SIGNET JEWELERS LTD 20-F 2006
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SECURITIES AND EXCHANGE COMMISSION
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This document comprises the annual report on Form 20-F for the year ended 28 January 2006 of Signet Group plc (the 2005/06 Form 20-F). Reference is made to the Cross Reference to Form 20-F table on page 1 hereof (the Cross Reference to Form 20-F Table). Only (i) the information in this document that is referenced in the Cross Reference to Form 20-F Table, (ii) the cautionary statement concerning forward-looking statements on page 1 and (iii) the Exhibits, shall be deemed to be filed with the Securities and Exchange Commission for any purpose, including incorporation by reference into the Registration Statements on Form S-8 of Signet Group plc (No. 333-12304, 333-09634 and 333-08964), and any other documents, including documents filed by Signet Group plc pursuant to the Securities Act of 1933, as amended, which purport to incorporate by reference the 2005/06 Form 20-F. Any information herein which is not referenced in the Cross Reference to Form 20-F Table, or the Exhibits themselves, shall not be deemed to be so incorporated by reference.
In 2005, the Company began preparing its financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS) and as permitted by IFRS has prepared one year of comparative financial data on a consistent basis. As a result, in accordance with the instructions of Form 20-F, selected financial data for only 2004/05 and 2005/06 is included below. Selected financial data under US GAAP is presented for 2001/02, 2002/03, 2003/04, 2004/05 and 2005/06.
The worlds largest speciality retail jeweller
The worlds largest
Annual Report & Accounts
Signet Group plc is an English public limited company, whose shares are listed on the London Stock Exchange (under the symbol SIG) and whose American Depositary Shares are listed on the New York Stock Exchange (under the symbol SIG).
In this Annual Report, 2004/05, 2005/06 and 2006/07, refer to, as appropriate, the 52 weeks ended 29 January 2005, the 52 weeks ended 28 January 2006 and the 53 weeks ending 3 February 2007.
This Annual Report contains translations of certain pound sterling amounts into US dollars at a rate of $1.77 = £1, which was the Noon Buying Rate in New York City for cable transfers in pounds sterling as certified for customs purposes by the Federal
Reserve Bank of New York (the Noon Buying Rate) on 28 January 2006. These translations should not be construed as representations that the pound sterling amounts actually represent such US dollar amounts or could be converted into US dollars at the rate indicated. On 5 April 2006 the Noon Buying Rate was $1.75 = £1.
For financial years commencing on or after 1 January 2005 UK listed companies are required to report in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS). The Group therefore now prepares its results under IFRS and this Annual Report contains audited and restated comparative information for 2004/05.
Cautionary statement regarding forward-looking statements
The Company desires to take advantage of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995 with respect to the forward-looking statements about its financial performance and objectives in this Annual Report. Readers are referred to Risk and other factors on pages 30 to 35.
The US division again significantly outperformed its main competition and has now become the largest US speciality jewellery retailer by sales. Total dollar sales increased by 12.1%, with like for like sales up 7.1%. Like for like sales in the first half rose by 7.9% followed by a solid performance in the second half when they rose by 6.4%.
The UK experienced the sharpest deterioration in retail trading conditions for 14 years. Consequently the divisions annual like for like sales fell by 8.2%, a performance believed to be at least in line with that of the UK jewellery sector.
The Group had a net cash outflow of £4.8 million (2004/05: £10.0 million) after investing £136.7 million in fixed and working capital during the year (2004/05: £152.1 million). The balance sheet remains strong and gearing (net debt to shareholders funds) at 28 January 2006 was 11.2% (29 January 2005: 10.8%). The store refurbishment programme in the UK continued at a similar level to that in 2004/05. In the US, new store space grew by 9% (2004/05: 8%) and will increase further over the next five years given a planned investment programme of $1 billion.
Subject to shareholders electing Malcolm Williamson as a director at the annual general meeting in 2006, the Board has appointed him as Chairman with effect from the conclusion of that annual general meeting. Mr Williamson is a senior international businessman with significant chairmanship experience and has been a non-executive of the Group since November 2005.
Mark Light was appointed Chief Executive of the US division in January 2006. He was also appointed an executive director of Signet Group plc at that time. Mr Light joined the Group in 1978 and had been President and Chief Operating Officer of the US business since 2002.
The Groups medium term objectives are to maintain leading performance standards on both sides of the Atlantic, to increase new store space in the US, and to maintain a strong balance sheet whilst funding expansion of space in the US and dividend payments.
The division significantly outperformed the US retail sector with total dollar sales up by 12.1% and like for like sales rising by 7.1%. Jareds like for like sales performance was particularly strong. Kays like for like sales increased broadly in line with the division as a whole, while those of the regional brands were slightly ahead of last year. Over the last five years the US divisions total dollar sales have grown at an annual compound rate of 9.7% and like for like sales by 4.7%. During the same period, the divisions share of the speciality jewellery market has risen from 5.8% to 8.2%. Consolidation in the speciality jewellery sector continues, providing significant opportunity to gain further market share.
New store space growth increased to 9% during 2005/06 (2004/05: 8%), compared with 6% in 2001/02. Compound growth in new store space over the last five years has been 7% per annum. The majority of the space increase was attributable to the expansion of Jared. The business also continued to invest in support services including increased capacity in the distribution centre, staff recruitment and training, and an expanded real estate department.
Over the next five years it is planned to invest $1 billion in fixed and working capital to grow new store space. This will increase the number of stores in operation by over 40%. Over the longer term the US division has the potential to double store space within the three existing formats of Kay, Jared and the regional brands.
The divisions current strategy is to gain further profitable market share through like for like sales growth by focusing on proven competitive advantages and by increasing new store space by 8% - 10% per annum (a measured increase from the previous target of 7% - 9%). Where appropriate, acceleration of this growth through acquisitions will be considered. Increases in total sales will provide further leverage of the cost base and supply chain efficiencies. The US division is increasingly becoming the speciality jewellery retailer of choice for customers, employees, suppliers and real estate developers.
Notwithstanding the difficult environment, the average transaction value increased by 5% and diamonds now account for 29% (2004/05: 28%) of the divisions sales. During the last five years the average transaction values have increased by 34% in H.Samuel and by 37% in Ernest Jones. Diamond participation has risen from 17% to 21% and from 33% to 38% respectively.
The business has continued to focus on improving customer service, with concentration on staff training and motivation. The diamond selection was further improved, with the Leo and Forever Diamond ranges once more outperforming the division. Stores remodelled during the year achieved a superior sales performance sufficient to satisfy the Groups investment criteria. Further trials of television advertising for both brands took place. In implementing these initiatives the division continued to draw on the US business best practice and experience. While the UK business has undergone significant changes in recent years there are still many opportunities for further improvement.
US performance review (73% of Group sales)
The operating margin was a little above that of last year, leverage of like for like sales growth offsetting the impact of additional immature space of 50 basis points as well as the adverse movement in gross margin of 50 basis points. The change in gross margin primarily reflected the growth of Jared and the increase in average transaction values as customers increasingly purchased larger and more expensive diamonds. Both of these factors were drivers of the like for like sales growth and are expected to continue in 2006/07. A range of supply chain initiatives and selective pricing changes largely counterbalanced commodity cost increases. The increase in the price of diamonds has moderated although the cost of fine gold continues to rise. Further pricing and supply chain initiatives are planned to
Group Chief Executives review (continued)
mitigate the impact of commodity cost increases. The bad debt charge was 3.0% of total sales (2004/05: 2.8%). The proportion of sales through the in-house credit card was 51.1% (2004/05: 50.6%).
In the jewellery sector, superior customer service and product knowledge are critical competitive advantages and during 2005/06 a system to measure customer satisfaction was introduced to help identify areas for improvement on a store-by-store basis. The proportion of qualified diamontologists, including those in training, increased to over 70% of full time sales staff. Recruitment practices were further improved and the programme to enhance jewellery repair procedures continued. A virtual diamond vault, offering consumers access via an in-store computer to a suppliers inventory of loose diamonds, was rolled out to all Jared stores and selected mall stores.
Average unit selling prices in both mall stores and Jared increased by some 8% reflecting further positive response by the consumer to new, higher value, merchandising initiatives, as well as selective changes in retail prices due to increased commodity costs. The upper end of the diamond selection was further enhanced and the Leo Diamond range was again expanded. In Jared the luxury watch ranges continued to be extended. During the year an initiative to develop the capability to source rough diamonds was commenced with the objective of securing additional reliable and consistent supplies of diamonds.
The annual gross marketing spend amounted to 6.7% of sales (2004/05: 6.6%) and dollar marketing expenditure increased by 12.7% reflecting the growth in sales. Kays consistent use of its highly effective Every kiss begins with Kay advertising campaign enabled it to gain further consumer awareness thereby benefiting its sales performance. It is intended to launch a new Kay website with an e-commerce capability during the second half of 2006. Regional brands continued to use radio advertising although television advertising was tested in one market over Christmas 2005. The test will be expanded to a further two markets in 2006/07. Local television advertising supported all Jared stores for the first time during the holiday period and it is now expected that Jared will have sufficient scale to move to national television advertising in the fourth quarter of 2007/08.
A project to increase the capacity of the distribution centre commenced in 2005/06 and is on schedule to be completed in 2006/07. As part of this project a new central repair facility was opened thereby increasing productivity.
In 2005/06 Kay increased sales by 9.9% to $1,290.1 million (2004/05: $1,174.4 million) and at the year end there were 781 Kay stores. It is planned to increase Kays representation in malls by 23-28 net new stores in 2006/07. In selected malls a superstore format, drawing on the experience of Jared and the recently launched metropolitan store concept, will be tested during 2006/07. The trial of Kay in open-air retail centres has proved successful and the rate of openings will be increased to 20-25 in 2006/07 (2005/06: 11). Three stores in metropolitan locations started trading in 2005/06 and two
more sites are expected to be added in 2006/07. An opportunity to open Kay stores in outlet centres has also been identified and it is intended to test about five stores in this format in 2006/07. In total a net 50-60 additional Kay stores are planned for 2006/07 (2005/06: 39) and in the longer term there is the potential for over 1,450 stores.
330 mall stores traded under strong regional brand names at 28 January 2006 with sales of $484.5 million (2004/05: $471.1 million). The regionally branded stores provide the potential to develop a second mall brand of sufficient size to justify the cost of national television advertising. This would require about 550 stores which could be achieved in the medium term by a mixture of store openings and acquisitions. It is planned that 10-15 net new stores will be opened in 2006/07 (2005/06: nine) and there is potential for some 700 regional stores under a single national brand.
Jared sales were $534.2 million (2004/05: $415.0 million) and the portfolio of 110 stores is equivalent in space terms to about 450 mall stores. The Jared concept is the primary vehicle for US space growth and in 2005/06 the number of store openings increased to 18 (2004/05: 14). One store in New Orleans was closed due to hurricane and flood damage. The chain is immature with only 40% of stores having traded for five full years. Nonetheless Jareds average store contribution rate is nearing that of the division as a whole. The 43 mature Jareds achieved, on average, sales of some $5.6 million in their fifth year of trading, above their target level. During 2006/07 it is intended to increase the number of Jared openings to 18-23 and opportunities for over 250 stores have been identified.
The table below sets out the store numbers and net new openings and the potential number of stores by chain:
In 2005/06 fixed capital investment was $88.4 million (2004/05: $77.6 million) and this is planned to rise to over $100 million in 2006/07. Some $45 million of the fixed capital investment related to new store space in 2005/06, with an increase to about $55 million expected in 2006/07. The investment in working capital, that is inventory and receivables, associated with space growth amounted to some $96 million in 2005/06[ and is expected to increase to over $115 million in 2006/07.
Recent investment in the store portfolio, both fixed and working capital, is set out below:
UK performance review (27% of Group sales)
The UK divisions operating margin was 10.5% (2004/05: 15.1%) reflecting the poor trading conditions and the resulting negative operational leverage. Pricing discipline was maintained and the gross margin increased by 60 basis points in 2005/06 but is expected to show a slight decline in 2006/07.
Diamond jewellery assortments were further enhanced during the year and participation continued to rise. The Leo Diamond range was further expanded in Ernest Jones and the Forever Diamond selection was increased in H.Samuel. White metal jewellery again proved popular. The average selling price in H.Samuel was £38 (2004/05: £37) and in Ernest Jones £148 (2004/05: £141).
Both customer service and product knowledge remain priorities. A carefully structured weekly training programme continues to be followed, with an emphasis on measurable outcomes. The sales commission scheme, which drew on the Groups US experience, was successfully tested in 2004/05 and rolled out during 2005/06.
The television advertising trial continued at a similar level of coverage to 2004/05. Marketing expenditure represented 3.2% of sales in 2005/06 (2004/05: 3.0%). In August 2005 an e-commerce capability was launched on the H.Samuel website as a complement to store-based customer service. It is anticipated that the Ernest Jones website will commence e-commerce in 2006/07.
During the year 78 stores were refurbished or relocated. At the year end 228 stores, mostly H.Samuel, traded in the modernised format, accounting for over 40% of the UK divisions sales. Five Ernest Jones and three H.Samuel stores were opened. 15 H.Samuel and two Ernest Jones stores were closed. At the year end there were 593 stores (386 H.Samuel and 207 Ernest Jones). A lower level of store refit is planned for 2006/07 in line with the normal refit cycle, with store capital expenditure expected to be some £12 million (2005/06: £22 million).
Recent investment in the store portfolio is set out below:
The financial data included in the Financial summary above has been derived, in part, from the consolidated accounts for such periods included elsewhere in this Annual Report. The financial data should be read in conjunction with the accounts, including the notes thereto, and the Financial review included on pages 22 to 29.
Further selected financial data is shown on pages 118 and 119. The accounts of the Group for 2005/06 and 2004/05 have been prepared in accordance with IFRS, which differ in certain respects
from US GAAP. See note 30 on page 99 for details of transitional exemptions where full retrospective application has not been applied. See pages 103 to 111 for information on the material differences between IFRS and US GAAP that affect the Groups profit and shareholders funds.
Over the longer term, the divisions aim is to gain further profitable market share through like for like sales growth by focusing on proven competitive advantages. It aims also to increase US new store space by between 8% 10% per annum, with Jared accounting for the majority of the planned space growth.
Experience demonstrates that the sales associates ability to communicate and explain the value and quality of the merchandise plays a significant part in a retail jewellery purchase. Therefore, the US division has developed specialised training for its retail associates, and its size provides leverage of training resources and systems. The division now has at least one certified diamontologist in each of its stores and all store managers are required to be so qualified.
Strict criteria are followed when evaluating real estate investment or lease renewal, and management believes that the quality of the store portfolio is superior to that of its competitors. The trading record and the strength of the Group balance sheet make Signet an attractive tenant.
Management believes that Signet has a supply chain advantage compared to its competitors as it has greater experience and capacity to direct source loose diamonds (i.e. to purchase loose polished diamonds from diamond cutters and supply them to contract manufacturers who produce finished merchandise). This sourcing strategy allows the Group to provide superior value and quality to the consumer. Diamond jewellery accounts for approximately 71% of total merchandise sales. The divisions sophisticated merchandising systems test, track, forecast and respond to consumer preferences and provide competitive advantage by helping to ensure high in-stock positions of key merchandise assortments and faster moving items.
Kay is one of a very limited number of US speciality retail jewellery brands with a presence large enough to justify national television advertising, which is the most cost effective way to attract customers, enter new markets and increase brand recognition.
All Jared stores were supported by local television advertising over Christmas 2005 and it is expected to have sufficient scale to benefit from the use of national television advertising for Christmas 2007.
