Edgar Filing: SIGNET JEWELERS LTD

10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



x	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the fiscal year ended January 30, 2016

Commission file number 1-32349

SIGNET JEWELERS LIMITED

(Exact name of Registrant as specified in its charter)




Bermuda		Not Applicable
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

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:



Title of Each Class		Name of Each Exchange on which Registered
Common Shares of $0.18 each		The New York Stock Exchange

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 July 31, 2015 was $9,644,661,044.

Number of common shares outstanding on March 18, 2016: 78,384,481

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 17, 2016.

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SIGNET JEWELERS LIMITED

FISCAL 2016 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS




		PAGE
FORWARD-LOOKING STATEMENTS			3

	PART I

ITEM 1.	BUSINESS		4
ITEM 1A.	RISK FACTORS		26
ITEM 1B.	UNRESOLVED STAFF COMMENTS		33
ITEM 2.	PROPERTIES		33
ITEM 3.	LEGAL PROCEEDINGS		34
ITEM 4.	MINE SAFETY DISCLOSURE		34

	PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		35
ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA		40
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		51
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		79
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		81
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		136
ITEM 9A.	CONTROLS AND PROCEDURES		136
ITEM 9B.	OTHER INFORMATION		136

	PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		137
ITEM 11.	EXECUTIVE COMPENSATION		137
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		137
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		137
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES		137

	PART IV

ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES		138

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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.

PRESENTATION OF FINANCIAL INFORMATION

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

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 2017,” “Fiscal 2016,” “Fiscal 2015,” “Fiscal 2014,” “Fiscal 2013” and “Fiscal 2012” refer to the 52 week periods ending January 28, 2017, January 30, 2016, January 31, 2015, February 1, 2014, the 53 week period ending February 2, 2013 and the 52 week period ending January 28, 2012, respectively. Fourth quarter references the 13 weeks ended January 30, 2016 (“fourth quarter”) and the 13 weeks ended January 31, 2015 (“prior year 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, a decline in consumer spending, 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 customer credit, seasonality of Signet’s business, financial market risks, deterioration in customers’ financial condition, exchange rate fluctuations, changes in Signet’s credit rating, 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, risks relating to Signet being a Bermuda corporation, the impact of the acquisition of Zale Corporation on relationships, including with employees, suppliers, customers and competitors, the impact of stockholder litigation with respect to the acquisition of Zale Corporation, and our ability to successfully integrate Zale Corporation’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

ITEM 1. BUSINESS

OVERVIEW

Signet Jewelers Limited (“Signet” or the “Company”) is the world’s largest retailer of diamond jewelry. 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 required to file or furnish with the US Securities and Exchange Commission (“SEC”) may be viewed or downloaded free of charge.

On May 29, 2014, the Company acquired 100% of the outstanding shares of Zale Corporation (the “Zale Acquisition” or “Acquisition”) for $1,458.0 million, including $478.2 million to extinguish Zale Corporation’s existing debt. The Acquisition was funded by the Company through existing cash and the issuance of $1,400.0 million of long-term debt. The Acquisition aligned with each strategic pillar of the Company’s Vision 2020. See Notes 3 and 19 of Item 8 for additional information related to the Acquisition and the issuance of long-term debt to finance the transaction, respectively.

The Company manages its business by store brand grouping, a description of which follows:


•	The Sterling Jewelers division is one reportable segment. It operated 1,540 stores in all 50 US states at January 30, 2016. Its stores operate nationally in malls and off-mall locations principally as Kay Jewelers (“Kay”), Kay Jewelers Outlet, Jared The Galleria Of Jewelry (“Jared”) and Jared Vault. The division also operates a variety of mall-based regional brands.


•	The Zale division consists of two reportable segments:


◦	Zale Jewelry, which operated 977 jewelry stores at January 30, 2016, is located primarily in shopping malls in North America. Zale Jewelry includes the US store brand Zales (Zales Jewelers and Zales Outlet), which operates in all 50 US states, and the Canada store brand Peoples Jewellers, which operates in nine provinces. The division also operates regional brands Gordon’s Jewelers and Mappins.


◦	Piercing Pagoda, which operated 605 mall-based kiosks at January 30, 2016, is located in shopping malls in the US and Puerto Rico.


•	The UK Jewelry division is one reportable segment. It operated 503 stores at January 30, 2016. Its stores operate in shopping malls and off-mall locations (i.e. high street) principally as H.Samuel and Ernest Jones.

Certain company activities (e.g. diamond sourcing) are managed as a separate operating segment and are aggregated with unallocated corporate administrative functions in the segment “Other” for financial reporting purposes. Signet’s diamond sourcing function includes our diamond polishing factory in Botswana. See Note 4 of Item 8 for additional information regarding the Company’s reportable segments.

MISSION, STRATEGY, COMPETITIVE STRENGTHS AND OBJECTIVES

Signet’s mission is to help guests “Celebrate Life and Express Love.” Our Vision 2020 strategy is a road map for on-going Signet success which includes five strategic pillars:


•	Maximize mid-market


•	Best in bridal


•	Best in class digital ecosystem


•	Expand footprint


•	People, purpose and passion

These strategic pillars guide Signet in building profitable market share. Maximizing the mid-market drives our competitive strengths focused on merchandising initiatives, marketing, store growth and productivity. We define the mid-market jewelry sector based on the value of products that consumers purchase. We consider this market to be defined by jewelry purchases with price points ranging from $100 to $10,000, which essentially excludes costume and luxury jewelry categories. The vast majority of Signet’s sales (95%) are in this range of price points. This subset of the total US jewelry market is $41.2 billion or over half the total US market. In pursuit of this strategic pillar, we continuously review our US national store brands performance and have concluded that our customer population has several distinct shopping and purchasing characteristics or customer identities. Consequently, we attempt to maximize our share of the mid-market by differentiating customers based on attitudes and behaviors, versus demographic information. This approach to customer segmentation results in distinct customer identities:


•	The “Sentimentalist” - a seeker of high-quality, timeless jewelry which invokes sentimental value.


•	The “Gifter” - a customer that is not highly knowledgeable of jewelry but purchases for others.

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•	The “Influencer” - a customer that uses jewelry to show status and is knowledgeable of brands. The Influencer is a customer focused on both self-purchase and gifting.


•	The “Stylish Shopper” - a customer that wears jewelry often and considers it an essential aspect of fashion.


•	The “Practical Shopper” - a customer that focuses on inexpensive, everyday jewelry.

