Signet Jewelers Ltd (SIG) 2011 Q4 法說會逐字稿

Good day and welcome to the Signet Jewelers fourth-quarter and full-year results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mike Barnes and Ron Ristau. Please go ahead sir.

Thank you. Hi. Good morning and welcome to the conference call for Signet's fiscal 2011 full-year and fourth-quarter results. I am Mike Barnes, Chief Executive Officer. With me is Ron Ristau, our Chief Financial Officer.

Before I go through the operating performance, Ron will give the Safe Harbor statement and review the financial performance for the year. Ron?

Good morning.

During today's presentations, we will, in places, discuss Signet's business outlook and make certain forward-looking statements. Any statements that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. We urge you to read the risk factors, cautionary language, and other disclosures in the annual report on Form 10-K that was filed with the SEC in March of 2010.

We also draw your attention to this slide. Our fourth-quarter results included $47.5 million Make Whole Payment resulting from the prepayment of our private placement notes that was completed on November 26, 2010. We have excluded this Make Whole Payment in the presentation of the results as it was a significant, unusual, and nonrecurring item. The figures, excluding this item, are a non-GAAP measure and a reconciliation to the most directly comparable GAAP number is provided in the appendix to this presentation.

We are delighted with our fiscal 2011 results reflecting the ongoing success of our business driven by our competitive advantages, strong balance sheet, and financial flexibility. For the year as a whole, total Signet same-store sales were up by 6.7%, led by the 8.9% US comparable store sales increase and a 1.4% decline in the UK. Operating margin increased to 10.8%, an increase of 270 basis points.

Income before taxes and the Make Whole Payment arising from the prepayment of our private placement notes in November was $347.9 million, up $117.4 million or 50.9%. Diluted earnings per share, excluding the Make Whole, were $2.66, up $0.83 or 45.4%. Free cash flow was $315.8 million before the prepayment of the private placement notes and the resulting $47.5 million Make Whole Payment, compared with the target at the start of the year of $150 million to $200 million.

Now let's look at the results in a little more detail, starting with the sales performance. Total sales for Signet increased 5% to $3.4374 billion in fiscal 2011 compared to $3.2736 billion last year. Total Company comparable store sales increased 6.7% versus a decline of 0.4% in the prior year.

In the US, sales increased to $2.7442 billion, primarily reflecting an increase in comparable store sales of 8.9% versus a 0.2% increase last year. In the UK, sales declined to $693.2 million, reflecting a comp sales decline of 1.4% compared to a decline of 2.4% in fiscal 2010. UK sales were also adversely impacted by currency fluctuation and space reductions. In total, reductions in store space lowered reported sales by 1.1% and exchange rate impacted sales by 0.6%.

In fiscal 2011, the operating income was $372.5 million, an improvement of $108 million or 40.8%. This was driven by the US division with operating income of $342.7 million, an increase in profits of $118.2 million or 52.7%. The UK division's operating profit was $57 million, up by $0.5 million, and our unallocated costs were $27.2 million as compared to $16.5 million last year, the increase primarily reflecting the cost of our management transition.

Income before taxes was $300.4 million, up $69.9 million or 30.3%. Our diluted earnings per share were $2.32, up $0.49 or 26.8%.

The tax rate was 33.3% versus 31.8% last year. As I outlined in the highlights, excluding the Make Whole Payment, income before taxes was $347.9 million, up $117.4 million or 50.9%. Diluted earnings per share were $2.66, up $0.83 or 45.4%.

Our gross margin was $1.2429 billion, an improvement of $177.3 million. The gross margin rate was 36.2%, up by 360 basis points. The drivers of the improvement were gross merchandise margin which improved by 80 basis points with the US up 120 basis points and the UK down 40. Again, our merchandise margin was up despite higher gold costs and we'd ask you to note that we've been successfully managing fluctuations in commodity costs for many years.

Our net bad debt to total US sales ratio came in at 4.2%, a 140 basis point improvement from the prior year. We experienced occupancy -- leverage on our occupancy costs.

SG&A expense was $980.4 million for fiscal 2011, up $63.9 million or 7% from last year. As a percentage of sales, they were 28.5%, an increase of 50 basis points. The increase primarily reflects higher incentive payments, the non-recurrence of the fiscal 2010 benefit due to the change in the vacation entitlement policy, management transition costs, and higher advertising expenditures.

Other operating income was $110 million, down $5.4 million on last year, reflecting the adverse impact of the amendments to the Truth in Lending Act. This had a 40 basis point negative impact on operating margin.

Fiscal 2011 operating income was $372.5 million, an improvement of $108 million, this after a total estimated impact of $11.9 million due to the amendments in the Truth in Lending Act. Our operating margin was 10.8%, up from 8.1%, improving by 270 basis points.

Net interest paid before the Make Whole was $24.6 million, a decrease of $9.4 million, a fall of 40 basis points. Net income before tax before the Make Whole was [$347.9 million] (corrected by company after the call), an increase of $117.4 million. As a percent of sales, this was 10.1%, an improvement of 310 basis points. Therefore, our reported income before tax increased $69.9 million, or 30.3%, to $300.4 million.

In fiscal 2011 as a percentage of US sales, the net bad debt ratio improved, as I mentioned earlier, by 140 basis points to 4.2% from 5.6% in fiscal 2010. This was driven by our consistent credit practices and the quality of our collection practices, as well as a more stable rate of employment. We believe that, over time, we can continue to move towards the historic levels of 2.8% to 3.5% of US sales. The monthly collection rate accelerated by 10 basis points to 12.6%, and our credit participation increased to 54.2% of sales versus 53.9% last year.

In fiscal 2011, free cash flow, excluding the Make Whole, was $315.8 million, significantly ahead of the financial objective of $150 million to $200 million set at the start of fiscal 2011 and above the $275 million to $300 million range given in January.