Initiatives in 2005/06
US operating review (continued)
Initiatives for 2006/07
Jewellery sector sales have, over the longer term, grown faster than retail sales (source: US Department of Commerce and US Census Bureau) and the rate of growth accelerates and slows broadly in line with major non-food retail categories. Management believes that a major contributor to the relationship with other non-food retail categories is that the majority of jewellery sales are made in the middle mass market for bridal related or annual gift giving events. Retail jewellery sales have risen at a compound annual growth rate of 4.8% from 1998 to 2005 (see graph below). Jewellery sales outperformed other comparable sectors in the more buoyant late 1990s, under-performed in 2001 and have performed in line with the selected other non-food retail categories over the last four years. Over this eight year period Signets total US dollar sales rose (excluding the acquisition of Marks & Morgan) at a compound annual growth rate of 10.9%.
Growth of US retail sales
Furniture & household
Equipment ex electricals
Source: US Departments of Commerce
In 2000 and 2001 Signets growth excludes the impact of Marks & Morgan acquisition.
Management believes that the longer term outlook for jewellery sales is encouraging given the growth in disposable incomes and the increasing number of women in the work force. However, jewellery sales are still subject to fluctuations in the general level of retail sales.
The US retail jewellery industry is very competitive and highly fragmented. The broader total US retail jewellery market includes formats such as department stores, discount outlets, television home shopping, internet retailers and general merchandise, apparel and accessory stores. The largest jewellery retailer is believed to be Wal-Mart Stores, Inc., which includes a wide assortment of costume jewellery. Management believes that the business also competes with non-jewellery retailers for consumers discretionary spending.
The US divisions largest speciality jewellery competitor is Zale Corporation, which has a speciality market share of about 7.8%. Competition is also encountered from a limited number of large regional retail jewellery chains (only five other speciality jewellery retailers have more than 100 stores) and independent retail jewellery stores (including smaller regional chains of fewer than 100 stores) which account for over 70% of the speciality market.
In 2005 the Jewelers Board of Trade estimated that there were some 24,500 speciality jewellery firms in the US, compared to 26,750 in
1999, a decrease of about 2,250 firms, equivalent to a compound annual decrease of around 1.5%. The number of stores operated by the five largest speciality jewellery retailers increased by about 700 over the same period and reflects the continuing consolidation taking place in the sector. The US division accounted for about 60% of the increase in store numbers of the five largest speciality jewellery retailers.
Management believes that the five largest speciality jewellery retailers have increased their market share from about 18% to about 24% of speciality jewellery sales over the last five years. The majority of this increase reflected Signets growth. These trends provide a significant growth opportunity for those businesses with competitive advantages in the sector, and it is believed that Signet is well positioned to gain further market share.
The US division competes on the basis of the quality of its personal customer service, merchandise selection, availability, quality and value. Brand recognition, trust and store locations are also competitive advantages as is the ability to offer private label credit card programmes to customers. The US division does not hold any material patents, licenses, franchises or concessions but has a range of trading agreements with suppliers, the most important being in regard of the Leo Diamond. The established trademarks and trade names of the division are essential to maintaining its competitive position in the retail jewellery industry.
Store operations and human resources
A customer satisfaction index covering 20 criteria was introduced during 2005/06. Each store is benchmarked against others in its district, region and across the division based on customer feedback. The scores are reported on a monthly basis highlighting areas of good performance and those for improvement.
Providing knowledgeable and responsive customer service is a priority, and is regarded by management as a key point of differentiation. It is believed that highly trained store sales staff with the necessary product knowledge to communicate the quality, attributes and competitive value of the merchandise are critical to the success of the business. The US divisions substantial training and incentive programmes for all levels of store staff are designed to play an important role in recruiting, educating and retaining qualified store staff. The preferred practice is to promote managers of all levels from within the organisation in order to maintain continuity and familiarity with the divisions procedures.
Retail sales personnel are encouraged to become certified diamontologists by graduating from a comprehensive correspondence course provided by the Diamond Council of America. Over 73% of the divisions full time sales staff who have completed their probationary period are certified diamontologists or are training to become certified. Employees often continue their professional development through completion of further courses on gemstones. The number of certified diamontologists employed by the US division was up by 12% in 2005/06.
All store employees are set daily performance standards and commit to goals. Sales contests and incentive programmes also reward the achievement of specific goals with travel or additional cash awards. In addition to sales-based incentives, bonuses are paid to store managers based on store contribution and to district managers based on the achievement of key performance objectives. In 2005/06 approximately 24% (2004/05: 23%) of store personnel remuneration was commission and incentive-based.
Each store is led by a store manager who is responsible for various store level operations including overall store sales and branch level variable costs; certain personnel matters such as recruitment and training; and customer service. Administrative matters, including purchasing, merchandising, payroll, preparation of training materials, credit operations and divisional operating procedures are consolidated at divisional level. This allows the store manager to focus on those tasks that can be best executed at a store level, while enabling the business to benefit from economies of scale in administrative matters and to help ensure consistency of execution across all the stores.
Although staff recruitment is primarily the responsibility of store and district managers, a central recruitment function supplies field recruiters from the US head office, and uses methods such as internet recruitment to provide stores with a larger number of better-qualified candidates from which to select new staff.
Management believes that the retention and recruitment of highly-qualified and well-trained staff in the US head office in Akron, Ohio is essential to supporting the stores. A comprehensive in-house curriculum supplements specific job training and emphasises the importance of the working partnership between stores and the head office.
US head office bonuses are mainly based on the performance of the division against predetermined annual profit targets. Promotion decisions for all non-management head office personnel are based on performance against service level and production goals; for managers they are based on annual objectives and performance against individual job requirements.
and appearance of stores is standardised within each chain. The typical investment in the first year of trading to open a mall store is about $1.1 million.
The typical Jared store has about 4,700 square feet of selling space and 5,900 square feet of total space. Its size permits significantly expanded product ranges and enhanced customer services, including in-store repair and custom design facilities. A private viewing room is available for customers when required. There are also complimentary refreshments and a childrens play area. The typical investment in the first year of trading to open a Jared store is about $3.8 million.
Management believes that the US divisions prime real estate portfolio, together with its regular investment in mall store refurbishments and relocations, are competitive advantages that help build store traffic. Superior like for like sales growth is normally achieved for a number of years following such investment. The typical benefits from mall store refurbishments, which normally occur on a ten year cycle, include an increase in linear footage of display cases positioned on the store frontage, more effective lighting, improved visibility and better access to the store. When relocating a store to a better location in a mall, such as a centre court corner site from an in-line location, an increase in like for like sales is expected for the reasons given above.
In some of the highest traffic malls it is intended to test a format which offers increased selling space, better customer service facilities and a wider merchandise assortment, in particular a much greater selection of loose polished diamonds and settings thereby drawing on the divisions experience with Jared.
In 2005/06 there was a net increase in the US divisions new store selling space of 9%, at the top end of the target range. In 2006/07 it is planned to open approximately 18-23 Jared stores, 23-28 mall stores, 20-25 off-mall Kay locations, two metropolitan stores and up to five Kay stores in outlet centres. Around 20 mall stores are planned for closure. The programme should result in a net increase in new store space of 8% 10% by the end of 2006/07. Criteria for investment in real estate remain stringent.
Signet may consider selective purchases of mall stores that meet its acquisition criteria regarding location, quality of real estate, customer base and return on investment.
US operating review (continued)
Kay lifestyle and power strip stores provide an expansion opportunity to take advantage of fast growing retail venues. A lifestyle centre is a suburban open air shopping centre where the retail mix is biased toward fashion and leisure stores and is also likely to have a large number of restaurants. A power strip centre is also a suburban open air shopping complex but the retail mix is predominantly category killer superstores with some smaller speciality units. These shopping centres are often referred to as off-mall locations.
Kay stores in off-mall locations were successfully tested between 2003 and 2005 with 31 stores having been opened. It is intended to commence the roll-out of Kay stores in these open air centres with 20-25 openings expected in 2006/07. The potential for some 500 suitable locations has been identified in these types of centres. While these Kay stores are expected to have a lower capital expenditure, lower rents and lower sales per store at maturity than that of the Kay chain average, they are expected to satisfy the normal return on investment hurdle set by the Group.
Kay metropolitan stores allow penetration into high population downtown areas under-served by the divisions typical mall and
off-mall stores. These metropolitan markets have a high density of retail, business, entertainment and government establishments with good transit services and high pedestrian footfall.
During 2005/06 three Kay stores were opened in metropolitan locations in Chicago, Manhattan and Brooklyn. These Kay stores also need to meet the Groups normal investment criteria and are anticipated to have a higher capital expenditure, higher rents and higher sales per store at maturity than that of the Kay chain average. The development of these stores draw on the divisions experience gained from both Kay and Jared. It is anticipated that there is potential for approximately 50 such stores.
In 2006/07 it is intended to test about five Kay stores in outlet malls. These stores will provide penetration into the bargain hunter sector of the market. They will be located in two types of centres; Factory outlets in which 50% or more tenants are manufacturing outlets and Mixed use centres, typically with one million square feet of manufacturers outlet units, traditional mall stores and large space retailers.
The following table sets out information concerning the US stores operated by Signet during the period indicated:
Management believes that the expansion of Kay outside of covered regional malls presents a potential opportunity to reach new customers currently aware of the brand but with no convenient access to a store. These stores will leverage further the strong Kay brand awareness, the marketing support and the central overhead.
New regional chain stores are opened if real estate satisfying the divisions investment criteria becomes available in their respective trading areas or in adjacent areas where marketing support can be cost effective. Areas in which the scale to support cost-effective marketing can be built over a reasonable time span are also considered for store openings. Management believes there is potential to develop a second mall-based brand of sufficient size to take advantage of national television advertising. Such a strategy would require the rebranding of the stores to one national format and may also include the acquisition of small or large regional chains of speciality jewellery stores that meet the Groups strict operational and financial criteria.
Jared locations are typically free-standing sites in shopping complexes with high visibility and traffic flow, and positioned close to major roads. The retail centres in which Jared stores operate normally contain strong retail co-tenants, including other category killer destination stores such as Borders Books, Best Buy, Home Depot and Bed, Bath & Beyond as well as some smaller speciality units.
Jared targets an under-served sector at the upper end of the middle market. This customer is more mature with a higher income than that of Signets US mall store customers. An important advantage of a destination store is that the potential customer visits the store with the intention of making a jewellery purchase, whereas in a mall there is a greater possibility of the intended spend being diverted to non-jewellery purchases.
There were 110 Jared stores at 28 January 2006 (29 January 2005: 93 stores) and sales in 2005/06 were $534.2 million (2004/05: $415.0 million). The average retail price of merchandise sold in Jared stores during 2005/06 was $697 (2004/05: $644), which was more than double that of a Signet US mall store.
In the first five years of trading a Jared store is projected to have a faster rate of like for like sales growth than that of a mall store during the same period. At the end of this period the projected operating margin is expected to have risen to a level comparable to that of a mall store at maturity, with a greater return on capital employed. The average sales of the 43 Jared stores that have reached maturity is $5.6 million in their fifth full year. At 28 January 2006 some 60% of the Jared stores had been open for less than five years. The average sales per Jared store opened for the whole of 2005/06 was $5.5 million (2004/05: $5.0 million).
Since the first Jared store opened in 1993, the concept has been continually evaluated, developed and refined. Management believes that in addition to the competitive advantages possessed by the division as a whole, Jared also benefits from leveraging the divisions established infrastructure, access to a pool of experienced store management, and availability of capital required to develop and grow the brand.
Some Jared stores are being opened to test new real estate selection criteria that may increase the potential number of sites suitable for a Jared store. These include opening Jared stores nearer to each other in established markets with above-average population density, entering smaller markets when national television advertising would make marketing support cost-effective and locating stores attached to the exterior of covered malls. Consideration is also being given to entering major metropolitan markets in anticipation of the planned introduction of national television advertising during the fourth quarter of 2007/08.
In the longer term, the chain has the potential to expand nationwide to over 250 stores, generating annual sales of over $1.5 billion based on the current performance of existing Jared stores.
In summary, management believes that there is potential to almost double US selling space over the next several years by continuing to focus on existing concepts and the potential number of stores by chain.
Merchandising and purchasing
US operating review (continued)
The following map shows the number and locations of Kay, Regional and Jared stores at 28 January 2006:
research and testing. Best-selling products are identified and their rapid replenishment ensured through analysis of sales by stock keeping unit. This approach enables the division to deliver a focused assortment of merchandise to maximise sales, minimise the need for discounting and accelerate inventory turn. The US division is able to offer superior value and consistency of merchandise due to its industry leading direct sourcing capability.
Sophisticated inventory management systems for merchandise testing, assortment planning, allocation and replenishment have been developed and implemented. Approximately 70% of the merchandise is common to all US division mall stores, with the remainder allocated to reflect demand in particular markets. It is believed that the merchandising and inventory management systems, as well as improvements in the productivity of the centralised distribution centre, have allowed the division to achieve inventory turns comparable to those of most of its quoted competitors although it has
a less mature store base and undertakes more direct sourcing of merchandise.
In 2005/06, the bridal category accounted for about 45% of merchandise sold and its participation in the sales mix has steadily grown over the past five years.
Programmes have been developed in conjunction with certain vendors for the provision of branded jewellery merchandise. For example, the Leo Diamond range is sold exclusively by Signet in the US and the UK. Management believes that the US divisions merchandising process, market share and relationship with suppliers, position the business as an ideal partner to develop branded initiatives.
Further examples of merchandising initiatives are:
The table below sets out Signets US merchandise sales mix as a percentage of sales:
It is believed that the US division has a competitive cost and quality advantage as approximately 55% of the diamond merchandise sold is sourced through contract manufacturing; Signet purchases loose polished diamonds on the world market and outsources the casting, assembly and finishing operations to third parties. By using this approach the cost of merchandise is reduced and this cost advantage is largely used to provide superior value to the consumer which helps to increase market share. Contract manufacturing is generally utilised on basic items with proven non-volatile historical sales patterns that represent a lower risk of over or under purchasing. This purchasing strategy also allows the buyers to gain a detailed understanding of the manufacturing cost structure and improves the prospects of negotiating better pricing for the supply of finished products.
Having made some preliminary test purchases of rough diamonds during 2005/06, further purchases of rough diamonds will be made in 2006/07. Once the rough stones have been cut and polished on a contract basis, they enter the US divisions supply chain in a similar way to other polished loose diamonds. As part of this process the division has appointed Hennig, the worlds largest international diamond consultancy and broking firm to act as its strategic consultant on rough diamond related issues. The objective of this supply chain initiative is to secure additional reliable and consistent supplies of diamonds for the divisions customers, supporting the growth of Signets US business and its ability to offer customers superior value.
Certain merchandise is purchased complete as a finished product where the manufacturers price is more competitive than using direct sourcing, or the complexity of the product is great or the merchandise is considered likely to have a less predictable sales pattern. This strategy provides the opportunity to reserve stock held by vendors and to make supplier returns or exchanges, thereby reducing the risk of over or under purchasing.
Merchandise held on consignment is used to enhance product selection and test new designs. This minimises exposure to changes in fashion trends and obsolescence and provides the flexibility to
return non-performing merchandise. At 28 January 2006 the US division held approximately $174 million (29 January 2005: $158 million) of merchandise on consignment (see note 13 on page 82).
In 2005/06 the five largest suppliers collectively accounted for approximately 22% (2004/05: 25%) of the total US divisions purchases, with the largest supplier accounting for approximately 11% (2004/05: 12%).
Marketing and advertising
Advertising activities are concentrated during periods when customers are expected to be most receptive to the marketing message. The proportion of television advertising expenditure to sales continues to grow, and the cost of network television advertising is leveraged as the number of stores increases. The romance and appreciation based theme of Kays advertising programme continues to utilise the tag line Every kiss begins with Kay, which has improved name recognition of the chain. This programme was supplemented with national print advertising in USA Today and national network radio advertising.