Although each of our US national store brand customers share many of these five customer traits, each store brand attracts a heavier weighting of certain types of customers. This customer segmentation approach empowers Signet to define our highest-priority growth opportunities within the mid-market (i.e., where Signet will play), to differentiate and optimize our store brands, including guest experience, merchandise brands and marketing.

Our brand discussion included within Item 1 includes alignment of these customer identities with our US national store brands.

Being the best in bridal is an ongoing journey, not a destination. In jewelry, bridal represents the closest thing to a necessity for our customers. We continuously look to develop differentiated bridal jewelry products, increasing targeted marketing programs, delivering the best guest experience by our sales associates, advancing vertical integration in our supply chain and offering credit financing. Our omni-channel approach to educating, selling and serving of customers is uniquely important in jewelry retail because the purchase of jewelry is personal, intimate and typically viewed as an important experience. The internet often represents the first interaction a customer or prospective guest will have with us when a jewelry-buying occasion arises. As trust is the most important factor in why people buy jewelry where they do, customers overwhelmingly complete their purchases in our stores with our trusted knowledgeable sales associates. Enhancing our digital eco-system and simplifying and accelerating our guest’s engagement with our brands is a crucial step of our omni-channel approach. Expanding our geographic footprint is expected to enable cross-collaboration among and between our domestic and international teams and further growth and diversification of our real estate portfolio. In order to truly accomplish our core mission of helping our guests “Celebrate Life and Express Love,” we must have people with high capability and passion. We will continue our efforts to attract, develop and retain the best and the brightest individuals in the jewelry and watch industry.

The expression of romance and appreciation through bridal jewelry and gift giving are very important to our guests, as is self-reward. Guests associate Signet’s brands with high quality jewelry and an outstanding guest experience. As a result, the training of sales associates to understand the guests’ requirements, communicate the value of the merchandise selected and ensure guest needs are met remains a high priority. Signet increases the attraction of its store brands to guests 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. The Company 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.

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.

Signet’s competitive strengths include: strong store brands, outstanding guest experience, branded differentiated and exclusive merchandise, sector-leading advertising, diversified real estate portfolio, supply chain leadership, customer finance programs, and financial strength and flexibility.

Operational Strategy

In setting financial objectives for Fiscal 2017, consideration was given to several factors including the Zale integration, Signet’s Vision 2020 strategy and the economic environments in which the Company does business. The economies of the US, Canada and UK have improved slightly over the past year due to relatively low unemployment, inflation, interest rates and energy prices, offset by higher food and health care costs and higher consumer savings. Certain sectors of the U.S. and Canadian economies have declined during Fiscal 2016, including the Oil & Gas industry. We believe this decline has had a disproportionate impact within our Zale Jewelry segment due to the concentration of retail locations within affected regions such as Edmonton, Calgary, the “Dakota’s” region (Southern Saskatoon, North Dakota and Western Colorado), West Texas, and the Houston region.

Signet will execute on its strategic priorities and continue to make strategic investments for the future. The cost of diamonds, Signet’s most significant input cost, is currently expected to increase at low-to-mid single digit rates. Consumer credit is important for Signet. Signet takes a hybrid approach to credit by assuming the risk and reward of owning in-house accounts receivable for its Sterling Jewelers division while primarily using third party financing programs for its other divisions. Financing will continue to support sales growth and we expect the receivables portfolio to grow and perform strongly. Signet intends to improve results through realization of synergies associated with the Zale Acquisition and other initiatives around merchandising, real estate optimization, channel expansion and cost control.

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Signet’s goal in Fiscal 2017 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 2017 are to position the Company for long-term growth by:


•	Expanding our gross margin rate through higher sales and realization of synergies.


•	Leveraging our selling, general and administrative expense to sales ratio, by executing effective multi-channel marketing programs, through implementing organizational design efficiencies and workforce management.


•	Gaining profitable market share through brand differentiation and market segmentation, product cost control and asset management.


•	Advancing our integration activities of Zale, including continued realization of cost and operating synergies. Signet anticipates realizing $225 million to $250 million in cumulative 3-year synergies through January 2018. Approximately 70% of that cumulative goal is expected to be realized by the end of Fiscal 2017.


•	Investing $315 to $365 million of capital in new stores, store remodels, enhancing information technology infrastructure to drive future growth and expanding our Akron-based store support center.

Signet has the opportunity to take advantage of its competitive position as one of the world’s largest and most profitable jewelry retailers. Signet’s ability to deliver sales growth allows the business to strengthen relationships with suppliers, facilitate the ability to develop further branded differentiated and exclusive merchandise, improve the efficiency of its supply chain, support marketing investments and improve operating margins. Signet’s financial flexibility and access to capital markets allow it to take advantage of investment opportunities, including space growth and strategic developments that meet investment criteria.

Capital Strategy

The Company expects to maintain a strong balance sheet that provides the flexibility to execute its strategic priorities, invest in its business, and then return excess cash to shareholders while ensuring adequate liquidity. Signet is committed to maintaining its investment grade rating because long-term, it intends to pursue value-enhancing strategic growth initiatives. Among the key tenets of Signet’s capital strategy:


•	Achieve adjusted debt¹/ adjusted EBITDAR¹ (“adjusted leverage ratio”) of 3.5x or below. This would allow the Company to utilize available sources of debt in Fiscal 2017 and beyond.


•	Distribute 70% to 80% of annual free cash flow¹ in the form of stock repurchases or dividends assuming no other strategic uses of capital.


•	Consistently increase the dividend annually assuming no other strategic uses of capital.

The Company has a remaining share repurchase authorization as of the end of Fiscal 2016 of $135.6 million. In February 2016, the Company’s Board of Directors authorized an additional $750 million of share repurchases to be executed in a manner that aligns with leverage and free cash flow targets.


¹	Adjusted debt, Adjusted EBITDAR, and free cash flow are non-GAAP measures. Signet believes they are useful measures to provide insight into how the Company intends to use capital. See Item 6 for reconciliation.

BACKGROUND

Operating segments

The business is managed as five reportable segments: the Sterling Jewelers division (60.9% of sales and 102.1% of operating income), the Zale division, which is comprised of the Zale Jewelry segment (23.9% of sales and 6.3% of operating income) and the Piercing Pagoda segment (3.7% of sales and 1.1% of operating income) and the UK Jewelry division (11.3% of sales and 8.7% of operating income). All divisions are managed by an executive committee, which is chaired by Signet’s Chief Executive Officer, who reports to the Board of Directors of Signet (the “Board”). The executive committee is responsible for operating decisions within parameters established by the Board. Additionally, as a result of the acquisition of a diamond polishing factory in Gaborone, Botswana in Fiscal 2014, management established a separate reportable segment (“Other”) (0.2% of sales and (18.2)% of operating income). Other consists of all non-reportable segments, including subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones and unallocated corporate administrative function. See Note 4 of Item 8 for additional information regarding the Company’s segments.

