling and the US dollar. Accordingly, any decrease in the weighted average value of the pound sterling against the US dollar would decrease reported sales and operating income.

The monthly average exchange rates are used to prepare the income statement and are calculated each month from the weekly average exchange rates weighted by sales of the UK division.

Where pounds sterling are held or used to fund the cash flow requirements of the business, any decrease in the weighted average value of the pound sterling against the US dollar would reduce the amount of cash and cash equivalents and increase the amount of any pounds sterling borrowings.

In addition, the prices of materials and certain products bought on the international markets by the UK division are denominated in US dollars, and therefore the UK division has an exposure to exchange rate fluctuations on the cost of goods sold.

Fluctuations in the availability and pricing of commodities, particularly polished diamonds and gold, which account for the majority of Signet’s merchandise costs, could adversely impact its earnings and cash availability.

The jewelry industry generally is affected by fluctuations in the price and supply of diamonds, gold and, to a lesser extent, other precious and semi-precious metals and stones. In particular, diamonds account for about 47% of Signet’s merchandise costs, and gold about 15% in Fiscal 2014.

In Fiscal 2014, polished diamond prices experienced a single digit percentage increase when compared to Fiscal 2013 levels, unlike as had occurred in prior years. Industry forecasts indicate that over the medium and longer term, the demand for diamonds will probably increase faster than the growth in supply, particularly as a result of growing demand in countries such as China and India. Therefore, the cost of diamonds is anticipated to rise over time, although fluctuations in price are likely to continue to occur. The mining, production and inventory policies followed by major producers of rough diamonds can have a significant impact on diamond prices, as can the inventory and buying patterns of jewelry retailers and other parties in the supply chain.

While jewelry manufacturing is the major final demand for gold, management believes that the cost of gold is predominantly impacted by investment transactions which have resulted in significant volatility and overall increases in gold cost over the past several years followed by somewhat of a decline in Fiscal 2014. Signet’s cost

 

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of merchandise and potentially its earnings may be adversely impacted by investment market considerations that cause the price of gold to significantly escalate.

The availability of diamonds is significantly influenced by the political situation in diamond producing countries and by the Kimberley Process, an inter-governmental agreement for the international trading of rough diamonds. Until acceptable alternative sources of diamonds can be developed, any sustained interruption in the supply of diamonds from significant producing countries, or to the trading in rough and polished diamonds which could occur as a result of disruption to the Kimberley Process, could adversely affect Signet, as well as the retail jewelry market as a whole. In 2012, the Kimberley Process, chaired by the United States, initiated a process to review ways to strengthen and reform the Kimberley Process, including reviewing the definition of a conflict diamond. In January 2013, South Africa became the chair, and the review process was expected to continue; however, no reform efforts were achieved. In 2014, the Kimberley Process is being chaired by China, which will be followed by Angola in 2015. In addition, the current Kimberley Process decision making procedure is dependent on reaching a consensus among member governments, which can result in the protracted resolution of issues, and there is little expectation of significant reform over the long-term. The impact of this review process on the supply of diamonds, and consumers’ perception of the diamond supply chain, is unknown. In addition to the Kimberley Process, the supply of diamonds to the US is also impacted by certain governmental trade sanctions imposed on Zimbabwe.

The possibility of constraints in the supply of diamonds of a size and quality Signet requires to meet its merchandising requirements may result in changes in Signet’s supply chain practices, for example its rough sourcing initiative. In addition, Signet may from time to time choose to hold more inventory, to purchase raw materials at an earlier stage in the supply chain or enter into commercial agreements of a nature that it currently does not use. Such actions could require the investment of cash and/or additional management skills. Such actions may not result in the expected returns and other projected benefits anticipated by management.

An inability to increase retail prices to reflect higher commodity costs would result in lower profitability. Historically jewelry retailers have been able, over time, to increase prices to reflect changes in commodity costs. However, in general, particularly sharp increases in commodity costs may result in a time lag before increased commodity costs are fully reflected in retail prices. As Signet uses an average cost inventory methodology, volatility in its commodity costs may also result in a time lag before cost increases are reflected in retail prices. There is no certainty that such price increases will be sustainable, so downward pressure on gross margins and earnings may occur. In addition, any sustained increases in the cost of commodities could result in the need to fund a higher level of inventory or changes in the merchandise available to the customer.

In August 2012, the SEC, pursuant to the Dodd-Frank Act, issued final rules, which require annual disclosure and reporting on the source and use of certain minerals, including gold, from the Democratic Republic of Congo and adjoining countries. The gold supply chain is complex and, while management believes that the rules will only cover less than 1% of annual worldwide gold production (based upon current estimates), the final rules require Signet and other jewelry retailers and manufacturers that file with the SEC to exercise reasonable due diligence in determining the country of origin of the statutorily designated minerals that are used in products sold by Signet in the US and elsewhere. Signet must first report to the SEC on our country of origin inquiries, our due diligence measures, the results of those activities, and our related determinations in May 2014, with respect to the calendar year ended December 31, 2013.

Compliance with the rules to date has not and will not likely add significantly to Signet’s costs, and management does not expect this increase to be material. There may be reputational risks with customers and other stakeholders if Signet, due to the complexity of the global supply chain, is unable to sufficiently verify the origin for the relevant metals. Also, if the responses of parts of Signet’s supply chain to the verification requests are adverse, it may harm Signet’s ability to obtain merchandise and add to compliance costs.

The final rules also cover tungsten and tin, which are contained in a small proportion of items that are sold by Signet. It is possible that other minerals, such as diamonds, could be subject to similar rules.

 

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Price increases may have an adverse impact on Signet’s performance.

If significant price increases are implemented, by either division, across a wide range of merchandise, the impact on earnings will depend on, among other factors, the pricing by competitors of similar products and the response by the customer to higher prices. Such price increases may result in lower achieved gross margin dollars and adversely impact earnings.

Signet’s competitors are specialty jewelry retailers, as well as other jewelry retailers, including department stores, mass merchandisers, discount stores, apparel and accessory fashion stores, brand retailers, shopping clubs, home shopping television channels, direct home sellers, online retailers and auction sites. In addition, other retail categories, for example, electronics and other forms of expenditure, such as travel, also compete for consumers’ discretionary expenditure. This is particularly so during the holiday gift giving season. Therefore, the price of jewelry relative to other products influences the proportion of consumers’ expenditure that is spent on jewelry. If the relative price of jewelry increases, Signet’s sales and earnings may decline.

The failure to satisfy the accounting requirements for ‘hedge accounting’, or default or insolvency of a counterparty to a hedging contract, could adversely impact results.

Signet hedges a portion of its purchases of gold for both its US and UK divisions and hedges the US dollar requirements of its UK division. The failure to satisfy the requirements of the appropriate accounting requirements, or a default or insolvency of a counterparty to a contract, could increase the volatility of results and may impact the timing of recognition of gains and losses in the income statement.

The inability of Signet to obtain merchandise that customers wish to purchase, particularly ahead of and during, the fourth quarter would adversely impact sales.

The abrupt loss or disruption of any significant supplier during the three month period (August to October) leading up to the fourth quarter would result in a material adverse effect on Signet’s business.

Also, if management misjudges expected customer demand, or fails to identify changes in customer demand and/or its supply chain does not respond in a timely manner, it could adversely impact Signet’s results by causing either a shortage of merchandise or an accumulation of excess inventory.

Signet benefits from close commercial relationships with a number of suppliers. Damage to, or loss of, any of these relationships could have a detrimental effect on results. Management holds regular reviews with major suppliers. Signet’s most significant supplier accounts for 6% of merchandise. Government requirements regarding sources of commodities, such as those required by the Dodd-Frank Act, could result in Signet choosing to terminate relationships with a limited number of suppliers.

Luxury and prestige watch manufacturers and distributors normally grant agencies to sell their ranges on a store by store basis, and most of the leading brands have been steadily reducing the number of agencies in the US and the UK over recent years. The watch brands sold by Ernest Jones, and to a lesser extent Jared, help attract customers and build sales in all categories. Therefore an inability to obtain or retain watch agencies for a location could harm the performance of that particular store. In the case of Ernest Jones, the inability to gain additional prestige watch agencies is an important factor in, and may reduce the likelihood of, opening new stores, which could adversely impact sales growth.

The growth in importance of branded merchandise within the jewelry market may adversely impact Signet’s sales and earnings if it is unable to obtain supplies of branded merchandise that the customer wishes to purchase. In addition, if Signet loses the distribution rights to an important branded jewelry range, it could adversely impact sales and earnings.

 

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Signet has had success in recent years in the development of branded merchandise that is exclusive to its stores. If Signet is not able to further develop such branded merchandise, or is unable to successfully develop further such initiatives, it may adversely impact sales and earnings.

An inability to recruit, train, motivate and retain suitably qualified sales associates could adversely impact sales and earnings.

Management regards the customer experience as an essential element in the success of its business. Competition for suitable individuals or changes in labor and healthcare laws could require us to incur higher labor costs. Therefore an inability to recruit, train, motivate and retain suitably qualified sales associates could adversely impact sales and earnings.

Loss of confidence by consumers in Signet’s brand names, poor execution of marketing programs and reduced marketing expenditure could have a detrimental impact on sales.

Primary factors in determining customer buying decisions in the jewelry sector include customer confidence in the retailer and in the brands it sells, together with the level and quality of customer service. The ability to differentiate Signet’s stores and merchandise from competitors by its branding, marketing and advertising programs is an important factor in attracting consumers. If these programs are poorly executed or the level of support for them is reduced, or the customer loses confidence in any of Signet’s brands for whatever reason, it could unfavorably impact sales and earnings.

Long-term changes in consumer attitudes to jewelry could be unfavorable and harm jewelry sales.

Consumer attitudes to diamonds, gold and other precious metals and gemstones also influence the level of Signet’s sales. Attitudes could be affected by a variety of issues including concern over the source of raw materials; the impact of mining and refining of minerals on the environment, the local community and the political stability of the producing country; labor conditions in the supply chain; and the availability of and consumer attitudes to substitute products such as cubic zirconia, moissanite and laboratory created diamonds. A negative change in consumer attitudes to jewelry could adversely impact sales and earnings.