Seasonal promotion campaigns for the regional chains use local radio advertising as the primary medium to support and enhance name recognition. Direct mail and telephone marketing are also used to encourage repeat purchases by current customers. Local television advertising was tested in the Cleveland, Ohio market for JB Robinson during Christmas 2005 and it is intended to expand this test in 2006/07 to two additional markets. The regional brands marketing support is a similar proportion of sales as for Kay.
Jared advertising on local radio takes place for most of the year and is complemented during key trading periods by advertising on local television in all markets. Management believes that when the Jared chain reaches the critical mass to justify national television advertising, which is considered to be the most efficient and cost-effective form of marketing, brand name recognition will be enhanced nationwide, thus providing increased marketing leverage
US operating review (continued)
and improved access to prime store real estate sites in large, high cost advertising markets. National television advertising for Jared is planned to start during the fourth quarter of 2007/08. Jared has a higher advertising to sales ratio than the divisions mall stores because it is a destination store and is still at an early stage of development. Jared advertising is designed to build name recognition and visit intent through an emphasis on selection and service.
In 2005/06 the US division produced ten Kay catalogues that featured a wide selection of merchandise and were prominently displayed in stores and are also mailed directly to targeted customers. A similar number of catalogue editions were produced for each regional brand. Statistical and technology based systems are employed to support a direct marketing programme that uses a proprietary database of about 24 million names to strengthen the relationship with customers. The programme targets current customers with special savings and merchandise offers during the key trading periods. In addition, invitations to special in-store promotional events are extended throughout the year. A special catalogue featuring luxury watches was produced for Jared.
There are informational websites for Kay, JB Robinson and Jared that display a selection of merchandise assortments, provide store locations, and allow for on-line customer registration and credit application. The division continues to research and monitor the development and execution of e-commerce as a sales channel in conjunction with the marketing and advertising programmes. It is anticipated that a new Kay website incorporating an e-commerce facility will be launched during the second half of 2006.
The table on page 15 presents data related to the in-house credit business for the past three financial years. Since credit authorisation and collection systems were centralised in 1994 the credit offer and performance have been relatively consistent over the economic cycle. The average outstanding balance at the year end was $841 (2004/05: $792).
The credit portfolio turns approximately every seven months and the monthly collection rate in 2005/06 was 14.5%. The bad debt charge for the year, at 5.8% of credit sales, remained near the bottom end of
the historic range. In-house credit sales represented 51.1% of total US sales in 2005/06 (2004/05: 50.6%). A number of programmes offer interest-free financing, subject to certain conditions. In most US states customers are offered optional third party credit insurance.
Authorisation and collections are all performed centrally at the US head office, rather than by store staff. The majority of credit applications are processed and approved automatically; they can and are initiated via in-store terminals, through a toll-free phone number or on-line through the informational websites. All applications are evaluated by the scoring of credit data and using data obtained through third party credit bureaux.
Investment in staff, training and systems to maintain or improve the quality of the credit portfolio continued throughout 2005/06. A new, customised, collection system using up to date technology replacing a system that was initially installed when credit operations were centralised began to be developed in 2004/05 and was fully implemented during 2005/06.
The new system provides management with increased flexibility to implement and/or modify collection strategies, and a more user-friendly platform. Collection strategies and efforts continued to include emphasis on risk-based calling and first call resolution. In authorisations, new applicant scorecards were updated to provide improved separation in evaluating high and low-risk applicants and to increase activation rates with preferred customers to encourage higher sales.
In addition to in-house credit sales, the US stores accept major credit cards. Third party credit sales are treated as cash sales and accounted for approximately 38% of total US sales during the year.
Management tools and communications
All stores are supported by the internally developed Store Information System, which includes electronic point of sale (EPOS) processing, in-house credit authorisation and support, a district manager information system and a satellite-based communications system that supports data transmissions and division-wide e-mail. The EPOS system updates sales, in-house credit and perpetual inventory replenishment systems from data captured throughout the day for each store.
In order to enhance customer service and allow staff more time for selling, further steps to improve store systems were taken. For example special order and repair service procedures were made more efficient.
At 28 January 2006 there were 386 H.Samuel stores and 207 Ernest Jones stores (including 16 Leslie Davis stores). Approximately 47% of these are located in prime High Streets (main shopping streets with high pedestrian traffic) and 53% are in covered or enclosed shopping malls. High Street stores accounted for 39% of total UK division sales and shopping mall stores for 61%. H.Samuel is the largest chain of speciality retail jewellers in the UK and its stores are located in virtually every medium and large retail centre. Ernest Jones, the second largest speciality retail jewellery chain, is represented in most large retail centres.
The UK strategy is to increase the average transaction value by focusing on merchandise where the UK divisions competitive advantages are greatest, particularly diamond jewellery, thereby improving store productivity and achieving operational leverage. To achieve this the division has a series of initiatives in the key areas of retail execution that are designed to grow the sales of diamonds and other products involving higher customer service levels.
The divisions scale enables it to develop and invest in training procedures tailored to its own requirements. This is particularly important, as the sale of diamond jewellery requires increased standards of product knowledge and customer service from sales associates. The division also enjoys economies of scale in recruitment and store administration.
Strict criteria are followed when evaluating real estate investment, and management believes that the quality of its store portfolio is superior to that of many of its competitors. The strength of the Groups balance sheet and the divisions trading record makes it an attractive tenant. The well-tested H.Samuel and Ernest Jones revised store formats, which are more suited to selling diamonds, and improved customer service enables the division to take an increased share of the diamond category, which is one of the fastest growing major segments within the UK jewellery market.
Management believes that the divisions leading position in the UK jewellery sector is a commercial advantage when sourcing merchandise and enables delivery of better value to the customer. An example of this is its capacity to contract with jewellery manufacturers to assemble products, utilising directly sourced gold and loose polished diamonds. In addition, the division has the scale to utilise sophisticated merchandising systems to test, track, forecast and respond to consumer preferences.
The UK division has strong and well established brands and leverages them with advertising (both print and television), catalogues and the development of customer relationship marketing techniques. Few of its competitors have sufficient scale to utilise these marketing methods successfully.
The UK business also benefits from its close relationship with Signets US operations. Synergy is gained by sharing knowledge in merchandising, marketing, operations, systems and best practice procedures. None of the UK divisions competitors has similar access to the leading operator in the worlds largest jewellery market.
Initiatives in 2005/06
Store operations and human resources
Initiatives in 2006/07
non-speciality jewellery retailers such as mail order catalogues, catalogue showrooms and jewellery departments in department stores.
The UK retail jewellery market is very fragmented and competitive, with a substantial number of independent speciality jewellery retailers. Management believes there are approximately 7,000 speciality retail jewellery stores in the UK.
In the middle market H.Samuel competes with a large number of independent jewellers, the only competitor of significant size being F Hinds (105 stores). Competition at the lower end of the H.Samuel product range also comes from Argos, the catalogue showroom operator and discount jewellery retailers such as Warren James (116 stores).
In the upper middle market Ernest Jones competition is from independent speciality retailers and a limited number of other upper middle market jewellery brands such as Goldsmiths (173 stores) and Beaverbrooks (57 stores).
Based on surveys, management believes that customers are attracted to H.Samuel because they have confidence in the brand and its staff are perceived to be friendly, helpful and knowledgeable. Ernest Jones is perceived to offer high quality merchandise and premium service from a professional and knowledgeable staff.
Store operations and human resources
Recruitment procedures continue to improve the suitability of new store personnel helping to ensure that they meet key basic requirements and are motivated to work within the jewellery store environment. Field and human resources management are responsible for the recruitment, performance review, training and development of sales staff, thereby ensuring consistency in operating standards and procedures throughout the business. All new store personnel must complete a selling skills learning programme during their probationary period and thereafter undertake additional training in selling, product knowledge and customer care.
All store personnel have daily performance targets. They are given training and weekly feedback on their performance from store and field management to help them achieve these targets.
In 2004/05 commission-based remuneration was tested. The level of commission paid is dependent on a combination of store and individual performance. This commission system was introduced in all stores during 2005/06.
In conjunction with the Signet Jewellery Academy, training in management skills for all tiers of store operations management was developed further last year to support the initiative to improve customer service. In 2005/06 the number of training courses completed again increased.
The preferred policy is to promote store managers from within the business; approximately 66% of store management appointed in 2005/06 were so promoted. At any given time each chain has a number of sales staff who are qualified to advance to store management level, thus assuring the availability of newly trained managers familiar with the divisions operating standards and procedures.
In order to increase staff selling time and to improve efficiency, operating procedures are routinely reviewed to identify opportunities to enhance customer service and reduce in-store administrative tasks. The Signet intranet provides a computer-based platform for improved communication between stores and head office, with sales floor and back office administrative functions being simplified and standardised through this medium.
Management also believes that successful recruitment, training and retention of head office staff is essential. Comprehensive recruitment, training and incentive programmes for head office staff are in place in the Borehamwood and Birmingham offices. Programmes to provide employees with structured development plans, training and career paths have been implemented. Internal career advancement is encouraged and is supported by a succession planning process. Teamwork and service to the stores are encouraged through a performance bonus plan for head office staff, which is based on the divisions results.
Opportunities for better employment practices were identified through a staff opinion survey. It is believed that the results provide a basis for further improvement in the motivation and retention of staff.
UK operating review (continued)
This revised format features open frontages which are intended to make the store more accessible and inviting to the customer, as well as improved presentation of the merchandise. The design for mall locations includes display cases on the frontage with the concourse, rather than the traditional window presentation. The High Street stores have wide floor-to-ceiling windows that provide views directly into the store.
Much of the merchandise is presented in low level display units that also serve as service counters and allow the sales associate to show an assortment of merchandise to the customer without having to break away to select additional merchandise from the window displays, as in the traditionally designed store.
The increase in sales from the additional investment meets the well established Group investment criteria. The reformatted stores achieved a rise in both diamond sales and average retail price. An additional 86 stores, primarily H.Samuel, were trading in the new format at 28 January 2006, bringing the total to 228, accounting for over 40% of the UK divisions sales. A multi-year rollout plan for the new format is being implemented as part of the normal refurbishment cycle; it is planned to refurbish or relocate 30 to 35 stores in 2006/07, the majority again being H.Samuel.
Details of recent investment in the store portfolio are set out below:
The average retail price of items sold has increased at a compound annual growth rate of 6.1% over the last five years. This upward trend is expected to continue as the sales mix of diamonds is anticipated to rise and that of gifts to decline as a percentage of sales. Average sales per store have increased at a compound annual growth rate of 2.3% over the same period. In 2005/06 the average retail price increased
by 4.1% but the sales per store decreased by 5.8%. Management believes that the number of H.Samuel stores is unlikely to increase.
Ernest Jones (including Leslie Davis)
The principal product categories are diamonds, branded watches and gold jewellery, which are all merchandised and marketed to appeal to the more affluent upper middle market customer (see page 19, Merchandise mix). Ernest Jones retails an extensive range of diamond and gold jewellery as well as prestige watches such as Breitling, Cartier, Longines, Omega, Rado, Raymond Weil, Rolex, and Tag Heuer. It also sells contemporary fashion watches such as Burberry, DKNY, Emporio Armani, Gucci, Hugo Boss and a range of traditional watches including Accurist, Rotary, Seiko and Tissot.
At 28 January 2006 the chain had average selling space of 862 square feet per store. The average retail price of items sold has increased at a compound annual growth rate of 6.4% over the last five years. Over the same period average sales per store increased at an annual compound growth rate of 5.8% and were the most productive mall stores in the Group in terms of sales per square foot. In 2005/06 the increase in average retail price was 5.1% but sales per store decreased by 7.4%. Management considers that there is potential to increase the number of Ernest Jones stores to approximately 225 as suitable sites and watch agencies become available.
Merchandising and purchasing
The merchandise mix of the UK division is given below. In 2005/06 diamond jewellery sales accounted for 29% of total Signet UK sales versus 22% five years ago. In line with the strategy of the UK division to increase the percentage of diamonds in the merchandise sales mix, since 2000/01 the compound annual growth rate of Signet UK diamond sales has been about 10%.
Merchandise is purchased from a range of suppliers and manufacturers. In 2005/06 the five largest of these, all watch suppliers, together accounted for approximately 22% of total UK division purchases, with the largest accounting for approximately 6%. Only a small percentage of merchandise is purchased on consignment (see note 13 on page 82).
Economies of scale continued to be achieved by combining the volume of purchases for H.Samuel and Ernest Jones. Some 21% of the UK business gold jewellery is manufactured on a contract basis in Italy through a buying office in Vicenza, Italy, thereby eliminating the costs associated with intermediaries.
The UK division also employs contract manufacturers for approximately 28% of the diamond merchandise sold, thereby achieving cost savings. Both H.Samuel and Ernest Jones employ experienced buyers who concentrate on product development, sourcing and supplier management appropriate to their particular needs. Overseas direct sourcing capability in most product areas has been increased. Such purchases have grown by 144% in value since 1999/00, and now account for 31% of the merchandise mix.
Merchandising teams work in conjunction with the buyers and focus on assortment planning, branch grading, repeat orders, inventory levels and margin management. Product category reviews are regularly carried out with a focus on increasing potential gross margin return on investment. Rigorous test marketing procedures are used to trial products, and their subsequent distribution is made strictly against rates of sale. The merchandise ranges have been rationalised, with greater focus on key items, and offer a wider choice in the most popular categories.
The size and quality of diamond jewellery available to customers was enhanced during the year, with a greater proportion utilising precious white metals. Branded diamonds exclusive to Signet have been developed in recent years, an example of which is the Leo Diamond available in all Ernest Jones stores. The Forever Diamonds range is sold in all H.Samuel stores having been launched in 50 stores during 2002/03. Both the Leo Diamond and the Forever Diamond have unique cuts that provide greater sparkle and brilliance than a typically cut diamond of similar size, colour and clarity. The Leo Diamond utilises a higher quality diamond and therefore retails at a higher price than the Forever Diamond.
Each store is assigned a range of merchandise that reflects local buying patterns. Display equipment and layouts are constantly reviewed and updated, and new display formats that draw upon the US divisions experience have been implemented.
Marketing and advertising
The primary marketing and advertising medium employed in 2005/06 consisted of a series of catalogues for each brand, distributed as inserts in newspapers and magazines as well as by mail and available in all stores. The quality of catalogues was improved and their distribution was better targeted.
The trial of television advertising was continued for both chains during Christmas 2005 with different commercials tested. It was the third year of a large-scale test and took place in regions representing about 65% of the H.Samuel store base and 60% of the Ernest Jones store base, a similar level to 2004/05. It is planned to continue the development of television advertising in 2006/07.
Public relations initiatives resulted in greater coverage by national and consumer lifestyle media titles. Targeted marketing was increased to publicise special promotional events in the run-up to Valentines Day and Christmas. Customer relationship marketing was introduced during 2004/05 and the trial continued through 2005/06. It is intended that the programme will be refined further in 2006/07.
During the year an e-commerce (transactional) capability was enabled on the H.Samuel website (www.hsamuel.co.uk) as a complement to store-based customer service. The progress of this new distribution channel is encouraging. The other UK marketing websites (www.ernestjones.co.uk and www.lesliedavis.co.uk) have again seen an increase in visitor traffic. In 2006/07 it is anticipated that the Ernest Jones website will also be enabled with an e-commerce capability.
Signet Group plc Annual Report & Accounts year ended 28 January 2006 19
UK operating review (continued)
Insurance loss replacement business
Management tools and communications
A perpetual inventory process allows store managers to check stock by product category. These systems are designed to assist control of shrinkage, fraud prevention, financial analysis of retail operations, merchandising and inventory control.
New systems have been introduced to enhance control over cash banking to support financial management. Major computer hardware upgrades took place to improve resilience and capacity, particularly during the peak Christmas season.
The former administration centre at Colindale in North London was sold during 2005/06 and UK store operations, senior management, financial planning, marketing, and buying & merchandising functions have now been relocated to office space more appropriate to the needs of the business in Borehamwood, Hertfordshire, just to the north of London. The facilities for payroll, human resources, information technology, certain finance functions, distribution, e-commerce fulfilment and customer services, as well as the insurance replacement business and call centre, are located in Birmingham.