Trademarks and trade names

Signet is not dependent on any material patents or licenses in any of its divisions. Signet has several well-established trademarks and trade names which are significant in maintaining its reputation and competitive position in the jewelry retailing industry. Some of these registered trademarks and trade names include the following:

•

Kay Jewelers^®; Kay Jewelers Outlet^®; Jared The Galleria Of Jewelry^®; Jared Vault^TM; Jared Jewelry Boutique^TM; JB Robinson^® Jewelers; Marks & Morgan Jewelers^®; Every kiss begins with Kay^®; He went to Jared^®; Celebrate Life. Express Love.^®; the Leo^® Diamond; Hearts Desire^®; Artistry Diamonds^®; Charmed Memories^®; Diamonds in Rhythm^®; Open Hearts by Jane Seymour^®; Radiant Reflections^®; Colors in Rhythm^®;Chosen by Jared^TM; Now and Forever^®; and Ever Us^TM.

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•	Zales^®; Zales Jewelers^TM; Zales the Diamond Store^®; Zales Outlet^®; Gordon’s Jewelers^®; Peoples Jewellers^®; Peoples the Diamond Store^®; Peoples Outlet the Diamond Store^®; Mappins^®; Piercing Pagoda^®; Arctic Brilliance Canadian Diamonds^®; Candy Colored Jewelry^®; Celebration Diamond^®; The Celebration Diamond Collection^®; Unstoppable Love^®; and Endless Brilliance^®.


•	H.Samuel; Ernest Jones; Ernest Jones Outlet Collection; Leslie Davis; and Forever Diamonds.

Store locations

Signet operates retail jewelry stores in a variety of real estate formats including mall-based, free-standing, strip center and outlet store locations. As of January 30, 2016, Signet operated 3,625 stores and kiosks across 5.0 million square feet of retail space. This represented an increase of 1.3% and 3.3% in locations and retail space, respectively, due to new store growth. During Fiscal 2016, Signet opened 108 stores and closed 62 stores. Store locations by country and territory, as of January 30, 2016, are as follows:



	Sterling Jewelers division				Zale division						UK Jewelry division			Signet
	Kay	Jared	Regional brands	Total	Zales	Peoples	Regional brands	Total Zale Jewelry	Piercing Pagoda	Total	H.Samuel	Ernest Jones	Total	Total stores
US	1,129	270	141	1,540	720	—	58	778	591	1,369	—	—	—	2,909
Canada	—	—	—	—	—	145	43	188	—	188	—	—	—	188
Puerto Rico	—	—	—	—	10	—	1	11	14	25	—	—	—	25
United Kingdom	—	—	—	—	—	—	—	—	—	—	279	195	474	474
Republic of Ireland	—	—	—	—	—	—	—	—	—	—	20	6	26	26
Channel Islands	—	—	—	—	—	—	—	—	—	—	2	1	3	3
Total	1,129	270	141	1,540	730	145	102	977	605	1,582	301	202	503	3,625

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Store locations by US state, Canadian province and Puerto Rico, as of January 30, 2016, are as follows:



	Sterling Jewelers division				Zale division						Signet
	Kay	Jared	Regional brands	Total	Zales	Peoples	Regional brands	Total Zale Jewelry	Piercing Pagoda	Total	Total Stores
Alabama	23	2	4	29	12	—	—	12	2	14	43
Alaska	3	—	1	4	2	—	—	2	—	2	6
Arizona	19	9	1	29	15	—	—	15	12	27	56
Arkansas	8	1	—	9	10	—	4	14	—	14	23
California	79	18	3	100	59	—	—	59	34	93	193
Colorado	16	6	2	24	16	—	—	16	4	20	44
Connecticut	13	2	2	17	9	—	—	9	14	23	40
Delaware	4	2	—	6	4	—	2	6	6	12	18
Florida	81	23	9	113	56	—	5	61	70	131	244
Georgia	48	13	4	65	19	—	—	19	8	27	92
Hawaii	7	—	—	7	7	—	—	7	—	7	14
Idaho	4	1	—	5	1	—	—	1	—	1	6
Illinois	44	12	5	61	26	—	—	26	21	47	108
Indiana	26	6	7	39	12	—	—	12	11	23	62
Iowa	15	1	1	17	6	—	—	6	4	10	27
Kansas	9	2	—	11	7	—	—	7	4	11	22
Kentucky	19	3	6	28	8	—	—	8	7	15	43
Louisiana	16	3	1	20	16	—	8	24	—	24	44
Maine	6	1	1	8	1	—	—	1	2	3	11
Maryland	30	9	7	46	14	—	—	14	22	36	82
Massachusetts	24	5	3	32	10	—	—	10	26	36	68
Michigan	39	9	8	56	21	—	—	21	10	31	87
Minnesota	17	5	3	25	9	—	—	9	8	17	42
Mississippi	13	—	—	13	8	—	—	8	—	8	21
Missouri	18	5	—	23	12	—	1	13	6	19	42
Montana	3	—	—	3	1	—	—	1	—	1	4
Nebraska	7	—	—	7	3	—	—	3	1	4	11
Nevada	11	3	1	15	6	—	2	8	5	13	28
New Hampshire	11	4	2	17	6	—	—	6	8	14	31
New Jersey	31	7	—	38	20	—	—	20	31	51	89
New Mexico	5	1	—	6	9	—	4	13	4	17	23
New York	65	9	4	78	40	—	—	40	65	105	183
North Carolina	42	12	1	55	18	—	1	19	19	38	93
North Dakota	4	—	—	4	4	—	—	4	—	4	8
Ohio	57	17	27	101	13	—	—	13	23	36	137
Oklahoma	8	2	—	10	10	—	5	15	—	15	25
Oregon	15	3	1	19	5	—	—	5	4	9	28
Pennsylvania	61	11	7	79	36	—	1	37	62	99	178
Rhode Island	3	1	—	4	1	—	—	1	3	4	8
South Carolina	25	4	2	31	9	—	—	9	6	15	46
South Dakota	2	—	—	2	3	—	—	3	1	4	6
Tennessee	25	8	4	37	17	—	1	18	3	21	58

