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Signet Jewelers Limited (NYSE:SIG)

Goldman Sachs 2012 Global Retailing Conference Transcript

September 6, 2012 9:45 AM ET

Executives

Mike Barnes - Chief Executive Officer

Ron Ristau - Chief Financial Officer

James Grant - Investor Relations

Analysts

William Hutchings - Goldman Sachs

William Hutchings - Goldman Sachs

All right. Good morning, everyone. We will try and get back on schedule with our time. My name is William Hutchings. I’m an analyst based in London’s Goldman Sachs. And it’s a great pleasure that I’d like to welcome Signet Jewelers and Mike Barnes, Chief Exec; Ron Ristau, CFO; and James Grant, Investor Relations to the conference. We’re going to plan out just to share opening comments and then we’ll go straight into questions. Thank you very much.

Mike Barnes

Thank you very much. I appreciate that. And thank you all for coming in today. We really appreciate the opportunity to talk about our story a little bit. We feel like we have a great business model and that we’re in the early innings of a great expansion of our business for the long run.

Signet is a company better known as Kay, Every kiss begins with Kay and Jared, He went to Jared. So, I’m sure you’re familiar with the brands that we have. We also have a lot of great merchandise brands within those two store concepts and we look forward to the future and how we can expand and grow our business to the benefit of our shareholders.

So we really appreciate you coming here and we look forward to taking your questions today. The opportunities are really endless for us that we see. So, with that, we’ll keep it short, because we know we don’t have a lot of time and we’ll throw it out for questions to you guys.

William Hutchings - Goldman Sachs

Yeah. So for those of you who are on day two of this conference, we just get through the standard questions that we’re asking every company. So, first of all, what are your expectations for the latter half of the year and if you can comment, obviously, if you went to on 2013 and how it’s looking for you from where we are today?

Mike Barnes

Thank you very much. I appreciate the fact that you think that we’re all economist out here. But, no, seriously, we had a great first half of the year. We just announced our second quarter a while back and we had the strong comp stores sales in the U.S. and relatively speaking in the U.K. where we had positive comps in that market in a very, very tough environment.

Our business continues to get better overtime. I think the back half of the year is promising. We can’t control whether it’s going to happen in the macro environment, but we feel like we’re very well-positioned to meet our objectives for the back half of the year.

We had a lot of merchandise that we tested in the front half of the year that actually tested very, very well for us and we’re doing a lot of rollouts in the back half of the year into both Kay and Jared, with some of these brand extensions.

If you look at a brand like Neil Lane, Neil Lane has been a fantastic fairly new store Bridal range for us and has performed excellently. We have now tested it and expanded it into the design area, into the fashion area, the test went extremely well. And we’re going to roll it into all Kay and Jared stores for the back half of the year. So that’s going to be a fantastic, new brand for us going in.

Tolkowsky Diamond, which has done very, very well for us, it is the strong, new diamond range that we have and it is being expanded into another 250 stores to create a 550-door expansion back half of the year. We have a new collection called the family collection for Jane Seymour Open Hearts. That’s also being expanded, as well as several other merchandise initiatives.

So, we feel pretty good about the back half of the year and how we’re positioned and I think we’re setup well. As far as looking into next year, we’re always looking to the future and looking at what the newest trends are and the newest designs. That’s what we do. We’re the leader in our industry. We intend to remain there and so we’re working on some new initiatives that will take us into next year and beyond.

William Hutchings - Goldman Sachs

Thank you, Mike. And then one is pretty more relevant one up here as your capital allocation strategy clearly gone through a period of significant deleverage of your balance sheet over the last few years. Now what would be the outlet for CapEx plan repayment of dividend?

Ron Ristau

Well, our capital spending plans this year remained very strong. We’re going to spend between $155 million to $165 million. We’re focusing that money on new stores. We’ll be opening up approximately 53 new stores this year in the U.S -- 51 in the U.S., two in the U.K.

We are spending lot of money on our continue remodel since we have the number one jewelry store, we believe that our store should always have a excellent customer experience. So we continue to stay on a very aggressive remodel program so over 100 stores to be remodeled.

And the next greatest investment we’re making is between $40 million and $50 million in our IT infrastructure, building out our e-commerce systems, re-launching our websites, building our social media capabilities, as well as building the operating infrastructure of continue improvement in our POS systems and our inventory systems, which we believe are very important to maintaining our leadership position and operating our company.

