- Part I: Summary
- Part II: Risk Factors
- 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
2. RESULTS OF OPERATIONS
2.1 52 weeks ended 2 February 2008
2007/08 was a 52 week year and the comparable period was the 53 weeks to 3 February 2007. To demonstrate better the underlying trends within the business, percentage changes of sales at constant exchange rates and like for like sales, use the 52 weeks to 3 February 2007 as the comparable period. Total Group sales rose to $3,665.3 million (2006/07: $3,559.2 million), up by 3.0 per cent on a reported basis and 3.2 per cent on a 52 week constant exchange rate basis (see table at Section 2.1.7, below). Group like for like sales were down by 0.7 per cent and net new store space contributed 3.9 per cent.
Group operating margin decreased to 9.8 per cent (2006/07: 11.4 per cent), reflecting a decline in the US division and an increased operating margin in the UK division after adjusting for the impact of the 53rd week in 2006/07, (see table opposite). Group operating income fell to $358.7 million (2006/07: $404.8 million), down by 11.4 per cent on a reported basis and by 11.7 per cent on a 52 week constant exchange rate basis (see table at Section 2.1.7, below).
Net interest amounted to $22.5 million (2006/07: $17.5 million), the increase being primarily due to incremental borrowing as a result of the share buyback programme commenced in 2006/07 and which was completed in the first quarter of 2007/08.
Group income before income taxes decreased to $336.2 million (2006/07: $387.3 million), down by 13.2 per cent on a reported basis and by 13.8 per cent on a 52 week constant exchange rate basis. The 53rd week contributed some $3.2 million to income before income taxes in 2006/07. Net income for the financial period fell by 13.0 per cent to $219.8 million (2006/07: $252.7 million), a decrease of 13.8 per cent on a 52 week constant exchange rate basis. Basic earnings per share was 12.9 cents (2006/07: 14.6 cents), down by 11.6 per cent on a reported basis and by 12.8 per cent on a constant exchange rate basis.
2.1.1 Sales
Components of 2007/08 sales growth
| US per cent | UK per cent | Group per cent | |
|---|---|---|---|
| Like for like sales on a 52 week basis | (1.7) | 2.0 | (0.7) |
| Change in net new store space | 5.8 | (1.1) | 3.9 |
| Exchange translation | - | 6.5 | 1.7 |
| Total sales growth on a 52 week basis | 4.1 | 7.4 | 4.9 |
| Impact of 53rd week in 2006/07 | (2.1) | (1.6) | (1.9) |
| Total sales growth as reported | 2.0 | 5.8 | 3.0 |
The US division's like for like sales growth slowed in the first nine months of 2007/08 to 2.7 per cent, with the gift giving events of Valentine's Day and Mother's Day being disappointing. The very important fourth quarter was particularly difficult with like for like sales declining by 8.6 per cent, resulting in a full year decline of 1.7 per cent. The contribution from new store space was 5.8 per cent and the 53rd week in 2006/07 was adverse by 2.1 per cent. Total sales as reported rose by 2.0 per cent (see table above).
The UK division's like for like sales growth was 2.0 per cent, which was an encouraging performance in an increasingly challenging marketplace. As in the US, performance in the first nine months of 2007/08 was stronger at 4.7 per cent, but became more difficult in the fourth quarter with like for like sales declining by 1.7 per cent. The impact of changes in net new store space was a decrease of 1.1 per cent, foreign exchange movements increased reported sales by 6.5 per cent and the 53rd week in 2006/07 was adverse by 1.6 per cent. Total sales as reported increased by 5.8 per cent (see table above).