Free cash flow remains wrong, and while below that of fiscal 2010 due to last year's planned inventory realignment of $226.5 million that was not repeated in fiscal 2011, cash flow remains strong.

In fiscal 2011, inventory was up by only $19.5 million, or 1%, continuing to reflect improvement in inventory turn. Receivables were up by $78.7 million in fiscal 2011 compared to an increase of $32.4 million last year, reflecting the strong fourth-quarter sales performance in the US.

Net cash used in investing activities was $55.6 million, up from $43.5 million in fiscal 2010. This primarily reflects capital spending of $57.5 million slightly offset by gains on asset disposals. So for fiscal 2011, $280 million of cash was used to eliminate all of our long-term debt on which we are paying interest of 8.11%. This will save $101.7 million of interest expense over the remaining life of the notes and removes restrictive covenants on shareholder distributions and capital spending. This year, we ended the year at $302.1 million in cash.

Now we'll briefly turn to the fourth quarter. Total sales for Signet increased 6.2% to $1.2705 billion in the fourth quarter of fiscal 2011, compared to $1.1968 billion in the fourth quarter last year. Total Company comparable store sales for the quarter increased by 8.1% versus an increase of 5.1% in the prior year.

In the US, sales increase to $1.007 billion, up $93 million or 10.2%, primarily reflecting a comparable store sales increase of 11.4%. In the UK, sales declined to $263.5 million, down [$19.3 million] (corrected by company after the call) or 6.8%, reflecting a comp store sales decline of 2.9%, currency fluctuations, and the impact of space.

Operating income in the fourth quarter was $210.5 million, up by $33.3 million, or 18.8%, driven by the performance of the US division with profits of $167.9 million, an increase of $46.4 million or 38.2%. The UK operating -- the UK division operating income was $55.3 million, a decrease of $5.1 million or 8.4%. Our unallocated costs were $12.7 million, an increase of $8 million due to the management transition costs and the relocation of the UK office to Akron.

Net interest expense was $50.9 million, which includes [$47.5 million] (corrected by company after the call) for the Make Whole Payment. Excluding this, net interest expense was $3.4 million, down $4.1 million, reflecting the earlier repayment of the private placement notes in fiscal 2011. Our reported income before taxes was $159.6 million, down $10.1 million or 6%. Diluted earnings per share were $1.21, down $0.13 or 7.9%. However, when we exclude the November Make Whole Payment, income before taxes was $207.1 million, up $37.4 million or 22%, and diluted earnings per share were $1.55, up $0.21 or 15.7%.

Our gross margin in the fourth quarter was $518.5 million, an improvement of $87.1 million. The gross margin rate was 40.8%, up by 480 basis points. The drivers of gross margin were primarily -- merchandise margin was up 80 basis points with the US up 140 and the UK down 50, the improvement in our net bad debt expense in the US to 3.8%, which was a 120 basis point improvement, and leverage on occupancy due to the comp store sales performance.

SG&A expense in the fourth quarter was $336.7 million, up $54.1 million. As a percentage of sales, they were 26.5%, an increase of 290 basis points. This primarily reflects higher incentive payments, the management transition costs, and higher advertising expenditures in the fourth quarter in the US and UK division.

Other operating income was $28.7 million, up $0.3 million, reflecting the adverse impact of amendments in Truth in Lending Act. This had a 10 basis point negative impact on our operating margin. In fiscal 2011, operating income was $210.5 million, an improvement of $33 million with operating margin at 16.6%, up 180 basis points.

Net interest paid before the Make Whole was $3.4 million, a decrease of $4.1 million as a percentage of sales. That was an improvement of 30 basis points. Our income before tax before the Make Whole was $207.1 million, an increase of $37.4 million, an improvement of 210 basis points. After the Make Whole Payment, reported income before income tax decreased $10.1 million to $159.6 million.

Thank you, I'll now turn it over to Mike.

Thanks Ron. I'll now review our divisional operating performance. I'll start with the US division.

During calendar year 2010, we gained profitable market share and we outperformed the US specialty jewelry market, which grew by 4.9% based on US Census Bureau estimates. Over the last decade, our share has increased by 3.5% to 9.3%, the largest share gain of any specialty jeweler. Also of note, the market share gains in fiscal 2011 were driven by both Kay and Jared in the US.

US total sales were $2.7442 billion, which was up $203.8 million, an increase of 8%. Kay increased same-store sales by 7% in fiscal 2011, an acceleration from the 4.4% growth achieved in fiscal 2010. Jared had an outstanding year with comps up 15.7% for the full year following a decline of 6% last year. Overall US same-store sales increased by 8.9% in fiscal 2011 compared to up 0.2% last year. Average selling price, excluding the charm bracelet category, was up 7.6% for Kay, 7% for Jared, and 4% for the regional brands.

Both the bridal category and branded differentiated and exclusive merchandise increased in share of sales. In the bridal category, the convergence of superior customer service, supply-chain expertise and our ability to offer in-house customer financing resulted in an outstanding customer experience, giving our stores a significant competitive sales vantage. In branded merchandise, both established brands such as Leo Diamonds and newly introduced ranges such as Charmed Memories performed very well and did -- as did products we were testing. In addition, Jared also benefited from a recovery in spending among households with above-average incomes and from the continued expansion of the Pandora range.

Operating income was $342.7 million, up $118.2 million, which was a 52.7% increase. The operating margin increased by 370 basis points to 12.5%. This sales performance was driven by three primary factors. First, we continue to provide a superior customer experience due to our focus on service. This is based on great staff who are continually trained to improve service, product knowledge, and selling skills. The quality of the team members at Signet in every part of the business has been my most positive finding since I joined the Company. I've been particularly impressed by the continual focus on training, the teamwork, and the ability to execute at extremely high levels. I found that the quality of customer service is what you would expect from a high-end boutique. This is a very powerful competitive advantage that's difficult to replicate.

