SIGNET JEWELERS LTD - Annual Report: 2014 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended February 1, 2014

Commission file number 1-32349

SIGNET JEWELERS LIMITED

(Exact name of Registrant as specified in its charter)

Clarendon House

2 Church Street

Hamilton HM11

Bermuda

(441) 296 5872

(Address and telephone number including area code of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained to the best of Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

Large accelerated filer  x         Accelerated filer  ¨        Non-accelerated filer   ¨        Smaller reporting company  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨    No  x

The aggregate market value of voting common shares held by non-affiliates of the Registrant (based upon the closing sales price quoted on the New York Stock Exchange) as of August 2, 2013 was $5,975,516,529.

Number of common shares outstanding on March 21, 2014: 80,223,851

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant will incorporate by reference information required in response to Part III, Items 10-14, from its definitive proxy statement for its annual meeting of shareholders, to be held on June 13, 2014.

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SIGNET JEWELERS LIMITED

FISCAL 2014 ANNUAL REPORT ON FORM 10-K

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REFERENCES

Unless the context otherwise requires, references to “Signet” or the “Company,” refer to Signet Jewelers Limited (and before September 11, 2008 to Signet Group plc) and its consolidated subsidiaries. References to the “Parent Company” are to Signet Jewelers Limited. References to the “Predecessor Company” are to Signet Group plc prior to the reorganization that was effected on September 11, 2008, and financial and other results and statistics for Fiscal 2008 and prior periods relate to Signet prior to such reorganization.

PRESENTATION OF FINANCIAL INFORMATION

All references to “dollars,” “US dollars,” “$,” “cents” and “c” are to the lawful currency of the United States of America. Signet prepares its financial statements in US dollars. All references to “pounds,” “pounds sterling,” “sterling,” “£,” “pence” and “p” are to the lawful currency of the United Kingdom.

Percentages in tables have been rounded and accordingly may not add up to 100%. Certain financial data may have been rounded. As a result of such rounding, the totals of data presented in this document may vary slightly from the actual arithmetical totals of such data.

Throughout this Annual Report on Form 10-K, financial data has been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). However, Signet gives certain additional non-GAAP measures in order to provide increased insight into the underlying or relative performance of the business. An explanation of each non-GAAP measure used can be found in Item 6.

Fiscal year and fourth quarter

Signet’s fiscal year ends on the Saturday nearest to January 31. As used herein, “Fiscal 2015,” “Fiscal 2014,” “Fiscal 2013,” “Fiscal 2012,” “Fiscal 2011,” “Fiscal 2010” and “Fiscal 2009” refer to the 52 week periods ending January 31, 2015, February 1, 2014, the 53 week period ending February 2, 2013, and the 52 week periods ending January 28, 2012, January 29, 2011, January 30, 2010 and January 31, 2009, respectively. As used herein, “Fiscal 2007” refers to the 53 week period ending February 3, 2007, “Fiscal 2008” and “Fiscal 2006” refer to the 52 week periods ending February 2, 2008 and January 28, 2006, respectively. Fourth quarter references the 14 weeks ended February 2, 2013 (“prior year fourth quarter”) and the 13 weeks ended February 1, 2014 (“fourth quarter”).

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, based upon management’s beliefs and expectations as well as on assumptions made by and data currently available to management, appear in a number of places throughout this Annual Report on Form 10-K and include statements regarding, among other things, Signet’s results of operation, financial condition, liquidity, prospects, growth, strategies and the industry in which Signet operates. The use of the words “expects,” “intends,” “anticipates,” “estimates,” “predicts,” “believes,” “should,” “potential,” “may,” “forecast,” “objective,” “plan,” or “target,” and other similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, risks relating to Signet being a Bermuda corporation, the merchandising, pricing and inventory policies followed by Signet, the reputation of Signet and its brands, the level of competition in the jewelry sector, the cost and availability of diamonds, gold and other precious metals, regulations relating to consumer credit, seasonality of Signet’s business, financial market risks, deterioration in consumers’ financial condition, exchange rate fluctuations, changes in consumer attitudes regarding jewelry, management of social, ethical and environmental risks, security breaches and other disruptions to Signet’s information technology infrastructure and databases, inadequacy in and disruptions to internal controls and systems, changes in assumptions used in making accounting estimates relating to items such as extended service plans and pensions, the ability to

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complete the acquisition of Zale Corporation (“Zale”), the ability to obtain requisite regulatory approval without unacceptable conditions, the ability to obtain Zale stockholder approval, the potential impact of the announcement and consummation of the Zale acquisition on relationships, including with employees, suppliers, customers and competitors and any related impact on integration and anticipated synergies, the impact of stockholder litigation with respect to the Zale acquisition, and our ability to successfully integrate Zale’s operations and to realize synergies from the transaction.

For a discussion of these risks and other risks and uncertainties which could cause actual results to differ materially from those expressed in any forward looking statement, see Item 1A and elsewhere in this Annual Report on Form 10-K. Signet undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.