2.1.2 Operating income
Operating income margin movement
| US per cent | UK per cent | Group per cent | |
|---|---|---|---|
| 2006/07 margin | 12.0 | 11.0 | 11.4 |
| Impact of 53rd week | 0.2 | (0.2) | 0.1 |
| 12.2 | 10.8 | 11.5 | |
| Gross merchandise margin | (0.3) | (0.6) | (0.4) |
| Expenses | (1.5) | 1.2 | (0.9) |
| New store space | (0.6) | - | (0.4) |
| 2007/08 margin | 9.8 | 11.4 | 9.8 |
The operating margin in the US division was 9.8 per cent (2006/07: 12.0 per cent). This reflected deleverage of 150 basis points due to the like for like sales decline, the impact of additional immature space of 60 basis points, an adverse movement in gross merchandise margin percentage of 30 basis points and the impact in 2006/07 of the 53rd week of 20 basis points (see table above). Administrative expenses increased reflecting the resources required to support the growth of the division. The ratio of net bad debt to sales deteriorated to 3.4 per cent (2006/07: 2.8 per cent) but was largely offset by additional income on the receivables portfolio due to the lower monthly collection rate. Operating income was $265.2 million (2006/07: $318.9 million), down by 16.7 per cent on a 52 week basis and 16.8 per cent as reported.
The operating margin in the UK division was 11.4 per cent (2006/07: 11.0 per cent). The division's gross merchandise margin was down by 60 basis points, primarily caused by changes in mix due to the strong performance of the watch category, some impact from commodity costs and an increasing proportion of sales from Ernest Jones. A tight control of costs was maintained and resulted in a 120 basis point benefit to operating margin but the benefit to 2006/07 of the 53rd week had an adverse impact of 20 basis points. Operating profit increased 9.3 per cent to $109.3 million (2006/07: $100.0 million). The benefit of the 53rd week on operating income was about $3.3 million and on a 52 week constant exchange rate basis operating income in 2006/07 was $102.9 million.
2.1.3 Group costs
Group central costs amounted to $15.8 million (2006/07: $14.1 million) reflecting the impact of exchange translation movements and higher professional fees.
2.1.4 Taxation
The charge of $116.4 million (2006/07: $134.6 million) represents an effective tax rate of 34.6 per cent (2006/07: 34.8 per cent).
2.1.5 Return on capital employed ("ROCE")
The Group's ROCE is a non-GAAP measure calculated from the operating income divided by average capital employed excluding goodwill. It was 17.3 per cent (2006/07: 22.4 per cent). In the US the ROCE excluding goodwill was 15.1 per cent (2006/07: 21.2 per cent) reflecting lower operating income and the additional investment in a 10 per cent increase in net new store space. US capital employed included in-house credit card debtors of $840.2 million at 2 February 2008 ($778.9 million at 3 February 2007). In the UK there was a decrease to 33.7 per cent (2006/07: 34.0 per cent).
2.1.6 Depreciation, amortisation and capital expenditure
Depreciation and amortisation charges were $113.9 million (2006/07: $98.4 million), representing $72.1 million (2006/07: $61.3 million) in the US and $41.8 million (2006/07: $37.1 million) in the UK. Capital expenditure in the US was $111.1 million (2006/07: $101.1 million) and in the UK was $29.3 million (2006/07: $23.3 million). Capital expenditure in the US was primarily due to the rate of new store space growth while that of the UK reflected the number of stores refurbished and the phased replacement of the EPOS system.
2.1.7 Impact of constant exchange rates and 53rd week
The Group has historically used constant exchange rates to compare period to period changes in certain financial data, which is referred to as "at constant exchange rates" throughout this document. The Group considers this to be a useful measure for analysing and explaining changes and trends in the Group's results. The impact of the recalculation of sales, operating income, income before income taxes, net income and earnings per share at constant exchange rates and the impact of the 53rd week in 2006/07, including a reconciliation to the Group's GAAP results, is analysed below.