20 Signet Group plc Annual Report & Accounts year ended 28 January 2006
Signet attributes great importance to the location and appearance of its stores. Accordingly, in both Signets US and UK operations, investment decisions on selecting sites and refurbishing stores are made centrally, and strict real estate criteria are applied.
The Group has sufficient distribution capacity to meet its current requirements and increased capacity in 2005/06 to support anticipated future sales growth in the US.
The US division leases 17% of its store locations from Simon Property Group and 15% from General Growth Management, Inc. Otherwise, the division has no relationship with any lessor relating to 10% or more of its store locations.
During the past five financial years the US business has been generally successful in renewing its store leases as they expire and has not experienced difficulty in securing suitable locations for its stores. It is not believed that any of the store leases are individually material to the Groups US operations.
A 340,000 square foot head office facility is leased in Akron, Ohio. In addition, a 19,000 square foot repair centre was opened during 2005/06 in Akron. The relocation of the US division central repair facility from the head office premises enabled the expansion of the distribution capacity.
Wherever possible Signet is shortening the length of new leases that it enters into in order to improve the flexibility of its lease
commitments. Rents are usually subject to upward review every five years if market conditions so warrant. An increasing proportion of rents are related to sales of the store, subject to a minimum annual value. At the end of the lease period, subject to certain limited exceptions, leaseholders generally have statutory rights to enter into a new lease of the premises on negotiated terms. At 28 January 2006 the average unexpired lease term of Signets leased premises in the UK was 11 years. As current leases expire, Signet believes that it will be able to renew leases, if desired, for present store locations or to obtain leases in equivalent or improved locations in the same general areas. Signet has not experienced difficulty in securing leases for suitable locations for its UK stores. It is not believed that any of the store leases are individually material to the Groups UK operations.
Signet owns a 255,000 square foot warehouse and distribution centre in Birmingham. The relocation of the UK divisions central administration functions to Birmingham and Borehamwood, Hertfordshire, to enhance efficiency, meant that the 120,000 square foot administration centre at Colindale in North London was sold in August 2005. The new Borehamwood facility is held on a 15 year lease and consists of 36,200 square foot of office space. The holding company functions are located in 7,200 square foot offices on a ten year lease in central London which was entered into in 2005.
Trademarks and trade names
None of Signets employees in the UK and less than 1% of Signets employees in the US are covered by collective bargaining agreements. Signet considers its relationship with its employees to be excellent.
Signet Group plc Annual Report & Accounts year ended 28 January 2006 21
Adoption of International Financial Reporting
These changes have no impact on the Groups historical or future net cash flow, the timing of cash received or the timing of payments. A reconciliation of the results and net assets under UK GAAP, as previously reported, to IFRS is included in note 30 on page 99.
The gross margin percentage in retail jewellery is above the average for speciality retailers reflecting the slow inventory turn. The trend in gross margin depends on Signets pricing policy, movements in the cost of merchandise sold, changes in sales mix and the direct cost of providing services such as repairs.
In general, gross margin percentage on gold jewellery is above that of diamond jewellery, whilst that of watches and gift products is normally below that of diamond jewellery. Within the diamond jewellery category the gross margin percentage varies depending on the proportion of the merchandise cost accounted for by the value of the diamonds; the greater the proportion, the lower the gross margin percentage. In addition, the gross margin in a Jared store is slightly below that of a mall store, although at maturity the store contribution percentage of a Jared store is similar to that of a mall store. A change in merchandise mix will therefore impact the Groups UK and US divisions gross margin percentage and a change in the proportion of sales from Jared will impact the gross margin percentage of both the US division and Group. In the US division the growth of Jared and the increase in sales of higher value diamonds, both of which are helping to drive like for like sales growth, means that US gross margin percentage is expected to show a small decline each year.
The cost of goods sold that is used to arrive at gross profit takes into account all costs incurred in the purchase, processing and distribution of the merchandise and all costs directly incurred in the operation and support of the retail outlets. The classification of distribution and selling costs under IFRS varies from company to company and therefore the gross profit percentage may not be comparable from one company to another.
To maintain the operating profit margin the Group needs to achieve like for like sales growth sufficient to offset any adverse movement in gross margin, the increase in operating costs (including the net bad debt charge) and the impact of immature selling space. Like for like sales growth above the level required to offset the factors outlined above, allows the Group to achieve leverage of its fixed cost base
22 Signet Group plc Annual Report & Accounts year ended 28 January 2006
and improve operating margin; slower sales growth results in reduced operating margin. There are not any known trends or uncertainties in future rent or amortisation expenses that could materially affect operating results or cash flows.
Signets target of 8% - 10% new store space growth in the US, with minimal net new space in the UK, means lower like for like sales growth is required in the UK than in the US to maintain operating margin. The increase in the planned new space growth in the US to 8% - 10% from 6% - 8% two years ago, means that a faster rate of like for like sales growth will be required in the future to maintain the US operating margin than has historically been the case. However, as new store space is anticipated to break even or to make a small contribution at the store level, the increase in the rate of growth is not expected to reduce overall profitability.
The impact on operating profit of sales variances (either adverse or favourable) is less in the US division than the UK, as certain variable expenses such as turnover-related rent and sales commission account for a higher proportion of costs in the US business than in the UK division. The impact on operating profit of a sharp increase or decrease in like for like sales performance is particularly marked.
A key factor in driving operating margin is the level of average sales per store, with higher productivity allowing leverage of expenses both in store and in central functions.
Movements in the US dollar to pound sterling exchange rate impact the reported results of the Group as the US divisions results are translated into pounds sterling. A one cent movement in the exchange rate impacts profit before tax by some £0.8 million. The Board believes it is inappropriate to hedge this exposure as the US divisions sales and costs are dollar denominated and the cash flow from the US division is largely reinvested in the US space expansion or used to pay down US dollar denominated borrowings. The Group therefore would be putting in place a cash exposure to hedge a translation risk.
52 weeks ended 28 January 2006
Group operating margin decreased to 11.9% (2004/05: 13.2%), reflecting the significant decline in the operating margin of the UK division. While total sales increased, the decline in the operating margin resulted in Group operating profit decreasing to £208.2 million (2004/05: £212.5 million), down by 2.0% on a reported basis and 4.1% at constant exchange rates.
Net financing costs decreased to £7.8 million (2004/05: £8.6 million). The reduction was principally due to an increase in interest income in the first half of the year.
Group profit before tax decreased to £200.4 million (2004/05: £203.9 million), down by 1.7% on a reported basis and 3.8% at constant exchange rates. After a tax charge of 34.7% (2004/05: 33.9%) profit for the financial period reduced by 3.0% to £130.8 million (2004/05: £134.8 million), a decrease of 5.0% at constant exchange rates. It is anticipated that the tax charge for 2006/07 will be approximately 36%. Earnings per share was 7.5p (2004/05: 7.8p), down by 3.8% on a reported basis and 6.3% at constant exchange rates.
Financial review (continued)
Operating profit was £167.1 million (2004/05: £142.4 million), up by 17.3% on a reported basis and 13.6% at constant exchange rates.
Return on capital employed
Depreciation, amortisation and capital expenditure
Under English law, dividends can only be paid out of profits available for distribution (generally defined as accumulated realised profits less accumulated realised losses less unrealised losses) and not out of share capital or share premiums (generally equivalent in US terms to paid-in surplus). At 28 January 2006, after taking into account the subsequently recommended final dividend of 2.8875p per share (2004/05: 2.625p per share), the holding company had distributable reserves of £110.3 million (29 January 2005: £116.0 million).
In order to make further distributions in excess of this figure, the holding company would first need to receive dividends from its subsidiaries. In addition to restrictions imposed at the time of the 1997 capital reduction on the distribution of dividends received from subsidiaries, the payments of dividends from other tax jurisdictions,
such as the US, may not be tax efficient. Furthermore, there may be other reasons why dividends may not be paid by subsidiaries to the holding company.
Liquidity and capital resources
The cash flow performance of the Group depends on a number of factors, such as the:
Investment in new space requires significant investment in working capital, as well as fixed capital investment, due to the slow inventory turn, and the additional investment required to fund sales in the US utilising the in-house credit card.
In years when the rate of new store space expansion in the US is towards the lower end of the planned 8% 10% range, or the level of store refurbishment and relocation is below normal, the Group will have reduced levels of investment in fixed and working capital. In 2005/06 a faster rate of new store space growth in the US, a maintained level of refurbishment in the UK and increased dividend payments meant that cash flow was broadly neutral.
The Groups working capital requirements fluctuate during the year as a result of the seasonal nature of its business. As inventory is purchased for the Christmas season there is a working capital outflow which reaches its highest levels in late autumn. This position then reverses over the key selling period of November and December. The working capital needs of the business are then relatively stable from January to August. The rough diamond sourcing initiative will require the Group to hold an element of its inventory for approximately an additional 60 days. The timing of the payment of the final dividend, normally in July, is also material to working capital requirements during the year.
The Board considers that the capital resources currently available are sufficient for both its present and near term requirements. A description of the main credit facilities of the Group are given in the next section, Net debt.
In 2005/06 cash generated from operating activities amounted to £188.1 million (2004/05: £172.6 million) after funding a working capital increase of £66.3 million (2004/05: £81.6 million), principally as a result of the growth of the US division. It is anticipated that in 2006/07 there will be a further increase in the level of working capital due to planned US store openings. Interest of £11.4 million (2004/05: £11.6 million) and tax of £64.5 million (2004/05: £56.5 million) were paid. Net cash from operating activities was £112.0 million (2004/05: £104.5 million).
Group capital expenditure was £75.9 million (2004/05: £70.5 million). The level of capital expenditure was some 1.6 times the depreciation and amortisation charge. Capital expenditure in 2006/07 is expected to be between £75 million and £85 million, most of which will be store related. There were disposal proceeds of £7.5 million (2004/05: £0.2 million). Equity dividends of £52.7 million (2004/05: £43.8 million) were paid. Net cash outflow was £4.8 million (2004/05: £10.0 million). In 2006/07 the cash outflow is expected to be between £10 million and £30 million reflecting the planned increase in space growth in the US.
The Group funds part of its private label credit card receivables programme through a privately placed receivables securitisation. Under this securitisation, interests in the US receivables portfolio, held by a trust were sold principally to institutional investors in the form of fixed-rate Class A, Class B and Class C investor certificates. The aggregate outstanding principal amount of the certificates totalled $251.0 million at 28 January 2006 and 5 April 2006. The certificates have a weighted average interest rate of 5.42% and interest is paid monthly in arrears from the finance charges collections generated by the receivables portfolio. The revolving period of the securitisation ended in March 2006, with a final expected principal payment date in November 2006.
On 30 March 2006 Signet entered into a US Private Placement Note Term Series Purchase Agreement (Note Purchase Agreement) which was funded largely from US insurance institutional investors in the form of fixed rate investor certificate notes (Notes). These Notes represent 7, 10 or 12 year maturities, with Series (A) $100 million 5.95% due 2013; Series (B) $150 million 6.11% due 2016 and Series (C) $130 million 6.26% due 2018. The aggregate issuance was $380 million and the funding date is 23 May 2006. The proceeds from this debt issuance are to be used to refinance the maturing securitisation programme and for general corporate purposes. The Notes rank pari passu with the Groups other senior unsecured debt.
The principal financial covenants on this Note Purchase Agreement are identical to the Groups $390 million multi-currency revolving credit facility which are, as follows:
On 28 September 2004 Signet entered into a $390 million unsecured multi-currency five year revolving credit facility agreement (the Facility Agreement). Under the Facility Agreement, a syndicate of banks made facilities available to the Group in the form of multi-currency cash advances and sterling acceptance credits on, inter alia, the following terms:
The continued availability of the Facility Agreement is conditional upon the Group achieving certain financial performance criteria (see above). It also has certain provisions which are customary for this type of agreement, including standard negative pledge and pari passu clauses. At 28 January 2006 and 5 April 2006 the amount outstanding under the Facility Agreement was $nil.
It is the policy of the Group to enter into interest rate protection agreements in respect of at least 75% of its forecast US dollar borrowings. At 28 January 2006 the interest rate of forecast US dollar borrowings for 2006/07 was capped effectively at 5.4%.
Financial review (continued)
The cash contribution to the fund in 2005/06 was £4.3 million (2004/05: £3.7 million). The Group expects to contribute a minimum of £3.5 million in 2006/07 subject to review following the completion of the actuarial valuation, when additional contributions are expected to be agreed.
Contingent property liabilities
Impact of constant exchange rates
Financial review (continued)
Critical accounting policies
Implementation of IFRS
These changes have no impact on the Groups historical or future net cash flow, the timing of cash received or the timing of payments. A reconciliation of the results and net assets under Historic UK GAAP, as previously reported, to IFRS is included in note 30 on page 99.
IFRS 1 First-time adoption of international financial reporting standards grants certain exemptions from the full requirements of IFRSs in the transition period. The following exemptions have been taken in these financial statements:
The Group has not historically made provisions for sales returns as the year on year impact on profit and the impact on net assets is not material. As part of the transition to IFRS, the Group has now established returns provisions as part of its opening balance sheet.
The transition to IFRS has resulted in a number of presentational changes that do not have an impact on the profit or net assets of the Group. Insurance income and the impact of voucher promotions are now recognised in revenue. Only the commission element of UK warranty sales is recognised as revenue. Interest receivable from the US in-house credit programme is classified as other operating income.
Where necessary, provision is made for obsolete, slow-moving and damaged stock. This provision represents the difference between the cost of the stock and its estimated market value, based upon stock turn rates, market conditions and trends in consumer demand. For further detail on the provisions for inventory and the amount of reserves recorded each year, refer to note 13 on page 82 in the notes to the accounts.
In the US, stock losses are recognised at the mid-year and fiscal year end based on complete physical inventories. In the UK, stock losses are recorded as identified on a perpetual inventory system and an estimate is made of losses for the period from the last stock count date to the end of the financial year on a store by store basis. These estimates are based on the overall divisional stock loss experience since the last stock count.
Foreign currency translation
Changes in the fair value of financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity through the statement of changes in equity. Any ineffective portion of the gain or loss is recognised immediately in the income statement. For cash flow hedges that result in the recognition of a non-financial asset or liability, amounts previously deferred in equity are included in the measurement of the asset or liability. For cash flow hedges that result in the recognition of a financial asset or liability, amounts previously recognised in equity are recognised in the income statement in the same period in which the hedged forecast transaction affects the Groups net profit or loss.
Depreciation and impairment
In the UK, there are circumstances where refurbishments are carried out close to the end of the lease term, such that the expected life of the newly installed leasehold improvements will exceed the lease term. Where the renewal of the lease is reasonably assured, such shopfronts, fixtures and fittings are depreciated over a period equal to the lesser of their economic useful life, or the remaining lease term plus the period of reasonably assured renewal. Reasonable assurance is gained through evaluation of the right to enter into a new lease, the performance of the store and potential availability of alternative sites.
Where appropriate, provision is made on assets that have a lower economic value than net book value. Additionally, potentially impaired assets are identified by reviewing the cash contribution of individual stores where trading since the initial opening of the store has reached a mature stage. Where such stores deliver a low or a negative cash contribution, the related store assets are considered for impairment by reference to the higher of net realisable value and value in use.
Lease costs and incentives
Where the Group has onerous lease obligations, provision is made for the discounted cash outflow that is expected to arise under the lease. Account is taken of any sublet income received or reasonably expected, incentives to be received or paid and the time to lease expiry or reversal of the net cash outflow, whichever is the later.
The Group policy is to recognise a provision for onerous leases when the leased property ceases to be used by the Group.
The bad debt experience of the US division has been relatively stable over the past five years at between 2.8% and 3.2% of sales.
