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Executives

Mike Barnes - Chief Executive Officer

Ron Ristau - Chief Financial Officer

Tim Jackson - Investor Relations Director

Analysts

Bill Armstrong - CL King Associates

Rick Patel - Bank of America

Robert Drbul - Barclays Capital

David Wu - Telsey Advisory Group

Jeff Stein - Northcoast Research

Jennifer Davis - Lazard Capital Markets

Rod Whitehead - Deutsche Bank

Ben Spruntulis - Citigroup

Anthony Lebiedzinski - Sidoti & Co.

Ike Boruchow - J.P. Morgan

John Baillie - Societe Generale

David Jeary - Investec

Signet Jewelers Limited (SIG) Q3 2011 Earnings Call November 22, 2011 8:30 AM ET

Operator

Good day and welcome to the Signet Jewelers Q3 results conference call. Today’s conference is being recorded.

At this time I would like to turn the conference over to Tim Jackson. Please go ahead.

Tim Jackson

Good morning and welcome to the conference call for our third quarter results. I am Tim Jackson, Investor Relations Director. With me are Mike Barnes, CEO; and Ron Ristau, CFO. The presentation deck we will be talking to is available from the webcast section of the company’s website www.signetjewelers.com.

Before I hand over to Mike, I will give the Safe Harbor statement. During today’s presentation, we will in places discuss Signet’s business outlook and make certain forward-looking statements. Any statements that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. We urge you to read the risk factors, cautionary language and other disclosures in the Annual Report on Form 10-K that was filed with the SEC on March 30, 2011.

We also draw your attention to this slide. I will now hand over to Mike.

Mike Barnes

Thank you Tim and good morning everyone. We are very pleased with the record results in our third quarter, which reflects the ongoing success of our business driven by our competitive strengths.

For the quarter total Signet same-store sales were up 10.6% led by the US with a 13.9% comp store sales increase, while the UK comp was slightly down at 0.5%. So the comp growth momentum seen in the first two quarters was continued into the third quarter.

Some other key highlights include operating margin of 6%, an increase of 310 basis points from the prior year. Income before taxes at $42.1 million, up $30.1 million from $12 million. Diluted earnings per share were $0.30, that’s up $0.23, a more than three fold increase over the prior year comparable period.

Also I would like to note, reflecting the continued confidence we have in the strength of our business model, our ability to invest in growth initiatives and our commitment to build value for long term share holders, the Board has authorized a $300 million share repurchase program effective from January 16, 2012 for the 24 months following through January 15, 2014. It is also intended that the Board will announce the details of the fourth quarter dividend when we release our holiday trading statement, which is currently scheduled for January 10.

Now lets look at the results in a little more detail and we’ll start with the US division. Total US sales were $563 million, up $66 million, an increase of 13.3%. Kay had another outstanding quarter and increased same-store sales by 13%, that’s on top of 8.6% growth achieved in the third quarter of fiscal 2011.

Average selling prices, excluding the charm bracelet category rose by 8.7%, with customers trading up due to merchandizing initiatives, as well as the higher prices due to commodity costs.

Jared again performed extremely well with comps up 18.3%, following a 14.3% increase last year. That was an outstanding two-year comp number. There was a substantial increase in Jared non-de-average (ph) selling price reflecting both mix and price increases. In addition, Jared average unit selling price was favorably impacted by approximately $76, as a result of a one-time launch promotion, which had an 8.3% impact on same store sales at Jared.

Overall, US same store sales increased by 13.8%, compared to an increase of 9.7% last year. Net operating income was $56.4 million, up $30.7 million, which was a 119.5% increase and finally, the US division’s operating margin increased by 510 basis points to 10%.

You know, at the continued core of our success is the in-store experience. We’ve remained very focused on training all our team members ahead of the holiday season, so that we can continue to give our guest best in class service. We’ve been particularly focused on the bridal category to support some of our merchandise initiatives such as Neil Lane Bridal and the Tolkowsky diamond, along with our longer-term bridal brands.

We drew upon much of our knowledge we gained over the past year, in which we had a major research project that was focused on bridal. We’ve also been introducing customer assisted selling systems into selected Kay stores. This is a great example of our ability to build on the experience we’ve gained from operating set systems in Jared for a number of years now.

Leo continues to remain our leading bridal brand and is now complemented by a number of other exclusive brands. In particular, as I mentioned the Neil Lane brand and Tolkowsky diamond, both of which we’ve been rolling out over the last 15 months.

Neil Lane is now in all of our stores in the U.S. and the Tolkowsky diamond is in over 600 Kay stores. We continue to be very pleased with their performance and these brands are helping to contribute to the growth in average selling prices. The strength of these exclusive brands may be resulting in a shift away from more generic loose diamond sales. Overall, the bridal sector is a major contributor to our performance and is showing good growth.

Our non-bridal exclusive and differentiated brands continue to outperform, including Charmed Memories, which remains strong and was mostly a non-comp business in the third quarter. Le Vian is another standout brand and has an average selling price substantially higher than our overall average. These brands help to create a unique store destination and provide our great store teams with powerful selling propositions.

In the fourth quarter we expect to benefit from the initiatives we have taken in support of the development of these brands, including the rollout of great new designs within these ranges and expanded advertising support. In particular, as we moved into the fourth quarter we began our national television advertising for the holiday season. We are significantly increasing spend for both Kay and Jared, reflecting a greater number of impressions for both concept brands.

Our ability to support both our store concepts and our merchandise brands on national television is an important competitive strength. In fact, I’ve already seen a number of the ads air on some of the channels that I watch and they are terrific. I hope you all have an opportunity to see them as well over the coming holiday season.

