For the first half of 2006, Signet’s total jewelry sales in the U.K. were up a very modest 1.3 percent. Same-store sales were flat, with results from its two operating divisions offsetting each other: up-market Ernest Jones posted a same-store sales gain of 1.8 percent while middle-market H. Samuel’s same-store sales were down 1.6 percent.

 

The U.K. division has healthy financial characteristics, particularly related to store productivity, operating margins, and cash flow. While new square footage gains will be modest due to the maturity of the U.K. market, Signet has implemented many initiatives to drive sales growth in its stores for the longer term.

 

In an effort to maintain sales momentum, Signet continued to enhance its merchandise selection in the first half of 2006, with a particular focus on jewelry collections. Further, customer service remains a priority, and staff training continues unabated. Finally, in anticipation of a challenging 2006 holiday selling season, Signet has developed new television advertising, including new creative, to try to capture market share in its U.K. market.

 

Highlights of the first half, along with plans for the second half, follow for Signet Group’s U.K. retail jewelry operations:

 

• Sales trends have stabilized – While total sales grew only marginally - +1.3 percent in the first half – this was a significant turnaround from fiscal 2006, when sales were down 8.2 percent for the year. Sales in the first half were £185.7 million; this represented about 27 percent of Signet’s total revenues (the other 73 percent came from its U.S. retail jewelry division, Sterling Jewelers).

• Operating loss up – Signet’s U.K. store operating loss rose to £3.4 million, up from last year’s £2.4 million, reflecting a lower gross margin as well as inflationary costs in certain expense categories. Those categories included store occupancy – particularly higher property taxes; wages, where the rapid increase in the minimum wage has put some pressure on Signet; additional depreciation, reflecting the high level of store refits last year; and, finally, soaring energy costs.

• Store refits underway – By Christmas 2006, about 260 stores, predominantly middle-market H. Samuel units, should be operating with a more customer service-focused format. These 260 stores, representing about 45 percent of U.K. jewelry sales, also represent about 45 percent of the total of 582 stores expected to be in operation at the end of the year.

• Diamond sales up – Across all of its U.K. stores, diamond sales are up, although Ernest Jones’ diamond sales were soft. In H. Samuel stores, the Forever Diamond is boosting sales. Signet introduced champagne-colored diamonds, called Soul Mates, in its H. Samuel stores. In Ernest Jones, the Leo diamond jewelry collection has been expanded, and the range of cuts increased. Historically, U.K. shoppers have not embraced diamond jewelry nearly as strongly as their counterparts in the U.S. In addition, U.K. consumers have typically shunned the use of credit to buy jewelry. Signet is focusing on opportunities to boost higher-ticket diamond sales and introduce credit opportunities for their shoppers.

• Average ticket up – The average selling price was up in both H. Samuel and Ernest Jones stores in the first half of 2006. H. Samuel’s average ticket was £38 last year, and Ernest Jones’ average ticket was £148 in 2005.

• New jewelry selections strong – Across all jewelry categories, Signet has introduced new and more fashionable merchandise. There are more coordinated collections – for example, matching rings, earrings and necklaces – and more exclusive collections which help differentiate Signet’s stores from the competition.

• Watches helping – In the watch category, H. Samuel has many new offerings, along with a large number of exclusive styles. In Ernest Jones, it is difficult to obtain luxury watch brands. Thus, Signet has developed fashion diamond-set watches such as the Caf? Collection, Rotary (exclusive to H. Samuel), Vintage (art deco styling) and the Ernest Jones exclusive Armani Meccanico collection.

• Market programs rolling out – Catalogs are key to reaching U.K. consumers, and Signet is focusing on catalogs to spread the word about its new jewelry. The company is testing “bounce-back” vouchers, which are designed to boost customer traffic away from peak trading periods. New television commercials have been developed.

• E-commerce efforts solid – Last year, H. Samuel began offering jewelry online; this sales channel performed particularly well at Christmas 2005 and Valentine’s Day 2006. The range of merchandise offered has been expanded, and customer service improved. This fall, e-commerce will be introduced at Ernest Jones. The site will feature over 2,000 items, along with much information about how to buy diamonds and watches.

• Commission system upgraded – The new commission system for store sales associated, which was introduced last year, has helped with recruitment of new employees and retention of better sales people.

• Signet is dominant – In the U.K., Signet has the largest market share. Sales are nearly three times the next largest specialty jewelry retailer. In our opinion, the company has differentiated itself from the low-cost, non-specialty operators such as Argos and Asda with strong customer service and a broad selection of quality merchandise.