Kay

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Introduction
Kay operated 894 stores in 50 states at 2 February 2008 (3 February 2007: 832 stores) and the expansion of Kay as a nationwide chain is an important element of the US division’s growth strategy. Management believes that there is a long term potential for over 1,400 Kay stores in the US. Since 2004/05 Kay has been the largest speciality retail jewellery brand in the US, based on sales, and has subsequently increased its leadership position. Kay targets households with an income of between $35,000 and $100,000; such households account for about 40% of US jewellery expenditure.

2007/08
Kay sales were $1,489.6 million (2006/07: $1,486.7 million). The average retail price of merchandise sold in Kay in 2007/08 was $327 (2006/07: $317). During the year a further net 62 stores were opened, bringing the total to 894. The roll-out of Kay stores in open-air retail centres accelerated with 40 opened in 2007/08 (2006/07: 21 opened). The test of Kay stores in outlet centres entered its second year with five additional sites (2006/07: four additional sites) with encouraging initial results. In September 2006 an e-commerce facility was successfully launched on the Kay website and this was enhanced during 2007/08. E-commerce sales have increased significantly but remain small in the context of the division.

Customer service
Critical to Kay’s success are well trained staff with the appropriate product knowledge and selling skills to communicate the competitive value of merchandise. During 2007/08 the roll-out of the US division’s enhanced training programme and new store communications system was completed.

Merchandising
Each store has a core inventory package that includes those items promoted by Kay’s marketing. This core inventory is supplemented on a store by store basis by items selected by the division’s central merchandising function based on the sales pattern of each individual store.

No.1 US speciality retail jeweller in US
	07/08	06/07	02/03
Sales	$1,489.6m	$1,486.7m	$1,011.1m
Stores	894	832	676
Average sales per store*	$1.710m	$1.815m	$1.470m
Total sales: 5 year c.a.g.r.			8.1%
Customers typical household income			$35k-100k
Average selling price			$327
Share of US jewellery sector			2.3%
Average store selling space			1,270 sq ft
Long term potential to add over 500 stores

* includes only stores operated for the full financial period.

Kay 5 year sales, $m

Marketing
The romance-and appreciation-based theme of Kay’s television advertising programme begins with Kay”, which has been used to improve name recognition of the chain since 2000. Management believes that use of national television advertising, which is considered to be the most efficient and cost-effective form of paid for marketing, enhances brand name recognition nationwide, provides increased marketing leverage and improves access to prime store real estate sites.

Television advertising is supplemented with national print advertising in USA Today and national network radio advertising. In 2007/08 the US division produced 11 Kay catalogues that featured a wide selection of merchandise and were prominently displayed in stores and mailed directly to targeted customers. Telephone marketing is also used. The Kay website is the third most visited speciality retail jewellery website (source: Hitwise).

Real estate
Kay stores have historically been located in covered regional malls and it is believed that in the longer term there is potential for some 850 stores in this format.

Since 2002/03 new formats have been developed for locations not in traditional malls because management believes these alternative locations present an opportunity to reach new customers who are aware of the brand but have no convenient access to a store, or for customers who prefer not to shop in a mall. Such stores further leverage the strong Kay brand, marketing support and the central overhead.

Mall stores The average mall store contains approximately 1,270 square feet of selling space and 1,500 square feet of total space. The design and appearance of stores is standardised. The typical capital and working capital investment in the first year of trading is about $1.1 million. To maximise in centre court locations, corner locations by the main entrance to a mall or in corner locations by the food court; around 60% of the stores have centre court sites. In 2007/08 a net 17 new mall stores were opened, bringing the total to 789. A further net six mall stores are planned to be opened in 2008/09.

Off-mall locations Kay stores in off-mall centres provide an expansion opportunity to take advantage of these fast growing retail venues. These include powerstrips and lifestyle centres. A ‘power strip’ centre is a suburban open air shopping complex but the retail mix is predominantly ‘category killer’ superstores with some smaller speciality units. ‘Lifestyle’ refers to suburban open air shopping centres where the retail mix is biased toward fashion stores and is also likely to have a large number of restaurants and other leisure facilities such as a movie theatre.

Kay stores in off-mall locations were successfully tested for three years from 2003/04 with 31 stores having been opened. The roll-out of Kay stores in these open air centres began in 2006/07 and at 2 February 2008 there were 92 trading; it is planned to open a net 19 in 2008/09. A long term potential for over 500 suitable locations has been identified in these centres, and will account for the majority of new Kay stores. Such stores are expected to have a lower capital expenditure, lower rents and lower sales per store at maturity than that of the Kay chain average, and are anticipated to satisfy the normal return on investment hurdle set by the Group.

Outlet locations A test of Kay in outlet malls began in 2006/07 when four stores were opened. These stores provide penetration into the value conscious sector of the market and are located in two types of centres: “Factory outlets”, in which 50% or more tenants are manufacturers’ outlets; and ‘Mixed use’ centres, typically with one million square feet of manufacturers’ outlet units, traditional mall stores and large space retailers. The core merchandise is the same as in all other Kay stores, as is the pricing structure, but the range of such outlet locations is supplemented by clearance merchandise rather than fashion product. At 2 February 2008 there were ten (3 February 2007: five) Kay stores in outlet locations and a further eight are planned to be opened in 2008/09. Management believes there is a long term potential for between 50 and 100 Kay stores in outlet malls. The capital expenditure to open an outlet store is similar to that of a traditional mall store.

Metropolitan locations Kay metropolitan stores allow penetration into high population downtown areas under-served by the division’s typical mall and off-mall stores. These metropolitan markets have a high density of retail, business, entertainment and government establishments with good public transit services and high pedestrian footfall. While the performance of the three stores opened in 2005/06 has been satisfactory, no additional metropolitan stores have been opened due to a lack of real estate that satisfies both operational and financial investment criteria. Management believes that there is a long term potential for about 30 metropolitan Kay stores.

These Kay stores have a higher capital expenditure, higher rents and higher sales per store at maturity than that of the Kay chain average. The development of these stores draws on the division’s experience gained from both mall stores and Jared.

Recent openings, current composition, planned openings in 2008/09 and long term potential for each Kay format is shown below:

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