Turning now to the U.K., we continue to operate comparatively well on a challenging marketplace and continue to outperform the non-food retail sector as a whole. Total sales were $147.5 million, up $2.7 million, an increase of 1.9%, with same store sales down 0.5%. Watches and the bridal category, including gold rings, continue to perform well. Average selling prices, excluding the charm bracelet category were up by 6.5%.

The key to the results in any fiscal year in the UK division really is the fourth quarter. It’s the fourth quarter where we have the greatest opportunity to drive high operational leverage and profitability; therefore we’re very focused on the seasonal sales in front of us and we’ve developed strong initiatives to help us drive the best possible results.

A major initiative is our continued drive to increase our differentiation within the marketplace, with an emphasis on branded merchandise and new products in general. This holiday season we have a record level of new merchandise, providing our customers with a great reason to look at H.Samuel and Ernest Jones with their purchase needs as we move through the holiday season.

Exclusive branded merchandise include Love's Embrace, Tolkowsky diamond and Le Vian, which draw on our US experience, while others are specific to the UK market, such as the Amanda Wakeley collection. While the exclusive ranges are predominantly in Ernest Jones and H.Samuel, the key focus is more on building on its market leadership and partnering with major international brands such as DKNY and Guess amongst many others in the watch and jewelry categories.

In addition to product initiatives, marketing is a key focus for the fourth quarter. We are increasing television advertising for H.Samuel, at a time when many UK advertises are reducing spend. In doing so we’ve garnered the support of many leading watch brands as well.

In an Ernest Jones, we have more press advertising this year, as press being a more effective medium for reaching the Ernest Jones customer. In addition, we’ve increased customer relationship marketing at both H.Samuel and Ernest Jones.

I would also like to call out our two new stores in the Westfield Stratford City mall, which we opened during the quarter. We’re testing a number of new design concepts in these stores and we’re very pleased with the initial trading results. As always, the in-store customer experience remains a priority and we continue to focus on staff training and development.

This year, as we have discussed, an investment priority for both the US and UK division has been sales enhancing technology and many of our initiatives have come online in the third quarter. In the U.S., the most important are the major upgrades to both the Kay and the Jared websites in terms of their design, new features introduced, and our search engine rankings.

A particular note as a new feature was the launch of designer ring capability on the Kay website toward the end of the quarter. This is an example of our increasing ability to provide our customers with personalized jewelry through the use of emotionally connected technology.

We’ve also enhanced our digital media capabilities in the UK division. For example, new features have been introduced on both the H.Samuel and Ernest Jones websites, such as personalized jewelry.

We have improved our social media capabilities and I am pleased to announce, we have just launched our first fully transactional iPhone apps for both H.Samuel and Ernest Jones. If you search in the app store on your iPhone, you’ll find them to be an easy and fast download and of course, they are free. E-commerce sales continued to be very strong and on a consolidated basis we grew by over one-third for both the quarter and year-to-date.

I’ll now hand it over to Ron to go through the financials in a little bit more detail. Ron.

Ron Ristau

Thank you. As Mike indicated, total sales for Signet increased 10.7% to $710.5 million compared to $641.8 million in the third quarter last year. Total company comp store sales increased 10.6%, versus an increase of 7.2% in the comparable quarter last year.

In the US total sales increased 13.3% to $563 million, reflecting comp store sales up 13.9% versus a 9.7% increase last year. In the UK total sales increased 1.9% to $147.5 million, reflecting a comp store sales decrease of 0.5%, compared to a decline of 0.6% last year, and the favorable impact of currency fluctuations, which more than balance the 0.7% adverse impact of reduced space.

Now looking at the analysis of the $30.1 million increase in income before taxes from $12 million to $42.1 million. Gross margin was $229.9 million, an improvement of $36.3 million. The gross margin rate was 32.4%, up by 220 basis points, primarily benefiting from a leverage of store occupancy cost in both the US and UK divisions.

In addition, gross margin also benefited from the improved net bad debt to total sales ratio in the US division, which came in at 5.4% for the quarter, which was 50 basis points better than last year. Total gross merchandise margin was down by 50 basis points and was impacted by higher cost of commodities and a one-time watch promotion in the US division, largely offset by price increases.

The US gross merchandise margin was down 40 basis points; however, excluding the impact of the low margin watch promotion, merchandise margin increased by 45 basis points. In the UK merchandise margin declined 80 basis points as pricing only partially offset commodity inflation forward.

SG&A expense was $219.6 million, up $18.1 million or 9% from last year. As a percentage of sales they were 30.9%, an improvement of 50 basis points from last year, and I will cover this in more detail on the next slide.

Other net operating income was $32.2 million, up $5.8 million on last year, primarily reflecting interest income on higher accounts receivable, which had a 40 basis points favorable impact on the operating income margin. The third quarter’s net operating income was $42.5 million, an improvement of $24 million or 129.7%.

Operating margin was 6%, up from 2.9% last year in the third quarter, an increase of 310 basis points. I’d like to point out that while comps and merchandise margins were impacted by the watch promotion, there was no significant operating income impact, as margin on the watch promotion was largely offset by inventory reserves.

Net interest expense was $0.4 million, a decrease of $6.1 million or a fall of 90 basis points as a percentage of net sales. This primarily reflected the benefit of prepaying our private placement notes last year.

Income before tax was $42.1 million, an increase of $30.1 million or 250.8%. As a percentage of sales that was 5.9%, an improvement of 400 basis points based upon excellent execution in all aspects of the business. I’d like to point out that for the year we expect our tax rate to be 35.4%.

