Key Perfomance Indicators
Like for like sales growth
Net new store space growth
Total sales growth at constant exchange rates
Operating profit growth at constant exchange rates
Return on capital employed
Movement in net debt excluding exchange adjustments and net changes in equity
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Target: Like for like per annum sales growth of mid-single digits over the economic cycle. While the current challenging trading conditions persist the like for like sales performance is likely to be below the target level.
Definition: Annual percentage increase in sales from stores that have been opened for more than 12 months.
Performance: The five year compound growth in like for like sales of 3.3% was just below target as a result of the performance in 2007/08 which reflected challenging trading conditions, particularly in the fourth quarter.
Narrative: Like for like sales growth is key in determining store profitability. Over time, above industry like for like sales growth drives superior sales per store, central to achieving above average operating margins. Like for like sales growth is driven by factors external to the Group such as the:
- level of consumer confidence, which is significantly influenced by changes in the employment market;
- size and growth of the jewellery market;
- competition within the sector;
and the execution of the basic retail disciplines of:
- store operations, in particular customer service;
- merchandising and supply chain management;
- marketing;
- real estate management; and
- in the US, provision of credit.
Target: Increase in Group store selling space to average between 5% and 7% per annum over the economic cycle. In the current challenging trading environment the future rate of expansion in the US is anticipated to be less than in recent years, and the Group increase in space is expected to be 2%-5% in 2008/09 and 2009/10.
Definition: Percentage increase in store selling space over the prior year as at the year end.
Performance: The annual new store space increase of 6.5% over the five years was in the target range. In 2007/08 US net new space growth was 10% and in the UK there was a 2% reduction.
Narrative: The growth in new store space provides the potential for future profit growth and is a driver of the Group’s investment in fixed and working capital.
In the US, there is the long term potential to nearly double store space in existing formats. The constraint on growth is the availability of staff trained to the Group’s standards and the ability to secure real estate leases that satisfy the Group’s criteria. It is anticipated that about half of new store space over the next five years will consist of Jared locations.
In the UK, it is anticipated that the number of H.Samuel stores will decrease while those of Ernest Jones may increase.
While the expansion in store space is expected to increase shareholder value in the long term, it has an adverse impact on operating profit margin and return on capital employed in the short term.
Total sales growth at constant exchange rates
Target: 7% to 10% per annum growth in Group total sales at constant exchange rates over the economic cycle. In the current economic environment total sales growth is likely to be below the target range.
Definition: Annual percentage increase in total sales at constant exchange rates.
Performance: The 6.6% annual growth in total sales over the last five years was slightly below target. The performance in 2007/08 was significantly below the target range and reflected the performance of the jewellery market as a whole.
Narrative: Total sales growth gives the Group the ability to leverage central overhead expenditures. In addition, it brings the opportunities to achieve supply chain and marketing efficiencies. Total sales growth is also an important factor in the level of working capital utilised as it is a key influence on the level of inventory and US customer receivables held by the Group.
Total sales growth is dependent on the level of like for like sales growth and the sales generated by net new store space opened.
The proportion of sales derived from the US is anticipated to rise due to the level of new store space growth in the US division. The geographic mix of sales is also influenced by exchange rate movements.
Operating profit growth at constant exchange rates
Target: 7% to 9% per annum growth in Group operating profit at constant exchange rates over the economic cycle. As sales performance is a key driver of operating profit growth, the five year performance is expected to be below target until sales growth returns to its target range.
Definition: Group sales less cost of goods sold and administrative expenses; plus other operating income all at constant exchange rates.
Performance: The 1.8% compound growth in operating profit was below target, due to the 16.5% decline in 2007/08 which reflected minimal sales growth.
Narrative: Operating profit measures the surplus that the Group makes from selling jewellery, watches and other products and services. It depends on the cost of goods sold, the level of operating costs and other operating income. The most significant operating cost categories are staff, property operating lease rentals and marketing.
As many of the Group’s costs are comparatively fixed, sales per store is important in determining operating profit. To at least maintain its operating profit, the Group needs total sales growth sufficient to offset any adverse movement in gross margin and increases in operating expenses from both existing operations and new store selling space. The impact of changes in sales (either adverse or favourable) on operating profit is less in the US division than in the UK business, as certain expenses, such as staff costs and property rentals are more related to sales in the US.
Target: A Group ROCE of over 20% assuming the current target for new store space growth over the economic cycle. While trading conditions continue to be challenging, the five year average ROCE is anticipated to decline.
Definition: Annual Group operating profit divided by the average monthly Group capital employed for that year, expressed as a percentage.
Performance: The five year average ROCE of 22.8% was above target. While ROCE at 16.8% in 2007/08 was below the five year average, primarily due to the operating profit performance, it remained comfortably above the Group’s cost of capital.
Narrative: ROCE measures the efficiency of the Group in using capital to generate operating profit. Variation in operating profit and assets employed are the drivers of ROCE.
As the Group operates mainly leasehold stores, inventories, US customer receivables and shop fixtures are the largest elements in the Group’s capital employed.
In the US, ROCE is adversely impacted by new store space, which in the first year of trading requires investment in inventory and receivables but normally makes only a small contribution to operating profit. In the UK, the strategy to improve store productivity should increase ROCE as little additional inventory is required.
Movement in net debt excluding exchange adjustments and net changes in equity
Target: In 2007/08, for movement in net debt to increase by $70 million to $110 million. For 2008/09, net debt is anticipated to increase between $40 million and $80 million, subject to the general economic uncertainties. The expected reduced cash outflow reflects the planned slower rate of US space growth and lower tax payments.
Definition: Movement in net debt excluding exchange adjustments and changes in equity.
Performance: The cash outflow in 2007/08 of $120.6 million was above target due to the sales performance in the fourth quarter.
Narrative: The movement in the net debt position reflects the cash generated by operations, investment activities, payments to governments, interest and dividends. It depends on the:
- operating performance of the business;
- level of inventory investment;
- proportion of sales made on the in-house credit card and the average monthly collection rate of the credit balances;
- timing of payments to creditors;
- rate of space expansion;
- level of store refurbishment and relocations, and the purchases or disposals of other assets;
- level of tax payments made;
- interest paid; and
- dividends paid.