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Texas	71	30	—	101	97	—	24	121	21	142	243
Utah	10	3	—	13	3	—	—	3	3	6	19
Vermont	2	—	—	2	1	—	—	1	1	2	4
Virginia	39	10	7	56	27	—	—	27	26	53	109
Washington	19	3	7	29	14	—	—	14	10	24	53
West Virginia	10	—	6	16	6	—	—	6	11	17	33
Wisconsin	20	4	4	28	8	—	—	8	13	21	49
Wyoming	2	—	—	2	3	—	—	3	—	3	5
US	1,129	270	141	1,540	720	—	58	778	591	1,369	2,909

Alberta	—	—	—	—	—	24	8	32	—	32	32
British Columbia	—	—	—	—	—	23	4	27	—	27	27
Manitoba	—	—	—	—	—	5	1	6	—	6	6
New Brunswick	—	—	—	—	—	4	—	4	—	4	4
Newfoundland	—	—	—	—	—	2	—	2	—	2	2
Nova Scotia	—	—	—	—	—	8	2	10	—	10	10
Ontario	—	—	—	—	—	68	27	95	—	95	95
Prince Edward Island	—	—	—	—	—	2	1	3	—	3	3
Saskatchewan	—	—	—	—	—	9	—	9	—	9	9
Canada	—	—	—	—	—	145	43	188	—	188	188

Puerto Rico	—	—	—	—	10	—	1	11	14	25	25

Total North America	1,129	270	141	1,540	730	145	102	977	605	1,582	3,122

Guest experience

The guest experience is an essential element in the success of our business and Signet strives to continually improve the quality of the guest experience. Therefore the ability to recruit, develop and retain qualified sales associates is an important element in enhancing guest satisfaction. We have in place comprehensive recruitment, training, and incentive programs. We use employee and guest satisfaction metrics to monitor and improve performance, as well as conducting an annual flagship training conference ahead of the holiday season.

Digital ecosystem

As a specialty jeweler, Signet’s business differs from many other retailers such that a purchase of merchandise from any of Signet’s stores is personal, intimate and typically viewed as an important experience. Due to this dynamic, guests often invest time on Signet websites and social media to experience the merchandise assortments prior to visiting brick-and-mortar stores to execute a purchase transaction. At times, particularly related to high value transactions, guests will supplement their online experience with an in-store visit prior to finalizing a fashion or gift-giving decision. Distinguishing whether the Company’s performance is driven by the initial exposure to the on-line assortment versus the merchandising and experience with in-store professionals is not a primary focus of management, as electronic efforts are a support channel for all store brands.

Through Signet’s websites, we educate our customers and provide guests with a source of information on products and brands, merchandise available, as well as the ability to buy online. Our websites are integrated with each division’s stores, so that merchandise ordered online may be picked up at a store or delivered to the guest. Our websites make an important and growing contribution to the guest experience, as well as to each division’s marketing programs. In recent years, significant investments and initiatives have been completed to drive sales growth. These investments include:


•	Optimization of brand websites for both desktop and mobile devices with improved functionality in product search and navigation;


•	Increased merchandise assortment;


•	Investments in social media, including Facebook, Instagram and Twitter, as well as a YouTube channel; and


•	Improvements in store broadband to enhance in-store eCommerce sales.

Signet’s supplier relationships allow it to display suppliers’ inventories on the brand websites for sale to guests without holding the items in its inventory until the products are ordered by guests, which are referred to as “virtual inventory.” Virtual inventory expands the choice of merchandise available to guests both online and in-store.

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Raw materials

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 45%, and gold about 14%, of Signet’s cost of merchandise sold, respectively.

Signet undertakes hedging for a portion of its requirement for gold through the use of 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.

Diamond sourcing

Signet procures its diamonds mostly as finished jewelry and to a smaller extent as loose cut-and-polished stones and rough stones.

Finished jewelry

Merchandise is purchased as finished product where the items are relatively more complex, have less predictable sales patterns or where it is cost effective to do so. This method of buying inventory provides the opportunity to reserve inventory held by vendors and to make returns or exchanges with suppliers, thereby reducing the risk of over- or under-purchasing. Signet’s scale, strong balance sheet and robust procurement systems enable it to purchase merchandise at advantageous prices and on favorable terms.

Loose diamonds

Signet purchases loose polished diamonds in global markets (e.g. India, Israel) from a variety of sources (e.g. polishers, traders). Signet mounts stones in settings purchased from manufacturers using third parties and in-house resources. By using these approaches, the cost of merchandise is reduced and the consistency of quality is maintained enabling Signet to provide better value to guests. Buying loose diamonds helps allow 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.

Rough diamonds

Signet continues to take steps to advance its vertical integration, which includes rough diamond sourcing and manufacturing. Signet’s objective with this initiative is to secure additional, reliable and consistent supplies of diamonds for guests of all divisions while achieving further efficiencies in the supply chain. In Fiscal 2014, Signet acquired a diamond polishing factory in Gaborone, Botswana and established a diamond buying office in India. In Fiscal 2015, Signet was appointed a sightholder by DeBeers, which further increased Signet’s supply of rough diamonds. As of Fiscal 2016, Signet has contracted allocations of rough diamonds with Rio Tinto, DeBeers and Alrosa. These developments in Signet’s long-term diamond sourcing capabilities allow Signet to buy rough diamonds directly from the miners and then have the stones marked, cut and polished in its own polishing facility. Any stones deemed unsuitable for Signet’s needs are sold to third parties with the objective of recovering the original cost of the stones. Signet’s sourcing initiative is primarily focused on supplying the diamond needs of the Sterling Jewelers division and has since been expanded to include all Signet divisions.

Merchandising and purchasing

Management believes that a competitive strength is our industry-leading merchandising. Merchandise selection, innovation, availability and value are all critical success factors for its business. The range of merchandise offered and the high level of inventory availability are supported centrally by extensive and continuous research and testing. Signet established a jewelry design center in New York which evaluates global design trends, innovates, and helps our merchant teams develop new jewelry collections that resonate with guests. An example of the design center’s work was the launch of the Ever Us collection.

Ever Us was the biggest product introduction in our history. It is an example of Signet creating a trend in the jewelry industry which is a unique advantage that we possess as the largest diamond retailer in the world. Led by our New York-based design office, we identified a need in the jewelry industry through market research and developed the Ever Us collection which continues to be consistently marketed and tagged with each of our national store banners. The two-stone diamond ring, positioned to be for one’s “best friend and true love,” serves a variety of gift-giving occasions in the lives of couples. Launched in October 2015, Ever Us was purchased for anniversaries, birthdays, special mother-daughter events, and even engagement in some cases.