Now looking at SG&A in more detail, as a percentage of sales in the third quarter, again SG&A improved to 30.9% as compared to 31.4% in the prior year. The major reasons for the increase of $18.1 million in the third quarter were as follows: an increase in net advertising investment of $3.7 million; a $1.5 million increase attributable to currency fluctuations; $1.1 million of the increase was due to higher 401(k) contributions; and $7.1 million of the remaining increase was a result of store staff costs, which of course flexed with sales; and the balance primarily reflected increased investment in IT, credit infrastructure and incentive compensation expense. We believe our SG&A remains extremely well controlled.

This next graph shows the third quarter net bad debt to US sales ratio and the collection rate for the last 10 years. The absolute level of the ratio in the quarter is no doubt to the full year, due to the seasonal nature of our sales and net bad debt charges; however, the change on the comparable quarter in the prior year is meaningful.

The third quarter net bad debt to US sales ratio improved by 50 basis points from 5.9% to 5.4%, reflecting both higher sales and an improvement in the receivable performance, which were seen in many of the other key indicators of receivable management. This is the eighth consecutive quarter that we have seen improvement.

On a year-to-date basis, our ratio stood at 3.6% versus 4.4% last year, an improvement of 80 basis points. We believe that we will continue to move towards the historical annual range of 2.8% to 3.4%. Our average monthly collection rate was 12.2% versus 12.1% in the prior year. This is a 10 basis point improvement.

Now turning briefly to the year-to-date results. For the year-to-date, total Signet same stores sales were up 10.2%, led by the US with a 12.8% same store sales increase and the UK up 0.4%. Gross margin was 36.5% versus 33.4% last year; an improvement of 310 basis points and our SG&A was 29.6% versus 29.7% in the prior year.

Operating margin was 11%, an increase of 350 basis points. Income before taxes was $259.7 million, up $118.9 million or 84.4%, and diluted earnings per share are $1.93, up $0.83 or 75.5%.

Now looking at our cash flow, reflecting our seasonal build in inventory, increased receivable balances which moved in line with the US sales increases and our increased investment in capital projects, our year-to-date cash flow was $40.6 million as compared $157.4 million last year. We continue to project free cash flow for the year will be in the range of $175 million to $225 million.

We ended the quarter with cash of $349.6 million, as compared to $414.9 million a year ago and this reflects the repayment of the $229.1 million of private placement notes in the fourth quarter of the prior fiscal year, offset by the cumulative cash generated since the payment.

Looking at our financial objectives throughout this year thus far, we believe we have made excellent progress against all of our financial objectives for fiscal 2012 and look forward to the successful completion of the holiday selling period.

I’ll now turn it over to Mike for final comments.

Mike Barnes

Thanks Ron. You know as noted we are very pleased with the start of the fourth quarter. With the majority of our sales ahead of us we are confident that the superior quality of our in-store experience, our well-tested merchandising programs, and the exciting new advertising support means that we are well positioned for the remainder of the holiday season.

I will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Bill Armstrong from CL King Associates.

Bill Armstrong - CL King Associates

Good morning Mike and Ron. On the Jared watch promotion, I was wondering if you could just maybe give us a little more detail on that. So what was the rational for running that promotion? Were you over inventoried or was there a specific promotion that was in concert with the particular brand?

Mike Barnes

Yes, good morning Bill. Thanks for the question. Let me put a little bit more detail behind that. What it was is, it was a one-time promotion that we had for Rolex watches and it was primarily executed within the third quarter. The bottom line is that we will be exiting our sales partnership with Rolex in the US during the spring of next year and really this was part of a joint sell-down strategy to help facilitate that transition.

What has happened is that as Rolex has repositioned their brand, including to even higher luxury price points, we really feel it’s no longer optimally positioned for our core Jared customers. It’s a great brand of course, but our customers are really in the upper middle market and not in the ultra high-end luxury consumer.

Rolex realizes this as well and hence they are making what they believe are the appropriate moves to reposition their brand accordingly. This is not directed just solely at Signet, but it’s really a core change in their thoughts regarding the proper channels for distribution for them and this has been, you know just to put a little bit more perspective behind it, it’s really been an evolution as we have closed certain doors for Rolex over several years now. In fact, we’ve only carried it in about 30 doors during the current year.

And as I said, Rolex, they have been great partners over the years and they are going to continue to be great partners in working with us to service our customers going forward, as they continue to provide the quality of service that they’ve become known for.

Bill Armstrong - CL King Associates

I see. And will that in turn open up any opportunities for other brands of watches within the Jared stores?

Mike Barnes

Yes, we’ve already been in discussions this year on how we could strategically realign our watch business to really better meet the needs of our core customer base and we do have a lot of other long-term strategic watch brands that are great partners and we feel are a great fit for our Jared demographic. We have certain focuses on them going forward, and we are looking at the entire strategy for our watch business long term, you know going forward.

Bill Armstrong - CL King Associates

Got it, okay. And then just one other question on the UK, the gross margin or the merchandise margin was down. I think you did have some price increases this year and you are putting in some more differentiated brands. Should we possibility expect may be a turnaround and improvement in merchandise margins as we go into the New Year.

Ron Ristau

I think it’s always our goal to try to off set the commodity price inflation with price increases. In the UK we’ve been able to do that to a large extent, but not entirely, so our margins have been running slight down throughout the year. As we move into next year, it will certainly be our intention to try to stabiles that a little more, but it depends on the strength of the economy and the level of how we have to meet competition, whether or not we can totally pass through all commodity price increases next year. So it’s a little premature to exactly commit to that, but it certainly is our goal as we move through our planning process and into next year to seek to try to accomplish that.