Second, we increased national TV advertising in the fourth quarter. It once more proved to be the most productive and efficient media. The campaigns for Kay and Jared were also very effective in driving branded merchandise sales.

Third, our merchandising -- we continue to develop innovative branded ranges to give customers compelling reasons to shop with us. In fiscal 2011, the mix of exclusive branded products in the US sales increased by about 300 basis points to 22% of the merchandise sales. We also had success in the bridal category with its share of the mix up over 50% of the sales.

While strong sales performance was central to the profit increase, we exceeded our gross merchandise margin guidance of at least matching the level achieved last year. It increased by 120 basis points. Also, as Ron highlighted earlier, we reduced the bad debt to sales ratio in the US and leveraged store occupancy costs.

Now, turning to the UK, total sales were $693.2 million, down $40 million, a decrease of 5.5% or 3% at constant exchange rates. Same-store sales were down 1.4% following a decline of 2.4% in fiscal 2010 with the performance of H. Samuel and Ernest Jones being very similar. Charm bracelets, fashion watches and the bridal category, including gold rings, performed well.

The same-store sales performance was in line with other nonfood retailers in the UK as reported by the British Retail Consortium, a good performance in a very challenging retail environment, particularly as we increase prices to help protect gross merchandise margin. However, it was still down 40 basis points for the year. The movement in average selling price, excluding the charm bracelet category, primarily reflected this pricing action. Management kept very tight control of costs during the year, which offset lower sales with the operating margin up 50 basis points and reported profits up a fraction to $57 million.

The results for fiscal 2011 were very impressive and clearly demonstrate Signet's successful strategy which is being very well executed. I'd like to thank all of the Signet team members that contributed to this.

Now I'll turn to our operating strategy and financial objectives for the current fiscal year. I'll review our operating strategy in a little bit more detail than I normally would, as I want to emphasize the many strengths of our business.

We've had an encouraging start to fiscal 2012 with same-store sales up 8.5% in the first seven weeks. This was led by the United States market with same-store sales up 11.4% on top of an 8.2% increase in comparable period last year. In the UK, same-store sales are down 4.6% against a decrease of 0.1% in the comparable period. However, the shift in Mother's Day, which is three weeks before Easter in the UK and was in the first seven weeks last year but is not this year, adversely impacted the comp sales growth by an estimated 1.5% to 2%.

Given the results for last year and the start to fiscal 2012, you won't be surprised that our strategy is little changed, although we are planning to be more aggressive in the US. We remain focused on building profitable market share by further enhancing our own competitive advantages within the basic retail disciplines. We'll maintain our balance sheet strength and financial flexibility and use it, as appropriate, to increase investment in inventory and capital expenditure that will further build our competitive advantages for the future.

In setting the financial objectives for fiscal 2012, consideration was given to the current operating environment, which remains challenging with the developments in the US and UK economies becoming increasingly divergent. There is stabilization in the US economy and growth in the US jewelry market. The UK economy is being impacted by pressure on discretionary spending due to the government's austerity program, which includes an increase in the value-added tax rate implemented on January 4 and the impact of higher consumer inflation at a time of limited growth and personal disposable income.

Our financial objectives for this year are therefore to, first, gain profitable market share. Improve our gross margin ratio -- we anticipate the gross margin ratio will benefit from improved store productivity, which is expected to offset the impact of changes in the cost of commodities, in particular the cost of diamonds and gold, and provide leverage of occupancy costs and the net bad debt expense. We believe the gross merchandise margin in the US division will be relatively similar to fiscal 2011, but the UK division may experience some merchandise margin pressure.

We intend to maintain the SG&A sales ratio at a level broadly similar to fiscal 2011, although SG&A will flex during the year primarily as a result of changes in expenses that vary with sales. Therefore, as in fiscal 2011, the extent of our increase in our advertising expenditure will not be finalized until near the fourth quarter.

We are targeting free cash flow of between $150 million and $200 million, which reflects increased capital expenditure and higher working capital. This is to support growth in sales, the strategic development of the business, and the further development of sustainable competitive advantages.

Now, looking at the operational actions we are taking to achieve these objectives, starting with the US division, we have multiple competitive strengths that have driven profitable market share growth. In jewelry, even more so than in other retail sectors, customer service remains a key differentiator as each item is under lock and key and requires an experienced sales presentation. We have a highly qualified and trained sales force. All of our stores have at least one qualified diamontologist as all store managers have to be so qualified. Many of the stores have a number of qualified diamontologists, particularly Jared.

As well as being technically proficient, we continually train our store staff on customer service and selling skill. This training is based on daily monitoring of key performance indicators, corporate initiatives, and valuable monthly customer feedback measured on a number of parameters on a store-by-store basis. Our store staff are well motivated with field incentives based on individual as well as store performance. They are supported by seasoned field management with a very strong corporate culture, as all field managers are required to have been a Signet store manager at some point in time.

We also have strong after-sales service support with nearly all jewelry repairs completed in-house. We train and employ about 1100 skilled jewelry artisans to better serve our customers.

Another competitive advantage is the strength and size of our marketing budget. This is driven by our unmatched scale and our marketing-to-sales ratio that is nearly double what is typical in the jewelry sector.

In fiscal 2012, we plan to increase our marketing expenditure again with the majority of the expenditure continuing to be on national television advertising. Our expenditure is made even more productive by the use of highly effective and very well-recognized campaigns such as Every Kiss Begins With Kay and He Went to Jared. We will continue to use these campaigns to support our branded differentiated and exclusive ranges. This has been a very important factor in our success.

In addition to television advertising, we have a proprietary database of about 27 million names that we use for customer relationship marketing. We are also increasing our investment in the Internet and social media going forward.

We also see opportunities to grow bridal sales through the development of exclusive branded merchandise programs. This will build on our track record of success in the bridal category that's been based on the convergence of our strategic strengths in superior customer service, our supply-chain advantages, and our ability to offer in-house customer finance.