Best-selling products are identified and replenished rapidly through analysis of sales by stock keeping unit. This approach enables Signet to deliver a focused assortment of merchandise to maximize sales and inventory turn, and minimize the need for discounting. Signet believes it is better able to offer greater value and consistency of merchandise than its competitors, due to its supply chain strengths. 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 guest 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 Signet’s ability to satisfy guests’ requirements while reducing the likelihood of having to discount merchandise.

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Merchandise mix

Details of merchandise mix (excluding repairs, warranty and other miscellaneous sales) are shown below:



	Sterling Jewelers division		Zale division		UK Jewelry division			Total Signet
Fiscal 2016
Diamonds and diamond jewelry	77	%	61	%	34	%		65	%
Gold and silver jewelry, including charm bracelets	9	%	27	%	16	%		9	%
Other jewelry	8	%	9	%	18	%	⁽¹⁾	17	%
Watches	6	%	3	%	32	%		9	%
	100	%	100	%	100	%		100	%
Fiscal 2015
Diamonds and diamond jewelry	76	%	61	%	31	%		63	%
Gold and silver jewelry, including charm bracelets	10	%	26	%	19	%		14	%
Other jewelry	8	%	9	%	17	%	⁽¹⁾	11	%
Watches	6	%	4	%	33	%		12	%
	100	%	100	%	100	%		100	%
Fiscal 2014
Diamonds and diamond jewelry	75	%	n/a		30	%		64	%
Gold and silver jewelry, including charm bracelets	11	%	n/a		19	%		15	%
Other jewelry	8	%	n/a		18	%	⁽¹⁾	8	%
Watches	6	%	n/a		33	%		13	%
	100	%	n/a		100	%		100	%

⁽¹⁾UK Jewelry division’s other jewelry sales include gift category sales.

n/a Not applicable as Zale division was acquired on May 29, 2014.

The bridal category, which includes engagement, wedding and anniversary purchases, is predominantly diamond jewelry. The bridal category experiences stable demand, but is still dependent on the economic environment as guests can trade up or down price points depending on their available budget. In Fiscal 2016, bridal growth was driven primarily by the branded bridal portfolio and bridal represented approximately 50% of Signet’s total merchandise sales. Customer financing is an important element in enabling Signet’s bridal business.

Gift giving is particularly important during the Holiday Season, Valentine’s Day and Mother’s Day. In Fiscal 2016, Signet had several successful fashion jewelry collections including Ever Us^TM, Diamonds in Rhythm^® and Unstoppable Love^® (not all collections are sold in every store brand).

A further categorization of merchandise is non-branded merchandise, third party branded, as well as branded differentiated and exclusive. Non-branded merchandise includes items and styles such as bracelets, gold necklaces, solitaire diamond rings, and diamond stud earrings. Third party branded merchandise includes mostly watches, but also includes ranges of charm bracelets. 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 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 leverage 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 offered in our various store brands includes:


•	Artistry Diamonds^®, genuine diamonds in an ultimate palette of colors;


•	Celebration Diamond^® Collection, diamond jewelry that has been expertly cut to maximize its brilliance and beauty;


•	Charmed Memories^®, a create your own charm bracelet collection;


•	Diamonds in Rhythm^®, diamonds set at a precise angle to allow for continuous movement of the center diamond and amazing effect;


•	Ever Us^TM, a collection of two stone rings, with one diamond for your best friend, one diamond for your true love;

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•	Jared Vivid^® Diamonds, the brilliance of diamonds combined with the vitality of color;


•	Le Vian^®exclusive collections of jewelry, famed for its handcrafted unique designs and colors;


•	Leo Diamond^® collection, the first diamond to be independently and individually certified to be visibly brighter;


•	Lois Hill^®, reaches back through the centuries and across the globe to create her collection of jewelry;


•	Miracle Links^®, a collection designed with interlinking circles to symbolize the unique connection between a mother and her child;


•	Neil Lane Bridal^®, a vintage-inspired bridal collection by the celebrated jewelry designer Neil Lane;


•	Neil Lane Designs^®, hand-crafted diamond rings, earrings and necklaces inspired by Hollywood’s glamorous past;


•	Open Hearts by Jane Seymour^®, a collection of jewelry designed by the actress and artist Jane Seymour;


•	Tolkowsky^®, an ideal cut diamond “Invented by Tolkowsky, Perfected by Tolkowsky”^®;


•	Unstoppable Love^®, features shimmering diamonds in movable settings that sparkle with every turn;


•	Vera Wang LOVE^® collection, bridal jewelry designed by the most recognizable name in the wedding business, Vera Wang.

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. Primarily all of Signet’s consignment inventory is held in the US.

Suppliers

In Fiscal 2016, the five largest suppliers collectively accounted for 16.5% of total purchases, with the largest supplier comprising 3.9%. Signet 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.

Marketing and advertising

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, Signet continues to strengthen and promote its store brands and merchandise 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, point of sale signage and in-store displays, as well as coupon books and outdoor signage for the Outlet channels, leading to an omni-channel approach.

While marketing activities are undertaken throughout the year, the level of activity is concentrated at periods when guests are expected to be most receptive to marketing messages, which is ahead of Christmas Day, Valentine’s Day and Mother’s Day. Recent efforts focused in the Fall season with a focus on bridal marketing (“Engagement Season”) have been successful and an increased level of sales activity has been generated during this period of the year. A significant majority of the expenditure is spent on national television advertising, which is used to promote the store brands. Within such advertisements, Signet also promotes certain merchandise ranges, in particular its branded differentiated and exclusive merchandise and other branded products. Statistical and technology-based systems are employed to support customer relationship marketing programs that use a proprietary database to build guest loyalty and strengthen the relationship with guests through mail, telephone, email and social media communications. The programs target current guests with special savings and merchandise offers during key sales periods. Our targeted marketing efforts are aligned with our customer segmentation approach which, as discussed previously, differentiates our brands by focusing on customer attitudes and behaviors, rather than demographic information. In addition, invitations to special in-store promotional events are extended throughout the year.

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Details of gross advertising, advertising before vendor contributions, by division is shown below:



	Fiscal 2016				Fiscal 2015				Fiscal 2014
	Gross advertising spending		as a % of divisional sales		Gross advertising spending		as a % of divisional sales		Gross advertising spending		as a % of divisional sales
	(in millions)				(in millions)				(in millions)
Sterling Jewelers division	$	261.2	6.5	%	$	246.6	6.6	%	$	233.6	6.6	%
Zale division	98.7		5.4	%	64.6		5.3	%	n/a		n/a
UK Jewelry division	24.3		3.3	%	21.8		2.9	%	20.2		3.0	%
Signet	$	384.2	5.9	%	$	333.0	5.8	%	$	253.8	6.0	%

n/a Not applicable as Zale division was acquired on May 29, 2014.

