James Grant - VP of IR Mark Light - President and CEO Michele Santana - CFO.

Simeon Siegel - Nomura Securities International, Inc. Kushan Akhtil - Northcoast Research Rick Patel - Stephens Incorporated Lorraine Hutchinson - BoA Merrill Lynch Joan Payson - Barclays Dorothy Lakner - Topeka Capital Markets Tom Nikic - Sterne Agee & Leach Oliver Chen - Citigroup.

Welcome to the Signet Jewelers Third Quarter Fiscal 2015 Results Conference Call. My name is Ellen, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Mr. James Grant, Vice President of Investor Relations.

Sir, you may begin..

Good morning. Yes, welcome to our third quarter fiscal 2015 call. On our call today is Mark Light, CEO and Michele Santana, CFO. The presentation deck, we will be referencing, is available under the Investor section of our website signetjewelers.com.

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 27 of this year and in the quarterly report on Form 10-Q that was filed with the SEC on September 10 of this year. We also draw your attention to Slide Number 2 in today’s presentation.

And now, I’ll turn it over to Mark..

Thank you, James, and good morning everyone. In the third quarter, we delivered solid topline results. Signet comps increased by 4.2% led by the Sterling and UK divisions. From a merchandize perspective, Signet's branded bridal, fashion diamonds, and watches, all performed well.

Our strength by selling channel was broad based with outlets and eCommerce delivering strong results. Signet's third quarter profit as anticipated was diluted by the seasonally low sales volumes and high fixed cost of our Zales division as well as the UK to a lesser extent. Signet did not own sales in the third quarter of last year.

As a result year-over-year profit metrics were lower, but importantly, adjusted EPS of $0.21 exceeded expectations and when measured on an apples-to-apples basis versus last year, our EPS was up $0.05 or 11.9%. Our acquisition integration activities are progressing well and we remain well prepared for the holiday season.

I'll take you through some of our initiatives in a few minutes. Let's now take a closer look at Signet's third quarter sales performance by our divisions and SEC operating segments. Sterling's third quarter total sales were $692.8 million that was up 9.7%. Same store sales increased by 6.8%.

Kay comps led the way with a strong 7.5% increase, while Jared increased by 6.5%. The Zale division delivered total sales of $331.4 million and a comp decline of nine tenths of a percent.

This was due primarily to the late timing of new inventory replacing slow moving collections as well as some distractions from initiatives implemented in the third quarter to position us for the holiday period. Our U.K. division's third quarter total sales were at $151 million, up 8.4% or 4.7% on a constant currency basis.

Same store sales increased by 3.7%, which was by the way the best in seven years for the third quarter, which was driven by diamonds and watches.

Signet's sales growth was driven in part by eCommerce sales of $44.8 million, which is an increase of 96.5% due to the addition of Zale this year, but the growth rate was at 27.6% if you exclude our Zale division.

We've a variety of drivers behind our third quarter sterling results, most notably it was due to our sustainable competitive strength that include our superior customer experience, exciting merchandize offerings, creative marketing and a multi channel approach.

The guest experience is central to our success and we remain focused on the training and development of our store teams. We had a very successful and well received Managers Leadership Conference in the September, October timeframe to kick off our fourth quarter holiday preparations at the store level.

The main merchandizing initiatives which drove third quarter results in the Sterling division were bridal brands Neil Lane and Leo along with fashion brands Le Vian and Diamonds in Rhythm.

We introduced new TV bridal ads in the third quarter, but the real payback for those ads will be in the fourth quarter, not only because of the fabulous new creative, but also because of the efficiency of the buys and the placement of those ads. We also saw success across selling channels in eCommerce and outlets in malls and in free standing stores.

In the U.K., the initiatives around store operations, merchandize and an Omni-channel approach are all making a difference. We've made a variety of store operation improvements that are driving better sales productivity. The U.K.

sales increase was driven principally by the benefits of strategic moves we've taken around diamonds based upon a better understanding of our customers and the type of products, pricing and promotions that they require. Our store team member training is more focused on diamonds. Our point of purchase displays are more powerful.

We're dedicating more space to diamonds, and bridal diamond brands performed well such as Forever and Perfect Fit in our H. Samuel stores and Le Vian, Tolkowsky and Neil Lane in our Earnest Jones stores. Our success in Diamonds and Bridal is not coming at the expense of watches.

We're seeing increased results in watches with our luxury brands performing strongly. We also re-launched the H. Samuel and Earnest Jones websites in October. They are designed to be cleaner, deliver more content and education and present our brands better while maintaining the ease of use that we've always possessed.