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PART I

OVERVIEW

Signet is the largest specialty retail jeweler by sales in the US and UK. Signet is incorporated in Bermuda and its address and telephone number are shown on the cover of this document. Its corporate website is www.signetjewelers.com, from where documents that the Company is obliged to file or furnish with the US Securities and Exchange Commission (“SEC”) may be viewed or downloaded free of charge.

On September 11, 2008, Signet Group plc became a wholly-owned subsidiary of Signet Jewelers Limited, a new company incorporated in Bermuda under the Companies Act 1981 of Bermuda, following the approval by the High Court of Justice in England and Wales under the UK Companies Act 2006. Shareholders of Signet Group plc became shareholders of Signet Jewelers Limited, owning 100% of that company. Signet Jewelers Limited is governed by the laws of Bermuda.

Effective January 31, 2010, Signet became a foreign issuer subject to the rules and regulations of the US Securities Exchange Act of 1934 (“Exchange Act”) applicable to domestic US issuers. Prior to this date, Signet was a foreign private issuer and filed with the SEC its annual report on Form 20-F.

Signet’s US division operated 1,471 stores in all 50 states at February 1, 2014. Its stores trade nationally in malls and off-mall locations as Kay Jewelers (“Kay”), and regionally under a number of well-established mall-based brands. Destination superstores trade nationwide as Jared The Galleria Of Jewelry (“Jared”). Signet acquired Ultra Stores, Inc. (“Ultra”) on October 29, 2012 (the “Ultra Acquisition”). The majority of the Ultra stores acquired were converted to the Kay brand during Fiscal 2014. In addition, on November 4, 2013, Signet acquired a diamond polishing factory in Gaborone, Botswana. This acquisition expands Signet’s long-term diamond sourcing capabilities and provides resources for Signet to cut and polish stones.

Signet’s UK division operated 493 stores at February 1, 2014, including 14 stores in the Republic of Ireland and three in the Channel Islands. Its stores trade in major regional shopping malls and prime ‘High Street’ locations (main shopping thoroughfares with high pedestrian traffic) as “H.Samuel,” “Ernest Jones,” and “Leslie Davis.”

The expression of romance and appreciation through bridal jewelry and gift giving are very important to our customers, as is self reward. Management believes customers associate our brands with high quality jewelry and an outstanding customer experience. As a result, the training of sales associates to understand the customer’s requirements, communicate the value of the merchandise selected and ensure customer needs are met remains a high priority. Management increases the attraction of Signet’s store brands to customers through the use of branded differentiated and exclusive merchandise, while offering a compelling value proposition in more basic ranges. Signet accomplishes this by utilizing its supply chain and merchandising expertise, scale and balance sheet strength. Management intends to further develop national television advertising, digital media and customer relationship marketing, which it believes are the most effective and cost efficient forms of marketing available to grow its market share. Management follows the operating principles of excellence in execution; testing before investing; continuous improvement; and disciplined investment, in all aspects of the business.

STRATEGY, GOALS AND OBJECTIVES

Fiscal 2014 was another record year for Signet with total sales up 5.7% and diluted earnings per share up 4.8%, driven by merchandise offerings, creative and unique advertising and our sales associates who executed with excellence, discipline and enthusiasm. Our merchandise offerings included an expansion of branded differentiated and exclusive merchandise which represented 31.1% of the US division’s merchandise sales. In Fiscal 2014, we successfully integrated stores from the Fiscal 2013 Ultra Acquisition, and continued to accelerate our real estate expansion in the US by increasing net selling space in the US by 5%. In Fiscal 2014, Signet

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repurchased approximately 1.6 million shares for $104.7 million, or 1.9% of our outstanding shares at the start of the fiscal year. Since the inception of our share repurchase program in January 2012, which was expanded in June 2013, we have bought back $404.6 million, or 9.5%, of our outstanding shares. We also increased our quarterly dividend by 25% to $0.15 per share during Fiscal 2014.

Our goal is to further enhance Signet’s position as a leading US and UK specialty retail jewelry retailer by helping our customers “Celebrate Life” and “Express Love” through offering a unique customer experience and driving customer loyalty. To accomplish our goal, we will drive our business into the future through the following strategic priorities:

These strategies continue to build profitable market share for each of Signet’s leading store brands. Maximizing the mid-market drives our competitive strengths focused on merchandise initiatives, marketing, store growth and productivity. Being the best in bridal will be achieved by continuing to develop unique differentiated bridal jewelry brands, increasing targeted marketing programs, continuing to offer our customers a unique experience via our stores, sales associates and selling systems and offering an in-house credit program in the US. Enhancing our digital ecosystem will simplify and accelerate customers’ engagement with our brands, support our physical channels of distribution and expand our geographic footprint enabling cross-collaboration among countries, which creates a global platform to support existing and possible future geographic expansion. In order to truly accomplish our core purpose of helping our customers “Celebrate Life” and “Express Love”, we must have people with high capability and passion. We will continue to attract, develop and retain the best and the brightest individuals in the jewelry and watch industry.

