IDEX Online Research: Signet Jewelers Produces Solid Financial Results in Q1
June 15, 10
Signet’s American division, Sterling Jewelers, was the star operating entity for the company during the quarter ended April 2010. Sales rose by almost 7 percent and operating profits surged by nearly 62 percent.
Here’s what is most impressive about their first quarter performance: virtually all financial metrics at Sterling showed improvement. Its financial gains were not driven by just one or two factors. Rather, a large number of factors – none of which showed dramatic improvement – came together to generate a solid broad-based gain for Sterling and Signet.
Sterling’s operating margin rose to 13.7 percent from last year’s 9 percent due to at least four key factors:
· Merchandise margin rose by 0.9 percent
· Net bad debt fell by 1.2 percent
· Store occupancy and other expense leverage helped by 1.7 percent
· Controllable operating costs dropped by 1.4 percent
These improving financial metrics were offset by higher commodity costs – primarily gold – as well as slightly lower “other income” because of changes to the laws governing Sterling’s consumer credit operation.
The following table summarizes Signet’s corporate performance as well as results by its U.S. and U.K. divisions.
First Quarter Highlights
Sterling Jewelers represented about 82 percent of corporate revenues in the first fiscal quarter ended April 2010. The following are financial highlights from Sterling’s first three-month fiscal period.
· Management cited several reasons for improved sales at Sterling, including the following:
o Sustainable competitive advantages which Sterling has developed, in contrast to many competitors who are struggling in the post-recessionary environment.
o The reduction in the number of specialty jewelers in the U.S. has allowed Sterling to pick up market share.
o A recovery among higher income households has been especially beneficial to Jared.
o New merchandising and promotional programs have been successful.
o The average selling price in the U.S. division rose by 5.1 percent, the first increase in five quarters. Kay’s average selling price of $322 was up 6.0 percent while the average selling price at the regional brands was down 1.4 percent to $339. In Jared, the average selling price rose by 2.9 percent to $741 (excluding beads and charms).
· Signet’s gross margin rose to 36.6 percent in the quarter, up from last year’s 33.5 percent. While the company does not break out its gross margin by operating division, it does provide an explanation of the components that drive the corporate gross margin. Sterling contributed to the overall gross margin in several ways:
o Merchandise margins rose
o Bad debt levels dropped
o The occupancy expense ratio declined due to sales leverage
o Controllable costs were lower
Unfortunately, the U.K. division reported an overall decline of 100 basis points in its gross margin, primarily due to higher commodities costs. Thus, the U.S. division was responsible for the entire corporate gain in the gross margin.
· Sterling’s credit participation remained relatively flat at 51.6 percent in the quarter versus 51.2 percent last year. The net bad debt to total sales ratio fell by 120 basis points versus the comparable period a year ago.
· The corporate operating expense ratio was 29.4 percent in the April quarter, down from last year’s 30.5 percent. Two key factors helped improve this financial metric: 1) controllable expenses were lower; and 2) sales helped leverage some of the fixed expenses included in operating costs.
· Sterling’s operating profit in the quarter was $91.1 million, up nearly 62 percent from the prior year.
Outlook for the Year
· During 2010, Sterling plans a further reduction of about 2 percent in the number of stores it will operate at the end of the fiscal year (January 2011). At the end of the most recent fiscal year – January 2010 – Sterling had 1,361 units. We expect that 1,319 will be operating as of January 2011, with most of the reduction coming in the regional brands. We expect to see a net of one new Jared store (180 in operation) and a net decline of two units in the Kay division (about 788 mall and 127 off-mall units).
Management noted that prime retail space is still in demand in existing malls. While there is much mall space that has become available due to retail failures, much of this space is poor and may have contributed to the merchant’s demise. Further, management noted that mall developers are focusing on improving the productivity of their existing malls, rather than building new edifices.
· Consumers continue to clamor for jewelry that is new and different, and Sterling will meet this challenge. It is expanding many of its existing product lines – LeVian, Open Hearts, and Love’s Embrace, for example – while developing new programs. It currently is testing at least three fashion jewelry programs, including silver statement jewelry, a charm bracelet for its mall stores, and a colored stone collection in partnership with Swarovski.
The company is also developing new initiatives in the bridal category, which represents 45-50 percent of its U.S. sales. This is a growing and profitable category for both Sterling and the U.S. jewelry industry.
· Signet management is predicting that its corporate gross margin will be roughly flat for the year. Previously, it was expecting a small improvement in the gross margin, but the prospects of rising commodity costs – specifically gold and diamonds – have caused the company to reassess the prospects for margin maintenance.
· Management said that Sterling “may” increase retail prices for a second time this year, if commodity costs continue to rise. The company implemented a round of price increases in the first quarter. If there is another round of price increases, it would most likely come by September; that would allow the new prices to be incorporated into the company’s holiday season advertising.
In response to a question from an investor about consumer sensitivity about price increases, management replied that consumer “sensitivity is more around having exciting, compelling products that appeal to the consumer and that are appropriately priced within the marketplace” than worrying about how to implement a price increase and convince a shopper that it is appropriate.
· Sterling is looking at the possibility of a customer rewards program for shoppers in its Jared division. Jared’s sales were particularly hard-hit in the recession, with per-store sales declining to about $4.0 million in 2009 from $5.3 million in 2006.