In addition to eCommerce progress, the first few Earnest Jones outlet collection stores have opened, which is strengthening our U.K. multi channel approach. Now I would like to talk about our Zale acquisition and some of the accomplishments that we've made recently.

In the third quarter, the Zale division brought together almost 1500 of our store managers along with our field and home office leadership and this was the first time this was done in over 10 years and we brought our managers to focus in on our strategy and make sure they are ready for the holiday selling season.

All of our store managers underwent Vision 20-20 training to gain an understanding of how they fit into the wider Signet organization and to align their efforts to the company strategy. The multi day's session featured a breakout session on best in bridal.

The managers refresh their product knowledge around the division's two premier bridal brands, which are Vera Wang Love and the Celebration Diamond. With a focus on sales behaviors that drive improved closure rates. The meeting also provides the managers with tools to better coach and develop their teams in order to improve the guest experience.

We've also strengthened our fourth quarter marketing approach. Holiday TV started for Zale's on November 5 and for People's on November 10. Zale's and People's are our stores in Canada. Both have new commercials for Vera Wang Love and the Unstoppable Love program.

In addition, People also has a new commercial featuring Arctic Brilliance, which is a Canadian mine diamond. We also target our TV ad placements more appropriately to our customers. In addition our Black Friday activities, print advertising and in-store events are all much more robust.

A study with Bain & Company is underway to increase our understanding of our store brand positioning, our value propositions and the opportunities for growth with the primary focus on our Zale, Kay and Jared store brands. Regarding merchandize, we continue to test cross selling of certain collections.

Some of the more high profile brands of Zale are testing in Kay and vice versa. We look forward to more actual data from the high volume fourth quarter.

We've also made some aggressive changes stepping up the merchandize mix of Vera Wang and Unstoppable Love and eliminating nearly 10% of the division's inventory in favor of faster moving collections, such as those I just mentioned.

We're making strides of an integration and I said in the news release this morning, we expect to deliver a $150 million to $175 million in cumulative three year synergies from January year end 2015 to January year end 2018 and I am confident about the position that we are in today and the position where we're heading.

As for the fourth quarter, we are ready to win this holiday season. We've several initiatives to drive business that are underway in each of our divisions. I spoke to you moments ago about the power and the value of the Zale leadership conference. We also completed conferences in our Sterling and U.K.

divisions as well with just as much enthusiasm and accomplishment. Also in the area of store operations, this will be an exciting holiday selling season for roughly a 150 new Kay stores that have our brand new Kay store design, which is shown here on Slide 8.

The stores feature side by side selling, branded boutiques and innovative use of technology within the store. We've been testing this concept for nearly two years and after a very successful result, we've been rolling this concept out during the year and we'll continue to do so into the future.

In merchandizing, we've strong balance of line expansions and existing product brands and we're also testing two exciting new brands, Earthly Treasures Smithsonian collection in our Jared stores and Sofia collection by Sofia Vergara in our Kay stores.

In marketing, we've developed dynamic new creative for our TV ads including an ad that we produced for our Kay stores called Penguins that was ranked by advertising age as one of the top new ads in the first week of November. We've also launched new advertising creative for our H. Samuel stores in the U.K.

and we've increased viewer impression in the holiday selling season for our store brands H. Samuel, Zale's, People's and Jared's. In all our divisions, we believe we've improved upon our store events as well as the content and cadence of our seasonal promotions. And for my final topic, I would like to just say a few words on our diamond procurement.

Today we announced that we entered into an agreement with DeBeers. Our DeBeers site advances our strategic diamond sourcing efforts to the next level and following last year's purchase of a diamond cutting factory in Botswana we believe, as a DeBeers site owner that we're now far ahead of most of our industry peers.

We'll continue to expand our vertical integration and procure more rough or unpolished diamonds over the long term. This provides us greater access to supply and a growing supply and demand gap. And now, I'll turn the call over to Michele for a run through on our financials..

Thanks Mark and good morning everyone. So let’s start by reviewing the third quarter sales. Mark has just offered a similar overview of the numbers on Slide four, so I will point out just a few highlights. In the Sterling division, total sales increased 9.7% to $692.8 million, which included a same-store sales increase of 6.8%.

Sales increases continue to be driven by a balance between both the number of transactions and the average transaction price, the number of transaction and the average transaction price.

The number of transactions increased in Sterling by 3.7% and the average transaction price increased by 2.7% driven by fashion jewelry collections and branded bridal. Zale division total sales were $331.4 million for the quarter, which also includes an $11.5 million unfavorable revenue impact due to purchase accounting adjustments.

