Understanding Signet’s Fiscal 2Q18 Margins
Gross margin in fiscal 2Q18
Signet Jewelers’ (SIG) fiscal 2Q18 margins took a hit from lower merchandise due to increased promotional spending. During the second quarter, Signet’s gross margin contracted 120 basis points to 32.7%, as leverage from higher sales were offset by the rise in promotional spending.
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By segment, the Sterling division’s gross margin fell by 150 basis points, reflecting a lower merchandise margin rate, partially offset by a fall in store occupancy costs.
Zale’s gross margin contracted 70 basis points due to increased promotional activity and higher store operating expenses, offset by favorable mix. UK Jewelry’s gross margin fell 30 basis points YoY (year-over-year) on account of higher promotions and store occupancy costs.
Signet’s operating margin expanded 100 basis points to 9.7% in fiscal 2Q18, as lower gross margins were offset by cost reductions. The company’s SG&A (selling, general, and administrative) expenses fell 110 basis points in fiscal 2Q18, reflecting lower payroll-related expenses.
Signet’s margins are likely to be impacted by the company’s strategic promotional spending going forward, and this will likely result in a lower merchandise margin rate. Although the management is focusing on a better discount control mechanism, the continued industry-wide softness will likely result in a higher promotional environment. However, tight expense controls are projected to supplement Signet’s operating margin growth rate.