News about third quarter financial results from Signet Group was by far the best of any of the mass market jewelers, and it reflects a company that met the quarter’s challenges and still produced a profit, though it was less than half of last year’s level. 

Highlights of financial and operating benchmarks from the three months ended October 2005 include the following:

U.S. Division – Sterling Jewelers

• Sales – Total sales +11.8 percent (constant dollars); same-store sales +6.6 percent.   These gains were far ahead of any other major mass- market jeweler. 
• Sales were strongest in August, with some modest weakening in September and October.  However, Signet management noted that sales were “solid” in all three months of the fiscal quarter.
• Sales were strong for both Sterling’s mall-based stores and for the Jared superstore division. 
• The average transaction was up about 10 percent in the third quarter; year-to-date, it was up about 12 percent.  The average ticket increased by about the same amount in both the mall stores and Jared.  More of Sterling’s customers have indicated their willingness to purchase higher-priced goods; as a result, Sterling’s merchandise mix now includes a greater mix of higher-priced goods.  About half of the average transaction value increase came from higher prices and about half from merchandising initiatives. 
• Sterling implemented selected price increases earlier this year; these are helping to drive total sales gains and a higher average transaction value.
• Strong categories include the Leo diamond, loose diamonds, and solitaire diamonds.  Fashion gold was also strong, boosted by marketing support from the World Gold Council.  In Jared, luxury watch demand was very strong. 
• The average transaction value at Sterling’s mall stores is about $310, while the average transaction at Jared is about $720. 
• Gross margin – Down 40-60 basis points, at least – Signet group does not disclose its gross margin by division.  However, management noted that three key factors affected its gross margin:
• Commodity cost increases, including gold, silver, platinum, and, to a lesser extent, diamonds.
• A greater mix of higher-ticket goods, which have an inherently lower gross margin.
• Supply chain improvements and price increases helped offset some of Sterling’s margin pressure from other factors.
• Operating Costs – A lower operating cost ratio helped boost the quarter’s operating profit to 4.3 percent of sales from 4.0 percent last year.  Operating profit rose by just over 20 percent in the U.S. division.  Notable factors which had some impact on operating costs were as follows:
• Sales leverage helped boost the operating cost ratio.
• Unusual costs related to potential uninsured losses at stores affected by Hurricanes Katrina and Rita had a negative impact.
• Bad debt, year-to-date, rose to 3.2 percent of sales from 2.9 percent last year.  In part, this movement reflects a one percent increase in the credit/cash sales mix.  Higher receivables income helped offset some of this increased bad debt. 
• Other comments about the quarter and year-to-date include the following:
• About 51 new stores and 72 refurbishments are virtually complete going into the holiday selling season.  Sterling plans to close 13 mall stores, slightly below normal even, after including three stores that will remain closed through the end of the year due to Hurricane Katrina. 
• By year-end, the company will have opened Kay stores in 11 off-mall locations and three metropolitan sites. 
• By year-end, 18 new Jared stores will have been opened.  At year-end, Sterling will have about 110 Jared stores open, equivalent in space to 450 mall stores.
• Sales at Jared stores are above plan, due to the introduction of television advertising as well as new merchandising initiatives such as the development of the luxury watch category. 
• The company says its off-mall and superstore concepts have proven themselves, in terms of financial measures.  With fewer new malls being built in the U.S., Sterling will focus on opening more stores in off-mall locations and pad sites. 
• Sterling management reiterated its commitment to selling jewelry over the internet.  Signet chairman Terry Burman said that “sooner rather than later” the company will begin to sell jewelry over the internet. 

U.K. Division – H. Samuel and Ernest Jones

• Sales – Total sales fell by 7.2 percent due to weak consumer spending in the U.K.  Same-store sales were down 8.1 percent, with H. Samuel same-store sales down by 9.3 percent and Ernest Jones down by 6.7 percent.   Ernest Jones is the company’s high-end division, while H. Samuel targets mass market consumers. 
• The diamond mix and the average transaction in both H. Samuel and Ernest Jones continued to increase; however, customer traffic was down.
• The number of transactions was down in both divisions. 
• The company’s goal is to increase its diamond sales mix.  The Leo and Forever diamond price ranges and merchandise selection have been expanded, and its selection of white metal jewelry has also been increased. 
• Signet’s U.K. stores are featuring a limited number of key items, which will be promoted especially heavily to increase customer traffic.
• The new sales commission system continues to be expanded, and is driving sales gains. 
• E-commerce in the H. Samuel division is “meeting expectations.”