Under purchase accounting rules, Zale's deferred revenue was reduced on its opening balance sheet earlier this year by $90.5 million resulting in a permanent reset of the associated revenue to be recognized. This adjustment will continue to have an unfavorable non-cash impact to Zale revenue over the next several years and will diminish thereafter.

U.K. division total sales increased 8.4% or 4.7% on a constant exchange basis to $151 million and that was driven primarily by diamonds and watches. The average merchandise transaction value in the U.K. increased 6.3% primarily driven by sales mix. In terms of merchandised transaction, the U.K. division decreased 2.9% driven by H.

Samuel and that related to volume reduction in watches, gold jewelry and guests. Moving on, over the next couple of slides we’ll look at Signet’s consolidated Q3 performance before we turn and analyze Signet’s adjusted results. On Slide 11, the table provides a reconciliation of Signet’s adjusted results to consolidated results.

The difference between adjusted Signet and Signet are the three columns reflected purchase accounting, severance cost and transaction cost.

On a GAAP basis, EPS was a loss of $0.02 and that was per share -- and that was in line with Signet’s guidance and this loss includes a $0.02 loss from unanticipated severance related to the CEO change, which is reflected in the table.

Purchase accounting adjustments include a reduction to deferred revenue, amortization related to inventory fair value step up and amortization of unfavorable contracts or dilutive to EPS by $0.12. Transaction cost including advisory, accounting and integration cost were responsible for $0.09 of dilution.

The effective tax rate for the quarter was 31.6% and the forecasted effective tax rate for fiscal 2015 is 29.3%. Next I'll walk through the breakout of operating income by division.

Operating income of $10.7 million or 0.9% of sales consisted of the following components; Sterling Jewelers operating income of $68.1 million or 9.8% of division sales up 20 basis points from last year, Zale division operating loss of $34.5 million or 10.4% of division sales.

Note that the loss in the quarter is consistent with Zale's pre-acquisition trend of positing a loss in the third quarter given the relatively small amount of revenue in this period. Zale's Q3 loss consist of a $26.7 million loss from the Zale Jewelry operating segment and a $7.8 million loss from the Piercing Pagoda operating segment.

Now that does include cost of $13.6 million related to purchase accounting adjustment, which we just discussed on the previous slide. Excluding the impact from accounting adjustment, the Zale division's operating loss was $20.9 million or 6.1% of division sales. The U.K.

operating loss was $2.7 million or 1.8% of division sales, reflecting an improvement of $1.7 million from last year and was the best Q3 operating performance in four years. This performance is attributed to a focus on growing topline combined with cost control measurements.

Other primarily consist of our corporate administrative expenses and Signet's diamond store sale subsidiaries and also includes $11.4 million of loss related to transaction and severance cost.

To help provide comparability to last year, we're also presenting our results on an adjusted basis, which excludes a purchase accounting adjustment, severance cost and transaction cost. The presentation here on Slide 13 takes adjusted Signet, which is shown on the far right side and is shown on Slide 11 and then breaks it into two parts.

One part is Zale operations shown in the middle two columns and the second part in the left hand column is adjusted Signet excluding Zale. Adjusted Signet excluding Zale is the rest of Signet inclusive of finance interest and taxes. From sales to operating income, this column gives you an apples-to-apples comparability to prior year results.

In addition, the information is provided to give you visibility at how the Zale operations performed in the third quarter. Now recall that we had guided for sale EPS dilution of $0.19 to $0.21. Actual dilution was $0.17 resulting from higher margins and lower expenses than planned in the quarter.

We anticipate providing this incremental detail for you until we establish precedent for Signet results post acquisition when we lap these numbers in the third quarter of next year. Continuing on, let's review Signet's adjusted P&L results below the sales line.

Adjusted gross margin was $363.9 million or 30.6% of adjusted sales and that was down 40 basis points versus last year. The decrease in rate was driven by the addition of Zale, which impacted the gross margin rate by 80 basis points. Sterling and U.K.

gross margin rates were higher by 50 and 80 basis points respectively and that was due primarily to lower commodity cost and leverage on store occupancy cost as a result of higher sales. Adjusted SG&A was $381.7 million or 32.1% of adjusted sales and that was up 190 basis point versus last year.

Again this increase was driven mostly by the addition of Zale, which impacted the rate by 110 basis points. The remainder of the increase in rate was attributed primarily to the timing and store operations expense and incremental advertising in Sterling and U.K. divisions.

In addition, higher central cost associated with headcount and bonuses also impacted the SG&A adjusted rate. Other operating income was $53.5 million. This increase of $7.7 million was primarily due to higher interest income earned from higher outstanding receivable balances.