UK retirement benefits
Advertising and promotional costs
Operating reviews, financial review and descriptive material
All forward-looking statements should be read, in particular, in the context of the Risk and other factors described in this section. Shareholders are cautioned not to place undue weight on these forward-looking statements. Actual results may differ materially from those anticipated in such forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein may not be realised. The Group undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.
Impact of general economic conditions
The success of the Groups operations depends to a significant extent upon a number of factors relating to discretionary consumer spending. These include economic conditions and perceptions of such conditions by consumers, employment, the rate of change in employment, the level of consumers disposable income, business conditions, interest rates, consumer debt levels, availability of credit and levels of taxation for the economy as a whole and in regional and local markets where the Group operates. There can be no assurance that consumer spending on jewellery will not be adversely affected by changes in general economic conditions. However, due to the limited seasonality in the product mix, the risk of having to discount inventory in order to be correctly stocked for the next selling season is more limited than for some other retail sectors.
While the level of consumer expenditure may vary, the occasions when jewellery is purchased engagements, weddings and events such as Christmas, wedding anniversaries, birthdays, Valentines Day and Mothers Day occur on a regular basis.
Signets US business is believed to be less exposed to the economic cycle than its UK business. Approximately 45% of sales in the US are in the bridal related sector which is thought to be less sensitive to changes in general economic conditions than other categories of jewellery, while in the UK only 15% 20% of sales are bridal related. Furthermore, a greater proportion of costs in the US business are proportional to sales than in the UK business so the impact on any change in sales, either positive or negative, has less of an impact on operating profit in the US than in the UK.
As a substantial proportion of the Groups US sales are made on credit, any significant deterioration in general economic conditions or consumer debt levels may inhibit consumers use of credit and cause a material adverse effect on the Groups revenues and profitability. Furthermore, any downturn in general or local economic conditions in the markets in which the Group operates may adversely affect its collection of outstanding credit accounts receivable and hence the net bad debt charge. Currently there are all-time high levels of consumer debt in the US, however, the level of net bad debt charge as a percentage of credit sales in the Groups US division in 2005/06 was towards the bottom end of the range in recent years.
Merchandise selection, pricing, inventory and purchasing
The Groups operating experience suggests that while the price of jewellery is a consideration for consumers, it is not among the top three factors in determining where they buy jewellery. The Group believes these factors to be the level of service provided to the customer, the quality, together with the selection of merchandise offered and the reputation of the retailer. Therefore while discounting price may increase sales, it may not increase profit.
Reputation and marketing
The ability to differentiate the Groups stores from competitors by its branding, marketing and advertising programmes is a factor in attracting consumers. Therefore these programmes are carefully tested and their success monitored by methods such as market research (see pages 14 and 19 for more details).
The Diamond Trading Company (DTC), a subsidiary of De Beers Consolidated Mines Limited (De Beers), promotes diamonds and diamond jewellery in the US and the UK. The level of support
provided by the DTC and the success of the promotions influence the size of the total jewellery market in those countries.
The Groups reputation in the financial markets can influence the availability of capital, the cost of capital and its share price.
In particular, the success of the Jared off-mall destination store concept, which accounts for the majority of the Groups net increase in new store space, will influence the future performance of the Group. This concept has been tested and developed over a number of years and its performance against the investment model is regularly reviewed. The rate of new store development is dependent on a number of factors including obtaining suitable real estate, the capital resources of the Group and the availability of appropriate staff and management.
The Groups results are dependent on a number of factors relating to its stores. These include the availability of property, the location of the mall or shopping centre, the availability of attractive locations within a mall or High Street, the terms of leases, the Groups relationship with major landlords and the design and maintenance of the stores. In addition, the Groups operations, particularly in the US, are dependent upon the continued popularity of enclosed malls as a shopping destination and the ability of enclosed malls, their tenants and other mall features to attract customers.
The continued growth of Jared and the development of Kay in suburban open air malls and metropolitan locations is reducing the Groups dependence on enclosed malls.
Risk and other factors (continued)
If the Group falls behind competitors with respect to one or more of these factors, the Groups operating results or financial condition could be adversely affected. In the US the Group has an estimated 8.2% market share of the speciality jewellery sector and has only one major national competitor. While another major national brand could develop, the sector is highly fragmented. As a result of the growth of Jared and the development of Kay outside of its mall base, the Group is increasingly competing with independent speciality jewellery retailers rather than the national or major regional chains which predominate in enclosed malls. In the UK the Group has an estimated 17% share of the fine jewellery sector and has only limited scope to increase sales by opening new stores.
The channels through which consumers buy jewellery continually evolve and a major non-speciality retailer could enter the wider jewellery market. In the US, for example, sales by discount retailers have increased, while those of the department stores have been in relative decline and catalogue retailers have withdrawn from the market. In the UK a number of fashion and general retailers have introduced jewellery into their ranges whilst others have reduced their selection. The Group regularly shops the competition to monitor their merchandising, pricing and service standards. In both the US and the UK, internet retailers sell jewellery and watches. The Group monitors the competitive environment and the development of possible new channels of distribution such as the internet. As part of this process there are marketing websites for each of the Groups major brands. H.Samuel added an e-commerce capability to its website in 2005/06 and it is anticipated that both the Ernest Jones and Kay websites will introduce e-commerce capabilities during 2006/07.
the UK business the proportion is over 35%. The cost of raw materials is only part of the costs involved in the retail selling price of jewellery with labour costs also being a significant factor.
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. In addition, if the Group continues to increase its market share it will require additional sources of diamonds of consistent quality. Therefore the Group continually seeks to identify and implement improvements in its supply chain. For example, an initiative to develop a capability to source, cut and polish rough diamonds was commenced in 2005/06.
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. Due to the slow inventory turnover they are not under immediate pressure to change prices. In addition, the Group can improve the efficiency of its supply chain to partly offset an increase in commodity costs.
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 (and its predecessor, the Central Selling Organisation) has for many years controlled the marketing of a substantial majority of the worlds supply of rough diamonds and sells diamonds to diamond cutters in quantities and at prices determined at its sole discretion. In 2000 De Beers announced a change in corporate strategy designed to improve the efficiency of the supply chain and increase the level of marketing support for diamonds.
The availability of diamonds to the DTC and the Groups 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.
Consumer confidence in diamonds, gold and other precious metals and gemstones also influences the level of Group sales. Confidence could be affected by a variety of issues including the availability and consumer awareness of substitute products such as cubic zirconia, moisanite and of laboratory created diamonds; labour conditions in the supply chain; and concern over the source of raw materials and the impact of mining and refining of minerals on the environment, health issues and the local community. The Group, therefore, has a Supplier Code of Conduct which sets out the Groups expectations of its suppliers. An example of an issue that could affect confidence in this way is that of conflict diamonds, which is the term used for diamonds sold by rebel movements to raise funds for military campaigns. There have been a number of United Nations resolutions regarding conflict diamonds and an international agreement, known as the Kimberley Process, was signed in November 2002. This was designed to exclude conflict diamonds from the legitimate diamond
trade. During 2003 legislation was passed in the European Union and the US, implementing the Kimberley Process. The impact of the Kimberley Process and its associated legislation has not resulted in any disruption to the supply of rough diamonds to date and has helped to improve the integrity of the supply chain.
The Group reviews its procedures and documentation for compliance with the Kimberley Process and makes appropriate amendments. In addition, staff are briefed and suppliers reminded about the procedures. During the year the Groups internal audit function and mystery shopper programmes checked for compliance. See page 46 for further information on the Supplier Code of Conduct, the Kimberley Process and the Groups policy on conflict diamonds.
Social, ethical and environmental risks
In recent years stakeholder expectations of public companies have increased. Managing and responding as a business to these changing expectations, including with regard to SEE issues, is part of the normal responsibilities of corporate management.
The Group regularly carries out SEE risk reviews and benchmarking exercises with the assistance of an external adviser. Such reviews include an assessment of Group policies, procedures and controls in respect of SEE matters. Reports are regularly made to the Groups Risk Management Committee and to the Board. The greatest SEE risks are judged to relate to the integrity of the merchandise and to the SEE standards in the Groups supply chain.
In order to better address issues relating to social, ethical and environmental issues within the diamond and gold jewellery supply chain, the Group was a founding member of the Council for Responsible Jewellery Practices. This body was set up in May 2005 with the objective of promoting responsible business practices in a transparent and accountable manner throughout the industry from mine to retail. The Council represents all parts of the supply chain and is undertaking public consultation on its Code of Practice, which will involve third party monitoring. See www.responsiblejewellery.com for further information on the Council.
On 21 October 2001 the Association of British Insurers published guidelines on Socially Responsible Investment. In line with that guidance the Board confirms that it has identified and assessed the Groups SEE risks and that these are being managed.
SEE matters are dealt with in more detail on pages 45 to 49 and in the CSR section on www.signetgroupplc.com.
Regulatory requirements and GAAP
The presentation of the Groups accounts can also be affected by changes to generally accepted accounting policies, such as the adoption of International Accounting Standards in 2005/06 (see note 30 on page 99 for details). GAAP continues to be revised and subject to new interpretations. Such changes may influence the valuation of the Groups shares.
Risk and other factors (continued)
The next triennial valuation of the UK Scheme occurs as at 5 April 2006, following which, contribution rates will be reviewed with the trustees of the Group Scheme. Under the Pensions Act 2004 the Pensions Regulator has powers to vary and impose funding arrangements which could be more onerous than may be agreed with or proposed to the trustees. In addition, the provisions of the Pensions Act 2004 may restrict the freedom of the Group to undertake certain re-organisation steps or to effect returns on capital or unusual dividends without the prior agreement of the Group Scheme trustees, in consultation with the Pensions Regulator.
In the UK, the Group introduced a defined contribution plan in 2004, replacing the closed Group Scheme, for new employees. The US division also operates a defined contribution plan.
Equity and debt financing
Financial market risks
profit (as was the case in 2002/03, 2003/04 and 2004/05), and appreciation in the weighted average value of the US dollar against the pound sterling could increase reported revenues and operating profit (as was the case in 2000/01, 2001/02 and 2005/06). The Board has chosen not to hedge the translation effect of exchange rate movements on the results of the Group given that there is little movement of cash between the Groups two divisions.
As part of its long-term strategy, the Group seeks to finance its US net assets with borrowings denominated in US dollars as a hedge against the impact of exchange rate fluctuations on its US operating profit. Currently nearly all of the Groups borrowings are denominated in US dollars. Therefore fluctuations in the exchange rate between the pound sterling and the US dollar affect the amount of the Groups consolidated borrowings.
In addition, the prices of materials and certain products bought on the international markets by the UK division are denominated in US dollars, and therefore the Group has an exposure to exchange rates on the cost of goods sold which will have an opposite effect to its exposure on US operating profit. The Group does use hedging operations in respect of purchases of US dollars by its UK division, within the treasury guidelines approved by the Groups Board.
Cash dividends paid by the Group in respect of the shares will be in pounds sterling and fluctuations in the exchange rate between the pound sterling and the US dollar will affect the dollar amount received by holders of ADSs upon conversion of such dividends. Moreover, fluctuations in the exchange rate between the pound sterling and the US dollar will affect the US dollar equivalents of the pound sterling price of the shares on the London Stock Exchange and, as a result, are likely to affect the market price of the ADSs in the US.
The table on page 35 sets out, for the calendar years indicated, the average, high, low and period end exchange rates for the pound sterling expressed in US dollars per £1.
The Groups policy is to manage financial risk resulting from exposure to currency and interest rate fluctuations. Translation exposure relating to non-pound sterling denominated assets in the US is partially hedged by borrowing in US dollars. Interest rate exposure is managed through the use of swaps, caps and floors.
A committee of the Board is responsible for the implementation of treasury policies and guidelines which are considered to be appropriate by the Board for the management of financial risk. The Groups funding, liquidity and exposure to interest rate and exchange rate risks are managed by the Groups treasury department. The Group uses derivative instruments for risk management purposes only, and these are transacted by specialist treasury personnel.
For financial instruments held, the Group has used a sensitivity analysis technique that measures the change in the fair value of the Groups financial instruments from hypothetical changes in market rates and this is shown in the table on page 35.
(1) Based on unweighted data points sourced from Reuters.
The amounts generated from the sensitivity analysis are forward-looking estimates of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from those projected due to changes in the portfolio of financial instruments held and actual developments in the global financial markets. These may cause fluctuations in interest and exchange rates to exceed the hypothetical amounts disclosed in the table above.
The example shown for changes in the fair values of borrowings and associated derivative financial instruments at 28 January 2006 is set out in the table below. The fair values of borrowings and derivative financial instruments are estimated by discounting the future cash
flows to net present values using appropriate market rates prevailing at the period end.
The estimated changes in fair values for interest rate movements are based on an instantaneous decrease of 1% (100 basis points) in the specific rate of interest applicable to each class of financial instruments from the levels effective at 28 January 2006 with all other variables remaining constant. The estimated changes in the fair value for foreign exchange rates are based on an instantaneous 10% weakening of the pound sterling against the US dollar from the levels applicable at 28 January 2006 with all other variables remaining constant.
The analysis above should not be considered to be a projection of likely future events.
Robert Anderson, 47, appointed in 2005. He became Chief Executive of the Groups UK division in January 2003 having joined the Group as Chief Operating Officer of the UK division in August 2000. Prior to joining the Group Mr. Anderson had worked at Marks & Spencer Plc for 19 years, latterly as Business Unit Director.
Robert Blanchard*, 61, appointed in 2000. He was a Group Vice President of Procter & Gamble and President of its Global Skin Care and Cosmetics business until his retirement in 1999. He is a non-executive director of Bandag Inc. but has indicated that he will be retiring from that board in May 2006. He was also a non-executive director of Best Buy Co. Inc. until he retired from that board in June 2005.
Walker Boyd, 53, appointed Group Finance Director in 1995. He is a member of the Institute of Chartered Accountants of Scotland. From 1992 he was Finance Director of the Groups UK division.
Terry Burman, 60, appointed Group Chief Executive in 2000. He was, until January 2006, also Chief Executive Officer of the Groups US division. Mr. Burman was appointed to the Board in 1996. Prior to joining the Group in 1995 he was Chief Executive Officer of Barrys Jewelers, Inc.
Dale W. Hilpert*, 63, appointed in 2003. He was Chief Executive of Williams-Sonoma, Inc. from April 2001 until his retirement in January 2003. Prior to this he was Chairman and Chief Executive of Foot Locker, Inc. which he joined as President and Chief Operating Officer in 1995.
Brook Land*, 57, appointed in 1995 and first elected to the Board in 1996. Until 1996 he was a senior partner of, and is now a consultant to, solicitors Nabarro Nathanson. He is also non-executive Chairman of RPS Group plc and Medal Entertainment & Media plc. Mr. Land was nominated as the Senior Independent Director of Signet in June 2002.
Mark Light, 44, appointed in January 2006. He became Chief Executive of the Groups US division in January 2006 having been President and Chief Operating Officer of the US division from 2002. He joined the Group in 1978.
Robert Walker*, 61, appointed in 2004. He was Group Chief Executive of Severn Trent Plc, from August 2000 until his retirement in February 2005. Prior to this Mr. Walker had been a Division President of PepsiCo International and had previously worked for McKinsey and Company and Procter & Gamble. He is non-executive Chairman of WH Smith PLC and a non-executive director of Wolseley Plc, Tate & Lyle PLC and Williams Lea Group Limited. He is also an adviser to Cinven.
Russell Walls*, 62, appointed in 2002. He was Group Finance Director of BAA plc until his retirement in August 2002 and was the senior independent director of Hilton Group plc until May 2003. Mr. Walls is the senior independent director of Stagecoach Group plc and a non-executive director of Aviva plc and non-executive Chairman of Delphic Europe Limited. He is a Fellow of the Association of Chartered Certified Accountants.
