IDEX Online Research: Signet Jewelers’ Profits Nearly Double in Second Quarter
September 13, 11(IDEX Online) – Signet Group’s U.S.-based Sterling Jewelers, which operates Kay, Jared, and regional branded stores, did a lot of things right in the quarter ended July 2011, including the following:
· Posted double-digit same-store sales gains: +13.5 percent in Kay and +12.6 percent in Jared stores.
· Generated a 10.7 percent increase in total revenues in the U.S., despite a 2.2 percent decrease in the number of stores in operating this year versus last year.
· Posted both a double-digit operating and pretax margin.
· Generated an 82 percent increase in pretax income versus the same quarter last year.
· Increased its gross margin by 400 basis points despite a sharp rise in jewelry commodity prices such as diamonds and precious metals.
· Reduced its operating expense ratio by 10 basis points.
· Paid off all of its long-term debt, so it has no long-term debt on its balance sheet. Last year, the company had $229 million of long-term debt.
· Amassed a cash balance of $440 million.
· Reinstated a cash dividend of $0.40 per year, which will cost the company about $34 million, barely a dent in its cash balance.
· Reported that sales trends through the first three weeks of August remained stable and in line with second quarter sales levels, despite volatility in the financial markets driven by uncertainty around the globe.
The table below summarizes key financial information from the company’s second quarter. Sales are in millions of U.S. dollars.
How Did Sterling / Signet Navigate The Second Quarter So Successfully?
Here are some of the factors that drove the company’s sales gains in the quarter:
· The average ticket rose at all three of Sterling’s divisions during the second quarter:
o Kay - $391, up 12.0 percent
o Jared - $834, up 8.6 percent
o Regional brands $401, up 13.3 percent
· Same-store sales rose at all three of Sterling’s divisions during the second quarter:
o Kay +13.5 percent, with total sales up 13.5 percent to $367.5 million
o Jared +12.6 percent, with total sales up 12.7 percent to $213.8 million
o Regional brands +4.0 percent, with total sales down 4.1 percent to $61.7 million (mostly resulting from 9 percent fewer regional brand stores this year)
· Sterling’s sales of proprietary merchandise rose in the quarter. Because retail price points for this jewelry are generally higher than other goods, proprietary jewelry generates an inherently higher average ticket. Sterling’s sales people have been trained to trade-up a shopper to branded goods, since American consumers seem to have an affinity for brands and designer goods.
While the company did not disclose the sales mix for proprietary goods in the quarter, management did say that it was up from the fiscal year-end (January 2011) level of 22 percent. We’d estimate that the sales mix of proprietary jewelry is approaching one-quarter of total sales at Sterling.
· Online sales were up 50 percent over the same quarter last year. While the company did not disclose the level of its online sales, they are still miniscule when compared to its store sales. In an effort to boost online sales, management said that it planned to upgrade both the Kay and Jared websites in the third quarter.
· In-house credit participation rose to 57.7 percent from 56.3 percent a year ago. Credit availability helps to drive Sterling’s sales. Management says it did not change its credit scoring model; further, approval rates are stable. Clearly, its employees are pushing credit sales more aggressively.
Further, the company said that credit is an important factor in its bridal sales efforts. As bridal sales increase as a percentage of its sales mix, Sterling’s average ticket will also rise.
· Sterling implemented selective price increases. While management would not disclose exactly how it implemented price increases, it did give some guidance:
o Price increases are implemented at certain times of the year, mostly prior to the fourth quarter. It appears that a majority of the price increases were implemented in the April / May time period.
o The company maintains a full range of retail price points to meet its customers’ needs. It is most concerned about consumer perception of the value which it offers. Thus, it does not move away from “hot” price points, but rather creates merchandise to meet a consumer’s desire for goods at a certain price point while still maintaining its margins.
o Management said the company’s price increases more than offset commodity price increases.
o Signet / Sterling hedges much of its jewelry commodity purchases, but did not disclose exactly how it does this. Management said that its jewelry costs are more or less protected – and predictable – for six months or so.
o The company has a program for “getting closer” to its suppliers. It did not elaborate on this, except to say that it should lead to stable – if not lower – merchandise costs.
· In response to a specific question about Pandora sales, management said that “we continue to see Pandora be a very strong business for us at Jared, and we continue to see strong double-digit comps.” This reflects the trends that other American jewelers report, and it casts questions about Pandora’s management claims of slowing sales.
Operating Profits Rise Dramatically
In addition to strong sales, Sterling / Signet posted a much higher gross margin – 37.0 percent vs. 33.0 percent – and a slightly lower operating expense ratio – 28.2 percent vs. 28.3 percent – all of which added up to a much higher operating margin –12.8 percent vs. 8.4 percent – and a substantially higher pretax margin – 12.5 percent this year versus 7.6 percent last year.
Signet management noted that its gross merchandise margin in the Sterling Jewelers division (Kay, Jared and regional brands) rose 110 basis points in the second quarter due to reduced discounting and selective price increases, which more than offset higher commodity costs.
Here are some of the factors which helped boost profits significantly.
· An increased mix of proprietary jewelry – which generally carries an inherently higher margin – helped to boost the company’s gross margin.
· A higher average ticket helped leverage costs, both at the gross margin level and at the operating cost / margin level.
· Net bad debt to total U.S. sales declined to 4.4 percent versus 5.2 percent last year. Further, its collection rate continues to improve. This is the seventh consecutive quarter that Sterling’s bad debt ratio has improved.
· The company was able to leverage its occupancy costs due to higher sales.
· As noted earlier, the company was able to implement retail price increases that more than covered its commodity cost increases. Further, its hedging programs help abrogate volatile commodity cost increases.
· The company continues to focus on its supply chain as a way to reduce costs associated with its merchandise offering.
· Management also said that its gross margin gains in the second quarter were also the result of mix changes as well as the timing of some recent price increases. A large number of its price increases are implemented in the April / May timeframe. The company uses an “average cost” method to determine its merchandise margins.
· While strong sales gains helped leverage the company’s operating cost ratio, there were a number of factors which added to the company’s expense structure in the quarter, including the following:
o Higher net advertising costs (an “investment”) of $4.0 million.
o Currency translation of $3.5 million.
o Greater retirement contribution of $1.5 million.
o Store staffing costs of $7.6 million.
o Increased investment in technology and credit infrastructure of $4.2 million.
What Happens Next?
Looking ahead, what’s in store for Sterling Jewelers, the U.S. based division of Signet Jewelers? Management noted two key forward-looking trends:
· Despite volatile financial margins, an uncertain global and U.S. economy, and a number of other negative factors what might deflect consumer spending for jewelry, management said that its sales trends for the first three weeks of August were stable and in line with second quarter sales trends. IDEX Online Research confirms that most jewelers in its sample have also reported similar trends.
The company has slightly reduced the number of stores that it plans to close this year, and it continues to look for new store opening opportunities. Between Kay and Jared, we look for a net of seven new stores this year, so that there will be 1,097 of these units open at the end of the fiscal year in January 2012. The number of regionally branded stores is slated to decline by 16 units this year, with no openings; at year-end, there should be 208 of these units remaining in operation. The company continues to focus its growth efforts on the Kay – both mall and off-mall units – and Jared brands.
Here’s what management said about new store openings: “We have an appetite to open a lot more stores than we are able to find great real estate for right now.”