In setting the financial objectives for Fiscal 2015, consideration was given to the US and UK economic environments and the potential impact of the acquisition of Zale Corporation (“Zale”), which was announced on February 19, 2014. The US economy has improved slightly over the past year with decreasing unemployment, a stronger housing sector and higher consumer confidence. Growth is improving but remains below historical levels. We plan to continue to execute our strategic priorities and continue to make strategic investments for the future. The UK economic environment has improved over the past year with an increase in the GDP and unemployment decreasing but growth remains slow. Commodity pricing remains volatile. Signet’s plans are based upon favorable gold price benefits in product cost offset by carryover gold hedge losses and an unfavorable impact from lower recovery gold prices on trade-ins and inventory. Diamond pricing is currently expected to continue to increase at low-to-mid single digit rates. Credit financing will continue to support sales growth and we expect the portfolio to grow with continued strong portfolio performance. Due to growth in the receivable portfolio, we expect bad debt expense to increase slightly as a percentage of sales. We expect to maintain a leading position and plan to continue our strategy to improve results through initiatives around merchandising, real estate optimization, channel expansion and cost control.

Signet’s goal in Fiscal 2015 is to deliver strong results building on our recent performance, while making strategic investments necessary for future growth. Financial objectives for the business in Fiscal 2015 are to improve Signet’s operating profit as a percentage of sales by:

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Our operating divisions have the opportunity to take advantage of their competitive positions to grow sales and increase store productivity. Sales growth allows the business to strengthen relationships with suppliers, facilitates the ability to develop further branded differentiated and exclusive merchandise, improves the efficiency of our supply chain, supports marketing expense and improves operating margins. Our financial flexibility and superior operating margins allow us to take advantage of investment opportunities, including space growth and strategic developments that meet our return criteria.

On February 19, 2014, we announced a definitive agreement to acquire Zale, a specialty jeweler. The addition of Zale will help us maximize the strategies discussed above in a variety of ways around merchandise, innovation and testing, new formats, service programs and geographic expansion. We expect the transaction will generate approximately $100 million in synergies by the end of the third full fiscal year of operations. While we expect the transaction to close within calendar year 2014, Signet cannot predict whether or when Zale stockholder and regulatory approval will be obtained, or if the closing conditions will be satisfied. The acquisition will result in the realization of incremental expenses prior to the close of the transaction. These expenses will primarily be transaction-related costs, i.e., legal, tax, banking and consulting expenses, which are expensed as incurred.

The transaction provides for the acquisition of all of Zale’s issued and outstanding common stock for $21.00 per share in cash consideration, or approximately $1.4 billion including net debt, which value may fluctuate depending on the timing of the closing. Signet plans to finance the proposed acquisition with approximately $1.4 billion of debt, which includes $600 million in securitization of Signet’s US accounts receivables portfolio and $800 million in other debt financing. Signet has secured fully committed financing for the transaction, which includes an $800 million 364-day unsecured bridge facility and a $400 million 5-year unsecured term loan facility. The bridge facility is expected to be replaced by permanent financing in due course. The bridge facility and the term loan facility contain customary fees which will be recorded as an expense in Fiscal 2015, with additional interest expense dependent on the timing of borrowings and closing of the transaction.

BACKGROUND

Business segment

Signet’s results principally derive from one business segment – the retailing of jewelry, watches and associated services. The business is managed as two geographical reportable segments: the US division (84% of sales and 93% of operating income) and the UK division (16% of sales and 7% of operating income). Both divisions are managed by executive committees, which report to Signet’s Chief Executive Officer, who reports to the Board of Directors of Signet (the “Board”). Each divisional executive committee is responsible for operating decisions within parameters established by the Board. In the fourth quarter of Fiscal 2014, subsequent to the November 4, 2013 acquisition of a diamond polishing factory in Gaborone, Botswana, management established a separate operating segment (“Other”), which consists of all non-reportable segments including subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones. Detailed financial information about Signet’s segment information is found in Note 2 of Item 8.

Trademarks and trade names

Signet is not dependent on any material patents or licenses in either the US or the UK. However, it does have several well-established trademarks and trade names which are significant in maintaining its reputation and competitive position in the jewelry retailing industry. These registered trademarks and trade names include the following in Signet’s US operations: Kay Jewelers; Kay Jewelers Outlet; Jared The Galleria Of Jewelry; JB Robinson Jewelers; Ultra Diamonds; Marks & Morgan Jewelers; Shaw’s Jewelers; Belden Jewelers; Osterman

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Jewelers; Weisfield Jewelers; LeRoy’s Jewelers; Rogers Jewelers; Goodman Jewelers; Jared Jewelry Boutique; Ultra Diamond & Gold Outlet; Every kiss begins with Kay; He went to Jared; Celebrate Life. Express Love.; the Leo Diamond; Peerless Diamond; Hearts Desire; and Charmed Memories. Trademarks and trade names include the following in Signet’s UK operations: H.Samuel; Ernest Jones; Leslie Davis; Forever Diamonds; and Perfect Partner.