Malcolm Williamson*, 67, appointed in November 2005. He was President and CEO of Visa International between 1998 and 2004 before which he was Group Chief Executive of Standard Chartered PLC from 1993 to 1998. He is Chairman of National Australia Group Europe Limited (and the Principal Board member of National Australia Bank), CDC Group plc, Youth Business International Advisory Board and Deputy Chairman of Resolution PLC. He is also a non-executive director of JP Morgan Cazenove Holdings and Group 4 Securicor PLC.
Subject to shareholders electing Mr. Williamson as a director at the annual general meeting in 2006, the Board has appointed him as Chairman with effect from the conclusion of that annual general meeting.
Audit Russell Walls (Chairman), Dale Hilpert and Brook Land.
Nomination Brook Land (Chairman), Robert Blanchard, James McAdam and Malcolm Williamson (the latter with effect from 4 April 2006).
Under the Companys Articles of Association, directors appointed by the Board since the last annual general meeting, either to fill a vacancy or as an additional director, must retire at the next annual general meeting.
The Articles also specify that every director is required to retire at the annual general meeting in the third calendar year after he was last elected or re-elected, except for directors over the age of 70 who are required to retire at every annual general meeting. Similarly the Combined Code requires non-executive directors who have served longer than nine years; if they are to continue to serve, to do so subject to annual re-election. Such directors may, in these circumstances, seek re-election.
Messrs. Land, Light, McAdam, Walls and Williamson retire from the Board at the forthcoming annual general meeting. Following consideration by the Board of the recommendations of the Nomination Committee, other than Mr. McAdam who is not offering himself for re-election, the others do so.
Liam OSullivan, 34, Group Treasurer, appointed 2003. Previously he was Group Treasury Manager at Rank Group Plc. He is a member of the Institute of Chartered Accountants in England and Wales and a member of the Association of Corporate Treasurers.
No director or officer has any family relationship with any other director or officer.
of Scotland plc,
Results and dividends
Independence of non-executive directors
Mr. Land has no relationship with the Company, nor with any of the directors, which could impact his ability to remain objective or independent of mind. He does not provide any service to the Company and has no connections or ties to the Company other than in his capacity as a member of the Board. Where appropriate, he challenges and questions proposals in a positive and constructive way. This is an essential requirement of a strong independent non-executive director and the Board continues to value Mr. Lands contribution. The Board considers it to be especially important to have continuity in the role of Senior Independent Director whilst finding and establishing a new Chairman. Mr. Land will therefore offer himself for re-election to the Board at the forthcoming annual general meeting.
Directors remuneration, service contracts and share interests
immediate families at 28 January 2006 are given in the Directors remuneration report on pages 50 to 63.
Allotment of equity securities
Social, ethical and environmental matters
Substantial shareholdings and control of the Company
Purchase of own shares
The Company has entered into contractual arrangements with each of its directors to provide indemnities to the extent permitted under English law.
New York Stock Exchange (NYSE)
A reconciliation between Signets corporate governance practices and those required by the NYSE are detailed on the corporate website.
Annual general meeting
By order of
The Board monitors all developments in corporate governance, including the Combined Code and changes due to the Sarbanes-Oxley Act of 2002 in the US. The Board reviews its performance and procedures in the light of changing expectations regarding best practice and makes amendments, where it believes appropriate, to take account of them.
The formal schedule of matters reserved for the Board is reviewed annually and the division of responsibilities between the Chairman and the Group Chief Executive was set out in writing and agreed by the Board. In summary, the Chairman is responsible for:
The Chairman is also a member of the Nomination Committee.
In summary, the Group Chief Executive is responsible for:
The incumbent Group Chief Executive was also Chief Executive of the US division until January 2006.
The Board met eight times in 2005/06, including three extended sessions of more than one day. All directors attended all meetings of the Board.
The Board currently consists of 11 directors: the Chairman, four executive directors (the Group Chief Executive, the Group Finance Director and the Chief Executives of the UK and the US divisions) and six independent non-executive directors, one of whom is nominated as the senior independent director. Incumbents are identified on page 36. Directors are subject to election at the first annual general meeting after appointment and then to re-election by shareholders at no more than three yearly intervals. Whilst the Board is of the view that fixed terms or age limits are not as important as the particular contributions being made by the individual non-executive directors in deciding their terms of office, the Board has agreed to apply fixed three year terms, but on a staggered basis, to existing and future non-executive directors. Notwithstanding this, the performance of each director will continue to be reviewed annually. Any non-executive director who has served on the Board for nine years since first being elected as a non-executive director must stand for annual re-election; also any director over the age of 70 must stand annually for re-election.
The mix of skills and business experience of the directors is considered to be appropriate for the proper and efficient functioning of the Board. The terms of reference of the Nomination Committee include the regular review of the composition and balance of the Board. No one individual has unfettered powers of decision and no individual or grouping is in a position to unduly influence the Boards decision making. At least once a year the non-executive directors meet without the executive directors being present. They also meet occasionally without the Chairman being present.
On appointment new directors take part in an induction programme and are given an opportunity to familiarise themselves with the Groups business, procedures and investor perceptions. In addition to meeting with management this process includes briefings from the
Groups external auditors, lawyers, financial advisers and stockbrokers. Directors are kept informed of the latest developments and best practice in corporate governance and attend relevant courses or receive appropriate training to equip them to carry out their duties. The non-executive directors are given regular opportunities to see the operations of the business and to meet management and staff.
All directors receive written reports in a timely manner prior to each meeting which enables them to make informed decisions on the issues under consideration.
The performance of the Board, its Committees and individual members is rigorously monitored to ensure that each director continues to contribute effectively and demonstrate commitment to the role. The Board has agreed a formal written procedure for the evaluation process which is conducted by the Chairman, in conjunction with the senior independent director and the Group Company Secretary. It consists of a questionnaire, completed by the directors, followed by a structured discussion session to explore the responses and any other matters raised during the process which is designed to help in assessing the future development needs of the Board and the directors. The performance evaluation of the Chairman is led by the senior independent director and takes into account the views of both the non-executive and executive directors.
The Group Company Secretary is responsible, through the Chairman, for advising the Board on all governance matters and ensuring that Board procedures are followed. All directors have access to his advice and service. There is also a procedure for directors to take independent advice in the course of their duties, if considered appropriate, at the Groups expense.
The Audit Committee has written terms of reference which are available on request from the Group Company Secretary and on the Groups website. The terms of reference are reviewed annually.
The Audit Committees responsibilities include the review of the appropriateness and effectiveness of the Groups accounting policies and financial procedures and oversight of the external auditors work, including the scope and result of the audit. The Audit Committee also reviews the effectiveness of the internal auditors, the Disclosure Control Committee and the Groups whistleblowing procedures. The review of the whistleblowing procedures includes receiving reports on all matters raised and on actions taken. The Audit Committee also reviews the effectiveness of the Groups internal control and risk management procedures and reports to the Board on these matters. This review is based on a report submitted via the Risk Management
Committee which includes annual written self-certification statements prepared by the operating divisions and head office departments which confirm the extent of their compliance with all material internal financial operating and disclosure controls. These statements are prepared by the divisional finance directors on behalf of each operating division and are reviewed by senior divisional executives, Group management and the Audit Committee. In addition to the Management self-certification process, the Audit Committee receives regular updates on divisional internal audit activity throughout the year and reviews reports submitted to the Board by the Groups external auditor. Quarterly Risk Management Committee reports are also provided to the Chairman of the Audit Committee and a member of that Committee is in attendance at each Risk Management Committee meeting. The Audit Committee reviews, discusses with management and approves for submission to the Board, all Group audited accounts, trading statements and selected internal financial reports.
The external auditors objectivity and independence is monitored by the Audit Committee having primary responsibility for making a recommendation on the appointment of the external auditor, the determination of their fees and making an annual assessment of their independence (including consideration of a written disclosure by the external auditor of all relationships that they have with the Group). The planned rotation of partners and staff of the external auditor, together with a cooling off period before anyone from the external auditor joins the Group, also assist in maintaining the independence of the external auditor. The Audit Committee has reviewed and approved a policy for the provision of audit and non-audit services by the auditor which is compliant with the requirements of the Sarbanes-Oxley Act in relation to non-audit work. The policy requires that the Audit Committee approves in advance all audit and non-audit work carried out by the external auditor (subject to a de minimis amount, this being then reported to the Audit Committee on a quarterly basis). The approval process requires disclosure of the objectives and scope of services to be performed in addition to the fee structure. The Audit Committee also reviews all approved services and fees at subsequent meetings. See page 76 for details of fees paid to the external auditor.
The Audit Committee has an established channel of direct communication with the external auditor who normally attends meetings except in relation to certain aspects of their own appointment, assessment of their independence and determination of their fees. The Chairman, the Group Chief Executive, the Group Finance Director and others attend the meeting by invitation. The Audit Committee meets at least once a year with both the external auditor and internal auditors without executive management being present. The Audit Committee also meets on two occasions during the year for the purpose of being briefed on business and technical developments and to meet with divisional management to assess the risk and internal audit functions of both of the divisions. The Business Risk Assurance Manager also reports to the Committee on the processes in relation to the mitigation and review of business risks.
Corporate governance statement (continued)
All members of the Audit Committee are independent, as defined by the Combined Code, the SEC and the NYSE and the only remuneration members of the Audit Committee receive, from the Group, is as directors. Russell Walls is Chairman and an audit committee financial expert as defined by the applicable SEC regulations. During the year the Audit Committee consisted of Dale Hilpert, Brook Land and Russell Walls with all having significant financial experience either as a result of positions held in other companies or from advising on such matters. The Group Company Secretary acts as secretary to the Audit Committee. The Audit Committee met eight times in 2005/06, including a meeting entirely dedicated to the consideration of corporate governance matters and there was full attendance at all meetings.
The Nomination Committee terms of reference are reviewed annually and are available on request from the Group Company Secretary and on the Groups website. The Nomination Committee has responsibility for reviewing the composition and balance of the Board, as well as Board and senior management succession. It also makes recommendations to the Board on all new Board appointments and nominations for re-election as directors. Once the Nomination Committee has agreed a job specification, the services of external recruitment agencies are used to identify suitable candidates for senior executive posts and for all Board appointments. The Nomination Committee carries out interviews with such individuals in accordance with a formalised re-election process particularly with regard to the performance evaluation procedures for individual directors. The review of any non-executive director, who is serving beyond six years from first being elected to the Board, is considered with particular care. No director is involved in any decision about his own re-appointment. The procedure for the election of directors is laid out on page 36.
When the role of the Chairman or any matter relating to succession to that role is discussed, the Chairman may be consulted, but the responsibility for preparing a job specification and making any recommendation to the Board rests solely with the independent non-executive directors of the Nomination Committee. The Nomination Committee also reviews a number of other senior appointments within the Group, such as that of the Group Company Secretary. The senior independent director chairs the Nomination Committee. During the year the Nomination Committee consisted of Robert Blanchard, Brook Land, and James McAdam. The Group Company Secretary acts as secretary to the Nomination Committee. The Nomination Committee met seven times in 2005/06 and there was full attendance at all meetings.
The role of the Remuneration Committee is discussed in the Directors Remuneration Report on page 50.
Further details regarding the chairmen and members of these Committees are set out on page 36.
meets regularly. The Group Chief Executive was, until January 2006, also Chief Executive of the Groups US division. The Group Finance Director and the Chief Executives of the UK and US divisions report to the Group Chief Executive.
The executive management is responsible to the Board for the performance of the Group and its compliance with the internal policies and procedures set by the Board. As part of this responsibility the executive management regularly reports to the Board on the performance of the Group, the competitive environment and its relations with stakeholders.
Business strategies; long range plans; budgets; acquisitions, disposals, material agreements and capital expenditures outside predetermined limits set by the Board; and internal policies and procedures are presented to the Board by executive management for consideration. Within this approved framework the executive management is responsible for the day to day running of the business including: merchandising; store operations; human resource management and planning; marketing; real estate; financial reporting; treasury management; risk management; tax management; social, ethical and environmental matters; and communications with investors.
Code of Conduct and Code of Ethics
A code of ethics meeting the requirements of the Sarbanes-Oxley Act, covering the Chairman, the Group Chief Executive, the Group Finance Director and senior officers, is also in place. These codes are available on request from the Group Company Secretary and on the Groups website.
Relations with shareholders
The Board recognises that the prime opportunity for private investors to question the Board is at a general meeting of shareholders. All of
the directors are expected to attend the annual general meeting and the chairmen of the Audit, Nomination and Remuneration Committees, in addition to the Chairman of the Board, are required to be available to answer questions relating to the function of their respective Committees.
The Group Chief Executive, the Group Finance Director and the Investor Relations Director carry out an extensive programme of meetings with institutional investors. The Chairman and the senior independent director are also available to meet with investors from time to time. Major shareholders are offered an opportunity to meet new non-executive directors following the appointment of the individual.
The Board is kept informed of investment market attitudes to the Group by receiving regular reports on investor relations, copies of brokers research, press cuttings and third party surveys of investor perceptions.
Compliance statement and Combined Code
In a limited number of areas the Group, as is permitted by the NYSE rules, has elected to defer to the UK corporate governance practices. This is permissible provided significant variations are explained. The explanation of those variations can be found on the Groups website.
The Board considers that it has complied throughout the year with the provisions of the Combined Code required to be observed by companies.
Internal Control: Guidance for Directors on the Combined Code (the Turnbull guidance) was published in September 1999. The Board of Directors considers that it has complied with the Turnbull guidance throughout the year and up to the date of approval of this Annual Report & Accounts. In addition, although compliance with the requirements of S404 of the Sarbanes-Oxley Act was deferred for a year, the Board continued during 2005/06 to review the implications of the Sarbanes-Oxley Act and took steps to ensure compliance. The Group Chief Executive and the Group Finance Director will, as they did in previous years, sign the applicable certifications required by the Sarbanes-Oxley Act when the Annual Report on Form 20-F is filed with the SEC.
The Board exercises ultimate responsibility for the Groups system of internal controls and for monitoring its effectiveness. The internal controls system is designed to safeguard shareholders investments and the Groups assets, both tangible and intangible, including the reputation of the Group with its various stakeholders. Procedures are in place to ensure the maintenance of proper accounting records, the reliability of the financial information used within the business or for publication and the determination of disclosure obligations and of materiality. These procedures also cover disclosure on a timely basis of information to the investment markets. However, such procedures are designed to manage rather than wholly eliminate the risk of failure to achieve business objectives and can provide only reasonable, not absolute, assurance against material misstatement or loss.
Signets disclosure control procedures are designed to help ensure that processes and procedures for information management are in place at all levels of the Group. The disclosure control procedures aim to ensure that any information disclosed by the Group is recorded, processed, and summarised appropriately. The procedures are also designed to ensure that information is accumulated and communicated to management to allow timely decisions to be made regarding required disclosure. The Groups Disclosure Control Committee consists of the Group Finance Director, the Group Company Secretary, the Investor Relations Director and the Group Financial Controller who consult with the Groups external advisers and auditor, as necessary. These procedures are designed to enable Signet to make timely and accurate public disclosures.
Key procedures designed to provide effective internal controls are:
Corporate governance statement (continued)
the increasing demands of corporate governance, to comply with the Sarbanes-Oxley Act, to monitor and address evolving and more complex accounting standards, including changes in the application and interpretation of US GAAP. The Group has recently strengthened its Group Finance function reflecting the increasing demands of IFRS accounting and US GAAP requirements. At the divisional level in both the UK and the US, the internal audit functions have been strengthened with particular focus on review of internal control processes.
The Group issues both sales and financial results on a quarterly basis. The external auditor reviews the quarterly and half year statements, and Christmas trading statement and presents reports to the Audit Committee for consideration.