Bill Armstrong - CL King Associates

Understood. Okay, thank you very much.

Mike Barnes

Thank you.

Operator

We will now take our next question form Rick Patel from Bank of America.

Rick Patel - Bank of America

Thank you. Good morning. Can you provide some color on which categories customers have been most willing to accept higher prices for and can you also highlight some areas where you had some push back to higher prices, whether its for entry level merchandise or certain fashion categories.

Mike Barnes

I would defiantly say and I think this is partly reflected not only in increased commodity cost, but also certain trade-ups that we talked about from time to time, that quite frankly some of the higher priced merchandise and especially a lot of the branded merchandise, both inside the bridal and outside the bridal realm continue to be opportunities for us to gain higher prices on.

I mentioned a little bit about the Neil Lane that has now been fully rolled out in the US, which does carry some higher bridal prices. The Tolkowsky Diamond, which is an ideal cut diamond that also carries higher prices and I think that you know a lot of the branded businesses are less resistant than some of the more core business to price increases.

Ron Ristau

And just to add to that, I would say that we monitor this very closely by SKU whenever we put in a price increase and part of the art of our merchants is the SOA in which they protect customer value, so that we have seen very, very rare instances of resistance to price, because we always try to make sure that our prices reflected value in the current market place.

Rick Patel - Bank of America

And can you also give us an updated on the charm bracelet category, both Pandora and Charmed Memories. Recently another middle market jewelry company and also an online retailer, both stated selling Charmed jewelry. So I’m curious if you guys think this category is getting crowded and if so, your plans to either maintain or increase market share in the future.

Mike Barnes

Sure. You know basically Charmed Memories, which was mostly a non-comp business in Q3 last year did very well for us. It was a great business. And Pandora by the way had another great quarter for us as well, the business was, very, very strong.

You know it’s kind of a tail of two countries quite frankly in the UK. You know as we mentioned its tough business model over there anyway, but the Charmed and bead business has slowed down for us in the UK a little bit more. In the US we have continued to see strength in both Charmed Memories and in Pandora and Jared, with a little bit more of a slowing in the UK on that.

Rick Patel - Bank of America

Thank you very much and best of luck for holiday.

Mike Barnes

Thank you so much.

Operator

We will now take our next question from Rober Drbul from Barclays Capital.

Robert Drbul - Barclays Capital

Hi, good morning.

Mike Barnes

Good morning.

Robert Drbul - Barclays Capital

First question is, on the ASP increases that you expresses in the businesses; is there a portion that you could attribute to price increase versus the mix or the move to private brands. Is there a way you could break that down for us?

Mike Barnes

It’s somewhat difficult to break it out. We do that internally. I would say that the majority of it is driving by pricing from a perspective of giving you some color around it. Although of course we are seeing trade off in our bridal categories as we move through the introduction of Neil Lane and Tolkowsky and Leo. These are more expensive products and we do find that the consumer is trading up and more willing to pay for the perceived quality of products without too much resistance. But I would categorize it for you broadly that the majority of it is due to the price increases that we put through.

Robert Drbul - Barclays Capital

All right. And within the buy back authorization, can you just maybe develop a little bit more around the approach, the buy back. You know is it going to be more price sensitive or just at current market prices you’ll just use the authorization. How should we think about that?

Mike Barnes

Well you know first off the buy back has been approved by the board, but we can’t start it due to the normalized black out period we have until January. So you know it will take a little bit of time on putting together our strategy on how to execute that in the best way in the interest of the shareholders.

Frankly we just feel like it was the right thing to do. It was a good addition to the dividend that we had already instituted and we think because of our strong business model and the fact that we have identified what we believe is an appropriate balance sheet kind of on a go-forward basis, that it gives us an opportunity to buyback the stock in the interest of the shareholders over time.

As far as putting pricing and parameters around that, obviously we are not going to go public with what our parameters are. We would just say that we are looking to buy stock when we do feel like there is a good opportunity to increase value to the shareholders and when we feel like the stock may be under appreciated.

Robert Drbul - Barclays Capital

Great. And then my last question is, merchandised margins were up in the second quarter and they were down largely in the third quarter. Just can you help us understand the differences sequentially around that specific statistic?

Ron Ristau

Sure, the merchandise margins in the third quarter would actually be up, okay, if we take out the impact of the watch promotion on the US division. So in other words, that’s a swing of 85 basis points due to this watch promotion, which was it turned out was a high volume, but low margin activity, okay.

The other thing that occurred in the third quarter of this year was particularly in the US. We were up against some price increases taken in the third quarter of last year, which we did not repeat this year, because we felt our products were well placed. We received the benefit from that in the first and second quarter and it was slightly less of a benefit in the third quarter this of year.

We still believe that our gross margin, our merchandise margin management has been excellent. We will more than achieve our goal of maintaining imparity of even the slight improvement on the year and think that our prices are very competitive in the market right now.

Robert Drbul - Barclays Capital

Great. Thank you very much.

Operator

We will now take our next question from David Wu from Telsey Advisory Group.

David Wu - Telsey Advisory Group

Hi. Good morning everyone and congrats on a solid quarter. First question, you mentioned that you’re pleased with the start of this quarter. Is it fair to assume that the comp so far in November is maintaining a similar pace as the third quarter?

Mike Barnes

Yes, I think that’s a fair characterization. I would say that they were broadly similar just like I did last quarter and that happens to be the case. So we feel very good about the start that we’ve had in the fourth quarter. We think that our positioning is as good as it’s ever been; that we have great marketing initiatives behind our products and our store concepts and you know we are looking forward to the remainder of the holiday season.