Adjusted operating income in the third quarter was $35.7 million or 3% of adjusted sales. Excluding the impact of Zale, Signet operating margin was flat to last year at 6.7%. Adjusted EPS was $0.21 compared to $0.42 in the third quarter of fiscal 2014.

On a comparable basis that is when excluding this year's impact from the newly acquired Zale and capital structure and financing, EPS was $0.47 or an 11.9% increase over last year. Now let's move on to the balance sheet and let's start with inventory.

Net inventories ended the quarter at $2.7 billion an increase of $1 billion or 62.6% over last year's third quarter. The increase was driven almost entirely by the acquisition of Zale. To a lesser extent, inventory levels were also impacted by Sterling division increases around bridal brand expansions, lose diamonds and new stores.

We believe our inventory level and assortment are well positioned for the fourth quarter. Moving on, let's turn our attention to our in-house credit metrics and statistics. In-house credit remains an important component of our Sterling division's business and a competitive advantage.

Net accounts receivable increased to $1.29 billion compared to $1.12 billion last year, up 15% driven by higher sales and an increase in the credit penetration rate. In the year-to-date, credit participation was 61.7% compared to 58.9% last year.

The increase in credit participation was attributed primarily to credit decision engine improvement made in April of this year, higher outlet credit participation and strong guest acceptance of our credit offerings.

The average monthly collection rate year-to-date was 12.1% compared to 12.3% last year as guests continue to opt more for our regular credit turns, which requires lower monthly payments as opposed to the 12-month interest free program. Next I’ll move on to credit statistics focusing on year-to-date metrics, which minimizes the effect of seasonality.

Year-to-date, our net debt expense was $105.8 million compared to $92.9 million last year or an increase to $12.9 million and that was driven primarily by growth in the receivable balance from increased credit penetration and change in the credit program mix.

Year-to-date other operating income which is a primarily financed charge related was $161.2 million compared to $139.1 million last year, an increase of $22.1 million and is due primarily to more interest income on the higher outstanding receivables as well as the shift away from interest fee program.

So the net impact of these two items was income of $55.4 million year-to-date compared to $46.2 million in the prior year, an increase of $9.2 million. Operating improvements made to our decision engine has helped increase credit penetration without adversely affecting the net impact of our bad debt.

The portfolio continues to perform strongly and as evidenced by the allowance as a percentage of ending accounts receivable decreasing 10 basis points from 7.5% to 7.4%. Now let’s move on to some other highlights on the balance sheet. We now carry $1.4 billion of long term debt.

The debt is very cost efficient at an average interest cost of 2.6% and our finance trust includes a balanced mix of short, medium and long term debt. In the quarter we used $145 million of our credit facility for seasonal inventory needs and we anticipate that this will be fully repaid by fiscal year end.

In terms of Signet's capital structure we continue to evaluate our working capital and cash flows associated with Zale. During the third quarter we did make some minimal share repurchase and we will look to the results of the holiday selling season and that will change fiscal 2016 share repurchases.

We ended the third quarter with cash of $87.6 million. Now let me share with you our guidance. Fourth quarter Signet comparable store sales are expected to increase 3% to 4%.

Fourth quarter adjusted EPS is expected to be $2.95 to $3.05 and adjusted EPS is EPS less the two sets of adjustments shown on slide 19 being purchase accounting and transaction cost. Now within adjusted EPS Zale operations are expected to be accretive in the fourth quarter by $0.36 to $0.40.

Annual adjusted EPS is projected at $5.51 to $5.61 and that is up from the previous full year guidance we provided of $5.38 to $5.54. And the fiscal 2015 annual effective tax rate is anticipated to be 29.3%.

Capital expenditures guidance for the full year is $240 million to $250 million and net selling square footage is projected to grow 45% to 47.5% inclusive of Zale or approximately 4% when excluding Zale. I would also reference you to see our news release for detailed by store comps.

That concludes my prepared remarks on the financials and now I'll turn the call back over to Mark..

Thank you, Michele. In conclusion, I would like to thank all of our Signet team members for their hard work, their efforts, their focus on our business plans and for their contributions to a successful quarter. And now we’ll take time for some questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Simeon Siegel with Nomura. Please go ahead..

Thanks, good morning guys, nice quarter..

Good Morning, third quarter..

Michele Santana:.

So, given the increase in Sterling gross margins despite everything about promotional environment, how do you view that gross margin line going forward into holiday and then beyond? How do you think about the commodity costs? What benefits do you see from a more rational pricing environment given that you no longer have a meaningful competitor? And then just regarding the replacement of the nonproductive inventory of Zale, when do you see the opportunity to get the new product fully ramped up? And maybe any thoughts you can share on the road to deposit comps, EBIT growth, etc.

for Zales? Thanks..