Within the bridal category, we have two established differentiated brands, the Leo Diamond, which is widely recognized as the most successful branded diamond program and is sold in both Kay and Jared, and the Peerless diamond, an ideal cut diamond which is exclusive to Jared. The two other branded bridal ranges we are currently testing are Perfected by Tolkowsky, which is an ideal cut diamond sold in Kay, and Neil Lane Bridal, which is the first differentiated branded setting we've sold and is being tested in both Kay and Jared. Neil Lane designs jewelry for celebrities and is based in Los Angeles. He also designs the ring for the Bachelor and Bachelorette TV shows, through which he has built a significant name awareness in our market sector.

Our development of branded, differentiated, and exclusive merchandise creates a unique store destination and provides our well-trained sales associates a powerful selling proposition. These brands also have slightly higher merchandise margins than similar unbranded items and there is significantly less exposure to competitive discounting. Our ability to drive brand awareness and purchase intent of these ranges as part of the national television advertising for Kay and Jared is becoming increasingly more important. Our scale and proven record of success in developing branded, differentiated, and exclusive merchandise enables us to better leverage our supply-chain strengths with jewelry designers and manufacturers seeking to partner with us.

For Open Hearts by Jane Seymour and Love's Embrace, we will continue to introduce new designs and refine the selection. For Le Vian, we will roll out the Internet-based selling system to all Jared stores and increase product availability. Charmed Memories, a charm bracelet range which was only rolled out to our mall stores for the 2010 holiday season and was very successful, will contribute on a largely non-comp basis for the first three quarters of fiscal 2011.

In addition to differentiated brands, we will continue to grow Pandora within Jared. The store format and our superior customer service enables us to execute this program very well.

Our ability to identify differentiated merchandise is only one example of our supply-chain strengths, which are based on our leading market share, a strong balance sheet, the quality of our buying and merchandising teams and systems, and our proven ability to execute. Our scale and systems enable us to test merchandise before we invest in major product launches. As a result, we have a reduced inventory risk and are better able to identify winners before our competitors.

We also have the most sophisticated direct sourcing of polished diamonds in the middle market. Because of this, we have a very detailed understanding of jewelry manufacturing costs, which helps us negotiate a cost advantage.

Looking at changes in the US space, in fiscal 2012, we plan to open 21 Kay stores, 8 in malls and 13 off-mall, and 4 Jared stores. We also expect to exit about 36 stores at the end of their leases. Overall, the change in space during the year is expected to be broadly neutral, but the quality of sites will have been enhanced.

Now I am turning to the UK, which is a more challenging economic environment than the US. There is pressure on discretionary spending due to the UK government's austerity program, including the increase in value-added tax. Unlike in the US, this sales tax is included in the display price and is not added on at the end of the sale. Therefore, if our UK prices were not changed, about $13 million would be lost directly from the sales line.

At the same time, the economy is experiencing higher inflation, much of it driven by commodity costs. This comes at a time when there is little, if any, growth in disposable income. Given this background and the sales reported for the period since the start of calendar 2011 by UK retailers, particularly for those outside the food and apparel sectors, the UK division seven-week sales performance reflected its competitive strengths.

First, looking at the sales initiatives, we'll continue to test and develop new merchandise but with an increased focus on differentiated brands. Customer service and differentiated brands will be important factors in expansion of in-store events which help generate traffic and [are a] focus for marketing. We will also continue to develop customer relationship marketing by investing in our websites with an increased PR activity. In addition, staff training and focusing on customer service will remain a priority.

We plan to continue to upgrade our store portfolio in the UK with more new stores and relocations, an increase in refurbishments, and the continued rationalization of weaker sites. This activity is expected to reduce space by about 3% over the course of fiscal 2012 but with an overall increase in quality. For example, we will have two stores in the major new center connected to the London Olympic site while further reducing our exposure to smaller, traditional High Street locations. We will also be testing ways to improve the presentation of brands within our stores.

We intend to further enhance our support systems and develop our websites. In a challenging economic environment, the ability to invest in the business is an important factor in being well-positioned to gain market share and take advantage of any improved business environment in the future.

Now, looking at development of capital investment across both the US and the UK divisions, during the economic downturn, capital expenditure was carefully managed and was only $43.6 million in fiscal 2010. In fiscal 2011, spending was increased but remained well below depreciation levels. We now believe it's appropriate to use our balance sheet strength and financial flexibility to increase capital expenditure to reinforce our competitive advantages. We therefore plan during fiscal 2012 to clear a small backlog of store refurbishments that's built up over the last couple of years. We believe, as the market leader, our stores must remain at a standard which reflects that position.

The rate of store openings in the US will also increase. Actually, we are ready, willing, and able to open even more new stores but there is limited high-quality real estate currently available that meets our demanding store site selection criteria. In addition, we are normalizing expenditure on infrastructure with increased expenditure on both IT systems and Internet capabilities designed to improve the efficiency and effectiveness of our execution.

In summary, our operating strategy continues to be about driving sales growth and reinforcing our competitive advantages. We will use our operating and financial strength to invest in the business, for example by increasing marketing expenditures, sales associates support, training, and the continued development of branded merchandise. We also plan additional investments in inventory to support sales growth, particularly in differentiated brands. At the same time, we'll continue to look to improve the inventory productivity where practical. Capital expenditure will be higher as we seek to drive further competitive advantage. While increasing investment, we will of course maintain our disciplined approach and will continue to apply our demanding return on investment criteria.

Now, we would be happy to take any questions you may have.

(Operator Instructions). Jennifer Davis, Lazard Capital Markets.

Congratulations on a great quarter and a very nice start to this year. A couple of questions -- first, a clarification. Did you say that the later Easter negatively impacted the quarter-to-date comps by about 1.5% to 2%, or did I hear that wrong?