| 2007/08 | 2006/07 | Growth at ctual exchange rates | Impact of 53rd week | 2006/07 on 52 week basis at actual exchange rates (non- GAAP) | 2007/08 52 week growth at actual exchange rates (non- GAAP) | Impact of exchange rate movement | 2006/07 on 52 week basis at constant exchange rates (non- GAAP) | 2007/08 52 week growth at constant exchange rates (non- GAAP) | ||
|---|---|---|---|---|---|---|---|---|---|---|
| $m | $m | per cent | $m | $m | per cent | $m | $m | per cent | ||
| Sales by origin and destination: |
||||||||||
| UK | 959.6 | 907.1 | 5.8 | (13.2) | 893.9 | 7.4 | 57.0 | 950.9 | 0.9 | |
| US | 2,705.7 | 2652.1 | 2.0 | (52.2) | 2,599.9 | 4.1 | - | 2,599.9 | 4.1 | |
| 3,665.3 | 3559.2 | 3.0 | (65.4) | 3,493.8 | 4.9 | 57.0 | 3,550.8 | 3.2 | ||
| Operating income: | ||||||||||
| UK | -Trading | 109.3 | 100.0 | 9.3 | (3.3) | 96.7 | 13.0 | 6.2 | 102.9 | 6.2 |
| - Group function | (15.8) | (14.1) | n/a | - | (14.1) | n/a | (0.9) | (15.0) | n/a | |
| 93.5 | 85.9 | 8.8 | (3.3) | 82.6 | 13.2 | 5.3 | 87.9 | 6.4 | ||
| US | 265.2 | 318.9 | (16.8) | (0.5) | 318.4 | (16.7) | - | 318.4 | (16.7) | |
| 358.7 | 404.8 | (11.4) | (3.8) | 401.0 | (10.5) | 5.3 | 406.3 | (11.7) | ||
| Income before income taxes | 336.2 | 387.3 | (13.2) | (3.2) | 384.1 | (12.5) | 6.1 | 390.2 | (13.8) | |
| Net income | 219.8 | 252.7 | (13.0) | (2.1) | 250.6 | (12.3) | 4.3 | 254.9 | (13.8) | |
| Earnings per share | 12.9c | 14.6c | (11.6) | (0.1)c | 14.5c | (11.0) | 0.3c | 14.8c | (12.8) | |
2.1.8 Dividends
In November 2007 an interim dividend of 0.96 cents per share was paid (2006/07: 0.4434p). and a final dividend of 6.317 cents (2006/07: 6.317 cents) per share for 2007/08 was paid on 3 July 2008. This represents an increase in the total dividend for the year of 1.6 per cent converting the interim dividend paid in 2006 at the US dollar pound sterling rate from Reuters at 4.00 p.m. on 3 November 2006. The US dollar to pound sterling rate used to convert the 6.317 cents dividend per share for payment to shareholders who elected to receive a pound sterling dividend, was the rate as derived from Reuters at 4.00 p.m. on the record date of 23 May 2008.
Further details of the dividend policy of the Company going forward are set out at Section 6. of this Part IX
At 2 February 2008, after taking into account the subsequently recommended final dividend of 6.317 cents per share (2006/07: 6.317 cents per share), Signet had distributable reserves of $283.2 million (3 February 2007: $199.0 million).
2.2 Prior year review 53 weeks ended 3 February 2007
Total Group sales rose to $3,559.2 million (2005/06: $3,154.1 million), up by 12.8 per cent on a reported basis and 11.5 per cent at constant exchange rates. On a 52 week basis Group like for like sales were up by 5.4 per cent and net new store space contributed 4.5 per cent. The 53rd week contributed 1.6 per cent to sales in 2006/07 (see table opposite). Group operating margin decreased to 11.4 per cent (2005/06: 11.7 per cent), reflecting a decline in the operating margin of the US division and an increase in that of the UK division (see table opposite). The 53rd week contributed some $3.4 million to operating income in 2006/07. Group operating income increased to $404.8 million (2005/06: $370.5 million), up by 9.3 per cent on a reported basis and 8.3 per cent at constant exchange rates, as total sales growth more than compensated for the decline in operating margin. Net interest amounted to $17.5 million (2005/06: $16.2 million), the increase being primarily due to the transition from a securitised borrowing facility to the new private placement note facility and incremental borrowing as a result of the share buyback programme offset by the movement in the US dollar/pound sterling exchange rate. Group income before income taxes increased to $387.3 million (2005/06: $354.3 million), up by 9.3 per cent on a reported basis and 8.2 per cent at constant exchange rates. The 53rd week contributed some $2.8 million to income before income taxes in 2006/07. Net income increased by 6.2 per cent to $252.7 million (2005/06: $238.0 million), an increase of 5.2 per cent at constant exchange rates. Basic earnings per share was 14.6 cents (2005/06: 13.7 cents), up by 6.6 per cent on a reported basis and 5.8 per cent at constant exchange rates.