Sure, so why don’t I start with on your gross margin question? In terms of the gross margin and how we see that going forward, again for the holiday season at this point we don’t anticipate it to be more promotional any more so than last year.

We do see the benefits coming through of our lower gold cost which will continue to help the rate that's offset slightly by some of the lower trading recovery we get with the lower gold cost.

Directionally what I was saying is that on our full year basis we would expect to I'd say broadly maintain maybe some slight increase and our gross margin rate driven by the combination of the lower commodity costs I just spoke about as well as sales mix associated with that.

The other thing I would just add to that real quick, in terms of gross margin rate on our primarily more so on our UK Division is again we really remain focused on driving incremental gross margin dollars in that business and less so on the rate.

So I would just add that, and I'll turn it over Mark if you want to address the second question on the unproductive inventory..

Sure. Hi Simeon. So as far as the inventory for the months of primarily September and October we pulled back over $100 million of slower turning inventory out of the Zale stores and the Zale Division.

We have been obviously buyback the goods and we believe are fully up to speed now getting those goods back in the place and the goods we're investing back and as I mentioned in my comments are programs like Vera Wang, programs like Unstoppable Love, programs that we believe they were not backing the inventory as well as they could to maximize sales and that all is in place right now and pretty much has gotten in the stores by the first of November.

So….

Yeah, I would just add that there was a little bit of the timing how we originally planned and how it actually occurred with a little bit slower back-ended in the third quarter, but as Mark indicated we're fully ramped up at that inventory in the fourth quarter..

Great, thanks a lot guys, and good luck for the holiday..

Thanks Simeon..

Thank you..

The next question is from Jeff Stein with Northcoast Research. Please go ahead..

Hi guys this is [indiscernible] for Jeff. I just had a question on any takeaways from the cross brand selling test? Are the test stores both in malls they will overlap and where there is a single store may have seen any cannibalization? Thank you..

Yeah, in reference to the cross-selling, first of all just to remind everybody, we put Sterling and we put Zale brands in fifty of our case stores and Kay stores and 30 of our Jared doors and we also put Neil Lane and we put Le Vian and Jane Seymour and 50 Zale stores and we have it at also 30 Peoples doors.

And it is way too soon to take a read on it. We've got basically in our stores we've been in each of those divisions for the last two weeks or so, it is way too soon to read. At the end of the fourth we'll get a better sense of what's going on, on that front. So long answer to your question is it is too seen to get any read as of yet..

We'll take the next question please?.

The next question is from Rick Patel with Stephens Incorporated. Please go ahead..

Hey, good morning everyone, congrats on the strong momentum into holiday..

Thank you..

Can you talk about your promotional cadence that you are planning for holiday? I know last year things were a little tricky with the winter storm during the key promotional time.

So how do you expect to approach things this year? And then secondly, how do you feel about the health of your consumer in general just given we've heard so many discretionary retailers talk about difficult trends so far in the fall?.

Okay thanks Rick. As far as our promotional cadence, we as Michele mentioned, I mentioned we don’t, we're not going to promote any more this year over last. We don’t see any reason to do so. We thought that you can tell by our results our customers are doing just fine and that we don’t see any reason to promote more.

We are going to do for specific of the Zale divisions we are going to be, have a little more direct and targeted promotions to the customers that we know and how they react. So you'll see some different promotions from Zales than the previous years, but it won't be any more deeper discounts or any more promotion promoting going on.

So the cadence will be the same as last year for our Sterling and UK Division.

Zales, you'll see some differences we specifically have the new batches coming out in the middle of December which is what we called preferred customer weekend promotion which we believe gives our sales associates and our Zale Division an opportunity to trade off and add on through more of these promotions that they've had in the past.

The second, that was….

If a customer, in terms of you know how our customer or our kind of customers are doing it, again we are seeing that customers are turning up at our stores..

Yeah, we believe because our customers are much more of a premeditated customer, meaning that they either know that they have to get a Christmas gift or a birthday gift, or an engagement ring, so it's a premeditated type of shopping experience and they are thinking about it.

And due to our incremental advertising that worked well we have been doing and we will be doing and we believe that with our better creative and better placement of our ads that we’re able to get that premeditated customers thinking about giving, gift giving into our stores more so than our competitors sell due to our extra advertising, our great customer services, some of the new brands and extension of brands that we’re offering to our guests and customers..