So our capital spending remains robust and we’re still generating very good levels of free cash flow and so we make anything work. We’re able to invest in our business, take a little bit opportunities that we see, as well as generate additional free cash for other uses.

Mike Barnes

I think just as a quick follow-up to that to Ron. You mentioned that the investments that we’re making in IT and in our infrastructure, it is so important to this company. Because what we’re doing is we’re setting ourselves up for robust future growth right now and we’re looking to the future and we’re looking where the trend is going, not where it’s been.

And the investments that Ron mentioned in our e-commerce. We are going to re-launch both Jared and Kay in the fall with brand new sites, that have much more user friendly applications on them and that business has been growing at a rapid pace.

If you look at our last quarter on a consolidated basis between the U.K. and U.S., we grew around 40%. U.S. was actually higher at about 48%. So it’s a very strong part of the business.

And we see that has being a great partnership with the brick-and-mortar stores that we have out there and we call it our brick-and-quick strategy so to speak and it really works well and our customers have responded to it. And they are really addressing it and they are doing business with us. The way they want to do business, when they want to do business and how they want to do business.

So they are buying from their homes and having it shipped to their home as a traditional e-commerce or they are buying from their homes and having shipped to a store, because they still want to come in and they want to talk to somebody that can really explain to them about the products that they’re buying, about the diamonds, the color, the clarity, the quality of what they’re purchasing. So we think it’s a fantastic strategy.

And then on the other side of the IT infrastructure, we are also doing customer facing technology inside our stores. We are sending out touchscreen devices into every single one of our Kay and Jared stores.

They will all be out there by fall. It’s going to be a great way for our managers and our associates to interact with our customers as they come into the store and really help them finalize their purchases, customize their purchases, et cetera. So, all the investments that Ron is talking about are things that are really going to drive our business for the future.

William Hutchings - Goldman Sachs

And just a follow-up, when you think about capital allocation, clearly, a lot of capital allocation go into inventory with the business in Jared. I wonder, if you could just talk a little bit about, how you think about managing inventory and you still doesn’t have that changed overtime, especially in the license, the volatile input prices and…

Mike Barnes

Well, we are by far the best inventory managers in our industry. Our inventories for jewelry business turned far better than any ones. Last quarter our inventories were up about 9% and our inventory levels have to be aggressively managed in order to achieve that, because the underlying rate of commodity inflation is somewhat higher than that, commodity inflation is the number one driver of increases in our inventory levels.

So what you see underneath that, you don’t see underneath that is that our aggressive management of unit turns which will reach new record in our company are ongoing, so that we can minimize the growth impact of commodity pricing on the net level of inventory investment we have to make from our staff side.

So we are very good at it. We’re very serious about it. It’s a core competency. Our branded businesses that we have gotten involved with overtime have added to our inventory efficiency because as we become more branded, we’re able to get more specific and limit our skew counts, whereas if you are in the generic Jewelry business, you are going to have a broader selection because you -- you’re not quite, you are broader because its less focused on exactly what consumers want.

As you become more branded, we’ve been able to bring our skew counts down in our branded inventories which is another benefit of the branding process that we -- people often overlook that, it’s a more efficient inventory model. So we’re very pleased with the way our inventories are up.

William Hutchings - Goldman Sachs

Thanks. And just the final one, Mike, being economist, but, you don’t view in terms of these events that potentially come out from the macro, the election fiscal cliff kind of question mark. How do you think about and do you prepare for them as an event for the business?

Mike Barnes

Yeah. I mean that’s a great question because the reality is none of us really knows exactly what the future holds. So what we have done is we have positioned our company to be able to withstand whatever the environment is out there.

We think that in a good environment, we’ll continue to grow and we’ll continue to expand, we’ll continue to build stores and we’ll continue to take market share. In a bad environment, we’ll continue to do what’s necessary, we will adjust to a bad environment just as we did in the past recession in whatever way is appropriate.

But at the same time, we think because of our strength and the strength of our balance sheet and our business model that even in a tough environment should one happen to come, that we’re going to be able to take market share, maybe even faster than we can in a good environment.

So we’re very well-positioned in any market that is happening out there, whether it would be good or bad, whatever happens with the election. It’s a situation that we feel extremely well-prepared for and that’s the way we will deal with it.

William Hutchings - Goldman Sachs

Fantastic. And I think there is mikes, so, we’re going to start with the front question of the front-end.