2.2.1 Sales
Components of 2006/07 sales growth
| US per cent | UK per cent | Group per cent | |
|---|---|---|---|
| Like for like sales on a 52 week basis | 7.0 | 1.1 | 5.4 |
| Change in net new store space | 6.2 | 0.1 | 4.5 |
| Exchange translation | - | 4.6 | 1.3 |
| Impact of 53rd week | 1.7 | 1.5 | 1.6 |
| Total sales growth | 14.9 | 7.3 | 12.8 |
Like for like sales for the US division increased by 7.0 per cent on a 52 week basis, and total US dollar sales by 14.9 per cent. The US division had a consistent performance throughout the year. The contribution from new store space was 6.2 per cent and the impact of the 53rd week was 1.7 per cent (see table above). Total reported sales grew by 14.9 per cent.
The UK business saw sales stabilise in 2006/07 after a sharp deterioration in 2005/06. The strategy of increasing diamond participation continued to drive improvements in performance indicators such as average selling price, with the volume of transactions reduced. On a 52 week basis like for like sales increased by 1.1 per cent, the impact of changes in net new store space was 0.1 per cent, the impact of exchange rate movements was 4.6 per cent and the 53rd week 1.5 per cent (see table above). Total sales increased by 7.3 per cent.
2.2.2 Operating income
Operating income margin movement
| US per cent | UK per cent | Group per cent | |
|---|---|---|---|
| 2005/06 margin | 12.8 | 10.5 | 11.7 |
| Gross merchandise margin | (0.7) | 0.3 | (0.5) |
| Expenses | 0.8 | 0.2 | 0.8 |
| Initial adoption of SFAS 123(R) | (0.2) | (0.2) | (0.2) |
| New store space | (0.5) | - | (0.3) |
| Impact of 53rd week | (0.2) | 0.2 | (0.1) |
| 2006/07 margin | 12.0 | 11.0 | 11.4 |
The operating margin in the US division was 12.0 per cent (2005/06: 12.8 per cent). Leverage of 70 basis points from like for like sales growth partly offset the impact of additional immature space of 50 basis points as well as the adverse movement in gross margin percentage of 70 basis points and the impact of the 53rd week of 20 basis points (see table above). Selling, general and administrative expenses increased reflecting the resources required to support the growth of the division. The ratio of net bad debt to sales improved a little to 2.8 per cent (2005/06: 3.0 per cent). Operating income was $318.9 million (2005/06: $295.9 million), up by 7.8 per cent. The commencement of television advertising for Valentine's Day 2007 in the last week of 2006/07, with the related sales benefit occurring in 2007/08, meant that the 53rd week did not contribute to operating income.
The UK division's gross merchandise margin increased by 30 basis points, the benefit from advantageous hedging positions and selective price increases more than offsetting higher commodity costs. The actions taken to reduce costs in 2005/06 benefited the business throughout 2006/07 and resulted in a 20 basis point improvement in operating margin prior to the 20 basis points adverse impact arising from the implementation of SFAS 123(R). The operating margin at 11.0 per cent was up on last year (2005/06: 10.5 per cent). Operating income rose by 12.7 per cent to $100.0 million (2005/06: $88.7 million) on a reported basis and 8.0 per cent at constant exchange rates. The impact of the 53rd week on operating income was about $3.4 million.
2.2.3 Group costs
Group central costs amounted to $14.1 million (2005/06: $14.1 million, including a property provision of $1.3 million).
2.2.4 Income taxes
The charge of $134.6 million (2005/06: $116.3 million) represents an effective income tax rate of 34.8 per cent (2005/06: 32.8 per cent).