Got it and then a question on the diamond supply contract, can you just touch upon how this is going to affect cost of goods over the next year or so? Given that the strategic initiative is it safe to assume that you'll incur some higher costs to insure diamond supply in the future?.

I’m going to start off just kind of give a little bit of overview and let Michele talk about the effect and cost of goods. First of all, for us this is a very exciting event. We’ve been as a retail company been really working on getting a DeBeers site for years.

And the benefit of partnering with a company like DeBeers who is still the leading diamond miner in the world is they really understand rough.

And what they, they have the ability of assorting the rough literally in over 10,000 different qualities and when you can get rough assorted the way DeBeers assorts rough and makes it easier for us to have better quality type of criteria that works better for our customers and the type of diamonds that we sell.

So it’s really a big thing for us to get into DeBeers site and get the wonderful assortments that DeBeers can offer and they can really cater that box as I called it or the site more so for our customers.

So the big initiative and the strategic initiative is really first and foremost is about getting the control of the supply and understanding the rough supply market. Now obviously there will be some benefits in gross margin and COGS I'll let Michele talk to that as far as the future and the benefits of that..

Yeah, yeah, in terms of how we would expect to see that impact our cost of sales, we really don’t go and disclose the numbers and how it is kind of moving through in our expectations, but to Mark's point we are going to be able to buy diamonds more efficiently and more effectively.

So there will be some benefit that shows through on our gross margin line items. It really is though, about securing our source and a consistent source of diamond supply. It is I would say first and foremost the primary benefit of our arrangement with DeBeers..

Thanks very much and good luck this holiday..

Thank you, have a good holiday..

Thank you. .

The next question is from Lorraine Hutchinson with Bank of America. Please go ahead..

Thank you, good morning..

Good morning..

I noticed that the Zales standalone operating margin was flat this last year and I just hoping you can provide some context around that?.

Yeah, Lorraine hi, it's Michele, good morning. In comparing to last year again, there is a few things that you have to take into consideration because it really isn’t an apple-to-apples comparison.

There is a number of things flowing through their operating margin which no longer seems to be the case and one item I'd call out there is the LIFO they are on the LIFO system no longer that is a part, so you would have an impact in last year versus this year.

Kind of pulling at us out I would say roughly when we look at the comparisons to last year it's kind of what we would have expected, you know given we are really just starting to get our arms around this business, putting on an initiative, gaining traction as we move forward.

So we weren’t expecting to see a major, I guess bump or increase in operating margins at this point when you do even get a down to an apple-to-apples basis..

Great, thank you..

You’re welcome..

The next question is from Joan Payson with Barclays. Please go ahead..

Hi, good morning and congratulations on the strong quarter..

Thank you..

Thank you..

So it looks like the Zales dilution this quarter was a little bit better than anticipated.

I was hoping you could talk a little bit about where the upside came from if there was any shifting of costs? And then also in terms of the outlets it looks like the remaining conversions are now finished between the Ultra Stores and the Jared, so if you could please talk a little bit about the outlet performance in the quarter and what that looked like?.

Yeah, so why don’t I start in terms of Zale dilution, it was favorable as you indicated $0.02 to the guidance we had provided and that was primarily driven by they were higher margins than what we had planned and I think some of that we’re starting to see the early signs of even this reengineering thing, the merchandise assortment that the sales mix is bringing in higher margin.

So we’re starting to see some of that already take shape in the Q3. The other part is on the expense side, and it wasn’t so much I would say a shift in cost from Q3 to Q4. But it was really lower expenses than what we had planned. One of it related to the leadership conference that expense actually did come in lower than what we had planned.

We’ve also had some benefit coming in on our broken and damage inventory. So by pulling out the unproductive inventory from the stores, we’re actually seeing the benefit with lower cost associated with broken and damage inventory, so that would be the other expense that came in favorable for us.

And with that then Mark if you want to address the second question..

Yes, in reference to the Ultra Stores we don’t report the Zales part separately. I will tell you that within our Sterling division we are very pleased with Ultra performance, they're doing very, very well. And as you stated we no longer have any Ultra Stores.

The whole Ultra portfolio in our Sterling division are either Kay outlet stores or the Jared Vault stores and they are doing very well. We’ve learned a lot from the best practice over the two years of what is the best way of operating outlet stores or and how they are supposed be operated and then it's really working out very well for us.

We’re also very excited that in our UK division we are going to open this year about half a dozen brand new Ernest Jones outlet collection stores first time for that division and that will be open here and we see opportunities opening more of those into the future.

In our Zale division we’re looking for to working closer with the Zale outlook stores to try to share those best practices that we’ve learned over several years and looking for some upside opportunity for the Zale outlook going in the future..