Seasonality

Signet’s sales are seasonal, with the first and second quarters each normally accounting for slightly more than 20% of annual sales, the third quarter a little under 20% and the fourth quarter for about 40% of sales, with December being by far the most important month of the year. Sales made in November and December are known as the “Holiday Season.” Due to sales leverage, Signet’s operating income is even more seasonal; about 45% to 50% of Signet’s operating income normally occurs in the fourth quarter, comprised of nearly all of the UK division’s operating income and about 40% to 50% of the US division’s operating income.

Employees

In Fiscal 2014, the average number of full-time equivalent persons employed was 18,179. In addition, Signet usually employs a limited number of temporary employees during its fourth quarter. None of Signet’s employees in the UK and less than 1% of Signet’s employees in the US are covered by collective bargaining agreements. Signet considers its relationship with its employees to be excellent.

COMPETITION

Jewelry retailing is highly fragmented and competitive. We compete against other specialty jewelers as well as other retailers that sell jewelry, including department stores, mass merchandisers, discount stores, apparel and accessory fashion stores, brand retailers, shopping clubs, home shopping television channels, direct home sellers and online retailers and auction sites. The jewelry category competes for customers’ share-of-wallet with other consumer sectors such as electronics, clothing and furniture, as well as travel and restaurants. This competition for consumers’ discretionary spending is particularly relevant to gift giving. Our competitive strengths are as follows:

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US DIVISION

US market

Calendar 2012 estimates are used by Signet to understand the size and structure of the US jewelry market as the provisional estimates for calendar 2013 available at the time of filing have historically been subject to frequent and sometimes large revisions.

Total US jewelry sales, including watches and fashion jewelry, are estimated by the US Bureau of Economic Analysis (“BEA”) to have been $73.7 billion in calendar 2012 in their January 2014 data release. The US jewelry market has grown at a compound annual growth rate of 4.2% over the last 25 years to calendar 2012 with significant variation over shorter term periods.

In calendar 2012, the US jewelry market grew by an estimated 6.3% (source: BEA, January 2014). The specialty jewelry sector is estimated to have grown by 6.0% to $31.5 billion in calendar 2012 (source: US Census Bureau, January 2014). The specialty sector of the jewelry market share in calendar 2012 was 42.7% as compared to 42.8% in calendar 2011. The Bureau of Labor Statistics estimated that, in calendar 2012, there were 22,080 specialty jewelry stores in the US (2011: 22,237), a reduction of 0.7% compared to the prior year.

The US division’s share of sales made by jewelry and watch retailers was 4.4% in calendar 2012 (calendar 2011: 4.4%), and its share of sales made by specialty jewelry retailers was 10.4% in calendar 2012 (calendar 2011: 10.2%), based on estimates by the US Census Bureau.

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US store brand reviews

Location of Kay, Jared and regional brand stores by state February 1, 2014:

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Store activity by brand

Sales data by brand

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Kay Jewelers

Kay accounted for 51% of Signet’s sales in Fiscal 2014 (Fiscal 2013: 49%) and operated 1,055 stores in 50 states, which include 65 Ultra stores converted to the Kay brand, as of February 1, 2014 (February 2, 2013: 949 stores). Since 2004, Kay has been the largest specialty retail jewelry store brand in the US, based on sales, and has subsequently increased its leadership position. Kay targets households with an income of between $35,000 and $100,000, with a midpoint target of approximately $70,000. Details of Kay’s performance over the last three years are shown below:

Kay mall stores typically occupy about 1,600 square feet and have approximately 1,300 square feet of selling space, whereas Kay off-mall stores typically occupy about 2,200 square feet and have approximately 1,800 square feet of selling space. Kay operates in regional malls and off-mall stores. Off-mall stores primarily are located in outlet malls and power centers. Management believes off-mall expansion is supported by the willingness of customers to shop for jewelry at a variety of real estate locations and that increased diversification is important for growth as increasing the store count further leverages the strong Kay brand, marketing support and the central overhead.

Recent net openings (closures) and current composition are shown below:

Jared The Galleria Of Jewelry

With 203 stores in 39 states as of February 1, 2014 (February 2, 2013: 190 in 39 states), Jared is a leading off-mall destination specialty retail jewelry store chain, based on sales. Jared accounted for 25% of Signet’s sales in Fiscal 2014 (Fiscal 2013: 25%). The first Jared store was opened in 1993, and since its roll-out began in 1998, it has grown to become the fourth largest US specialty retail jewelry brand by sales. Based on its competitive strengths, particularly its scale, management believes that Jared has significant opportunity to grow. Potential customers who visit a destination store have a greater intention of making a jewelry purchase. Jared targets households with an income of between $50,000 and $150,000, with a midpoint target of approximately $100,000.

Details of Jared’s performance over the last three years are shown below:

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Jared offers superior customer service and enhanced selection of merchandise. As a result of its larger size, more specialist sales associates are available to assist customers. In addition, every Jared store has an on-site design and service center where most repairs are completed within the same day. Each store also has at least one diamond viewing room, a children’s play area and complimentary refreshments.

The typical Jared store has about 4,800 square feet of selling space and approximately 6,000 square feet of total space. Jared locations are normally free-standing sites with high visibility and traffic flow, positioned close to major roads within shopping developments. Jared stores operate in retail centers that normally contain strong retail co-tenants, including big box, destination stores such as Bed, Bath & Beyond, Dick’s Sporting Goods and Home Depot, as well as some smaller specialty units.

