Signet Jewelers Ltd (SIG) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's Signet Group's third-quarter results conference call.

For your information, this conference is being recorded.

At this time, would like to hand the call over to Mr. Terry Burman and Mr. Walker Boyd.

Please go ahead.

Thank you, operator, and welcome to the conference call on Signet's third-quarter results.

I'm Terry Burman, Group Chief Executive, speaking from Akron, Ohio.

Joining the call from London are Walker Boyd, Group Finance Director, and Tim Jackson, Investor Relations Director.

Walker will discuss the financials and then I will cover the U.S. and UK operations.

We will then open the call to questions.

Before we begin, Tim, will you please give the Safe Harbor statement?

Thank you, Terry.

This call includes certain statements which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based upon management's beliefs, as well as on assumptions made by and data currently available to management and appear in a number of places throughout this call.

They include statements regarding, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, and the industry in which the Company operates.

These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties which are more fully described in the Company's earnings release dated the 21st of November, 2006, and in the Risks and Other Factors section of the Company's 2005/06 annual report on Form 20-F filed with the U.S.

Securities and Exchange Commission on the 4th of May, 2006, and other filings made by the Company with the Commission.

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 realized.

The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

Additionally, certain financial information used during this call are considered to be non-GAAP financial measures.

For a reconciliation of these to those directly comparable GAAP financial measures, please refer to the Company's earnings release dated 21 November 2006, available on the financial information section of the Company's website at www.signetgroupplc.com.

Thank you.

Thanks, Tim; and Walker will now review the numbers.

Good afternoon.

Looking firstly at the quarter, Group like-for-like sales were up by 5.4%, and total sales increased by 9.5% in constant exchange rates.

The rise in reported sales of 5.7% has been adversely affected by the retranslation of the first-half U.S. dollar sales at the cumulative average exchange rate for the year-to-date.

Group operating profit was 6.7 million pounds, against 5.5 million pounds last year.

Net financing costs of 2.9 million pounds showed a 400,000-pound increase.

This reflects the transition from the securitized borrowing facility, which was just amortized, to the new private placement note facility, together with the incremental borrowing as a result of the share buyback program.

Group profit before tax of 3.8 million pounds was ahead of the 3 million pounds reported last year.

The third quarter is traditionally a period of low profitability, and this year the adverse impact of unfavorable cumulative foreign exchange rate movements on both the reported operating profit and profit before tax was particularly marked, at 1.2 million pounds.

Turning to the figures for the nine months.

Group like-for-like sales were up 5.3%, and total sales increased by 10.2% on a reported basis or by 9.8% at constant exchange rates.

The average rate for the year-to-date was $1.83 against $1.84 last year.

Group operating profit for the nine months was 68.7 million pounds, up 12.6% on a reported basis and 11.9% at constant exchange rates.

The operating margin was 6% against 5.9% in the comparable period last year.

Net financial costs were 6.6 million pounds, up 700,000 pounds, largely reflecting the previously-discussed increase in the third quarter.

Group profit before tax was up 12.7% at 62.1 million pounds against 55.1 million pounds in the prior year.

At constant exchange rates, this represents an increase of 11.9%.

The year-to-date tax rate of 35.6% reflects the anticipated level for the full year.

In fiscal 2006, the tax charge was 34.5%.

Basic EPS were up 9.5% to 2.3 pence against 2.1 pence for the comparable period last year.

Looking at the balance sheet.

Net debt at the end of the quarter was just over 243 million pounds compared with 217.9 million pounds a year ago.

The seasonal increase in net debt for the year was 157.7 million pounds compared with 121 million pounds in the prior year.

This increase reflects the impact of the share buyback program and the timing of merchandise deliveries and payments.

We expect Group capital expenditure for the year to be about 75 million pounds, slightly below last year's level of 76 million pounds.

Turning to our share buyback, we purchased 17.8 million shares in the quarter, at a cost of 20.5 million pounds, the average price being 108.8 pence.

As of the 20th of November, we had purchased in total 28.2 million shares at a cost of 31 million pounds, the average price being 109.9 pence.

Excluding the share buyback, we are on track to be broadly cash flow neutral for the year as a whole, an improvement on our initial expectations for the year.

I will now hand you back to Terry.