Great, thank you..

Thank you..

The next question is from Dorothy Lakner from Topeka Capital Markets, please go ahead..

Thanks and good morning every one. Just wanted to talk about marketing, if you could just refresh us in terms of the increase in the dollars spend year-over-year? And then just in terms of the timetable going forward on Zale you know you’ve been to able to actually effect quite a bit of change very early on in this acquisition.

So just wondered what we should be looking for as we move into 2015 and beyond? What kinds of things you want to accomplish and what’s the timetable there?.

Thanks Dorothy. I’m just covering your last question and I’m going to kind of get you kind of actually a little differently. We were able to make some changes for Zales in the fourth quarter.

Just to remind everybody we just took over Zales in June and a lot of plans were in place and the inventories are in place and there’s certain things that we are able to effect, such as the marketing buy, we’re able to buy the Zales TV along our Kay and Jared buys we're able to make them more efficient, more productive buyer we believe, where as we are also able to place the Zale ads which we believe were more targeted appropriately towards the Zale customer than they have done historically.

So we’re able to change the advertising of it and we are going to increase impressions on Zales TV this year, year-over-year it will increased impression for Zales, so we got more efficient by better targeted advertising placements towards what we think is the appropriate customer segment.

And we have new creative for Zales, but we were able to make some changes not loads of changes. We have to keep every ground in that, we’ve only owned the company for several months and a lot of things were in place. We are still confident and feel very good about the changes and the enhancement we can make over the next two and three years.

But for the fourth quarter we were able to change some advertising as I stated, we’re able to invest in some more inventory at Vera Wang and some other faster-turning vehicles, and we’re able to start training the team members and some of our best in bridal training tactics and really that’s the a lot of stuff we’re able to do there’s a lot more to be done going into the future..

And Dorothy just to give you a little bit more color in terms of marketing spend, in the quarter our ratio on that percentage of sales on marketing was up about 50 basis points over the prior year and that's driven by a combination of increases in our Sterling division which we had increased over bridal in Q3 this and something focus on our UK division as well with our H.

Samuel TV ads and then there was also an increase in terms of the Zales division and the investments that we made in the marketing side. So from a dollar prospective it is an increase of about $15 million and about 50 basis points increase and just in a quarter to date basis.

Just to kind of give you a sense on our year-over-year basis, we’re up our ratio was actually as a percentage of sales is flat to last year, but we’re up about $33 million and again that’s kind of driven by increases across all businesses, but significant dollar increases by bringing in Zale this year..

Great, thanks so much and good luck for holiday..

Thank you..

Thank you. .

The next question is from Ike Boruchow with Sterne Agee. Please go ahead..

Hi everybody. This is actually, Tom Nikic on for Ike. Thanks for taking my question. I was wondering about the SG&A expenses. I noticed that excluding Zales they were still up 13%.

I was wondering if that's just marketing or if there was something else going on there? And then my second question was about merchandise margins by geography, I was wondering if there was a meaningful difference between the US and the UK if one was up big or anything like that? So thanks very much..

Sure, so let me start with on your question on SG&A and yes, our adjusted basis and when you pull out Zale, we did have an increase in SG&A in the Sterling and UK divisions and that was primarily driven by higher advertising cost. We talked about the investments we made in the Sterling division around Bridal in Q3.

The other component was timing related to store operations expense, primarily the leadership conference and when those expenses hit this year as opposed to last year.

And then the other element in there that impacted the adjusted Signet rate when you exclude Zale is our central cost which is higher than last year and that's driven by a couple of factors. One is associated with headcount increases and the other component is associated with bonuses and just overall performance hitting our higher bonus percentage.

And then I think your second question related to merchandize margins and really we have steered away from and don’t disclose merchandize margins in total or really across divisions.

I would just reference you back to overall our disclosures on the gross margin basis where we did see an increase of 50 basis points in gross margin on our Sterling division and then the offers on increase of 80 basis points in our UK division, again that was driven by leverage on our store occupancy costs as well as we did see benefit coming in on our lower commodity costs particularly the gold..

All right, thanks very much and good luck for holiday..

Thank you..

Thank you, I appreciate it..

The next question is from Oliver Chen with Cowen. Please go ahead..

Thanks a lot, congratulations and Mark congrats on your elevated role..

Thank you..

Regarding the longer term picture with the Zale Corp opportunity on increasing sales productivity, is the main category there opportunity bridal? And then I did have a question on the comp guidance, should we assume that the run rate may be similar between in the Zale Corp and negative single versus Sterling? And you guys had volatility last year on week-to-week basis, is there anything, do you anticipate the run rate being volatile off of those comparisons in terms of what you're seeing in the marketplace now?.