David Wu - Telsey Advisory Group

Great, and with regards to the credit program, can you talk about how credit sales performed in the quarter. How the approval rates have been trending and if you are planning any special credit promotion this holiday, such as interest re-promotes.

Mike Barnes

We are not planning any special credit programs for the fourth quarter. We believe we have an excellent offering throughout the year. We do offer of course interest rate programs, but they are the same programs that we offer all year long to people. We don’t do anything special for holiday, nor do we provide any additional incentives with our credit for sales in the fourth quarter. We believe our programs are well designed and our merchandise is certainly valued price, so that the consumer gets a great deal.

Our in-house consumer participation rates remain relatively consistent in the third quarter and we are very please with all of the statistics as it relates to credit and really our consumers are behaving in an excellent manner. They continue to make payments in excess of minimum requirements. They are paying large down payments. People are acting very responsible with credit and one of the reasons that our credit files are building is that the bridal category, which of course is a very important component of sales is credit and continues to be very strong for us.

So the credit is really, really in good shape. Probably at our internal records, better than its ever been and just continues to perform excellently; hats off to the people who run our credit operation, because they have been doing an excellent job managing it as we continue to recover.

David Wu - Telsey Advisory Group

Great. And you also mentioned higher ad spending this holiday season. So should we expect an increase in that on a marketing and sales basis for the fourth quarter?

Mike Barnes

As we have stated, we’ve been targeting 6% to 6.5% in the United States as far as an advertising marketing spend, you know on a yearly basis and that is up from last year slightly and we have invested more in the national televise advertising. You know, not only do we have inflation there, but we have invested additionally to get more impressions this year for both Kay and Jared then we had last year. So we think that our advertising is well positioned and it’s going to really help us drive sales.

David Wu - Telsey Advisory Group

Excellent. Thank you very much.

Mike Barnes

Your welcome.

Operator

We will now take or next question from Jeff Stein from Northcoast Research.

Jeff Stein - Northcoast Research

Hey Mike, I got a question for you with regard to you know who you are kind of going after in the bridal business. If you look at the demographics, it would seem to me that you got a lot of younger consumers out there that are probably delaying marriages. They don’t have a lot of money coming out of school.

It’s tough to find jobs and yet you guys are kind or rising the bar and going, it seems to me after a higher income demographic with some of your new private brands. So I’m wondering, is this a strategy that might come back to haunt you a little bit further down the line as the demographics potentially could begin to work against you.

Mike Barnes

Thanks for the question. Actually I think that you look at the broad offering that we have, both branded and in our core business or better known as non-branded business perhaps, that we really have not moved away from our customer. We have just given you know more choice and a branded opportunity to our customers.

You know the amazing thing is, if you look at – take Neil Lane for example, you know one of the highest or one of the best selling price points we have in that entire line is over $6000. So I truly believe that what we see is the consumer is just looking for something different. They want something more innovative, more fashionable, more stylish and they are willing to pay even more for it, which I think is a great thing, but its not necessarily that we are loosing those customers. I think a lot of them really are trading up and I’ve seen that throughout a lot of business over time.

Even in the very tough times back in the reversionary days, consumers were just looking for something that is very much differentiated from the sea of products and the sea of segments that they have seen out there and I think that’s one area that the branding initiative really helps us with. But we have plenty of opportunities and we look at our merchandise planning and our lines kind of as being on the grid.

We offer everything in many different price points, its very broad and it gives the consumer an opportunity to really figure out which features are most important to them; is it price? It is brightness? Is it an ideal cut diamond, etcetera, and that allows them to make the right choice and that’s really all we are doing, is trying to give the consumer you know the ability to choose what’s right for them.

Jeff Stein - Northcoast Research

Great, thank you for that and one additional question if I may. You’ve indicated historically, at least for this year that you’re private label penetration is about 22% up from 19% last year, about 300 basis points. But I’m wondering if you can drill down a little bit. Within the bridal category, which I think is about 50% of your sales, can you talk a little bit about where your private label penetration is just in bridal alone compared to the prior year.

Mike Barnes

Well first off, just to make sure that we are very clear here. The 22% was last year’s fiscal 2011 penetration for exclusive and differentiated brands and that was up 300 basis points from the year before that, which was fiscal year ‘10.

This year what we have said is that (a) overall, we expect to see that penetration continue to grow based on what we have seen, but we have not you know delivered quarterly penetration numbers on that and certainly we will get a comparison since we have given that out on an annual basis.

Bridal we have not broken out specifically what the penetration is on the branded goods, but if you look within the market place and some of the comments that we have said, we have rolled out over the last 15 months two major programs being Neil Lane and Tolkowsky Diamond and we have stated that Leo continues to be our largest selling branded program. So clearly, you know we would expect to see lot of growth in the bridal category as well, but we haven’t put any number to that yet.

Jeff Stein - Northcoast Research

Got it. Thank you.

Mike Barnes

You’re very welcome.

Operator

We will now take our next question from Jennifer Davis from Lazard Capital Markets.

Jennifer Davis - Lazard Capital Markets

Hey guys, congratulations on another great quarter.

Mike Barnes

Thanks Jennifer.

Jennifer Davis - Lazard Capital Markets

A quick clarification; first of all the watch promo; I think you said invested comps 8.3% at Jared. What was the impact on ASPs?

Ron Ristau

$76 I believe it was.

Mike Barnes

Yes.

Ron Ristau

Just, so let me give you the numbers. It’s 83 in Jared, it’s about three on US and two on total.