Customer finance

In our North American markets, we sell our products for cash and for payment through major credit cards and third-party financing like PayPal. In addition, we offer our customers financing through proprietary credit programs that are provided either in-house or through outsourced relationships with selected major lenders.

Our consumer credit programs are an integral part of our business and enable incremental sales as well as building customer loyalty. We also generate revenues from finance charges and other fees on these credit programs. In addition, we save on interchange fees that Signet would incur if our customers used major credit cards only.

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 are leased. In Fiscal 2016, global net store space increased 3.3% as a result of new store growth. The greatest opportunity for new stores is in locations outside traditional covered malls.

Recent investment in the store portfolio is set out below:



(in millions)	Sterling Jewelers division		Zale division		UK Jewelry division		Total Signet
Fiscal 2016
New store capital investment	$	48.3	$	12.1	$	3.3	$	63.7
Remodels and other store capital investment	50.6		25.0		16.3		91.9
Total store capital investment	$	98.9	$	37.1	$	19.6	$	155.6

Fiscal 2015
New store capital investment	$	52.6	4.4		$	2.4	$	59.4
Remodels and other store capital investment	52.6		15.1		11.3		79.0
Total store capital investment	$	105.2	$	19.5	$	13.7	$	138.4

Fiscal 2014
New store capital investment	$	54.0	n/a		$	1.5	$	55.5
Remodels and other store capital investment	46.3		n/a		10.3		56.6
Total store capital investment	$	100.3	n/a		$	11.8	$	112.1

n/aNot applicable as Zale division was acquired on May 29, 2014. See Note 3 of Item 8 for additional information.

Seasonality

Signet’s sales are seasonal, with the first quarter slightly exceeding 20% of annual sales, the second and third quarters each approximating 20% and the fourth quarter accounting for almost 40% of annual sales, with December being by far the most important month of the year. The “Holiday Season” consists of results for the months of November and December. As a result, approximately 45% to 55% of Signet’s annual operating income normally occurs in the fourth quarter, comprised of nearly all of the UK Jewelry and Zale divisions’ annual operating income and about 40% to 45% of the Sterling Jewelers division’s annual operating income.

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Employees

In Fiscal 2016, the average number of full-time equivalent persons employed was 29,057. 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 and Canada are covered by collective bargaining agreements. Signet considers its relationship with its employees to be excellent.



	Fiscal 2016	Fiscal 2015	Fiscal 2014
Average number of employees:⁽¹⁾
Sterling Jewelers	16,140	16,147	14,829
Zale⁽²⁾	9,309	9,241	n/a
UK Jewelry	3,370	3,292	3,104
Other⁽³⁾	238	269	246
Total	29,057	28,949	18,179


⁽¹⁾	Full-time equivalents (“FTEs”).


⁽²⁾	Includes 1,585 FTEs employed in Canada.


⁽³⁾	Includes corporate employees and employees employed at the diamond polishing plant located in Botswana.

n/a Not applicable as Zale division was acquired on May 29, 2014.

Regulation

Signet is required to comply with numerous 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. Management monitors changes in these laws to endeavor to comply with applicable requirements.

Markets

Signet operates in the US, Canada and UK markets.

In 2015, we concluded a market and customer segmentation study in the US and validated that Signet’s long-term growth opportunities should be directed to the mid-market. Instead of basing our view on the household income of consumers, we refined our mid-market thinking according to the value of the products they buy. From that perspective, mid-market jewelry represents products in the $100 to $10,000 range — essentially excluding costume and luxury. Ninety-five percent of Signet’s merchandise sales land within that range. In total, the mid-market in the US, which is a subset of the total US jewelry industry that excludes costume jewelry and luxury jewelry, is approximately $41 billion. Signet sees the mid-market of the industry as its core market.

According to the US Bureau of Economic Analysis and Census Bureau, the total jewelry and watch market was approximately $75 billion at the end of 2015, up approximately 2% from the prior year. This implies a Signet jewelry market share of more than 7%. Since 2000, the industry average annual growth rate is 3.2%. Nearly 85% of the market is represented by jewelry with the balance being watches. There were nearly 21,000 jewelry stores in the country, down approximately 1% from the prior year.

Canada

The jewelry market in Canada, according to Euromonitor, has grown steadily over the past five years, rising to an estimated C$7.2 billion in 2014, the latest data available to Signet. This represents a compound annual growth rate of 4.6%. Euromonitor estimates that 2014 was up 3% in dollars and 2% in units.

In the UK, the jewelry and watch market stands at about £4.1 billion, according to Mintel. That market saw a recovery in 2015 with growth of 1.2%. Self-purchasing among young women and gifting among men represent the largest parts of the precious jewelry market. The growth represents a slight slowdown from that achieved in 2014 due to a shift towards lighter-weight pieces and a decrease in average selling prices.

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STERLING JEWELERS DIVISION

Sterling Jewelers store brand reviews

Store activity by brand



	Fiscal 2016			Fiscal 2015			Fiscal 2014
Kay	42			58			63
Jared	18			17			13
Regional brands	—			—			35			⁽¹⁾
Total stores opened or acquired during the year	60			75			111

Kay	(7		)	(20		)	(22		)
Jared	(1		)	—			—
Regional brands	(16		)	(22		)	(61		)	⁽¹⁾
Total stores closed during the year	(24		)	(42		)	(83		)

Kay	—			1			65
Jared	—			33			—
Regional brands	—			(34		)	(65		)
Total logo conversions	—			—			—

Kay	1,129			1,094			1,055
Jared	270			253			203
Regional brands	141			157			213
Total stores open at the end of the year	1,540			1,504			1,471

Kay	$	2.178		$	2.112		$	2.033
Jared⁽²⁾	$	4.650		$	4.794		$	5.299
Regional brands	$	1.333		$	1.318		$	1.243
Average sales per store (millions)⁽³⁾	$	2.518		$	2.467		$	2.361

Kay	1,697			1,597			1,489
Jared	1,153			1,089			983
Regional brands	175			196			276
Total net selling square feet (thousands)	3,025			2,882			2,748

Increase in net store selling space	5.0		%	4.9		%	4.8		%

⁽¹⁾Includes the remaining 30 Ultra stores not converted to the Kay brand in Fiscal 2014.

⁽²⁾Includes sales from all Jared store formats, including the smaller square footage and lower average sales per store concepts of Jared 4.0, Jared Jewelry Boutique and Jared Vault.

⁽³⁾Based only upon stores operated for the full fiscal year and calculated on a 52-week basis.