Mike Barnes

We can hardly hear you.

William Hutchings - Goldman Sachs

Yeah. (Inaudible)

Question-and-Answer Session

Unidentified Analyst

You can just tell us who are your target customer is (inaudible).

Mike Barnes

Sure, everyone. No. Seriously, if you look at the concepts that we have, if you look at the U.S. like Kay and Jared, we consider Kay to be kind of middle market and Jared is kind of upper middle market demographics.

So Kay, the sweet spot is really probably going to be in that $50 to $75,000 average household income and then Jared is going to be slightly above that, positioned above that, at that $100,000 plus household income.

We do attract a lot of both male and female shoppers. If you’ve seen our advertising and if you haven’t then where have you been? He went to Jared, is kind of a trademark of ours and it’s a way for us to appeal to the young man out there that are looking to buy engagement rings for instance and things of that nature.

It’s a tough sale, it’s hard to believe. But even for, myself, going into a jewelry store as a very young man was not something, crossing that threshold was a little bit difficult for me.

So we think that its help us to appeal to the male shopper and we’re also appealing to the female shopper, the gift giver and the self shopper. A lot of what we’re doing in these branding especially on the fashion side of it, is really a lot of self purchasing. You look at some of the brands that we’re selling out there and as the -- on the fashion side and you know it’s a self purchaser that’s buying it.

So, Le Vian for instance is a fantastic fashion brand of ours that does very, very well. They are great partners. We work with them very closely. Our Pandora beads that we have in Jared, the Charmed Memories bead brand that we carry in Kay. So there is a lot of opportunity and we’re trying to hit that middle to upper middle segment of the demographic market basically.

Unidentified Analyst

(Inaudible)

Mike Barnes

Well, we had on a consolidated basis, 7.1% of comp store sales, 8.2% in the U.S., 2.1 in the U.K. So we feel like the customer is still out there and that business continues onward.

The back half of the year, again, we feel very well-positioned for that. In the third quarter we did give guidance that we’re expecting low single-digit comps. We are up against a pretty large watch promotion that we had last year, which affected the comp store sales.

But we’ve got all that factored in and we feel well-positioned and we think that we’re especially well set for holiday in both the U.K. and in the U.S. And we are looking forward to that time coming, because we think we’ll get -- we have some great product ranges out there, some great brands and we are ready for it.

Unidentified Analyst

(Inaudible)

Mike Barnes

We do hedge, I mean like gold? Yeah, we do. We have a regular robust hedging program, Ron and I, manage pretty closely and keep our eyes on it. In fact, most of he has got an update, I think gold is at $1,715.

Ron Ristau

Please forgive me. You’ve given me a headache. Just three weeks ago it was at $1,550. So we will decide now that it’s worth $1,715 and who knows. We deal with that commodity, the variability of commodity through our hedging programs, okay, where we can. And our attempt is always to smooth pricing and keep pricing on a rational basis. So we’ve been very successful about taking out this from the gold price over a number of years.

Unidentified Analyst

(Inaudible)

Ron Ristau

Sorry?

Unidentified Analyst

What percentage of your gold cost did you touched?

Ron Ristau

Gold varies, it varies, but we generally, I think we don’t want to disclose that numbers. It’s a fairly high percentage of our gold. When we think the market is predictable, we pull back from it when we think the market is a little irrational.

Mike Barnes

Basically, what we are trying to do or just take the ups and downs out of it and smooth out little bit. So between our average costing system on inventory management and the hedges that we provide into there, it gives us a lot of visibility into where our cost are going, which allows us to price appropriately and broadly maintain our merchandise margins, which is one of our goals.

Ron Ristau

Remember, turning it a little better than one time a year but for discussion purposes, think about it as one time and so we’re trying to do is get price predictability in our cost structure.

So that our merchants can react and appropriately price to maintain our gross merchandise margins, which is what we tell people and investors as our overall corporate goal and we’ve been very successful with that.

Unidentified Analyst

You mentioned market share, could you talk a bit about who you are taking share from and order deliveries that you have to take care? Is it quality of product, is it fashion lines, is it pricing and maybe on the last point if you could comment on pricing for yourself versus the competition.

Mike Barnes

Sure. If you take a look at the last 10 years, we’ve consistently taken market share over that time period. We went from being the number two market share 10, 12 years ago to number one and now pretty far and away number one. The last reliable numbers that we had in the U.S., said that we had about 10.4% market share in especially jewelry markets, which was almost double that of our next competitors.