US regional brands

Signet also operates mall stores under a variety of established regional nameplates, including the 30 remaining Ultra stores not converted to the Kay brand. Regional brands accounted for 7% of Signet’s sales in Fiscal 2014 (Fiscal 2013: 7%) and as of February 1, 2014, include 213 regional brand stores in 36 states (February 1, 2013: 194 stores in 33 states). The leading brands include JB Robinson Jewelers, Ultra Diamonds and Marks & Morgan Jewelers. All of these regional brand stores are located where there is also a Kay location, and target a similar customer. Details of the regional brands’ performance over the last three years are shown below:

Ultra

On October 29, 2012, Signet acquired Ultra which primarily operated in outlet malls. Ultra accounted for 1% of Signet’s sales in Fiscal 2013. At February 2, 2013, there were 110 Ultra stores and 33 Ultra licensed jewelry department stores. During Fiscal 2014, a majority of these stores were converted to the Kay brand, with the remaining open stores being reflected in regional brands. In addition, all licensed jewelry departments were closed in the fourth quarter of Fiscal 2014. Details of Ultra from the date of acquisition through the end of Fiscal 2013 are shown below:

US eCommerce sales

The Kay and Jared websites are among the most visited of the specialty jewelry retailers (source: JCK) and provide potential customers with a source of information about the merchandise available, as well as the ability to buy online. The websites are integrated with the division’s stores, so that merchandise ordered online may be picked up at a store or delivered to the customer. The websites make an important and growing contribution to

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the customer experience at Kay and Jared, and are an important part of the US division’s marketing programs. In Fiscal 2014, the US division’s eCommerce sales increased by 27.2% to $129.0 million (Fiscal 2013: $101.4 million), and represented 3.7% of US sales (Fiscal 2013: 3.1%).

US operating review

Operating structure

While the US division operates under the Kay, Jared and a number of regional store brands, many functions are integrated to gain economies of scale. For example, store operations have a separate dedicated field management team for the mall store brands, Jared and the in-store repair function, while there is a combined diamond sourcing function.

US customer experience and human resources

Management regards the customer experience as an essential element in the success of our business. Therefore the ability to recruit, train and retain qualified sales associates is important in determining sales, profitability and the rate of net store space growth. Accordingly, the US division has in place comprehensive recruitment, training and incentive programs and uses employee and customer satisfaction surveys to monitor and improve performance. A continual priority of the US division is to improve the quality of the customer experience. To enhance customer service, the US division is increasingly using sales-enhancing technology, including customer-assisted selling systems. These computerized tools enable a sales associate to better assist a potential customer to make a purchase decision. Investment in the digital environment such as websites, mobile applications and social media, further adds to the customer’s shopping choices.

US merchandising and purchasing

Management believes that merchandise selection, availability and value are critical success factors for its business. In the US business, the range of merchandise offered and the high level of inventory availability are supported centrally by extensive and continuous research and testing. Best-selling products are identified and replenished rapidly through analysis of sales by stock keeping unit. This approach enables the US division to deliver a focused assortment of merchandise to maximize sales and inventory turn, and minimize the need for discounting. Management believes that the US division is better able to offer greater value and consistency of merchandise than its competitors, due to its supply chain strengths discussed below. In addition, in recent years management has continued to develop, refine and execute a strategy to increase the proportion of branded differentiated and exclusive merchandise sold, in response to customer demand.

The scale and information systems available to management and the gradual evolution of jewelry fashion trends allow for the careful testing of new merchandise in a range of representative stores. This enables management to make more informed investment decisions about which merchandise to select, thereby increasing the US division’s ability to satisfy customers’ requirements while reducing the likelihood of having to discount merchandise.

Merchandise mix

US division merchandise mix (excluding repairs, warranty and other miscellaneous sales)

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The celebration of life and the expression of romance and appreciation are primary motivators for the purchase of jewelry and watches. In the US division, the bridal category, which includes engagement, wedding and anniversary purchases, is estimated by management to account for about 50% of merchandise sales, and is predominantly diamond jewelry. The bridal category is believed by management to experience stable demand, but is still dependent on the economic environment as customers can trade up or down price points depending on their available budget. Outside of the bridal category, jewelry and watch purchases, including for gift giving, have a much broader merchandise mix. Gift giving is particularly important during the Holiday Season, Valentine’s Day and Mother’s Day.

A further categorization of merchandise is branded differentiated and exclusive, third-party branded and core merchandise. Core merchandise includes items and styles, such as solitaire rings and diamond stud earrings, which are uniquely designed, as well as items that are generally available from other jewelry retailers. It also includes styles such as diamond fashion bracelets, rings and necklaces. Within this category, the US division has many exclusive designs of particular styles and provides high quality merchandise with great value to customers. Third-party branded merchandise includes mostly watches, but also includes ranges such as charm bracelets produced by Pandora^®. Branded differentiated and exclusive merchandise are items that are branded and exclusive to Signet within its marketplaces, or that are not widely available in other jewelry retailers.