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Sales data by brand



			Change from previous year
Fiscal 2016	Sales (millions)		Total sales		Same store sales
Kay	$	2,530.3	7.8	%	5.7	%
Jared	1,252.9		5.0	%	0.6	%
Regional brands	205.5		(8.7	)%	(1.2	)%
Sterling Jewelers	$	3,988.7	5.9	%	3.7	%

Kay Jewelers

Kay accounted for 39% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 41%) and operated 1,129 stores in 50 states as of January 30, 2016 (January 31, 2015: 1,094 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. Like the rest of our store banners, Kay targets a mid-market jewelry customer. But where Kay differs is that it particularly targets a customer, we identify as a “gifter,” who knows they need to buy jewelry but does not enjoy shopping and needs help to get it done right.

Details of Kay’s performance over the last three years is shown below:



	Fiscal 2016		Fiscal 2015		Fiscal 2014
Sales (millions)	$	2,530.3	$	2,346.2	$	2,157.8
Average sales per store (millions)	$	2.178	$	2.112	$	2.033
Stores at year end	1,129		1,094		1,055
Total net selling square feet (thousands)	1,697		1,597		1,489

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 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 guests 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.

The following table summarizes the current composition of stores as of January 30, 2016 and net openings (closures) in the past three years:



	Stores at	Net openings (closures)
	January 30, 2016	Fiscal 2016	Fiscal 2015	Fiscal 2014
Mall	755	6	2	5
Off-mall and outlet	374	29	37	101
Total	1,129	35	39	106

Jared The Galleria Of Jewelry

With 270 stores in 40 states as of January 30, 2016 (January 31, 2015: 253 stores), Jared is a leading off-mall destination specialty retail jewelry store chain, based on sales. Jared accounted for 19% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 21%). 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. Like the rest of our store banners, Jared targets a mid-market jewelry customer. But where Jared differs is that it particularly targets a customer, we identify as a “sentimentalist,” who enjoys shopping for jewelry and cares very much about the details of the product and shopping process.

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



	Fiscal 2016		Fiscal 2015		Fiscal 2014
Sales (millions)	$	1,252.9	$	1,188.8	$	1,064.7
Average sales per store(millions)⁽¹⁾⁽²⁾	$	4.650	$	4.794	$	5.299
Stores at year end	270		253		203
Total net selling square feet (thousands)	1,153		1,089		983

⁽¹⁾In Fiscal 2016 and Fiscal 2015, average sales per store reflect the impact of Jared outlet and mall store concepts.

⁽²⁾Includes sales from all Jared store formats, including the smaller square footage and lower average sales per store concepts of Jared 4.0, Jared Jewelry Boutique and Jared Vault.

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Jared offers superior guest service and enhanced selection of merchandise. 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 salon, 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 usually operate in retail centers that contain strong retail co-tenants, including big box, destination stores and some smaller specialty units.

Jared also operates Jared Jewelry Boutiques within malls. These mall stores have a smaller footprint than standard Jared locations and generally less than 2,000 square feet of selling space. In addition, a similar off-mall concept known as Jared 4.0 is being tested currently, which allows for more store openings in smaller markets, expands the Jared brand and increases the return on Jared advertising investment. Finally, Jared operates an outlet-mall concept known as Jared Vault. These stores, converted from a previous outlet store acquisition, are smaller than off-mall Jareds and offer a mix of identical products as Jared as well as different, outlet-specific products at lower prices.

The following table summarizes the current composition of stores as of January 30, 2016 and net openings (closures) in the past three years:



	Stores at	Net openings (closures)
	January 30, 2016	Fiscal 2016	Fiscal 2015	Fiscal 2014
Mall	11	3	8	—
Off-mall and outlet	259	14	42	13
Total	270	17	50	13

Sterling Jewelers regional brands

The Sterling Jewelers division also operates mall stores under a variety of established regional nameplates. Regional brands in the Sterling Jewelers division accounted for 3% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 4%) and as of January 30, 2016, include 141 regional brand stores in 31 states (January 31, 2015: 157 stores in 32 states). The leading brands include JB Robinson Jewelers, Marks & Morgan Jewelers and Belden Jewelers. Also included in the regional nameplates are Goodman Jewelers, LeRoy’s Jewelers, Osterman Jewelers, Rogers Jewelers, Shaw’s Jewelers and Weisfield Jewelers. The Company expects the number of regional brands locations to continue to decline through conversion to national store brands or through closure upon lease expiration.

Details of the regional brands’ performance over the last three years is shown below:



	Fiscal 2016		Fiscal 2015		Fiscal 2014
Sales (millions)	$	205.5	$	230.0	$	295.1
Average sales per store (millions)	$	1.333	$	1.318	$	1.243
Stores at year end	141		157		213
Total net selling square feet (thousands)	175		196		276

Sterling Jewelers operating review

Other sales

Custom design services represent less than 5% of sales but provide higher than average profitability. Our custom jewelry initiative has a proprietary computer selling system and in-store design capabilities. Design & Service Centers, located in Jared stores, are staffed with skilled artisans who support the custom business generated by other Sterling Jewelers division stores, as well as the Jared stores in which they are located. The custom design and repair function has its own field management and training structure.

Repair services represent less than 5% of sales and approximately 30% of transactions and are an important opportunity to build customer loyalty. The Jared Design & Service Centers, open the same hours as the store, support other Sterling Jewelers and approximately 200 Zale division stores’ repair business.

The Sterling Jewelers division sells extended service plans covering lifetime repair service for jewelry and jewelry replacement plans. The lifetime repair service 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. Jewelry replacement plans require the issuance of new replacement merchandise if the original merchandise is determined to be defective or damaged within a defined period in accordance with the plan agreement. Any repair work is performed in-house.

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Consumer finance

General

Our in-house consumer financing program provides Signet with a competitive advantage through the enabling of incremental profitable sales that would not occur without a consumer financing program. Several factors inherent in the US jewelry business support the circumstances through which Signet is uniquely positioned to generate profitable incremental business through its consumer financing program. These factors include a high average transaction value; a significant population of customers seeking to finance merchandise primarily in the bridal category; and the minimum scale necessary to administer credit programs efficiently. In addition, our credit program provides other benefits to our business overall, including:


•	complementing our “Best in Bridal” strategy in that 50% of merchandise sales are bridal and 75% of Sterling Jewelers division bridal sales utilize our credit as form of tender;


•	retaining of control in establishing high levels of service in managing the accounts receivable portfolio;


•	providing a database of regular guests and spending habits; and


•	establishing collection policies designed to minimize risk and maximize future sales as opposed to a focus on maximizing earnings from outstanding balances.