What we said was, in the UK, the shift in the Mother's Day, which unlike the US moves around, was about three weeks before Easter, which was later than it was last year. So in the seven weeks that we gave the data on, Mother's Day was in that in the UK last year but not in it this year. We thought the impact of that was about 1.5% to 2%

Okay, so that's just in the UK.

Correct.

Then could you talk a little bit about what your plans are to deal with your cash? You're now in a cash position of over $300 million. Are you planning a buyback or a dividend or anything?

It's nice to have a very strong and flexible balance sheet for sure. But yes, we are looking at opportunities there for continuing to (inaudible) shareholder value. Obviously, having been in the CEO role officially for two months now, my priority and our priority as a group is to work to invest in our businesses and really drive sales growth for the future, because that's the best investment we can make and the best shareholder value that we can create.

Having said that, with the strong balance sheet and the cash that's on it and the continuing expectations for positive good cash flow, we are taking a very thorough, thoughtful process to looking at other ways to deliver shareholder value. We will continue to give you an update in the future as we work through our analysis, both internally and with our advisers. So, that is something that is first and foremost; it is on the agenda for us to continue looking at. We want to continue to drive the business in a profitable way, grow the business, and look at other forms of delivering shareholder value because of the strength of our balance sheet. So it is on the agenda. We want to make sure everyone realizes that.

Great, thanks. Then one last one, sorry. Can you talk a little bit about what you've seen in terms of diamond prices for your brands specifically, and then any thoughts on price increases this year? Thanks a lot.

We think there definitely could be some pressure on commodity costs, including both diamonds and gold. Obviously, gold is something that is pretty well tracked on a day-to-day basis. It's a well-known figure and people have seen it go up over the years.

The fortunate thing is that we have been able to deal with commodity costs in our business very effectively over the years. It is something that we keep our eye on. We would say that there could be pressure on all commodity costs, which would include the diamonds that you mentioned as well as gold.

What are your thoughts on price increases this year?

Well, what we're doing is the same thing that we always do. We are really studying our prices and the value that we deliver to our customers very closely. We will make selective price increases if we determine that it is necessary. We do have a goal to maintain our gross merchandise margins to be similar to what they were last year. So taking all of that into account as needed, we will make any necessary changes in pricing based on the analysis that we get out of that.

Great. Good luck for the rest of the year.

Matt McClintock, Barclays Capital.

Good morning everyone. So Mike, first off -- and I'm sorry if I missed this but could you perhaps give us an idea of the performance of your differentiated merchandise range quarter-to-date for the first seven weeks relative to the overall Company?

Yes, I don't think that we broke anything out in terms of the first seven weeks on that. As we talked about in the fourth-quarter and the full-year earnings, differentiated merchandise ranges were a very important part of our product offering. They did increase approximately 300 basis points as a percentage of mix, so that's something that we are continuing to focus on. Brands continue to be extremely important, and it gives us a real competitive advantage against our competition because they don't have those brands that we have and they are very successful for us.

But when we do announce first-quarter earnings, I'm sure we'll give some more color to how that's going. But again, clearly based on last year's results, they continue to grow as a percentage of mix and are very important to our future.

Okay. Then if I may, one more. You did a great job at growing operating margin in the United Kingdom during the quarter in what was a pretty challenging environment. I understand you've outlined several initiatives that you plan to roll out in that region. But I was just wondering. How should we think about the relationship between comp store sales and operating margin going forward? What levers remain at your disposal to manage profitability in this region?

There's always a relationship with between comp store sales and operating margin for sure. In the United Kingdom, as you see at the beginning of the year, there's been some slight pressure on comp store sales. We indicated that the market itself we thought would be tougher than the US market this year for sure because of the macroeconomic environment.

We have many levers at our disposal. Our management team last year did an excellent job of managing its costs and anticipating a lot of the issues that they had. That continues into this year. We are, however, making some investments in our infrastructure and expanding our capital spending, so all of our costs will not be just be driven down. We are making some investment in the UK also to drive the business forward and to hopefully put in place the infrastructure [which can] support increased sales growth.

So I would say that you should think about it as being somewhat related, but know that we are very careful about how we apply our costs and will react if the business takes a turn further than what we anticipated to do relative to managing our costs. Because we've already anticipated a somewhat difficult environment.

Great. Mike, Ron, thanks a lot.

Ike Boruchow, JPMorgan.

Good morning. Congratulations on a great quarter. I wanted to -- I guess, Ron, on the gross margin line, 480 basis points in this quarter was pretty great. I guess you guys are commenting that, for the year, you expect, at least in the US, product margins to be at least flattish. Should we expect for Q1 and maybe even for Q2 I guess Q1 primarily given the sales trends and the leverage you're probably getting on the occupancy line, could we see a similar rate of gross margin improvement to start the year as well?

I can't really comment specifically on what level of gross margin you might expect in any particular quarter. We've said broadly for the year that we expect it to be similar, which essentially does annualize or lock in some of the benefits that we received from last year. How were they up by quarter, I really want to want to go into on this call.

Then on the SG&A line, I know obviously there was pressure in Q4. I was curious. Is there any more, besides what you've already mentioned, any additional expenses that are coming back into the P&L in 2011 and anything we should look for there?

As we said, we thought that the SG&A expenses will remain broadly similar as a percentages of sales to last year, and there will be some expenditures coming in. For instance, we mentioned we are going to increase our advertising support, which we think is prudent to continue to drive the terrific comp store sales performance that we are getting in the US. We are making additional investments in capital which will have some implications in depreciation and certain costs of that nature. We are continuing to invest in our employees, so we are not -- we are making prudent and appropriate investments in the SG&A structure but we still believe that, for the year, we will be relatively flattish in that particular cost structure. So I'm not saying huge or unusual, but appropriate and intelligent investment where necessary.