Branded differentiated and exclusive ranges

Management believes that the development of branded differentiated and exclusive merchandise raises the profile of Signet’s stores, helps to drive sales and provides its well trained sales associates with a powerful selling proposition. National television advertisements for Kay and Jared include elements that drive brand awareness and purchase intent of these ranges. Management believes that Signet’s scale and proven record of success in developing branded differentiated and exclusive merchandise attracts offers of such programs from jewelry manufacturers, designers and others ahead of competing retailers, and enables it to achieve its supply chain strengths. Management plans to develop additional branded differentiated and exclusive ranges as appropriate and to further expand and refine those already launched.

Branded differentiated and exclusive merchandise includes:

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Direct sourcing of rough diamonds

Management continues to take steps to advance its rough diamond sourcing and manufacturing through its wholly owned subsidiary Signet Direct Diamond Sourcing Limited. In Fiscal 2013, Signet was appointed by Rio Tinto as a Select Diamantaire, which provides the Company with a contracted allocation of rough diamonds provided by Rio Tinto, as well as entered into other supplier agreements. In Fiscal 2014, Signet acquired a diamond polishing factory in Gaborone, Botswana and established a diamond buying office in India. These developments in Signet’s long-term diamond sourcing capabilities mean that Signet is able to buy rough diamonds directly from the miners and then have the stones marked, cut and polished in its own polishing facility. Signet’s objective with this initiative is to secure additional, reliable and consistent supplies of diamonds for our customers while achieving further efficiencies in the supply chain.

Direct sourcing of polished diamonds

The US division purchases loose polished diamonds on the world markets and from Signet’s wholly owned diamond polishing factory in Botswana, as well as outsources the majority of casting, assembly and finishing operations to third parties. In addition, Signet mounts stones in settings purchased from manufacturers. In combination, these account for 40% of Signet’s diamond merchandise. By using these approaches, the cost of merchandise is reduced, and the consistency of quality is maintained, enabling the US division to provide better value to the customer, which helps to increase market share and achieve higher gross merchandise margins. The contract manufacturing strategy also allows Signet’s buyers to gain a detailed understanding of the manufacturing cost structures and, in turn, leverage that knowledge with regard to negotiating better prices for the supply of finished products.

Sourcing of finished merchandise

Merchandise is purchased as a finished product where the item is complex, the merchandise is considered likely to have a less predictable sales pattern or where the labor cost can be reduced. This method of buying inventory provides the opportunity to reserve inventory held by vendors and to make returns or exchanges with the supplier, thereby reducing the risk of over- or under-purchasing.

Management believes that the division’s scale and strong balance sheet enables it to purchase merchandise at an advantageous price, and on favorable terms.

Merchandise held on consignment

Merchandise held on consignment is used to enhance product selection and test new designs. This minimizes exposure to changes in fashion trends and obsolescence, and provides the flexibility to return non-performing merchandise. All of Signet’s consignment inventory is held in the US. At February 1, 2014, the US division held $312.6 million (February 2, 2013: $227.7 million) of merchandise on consignment, see Note 11 of Item 8.

Suppliers

In Fiscal 2014, the five largest suppliers collectively accounted for approximately 22% (Fiscal 2013: 23%) of the US division’s total purchases, with the largest supplier accounting for approximately 6% (Fiscal 2013: 6%). The US division directly transacts business with suppliers on a worldwide basis at various stages of the supply chain, with third party diamond cutting and jewelry manufacturing being predominantly carried out in Asia.

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The division benefits from close commercial relationships with a number of suppliers and damage to, or loss of, any of these relationships could have a detrimental effect on results. Although management believes that alternative sources of supply are available, the abrupt loss or disruption of any significant supplier during the three month period (August to October) leading up to the Holiday Season could result in a materially adverse effect on performance. Therefore a regular dialogue is maintained with suppliers, particularly in the present economic climate.

Luxury and prestige watch manufacturers and distributors normally grant agencies to sell their timepieces on a store by store basis. In the US, Signet sells its luxury watch brands primarily through Jared, where management believes that they help attract customers to Jared and build sales in all categories.

Raw materials and the supply chain

The jewelry industry generally is affected by fluctuations in the price and supply of diamonds, gold and, to a much lesser extent, other precious and semi-precious metals and stones. Diamonds account for about 55%, and gold about 15%, of the US division’s cost of merchandise sold, respectively.

The ability of Signet to increase retail prices to reflect higher commodity costs varies, and an inability to increase retail prices could result in lower profitability. Signet has, over time, been able to increase prices to reflect changes in commodity costs due to the visibility of cost increases and the turn of inventory.

Signet undertakes hedging for a portion of its requirement for gold through the use of options, net zero-cost collar arrangements, forward contracts and commodity purchasing. It is not possible to hedge against fluctuations in the cost of diamonds. The cost of raw materials is only part of the costs involved in determining the retail selling price of jewelry, with labor costs also being a significant factor. Management continues to seek ways to reduce the cost of goods sold and enhance the resilience of its supply chain.