Based on their review of the Groups disclosure controls and procedures, as of the end of the period covered by this Annual Report & Accounts, the Group Chief Executive and Group Finance Director have concluded that the Groups current disclosure controls and procedures are effective in achieving their objective of ensuring that information regarding the Group is recorded, processed, summarised and reported and that the information is accumulated and communicated to management to allow timely decisions regarding required disclosure.
It should be noted that while the Group Chief Executive and Group Finance Director conclude that its disclosure controls and procedures are effective to provide a reasonable level of assurance, they recognise such disclosure controls cannot eliminate all error and fraud. They are designed to provide only reasonable, not absolute, assurance that the objectives of this control system are met.
Sarbanes-Oxley Act of 2002
In 2005/06 management assessed the state of readiness for Sarbanes-Oxley compliance by performing a detailed review of the design of key controls throughout all process streams in scope. This involved the US, UK and Group functions and included an extensive review of IT general controls across the organisation. In addition to the business processes review, management has performed a comprehensive analysis of entity wide controls, utilising best practice templates, sourced from external advisors, to ensure adequate coverage of the Committee of Sponsoring Organisations (COSO) Risk and Control framework.
In addition to the detailed design work during 2005/06, Signets management has undertaken limited operational testing of those key controls that have passed the initial design assessment.
The Groups external auditors have been closely involved in the project and have executed walkthrough tests of the design of all key controls.
Governance of SEE matters
A SEE Committee, chaired by the Group Company Secretary, and consisting of senior managers from the UK and US, has responsibilities for the implementation of the various aspects of the SEE principles and policies through a programme approved by the Board. The Committee members are drawn from the merchandising and buying, human resource, corporate communication, finance and internal control functions. It meets at least four times a year. The Group Company Secretary reports to the Group Chief Executive regarding the Committees work.
Matters for which the SEE Committee has responsibility include:
The procedures for SEE risk management are embedded within the management structure of the Group. SEE risks are discussed on pages 30 to 35 Risk and other factors.
Signet has important relationships with a wide range of different stakeholders, including shareholders, customers, employees, suppliers and communities. The Group engages with these stakeholders in a number of ways, including consumer research, customer service facilities, employee attitude surveys, supplier relationship management systems, investor relations programmes and participation in civic and community activities. In addition, Jewelers of America (the US speciality jewellery retail trade association) engages with stakeholders in the industry, including non-governmental organisations, trade unions,
producers and manufacturers, governments and consumer groups, on major issues. The Group Chief Executive is on the Board of Jewelers of America and chairs its Ethical Initiatives Committee.
Principles and policies framework
The Group has a Supplier Code of Conduct (Supplier Code) which was reviewed and updated in 2004 and policies on business integrity, health and safety, the environment and labour standards. The Principles, Supplier Code and other policies are now incorporated, as appropriate, into the Groups staff induction process and operational procedures within the business. More detailed information is available on the Groups website (www.signetgroupplc.com).
Signets principles and policies are intended to provide a framework with which the divisional policies and procedures conform. They do not replace detailed divisional policies and procedures.
Developments in 2005/06
During the year the Group continued its work with the CRJP which is the industry group representing the entire length of the jewellery industry supply chain from the mine to retail and is dedicated to the objective of reinforcing consumer confidence in the diamond and gold supply chain. The Group believes it is in this forum that it can be most effective in considering environmental and supply chain issues and where, together with other industry constituents, it can more successfully promote responsible business practices in order to reinforce customer confidence and the integrity of the product.
Social, ethical & environmental matters (continued)
More information is available on the CRJP website (www.responsiblejewellery.com).
The Groups policy is that all customers should be treated with respect and warmth. Sales training programmes include modules on treating all customers with respect generally. The Group has customer service departments, complaint resolution processes, mystery shopper programmes and conducts market research to better understand customer requirements.
Signet considers its relationship with its employees to be excellent and values honest, open and constructive two-way communication throughout the organisation. This is achieved through store, area and regional management meetings in addition to staff opinion surveys, feedback reports and staff meetings. These procedures facilitate consultation during which the views of employees can be expressed and taken into account in decisions likely to affect their interests. Staff are kept informed of the Groups performance and objectives through management contact supplemented by staff publications in both the UK and US. The involvement of employees in the Groups
performance is encouraged through participation in performance-related incentive payment schemes and savings-related share option schemes which cover all Group employees subject to minimum employment requirements. The Group does not restrict or discriminate against employees who wish to be covered by collective bargaining agreements.
The Groups policy is not to tolerate any form of unlawful discrimination on any grounds or at any level. In respect of people with disabilities, full and fair consideration is given to employment, opportunities for training, career development and promotion according to their skills and capacity. The services of any existing employees who become disabled are, where possible, retained and appropriate training is arranged for them wherever possible.
The Group assigns responsibility for human resource matters, including health and safety, to divisional executive management committees. Both the UK and US operations have established systems which include the provision of training and development opportunities at all levels of the organisation. See pages 9 and 17 for further details.
Most of the raw and processed materials for the merchandise sold by Signet are traded on commodity exchanges or through multiple brokers and traders making the original source difficult to trace. Signet believes that SEE risks at the mining, trading and secondary processing phases of the supply chain are more effectively managed through co-operation within the industry. Signet therefore actively participates in Jewelers of America in considering what action Jewelers of America can take on behalf of its members to set SEE standards and influence matters throughout the supply chain. In 2002 Jewelers of America adopted a Statement of Principles relating to SEE matters and adopted a programme to communicate those principles to its members. Jewelers of America has developed a Supplier Code for the industry that was launched in the first quarter of 2004.
Signet is also working, where appropriate, with other trade bodies such as the CRJP and the Jewelers Vigilance Committee to be better able to respond to SEE issues at an industry level.
One of the specific issues facing the Group and the diamond sector is conflict diamonds, which are diamonds sold by rebel movements to fund military campaigns. The Group is a non-voting member of the World Diamond Council which, together with Jewelers of America,
has worked with the United Nations, government bodies, commercial interests and civil society to introduce a workable system for the certification of the source of uncut diamonds. This system, known as the Kimberley Process, and Kimberley Process Certification System (KPCS) was formally adopted in November 2002 and came into operation during 2003. Details regarding the Kimberley Process are available at www.kimberleyprocess.com.
Following the adoption of the KPCS, Signet wrote to all of its trade diamond and diamond jewellery suppliers. The text, based on the Jewelers of America guidance, requires them to supply the Group with merchandise that complies with the KPCS. Signet has amended its systems, procedures and documentation to take account of the KPCS so that only diamonds that are warranted to comply with the KPCS on invoices, annual agreements, or both are accepted from trade suppliers. As the Group moves to develop further its rough diamond sourcing and manufacturing capabilities, it has enhanced its KPCS processes in accordance with the requirements relating to rough diamond sourcing. The Group also trained its buying staff with regard to the KPCS requirements and briefed its sales associates on its operation. An internal audit of these procedures is carried out every year, and again this year the audit results confirmed the Groups compliance even though Signet is not directly governed for polished diamonds by the KPCS. During 2005/06 the US division also reviewed its systems for compliance with the recently enacted US Patriot Act, and updated its procedures where necessary.
In 2005 over 40 countries (including the European Union as a single entity) were Participants in the KPCS and accounted for over 99% of world diamond production. In 2005 Indonesia and Lebanon became Participants, with a further 11 countries wishing to become Participants. Currently Liberia and the Ivory Coast are temporarily suspended from participation.
While the overwhelming proportion of trade in rough diamonds was between Participants in the KPCS, it is difficult to assess the precise level of participation. However anecdotal evidence suggests that unscrupulous diamond dealers are finding it increasingly difficult to sell non-certified stones.
Since the formal adoption of the KPCS in November 2002, further steps to assist in the implementation have been taken. In 2005 these included:
In 2006 the three-year review of the KPCS will take place with the results and recommendations to be presented for consideration during autumn 2006.
While Signet is the worlds largest speciality jeweller, its share of the worldwide jewellery and watch market amounts only to about 2% of the total. Therefore it is the Groups belief that it can be most effective in influencing improvements to the Supply Chain by working with other industry representatives who together can, by concentration into a single industry voice, be representative of many aspects of the Supply Chain, and use their combined influence in working to improve it as a whole.
During the year the Group continued to work actively with other companies representative of the industry. In 2004 Signet was one of the signatories to a Statement of Intent that formed the basis of an agreement for further co-operation to promote increased consumer confidence and integrity in the product by promoting responsible business practices throughout the industry. As a result, during 2005, the CRJP was formed as a not-for-profit organisation whose members are participants in all aspects of the Diamond and Gold Jewellery industry. The CRJP for the first time seeks to bring together all participants of all aspects of the Diamond and Gold supply chain from mining to retail to promote responsible business practices. The CRJP aims to maintain consumer confidence in Diamond and Gold Jewellery products and the trust of all interested stakeholders in their industry. The CRJP believes that a co-ordinated worldwide industry approach to improving its business practices will provide increased clarity to the Diamond and Gold Jewellery industry and be most effective in implementing the industry standards necessary to maintain consumer confidence and the integrity of the product.
The CRJP mission statement is to promote responsible ethical, social and environmental practices throughout the diamond and gold jewellery supply chain, from mine to retail. It will endeavour to implement its mission statement and, in turn, will seek to reinforce confidence in the diamond and gold jewellery supply chain by:
Social, ethical & environmental matters (continued)
During 2003/04 Signet developed and tested data collection systems for its energy usage, greenhouse gas emissions and water usage in both the US and the UK. Signet strengthened its environmental management systems during 2004/05 by further developing its data collection process of key performance indicators for the purpose of validating the previous years results and then benchmarked the results against published data from UK competitors. The benchmarking process showed that when compared with its peers, the Group has a broadly similar impact in terms of energy usage, emission of greenhouse gases and water consumption. In 2005/06 the Board continued to collect baseline data for energy usage and greenhouse gas emissions, and to validate existing data for water usage. It also undertook an energy audit in representative stores in the US and reviewed the energy efficiency opportunities of the new model store designs in the UK.
During 2006/07 the Group will continue to collect and assess baseline data for energy use, greenhouse gas emissions and water usage.
Further, the Group continues to work within the CRJP, the Jewelers of America and with other jewellery retailers in exploring ways in which the jewellery industry can use its influence to improve environmental performance related to mining.
During 2005/06 community partnership initiatives were further increased, aimed at strengthening employment opportunities for disadvantaged citizens, and community affairs activities are continuing with the Group being committed to the support of charitable organisations. Signet believes it is best to give support to a small number of specific charities rather than fragment its charitable giving. In the US support is primarily given to The United Way, St. Jude Childrens Research Hospital and The Jewelers Charity Fund. In the UK the Group primarily supports the Princess Royal Trust for Carers. During the period the Group made provision for total charitable givings of £1,584,000 (2004/05: £1,467,000). This included direct charitable contributions of £369,000 (2004/05: £478,000), of which £103,000 (2004/05: £279,000) was in the UK and £266,000 (2004/05: £199,000) was in the US, and marketing initiatives on
both sides of the Atlantic which resulted in additional charitable contributions of £1,215,000 (2004/05: £989,000). In October 2005 a donation of $100,000 was made to the Hurricane Katrina American Red Cross Disaster Relief Fund. Support is also given to the management of Carer Centres operated by the Princess Royal Trust for Carers. Assistance is also given to organisations that help the disadvantaged into employment in the vicinity of the Groups US administrative and distribution centre in Northeast Ohio, such as United Disabilities Services, Mature Services and the Urban League.
No political donations were made in the US or the UK by the Group in the period (2004/05: £nil).
Information contained in sections and figures marked ß has been audited.
1. The role of the Remuneration Committee
The Companys remuneration policy seeks, by application of the six principles detailed below, to provide an overall remuneration package to a value within a specific range. The way that each package as a whole is structured, and the components that make it up, may differ. Due to the significant differences in remuneration practices in the two countries in which the Group operates, the level of remuneration is based upon and supported by surveys which are undertaken in both the UK and the US.
All members of the Remuneration Committee are independent non-executive directors who do not have any personal financial interest (other than as shareholders) in matters decided by the Committee. No executive director or senior manager is involved in determining his or her own remuneration.
The Remuneration Committee sets the remuneration of the Chairman of the Board. It also sets that of the Group Chief Executive after consultation with the Chairman. The remuneration of the other executive directors and certain senior managers is set by the Committee based on recommendations made by the Group Chief Executive after consultation with the Chairman of the Board. Performance targets are set by the Committee in consultation with the Chairman of the Board and, where appropriate, external professional consultants. Where executive directors are involved in assisting the Remuneration Committee, care is taken to recognise and avoid possible conflicts of interest.
The Remuneration Committee draws on external professional advice on a regular basis and makes use of relevant and reliable independent market surveys. The Committee has retained Towers Perrin as advisers to assist it and they are not retained in any other capacity within the Group. In addition Herbert Smith (on UK aspects) and Weil, Gotshal & Manges (on US aspects) advised the Remuneration Committee on legal matters. These firms also provide general legal advice to Signet.
The remuneration of the non-executive directors is not within the remit of the Remuneration Committee. Such remuneration is determined by the Chairman and the executive members of the Board following a recommendation by the Chairman after consideration of, among other factors, external comparisons, the time commitment and responsibilities.
The Remuneration Committee consists of Robert Blanchard (Chairman), Russell Walls and Robert Walker. The Committee met eight times during 2005/06 and there was full attendance at all meetings.
The terms of reference for the Remuneration Committee are available on request from the Group Company Secretary and are on the Groups website.
2. Remuneration policy
The components of total remuneration are:
(a) Base salary
(b) Annual bonus plan
(c) Share option plans
It is the policy of the Remuneration Committee that all employees, including directors, who satisfy certain qualifying conditions, should have the opportunity to participate in the equity of the Company through a savings-related share option plan, and annual invitations are normally made. Under the relevant legislation the exercise of these share options is not subject to performance criteria.
(d) Long term incentive plan (LTIP)
Committee at the time the awards are made and such awards do not normally vest within three years from the date the award is granted.
A new LTIP replacing the previous LTIP which expired in June 2005, was approved by shareholders at an extraordinary general meeting on 14 December 2005.
(e) Performance criteria
The criteria used to measure performance are based on the results of the Group (subject to minor adjustments that are approved by the Remuneration Committee) so as to provide clarity and objectivity.
For 2005/06 onwards achievement of performance criteria have been calculated against previously reported measures restated for IFRS.
(f) Pensions for executive directors
At the present time there are two such directors, the Group Finance Director and the Chief Executive of the UK division. The Group Scheme is a funded, Inland Revenue approved, final salary, occupational pension scheme and has a separate category of membership for directors. Pensionable salary is the members base salary, excluding all bonuses. All Group Scheme benefits are subject to Inland Revenue limits. Where such limitation was due to the Inland Revenue earnings cap the Signet Group Funded Unapproved Retirement Benefit Scheme (the FURBS) has been used to supplement pension benefits. This is a defined contribution arrangement.
The main features of the Group Scheme for a director are:
The Group Chief Executive and the Chief Executive of the US division receive, proportionately to base salary, equivalent pension contributions to the Group Finance Director and the Chief Executive of the UK division. These pension benefits are provided through an
Directors remuneration report (continued)
unfunded, unqualified deferred compensation plan and the Sterling Jewelers Inc. 401(k) Retirement Savings Plan. This is a defined contribution arrangement.
In the context of changes to pension taxation in the UK in force from 6 April 2006 the Remuneration Committee has agreed that pension provision through the Group Scheme should continue broadly as before to ensure that pension benefit commitments made continue to be met. Members should not benefit from a windfall gain through the removal of the current limits, e.g. removal of the earnings cap and therefore a scheme specific earnings cap has been introduced equivalent to the previous earnings cap, increased by RPI annually. As the tax treatment of FURBS and the other advantages of such a funding scheme have been eroded over time and these latest changes have now removed any residual advantages, the Remuneration Committee has agreed that the Group should cease paying contributions to the FURBS; and in substitution pay a salary supplement of the same amount as the Group contribution to the FURBS. The Group will not compensate members for any increase in taxation that they may face as a result of the changes and members will not be protected by the Group from the consequences of the changes in taxation, but will be provided with a cash supplement in lieu of pension accrual once members reach the Lifetime Allowance limit set by the new legislation if they choose to exercise this option.