I guess last, there have been some concern on a slowdown in the charm bracelet category in the US. I was wondering if you guys could comment on what you are seeing with Charmed Memories at Kay and with Pandora at Jared.

As we mentioned in some of the prepared remarks, we had a lot of success in the charm category in fiscal 2011. It was a great business, and we saw great growth in that business.

I can't really comment on how we see category breakdown going into this year. Clearly, we stated that, during the first seven weeks of fiscal 2012, we saw some very good numbers. I wouldn't want to break it down by category, but broadly speaking, obviously a lot of our businesses continue to do very well.

Great. Good luck guys.

Bill Armstrong, CL King and Associates.

I had a connection disruption briefly, so I apologize if you addressed this in your opening comments. But on your cash flow projection, your free cash flow of $150 million to $200 million, if we add back the capital expenditures, that would imply cash flow from operations of $280 million to $310 million, which actually would be lower than the $324 million you generated last year. I was wondering if you could just delve into that. Are we looking -- I'm sure we are not looking at lower net income. Are we looking at a higher investment in working capital this year?

There will be some additional investment in working capital this year. As we stated last year, our inventory balances grew by only $19 million or 1%. We said we would make -- and you can actually reference it in our press release -- but we said we would make the appropriate investments in inventory in order to drive particularly our bridal category where we will be rolling out such things as the Neil Lane collection that we've been talking about. That will require us to make some additional investment in inventory. So when you quote those numbers that you're quoting, you're not picking up the working capital investment, which will be prudent but there will be some working capital investment that goes along with our programs for this year.

Okay. On the fourth-quarter SG&A percentage up 290 basis points, you mentioned management transition, higher incentives costs, higher advertising. I was wondering if you could maybe break that out for us in terms of the order of magnitude of each of those three major components.

From an order of magnitude perspective, you would basically say that the advertising expenditure was number two. The bonus in US store bonuses was number one actually, and the CEO and transition costs would be number three. That's probably how you break it out.

Great. Then finally, on your holiday sales conference call, it looks like you said that shareholder distribution would be a high priority for the Board. It sounds like that's no longer the case. What's changed in the Board's thinking between then and now?

There really has been no change. It is a very high priority for us to look at potential shareholder distributions. We are studying that very thoroughly, and we want to make it a very thoughtful process. We should all remember that the times that we went through and just how tenuous this world is, even some of the world events over the past four to five weeks have shown us with the situation in Japan as well as other situations that have arisen in that time period, that it is still kind of a tenuous world.

Number one, also keep in mind that I have been the CEO on board full-time in-charge CEO for two months. Our priorities here, both Ron and I and our management team's, is to drive our businesses, because that's the best shareholder value creation that we can drive. But it remains at the front of our agenda and a high priority to look at potential shareholder distribution and shareholder value. Nothing, I can assure you, has changed with that. We will keep you up-to-date with where we are at in that process, but we are doing it very thoughtfully and thoroughly so that when we do -- if we make some decisions regarding that subject, that it is the right decision and at the right time.

Great. Appreciate that, thank you.

Rick Patel, Bank of America Merrill Lynch.

Good morning everyone. Given the lack of real estate opportunities in the US, can you update us on your thinking of potentially expanding into Canada or even other international markets perhaps, either organically or through acquisitions?

We are very open to any opportunistic opportunities that might surface out there. We have not closed the door on any other expansion opportunities into other geographies. At the same time, we are not pushing it forward. Just as we are being very thorough with our investment criteria in opening stores in the US and the UK, we'll be very thorough, given the opportunity should arise, for other geographic expansion. But we are definitely not a closed door to speaking about those if the opportunities arise out there.

Great. Then can you also give us some more color on your exclusive brand strategy for this year, perhaps some insight into which the brands you tested in fiscal 2011 that you think has the most potential and how should we think about the rollout of those brands into more stores as we go through this year?

The differentiated exclusive brands that are already rolled out, we are continuing on product development initiatives to keep those going and keep them fresh for the future. We do believe that it is continued great strategy for us that sets us apart from the competition. We have some things to test that we have talked about and we mentioned that we expect to continue to roll out things that we tested in fiscal 2011 such as Neil Lane Bridal, as well as Perfected by Tolkowsky. Then also on the Charmed Memories side, the charms and beads that we have in the Kay stores, they are basically noncomp for most of the first three quarters of this fiscal year. So there's a lot of opportunity for us to continue to roll out things that have tested successfully. No doubt the differentiated brand ranges that we have continue to be a very important part of our future success.

Great, thank you very much.

Jeff Stein, Soleil Securities.

Good morning guys. A couple of questions, the first one for Ron. Is there going to be any impact on the carryover from TILA in the first three quarters of this year?

No. TILA last year was about $11.9 million. There is no incremental impact from TILA, if you will. The TILA impact that was built in last year would be similar to the impact from this year, so nothing incrementally.

Excellent. Ron, what about the share count? It did kind of creep up in the fourth quarter. Absent any activity in terms of potential share buyback, what kind of share count assumption do you think is appropriate for this year?

Share count assumption for this year. Well, our share count jumped up a little bit at year-end because we had to issue some shares relative to the management transition. I don't think there's major changes in the share count from where it stands today. I don't have a specific number that I would give you, and it would be impacted by anything we might do in the future. So I don't know if I could give you a range on that at this point in time. I'll have to (technical difficulty) about that and call back because I don't -- we haven't really done that.

How about depreciation and amortization? In the slide presentation you had on your website, there was no number plugged in on D&A.

Sorry, no number plugged in on what?

Depreciation and amortization for this year.

It's in the range of $100 million again, $100 million, $105 million.

Okay. What is your -- what would you guess to be your occupancy leverage point?

I think our occupancy leverage point is in the low to mid single-digit comp range.

Okay. Just final one -- marketing. Can you be a little more specific in terms of what you spent for the full year last year in terms of marketing spend and do you expect it to go up? I know it is going to go up, but will it go up as percent of sales this year?