Mike Barnes

That’s comp.

Ron Ristau

Comp.

Jennifer Davis - Lazard Capital Markets

Right, okay, okay great thanks. And then …

Ron Ristau

Just doesn’t move up the chain. That’s $76 in the Jared ASP.

Jennifer Davis - Lazard Capital Markets

Got it, got it thanks. And then is Tolkowsky and all of the case stories that you think it can be in. I think you said its been a little over 600 out of the 900-ish.

Mike Barnes

Yes, it is around 600 doors right now. As we always do, we test before we invest, so you know we will continue to roll that out as appropriate. You know we‘ll see how the latest rollouts are doing. I can say that overall we have been very pleased with the results that we’ve seen from Tolkowsky, so we will just take it a step at a time, but I would necessarily say that the number of doors is limited at the number, no.

Jennifer Davis - Lazard Capital Markets

Okay great. And then can you talk a little bit about the delta between the comps at the regional brands in Kay. I mean the merchandise is similar, so do you think that’s largely attributable to the advertising, the national advertising at Kay or is there anything else that kind of factors in there.

Mike Barnes

You know that is far in a way as we’ve discussed the largest factor quite frankly. When you look at it, they have the same opportunity for the merchandise; it’s the same great training and people development that we do in all of our divisions and it eventually all reports up to the same management team. So really the biggest difference, there is the national advertising, which has helped us build a very powerful national mall brand and store.

Jennifer Davis - Lazard Capital Markets

All right, thank you for spending. Okay lastly, in terms of the UK, I understand that you’ve done like everything in your control, you are well prepared for the fourth quarter, but how do you feel about the consumer there? I guess how do you feel about what’s not in your control.

Mike Barnes

I think the consumer is having a very difficult time there. You know and obviously we are pleased that we are outperforming the other parts of the non-food retail sector. But it’s a tough business environment and there’s no way to dodge that animal. Its just there and its part of the macro-environment we have to deal with it.

The best we can do is position our self for the best possible results and position ourselves to try and take market share even more as we move forward and that’s what we are doing and again, as I mentioned earlier in the remarks, the fourth quarter is a very important part of that and we’ve focused ourselves you know pretty clearly on initiatives for that.

Jennifer Davis - Lazard Capital Markets

All right, great. Thanks and best of luck for holiday.

Mike Barnes

Thank you so much.

Ron Ristau

Thank you very much.

Operator

We will now take our next question from Rod Whitehead from Deutsche Bank.

Rod Whitehead - Deutsche Bank

Hi there. Clearly the strength you had so far this year is very much driven by bridal. What are you – I mean obviously it’s a different customer at Christmas, it’s a gift-giving customer. What products in particular do you think will be key to driving the performance over that period?

The second question, just coming back to the Rolex clear out, you mentioned that you’ll exit completely by spring of next year. So does that mean you’ve got further inventory. If you have, have they given you extra inventory, because you can work out from what you’ve given that the sales of Rolex in the quarter were $14 million, which at a full selling price must be close to your annual sales of Rolex?

And the final kind of question on that is, it looks as if, again from the numbers you’ve given, that the Rolex product was sold on about a 25% gross margin, which presumably means about 25% off normal selling prices. Why did you choose to kind of sell at such a huge discount, because I’m sure you’d sell that stuff anyway?

Mike Barnes

Okay. I’m going to go all the way back and try to remember your first question Rod.

Rod Whitehead - Deutsche Bank

Thank you.

Mike Barnes

That’s okay; thank you very much. Bridal has been very strong for us this year, but I wouldn’t say that it has inordinately driven our business. We’ve really seen a very broad-based growth, and that’s why I always point out, that even the non-bridal ranges that we have, both branded and non-branded have done well for us.

And you know on the branded side, you know some of the call outs that we’ve had in the US market is that beads have continued to do very well for us, the Charmed category. A lot of the fashion merchandise, even at the higher end, such as the Le Vian brand I mentioned earlier, has continued to do extremely well for us throughout the year and you know we have a lot of great merchandise initiatives.

The guys down in the merchandising department have done a fantastic job of making sure that all of our brands and non-brands have been well loaded with new merchandise and fresh merchandise as we have moved throughout the year, and again, well positioned for holiday, so I am not concerned about that.

I think what will drive holiday are the normal gift-giving suspects that we normally see out there. One thing I didn’t call out, not to focus just on the watch promotion that we had, but our watch business has been very good, actually both in the US and it’s been good in the UK as well as far as the category goes, so there is a lot of opportunity for us to drive holiday sales in the fourth quarter and we feel pretty good about that.

In terms of the watch promotion, we had various different price points within that watch promotion, depending on what our goals were on creating sales and what our inventory positions were, etcetera, and we feel like we appropriately priced the merchandise for the results that we wanted to achieve.

As I said, the biggest part of that watch promotion was conducted within the third quarter, and I would expect to not see the same type of impact on a go-forward basis as we continue to kind of finalize that business over the next couple of months, but really, we are only a few months away from spring, so it’s really a matter of just getting in and doing the right thing in a very controlled way with the brand as well.

Ron Ristau

Rod, we are going to run out of inventory before the fourth quarter, so it will be pretty much over at that point. They are not shipping in additional inventory for liquidation purposes.

Rod Whitehead - Deutsche Bank

That’s a shame. Okay, thank you.

Ron Ristau

Yes, I know.

Operator

We will now take our next question from Ben Spruntulis from Citigroup.

Ben Spruntulis - Citigroup

Thanks very much. Good morning Mike. Good morning Ron. Could I just start with a question on the US. You currently said the underlying gross margin in the US from the impact from the Rolex watch promotion; can I just clarify the impact that it had on your US same store sales in the quarter?