The retail jewelry industry is highly fragmented and competitive. Aggressive discounting or “going out of business” sales by competitors may adversely impact Signet’s performance in the short term.

The retail jewelry industry is competitive. If Signet’s competitive position deteriorates, operating results or financial condition could be adversely affected.

Aggressive discounting by competitors, particularly those holding “going out of business” sales, may adversely impact Signet’s performance in the short term. This is particularly the case for easily comparable pieces of jewelry, of similar quality, sold through stores that are situated near to those that Signet operates.

The US division faces significant competition from independent specialty jewelry retailers that are able to adjust their competitive stance, for example on pricing, to local market conditions. This can put individual Signet stores at a competitive disadvantage as the US division has a national pricing strategy.

The inability to rent stores that satisfy management’s operational and financial criteria could harm sales, as could changes in locations where customers shop.

Signet’s results are dependent on a number of factors relating to its stores. These include the availability of desirable property, the demographic characteristics of the area around the store, the design, and maintenance of the stores, the availability of attractive locations within the shopping center that also meet the operational and financial criteria of management, the terms of leases and Signet’s relationship with major landlords. The US division leases 19% of its store locations from Simon Property Group. Signet has no other relationship with any lessor relating to 10% or more of its store locations. If Signet is unable to rent stores that satisfy its operational

 

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and financial criteria, or if there is a disruption in its relationship with its major landlords, sales could be adversely affected.

Given the length of property leases that Signet enters into, it is dependent upon the continued popularity of particular retail locations. As Signet tests and develops new types of store locations and designs, there is no certainty as to their success. The majority of long-term space growth opportunities in the US are in new developments and therefore future store space is in part dependent on the investment by real estate developers on new projects. Limited new real estate development taking place would make it challenging to identify and secure suitable new store locations. The UK division has a more diverse range of store locations than in the US, including some exposure to smaller retail centers which do not justify the investment required to refurbish the site to the current store format. Consequently, the UK division is gradually closing stores in such locations as leases expire or satisfactory property transactions can be executed; however, the ability to secure such property transactions is not certain. As the UK division is already represented in nearly all major retail centers, a small annual decrease in store space is expected in the medium term which will adversely impact sales growth.

The rate of new store development is dependent on a number of factors including obtaining suitable real estate, the capital resources of Signet, the availability of appropriate staff and management and the level of the financial return on investment required by management.

Signet’s success is dependent on the strength and effectiveness of its relationships with its various stakeholders whose behavior may be affected by its management of social, ethical and environmental risks.

Social, ethical and environmental matters influence Signet’s reputation, demand for merchandise by consumers, the ability to recruit staff, relations with suppliers and standing in the financial markets. Signet’s success is dependent on the strength and effectiveness of its relationships with its various stakeholders: customers, shareholders, employees and suppliers. In recent years, stakeholder expectations have increased and Signet’s success and reputation will depend on its ability to meet these higher expectations.

Inadequacies in and disruption to internal controls and systems could result in lower sales and increased costs or adversely impact the reporting and control procedures.

Signet is dependent on the suitability, reliability and durability of its systems and procedures, including its accounting, information technology, data protection, warehousing and distribution systems. If support ceased for a critical externally supplied software package or system, management would have to implement an alternative software package or system or begin supporting the software internally. Disruption to parts of the business could result in lower sales and increased costs.

Security breaches and other disruptions to Signet’s information technology infrastructure and databases could interfere with Signet’s operations, and could compromise Signet’s and its customers’ and suppliers’ information, exposing Signet to liability which would cause Signet’s business and reputation to suffer.

Signet operates in multiple channels and, in the US division, maintains its own customer finance operation. Signet is also increasingly using mobile devices, social media and other online activities to connect with customers, staff and other stakeholders. Therefore, in the ordinary course of business, Signet relies upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including eCommerce sales, supply chain, merchandise distribution, customer invoicing and collection of payments. Signet uses information technology systems to record, process and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. Additionally, Signet collects and stores sensitive data, including intellectual property, proprietary business information, the propriety business information of our customers and suppliers, as well as personally identifiable information of Signet’s customers and employees, in data centers and on information technology networks. The secure operation of these information technology networks, and the processing and

 

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maintenance of this information is critical to Signet’s business operations and strategy. Despite security measures and business continuity plans, Signet’s information technology networks and infrastructure may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to employee error or malfeasance, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. The occurrence of any of these events could compromise Signet’s networks and the information stored there could be accessed, manipulated, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, and damage Signet’s reputation, which could adversely affect Signet’s business. In addition, it could harm Signet’s ability to execute its business and adversely impact sales, costs and earnings.

An adverse decision in legal proceedings and/or tax matters could reduce earnings.

In March 2008, private plaintiffs filed a class action lawsuit for an unspecified amount against Sterling Jewelers Inc. (“Sterling”), a subsidiary of Signet, in U.S. District Court for the Southern District of New York, which has been referred to private arbitration. In September 2008, the US Equal Employment Opportunities Commission filed a lawsuit against Sterling in U.S. District Court for the Western District of New York. Sterling denies the allegations from both parties and has been defending these cases vigorously. If, however, it is unsuccessful in either defense, Sterling could be required to pay substantial damages. At this point, no outcome or amount of loss is able to be estimated. See Note 22 in Item 8.

At any point in time, various tax years are subject to, or are in the process of, audit by various taxing authorities. To the extent that management’s estimates of settlements change, or the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax in the period in which such determinations are made.

Failure to comply with labor regulations could harm the business.

Failure by Signet to comply with labor regulations could result in fines and legal actions. In addition, the ability to recruit and retain staff could be harmed.

Failure to comply with changes in law and regulations could adversely affect the business.

Signet’s policies and procedures are designed to comply with all applicable laws and regulations. Changing legal and regulatory requirements have increased the complexity of the regulatory environment in which the business operates and the cost of compliance. Failure to comply with the various regulatory requirements may result in damage to Signet’s reputation, civil and criminal liability, fines and penalties, and further increase the cost of regulatory compliance. Changes in tax legislation, for example, the elimination of LIFO for US tax accounting purposes, could adversely impact cash flow.

Investors may face difficulties in enforcing proceedings against Signet Jewelers Limited as it is domiciled in Bermuda.

It is doubtful whether courts in Bermuda would enforce judgments obtained by investors in other jurisdictions, including the US and the UK, against the Parent Company or its directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against the Parent Company or its directors or officers under the securities laws of other jurisdictions.

Any difficulty executing an acquisition, a business combination or a major business initiative may result in expected returns and other projected benefits from such an exercise not being realized.

Any difficulty in executing an acquisition, a business combination or a major business initiative, including its direct diamond sourcing capabilities, may result in expected returns and other projected benefits from such an

 

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exercise not being realized. The acquisition of companies with operating margins lower than that of Signet may cause an overall lower operating margin for Signet. A significant transaction could also disrupt the operation of its current activities. Signet’s current borrowing agreements place certain limited constraints on its ability to make an acquisition or enter into a business combination, and future borrowing agreements could place tighter constraints on such actions.

Proposed Acquisition—Signet’s proposed acquisition of Zale is subject to Zale stockholder approval, certain regulatory approvals and customary closing conditions and the expected benefits from the acquisition may not be fully realized.

On February 19, 2014, Signet entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Zale to acquire all of Zale’s issued and outstanding common stock for $21.00 per share in cash consideration with an approximate transaction value of $1.4 billion including net debt. Although Signet has entered into a voting and support agreement with Golden Gate Capital, the beneficial owner of approximately 22% of Zale’s common stock, Signet cannot predict whether Zale stockholder approval will be obtained or whether or when the required regulatory approvals under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”) will be obtained or if the closing conditions will be satisfied. A failure to close the transaction or significant delays in doing so may negatively impact the trading price of our common stock and our business, financial condition and results of operations. The Federal Trade Commission (“FTC”) may condition the approval of the acquisition on divestiture of certain assets, including the divestiture of certain stores, which, if agreed to by Signet, may materially affect the anticipated benefits of the proposed acquisition, and there can be no assurance that such divestiture can be completed on terms satisfactory to Signet and the FTC. Under the Merger Agreement, Signet is not required to take any actions to obtain antitrust approvals that would, individually or in the aggregate, result in (i) the loss of revenue of Zale in excess of $135.0 million, (ii) the loss of sales of Signet in excess of $135.0 million or (iii) the combination of losses of revenues of Zale and sales of Signet in excess of $135.0 million in the aggregate, in each case as measured by such party’s Fiscal 2013 revenue or sales, respectively, reported in its annual audited financial statements for such year. The Merger Agreement also includes customary termination provisions for both Zale and Signet and provides that, in connection with the termination of the Merger Agreement by Signet or Zale, under certain specified circumstances Zale will be required to pay Signet a termination fee of $26.7 million. Signet may also be required to pay Zale a termination fee of $53.4 million if anti-trust clearance is not received prior to February 19, 2015 (or May 15, 2015 if all conditions to closing other than regulatory approval have been obtained prior to that date). In the event that either party terminates the Merger Agreement because Zale’s stockholders do not adopt the Merger Agreement following the making of a competing offer, Zale will be required to reimburse Signet for its expenses in an amount not exceeding $12.5 million. Signet expects to issue at least $1.4 billion of debt during the second half of Fiscal 2015 to fund the planned acquisition of Zale, which will significantly increase Signet’s outstanding debt. This additional indebtedness will require us to dedicate a portion of our cash flow to servicing this debt, thereby reducing the availability of cash to fund other business initiatives, including dividends and share repurchases. If the transaction closes, significant changes to Signet’s financial condition as a result of global economic changes or difficulties in the integration or execution of strategies of the newly acquired business, and the diversion of significant management time and resources towards completion of the transaction and integrating the business and operations of Zale may affect our ability to obtain the expected benefits from the transaction or to satisfy the financial covenants included in the terms of the financing arrangements.