The largest product category sold by Signet is diamonds and diamond jewelry. Changes in government policy in a number of African diamond producing countries have caused significant changes in the structure of the diamond supply chain in recent years. In addition, there are changes in the ownership of diamond mines and further major changes are likely.

Inventory management

Sophisticated inventory management systems for merchandise testing, assortment planning, allocation and replenishment are in place, thereby reducing inventory risk by enabling management to identify and respond quickly to changes in customers’ buying patterns. The majority of merchandise is common to all US division mall stores, with the remainder allocated to reflect demand in individual stores. Management believes that the merchandising and inventory management systems, as well as improvements in the productivity of the centralized distribution center, have allowed the US division to achieve consistent improvement in inventory turns. The vast majority of inventory is held at stores rather than in the central distribution facility.

Other sales

While custom design and repair services represent less than 10% of sales, they account for approximately 30% of transactions and have been identified by management as an important opportunity to build customer loyalty. All Jared stores have a highly visible Design and Service Center, which is open the same hours as the store. The repair centers meet the repair requirements of the store in which they are located and also provide the same service for the US division’s mall brand stores. As a result, nearly all customer repairs are performed in-house, unlike many other retailers, which do this through sub-contractors. The custom design and repair function has its own field management and training structure.

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The US division sells, as a separate item, a lifetime repair service plan for jewelry. These plans cover services such as ring sizing, refinishing and polishing, rhodium plating of white gold, earring repair, chain soldering and the resetting of diamonds and gemstones that arise due to the normal usage of the merchandise. Such work is performed in-house.

US digital ecosytem capabilities

In recent years, significant investments and initiatives have been completed to drive growth across all of Signet’s selling channels. New Kay and Jared websites with improved functionality in product search and navigation were re-launched in October 2012, increasing product selection by 10 times. Kay.com and Jared.com sites have further evolved from this re-launch, optimizing the customer experiences for both desktop and mobile devices. Fully transactional enhanced mobile sites for Kay and Jared, launched in October 2012, have also further evolved to allow customers to pay their credit balances from their mobile phones. Other initiatives in sales-enhancing technology included digital tablets in all Kay and Jared stores. Signet made significant investments in social media, as customer shopping practices require Signet to provide leading technology applications. The Kay and Jared fan base and followers on Facebook and Twitter continue to climb and social media outlets are driving more traffic to Signet’s eCommerce sites. In addition, Signet has also created an online education center, Jewelrywise.com, to provide a resource to customers who want to know more about jewelry.

Virtual inventory

Signet’s supplier relationships allow it to display suppliers’ inventories on the Jared and Kay websites for sale to customers without holding the items in its inventory until the products are ordered by customers, which are referred to as “virtual inventory.” Virtual inventory expands the choice of merchandise available to customers both online and in-store. Virtual inventory reduces the division’s investment in inventory while increasing the selection available to the customer.

US marketing and advertising

Management believes customers’ confidence in our retail brands, store brand name recognition and advertising of branded differentiated and exclusive ranges, are important factors in determining buying decisions in the jewelry industry where the majority of merchandise is unbranded. Therefore, the US division continues to strengthen and promote its brands by delivering superior customer service and building brand name recognition. The marketing channels used include television, digital media (desktop, mobile and social), radio, print, catalog, direct mail, telephone marketing, point of sale signage and in-store displays.

While marketing activities are undertaken throughout the year, the level of activity is concentrated at periods when customers are expected to be most receptive to marketing messages, which is ahead of Christmas Day, Valentine’s Day and Mother’s Day. A significant majority of the expenditure is spent on national television advertising, which is used to promote the Kay and Jared store brands. Within such advertisements, Signet also promotes certain merchandise ranges, in particular its branded differentiated and exclusive merchandise and other branded products. During Fiscal 2014, the US division continued to have the leading share of relevant marketing messages (“share of voice”) within the US jewelry sector.

Statistical and technology-based systems are employed to support a customer relationship marketing program that uses a proprietary database of nearly 28.5 million names to build customer loyalty and strengthen the relationship with customers through mail, telephone, eMail and social media communications. The program targets current customers with special savings and merchandise offers during key sales periods. In addition, invitations to special in-store promotional events are extended throughout the year.

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Given the size of the marketing budgets for Kay and Jared, management believes this has increased the US division’s competitive marketing advantage. The ability to advertise branded differentiated and exclusive merchandise on national television continues to be of growing importance. The US division’s three year record of gross advertising spending is shown below:

US real estate

Management has specific operating and financial criteria that have to be satisfied before investing in new stores or renewing leases on existing stores. Substantially all the stores operated by Signet in the US are leased. In Fiscal 2014, net store space increased 5% due to new store growth (Fiscal 2013: increase 11%, due to the Ultra Acquisition and new store growth). The greatest opportunity for new stores is in locations outside traditional covered regional malls.

Recent investment in the store portfolio is set out below:

US customer finance

Management believes that in the US jewelry market, offering finance facilities benefits our customers and that managing the process in-house is a strength of Signet’s US division. The US division:

The various customer finance programs assist in establishing and enhancing customer loyalty and complement the marketing strategy by enabling a greater number of purchases, higher units per transaction and greater value sales.