Ron Ristau

3%; approximately 3%.

Ben Spruntulis - Citigroup

3%, fantastic. And when you referred to on the call, happy with underlying trends in Q4, when you said similar to Q3, you were referring to an underlying Q3 trend?

Mike Barnes

Yes, we were referring to the comp store trends that we’ve seen.

Ben Spruntulis - Citigroup

The underlying trends?

Ron Ristau

No, the total company trend.

Ben Spruntulis - Citigroup

Okay, fantastic. And a follow-up on the UK; the operating margins in the UK feel by around 340 bps in the quarter, but gross merchandising margin was only down around 80 bps. Are there any other sort of investment that’s gone into SG&A that’s led to that operating margin decline?

Mike Barnes

Yes Ron, we are dealing with small numbers, but we’ve done a couple of things in the third quarter. We’ve increased advertising spend a little bit in the third quarter to try to continue to hold the line in what is a very difficult market there; we’ve got some increase in our store SPF costs, just driven by overall inflation and rises in the minimum wage and last year we had a one-time benefit of a property transaction, which was worth about $700,000, so those are the main things going on.

A little bit more in IT and a little bit more in some long-term share-based compensation costs, which is just driven by the way the program is designed, but these are all small changes. They produced an operating loss, which was greater in the third quarter.

But as Mike pointed out, we’ve been playing and continue to play for the fourth quarter, which is where we earned virtually all of our operating income in the UK division and have spent considerable time and efforts working with the merchants and teams there to try to get as strong in offering as we can in the fourth quarter, which is where we’re going to win or lose the whole year.

Ben Spruntulis - Citigroup

That’s very clear. Thanks very much.

Operator

We will now take our next question form Anthony Lebiedzinski from Sidoti & Company.

Anthony Lebiedzinski - Sidoti & Co.

Good morning. Just a follow-up on the question regards to the Q4 trends. Are you seeing similar trends in the US and the UK or – I just wanted to get a little bit more clarification on that comment in regards to current trends.

Ron Ristau

Yes, I don’t think we would want to be – you know we don’t provide guidance. We wouldn’t go into that level of detail. I think it would be suffice to say that on a total company basis we are very pleased with the trends and there is nothing – you know, I would just say the total company trend is good.

Anthony Lebiedzinski - Sidoti & Co

Okay, thank you. And I was just wondering about the credit participation. It was up again over here in the third quarter. I’m just wondering if you could provide a little bit of a breakdown between bridal sales versus non-bridal sales when it comes to credit participation.

Ron Ristau

Sure, well, I’ll go somewhat – I’ll meet you half way on that so to speak, but the credit participation on bridal is higher than the company average. There is no question about that, because we feel that the bridal offering is really a wonderful place where the intersection of our credit strengths, our pricing and our merchandised offering all come together to offer the consumer a great deal.

And often times a bridal customer is a young person in their late 20s who is still establishing themselves from a credit perspective and our programs are very much orientated towards helping that consumer, to make that purchase that they desire and our credit program strongly support it. So we do see distortion of more credit for bridal than we do in the overall business. But for competitive purposes I wouldn’t go into the exact percentage, but suffice to say it’s significantly more than the company as a whole.

Anthony Lebiedzinski - Sidoti & Co

Okay and as far as store growth for next year, I know you gave some comments during your analyst day. Is there anything further that you could perhaps add or are you still looking at the same type of store growth that you had communicated with the investment community?

Mike Barnes

Yes, we are pretty much in the same levels and you know just to repeat it, basically our expectations in the US are that we would open from 40 to 50 new stores next year and probably six to eight of those would be Jared type concepts. The remainder of course would be Kay and a lot of those would be off-mall concepts.

Anthony Lebiedzinski - Sidoti & Co

Okay. And as far as store closings for next year, any number you can give out?

Ron Ristau

No. It will probably be in the range of – I’d rather not give it out, but it’s probably in the range of around 30-ish; 30, 35 stores. I could be off on that. It’s always dependant upon how the businesses evolve over some time and into the year and so it’s always a number that moves around depending upon the performance of stores and the deals that we can cover with landlords and so on, but probably in that rough range.

Anthony Lebiedzinski - Sidoti & Co

All right, thank you.

Operator

We will now take our next question from Ike Boruchow from J.P. Morgan.

Ike Boruchow – J.P. Morgan

Hey guys, congrats on a great quarter. Ron, I guess I’ll ask you about – the CapEx budget for this year obviously came up quite a bit as you guys were catching up on some remodels. Can you give us any color on next year? I mean, is the business fully caught up? Are there more stores to remodel? Just how to think about capital spending?

Ron Ristau

Well, we are not prepared to speak about that yet in total, but I would give you a couple of comments on that. Number one, we are going to be doing more new stores. Number two, our IT investment programs are multi-year programs, they are not just a one-year program. That’s true of both our core operating systems development, as well as our Internet push, which Mike has really pushed on this year, so those are multi-year initiatives.

In addition to that, what we’d have to watch out for is the anniversary dates on some of our stores. So there is a large universe of our Jared stores which are coming up on 10-year anniversaries and of course as market leaders we want to continue to remodel those stores robustly to make sure they have the latest and greatest store designs and selling techniques available to them.

So all of those things will serve to keep capital spending at a fairly high level. So, I wouldn’t expect it to change that much. It will obviously change somewhat, but these programs are ongoing and will require capital over some period of time.