If Signet’s financing for the transaction becomes unavailable, the transaction may not be completed and we may be in breach of the Merger Agreement.

We intend to finance the cash required in connection with the transaction, including for expenses incurred in connection with the transaction, with debt financing of approximately $1.4 billion, which includes $600 million in securitization of Signet’s US accounts receivable and $800 million in other debt financing. Signet has secured a commitment for an $800 million 364-day unsecured bridge facility and a $400 million 5-year unsecured term loan facility in connection with the transaction. The bridge facility is expected to be replaced by permanent financing in due course. The bridge facility and the term loan facility contain customary fees which will be

 

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recorded as an expense in Fiscal 2015, with additional interest expense dependent on the timing of borrowings and closing of the transaction. The obligation of the lenders to provide the debt financing is subject to various customary closing conditions. In the event any of the closing conditions is not satisfied or waived, or to the extent one or more of the lenders is unwilling to, or unable to, fund its commitments under the debt financing, we may be required to seek alternative financing or fund the cash required in connection with the transaction ourselves. Due to the fact that there is no financing or funding condition in the Merger Agreement, if we are unable to obtain funding from our financing sources for the cash required in connection with the transaction, we would be in breach of the Merger Agreement assuming all other conditions to closing are satisfied and may be liable to Zale for damages.

Signet will incur transaction-related costs in connection with the transaction.

We expect to incur a number of non-recurring transaction-related costs associated with completing the transaction, combining the operations of the two companies and achieving desired synergies. These fees and costs may be substantial. Non-recurring transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, regulatory filing fees and printing costs. Additional unanticipated costs may be incurred in the integration of our and Zale’s businesses. There can be no assurance that the realization of other efficiencies related to the integration of the two businesses, as well as the elimination of certain duplicative costs, will offset the incremental transaction-related costs over time. Thus, any net benefit may not be achieved in the near term, the long term or at all.

Although we anticipate that Zale will continue to operate as a separate brand within Signet, failure to successfully combine Signet’s and Zale’s businesses in the expected time frame may adversely affect the future results of the combined company.

The success of the proposed transaction will depend, in part, on our ability to realize the anticipated benefits and synergies from combining our and Zale’s businesses. To realize these anticipated benefits, the businesses must be successfully combined. If the combined company is not able to achieve these objectives, or is not able to achieve these objectives on a timely basis, the anticipated benefits of the transaction may not be realized fully or at all. In addition, the actual integration may result in additional and unforeseen expenses, which could reduce the anticipated benefits of the transaction. These integration difficulties could result in declines in the market value of our common stock.

Purported stockholder class action complaints have been filed against Zale, Signet, the members of Zale’s board of directors and Signet’s merger subsidiary, challenging the transaction, and an unfavorable judgment or ruling in these lawsuits could prevent or delay the consummation of the proposed transaction and result in substantial costs.

In connection with the proposed transaction, purported stockholders of Zale have filed purported stockholder class action lawsuits in the Delaware Court of Chancery. Those lawsuits name as defendants Zale, Signet, the members of the board of directors of Zale, and Signet’s merger subsidiary. Among other remedies, the plaintiffs seek to enjoin the proposed transaction. If a final settlement is not reached, or if a dismissal is not obtained, these lawsuits could prevent and/or delay completion of the transaction and result in substantial costs to Zale and us, including any costs associated with the indemnification of directors. Additional lawsuits may be filed against Zale and us, our merger subsidiary and Zale’s directors related to the proposed transaction. The defense or settlement of any lawsuit or claim may adversely affect the combined company’s business, financial condition or results of operations.

Changes in assumptions used in making accounting estimates or in accounting standards may adversely impact investor perception of the business.

Changes in assumptions used in making accounting estimates relating to items such as extended service plans and pensions, may adversely affect Signet’s financial results and balance sheet. Changes in accounting standards,

 

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such as those currently being considered relating to leases, could materially impact the presentation of Signet’s results and balance sheet. Investors’ reaction to any such change in presentation is unknown. Such changes could also impact the way that the business is managed and access to the credit markets.

Loss of one or more key executive officers or employees could adversely impact performance, as could the appointment of an inappropriate successor or successors.

Signet’s future success will partly depend upon the ability of senior management and other key employees to implement an appropriate business strategy. While Signet has entered into employment contracts with such key personnel, the retention of their services cannot be guaranteed and the loss of such services, or the inability to attract and retain talented personnel, could have a material adverse effect on Signet’s ability to conduct its business. In addition, any new executives may wish, subject to Board approval, to change the strategy of Signet. The appointment of new executives may therefore adversely impact performance.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 2. PROPERTIES

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 and investment 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 rent based on sales above a specified base level. In Fiscal 2014, 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 10 years. Towards the end of a lease, management evaluates whether to renew a lease and refit the store, using similar operational and investment criteria as for a new store. Where management is uncertain whether the location will meet management’s required return on investment, but the store is profitable, the leases may be renewed for one to five years during which time the store’s performance is further evaluated. There are typically about 200 such mall stores at any one time. Jared stores are normally opened on 20 year leases with options to extend the lease, and rents are not sales related. A refurbishment of a Jared store is normally undertaken every 10 years. At February 1, 2014, the average unexpired lease term of US leased premises was five years, and over 60% of these leases had terms expiring within five years. The cost of refitting a mall store is similar to the cost of fitting out a new mall store which is typically between $400,000 and $850,000. Jared remodels have one of two tiers, the full scope tier ranges between $1,100,000 and $1,300,000 and reduced scope tier ranges between $500,000 and $600,000. New Jared stores are typically ground leases and range between $2,200,000 and $2,500,000. Management expects that about 75 new stores (about 63 Kay, 10 Jared and 2 regional brands) will be opened during Fiscal 2015. In Fiscal 2014, the level of major store refurbishment increased with 68 locations, including 7 Jared locations, being completed (Fiscal 2013: 80, including 18 Jared locations). It is anticipated that refurbishment activity in Fiscal 2015 will involve 92 stores. In addition, in Fiscal 2014, 65 Ultra stores were converted to the Kay brand and the remaining 30 stores to regional brands. The investment was financed by cash flow from operating activities.

The US division leases 19% of its store locations from Simon Property Group. The US division has no other relationship with any lessor relating to 10% or more of its store locations. At February 1, 2014, the US division had 2.75 million square feet of selling space (February 2, 2013: 2.62 million).

 

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During the past five fiscal 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 Signet’s US operations.

A 340,000 square foot head office and distribution facility is leased in Akron, Ohio through 2032. An 86,000 square foot office building next door to the head office is also leased through 2032, to which Signet relocated its credit operations in Fiscal 2013. A 39,000 square foot repair center was opened in Akron, Ohio during Fiscal 2006 and is owned by a subsidiary of Signet.

UK property

At February 1, 2014, Signet’s UK division operated from six freehold premises and 513 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 February 1, 2014, 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 also have an element related to the sales of a store, subject to a minimum annual value. For details of assigned leases and sublet premises see Note 22 of Item 8.

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 Signet’s UK operations.

A typical UK store undergoes a major refurbishment every 10 years and a less costly store redecoration every five years. It is intended that these investments will be financed by cash from operating activities. The cost of refitting a store is typically between £150,000 and £475,000 for both H.Samuel and Ernest Jones, while expansion in prestige locations typically doubles those costs.

The UK division has no relationship with any lessor relating to 10% or more of its store locations. At February 1, 2014, the UK division has 0.50 million square feet of selling space (February 2, 2013: 0.52 million).

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 eCommerce fulfillment. The remaining activities are situated in a 36,200 square foot office in Borehamwood, Hertfordshire which is held on a 15 year lease entered into in 2005. There are no plans for any major capital expenditure related to offices or the distribution center in the UK.

Certain corporate functions are located in a 3,350 square foot office in London, on a 10 year lease which was entered into in Fiscal 2013.

Distribution capacity

Both divisions have sufficient capacity to meet their current needs.

Other property

On November 4, 2013, Signet purchased a diamond polishing factory in Gaborone, Botswana with approximately 34,200 square feet of floor space.

 

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ITEM 3. LEGAL PROCEEDINGS

Five putative stockholder class action lawsuits challenging the Company’s acquisition of Zale have been filed in the Court of Chancery of the State of Delaware: Breyer v. Zale Corp. et al., C.A. No. 9388-VCP, filed February 24, 2014; Stein v. Zale Corp. et al., C.A. No. 9408-VCP, filed March 3, 2014; Singh v. Zale Corp. et al., C.A. No. 9409-VCP, filed March 3, 2014; Smart v. Zale Corp. et al., C.A. No. 9420, filed March 6, 2014; and Pill v. Zale Corp. et al., C.A. No. 9440-VCP, filed March 12, 2014 (collectively, the “Actions”). Each of these Actions is brought by a purported holder of Zale common stock, both individually and on behalf of a putative class of Zale stockholders. The Actions name as defendants Zale, the members of the board of directors of Zale, the Company, and a merger-related subsidiary of the Company. The Actions allege that the Zale directors breached their fiduciary duties to Zale stockholders in connection with their consideration and approval of the merger agreement by failing to maximize stockholder value and agreeing to an inadequate merger price and to deal terms that deter higher bids. The Actions also allege that Zale and the Company aided and abetted the Zale directors’ breaches of fiduciary duty. The Actions seek, among other things, an injunction to prevent the consummation of the merger or, in the event that the merger is consummated, rescission of the merger or damages, as well as attorneys’ and experts’ fees.

See discussion of other legal proceedings in Note 22 of Item 8.

 

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market information

The principal trading market for the Company’s Common Shares is the NYSE (symbol: SIG). The Company also maintains a standard listing of its Common Shares on the London Stock Exchange (symbol: SIG).

The following table sets forth the high and low closing share price on each stock exchange for the periods indicated.