Thank you Walker.

I will now review the Group’s operations beginning with the U.S.

Total sales for the quarter increased by 12.5% at constant exchange rates, and by 7% on a reported basis, to 235.5 million pounds.

Our like-for-like sales were up by 6.5%.

Kay's like-for-like performance was strong; and Jared continues to perform well.

Overall, there was a further gain in market share driven both by like-for-like sales and space growth.

U.S. third-quarter operating profit increased to 9.7 million pounds from 9.5 million pounds in the comparable period, the adverse impact of unfavorable cumulative foreign exchange movements being 1.2 million pounds.

At constant exchange rates, the increase was 16.9%.

In the year-to-date, U.S. like-for-like sales were up 6.9%, and total U.S. sales increased by 12.6% at constant exchange rates.

The average transaction value continued to rise and is up about 6% in the year-to-date.

The move primarily reflects selective price increases implemented to partially offset the higher cost of gold and a shift in merchandise mix.

As expected, the gross margin was down for the 39 weeks, in line with the decline seen in the first half.

We anticipate a broadly similar outcome for the fourth quarter.

U.S. operating profit for the nine months was 78.8 million pounds, an increase of 11% at constant exchange rates, and 11.6% on a reported basis.

Operating margin for the nine months was little changed at 9.2%, the movement in gross margin being offset by leverage of strong like-for-like sales and continued tight control of costs.

Bad debt charge for the nine months was 2.9% of total U.S. sales, against 3.2% in the comparable period.

The level of credit participation was similar to the comparable period last year.

Our mall real estate investment in 54 new stores and 63 refurbishments and relocations is substantially completed.

The number of closures is anticipated to be 20.

We have also opened Kay in 21 off-mall locations and in four outlet centers this year.

At the year end we anticipate an increase of 24 Jared stores, bringing the total to 134, equivalent to about 550 mall stores in space terms.

Kay's superior sales growth means TV impressions will again increase this holiday season, reinforcing its industry-leading position, with marketing spend in line with last year as a proportion of sales.

The commercials we are introducing this quarter continue the highly successful Every Kiss Begins with Kay execution, and have again performed well in our consumer research.

The TV campaign will continue to be supported by national radio, press, and direct-mail advertising.

The JB Robinson TV advertising test is being expanded to three additional cities; and the regional brands in other markets will continue to be supported by local radio commercials.

For Jared, national cable TV will be used for the first time.

There will also be local network television and radio advertising.

The U.S. divisional marketing spend for the year as a proportion of sales is expected to be slightly up on last year, reflecting the increase in sales mix coming from Jared.

For the first time, Kay will have an e-commerce capability this Christmas, and so far we're satisfied with its performance.

A number of merchandising initiatives are in place for the holiday season.

These include Journey diamond jewelry, which the Diamond Trading Company is supporting with a substantial advertising campaign.

Further expansion of the right-hand ring and circle jewelry select collections.

The Leo Diamond assortment, which continues to be developed in all formats.

Le Vian, a prestigious 500-year-old fashion jewelry brand that is now sold in all Kay stores.

In Jared the Peerless Diamond, a branded Ideal Cut diamond exclusive to the Group, has been rolled out to all locations.

Jared continues to build its offering and reputation in the luxury watch market.

Training has again been at record levels, with new and better programs being introduced.

In summary, the U.S. business, consistent with our culture of continuous improvement, has taken steps to ensure that we are able to execute this Christmas better than last year in the key retailing disciplines.

We're well positioned to compete.

Turning now to the UK, the jewelry market remains difficult, with year-to-date hallmarking volumes down by over 15% for the second year running.

However, our UK division continued its improving trend, with like-for-like sales growth of 3% in the quarter.

Both Ernest Jones and H.Samuel showed increases for the period.

Total sales increased by 2.4% to 92.7 million pounds.

The operating loss of 1.1 million pounds was 1.4 million pounds less than in the comparable period last year.

For the year-to-date, UK like-for-like sales increased by 0.9% and total sales by 1.7% to 278.4 million pounds.

The operating loss was 400,000 pounds less than last year, at 4.5 million pounds.

The results of the UK business are very seasonal.

Historically nearly all of the operating profit for the full year has been earned in the fourth quarter.