As a percent of sales, we expect it to remain in that 6% to 6.5% of sales. As we spoke to, in the fourth quarter we did increase our advertising, and we feel like we've got a lot of bang for the buck out of that based upon the fourth-quarter sales results that we saw. Ron, do you have the actual full-year (multiple speakers)?

We spent last year $162 million, which was 5.9% of sales. As we've said, we expect the dollars to go up but the percentages to remain in that 6% to 6.5% range that Mike was calling out.

Thank you very much.

Rod Whitehead, Deutsche Bank.

Thanks. Congratulations on a good year. A couple of things. On the US, immediately after the Christmas period, you said you were expecting the US gross merchandise margin to come out in the $130 million to $150 million range. It actually came out at $120 million. I was just wondering whether that's a one-off stock provision, or a change to the ongoing run rate for -- if you like for next year.

No, we really didn't consider that to be a material difference. It's just a slight difference from what we had projected, 10 basis points. Nothing unusual.

Okay. On the UK, the comp for the fourth quarter improved a lot from last reported, which suggested it was roughly flat in January against down four over November December. Is that kind of 4% difference what we should be thinking about as the impact of the two big snowfalls in the UK in December?

I think the answer to that is yes, Rod, because -- and you're correct. We did get a substantial improvement in comp in January in the UK. So, it was hurt early on in the first couple of weeks of December when the snowstorms went through, and we did recover nicely in the month of January. I think you're roughly in the range of what that comp impact would've been.

Thank you. Just finally, on the UK, you're looking to close another 22 stores in the year ahead. Is that just H. Samuel? Will that kind of finish the big changes to the UK portfolio? Would you expect the UK numbers to continue trending down in the medium term?

I think there'll be some additional closures in the UK. I don't know if we will continue at that same rate. I don't have at my fingertips the breakout between H. Samuel and Ernest Jones. I can certainly get that for you and give you a call.

The bottom line there though is that we're going to continue to look at the health of the portfolio stores that we operate, both in the UK and the US. As appropriate, we will open new doors, and as appropriate we will close, especially at the end of lease expirations when it's most efficient to do so, those that are underperforming so that we can continue to improve the overall portfolio health.

Nearly all of these would be lease expiries, would they?

Mostly, yes.

Okay, thank you.

Anthony Lebiedzinski, Sidoti & Co.

Good morning. A couple of quick questions. The 36 store closures in the US that you plan, are these all regional branded stores?

Primarily yes. Not all, but primarily.

Okay, so are there going to be any Jared store closures, or is it just the Kay?

There are no Jared store closures. There's just Kay.

Got it, okay.

[mostly regional brand stores]

[mostly regional brand stores]

As far as the advertising strategy going forward, will there be any significant shifts in terms of how you allocate your advertising dollars of TV versus radio versus other media?

As we said, we expect for national television advertising to continue to be a big driver of our advertising budget. We feel it's a differentiating factor for us. We have the scale to do it. We have some obviously well-known advertising out there. We want to continue to drive that competitive advantage, so TV is going to remain a very important part of that mix.

All right, thank you.

John Baillie, SG Securities.

Good morning gentlemen. A couple of questions. Just on the figure of 11.4% current trading in the US, can you give the ASP figure against that and maybe how different are Kay's against Jared's in 2011 to date?

We gave a total figure for the seven weeks trading, and we really don't break that down at this time. We will give some more color to that when we announce our first-quarter earnings in May. But we just wanted to give some color on how trading continued to perform as we moved into this first quarter, but that's about all we can comment to at this point in time.

Just on the ASP for this period?

No, I'm sorry. We can't break it out at this point in time. We'll give full details on ASP when we release our first-quarter results of course. (multiple speakers)

Just looking at the inventory at the start of this year, it looks it's only up 1% or less than 1% year-on-year. Given you've obviously got a very good start, are you a little bit short of inventory as you've (inaudible)? Are you -- is there a bit of catch-up going on?

No, we don't believe we are short of inventory. We believe the inventory flow has been appropriately planned, but we will be, as the year progresses, increasing our inventory positions, particularly in the US, to support the rollout of the couple of programs we've talked about, the Charmed Memories and also the Neil Lane. That will require some inventory investment. So we don't believe we are short. We are certainly doing well and getting all of the sales that we think we should be getting. But it will get larger, as has been planned, it stays to get larger as we go through the year.

Just on the space expansion in the US, I wonder how much flexibility there is, and you've said [for instance] (inaudible) four Jareds I think this year. Is there much sense of scope that that could be a much larger number, that there are other possibilities in the pipeline that could move the dial?

This year what we have planned are about 21 Kay stores and 4 Jareds, as we mentioned. We do expect to see slight increases in store openings for the following fiscal year. A lot of this just depends upon what the developers are doing, because we have very strict criteria and we need the developers to have new developments for us to really open a substantial number of more new doors. We have an appetite for it and we'd love to see it as appropriate, but we feel like the numbers that we've given are pretty much in the range of our expectations for the time being.

We are unlikely to be surprised that you are suddenly coming with 10 or 12 Jareds this year, that just there's not enough activity going on out there.

No, not given the leadtime of a Jared store. You wouldn't see that kind of upside. (inaudible) anyhow.

Casper Lund, Edoma Capital.

Good morning guys. Congratulations on a good performance in 2011. I have two questions. I just want to go back to a question that's already been asked by two other participants, namely on the return of capital. I appreciate that the transition from old CEO to new CEO takes a little bit of time, but I'm just trying to put this in perspective now, given your cash flow guidance for the year which suggests quite a high level of confidence in the operating environment and in your ability to execute and the strength of the balance sheet. When -- I'm also going to try and put you guys a little bit on the spot. When should we -- when do you want to make a decision on this area? Is it something you do at the end of 2011 calendar, or are we going to hear about it in Q1, Q2? I think we -- I think you need to think about some sort of timeline for a decision because, in my view, you're clearly over-capitalized at this stage, and you can easily execute on your growth ambitions without in any way jeopardizing the balance sheet.