How are we taking market share? We have a number of competitive strengths. Number one is our people and the training that we do. Everything that we do for our stores from talent acquisition to training, development, promotions from within, really speaks to a lot of the success that we’ve had out there. We have a great well trained staff that really connects with our customers and it works for us.

But there are so many other competitive strengths. On the product side, we have great brands, a lot of either differentiated or proprietary brands that we have whether it be Neil Lane, Jane Seymour, Tolkowsky Diamonds, the -- some of the other ranges that we have like Le Vian, which is also a differentiated range that we have even though it’s a third-party brand.

So, we’ve got great merchandise, we’ve got great people and we’ve got great marketing. We have the scalability and the ability to go out and advertise on national television in a pretty big way during the most important seasons of the year.

And as I said earlier, kind of jokingly, everyone knows that, Every kiss begins with Kay and He went to Jared, right. I mean, you see it all the time, so our ability to market the great merchandise that we have under the great store umbrellas of Kay and Jared. There is a huge competitive strength that we have.

And we believe that that’s going to give us the ability to continue to take market share overtime and then we’re not there yet. We’re not done yet. We’re just getting started quite frankly. And we think that we’re in the early innings of a long game and that we have the opportunity to really expand and succeed even further.

As far as pricing, what we mentioned is that we price to what our costs are and we have that goal, as Ron mentioned earlier, to broadly maintain our margins and we will continue to do so. We’re an industry that has been accepted that pricing is going to go up because we have inflationary products. The price of gold and diamonds has gone up over the long-term of time and it probably will continue to do so.

So what we would hope for is relatively stable low inflation environment, so that we can just kind of price over time and people do expect that, and they realize that the products that they’re buying from us have underlying value too.

It’s not as susceptible to inflation as things like apparel and suits and other items that really have no residual value, because the products that we’re selling that are based on gold and diamonds will always have lasting value for a lifetime and people realize that.

William Hutchings - Goldman Sachs

I think there is one at the back.

Unidentified Analyst

I’m trying to better understand, trying to better understand the guidance in same-store sales is back up to your low single-digit. Given the noise around watches and I’m not sure if you’re planning watches up or down and given the inflation in this the commanded inflation.

To hit your numbers, do you need jewelry units to be up or down, or does that not really matter and do you plan watches up or down. I’m just trying to better understand the thinking behinds the guidance?

Mike Barnes

It’s a little bit of both. Let me correct myself because I think I did say a low single-digit but what we actually guided to was low to mid single digits. If you look at the second quarter units really drove the business.

There is a lot of shifts that go on in this industry and we had a big shift. A lot of promotion from the first quarter and into the second quarter that we talked about in the first half of the year, because of Mother’s Day, which drove a lot of lower price gift giving type items.

So, it was primarily units specifically that drove the increases that we saw on the second quarter, but you’re always going to have some mixture of the pricing that we take price increases as well as units. And it’s really going to depend on which time period they bigger speaking to at that moment. Do you have anything to add to that?

Ron Ristau

I think that’s true. I think that the -- in general pricing has been an important part of our conferences over a long timeframe that’s we’ve been pretty clear about that, so pricing is important. But look at variations by quarter was or whether it’s pricing or units some last quarter was a 100% driven by unit increases.

William Hutchings - Goldman Sachs

Okay. And just a follow-up, is there a reason you’re not repeating the watch promotion or you are repeating, you don’t expect it to be…

Ron Ristau

It’s a one-time promotion. It’s a one -- it was a one-time essentially a promotion for us getting out over particular line. So we basically selling through the inventory and we will not repeat that promotion. And it had a very, very big spike impact in last year’s third quarter so.

Mike Barnes

On comps it did but from a profitability standpoint, it was less impactful because obviously it was a promotion. And it was done at a low margin. So from a comp sales standpoint, you’ll see a big impact but not so much in profitability there.

William Hutchings - Goldman Sachs

We had a question in the middle.

Unidentified Analyst

Hi. On the second quarter call, you talked a little bit about opportunity to improve the profitability in the U.K. operations. Can you give us a little bit of what some of the underlying assumptions are that would get you there, I believe you said assume even without meaningful improvement in the macro you still following everything that you could control there would drive the profitability improvements. Maybe just touch on that and a broader comment about what you are seeing in the U.K. competitively?