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In addition to interest-bearing transactions that involve the use of in-house customer finance, a portion of credit sales are made using interest-free financing for one year, subject to certain conditions. In most US states, customers are offered optional third-party credit insurance.

The customer financing operation is centralized and fully integrated into the management of the US division and is not a separate operating division nor does it report separate results. All assets and liabilities relating to customer financing are shown on the balance sheet and there are no associated off-balance sheet arrangements. Signet’s balance sheet and access to liquidity do not constrain the US division’s ability to grant credit, which is a further competitive strength in the current economic environment. The US division’s customer finance facility may only be used for purchases from the US division.

Allowances for uncollectible amounts are recorded as a charge to cost of goods sold in the income statement. The allowance is calculated using factors such as delinquency rates and recovery rates. A 100% allowance is made for any amount that is more than 90 days aged on a recency basis and any amount associated with an account the owner of which has filed for bankruptcy, as well as an allowance for those amounts 90 days aged and under based on historical loss information and payment performance. The calculation is reviewed by management to assess whether, based on economic events, additional analyses are required to appropriately estimate losses inherent in the portfolio.

Each individual application for credit is evaluated centrally against set lending criteria. The risks associated with the granting of credit to particular groups of customers with similar characteristics are balanced against the gross merchandise margin earned by the proposed sales to those customers. Management believes that the primary drivers of the net bad debt to total US sales ratio are the accuracy of the proprietary customer credit models used when granting customer credit, the procedures used to collect the outstanding balances, credit sales as a percentage to total US sales and the overall macro-economic environment. Cash flows associated with the granting of credit to customers of the individual store are included in the projections used when considering store investment proposals.

Customer financing statistics⁽¹⁾

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Customer financing administration

Authorizations and collections are performed centrally at the US divisional head office. The majority of credit applications are processed and approved automatically after being initiated via in-store terminals or online through the US division’s websites. The remaining applications are reviewed by the division’s credit authorization personnel. All applications are evaluated by proprietary credit scoring models. Collections focus on a quality customer experience using risk-based calling and strategic account segmentation. Investments are geared towards best in class technology, system support and strategy analytics with the objective of maximizing effectiveness.

US management information systems

The US division’s integrated and comprehensive information systems provide detailed, timely information to support, monitor and evaluate all key aspects of the business including finance, merchandise, marketing, multi-channel retailing, field support and private label credit.

All stores are supported by the internally developed Store Information System, which includes point of sale (“POS”) processing, in-house credit authorization and support, a district manager information system and constant broadband connectivity for all retail locations for data communications including eMail. The POS system updates sales, in-house credit and perpetual inventory replenishment systems throughout the day for each store.

The US division plans to invest approximately $49 million in information systems in Fiscal 2015 (Fiscal 2014: $27.0 million). The planned increase reflects investments in sales-enhancing technology, both in-store and in the digital environment and in information technology designed to improve the effectiveness and efficiency of the division’s operations.

Management believes that the US division has the most sophisticated management information systems among jewelry retailers.

US regulation

The US division is required to comply with numerous US federal and state laws and regulations covering areas such as consumer protection, consumer privacy, data protection, consumer credit, consumer credit insurance, health and safety, waste disposal, supply chain integrity, truth in advertising and employment legislation. Management monitors changes in these laws to endeavor to comply with applicable requirements.

UK DIVISION

The UK division is managed in pounds sterling, as sales and the majority of operating expenses are both incurred in that currency, and its results are then translated into US dollars for external reporting purposes. The following information for the UK division is given in pounds sterling as management believes that this presentation assists in the understanding of the performance of the UK division. Movements in the US dollar to pound sterling exchange rate therefore may have an impact on the results of Signet (as reflected in the table below), particularly in periods of exchange rate volatility. See Item 6 for analysis of results at constant exchange rates; non-GAAP measures.

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UK market

The UK market includes specialty retail jewelers and general retailers who sell jewelry and watches, such as catalog showrooms, department stores, supermarkets, mail order catalogs and internet based retailers. The retail jewelry market is very fragmented and competitive, with a substantial number of independent specialty jewelry retailers. Management believes there are approximately 4,030 specialty retail jewelry stores in the UK as of December 2013, a decrease from approximately 4,070 specialty retail jewelry stores in December 2012 (source: IBISWorld).

Ernest Jones and H.Samuel compete with a large number of independent jewelry retailers, as well as catalog showroom operators, discount jewelry retailers, supermarkets, apparel and accessory fashion stores, online retailers and auction sites.

UK store brand reviews

Sales data by brand

H.Samuel

H.Samuel accounted for 9% of Signet’s sales in Fiscal 2014 (Fiscal 2013: 10%), and is the largest specialty retail jewelry store brand in the UK by number of stores. H.Samuel has 150 years of jewelry heritage and its customers typically have an annual household income of between £15,000 and £40,000. The typical store selling space is 1,100 square feet.

H.Samuel continues to focus on larger store formats in regional shopping centers, and the number of H.Samuel stand alone ‘High Street’ locations has therefore declined as leases expire.

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H.Samuel store data