The gross margin was down in line with the first half, and the trend in the fourth quarter is anticipated to be similar.

The division's average selling price increased further in the 39-week period, as did diamond participation in the sales mix.

The average transaction was also up.

In real estate, the refit program will be as expected.

In total, stores covering about 45% of sales will be in the open format this Christmas.

In line with our real estate strategy, 371 H.Samuel and 205 Ernest Jones are planned to be trading at the year-end.

Enhancements to the diamond selection continue to be made.

The Leo and Forever diamond ranges have been further expanded, as has the white metal selection.

Use of collections and exclusive merchandise to differentiate our brands within the marketplace has been increased.

For the first time, H.Samuel will have national television advertising support during the Christmas season; and Ernest Jones will have similar regional coverage to last year.

New creative executions have been developed for both brands.

Both H.Samuel and Ernest Jones will have an e-commerce capability this Christmas.

So far their performance is meeting our expectations.

In conclusion, Group profit before tax in the nine months to date was 12.7%, ahead of last year.

Our U.S. division continued to trade well, despite trading conditions remaining difficult in the UK jewelry sector.

Our stores have shown an improved performance in the quarter.

We continue to execute strategies in the UK and U.S. to improve the competitive positions of both businesses, which are in good shape and are well placed to compete.

As always, results for the year as a whole will be dependent on the outcome during the very important fourth quarter, which represents some 40% of annual sales.

Now, I would like to open the call to take any of your questions.

However, please note that we will not comment on trading in November or on the outlook for the holiday season.

(OPERATOR INSTRUCTIONS) David Jeary with Credit Suisse.

A quick question if I may, re the UK trading performance, and particularly given your comments on the gross margin continuing on the same trend, what that implied for cost growth -- or rather lack of cost growth in the quarter and outlook over the rest of the year.

I think as we said earlier in the year, the expense realignment we took at the beginning of the year said in the first half our cost increases in the UK were down in the low single digits.

In the third quarter, you're right; expenses would have been basically flat on last year.

The main reason being that some of the investment we made in the business last year -- for example, the startup costs of e-commerce; we clearly have less significant increase in depreciation this year because of the reduced modernization program; the commission system that we put in last year is also beginning to anniversary.

So given that some of these incremental costs in last fiscal year are now in the base, then, yes, our increase in the third quarter was basically zero.

For the rest of the year, I don't see that changing dramatically, although clearly, going in the opposite trend, there will be some increase in advertising costs with H.Samuel moving towards -- to a national TV coverage this year in comparison to last year.

So that will have some small incremental impact in terms of percentage increase in expenses in Q4.

Thanks very much, Walker.

Stephen Oldfield with Cazenove.

A couple of questions if I may, still on the UK performance.

It looks like you have opened up quite a performance gap against the market, particularly in the third quarter.

So I wonder if you would perhaps highlight some of the factors driving that.

Also, if you have got a view as to why the market is just quite so weak, compounding on weak numbers.

I guess a follow-up, really, on the equivalent performance, where Kay I think was the kind of outperformer in the Q3 numbers, which I think generally came in a bit ahead of expectations.

In terms of the UK market, I think the things that are driving our sales performance this year are the introduction of commission selling and rollout of commission selling, all through -- which occurred at the end of last year and is helping, has helped us all this year and the year-to-date.

Helping us keep the employees motivated, and rewarding, and giving them some reward for performance.

Along the same lines with our personnel, we have improved our training programs and rolled out a new training program to all of the sales associates and management teams in the stores.

That has proved beneficial.

The improvement in merchandising, first in terms of merchandising collections, strengthening areas that had shown some weakness at the end of last year.

It has helped us in both Ernest Jones and HS.

Then also being a little more focused on our promotions, by having targeted promotional merchandise running through both businesses has been helpful.

I think that our in-store presentations are better.

Our displays are more focused, calling attention to the improved merchandise.

We, of course, have converted more stores this year to our open store format, which is always helpful.

Those are the reasons, I think, for driving our specific performance.

You asked me a second question about the UK, and I did not get that jotted down.

Yes, just really, Terry, if you had any sense of why the decline appeared to be almost secular.

Because we're looking at double-digit decline in the hallmarking volumes against a similar [out] on the previous year.