2.2.5 Return on capital employed
The Group's ROCE is a non-GAAP measure calculated from the operating income divided by average capital employed excluding goodwill. It was 22.4 per cent (2005/06: 22.3 per cent). In the US the ROCE excluding goodwill was 21.2 per cent (2005/06: 22.1 per cent) reflecting the additional investment in an 11 per cent increase in net new store space. In the UK there was an increase to 34.0 per cent reflecting high leverage of capital employed (2005/06: 26.0 per cent). US capital employed included in-house credit card receivables of $779.3 million at 3 February 2007 ($677.4 million at 28 January 2006).
2.2.6 Depreciation, amortisation and capital expenditure
Depreciation and amortisation charges were $98.4 million (2005/06: $83.2 million), $61.3 million (2005/06: $51.3 million) in the US and $37.1 million (2005/06: $31.9 million) in the UK. Capital expenditure in the US was $101.1 million (2005/06: $88.4 million) and in the UK was $23.3 million (2005/06: $48.2 million). The additional capital expenditure in the US was primarily due to the increase in the rate of new store space growth. The decrease in the UK reflected a lower level of expenditure in line with the fluctuations in the number of stores due to be refurbished.
2.2.7 Impact of constant exchange rates and 53rd week
The Group has historically used constant exchange rates to compare period to period changes in certain financial data, which is referred to as "at constant exchange rates" throughout this document. The Group considers this to be a useful measure for analysing and explaining changes and trends in the Group's results. The impact of the recalculation of sales, operating income, income before income taxes, net income and earnings per share at constant exchange rates and the impact of the 53rd week, including a reconciliation to the Group's GAAP results, is analysed below.
| 2006/07 | 2005/06 | Growth at actual exchange rates | Impact of exchange rate movement | 2005/06 at constant exchange rates (non- GAAP) | Growth at constant exchange rates (non- GAAP) | Impact of 53rd week | 2006/07 52 weeks basis at constant exchange rates (non- GAAP) | 52 week growth at constant exchange rates (non- GAAP) | ||
|---|---|---|---|---|---|---|---|---|---|---|
| $m | $m | per cent | $m | $m | per cent | $m | $m | per cent | ||
| Sales by origin and destination: | ||||||||||
| UK | 907.1 | 845.3 | 7.3 | 37.6 | 882.9 | 2.7 | (13.7) | 893.4 | 1.2 | |
| US | 2652.1 | 2308.8 | 14.9 | - | 2308.8 | 14.9 | (39.1) | 2613.0 | 13.2 | |
| 3559.2 | 3154.1 | 12.8 | 37.6 | 3191.7 | 11.5 | (52.8) | 3506.4 | 9.9 | ||
| Operating income: | ||||||||||
| UK | -Trading | 100.0 | 88.7 | 12.7 | 3.9 | 92.6 | 8.0 | (3.4) | 96.6 | 4.3 |
| - Group function | (14.1) | (14.1) | - | (0.6) | (14.7) | - | - | (14.1) | n/a | |
| 85.9 | 74.6 | 15.1 | 3.3 | 77.9 | 10.3 | (3.4) | 82.5 | 5.9 | ||
| US | 318.9 | 295.9 | 7.8 | - | 295.9 | 7.8 | - | 318.9 | 7.8 | |
| 404.8 | 370.5 | 9.3 | 3.3 | 373.8 | 8.3 | (3.4) | 401.4 | 7.4 | ||
| Income before income taxes | 387.3 | 354.3 | 9.3 | 3.5 | 357.8 | 8.2 | (2.8) | 384.5 | 7.5 | |
| Net income | 252.7 | 238.0 | 6.2 | 2.2 | 240.2 | 5.2 | (1.7) | 251.0 | 4.5 | |
| Earnings per share |
14.6c | 13.7c | 6.6 | 0.1c | 13.8c | 5.8 | (0.2)c | 14.4c | 4.3 | |
2.2.8 Dividends
In November 2006 an interim dividend of 0.4434p per share was paid (2005/06: 0.4125p) and a final dividend of 6.317 cents (2005/06: 2.8875p) per share was paid on 6 July 2007. Based on the exchange rate at 17 April 2007 this represented an increase in the total dividend for the year of 9.1 per cent.