The lifetime value of a customer obtained through the in-house credit program is estimated to be 3.5 times that of a customer not obtained through the in-house credit program. For our in-house credit program, as of January 30, 2016 and January 31, 2015, 52.7% and 50.5%, respectively, of balances due were from customers who were acquired as users of our credit program more than 12 months prior to their most recent purchase.

Our in-house consumer financing program has been centralized since 1990 and is fully integrated into the management of the Sterling Jewelers division. It is not a separate operating division nor does it report separate results. Investments are geared towards best in class technology, system support and strategy analytics with the objective of maximizing efficiency and effectiveness, resulting in continuous optimization of profitable sales enabled by the program. All assets and liabilities relating to consumer financing are shown on the balance sheet and there are no associated off-balance sheet arrangements. 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, guests also are offered optional third-party credit insurance.

Underwriting

The majority of credit applications originate in one of our retail locations and are approved or denied automatically based on proprietary origination models. Origination and purchase authorization strategies are designed by a dedicated Risk Management team, which is separate and distinct from our retail sales organization ensuring that financing decisions are not influenced by sales driven objectives. Our underwriting process considers one or more of the following elements: credit bureau information; income and address verification; current income and debt levels. We have developed and refined proprietary statistical models that provide standardized credit decisions, and drive the optimization of credit limit assignment, down payment requirements and more significant debt service requirements as compared to general consumer lending standards. For certain credit applicants that may have past credit problems or lack credit history, we use stricter underwriting criteria. These additional requirements may include items such as verification of employment and minimum down payment levels. Part of our ability to control delinquency and net charge-offs is based on the level of required down payments, tailored credit limits and more significant debt service requirements as mentioned above. Underwriting risk tolerance has not been altered in the past 10 years. Several factors can influence portfolio risk outside of the initial origination and subsequent authorization decisions including macro-economic conditions, regulatory environment, operational system stability and strategy execution, store execution, and the ability of marketing and prospecting activities to attract a consistent risk weighed mix of new applicants to the receivable.

The scores of Fair Isaac Corporation (“FICO”), a widely-used financial metric for assessing a person’s credit rating are used to benchmark portfolio and origination risk over time. Ten to twenty point ranges tend to be grouped together to form tiers of risk and scores can range from a low of 0 to over 800. The following aggregate FICO metrics for the portfolio demonstrate the overall consistency of our financing strategy approach:



	Fiscal 2016	Fiscal 2015	Fiscal 2014
Balance weighted FICO score - New Additions	684	685	690
Balance weighted FICO score - Portfolio	662	663	665

Credit monitoring and collections

Our objective is to facilitate the sale of jewelry and to collect the outstanding credit balance as quickly as possible, minimizing risk and enabling the customer to make additional jewelry purchases using their credit facility. On average, our receivable portfolio turns every 9 months. We closely monitor the credit portfolio to identify delinquent accounts early, and dedicate resources to contacting customers concerning past due

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accounts when they are as few as 5 days in arrears. Collectors are focused on a quality customer experience using risk-based calling and strategic account segmentation.

The quality of our credit loan portfolio at any time reflects, among other factors: 1) the creditworthiness of our customers, 2) general economic conditions, 3) the success of our account management and collection activities, and 4) a variety of variables that change over time such as the proportion of new versus seasoned accounts or changes in the relative growth rate in sales between our various retail brands or formats. Cash flows associated with the granting of credit to guests of the individual store are included in the projections used when considering store investment proposals.

Portfolio aging

Since inception of its in-house financing, Signet measures delinquency and establishes loss allowances using a form of the recency method. This form of the recency method relies upon qualifying payments determined by management to measure delinquency. In general, an account will not remain current unless a qualifying payment is received. A customer is aged to the next delinquency level if they fail to make a qualifying payment by their monthly aging. A customer’s account ages each month five days after their due date listed on their statement, allowing for a grace period before collection efforts begin. A qualifying payment can be no less than 75% of the scheduled payment, increasing with the delinquency level. If an account holder is two payments behind, then they must make a full minimum payment to return to current status. If an account holder is three payments behind, then they must make three full payments before returning to a current status. If an account holder is more than three payments behind, then the entire past due amount is required to return to a current status. Establishing qualifying payment methods in accounting for delinquencies is appropriate considering the high minimum payments that are required of customers. The weighted average minimum payment required as a percentage of the outstanding balance was 9% at year end fiscal 2016. The minimum payment does not decline as the balance declines. These two facts combined (higher scheduled payment requirement and no decline in payment requirement as balance decreases) allow Signet to collect on the receivable significantly faster than other retail/bank card accounts, which require a 3%-5% minimum payment, reducing risk and more quickly freeing up customer open to buy for additional purchases. Of all payments received in the fiscal year, 97% were equal to or greater than the scheduled monthly payment compared to 97% last year. While guests can make payments through online or mobile channels, via telephone or through the mail, 25% of payments are made in one of our retail locations.

See Note 1 of Item 8 for additional information regarding qualifying payments.

Allowances for uncollectible amounts are recorded as a charge to cost of goods sold in the income statement. The allowance is calculated using a model that analyzes factors such as delinquency rates and recovery rates. An allowance for amounts 90 days aged and under on a recency basis is established based on historical loss experience and payment performance information. A 100% allowance is made for any amount aged more than 90 days on a recency basis and any amount associated with an account the owner of which has filed for bankruptcy. An account is 90 days aged on a recency basis when there has not been a qualifying payment made within 90 days of the billing date. The net bad debt expensed on the income statement is equal to the sum of the total change in the allowance for uncollectible accounts and the total amount of charged off balances less any recoveries for accounts previously charged off. The allowance calculation is reviewed by management to assess whether, based on economic events, additional analysis is required to appropriately estimate losses inherent in the portfolio.

We deem accounts to be uncollectible and charge off when the account is both more than 120 days aged on a recency basis and 240 days aged on a contractual basis at the end of a month. Over the last 12 months, we have recovered 18% of charged-off amounts through our collection activities and the sale of previously charged off accounts. We track our charge-offs both gross, before recoveries, and net, after recoveries.

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Customer financing statistics⁽¹⁾



	Fiscal 2016			Fiscal 2015			Fiscal 2014
Total sales (millions)	$	3,988.7		$	3,765.0		$	3,517.6
Credit sales (millions)	$	2,451.2		$	2,277.1		$	2,028.0
Credit sales as % of total Sterling Jewelers sales⁽²⁾	61.5		%	60.5		%	57.7 </