 

     New York
Stock Exchange
Price per share
     London
Stock Exchange
Price per share
 
     High      Low      High      Low  
     $      £  

Fiscal 2013

           

First quarter

     51.26         44.55         32.03         28.14   

Second quarter

     49.29         41.27         30.58         26.43   

Third quarter

     51.71         42.60         31.97         27.30   

Fourth quarter

     63.43         51.24         40.31         31.70   

Full year

     63.43         41.27         40.31         26.43   

Fiscal 2014

           

First quarter

     69.99         59.64         45.24         39.13   

Second quarter

     74.65         65.14         49.34         42.64   

Third quarter

     76.56         66.40         49.00         42.60   

Fourth quarter

     80.86         70.12         49.00         42.99   

Full year

     80.86         59.64         49.00         39.13   

Number of holders

As of March 21, 2014, there were 11,420 shareholders of record.

Dividend policy

On March 27, 2013, the Board declared a 25% increase in our first quarter dividend, resulting in an increase from $0.12 to $0.15 per Signet Common Share. For Fiscal 2014, dividends of $0.15 per Common Share were paid on May 29, 2013, August 28, 2013, November 26, 2013 and February 27, 2014. For Fiscal 2013, dividends of $0.12 per Common Share were paid on May 29, 2012, August 28, 2012, November 26, 2012 and February 27, 2013. Future payments of quarterly dividends will be based on Signet’s ability to satisfy all applicable statutory and regulatory requirements and its continued financial strength. Any future payment of cash dividends will depend upon such factors as Signet’s earnings, capital requirements, financial condition, financing agreement restrictions and other factors deemed relevant by the Board.

 

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Repurchases of equity securities

The following table contains the Company’s repurchases of equity securities in the fourth quarter of Fiscal 2014:

 

Period

   Total
number of
shares
purchased(1)
     Average
price paid
per share
     Total
number of
shares
purchased
as part of
publicly
announced
plans or
programs(1)
     Maximum
number (or
approximate
dollar value)
of shares that
may yet be
purchased
under the
plans or
programs
 

November 3, 2013 to November 30, 2013

     29,700       $ 74.86         29,700       $ 297,776,769   

December 1, 2013 to December 28, 2013

     7,402       $ 75.00         7,402       $ 297,221,642   

December 29, 2013 to February 1, 2014

     25,000       $ 72.98         25,000       $ 295,397,069   
  

 

 

       

 

 

    

Total

     62,102       $ 74.12         62,102       $ 295,397,069   

 

(1) On June 14, 2013, the Board authorized the repurchase of up to $350 million of Signet’s common shares (the “2013 Program”). The 2013 Program may be suspended or discontinued at any time without notice.

Performance graph

The following performance graph and related information shall not be deemed “soliciting material” or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that Signet specifically incorporates it by reference into such filing.

Historical share price performance should not be relied upon as an indication of future share price performance.

The following graph compares the cumulative total return to holders of Signet’s Common Shares against the cumulative total return of the Russell 1000 Index and Dow Jones US General Retailers Index for the five year period ended February 1, 2014. The comparison of the cumulative total returns for each investment assumes that $100 was invested in Signet’s Common Shares and the respective indices on January 31, 2009 through February 1, 2014 including reinvestment of any dividends, and is adjusted to reflect a 1-for-20 share consolidation in September 2008.

 

LOGO

 

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Exchange controls

The Parent Company is classified by the Bermuda Monetary Authority as a non-resident of Bermuda for exchange control purposes. The transfer of Common Shares between persons regarded as resident outside Bermuda for exchange control purposes may be effected without specific consent under the Exchange Control Act of 1972 of Bermuda and regulations thereunder and the issuance of Common Shares to persons regarded as resident outside Bermuda for exchange control purposes may also be effected without specific consent under the Exchange Control Act of 1972 and regulations thereunder. Issues and transfers of Common Shares involving any person regarded as resident in Bermuda for exchange control purposes may require specific prior approval under the Exchange Control Act of 1972.

The owners of Common Shares who are ordinarily resident outside Bermuda are not subject to any restrictions on their rights to hold or vote their shares. Because the Parent Company has been designated as a non-resident for Bermuda exchange control purposes, there are no restrictions on its ability to transfer funds into and out of Bermuda or to pay dividends to US residents who are holders of Common Shares, other than in respect of local Bermuda currency.

Taxation

The following are brief and general summaries of the United States and United Kingdom taxation treatment of holding and disposing of Common Shares. The summaries are based on existing law, including statutes, regulations, administrative rulings and court decisions, and what is understood to be current Internal Revenue Service (“IRS”) and HM Revenue & Customs (“HMRC”) practice, all as in effect on the date of this document. Future legislative, judicial or administrative changes or interpretations could alter or modify statements and conclusions set forth below, and these changes or interpretations could be retroactive and could affect the tax consequences of holding and disposing of Common Shares. The summaries do not consider the consequences of holding and disposing of Common Shares under tax laws of countries other than the US (or any US laws other than those pertaining to federal income tax), the UK and Bermuda, nor do the summaries consider any alternative minimum tax, state or local consequences of holding and disposing of Common Shares.

The summaries provide general guidance to US holders (as defined below) who hold Common Shares as capital assets (within the meaning of section 1221 of the US Internal Revenue Code of 1986, as amended (the “US Code”)) and to persons resident and domiciled for tax purposes in the UK who hold Common Shares as an investment, and not to any holders who are taxable in the UK on a remittance basis or who are subject to special tax rules, such as banks, financial institutions, broker-dealers, persons subject to mark-to-market treatment, UK resident individuals who hold their Common Shares under a personal equity plan, persons that hold their Common Shares as a position in part of a straddle, conversion transaction, constructive sale or other integrated investment, US holders whose “functional currency” is not the US dollar, persons who received their Common Shares by exercising employee share options or otherwise as compensation, persons who have acquired their Common Shares by virtue of any office or employment, S corporations or other pass-through entities (or investors in S corporations or other passthrough entities), mutual funds, insurance companies, tax-exempt organizations, US holders subject to the alternative minimum tax, certain expatriates or former long-term residents of the US, and US holders that directly or by attribution hold 10% or more of the voting power of the Parent Company’s shares. This summary does not address US federal estate tax, state or local taxes, or the 3.8% Medicare tax on net investment income.

The summaries are not intended to provide specific advice and no action should be taken or omitted to be taken in reliance upon it. If you are in any doubt about your taxation position, or if you are resident or domiciled outside the UK or resident or otherwise subject to taxation in a jurisdiction outside the UK or the US, you should consult your own professional advisers immediately.

The Parent Company is incorporated in Bermuda. The directors intend to conduct the Parent Company’s affairs such that, based on current law and practice of the relevant tax authorities, the Parent Company will not become

 

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resident for tax purposes in any other territory. This guidance is written on the basis that the Parent Company does not become resident in a territory other than Bermuda.

US taxation

As used in this discussion, the term “US holder” means a beneficial owner of Common Shares who is for US federal income tax purposes: (i) an individual US citizen or resident; (ii) a corporation, or entity treated as a corporation, created or organized in or under the laws of the United States; (iii) an estate whose income is subject to US federal income taxation regardless of its source; or (iv) a trust if either: (a) a court within the US is able to exercise primary supervision over the administration of such trust and one or more US persons have the authority to control all substantial decisions of such trust; or (b) the trust has a valid election in effect to be treated as a US resident for US federal income tax purposes.

If a partnership (or other entity classified as a partnership for US federal tax income purposes) holds Common Shares, the US federal income tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. Partnerships, and partners in partnerships, holding Common Shares are encouraged to consult their tax advisers.

Dividends and other distributions upon Common Shares

Distributions made with respect to Common Shares will generally be includable in the income of a US holder as ordinary dividend income, to the extent paid out of current or accumulated earnings and profits of the Parent Company as determined in accordance with US federal income tax principles. The amount of such dividends will generally be treated partly as US-source and partly as foreign-source dividend income, for US foreign tax credit purposes, in proportion to the earnings from which they are considered paid for as long as 50% or more of the Parent Company’s shares are directly or indirectly owned by US persons. Dividend income received from the Parent Company will not be eligible for the “dividends received deduction” generally allowed to US corporations under the US Code. Subject to applicable limitations, including a requirement that the Common Shares be listed for trading on the NYSE, the NASDAQ Stock Market, or another qualifying US exchange, dividends with respect to Common Shares so listed that are paid to non-corporate US holders will generally be taxable at a current maximum tax rate of 20%.

Sale or exchange of Common Shares

Gain or loss realized by a US holder on the sale or exchange of Common Shares generally will be subject to US federal income tax as capital gain or loss in an amount equal to the difference between the US holder’s tax basis in the Common Shares and the amount realized on the disposition. Such gain or loss will be long-term capital gain or loss if the US holder held the Common Shares for more than one year. Gain or loss, if any, will generally be US source for foreign tax credit purposes. The deductibility of capital losses is subject to limitations. Non-corporate US holders are eligible for a current maximum 20% long-term capital gains taxation rate.

Information reporting and backup withholding

Payments of dividends on, and proceeds from a sale or other disposition of, Common Shares, may, under certain circumstances, be subject to information reporting and backup withholding at a rate of 28% of the cash payable to the holder, unless the holder provides proof of an applicable exemption or furnishes its taxpayer identification number, and otherwise complies with all applicable requirements of the backup withholding rules. Any amounts withheld from payments to a US holder under the backup withholding rules are not additional tax and should be allowed as a refund or credit against the US holder’s US federal income tax liability, provided the required information is timely furnished to the IRS.

 

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Passive foreign investment company status

A non-US corporation will be classified as a passive foreign investment company (a “PFIC”) for any taxable year if at least 75% of its gross income consists of passive income (such as dividends, interest, rents, royalties or gains on the disposition of certain minority interests), or at least 50% of the average value of its assets consists of assets that produce, or are held for the production of, passive income. For the purposes of these rules, a non US corporation is considered to hold and receive directly its proportionate share of the assets and income of any other corporation of whose shares it owns at least 25% by value. Consequently, the Parent Company’s classification under the PFIC rules will depend primarily upon the composition of its assets and income.

If the Parent Company is characterized as a PFIC, US holders would suffer adverse tax consequences, and US federal income tax consequences different from those described above may apply. These consequences may include having gains realized on the disposition of Common Shares treated as ordinary income rather than capital gain and being subject to punitive interest charges on certain distributions and on the proceeds of the sale or other disposition of Common Shares. The Parent Company believes that it is not a PFIC and that it will not be a PFIC for the foreseeable future. However, since the tests for PFIC status depend upon facts not entirely within the Parent Company’s control, such as the amounts and types of its income and values of its assets, no assurance can be provided that the Parent Company will not become a PFIC. US holders of PFIC shares are required to file IRS Form 8621 annually. US holders should consult their own tax advisers regarding the potential application of the PFIC rules to Common Shares.

Foreign financial asset reporting requirement

A US holder that is an individual and holds certain foreign financial assets (including Signet’s Common Shares) must file IRS Form 8938 to report the ownership of such assets if the total value of those assets exceeds the applicable threshold amounts, generally $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Some US holders may be subject to a greater threshold before reporting is required. Proposed regulations also would require certain domestic entities that are formed, or availed of, for purposes of holding, directly or indirectly, specified foreign financial assets to file IRS Form 8938. However, in general, such form is not required to be filed with respect to Signet’s Common Shares if they are held through a domestic financial institution.

Taxpayers who fail to make the required disclosure with respect to any taxable year are subject to a penalty of $10,000 for such taxable year, which may be increased up to $50,000 for a continuing failure to file the form after being notified by the IRS. In addition, the failure to file Form 8938 will extend the statute of limitations for a taxpayer’s entire related income tax return (and not just the portion of the return that relates to the omission) until at least three years after the date on which the Form 8938 is filed.

All US holders are urged to consult with their own tax advisors with respect to the application of this reporting requirement to their circumstances.

UK taxation

Chargeable gains

A disposal of Common Shares by a shareholder who is resident in the UK may, depending on individual circumstances (including the availability of exemptions or allowable losses), give rise to a liability to (or an allowable loss for the purposes of) UK taxation of chargeable gains.

Any chargeable gain or allowable loss on a disposal of the Common Shares should be calculated taking into account the allowable cost to the holder of acquiring his Common Shares. In the case of corporate shareholders, to this should be added, when calculating a chargeable gain but not an allowable loss, indexation allowance on the allowable cost. (Indexation allowance is not available for non-corporate shareholders).

 

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Individuals who hold their Common Shares within an individual savings account (“ISA”) and are entitled to ISA-related tax relief in respect of the same, will generally not be subject to UK taxation of chargeable gains in respect of any gain arising on a disposal of Common Shares.

Taxation of dividends on Common Shares

Under current UK law and practice, UK withholding tax is not imposed on dividends.

Subject to anti-avoidance rules and the satisfaction of certain conditions, UK resident shareholders who are within the charge to UK corporation tax will in general not be subject to corporation tax on dividends paid by the Parent Company on the Common Shares.

A UK resident individual shareholder who is liable to UK income tax at no more than the basic rate will be liable to income tax on dividends paid by the Parent Company on the Common Shares at the dividend ordinary rate (10% in tax year 2013/14). A UK resident individual shareholder who is liable to UK income tax at the higher rate will be subject to income tax on the dividend income at the dividend upper rate (32.5% in 2013/14). A further rate of income tax (the “additional rate”) will apply to individuals with taxable income over a certain threshold, which is currently £150,000 for 2013/14. A UK resident individual shareholder subject to the additional rate will be liable to income tax on their dividend income at the dividend additional rate of 37.5% (in 2013/14, as from the start of this tax year on April 6, 2013) of the gross dividend to the extent that the gross dividend when treated as the top slice of the shareholder’s income falls above the current £150,000 threshold.

UK resident individuals in receipt of dividends from the Parent Company, if they own less than a 10% shareholding in the Parent Company, will be entitled to a non-payable dividend tax credit (currently at the rate of 1/9th of the cash dividend paid (or 10% of the aggregate of the net dividend and related tax credit)). Assuming that there is no withholding tax imposed on the dividend (as to which see the section on Bermuda taxation below), the individual is treated as receiving for UK tax purposes gross income equal to the cash dividend plus the tax credit. The tax credit is set against the individual’s tax liability on that gross income. The result is that a UK resident individual shareholder who is liable to UK income tax at no more than the basic rate will have no further UK income tax to pay on a Parent Company dividend. A UK resident individual shareholder who is liable to UK income tax at the higher rate will have further UK income tax to pay of 22.5% of the dividend plus the related tax credit (or 25% of the cash dividend, assuming that there is no withholding tax imposed on that dividend). A UK resident individual subject to income tax at the additional rate for 2013/14 will have further UK income tax to pay of 27.5% of the dividend plus the tax credit (or 30 5/9% of the cash dividend, assuming that there is no withholding tax imposed on that dividend), to the extent that the gross dividend falls above the threshold for the 45% rate of income tax.

Individual shareholders who hold their Common Shares in an ISA and are entitled to ISA-related tax relief in respect of the same will not be taxed on the dividends from those Common Shares but are not entitled to recover the tax credit on such dividends from HMRC.

Stamp duty/stamp duty reserve tax (“SDRT”)

In practice, stamp duty should generally not need to be paid on an instrument transferring Common Shares. No SDRT will generally be payable in respect of any agreement to transfer Common Shares or Depositary Interests. The statements in this paragraph summarize the current position on stamp duty and SDRT and are intended as a general guide only. They assume that the Parent Company will not be UK managed and controlled and that the Common Shares will not be registered in a register kept in the UK by or on behalf of the Parent Company. The Parent Company has confirmed that it does not intend to keep such a register in the UK.

 

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Bermuda taxation

At the present time, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by the Parent Company or by its shareholders in respect of its Common Shares. The Parent Company has obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 31, 2035, be applicable to it or to any of its operations or to its shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or is payable by it in respect of real property owned or leased by it in Bermuda.

 

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ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

The financial data included below for Fiscal 2014, Fiscal 2013 and Fiscal 2012 have been derived from the audited consolidated financial statements included in Item 8. The financial data for these periods should be read in conjunction with the financial statements, including the notes thereto, and Item 7. The financial data included below for Fiscal 2011 and Fiscal 2010 have been derived from the previously published consolidated audited financial statements not included in this document.

 

FINANCIAL DATA:    Fiscal
2014
    Fiscal
2013(1)
    Fiscal
2012
    Fiscal
2011
    Fiscal
2010
 
     (in millions)  

Income statement:

          

Sales

   $ 4,209.2      $ 3,983.4      $ 3,749.2      $ 3,437.4      $ 3,273.6   

Cost of sales

     (2,628.7 )     (2,446.0 )     (2,311.6 )     (2,194.5 )     (2,208.0 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     1,580.5        1,537.4        1,437.6        1,242.9        1,065.6   

Selling, general and administrative expenses

     (1,196.7 )     (1,138.3 )     (1,056.7 )     (980.4 )     (916.5 )

Other operating income, net

     186.7        161.4        126.5        110.0        115.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     570.5        560.5        507.4        372.5        264.5   

Interest expense, net

     (4.0 )     (3.6 )     (5.3 )     (72.1 )     (34.0 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     566.5        556.9        502.1        300.4        230.5   

Income taxes

     (198.5 )     (197.0 )     (177.7 )     (100.0 )     (73.4 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 368.0      $ 359.9      $ 324.4      $ 200.4      $ 157.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA(2)

   $ 680.7      $ 659.9      $ 599.8      $ 470.3      $ 373.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income statement:

     (as a percent to sales)   

Sales

     100.0        100.0        100.0        100.0        100.0   

Cost of sales

     (62.5 )     (61.4 )     (61.7 )     (63.8 )     (67.4 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     37.5        38.6        38.3        36.2        32.6   

Selling, general and administrative expenses

     (28.4 )     (28.6 )     (28.2 )     (28.5 )     (28.0 )

Other operating income, net

     4.4        4.1        3.4        3.1        3.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     13.5        14.1        13.5        10.8        8.1   

Interest expense, net

     (0.1 )     (0.1 )     (0.1 )     (2.1 )     (1.1 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     13.4        14.0        13.4        8.7        7.0   

Income taxes

     (4.7 )     (5.0 )     (4.7 )     (2.9 )     (2.2 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     8.7        9.0        8.7        5.8        4.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA(2)

     16.2        16.6        16.0        13.7        11.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

          

Earnings per share: basic

   $ 4.59      $ 4.37      $ 3.76      $ 2.34      $ 1.84   

                         diluted

   $ 4.56      $ 4.35      $ 3.73      $ 2.32      $ 1.83   

Weighted average common shares outstanding:

          

                         basic (million)

     80.2        82.3        86.2        85.7        85.3   

                         diluted (million)

     80.7        82.8        87.0        86.4        85.7   

Dividends declared per share

   $ 0.60      $ 0.48      $ 0.20        —       $ —    

 

(1)

Fiscal 2013 was a 53 week period. The 53rd week added $56.4 million in net sales and decreased diluted earnings per share by approximately $0.02 for both the fourth quarter and fiscal period.

(2) EBITDA is a non-GAAP measures, see “GAAP and non-GAAP Measures” below.

 

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     Fiscal
2014
    Fiscal
2013
    Fiscal
2012
    Fiscal
2011
    Fiscal
2010
 

(in millions)

  

Balance sheet:

          

Total assets

   $ 4,029.2      $ 3,719.0      $ 3,611.4      $ 3,089.8      $ 3,044.9   

Total liabilities

     1,466.1        1,389.1        1,332.3        1,150.8        1,341.3   

Total shareholders’ equity

     2,563.1        2,329.9        2,279.1        1,939.0        1,703.6   

Working capital

     2,356.9        2,164.2        2,158.3        1,831.3        1,814.3   

Cash and cash equivalents

     247.6        301.0        486.8        302.1        316.2   

Loans and overdrafts

     (19.3 )     —         —         (31.0 )     (44.1 )

Long-term debt

     —         —         —         —         (280.0 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (debt)(1)

   $ 228.3      $ 301.0      $ 486.8      $ 271.1      $ (7.9 )

Common shares outstanding

     80.2        81.4        86.9        86.2        85.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow:

          

Net cash provided by operating activities

   $ 235.5      $ 312.7      $ 325.2      $ 323.1      $ 515.3   

Net cash used in investing activities

     (160.4     (190.9     (97.8     (55.6 )     (43.5 )

Net cash used in financing activities

     (124.8     (308.1     (40.0     (282.3 )     (251.6 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

   $ (49.7   $ (186.3   $ 187.4      $ (14.8   $ 220.2   

Ratios:

          

Operating margin

     13.5     14.1 %     13.5 %     10.8     8.1

Effective tax rate

     35.0     35.4 %     35.4 %     33.3 %     31.8 %

ROCE(1)

     25.2     28.1 %     28.6 %     23.0 %     15.0 %

 

     Fiscal
2014
    Fiscal
2013
    Fiscal
2012
    Fiscal
2011
    Fiscal
2010
 

Store data:

          

Store numbers (at end of period)

          

US

     1,471        1,443        1,318        1,317        1,361   

UK

     493        511        535        540        552   

Percentage increase (decrease) in same store sales

          

US

     5.2     4.0     11.1 %     8.9     0.2

UK

     1.0     0.3     0.9 %     (1.4 )%     (2.4 )%

Signet

     4.4     3.3     9.0 %     6.7     (0.4 )%

Number of employees (full-time equivalents)

     18,179 (2)      17,877 (3)      16,555        16,229        16,320   

 

(1) Net cash (debt) and ROCE are non-GAAP measures, see “GAAP and non-GAAP Measures” below.
(2) Number of employees includes 211 full-time equivalents employed at the diamond polishing plant located in Botswana.
(3) Number of employees includes 830 full-time equivalents employed by Ultra.

GAAP AND NON-GAAP MEASURES

The discussion and analysis of Signet’s results of operations, financial condition and liquidity contained in this Report are based upon the consolidated financial statements of Signet which are prepared in accordance with US GAAP and should be read in conjunction with Signet’s financial statements and the related notes included in Item 8. A number of non-GAAP measures are used by management to analyze and manage the performance of the business, and the required disclosures for these non-GAAP measures are shown below. In particular, the terms “at constant exchange rates,” “underlying” and “underlying at constant exchange rates” are used in a number of places. “At constant exchange rates” is used to indicate where items have been adjusted to eliminate the impact of exchange rate movements on translation of pound sterling amounts to US dollars. “Underlying” is used to indicate where adjustments for significant, unusual and non-recurring items have been made and “underlying at constant exchange rates” indicates where the underlying items have been further adjusted to eliminate the impact of exchange rate movements on translation of pound sterling amounts to US dollars.

 

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Signet provides such non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. Management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitution for, financial information prepared in accordance with GAAP.

1. Income statement at constant exchange rates

Movements in the US dollar to pound sterling exchange rate have an impact on Signet’s results. The UK division is managed in pounds sterling as sales and a majority of its operating expenses are incurred in that currency and its results are then translated into US dollars for external reporting purposes. Management believes it assists in understanding the performance of Signet and its UK division if constant currency figures are given. This is particularly so in periods when exchange rates are volatile. The constant currency amounts are calculated by retranslating the prior year figures using the current year’s exchange rate. Management considers it useful to exclude the impact of movements in the pound sterling to US dollar exchange rate to analyze and explain changes and trends in Signet’s sales and costs.

(a) Fiscal 2014 percentage change in results at constant exchange rates

 

     Fiscal
2014
    Fiscal
2013(1)
    Change     Impact of
exchange
rate
movement
    Fiscal 2013
at  constant
exchange
rates
(non-GAAP)
    Fiscal 2014
change
at  constant
exchange
rates
(non-GAAP)
 
     $million     $million     %     $million     $million     %  

Sales by origin and destination:

            

US

     3,517.6        3,273.9        7.4        —         3,273.9        7.4   

UK

     685.6        709.5        (3.4     (4.2     705.3        (2.8

Other

     6.0        —         nm        —         —         nm   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     4,209.2        3,983.4        5.7        (4.2     3,979.2        5.8   

Cost of sales

     (2,628.7 )     (2,446.0 )     (7.5 )     4.1        (2,441.9 )     (7.6 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     1,580.5        1,537.4        2.8        (0.1     1,537.3        2.8   

Selling, general and administrative expenses

     (1,196.7 )     (1,138.3 )     (5.1     1.9        (1,136.4 )     (5.3

Other operating income, net

     186.7        161.4        15.7        (0.1 )     161.3        15.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

            

US

     553.2        547.8        1.0        —         547.8        1.0   

UK

     42.4        40.0        6.0        1.7        41.7        1.7   

Other

     (25.1     (27.3     8.1        —         (27.3     8.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     570.5        560.5        1.8        1.7        562.2        1.5   

Interest expense, net

     (4.0 )     (3.6 )     (11.1 )     —          (3.6 )     (11.1 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     566.5        556.9        1.7        1.7        558.6        1.4   

Income taxes

     (198.5 )     (197.0 )     (0.8     (0.3 )     (197.3 )     (0.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     368.0        359.9        2.3        1.4        361.3        1.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 4.59      $ 4.37        5.0      $ 0.02     $ 4.39        4.6   

Diluted earnings per share

   $ 4.56      $ 4.35        4.8      $ 0.01     $ 4.36        4.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Fiscal 2013 was a 53 week period. The 53rd week added $56.4 million in net sales and decreased diluted earnings per share by approximately $0.02 for the fiscal period.

nm Not meaningful as Fiscal 2014 is the first year of sales.

 

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(b) Fourth quarter Fiscal 2014 percentage change in results at constant exchange rates

 

     13 weeks ended
February 1,
2014
    14 weeks ended
February 2,
2013(1)
    Change     Impact of
exchange
rate
movement
    14 weeks
ended
February 2,
2013
at constant
exchange
rates
(non-GAAP)
    13 weeks
ended
February 1,
2014
change
at constant
exchange rates
(non-GAAP)
 
     $million     $million     %     $million     $million     %  

Sales by origin and destination:

            

US

     1,288.0        1,244.9        3.5        —         1,244.9        3.5   

UK

     272.2        268.4        1.4        5.3        273.7        (0.5 )

Other

     3.8        —         nm        —         —         nm   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,564.0        1,513.3        3.4        5.3        1,518.6        3.0   

Cost of sales

     (915.2 )     (876.2 )     (4.5 )     (2.8 )     (879.0 )     (4.1 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     648.8        637.1        1.8        2.5        639.6        1.4   

Selling, general and administrative expenses

     (425.8 )     (410.9 )     (3.6 )     (0.7 )     (411.6 )     (3.4 )

Other operating income, net

     47.6        41.5        14.7        (0.2 )     41.3        15.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

            

US

     227.9        227.5        0.2        —         227.5        0.2   

UK

     51.7        48.8        5.9        1.7        50.5        2.4   

Other

     (9.0     (8.6     (4.7     (0.1     (8.7     (3.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     270.6        267.7        1.1        1.6        269.3        0.5   

Interest expense, net

     (1.2 )     (1.1 )     (9.1 )     0.1        (1.0 )     (20.0 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     269.4        266.6        1.1        1.7        268.3        0.4   

Income taxes

     (94.2 )     (94.8 )     0.6        (0.3 )     (95.1 )     0.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     175.2        171.8        2.0        1.4        173.2        1.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 2.20      $ 2.13        3.3      $ 0.02      $ 2.15        2.3   

Diluted earnings per share

   $ 2.18      $ 2.12        2.8      $ 0.01      $ 2.13        2.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Fourth quarter Fiscal 2013 was a 14 week period. The 14th week added $56.4 million in net sales and decreased diluted earnings per share by approximately $0.02 for the fourth quarter.

nm Not meaningful as Fiscal 2014 is the first year of sales.

 

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Table of Contents

(c) Fiscal 2013 percentage change in results at constant exchange rates

 

     Fiscal
2013
    Fiscal
2012
    Change     Impact of
exchange
rate
movement
    Fiscal 2012
at  constant
exchange
rates
(non-GAAP)
    Fiscal 2013
change
at  constant
exchange
rates
(non-GAAP)
 
     $million     $million     %     $million     $million     %  

Sales by origin and destination:

            

US

     3,273.9        3,034.1        7.9        —         3,034.1        7.9   

UK

     709.5        715.1        (0.8     (4.5     710.6        (0.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,983.4        3,749.2        6.2        (4.5     3,744.7        6.4   

Cost of sales

     (2,446.0 )     (2,311.6 )     (5.8 )     3.0        (2,308.6 )     (6.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     1,537.4        1,437.6        6.9        (1.5     1,436.1        7.1   

Selling, general and administrative expenses

     (1,138.3 )     (1,056.7 )     (7.7     1.2        (1,055.5 )     (7.8

Other operating income, net

     161.4        126.5        27.6        —         126.5        27.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

            

US

     547.8        478.0        14.6        —         478.0        14.6   

UK

     40.0        56.1        (28.7     (0.4     55.7        (28.2

Unallocated

     (27.3     (26.7     (2.2 )     0.1        (26.6     (2.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     560.5        507.4        10.5        (0.3     507.1        10.5   

Interest expense, net

     (3.6 )     (5.3 )     32.1        —          (5.3 )     32.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     556.9        502.1        10.9        (0.3 )     501.8        11.0   

Income taxes

     (197.0 )     (177.7 )     (10.9     0.1        (177.6 )     (10.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     359.9        324.4        10.9        (0.2     324.2        11.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 4.37      $ 3.76        16.2      $ —       $ 3.76        16.2   

Diluted earnings per share

   $ 4.35      $ 3.73        16.6      $ —       $ 3.73        16.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(d) Fourth quarter Fiscal 2013 percentage change in results at constant exchange rates

 

     14 weeks ended
February 2,
2013
    13 weeks ended
January 28,
2012
    Change     Impact of
exchange
rate
movement
    13 weeks
ended
January 28,
2012
at constant
exchange
rates
(non-GAAP)
    14 weeks
ended
February 2,
2013
change
at constant
exchange rates
(non-GAAP)
 
     $million     $million     %     $million     $million     %  

Sales by origin and destination:

            

US

     1,244.9        1,090.1        14.2        —         1,090.1        14.2   

UK

     268.4        263.7        1.8        6.7        270.4        (0.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,513.3        1,353.8        11.8        6.7        1,360.5        11.2   

Cost of sales

     (876.2 )     (790.6 )     (10.8 )     (5.1 )     (795.7 )     (10.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     637.1        563.2        13.1        1.6        564.8        12.8   

Selling, general and administrative expenses

     (410.9 )     (348.8 )     (17.8 )     (2.3 )     (351.1 )     (17.0

Other operating income, net

     41.5        29.5        40.7        —         29.5        40.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

            

US

     227.5        191.0        19.1        —         191.0        19.1   

UK

     48.8        58.5        (16.6     (0.5     58.0        (15.9

Unallocated

     (8.6     (5.6     (53.6     (0.2     (5.8     (48.3 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     267.7        243.9        9.8        (0.7     243.2        10.1   

Interest expense, net

     (1.1 )     (1.5 )     26.7        —         (1.5 )     26.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     266.6        242.4        10.0        (0.7 )     241.7        10.3   

Income taxes

     (94.8 )     (85.8 )     (10.5     0.2        (85.6 )     (10.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     171.8        156.6        9.7        (0.5     156.1        10.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 2.13      $ 1.81        17.7      $ —       $ 1.81        17.7   

Diluted earnings per share

   $ 2.12      $ 1.79        18.4      $ —       $ 1.79        18.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2. Net cash

Net cash is the total of cash and cash equivalents less loans, overdrafts and long-term debt, and is helpful in providing a measure of the total indebtedness of the business.

 

     February 1,
2014
    February 2,
2013
     January 28,
2012
 
(in millions)                    

Cash and cash equivalents

   $ 247.6      $ 301.0       $ 486.8   

Loans and overdrafts

     (19.3 )     —          —    

Long-term debt

     —         —          —    
  

 

 

   

 

 

    

 

 

 

Net cash

   $ 228.3      $ 301.0       $ 486.8   
  

 

 

   

 

 

    

 

 

 

3. Return on capital employed excluding goodwill (“ROCE”)

ROCE is calculated by dividing the 52 week annual operating income by the average quarterly capital employed and is expressed as a percentage. Capital employed includes accounts and other receivables, inventories, intangible assets excluding goodwill, property, plant and equipment, other assets, accounts payable, accrued expenses and other current liabilities, other liabilities, deferred revenue and retirement benefit asset/obligation. This is a key performance indicator used by management for assessing the effective operation of the business and is considered a useful disclosure for investors as it provides a measure of the return on Signet’s operating assets.

 

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4. Free cash flow

Free cash flow is a non-GAAP measure defined as the net cash provided by operating activities less purchases of property, plant and equipment, net. Management considers that this is helpful in understanding how the business is generating cash from its operating and investing activities that can be used to meet the financing needs of the business. Free cash flow does not represent the residual cash flow available for discretionary expenditure.

 

     Fiscal
2014
    Fiscal
2013
    Fiscal
2012
 
(in millions)                   

Net cash provided by operating activities

   $ 235.5      $ 312.7      $ 325.2   

Purchase of property, plant and equipment, net

     (152.7 )     (134.2 )     (97.8 )
  

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 82.8      $ 178.5      $ 227.4   
  

 

 

   

 

 

   

 

 

 

5. Earnings before interest, income taxes, depreciation and amortization (“EBITDA”)

EBITDA is a non-GAAP measure defined as earnings before interest and income taxes (operating income), depreciation and amortization. EBITDA is an important indicator of operating performance as it excludes the effects of financing and investing activities by eliminating the effects of interest, depreciation and ammortization costs. Management believes this financial measure is helpful to enhance investors’ ability to analyze trends in our business and evaluate our performance relative to other companies.

 

     Fiscal
2014
     Fiscal
2013
     Fiscal
2012
     Fiscal
2011
     Fiscal
2010
 
(in millions)                                   

Operating income

   $ 570.5       $ 560.5       $ 507.4       $ 372.5       $ 264.5   

Depreciation and amortization

     110.2         99.4         92.4         97.8         108.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 680.7       $ 659.9       $ 599.8       $ 470.3       $ 373.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, based upon management’s beliefs and expectations as well as on assumptions made by and data currently available to management, appear in a number of places throughout this Annual Report on Form 10-K and include statements regarding, among other things, Signet’s results of operation, financial condition, liquidity, prospects, growth, strategies and the industry in which Signet operates. The use of the words “expects,” “intends,” “anticipates,” “estimates,” “predicts,” “believes,” “should,” “potential,” “may,” “forecast,” “objective,” “plan,” or “target,” and other similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, risks relating to Signet being a Bermuda corporation, the merchandising, pricing and inventory policies followed by Signet, the reputation of Signet and its brands, the level of competition in the jewelry sector, the cost and availability of diamonds, gold and other precious metals, regulations relating to consumer credit, seasonality of Signet’s business, financial market risks, deterioration in consumers’ financial condition, exchange rate fluctuations, changes in consumer attitudes regarding jewelry, management of social, ethical and environmental risks, security breaches and other disruptions to Signet’s information technology infrastructure and databases, inadequacy in and disruptions to internal controls and systems, changes in assumptions used in making accounting estimates relating to items such as extended service plans and pensions, the ability to complete the acquisition of Zale, the ability to obtain requisite regulatory approval without unacceptable conditions, the ability to obtain Zale stockholder approval, the potential impact of the announcement and consummation of the Zale acquisition on relationships, including with employees, suppliers, customers and competitors and any related impact on integration and anticipated synergies, the impact of stockholder litigation with respect to the Zale acquisition, and our ability to successfully integrate Zale’s operations and to realize synergies from the transaction.

For a discussion of these risks and other risks and uncertainties which could cause actual results to differ materially from those expressed in any forward looking statement, see Item 1A and elsewhere in this Annual Report on Form 10-K. Signet undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.

GAAP AND NON-GAAP MEASURES

The following discussion and analysis of the results of operations, financial condition and liquidity is based upon the consolidated financial statements of Signet which are prepared in accordance with US GAAP. The following information should be read in conjunction with Signet’s financial statements and the related notes included in Item 8.

A number of non-GAAP measures are used by management to analyze and manage the performance of the business, and the required disclosures for these measures are given in Item 6. Signet provides such non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. The Company’s management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitution for, financial information prepared in accordance with GAAP.

Exchange translation impact

The monthly average exchange rates are used to prepare the income statement and are calculated each month from the weekly average exchange rates weighted by sales of the UK division. In Fiscal 2015, it is anticipated a one cent movement in the pound sterling to US dollar exchange rate would impact income before income tax by approximately $0.3 million.

 

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Table of Contents

Fiscal 2014 overview

The Fiscal 2014 results were led by a same store sales increase of 4.4% compared to an increase of 3.3% in Fiscal 2013; total sales were up by 5.7% to $4,209.2 million compared to $3,983.4 million in Fiscal 2013. As Signet follows the retail 4-5-4 reporting calendar, Fiscal 2013 included an extra week in the fourth quarter of Fiscal 2013 (the “53rd week”). The effect of the 53rd week added $56.4 million in net sales in Fiscal 2013 and decreased diluted earnings per share by approximately $0.02 for Fiscal 2013. Excluding the impact of the 53rd week in Fiscal 2013, sales were up 7.2%; see Fiscal 2013 detailed commentary beginning on page 67 for further information on the impact of the 53rd week. Operating margin decreased 60 basis points to 13.5% compared to 14.1% in Fiscal 2013. Operating income and diluted earnings per share increased to $570.5 million compared to $560.5 million in Fiscal 2013 and $4.56 per share compared to $4.35 in Fiscal 2013, up by 1.8% and 4.8% respectively.

At February 1, 2014 and February 2, 2013, Signet had no long-term debt and cash and cash equivalents of $247.6 and $301.0 million, respectively. During Fiscal 2014, Signet repurchased approximately 1.6 million shares at an average cost of $67.24 per share, which represented 1.9% of the shares outstanding at the start of Fiscal 2014, as compared to 6.4 million shares repurchased in Fiscal 2013 at an average cost of $44.70.

Drivers of operating profitability

The key drivers of operating profitability are:

 

   

sales performance;

 

   

gross margin;

 

   

level of selling, general and administrative expenses;

 

   

balance between the change in same store sales and sales from new store space; and

 

   

movements in the US dollar to pound sterling exchange rate, as 16% of Signet’s sales and approximately 7% of operating income, including unallocated corporate administrative costs, were generated in the UK in Fiscal 2014 and Signet reports its results in US dollars.

These and other drivers are discussed more fully below.

Sales

Sales performance in both the US and UK divisions is driven by the change in same store sales and net store selling space. Same store sales growth is calculated by comparison of sales in stores that were open in both the current and the prior fiscal year. Sales from stores that have been open for less than 12 months, including acquisitions, are excluded from the comparison until their 12-month anniversary. Sales from the 12-month anniversary onwards are compared against the equivalent prior period sales within the comparable store sales comparison. Stores closed in the current financial period are included up to the date of closure and the comparative period is correspondingly adjusted. Stores that have been relocated or expanded, but remain within the same local geographic area, are included within the comparison with no adjustment to either the current or comparative period. Stores that have been refurbished are also included within the comparison except for the period when the refurbishment was taking place, when those stores are excluded from the comparison both for the current year and for the comparative period. Sales to employees are also excluded. Comparisons at divisional level are made in local currency and consolidated comparisons are made at constant exchange rates and exclude the effect of exchange rate movements by recalculating the prior period results as if they had been generated at the weighted average exchange rate for the current period. eCommerce sales are included in the calculation of sales for the period and the comparative figures from the anniversary of the launch of the relevant website. Same store sales exclude the 53rd week in the fiscal year in which it occurs. Management considers same store sales useful as it is a major benchmark used by investors to judge performance within the retail industry.

