(IDEX Online) - While many of its competitors are wallowing in a financial morass, Signet Group has once again proven that it is possible to post solid financial results in a challenging environment. With over 1,300 stores in the U.S., the company is not only out-performing its peers, but it is taking market share from competitors.

 

The company’s press release highlights its stellar performance in the third quarter ended October, and it is worth reiterating:

 

·        Corporate same-store sales are up 7.2 percent, with U.S. same-store sales up a dramatic 9.7 percent. Clearly, the company took market share in the U.S. during the three-month period.

 

·        Pretax income was up over $25 million. Last year, the company lost money in the third quarter, this year, its pretax income was nearly 2 percent of sales. The third quarter is typically a specialty jeweler’s weakest quarter since it has no major jewelry sales event such as Valentine’s, Mother’s Day, or Christmas.

 

·        Signet Group has enough cash that it plans to prepay some of its debt, saving over $100 million in interest over the original life of the debt (which is offset by a “make whole” payment of $47 million to lenders).

 

Competitors should take notice of two comments that Signet management made concerning its U.S. division, Sterling Jewelers:

 

·        Sterling is increasing its holiday advertising above levels previously planned due to strong sales. Historically, the company’s gross advertising budget is between 6.5 percent and 7.0 percent of sales, well above the jewelry industry average of 4 percent or so. That explains why there are so many Kay and Jared ads on television.

 

·        Sterling is expected to step up new store openings. Competitors should look for new Kay and Jared stores nearby; further, they should be aware that they could lose their best employees, since Kay and Jared hire only the best people in the industry. A Jared store generates sales that are equivalent to just over four typical mall jewelry stores. Thus, when a Jared store opens, it has the same impact on the market as the opening of four jewelry stores simultaneously.

 

The table below summarizes the company’s financial performance for the third fiscal quarter ended October 2010.

 

 

The following are highlights from Sterling Jewelers’ third quarter. Sterling Jewelers is Signet’s U.S. operating division; thus, these comments relate to the U.S. market.

 

·        Sterling’s total sales rose by 8.8 percent to $497.0 million in the fiscal quarter ended October 2010. The following table summarizes Sterling’s performance by brand:

 

Brand   Third Quarter Sales   Average Unit Selling Price     % Chg Y/Y Total Sales   % Chg Y/Y Same-Store Sales % Chg Y/Y Average Unit Selling Price Kay $276.3 $413 7.4% 8.6% 6.6% Regionals $56.3 $413 (5.0%) 2.6% 4.6% Jared $164.4 $867 16.9% 14.3% 6.9% Sterling US $497.0 $484 8.8% 9.7% 8.0%

  

·        Sales were driven primarily by three categories: 1) bridal; 2) proprietary differentiated merchandise; and, 3) in Jared, Pandora was particularly strong. Jared also benefited from a recovery in jewelry spending by higher income households.

 

·        Sterling’s gross merchandise margin rose by 90 basis points in the third quarter. The company does not disclose the exact level of its merchandise margin, though we’d guess it is above keystone, since it is a “raw” margin. This margin improvement was driven by selective price increases in both the first and third quarters of 2010; lower average polished diamond costs, and reduced store-level discounting. These three factors offset rising gold prices.

 

·        Credit sales to customers via Sterling’s in-house credit program represented 60.0 percent of sales in the quarter, up 30 basis points from last year’s 59.7 percent credit participation level. The net bad debt ratio was 5.9 percent, down dramatically from last year’s 8.4 percent. However, the company’s “other income” fell by just over $5 million due to lower interest income on U.S. customer receivables because of amendments to the Truth In Lending Act. This loss of income was offset almost entirely by a similar decline in interest expense.

 

·        The company’s operating expense ratio in the U.S. dropped by 90 basis points due primarily to same-store sales leverage of relatively fixed expenses during the quarter.

 

·        Management cited its competitive differential versus other mass market specialty jewelry chains:

 

o       Strong financials, including a solid balance sheet. Some of its main competitors are struggling financially.

 

o       Well-trained and highly motivated sales staff.

 

o       Supply chain and merchandising purchasing expertise, which allows the company to buy goods at the lowest possible cost.

 

o       An on-going effort to increase its sales mix of proprietary and differentiated product. Thus, customers will see “something new” at Kay and Jared; further, proprietary merchandise typically carries a higher margin.

 

o       The largest advertising budget in its sector.

 

o       Excellent store locations

 

o       In-house credit availability.

While some jewelers are focused on online advertising, Sterling says most of the fourth quarter increase in its advertising budget has gone toward more television promotions.