Ike Boruchow – J.P. Morgan

Okay and then Mike, when we think about the – I know it’s a little premature, but when we think about your new buyback program, in conjunction with your comments at the last analyst day, it sounds like you guys have a $300 million roughly cash cushion target. But if the business continues to run at the pace it’s running, I mean you could fully exhaust that repurchase program next year and still be well within your targeted cash cushion. Is there any comments on how you plan to use that $300 million? Do you need to spread it out over two years, could you accelerate it; just anything there?

Mike Barnes

Yes, we really haven’t got any details as to how we would execute the plan yet and there’s a lot of reasons for that. But the cushion that you speak of is kind of a moving target as well.

Number one; it’s not a hard and a fast number. Obviously, there may be times where you’re a little below it, and times when you’re a little bit above it, but we kind of couch that in terms of like a 7% to 9% of net sales. So as our business continues to grow, you know that number would change over time as well. But right now it’s somewhere in approximately the $300 million range as you pointed out.

Clearly, we’re going to execute that buyback in whatever is the best fashion that we determined in the interest in the shareholders. So well, we do need to give it a little bit more time to think it through. It could be done rather quickly or it may take a little bit of time, we’ll just have to see what the market looks like at the time when we get there.

Ike Boruchow – J.P. Morgan

Okay, congrats guys. Thanks.

Mike Barnes

Thank you so much.

Operator

We will now take our next question form John Baillie from Societe Generale.

John Baillie - Societe Generale

Hi, good morning gentlemen. Great set of results. I mean, just on the merchandise, the gross merchandise margin, I’m just wondering if the differential on the exclusive product is widening as you build up scale and roll it out. Is there really quite a gap now between that and the rest of the product range?

Ron Ristau

No, I wouldn’t it describe the gap. We’ve always described the gross merchandise benefit of the branded product as slightly higher than the overall commodity lines that we carry and that is of course fully absorbed if there are any costs that we incurred for the loan. It’s not really widening significantly. I would say it’s relatively stable, because it too was affected by increases in commodity pricing and so on. so I wouldn’t say it’s widening, I wouldn’t say it’s widening.

John Baillie - Societe Generale

So, they would be then directed soon as it really builds up above the 22%, that there is scope to squeeze more out of it?

Ron Ristau

Well again, when you’re looking at these type of loans, the manufacturing cost is actually the lowest cost of the costs that we incur. So labor is really relatively insignificant in comparison to the commodity costs, which is really where you’re driving your margin from. So again, I would describe it as relatively stable, not growing more than it had been.

John Baillie - Societe Generale

Okay. Can you just say how much the number of account on the credit side help? What’s the growth in the number of accounts coming through at the moment? What’s sort of the run rate?

Ron Ristau

The growth in the number of accounts? I would say the growth in the number of accounts is the average receivable balance ahs remained relatively consistent at approximately $1,000; a little bit more, but if you simply take that number and look at the growth in receivable as it relates to our US sales, it’s moved. That’s how many new accounts you would have picked up. So, what’s the growth rate in the accounts receivable for the quarter? I would simply take that number and that’s the number of accounts we would have increased.

John Baillie - Societe Generale

Right, okay. I mean just looking, so the net other operating income was – certainly the growth rate was certainly quite above the sales growth at this moment in time, so quite a bit of momentum going into Q4. I mean, have you been able to push up any of the APR rates on it or really is that stable?

Ron Ristau

No, we have not really pushed up the APR. The APRs were set last year and have been relatively stable. Any differences that have occurred have occurred because of the level of receivable increasing and that’s primarily the number one reason that that income was up.

John Baillie - Societe Generale

Okay. Thank you very much.

Ron Ristau

When you really get into it, it’s the time that people are standing and so on, but that’s the number one driver.

John Baillie - Societe Generale

Okay. Thank you.

Ron Ristau

That growth rate is about 13.4%. I just didn’t have it at my fingertips.

Operator

(Operator Instructions) We will take our next question from David Jeary from Investec.

David Jeary - Investec

Yes, good afternoon gentlemen. A couple of questions for me if I may. Can you remind me or describe to me the shape of the Q4 compared to last year in the US? It was obviously the toughest of the year. I just wonder whether that really kicked off beyond Black Friday or whether it was roughly at a stable level across the quarter.

And my second question is just really on the pricing of some of the branded merchandise that you are selling in the US and UK and about the pricing and how – you know whether there’s any differential over and above translation rates on that pricing, whether there are incremental costs that you incur, because there are smaller volumes going through the UK for example, just to get a bit of a feel on that branded merchandise. What differential pricing on margins there may be?

Ron Ristau

Well, let me just, first off take the first question on the comp store sales. It was 11.4% in the US in the fourth quarter of last year and while we don’t really go into the weekly or monthly trends, you know obviously the important months of the year are in November and certainly December is it; that’s where the lion’s share of all sales are generated in the quarter in both the US and in the UK, so you can’t generate that comp unless your December comp is in that level or higher.

David Jeary - Investec

Yeah, indeed. That’s what I was looking for really, to see whether it was higher or…

Ron Ristau

Well, you’ve got to drive it in December. It’s almost like your November again and not that they don’t count, but December is the ballgame.

David Jeary – Investec

Yes, absolutely. Thank you.

Operator

As there are no further questions in the queue that will conclude today’s Q&A session. I would now like to turn the call back to Mr. Mike Barnes.

Mike Barnes

Thank you and thank you all for joining the call today; we really appreciate it. Our next scheduled results call is going to be our holiday sales report and that is expected to be on January 10 and we all look forward to speaking to you again then. Have a great holiday.

Ron Ristau

Have a great holiday. Thank you.

Operator

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

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