Mike Barnes

Sure. The U.K. environment remains very tough. But we believe that we have performed extremely well in the environment. In fact, if you look at last year, I believe, our operating income was around 7.8% in the U.K. for the last four year. A lot of people would signup for that number for many, many years in a row and I wouldn’t blame them. But it’s not good enough for us.

We believe that we have the opportunity to go back to double-digit operating income in that market. We’ve been there before and we have high standards. And so we have plans in place that, we believe over approximately a three-year period will take us back to double-digit operating income, specifically what we’re doing.

We’re working on new merchandise initiatives in the U.K. just like we are in the U.S. Some of them are the same merchandise initiatives that we can leverage between the two countries and use the brand strength to really drive the business. Tolkowsky for instance, Le Vian is also in the U.K. for us. And then they have some of their own brands that they have been developing like Forever Diamond, which we have recently relaunched, which is doing extremely well, as well as several other merchandise brands that are really driving a lot of the business there.

The other things that we are doing is we’re repositioning ourselves from a store standpoint. If you look at the retail mix in the U.K., it is really shifted over the last number of years. And it’s moving away from -- forget about central one then because that’s a different animal, kind of, life being here in New York City. But the normal high street locations in most cities in the U.K. really have been diminishing somewhat.

And a lot of that business is going to these big regional mall centers that are driving huge amounts of traffic and huge amounts of volume. And what we’ve done is we have been investing in these centers and we’ve been building flagship locations to have larger size stores, newer designs, more technology and it’s working for us. These stores are performing fantastically.

We’re building stronger bonds with some of the great watch partners that we have and we’re building boutiques. For instance, we have an Omega boutique in the Bullring Shopping Center that’s doing fantastic for us. In fairly new Stratford Center for Westfield in London, which is right by where the Olympics took place. We have a fantastic Breitling boutique that we opened that’s doing extremely well for us.

So we are putting shopping shops into a lot of our stores. So, we’re moving our stores where the business is going. There are newer, better concepts, larger scale, more branding, more shop in shops, that’s working for us. And we are also taking a very strong position on rationalizing stores, where the business is diminishing in some of these more old high street location.

So we’ll be closing a number of doors in the U.K. and the end result will be that we’ll have a slightly smaller, but much more productive portfolio in that market. And then finally, we are addressing head on the central cost that we have in the country and we are looking at this environment and you’re correct. We think even in this macro environment that we are facing today that we can still accomplish these objectives.

And we are looking at it as kind of the new normal. So if we do have more of the recovery in the U.K., we look at that as an upside for us. Because we think that we can accomplish the objectives in the current environment of getting back to 10% operating income over that three-year period.

Ron Ristau

And just as a level set from an investment perspective 92% to 93% of our income is generated in the United States. So, the U.K. is a rather small segment of our business from operated profit contribution, as Mike pointed out that’s still profitable and its cash flow positive. And we have a very good plan in place, which is being executed by the management there. But the majority of our income and the majority of our time and effort is still spent here in United States.

Unidentified Analyst

(Inaudible)

Ron Ristau

Well, number one, we don’t give the specifics of our stock buyback program. I am sure you can understand the reasons as to why we don’t. We felt that the stock represented a very good value as we look that over the first six months of the year. So it’s just why we purchase this rapidly as we did.

Our goal would be program as of course to return value to shareholders. But we also want to make sure that we’re smart and using shareholder fund. So that we do take a view as to what we think might or not might happen in the market when we pace ourselves on that so to speak.

It’s an important part of our strategy to continue as we’ve said in the future. We’ll take a look at it and make decisions whether we scale it up or down or even further from what we’ve done will depend upon our free cash flow and our view of the markets and our view of our own investment opportunities. But we did set a target of only holding cash at around an 8% of sales level.

So to the extent, we have a free cash flow above that than dividends, stock buybacks become an option for us. So we may add to it in the future. We’ll see what our Board decides, okay.

Mike Barnes

We do plan to actively manage that balance sheet though along the guidelines that we gave out that Ron just mentioned. So it is something that will stay in the forefront of our mind.

Ron Ristau

Yeah. We thought it’s a buyback was very infinitive by the way, we took at about lower 7% of this outstanding shares and average about $44 for the stock price. So it’s a very good value vis-à-vis for our long-term shareholders.

Unidentified Analyst

(Inaudible)

Ron Ristau

Yeah. 12 months or so promises.