So okay, so I think those are three questions. I'm going to start with the first one which the question was in reference to, if we believe the big opportunity for Zales in relation to merchandize assortments is in the bridal category, and I will say yes, we believe there is an opportunity in the Bridal category.

There is no question that they are one of the top bridal brands in Vera Wang in the country as it relates to the bridal engagement rings and we believe there is opportunity to really take Vera to next level, invest in the inventory, invest in marketing, invest in in-store training in the whole bridal category.

But we also believe there is great opportunities in the other parts of business. We think there is big opportunity to enhance their fashion assortment and enhance their fashion diamond business. We think that there is a scenario of the business they really haven’t done a really great job in and we think there is upside potential there.

And there's a lot of other parts of the business that there is great potential that we believe there is great opportunity in enhancing the repair business which is a very important business in our industry as it relates to not only because of this nice margin that this has been more importantly, that when you fix a customer's heirloom piece they could be a customer for life in how you take care of their repair item is just that if not more important than new merchandize product.

And there is a lot of areas of the business that we'll share with you going down the road over the next two to three years that there is a lot of opportunity outside of just the bridal assortment. So that's the answer to that question. .

Yeah and Oliver maybe I can jump on your question in terms of the cost items we provided and what I would steer you to is really we're providing the cost guidance on a total basis with all of our business divisions we're really not breaking it down between say Sterling and the UK division.

So with that maybe just add a little bit color and I think your thought process is kind of right on in line. But we do expect that we'll continue to maintain our strong sales momentum in our Sterling and UK division. The other thing that I would add too is bear in mind in the UK division we are up against a high hurdle rate of last year.

Last year fourth quarter was 5.7% and that when we started to launch and that we focus on the selling of our diamonds in the bridal components that we do have a higher hurdle there on the UK side.

And again I would just steer you back to Mark's earlier comments on the Zale that even that we do believe we put in initiatives or gaining traction for the holiday period, it really has been a short time period since owning Zale and we're only able to effect so much within this time period.

So we're being cautious on Zale and particularly the sales line during this holiday selling season. And then I think Oliver, you had may be one more question on the run rate or the volatility week by week leading up into the holiday selling season..

Yes, I know last year you gave certain degree of flexibility for the store folks to give compelling values to customers.

So as you anniversary that, just are your thoughts on volatility may be a factor in terms of how comps are manifesting?.

No, I think as we sit today Oliver and I own the right to change their mind depending on what happens out in the next eight weeks or so or six weeks, right now no.

We believe that we are positioned well and we won't have to use that tool like we did last year because if you remember last year, although a lot of it was because we had horrible, horrible winter storms and one of the biggest weekends -- and one of the biggest promotions we have in mid December.

So we felt we lost a lot of that momentum because we lost all those customers in the East Coast. So we use some flexibility on making sure we closed some deals to customers that missed out on that event due to weather. So we gave our stores the opportunity to discount more.

Unless there is a weather issue or something happens in the macroeconomic environment, we don't believe we're going to need to use those same tactics this year..

Okay. Just our final question is congrats on the strategic sourcing initiative.

Is that across all grades of diamonds? Were there particular grades where you felt supply versus demand was particularly important to ensure that? And do you see yourself having more vertical integration going forward? What are the next steps as you look to the challenges that the long-term may face in matching supply and demand?.

Yes just to remind you and everybody that this rough initiative of ours is in our best case scenario this year maybe 10% of our total diamond purchases or total lose diamond purchases and longer term, we will never get to any way near the majority of our purchase. We need to stay in the polished diamond market.

It's an important part of the market, but we do plan on growing this initiative further and we've stated up to 20% of our -- up to 20% or more of our needs will come out of this initiative.

As far as the grades, it's primarily that right now because we're getting from DeBeers in the open market are primary the nicer qualities called SI1 and better and so it's really going into heavier, into our Jared division. We'll stay in tune to the market place.

We would like to get into more qualities, but right now it's more in the higher end type of goods that we're getting through this particular initiative..

Okay thanks. Best regards for the holiday season..

Thank you. Same to you..

Thanks Oliver..

We have no further questions at this time. I will now turn the call back to Mr. Light..

Thank you. Thank you to all of you for taking part in this call. Our next event for the investment community will be our holiday sales call on Thursday, January 8, when we will review our November, December sales announcement. I want to wish all of you a very happy and healthy holiday and Thanksgiving and thanks again. Good bye..

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect..