- Part I: Summary
- Part II: Risk Factors
- Impact of general economic conditions
- Staff
- Short term variations in consumer preferences, merchandise selection, inventory and pricing
- Reputation and marketing
- Long term changes in consumer attitudes to jewellery
- Store portfolio
- Competition
- Suppliers
- Raw materials and the supply chain
- Seasonality
- Social, ethical and environmental risks
- Internal controls and systems
- Legal actions
- Regulatory requirements
- US GAAP
- Acquisitions
- Pensions
- Equity and debt financing
- Financial market risks
- Loss of one or more key executive officers or employees
- Implementation of the Proposal
- Market price of Common Shares
- Future sales of Common Shares by existing shareholders
- Dilution to Common Shares
- Rights as a Depositary Interest Holder
- Limitations on the transferability of the Common Shares
- Changes in tax treatment
- Secondary listing
- Consequences of a secondary listing
- Proceedings against Signet Jewelers Limited
- More extensive US regulation of the Company
- Part III: The Scheme of Arrangement and Share Capital Consolidation
- Part IV: Directors, Company Secretary, Registered Office and Advisers
- Part V: Presentation of Statisical Data and Other Information
- Part VI: Information on The Group
- Part VII: Directors and Corporate Governance
- Part VIII: Selected Financial Information
- Part IX: Operating and Financial Review
- Part X: Accountant's Reports and Financial Information
- Part XI: Interim Financial Information of The Group for The 26 Week Period Ended 2 August 2008
- Part XII: Additional Information
- Part XIII: Definitions
1.9 Raw materials and the supply chain
The jewellery 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.
The ability of the Group to increase retail prices to reflect higher commodity costs varies and an inability to increase retail prices could result in lower profitability. Historically jewellery retailers have been able, over time, to increase prices to reflect changes in commodity costs. However, particularly sharp increases and volatility in commodity costs usually result in a lag before increased commodity costs are fully reflected in retail prices. The US dollar price of gold has increased significantly in recent years. In early 2008/09 the US division implemented a wide range of price increases to reflect higher commodity costs. There is no certainty that such price increases will be sustainable so further downward pressure on gross margins may occur. Further increases in commodity costs would also adversely affect gross margin. The Group also seeks to improve the efficiency of its supply chain to partly offset any increase in commodity costs.
The Group undertakes some hedging of its requirement for gold through the use of options, forward contracts and outright commodity purchasing. It does not hedge against fluctuations in the cost of diamonds. The Group does hedge the exposure of the UK division to the US dollar with regard to diamond and other costs of goods sold. The cost of raw materials is only part of the costs involved in determining the retail selling price of jewellery with labour costs also being a significant factor.
Diamonds are the largest product category sold by the Group. The supply and price of diamonds in the principal world markets are significantly influenced by a single entity - the DTC. The DTC's share of the diamond supply chain has been decreasing over recent years and this may result in more volatility in rough diamond prices.
The availability of diamonds to the DTC and the Group's suppliers is to some extent dependent on the political situation in diamond producing countries. Until alternative sources can be developed, any sustained interruption in the supply of diamonds from the significant producing countries could adversely affect the Group and the retail jewellery industry as a whole.
It is forecast that the demand for diamonds will increase faster than the growth in supply; therefore the cost of diamonds is anticipated to rise over time, although short term fluctuations in price will occur. Significant increases in the prices of larger diamonds than the Group normally sells have occurred and in the future this trend may occur in the size and quality of diamonds sold by the Group. In addition, if the Group continues to increase its market share it will require additional sources of diamonds of consistent quality; the consistency of merchandise being an important element in the Group's selling system. Therefore the Group continually seeks to identify and implement improvements in its supply chain and its ability to obtain diamonds.
In 2005/06, the Group began an initiative to trial the development of a capability to source rough diamonds, and to then cut and polish the stones on a contract basis. This initiative is intended to improve the consistency of supply and quality of diamonds to the Group, as well as further improve the efficiency of the Group's supply chain. The size of the trial was expanded in 2006/07. In 2007/08 it was decided to move from the trial stage to implementation. As a result, investments in management, systems and infrastructure have been made. While this initiative has been carefully planned, it may not be successful. In particular the Group is investing in new staff, skills, procedures and systems to develop this capability. In addition, some of the rough stones purchased and the polished stones produced may be of a higher or lower quality than the Group requires. The access to such stones and the terms on which they are purchased will impact the success of the initiative. The development of this initiative will require additional investment in inventory. The required investment and the associated financing costs have been included in the Group's appraisal of this initiative.