Right.

I really can't speak to it.

It does appear; and most of our information is anecdotal, but there is enough of it that the sector, the jewelry sector, continues to be weak in the UK.

Certainly, the feedback we have gotten from the Argos conference indicates that their numbers are weak.

The Assay Office numbers are weak that we see from the hallmarking numbers.

And anecdotally, we hear that from the vendors.

Why the sector remains weak on top of weak numbers, I just -- I really can't speak to.

In terms of the Kay performance, Kay did do exceptionally well, as did -- but so did Jared in quarter and in the year-to-date.

The formats that are lagging are our regional brands in the U.S.

They are frankly at the same competitive disadvantage to Kay that I have spoken about for some time now.

That is, that Kay has the benefit of national TV advertising, which is really cost-effective media, the most cost-effective media.

We have got a great campaign in Kay, well developed.

The brand-name recognition continues to increase.

Customers continue to respond to our marketing, advertising, our training programs.

The regional brands stores are disadvantaged in that their advertising impressions, while we spend the same per-sales dollar, because of Kay's mass and our ability to go national, the impressions are of a higher quality on TV; and we get better value in terms of buying those impressions for Kay, because of the mass that we are buying.

So as the growth in Kay continues to expand, that differential continues to expand and continues to favor Kay even more.

As you know, we are attempting to solve that by creating a TV campaign that we can possibly do regionally, if not nationally, for our regional divisions.

But so far, we are just in early testing phases of that program.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Andrew Hughes with UBS.

I have a question on just your comments, Walker, on year-end cash position.

Was I right in hearing that you are expecting roughly cash neutrality in the current year?

Yes, before the cost of the buyback program.

If you recall, at the beginning of the year we gave an indication that -- and obviously at that time we had not considered the buyback program.

Beginning of the year, we said that cash was likely to -- or net debt was likely to increase somewhere between 10 and 30 billion pounds, depending on where we got to in terms of our expansion program.

So what I said was, looking at the moment, that 10 to 30 million pounds outflow is going to be nearer to neutrality.

Obviously, on top of that, we will have an increase in net debt, the amount of the buyback program, which we are targeting at about 50 million pounds.

Is that mainly due to CapEx being a little bit lower?

Or is it inventories?

Because I noticed in Q3 last year you had a big increase in inventories; and that has sort of leveled off a bit, this time around.

Yes, I think that to be [fair] there is not any one reason.

I think CapEx, yes, is a little bit lower than we had originally expected.

For example, in the UK, we probably spent a little bit less.

We haven't opened as many new Ernest Jones stores as we would have anticipated.

I think last year we did have a bigger increase in the UK inventory as we invested in diamonds.

I think also, the performance of our credit program in the U.S. continues to be strong.

There, with the continued strong monthly collection percentage, their [net] collection is probably a little bit higher.

So no one specific factor, but a combination of a number of factors.

I think our tax payments also are likely to be a little bit less this year than we had originally anticipated.

Right.

Just one follow-up.

In terms of the buyback itself, I guess you are in print saying that you are going to complete it.

Are you therefore agnostic at the price at which you buy that stock back?

No, we are not completely agnostic as to the price.

But as you heard from what I said, we have continued to be buyers, in terms of continued the buyback program so far during the month of October, where we have processed about just over 10 million shares.

Sorry, during the month of November.

We still have the target of 50 million pounds.

Whether we achieve that or not clearly will depend on a number of factors.

Obviously, we are now entering into a particular closed period as we approach Christmas.

So we still have the target of 50 million pounds by the end of the fiscal year.

So you say you are in close now until Christmas, pretty much?

I think that is likely to be our position, yes.

All right, thanks.

(OPERATOR INSTRUCTIONS) Mr. Burman, Mr. Boyd, we have no further questions at this point.

Thank you.

Our Christmas trading statement is scheduled for January 11, next year, and will be followed by a conference call.

We're also planning to hold an investor day and store tour for professional investors in Akron on the 10th of May.

We look forward to seeing you there so that you can develop your understanding of how we operate; meet the senior U.S. management team; and see how we execute at the store level.

Thank you for taking part in this call.

We wish you all a happy and healthy Christmas and holiday season.

Ladies and gentlemen, you may now disconnect.