 

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Table of Contents

A new US store typically has sales ranging from 70% to 75% of a five year old store, and will only contribute to sales for part of the fiscal year in which it is opened. Store openings are usually planned to occur in the third quarter, and store closures in January, although this does not always occur. When investing in new space, management has stringent operating and financial criteria. US net space increased 5% in Fiscal 2014, compared to an increase of 11% in Fiscal 2013 of which 7% related to the Ultra Acquisition. In the UK, there has typically been a decline in net space as the division has exited from retail markets where operation no longer meets the economic criteria established by management due to growth in regional malls. The UK net space decreased by 3% in both Fiscal 2014 and Fiscal 2013.

Net change in store selling space

 

     US     UK     Signet  

Fiscal 2014:

      

Openings

     81 (1)      2        83   

Closures

     (53 )(2)     (20     (73 )

Net change in store selling space

     5 %     (3 )%     4 %

Fiscal 2013:

      

Openings or acquisitions

     158 (3)      —          158   

Closures

     (33 )     (24     (57 )

Net change in store selling space

     11 %     (3 )%     8 %

Fiscal 2012:

      

Openings

     23        3        26   

Closures

     (22 )     (8     (30 )

Net change in store selling space

     1 %     0     1 %

 

(1) Includes 3 Ultra Diamonds stores opened in Fiscal 2014.
(2) Includes 15 Ultra stores closed in Fiscal 2014.
(3) Includes Ultra stores and excludes 33 Ultra licensed jewelry departments.

Cost of sales and gross margin

Cost of sales includes merchandise costs net of discounts and allowances, freight, processing and distribution costs of moving merchandise from suppliers to the distribution center and to stores, inventory shrinkage, store operating and occupancy costs, net bad debt expense and charges for late payments under the US customer finance program. Store operating and occupancy costs include utilities, rent, real estate taxes, common area maintenance charges and depreciation. As the classification of cost of sales or selling, general and administrative expenses varies from retailer to retailer and few retailers have in-house customer finance programs, Signet’s gross margin percentage may not be directly comparable to other retailers.

The gross merchandise margin is the difference between the selling price achieved and the cost of merchandise sold expressed as a percentage of the sales price. Gross merchandise margin dollars is the difference expressed in monetary terms. The trend in gross merchandise margin depends on Signet’s pricing policy, movements in the cost of merchandise sold, changes in sales mix and the direct cost of providing services such as repairs.

Important factors that impact gross margin are the cost of diamonds and gold and our ability to adjust prices to offset such costs. In the US division, about 55% of the cost of merchandise sold is accounted for by polished diamonds and about 15% is accounted for by gold. In the UK division, diamonds and gold account for about 10% and about 15%, respectively, of the cost of merchandise sold, and watches for about 45%. The pound sterling to US dollar exchange rate also has a material impact as a significant proportion of the merchandise sold in the UK is purchased in US dollars. At times, Signet uses gold and currency hedges to reduce its exposure to market volatility in the cost of gold and the pound sterling to US dollar exchange rate, but is not able to do so for diamonds. For gold and currencies, the hedging period can extend to 24 months, although the majority of hedge contracts will normally be for a maximum of 12 months.

 

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The price of diamonds varies depending on their size, cut, color and clarity. Demand for diamonds is primarily driven by the manufacture and sale of diamond jewelry and their future price is uncertain.

During Fiscal 2014, while the cost of gold remained volatile, the overall cost of gold decreased significantly from Fiscal 2013, with an average cost of $1,246 per troy ounce in January 2014 compared to an average cost of $1,671 per troy ounce in January 2013. The future price of gold is uncertain.

Signet uses an average cost inventory methodology and, as jewelry inventory turns slowly, the impact of movements in the cost of diamonds and gold takes time to be fully reflected in the gross margin. As inventory turn is faster in the fourth quarter than in the other three quarters, changes in the cost of merchandise are more quickly reflected in the gross margin in that quarter. Furthermore, Signet’s hedging activities result in movements in the purchase cost of merchandise taking some time before being reflected in the gross margin. An increase in inventory turn would accelerate the rate at which commodity costs impact gross margin.

Account receivables comprise a large volume of transactions with no one customer representing a significant balance. The net US bad debt expense includes an estimate of the allowance for losses as of the balance sheet date. The allowance is calculated using a proprietary model that analyzes factors such as delinquency rates and recovery rates. A 100% allowance is made for any amount that is more than 90 days aged on a recency basis and any amount associated with an account the owner of which has filed for bankruptcy, as well as an allowance for those 90 days aged and under based on historical loss information and payment performance. Management believes that the primary drivers of the net US bad debt to total US sales ratio are the accuracy of the proprietary consumer credit scores used when granting customer finance, the procedures used to collect the outstanding balances, US credit sales as a percentage of total US sales and the rate of change in the level of unemployment in the US economy.

Selling, general and administrative expenses

Selling, general and administrative expenses include store staff and store administrative costs, centralized administrative expenses, including information technology, credit and eCommerce, advertising and promotional costs and other operating expenses not specifically categorized elsewhere in the consolidated income statements.

The primary drivers of staffing costs are the number of full time equivalent employees employed and the level of compensation, taxes and other benefits paid. Management varies, on a store by store basis, the hours worked based on the expected level of selling activity, subject to minimum staffing levels required to operate the store. Non-store staffing levels are less variable. A significant element of compensation is performance based, and is primarily dependent on sales or operating profit.

The level of advertising expenditure can vary. The largest element of advertising expenditure is national television advertising and is determined by management’s judgment of the appropriate level of advertising impressions and the cost of purchasing media.

Other operating income

Other operating income is predominantly interest income arising from in-house customer finance provided to Signet’s customers by the US division. Its level is dependent on the rate of interest charged, the credit program selected by the customer and the level of outstanding balances. The level of outstanding balances is dependent on the sales of the US division, the proportion of sales that use the in-house customer finance and the monthly collection rate.

Operating income

To maintain operating income, Signet needs to achieve same store sales growth sufficient to offset any adverse movement in gross margin, any increase in operating costs, the impact of any immature selling space and any adverse changes in other operating income. Same store sales growth above the level required to offset the factors

 

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outlined above allows the business to achieve leverage of its cost base and improve operating income. Slower sales growth or a sales decline would normally result in reduced operating income. When foreseen, such as through the US division’s cost saving measures implemented in Fiscal 2010, Signet may be able to reduce costs to help offset the impact of slow or negative sales growth. A key factor in driving operating income is the level of average sales per store, with higher productivity allowing leverage of expenses incurred in performing store and central functions. The acquisition of companies with operating margins lower than that of Signet may cause an overall lower operating margin for Signet.

The impact on operating income of a sharp, unexpected increase or decrease in same store sales performance can be significant. This is particularly so when it occurs in the fourth quarter due to the seasonality of the business. In the medium term, there is more opportunity to adjust costs to the changed sales level, but the time it takes varies depending on the type of cost. An example of where it can take a number of months to adjust costs is expenditure on national network television advertising in the US, where Signet makes most of its commitments for the year ahead during its second quarter. It is even more difficult to reduce base lease costs in the short or medium term, as leases in US malls are typically for 10 years, Jared sites for 20 years and in the UK for five plus years.

Operating income may also be impacted by significant, unusual and non-recurring items. For example, in Fiscal 2011, the impact of amendments to the Truth in Lending Act had an estimated net direct adverse impact on operating income of $11.9 million, primarily by reducing other operating income. In Fiscal 2010, the vacation entitlement policy in the US division was changed, which resulted in the selling, general and administrative costs being reduced, while operating income increased by $13.4 million. Other line items may also be impacted by significant, unusual and non-recurring items. For example, in Fiscal 2011, Signet made a “Make Whole Payment” of $47.5 million, reflected as an increase to interest expense as a result of the prepayment in full of private placement notes in November 2010.

Results of operations

 

     Fiscal
2014
    Fiscal
2013(1)
    Fiscal
2012
 
(in millions)                   

Sales

   $ 4,209.2      $ 3,983.4      $ 3,749.2   

Cost of sales

     (2,628.7 )     (2,446.0 )     (2,311.6 )
  

 

 

   

 

 

   

 

 

 

Gross margin

     1,580.5        1,537.4        1,437.6   

Selling, general and administrative expenses

     (1,196.7 )     (1,138.3 )     (1,056.7 )

Other operating income, net

     186.7        161.4        126.5   
  

 

 

   

 

 

   

 

 

 

Operating income

     570.5        560.5        507.4   

Interest expense, net

     (4.0 )     (3.6 )     (5.3 )
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     566.5        556.9        502.1   

Income taxes

     (198.5 )     (197.0 )     (177.7 )
  

 

 

   

 

 

   

 

 

 

Net income

   $ 368.0      $ 359.9      $ 324.4   
  

 

 

   

 

 

   

 

 

 

 

(1)

Fiscal 2013 was a 53 week period. The 53rd week added $56.4 million in net sales and decreased diluted earnings per share by approximately $0.02 for both the fourth quarter and fiscal period.

 

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The following table sets forth for the periods indicated, the percentage of net sales represented by certain items included in the statements of consolidated income:

 

     Fiscal
2014
    Fiscal
2013
    Fiscal
2012
 
(% to sales)                   

Sales

     100.0        100.0        100.0   

Cost of sales

     (62.5 )     (61.4 )     (61.7 )
  

 

 

   

 

 

   

 

 

 

Gross margin

     37.5        38.6