I appreciate your thoughts on that very much actually and understand where you're coming from. I think it would be very difficult for us to put a specific timeline on that. It would be inappropriate at this point in time. But I can only stress again that it is very high up on our priority list to study this. We want to get it right, and we want to make sure that we are investing appropriately in our businesses.

Then yes, we do realize that there may be opportunities to return some value to the shareholders. Believe me, we want to do whatever is best for the shareholders; that's really important to us. I do promise that we'll keep you updated on where we are at with our thoughts on this. At the appropriate time, we'll give more color on what our studies show and what our decisions are. Maybe we'll know more about the AGM. I couldn't guarantee that. But I can tell you that we will continue to update you as appropriate going forward.

I appreciate that. I had a question also on your operating performance, which seems to be -- which is very strong since the fiscal period ended. I just wanted to -- without trying to sort of [focus] too much on the detail, is your sense that you -- is it more of the same you're taking market share, or is there a recovery in the subset of specialty US retail spending? How do you see this performance out of the gate in fiscal 2012?

We don't really give a lot of detail on guidance of the performance going forward. We did give you some sales numbers for the first seven weeks.

I think you can turn back to -- there was a slide in our deck that does show that last year clearly we gained market share again. Over the past several years, we have gained more market share than anyone else in the industry. That has been a multi-year trend going back to the numbers that we reported as of the full-year fiscal 2011. So you can look at the historical numbers and draw your own conclusions, and look at what we did report for the first seven weeks and draw your own conclusions.

Okay. Just a final question on that. We are now I guess one year, 1.5 years past the lows in terms of retail spending across the board in the United States. Do you feel that the competitive dynamics which have taken place in the last two or three years, i.e. the closure of the smaller stores, the troubles of some of your nearest competitors, is that going to continue or do you feel you're exhausting at some point the potential for the rapid market share gains that we've seen in the past?

We are going to stay focused on our competitive advantages and continue to try and drive market share increases. Obviously that's what we're here for. e think we are well positioned to do that. We operated very well through the very tough environment that we went through. Of course the environment is still very difficult in the UK as we have discussed on many levels. We will continue to -- that's what's great about having a strong balance sheet and the financial flexibility that we have. We have the ability to continue to invest in our businesses and continue to invest in our strategic advantages that we have over the competition, whether it be the other chains or the independents that you're mentioning, the smaller stores or companies. We're going to continue to do that. That is our reason for being. We have some great products, we have an incredible team of people here at Signet that execute very well at all levels, and we're going to just continue to drive towards our goals.

Okay, thanks. Once again congrats on your operating performance so far.

Thank you so much. Appreciate that.

Andrew Hughes, UBS.

Hi guys. It's Andrew from UBS. I've got one more question on space if I may. Looking at your Slide 28, we've seen this quite sharp reduction in the regionals over the last four years. If we fast forward another four years, do you think there will be any regional stores left, or all have been phased out?

The second related question was just on Jared. Mike, whether you had any thoughts on extensive chain over the medium term for Jared?

We have said on a regional brands and we've said that we think, on a long-term basis, that number would reduce to approximately 100. So it will not totally disappear, but we do anticipate over the next several years that there will be more regional wins closing down to a number of about 100 where we should see some stabilization. Relative to Jared, I'll let Mike take that question.

I'm sorry. Could you repeat the question on Jared?

It was just a question on extensive chain that you see for Jared over the medium to long term.

We clearly think there is opportunity for more door expansion with Jared. We are continuously looking at real estate opportunities out there, so as appropriate and as they meet our financial criteria, we will continue to expand. We are very pleased with the results that we saw last year with Jared. We had some great comps and we look forward to watching that business grow in the future.

We've targeted that at around 300 stores in our long-range planning.

Okay. Just one other thing. On that 100 target for the regionals, will that still be spread across the variety of brands that you have, or will it shrink down to one particular brand?

I think there are certainly brands that are stronger than others, so it will still be more than one brand. It will be a variety of brands. But it will tend to be I guess more geographically concentrated where some of those brands have regional strength because everybody is so (inaudible). So that's how I guess I would answer that question.

Yes, but in general, we basically put the same criteria when we look at the regional stores. As they come up upon lease expiration, we analyze the financials the same way that we would with any of the other stores. That's why we think there will always be some out there, because some are actually performing very well. We just want to improve the performance of the overall portfolio by closing the underperformers as appropriate. So as Ron said, yes, there will be more than one name most likely out there, but we use the same criteria. That's what's really important about it.

Great. Thanks guys.

James Pan, [CBE] Partners.

Congratulations on a quarter well done. I don't really have a question, but I did want to voice my support for an extremely strong balance sheet like you currently have. There were some comments earlier from another questioner saying you have flexibility on the balance sheet. I just hope that we never go back to the situation like we had in 2008 where we had a serious amount of net debt on our balance sheet. We just paid for that last quarter with that $48 million true-up payment or Make Whole Payment. At least from my perspective, and I've been a shareholder for the last six or seven years, having $200 million to $300 million of net cash on the balance sheet is perfectly fine with me. If you want to use your free cash flow to pay out dividends and buy back shares, that's great at the right price. But going back into -- (inaudible) going back into a net debt situation would make what we just did in the last three years kind of pointless. That's all I had to say.

We appreciate your comments on that. It's our goal to really have an appropriate balance sheet, and that's what we're focused on. Ron and I want to run the Company with a strong fiscal strategy that really benefits the shareholders long-term. And so thank you again for the comments.

Thank you.

There are no further questions.

Okay. We want to thank all of you for joining us. Our next scheduled update is our Q1 sales and results on May 26. So thank you again and have a good day.

That will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.