William Hutchings - Goldman Sachs

Could you comment a bit on mix, how much of your gross margin dollars, revenue dollars come from big ticket diamond items? And how do you expect that mix to change if you expect it to change going forward, so with your fashion lines and other stuff that you mentioned. Do you expect that to change?

Mike Barnes

Yeah. That the -- it’s difficult to define high ticket diamond items. But we have seen overtime our average selling price has continued to go up, in both Kay and Jared. And a lot of the brands that we have added to our portfolio that have some higher prices associated with them have been driving higher percentages of the sales and so we are seeing that effect happens.

It’s amazing, if you look at Kay with the Neil Lane bridal brand that we have in there. It has done really, really well for us. And amazingly, one of the highest, I am sorry, one of the best selling skews that we have usually the best selling skew. Sales for retail value of over $7,000 in a mall jewelry store. That’s pretty amazing.

So we are seeing people reach up aspirationally as we develop in these brands and some great merchandise to go with them to Tolkowsky diamonds, the ideal cut diamond range that we have, has also done extremely well for us and we have that in Kay. We are also going to be expanding that into Jared this fall and it’s great story. It’s great brand. It’s great product quite frankly. And people are reaching up and they are paying those higher prices for this branded merchandise.

So, I would say that trend would continue. It’s not going to be, who knows for what, we are not going to double our average selling price over the next year or anything like that. But I think we’ll continue to see people reaching up and as long as we provide great mechanize under great brand umbrellas. I think we will be able to sell higher price merchandise in there.

Unidentified Analyst

And there was some angst on the core level of credit penetration and is there a level as you say that gets to tune to above 50%, 55% growth is really, as long as your credit part of the season, procedures are being met, there’s no reason it couldn’t go about specific any levels?

Ron Ristau

Yeah. I just try to clarify. From our perspective there was no angst to have about the credit penetration. The credit penetration and I think it’s the latter, but as long as we’re following our credit polices and we are ensuring that we only grant credit to people who can pay us back effectively. And interestingly enough while our credit penetration went up, our approval rates actually went down slightly in that period.

So, we think that is a healthy trend. What we see as I mentioned on the call is that when people come into our store, virtually a 100% of what they buy is done on credit. And now they’re just choosing, am I going to use our bank credit card or am I going to use the private label credit that we offer. So we keep seeing people increasingly self-select our credit offering because they feel it meets their need, okay.

And they’re able to then effectively pay that off rapidly because our minimum payments on our normal terms are much more aggressive than that of the bank. And most people pay us back into the ranges between 12% and 14% of our average monthly balance.

So in less than a year, we’re getting paid back on the credit that we grant. Remember, our credit program is setup to support the sale of jewelry. So we want to do is grant people credit and may get repaid as rapidly and predictably as possible. So that we free-up more open to buy to more -- buy more jewelry.

So people seems to be protective and be glad to get that open to buy, if you will, to make the jewelry purchase while protecting their bank credit cards from maybe their everyday usage more often that’s just the trend we’re seeing.

Unidentified Analyst

There is no number.

Ron Ristau

There is no number in our mind. I doubt it would get into the 60s in my own mind or maybe I will get the 60, but it’s because of the mix. It’s not because of anything that I’m doing, and if they got to 60, I wouldn’t go oh my God, that’s a business problem. I look at the bad debt percentages, the performance of the portfolio, the credit quality that we’re granting and always I’m happy with all that then I think that the credit program is working and doing his job effectively.

Mike Barnes

[Charles] just to follow that up, we -- just to reconfirm, we have not loosened our credit policy in any way that’s important, we stand strong behind that and we watched the things like the bad debt and the approval rates. And the approvals rates have actually gone down slightly which is amazing.

Bad debts have remained very low. Part of the reason for that going up also relates to the last question. Some of the higher price merchandize especially as it relates to bridal, people are going to use more credit for that.

So as they reach up to buy this higher price merchandize, they are pulling out their card and they are using it. And they are buying a little bit more on credit and we think it’s a great business model. We believe that it helps us be the leader in the industry. And it helps us drive our business going forward and we’re very happy with the way it operates.

Ron Ristau

And before we open that point Bridal and we said to people, Bridal has a higher credit penetration in the average. It’s purchase 70% in the bridal business because as you can imagine, that’s where the intersection of having great product and younger people who are about to get engage and married often have financial stress. So they need the credit to carry through that timeframe. And they are very happy to withstand behind that purchase with a very good credit offering for them. So, it helps stores.