The Group Scheme has been reviewed to determine how the new range of flexibility in pension arrangements can be introduced where that can be achieved without additional cost or administrative burden. For example, the new flexibility on tax-free cash has been incorporated into the Group Scheme.
Apart from remuneration itself, there are certain other allied policy matters which are the concern of the Remuneration Committee. These are:
(i) Companies used for comparison
(ii) Service contracts
(iii) Early termination
contracts for new directors. Where no explicit compensation terms are included, departing directors or senior managers are expected to mitigate their loss within the framework of individual circumstances.
(iv) Executive directors outside
3. Directors remuneration
(a) Salary and benefits
(b) Annual bonus plan
2004/05 pre-tax profit + inflation: 0% of maximum bonus;
Increase in pre-tax profit is calculated on a constant exchange rate basis and is earned on a pro-rata basis for performance between the targets.
In 2005/06 no annual bonus was earned by the Chief Executive of the UK division (potential maximum 75% of base salary). An annual bonus of 64.4% of base salary (potential maximum 70% of base salary) was earned by the Chief Executive of the US division. The
The figures above represent emoluments earned as directors during the relevant financial year. Such emoluments are paid in the same financial year with the exception of bonus payments, which are paid in the year following that in which they are earned.
bonuses were calculated using the same formula as above, but based on operating profit of the respective divisions.
Bonus targets for 2006/07 are unchanged.
(c) Share option and long term incentive
(i) Executive share option plans
The 2003 Plans replaced the Signet Group plc 1993 Executive Share Option Scheme (the 1993 Scheme), under which no further options may be granted.
The 2003 Plans allow the Remuneration Committee discretion to set performance conditions. The performance conditions under the 2003 Plans were set out in the circular to shareholders seeking approval for the 2003 Plans and no significant change in those conditions will be made without prior consultation with major shareholders.
As indicated in the 2005 Directors Remuneration Report, the Remuneration Committee in recognising the continuing development of shareholder sentiments regarding remuneration practices, committed to conduct a full review of all aspects of directors remuneration when a new LTIP was developed for shareholder approval. After completing this review, which included extensive consultation with major shareholders, the Remuneration Committee concluded that the remuneration principles that were adopted in 2003 and have been published in all subsequent Directors Remuneration Reports, had served all stakeholders well and should remain unchanged. Based on surveys of comparator companies, the Committee also concluded that the present mix of total remuneration remains appropriate. However, the Committee decided that in addition to the introduction of a new LTIP it was also appropriate to make certain changes in the existing share option plan, including the balance of share option grant level, and LTIP awards.
Directors remuneration report (continued)
The changes to share option plan arrangements which have been implemented include:
These changes to the existing share option plan arrangements were made after extensive consultation with major shareholders and were explained to shareholders in a circular dated 14 November 2005 prior to their approval of the adoption of the new LTIP.
The Remuneration Committee made the 2006/07 option grants on the same basis as the arrangements described above. Options granted under the executive share option plans that have passed the necessary performance conditions are normally only exercisable between three and ten years from the date of grant, after which the options lapse.
The conditions are set out below:
In addition, grants are subject to exercise conditions as follows:
For all grants beginning with those awarded in 2006/07 performance will only be measured over the three year period from the start of the financial year in which the grant is made, all retesting in the measurement of performance target achievement having been eliminated.
Performance will be measured over three years from the start of the financial year in which the award is made and may then be measured from the last month of the year in which the award is made to the end of the fourth or fifth years, if not previously satisfied.
For grants beginning with those awarded in 2006/07 the post-grant performance condition will be measured over three years from the start of the financial year in which the award is made.
In April 2005 options of five times salary were awarded to the Group Chief Executive. The Group Finance Director was awarded options amounting to one and a half times salary. Awards to the Group Chief Executive are based on principles 2(iv), 2(v), 2(vi) (set out on pages 50 and 51), a comparative remuneration survey and a review of the performance of both the Group and the executive over the prior three years.
Before any share option grant is made to the Group Chief Executive, the Remuneration Committee has to satisfy itself that the demanding pre-grant conditions, mentioned above, have been achieved. This requires affirmation: (1) that the Groups business performance has been superior to that of its industry sector; and (2) that the Group Chief Executives personal performance continues to be of the highest standard.
On a divisional basis this business performance review includes a three year comparison of compound like for like as well as total sales growth compared in the US to that of the US quoted jewellery sector and in the UK to the UK quoted general retail sector. Further, there is a similar comparison of operating margin compared to the Groups principal competitors in the US and the UK.
On a Group basis the review includes a comparison of compound three year earnings per share growth, at constant exchange rates, like for like as well as total sales of the UK general retail sector of FTSE 100 companies. Further there is a similar comparison of total shareholder return against that of the FTSE 350 companies (excluding investment trusts) and the FTSE general retailers index.
The Remuneration Committee concluded that the review had confirmed in 2006/07 that the pre-grant conditions had been achieved reflecting performance at the top end of the scale.
On the basis of sustained out-performance and with management achievements acknowledged by industry followers, the Committee concluded that the Group Chief Executive and Group Finance Director continued to merit total remuneration towards the upper end of the range determined by the remuneration principles. Based on the surveys conducted, this indicated a base salary increase as detailed
on page 52 and a share option grant equivalent to four times base salary, for the Group Chief Executive. Similar surveys undertaken in the UK indicated a base salary increase as detailed on page 52 for the Group Finance Director and options amounting to 120% of base salary. Similarly the Chief Executives of the UK and the US divisions were awarded options amounting to 80% and 160% of base salary respectively.
Certain provisions of all the share option plans may be amended by the Board, but certain basic provisions (and in particular most of the limitations on individual participation, the number of shares and the percentage of share capital that can be issued thereunder) cannot be altered to the advantage of the participants except with the approval of shareholders or in accordance with the adjustment provisions in the 2003 Plans.
In 2005 the Remuneration Committee approved an amendment to the 2003 Plans (other than the Inland Revenue Approved Plan) to provide that, on exercise, options may be satisfied by the Company providing to the optionholder shares with a value equal only to the gain on exercise, without the requirement of a payment of the exercise price. This does not provide any financial benefit to either the Company or optionholders, but results in less dilution for shareholders.
(ii) All-employee share plans
The options granted under the Sharesave Scheme and the Irish Sharesave Scheme are normally exercisable between 36 and 42 months from the date of the relevant savings contract. Options were
granted under these schemes at a price approximately 20% below the middle market price of the shares on the London Stock Exchange on the dealing day prior to the date that employees were invited to participate in them.
The options granted under the Employee Stock Savings Plan, which is for employees in the US, are normally exercisable between 24 and 27 months from the date of grant, such date being the first business day of any period during which savings may be accumulated under a savings contract. The options under this plan were granted at a price approximately 15% below the middle market price of the shares on the London Stock Exchange on the date of grant. The period of exercise and the discount allowed vary from the UK due to different legal regulations in the US.
(iii) Long term incentive plan
A replacement Long Term Incentive Plan, the Signet Group plc 2005 Long Term Incentive Plan (LTIP 2005), was given shareholder approval in December 2005 with approximately 96% of the 82% of the entire issued share capital which was voted at the meeting being voted in favour of adoption of the LTIP 2005.
The principal features of the LTIP 2005, include:
Directors remuneration report (continued)
All other features of the LTIP 2005 are identical to those of the expired LTIP plan, and are summarised below.
The LTIP 2005 provides for the Remuneration Committee to make awards subject to performance targets which will normally be tested at the end of a fixed period of at least three years. To the extent the performance targets are satisfied it is intended that the participant will receive a combination of the grant of an option over shares in the Company and cash. While the Remuneration Committee has authority to determine the precise mix, in line with past practice the intention is to continue with a mix of 50% cash and 50% share options. No changes in this mix will be made without prior consultation with major shareholders. The share options will normally be exercisable within ten years of the original award date.
The performance conditions, set by the Remuneration Committee for 2006/07 and for the foreseeable future, are based, as in the previous LTIP, on:
The performance conditions may relate to the Group or a combination of the Group and each operating division, or each operating division separately, as considered appropriate by the Remuneration Committee according to the role of the particular participant.
In determining the precise conditions that will apply to an award, the Remuneration Committee will specify, at the commencement of each three-year performance period, the compound annual growth in profit that it will be necessary to achieve over the performance period and the required ROCE for the performance period.
Having considered alternative performance measures, the Remuneration Committee believes that, in Signets case, measures based on growth in profit and ROCE remain the best indicators of the Companys financial performance and will continue to use these measures for the foreseeable future. However, the Remuneration Committee has the flexibility to change the measures if it believes it to be appropriate but it will not make any material changes without first consulting major shareholders.
The LTIP 2005 contains no element to allow retesting of the performance targets and allows only a pro-rated release of an award, whether in the form of the grant of an option over shares or cash, where a participant leaves early for good reasons or there is a change of control. The performance targets must in any event be satisfied before any release is made in all cases.
Awards were made to executive directors and other senior executives in 2003/04, 2004/05 and 2005/06 under the LTIP. All these awards are subject to fulfilment of minimum performance conditions set at the time of the award as to:
In each case over a fixed period of three successive financial years starting with the one in which the award was made. Nothing is payable under the award unless both minimum performance conditions are achieved. The minimum Profit Growth is set at a threshold level after taking account of inflation. The conditions were selected to ensure that awards would only vest provided that growth in profits exceeded the rate of inflation and that the businesss targeted ROCE is achieved.
If the performance conditions are achieved the award will vest and its value will depend on the extent to which the minimum performance conditions are exceeded:
The table on page 55 shows the percentages and the inflection points which have been specified for the existing awards and indicates the relevant profits and ROCE to be used for measurement.
When the performance conditions have been satisfied 50% of the amount which vests will be payable in cash and the other 50% will consist of the grant of an option to acquire shares in the Company, the number of shares being determined by using the middle market price on the day preceding the grant of the award. For the 2003/04, 2004/05 and 2005/06 awards, that share price was 83.50p, 112.50p and 112.60p respectively. Due to the deferred equity nature of the share linked element of the award, the exercise price of the total option grant is a nominal amount of £1 or $1, as appropriate. The participants can normally exercise their option at any time after vesting, until the tenth anniversary of the grant of the award.
In 2006/07 awards under the LTIP 2005 have been made to the Group Chief Executive, the Group Finance Director and the Chief Executives of the UK and US divisions on the following basis:
The share price for the awards was fixed following the announcement of the preliminary results. The performance criteria of the awards to the Chief Executives of the UK and US divisions are related to each of the respective divisions.
The Remuneration Committee has the flexibility to alter the performance conditions in future years but will not make any material changes without discussing them with major shareholders.
(d) Employee trusts
Both the LTIP and the LTIP 2005 (the LTIPs) operate in conjunction with the ESOT and the 2004 ESOT which may be funded by the Group to acquire shares in the Company for the purposes of meeting the Companys obligation to provide shares on the exercise of options.
The trustees of the QUEST, ESOT and 2004 ESOT have waived their rights to any dividends declared on shares held in the trusts.
(e) Share scheme limits
In any ten year period not more than 10% of the issued share capital of the Company from time to time may in aggregate be issued or issuable pursuant to options granted under the All-employee Schemes or any other employees share schemes adopted by the Company.
Directors remuneration report (continued)
The number of shares which may be issued or issuable pursuant to the LTIPs (including to the ESOT and the 2004 ESOT), when aggregated with any shares issued or issuable by the Company in the preceding ten years under any employees share scheme, participation in which is at the discretion of the Board, is limited to 5% of the Companys issued share capital from time to time. The number of shares which may be issued or issuable pursuant to the LTIPs (including to the ESOT and the 2004 ESOT), when aggregated with all shares issued or issuable by the Company in the preceding ten years under any other employees share scheme, is limited to 10% of the Companys issued share capital from time to time.
No more than 5% of the issued share capital of the Company may be held by the trustee of the ESOT or the 2004 ESOT without prior approval of shareholders.
(f) Shareholding guidelines
(g) Service contracts
£100 million aggregate coverage limit and £50 million Side A aggregate dedicated coverage limits, then the Group Chief Executive may be permitted upon 90 days written notice to terminate his employment. In the event of such termination the Company will pay the Group Chief Executive his base salary and short term bonus prorated to the date of termination. Entitlement to any share options or LTIP awards is governed by the rules of the relevant scheme. The amount of termination payments due to the Group Finance Director in the event of early termination by the Group in the event of certain changes of control, would equal, in summary, the aggregate of (i) his annual salary at the time of termination, (ii) the market value of the contractual benefits in kind (including any pension contribution) to which he would have become entitled during the following 12 months, and (iii) all payments to which he would have become entitled under the annual bonus plan during the same 12 month period. The Chief Executive of the UK division has a rolling service contract (dated 1 March 2003) with a UK subsidiary which can be terminated on one years notice in writing by either party or terminates on his 65th birthday. In the case of early termination, the contract provides for salary to be paid in lieu of notice, or where notice has been given, for any balance of the notice period. The Chief Executive of the US division has a rolling service contract (dated 26 April 2002 and amended and restated in August 2004 and January 2006) with a US subsidiary. The Company may terminate the contract at any time by notice in writing. In the case of termination the Company is obligated to continue to pay salary for 12 months from the date of termination. Entitlement to any share options or LTIP awards is governed by the rules of the relevant scheme.
These contracts all contain confidentiality and non-competition clauses.
The Chairman has a letter of appointment (dated 20 June 2001), with no fixed term. The appointment can be terminated in writing by either party on reasonable notice and does not provide for compensation for loss of office. Upon his retirement from the Company, the Chairman will remain a member of the Signet Health Care Scheme and will fully reimburse the Company the premium paid on his behalf.
Each non-executive director has a letter of appointment from the Company which does not have a termination clause and does not provide for compensation for loss of office. The duration of any such appointment is currently subject to the terms of the Articles of Association and normally runs until such director is next required to stand for election or re-election. The Board, however, has agreed in addition, to introduce on a staggered basis a fixed three year period for each non-executive director.
The Group Chief Executive and the Chief Executive of the US division are members of the Sterling Jewelers Inc. 401(k) Retirement Savings Plan and an unfunded, unqualified deferred compensation plan. Contributions made by Signets US division in respect of the Group Chief Executive during the period totalled £1,074ß (2004/05: £1,653ß) and £148,472ß (2004/05: £134,024ß) respectively and in respect of the new Chief Executive of the US division from his appointment on 12 January 2006 totalled £50ß and £1,544ß respectively.
Pension benefits in respect of the UK based directors are set out below.
Except as set out in tables (a), (b) and (c) on pages 60 to 62, or in the notes under these tables, no director nor any member of any directors immediate family had an interest in, or was granted or exercised any right to subscribe for, shares or debentures of the Company or any subsidiary, nor did any such right to subscribe lapse during the financial year, nor was there any change between the end of the financial year and 5 April 2006 in the interests of any director of the Company disclosed to the Company under the provisions of section 324 (duty of directors to disclose shareholdings
in own company) as extended by section 328 (extension of section 324 to spouses and children) of the Companies Act 1985 nor in any right to subscribe for shares in, or debentures of, the Company.
At 29 January 2005, 28 January 2006 and 5 April 2006, according to the register kept by the Company under section 325 of the Companies Act 1985, the directors held interests in the shares of the Company as indicated in tables (a), (b) and (c) on pages 60 to 62. As explained on page 55 the value of the awards that vest under the LTIP depends upon the extent to which the performance conditions are met. The awards are also capped by reference to a percentage of the recipients base salary.