Unidentified Analyst

(Inaudible)

Ron Ristau

The round number is 50.

Unidentified Analyst

(Inaudible)

Ron Ristau

Well, we wouldn’t make it on it. We would not make it through our proprietary credit. People will have the option of using a bank card if they have it or at that point paying cash.

Unidentified Analyst

Do you have any sense of whether you lose 50%, is that 50% or kind of 50 or…

Ron Ristau

No, I don’t. I’m sorry.

Mike Barnes

We don’t have that stats.

William Hutchings - Goldman Sachs

So we’ve got five minutes left for these three questions.

Unidentified Analyst

(Inaudible)

Ron Ristau

No. It’s closer to 4.

Unidentified Analyst

For the U.S.?

Ron Ristau

For U.S.

Unidentified Analyst

(Inaudible)

Ron Ristau

Well, I think there are two forces going on. Number one, you have very good performance in our credit portfolio, but we do have the absolute level of the receivable going up. So, what will happen is if you have the same performance in the portfolio, you’ll get a higher percentage of sales as a bad debt, not materially. But I don’t think you’re going to see rapid improvement from where it was. I would think that in around the same level as last year on a relative basis is what we’re expecting.

So we’ve improved very rapidly. If they come down from the 5.8%, 6% level down to, I think it was something 4% in the last year. So that was a very good level for us, okay. And we think that that is more sustainable around there. You’re not going to see major improvements in the gross margin driven by the credit percentage because the level of the receivable is going up and some upside.

Unidentified Analyst

(Inaudible)

Ron Ristau

No. it’s in the 3.5%, 4% range, yeah.

Unidentified Analyst

(Inaudible)

Ron Ristau

As far as the trends of what we’re seeing in jewelry right now, there is a lot of things going on in the fashion part of the jewelry business. And a lot of it has to do with color. So, we see a lot of our great brands, Le Vian brand, which is a great fashion brand. They are known for the chocolate diamonds and they have other colored stones as well. And they have some fantastic designs. And we do very well with that brand.

Shades of Wonder, which is a new brand that we’ve launched recently. We tested it in spring and we’re rolling it out in the fall very strongly is another color diamond story. It’s earth tone type diamonds that come from Australia and is a fantastic product for us. We have great partner working with us on that.

Another trend that’s happening, again staying with the color theme blue diamonds and we have launched a blue diamond range that is doing very, very well for us. And again, it will be rolling to all Kay and Jared doors for the fall. So, we’re getting a lot of rollout out of this fashion. And especially the color stories that we’ve got out there for the back half of the year that I think is going to bode well for holiday.

Some other things that are happening, we have tested a range, it’s called Lois Hill. Its fashion sterling jewelry and it’s a fantastic designer. She has very beautiful products in a great sterling price range. And so that’s going to be rolling out to all Jared stores in the fall as well.

So some great opportunities for merchandise that we have. There is a lot of exciting trends going on. And what we’re seeing is that people are willing to come out and buy. But they want something different. They want innovation. They want fashion. They want something that is really up with the trends of today and not the same old things they’ve got in the drawer back at home.

So, I think that’s important and that’s what our merchants are doing. They are really following true on these ideas and they are testing. They are sticking with our philosophy of test before you invest. So we’re testing it. We’re reacting. We’re tweaking it and then we’re rolling it out. And it’s working for us.

Unidentified Analyst

(Inaudible)

Ron Ristau

We stop giving that number, like average per unit. It’s on the average age of the customer age. If you look at the average age of both that will be -- it will be in a late 20s. Late 20s or…

Mike Barnes

We’re seeing the age actually come down to some extent. The Gen Y and Millenials are really becoming a bigger and bigger part of the purchasing force out there. And so you’re getting a younger customer, which is great because they are the once out there actively seeking the new trendy merchandise.

So I think that a lot of what we’re doing with branding and with trends is really helping us attract that younger consumer into our stores.

Ron Ristau

Yeah. That’s why our social media programs are so important because our customers think about when people tend to get married and tend to follow average age of marriage. That’s when people start first interacting big time with jewelry stores.

William Hutchings - Goldman Sachs

Okay. We’ve run out of time, please. So, Mike, Ron and James, thank you very much.

Mike Barnes

Thank you. And thank all of you…

Ron Ristau

Thank you for all those entries.

Mike Barnes

Thank you so much. Thanks.

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