OREANDA-NEWS. Fitch Ratings has affirmed the ratings on \$400 million 4.70% senior unsecured notes due 2024, issued under Signet Jewelers Limited (Signet) financing subsidiary, Signet UK Finance plc.

The ratings on the senior unsecured notes reflect the consolidated credit profile of Signet. Signet and certain subsidiaries of Signet will fully and unconditionally guarantee the payment obligations of Signet UK Finance plc's notes. The notes will be pari passu with all the existing and future unsecured and unsubordinated obligations at Signet and certain subsidiaries of Signet. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

The ratings reflect Signet's and Zale's leading shares in the specialty jewelry market in the U.S. as well as the UK and Canada. Signet generated \$5.8 billion in revenue and roughly \$842 million in adjusted EBITDA (adding back acquisition related charges) in 2014 (ending January 2015), which includes eight months of contribution from Zale. Fitch expects that Signet's retail adjusted leverage (as detailed below), will improve to low 3.0x range over the next 24 months from a 2014 level of 3.4x, based on projected EBITDA of approximately \$1 billion and no increase in debt.

Signet operates over 3,550 stores in the U.S., UK and Canada under various well-known brands, post its acquisition of Zale Corporation in May 2014. Kay Jewelers, Jared the Galleria Of Jewelry, and Zale hold a combined share of approximately 16% to 17% of the U.S. specialty jewelry market (\$31 billion in industry sales in 2014 according to U.S. Census Bureau). Kay and Zale hold the number 1 and 2 market position in the U.S. mall-based specialty retail jewelry space, respectively, and Jared is the number 1 off-mall specialty retail jeweler. In addition, Zale is number 1 in Canada under its Peoples brand (roughly 4% of total revenue assuming a full year of contribution) and Signet holds the leading market shares in the UK under its H.Samuel and the Ernest Jones brands (roughly 12%).

Signet has generated strong top-line and EBITDA growth since the recession, driven by the growth of the specialty jewelry industry of roughly 3% annually over the past five years; continued industry consolidation; and the company's strong execution of its growth initiatives. The expanded retail footprints of its strong concepts such as Kay and Jared, restructuring of regional brand stores, increasing penetration of its exclusive brand portfolio (representing approximately 32.3% of total U.S. sales in 2014) and increasing vertical integration of its supply chain have helped drive mid-to-high single-digit growth in same store sales and EBITDA margin improvement to 16.9% in 2014 from 9.7% in 2007.

Zale has underperformed historically, but has been in a turnaround mode since 2010 and turned profitable in 2013 on a net income basis for the first time since 2008 (on EBITDA of \$76 million or EBITDA margin of 4%). Zale's adjusted EBITDA margin improved to 5.5% for the eight months ended Jan. 31, 2015 and Fitch expects that it could improve to high single digit range over the next 24 months. Signet's acquisition of Zale is providing the latter the necessary capital of approximately \$80 million - \$90 million to invest in its stores and systems and bring expertise in supply chain and expense management, versus historical capex levels at Zale's of approximately \$20 million annually.

Fitch expects Signet, on a standalone basis, will continue to generate mid-single-digit top-line growth over the next two to three years, driven by comps growth in the 4% range and modest contribution from store expansion. Zale-related brands are expected to grow in the mid-single-digit range mainly on same store sales, offset by some modest square foot reduction of underperforming stores. As a result, consolidated EBITDA is expected to grow to approximately \$1 billion by 2017 from a current base of \$842 million. There could be potential upside with EBITDA growing over the next 24 months should Signet be able to realize the targeted \$150 million to \$175 million of net synergies in the bottom line.

Signet's debt structure consists of a \$400 million revolving credit facility and a \$390 million term loan both due May 2019 at Signet Group Limited; \$400 million senior unsecured notes due June 2024 at Signet UK Finance plc; and a \$600 million A/R securitization facility due to mature May 2017 at Sterling Jewelers Receivables Master Note Trust. Consolidated adjusted debt/EBITDAR at the end of 2014 (ended January) was at 4.0x.

Fitch expects the consolidated leverage ratio to improve to the high 3x range over the next two to three years. Fitch's assessment of Signet's credit profile incorporates a retail adjusted leverage. Fitch notes that Signet is one of a select group of retail companies that still own their credit card receivables and assigns a portion of the company's debt to the more highly leveraged credit card business. This is consistent with Fitch's practice of treating debt for companies that fund their own credit card receivables.

Fitch assumes Signet's credit card receivables could be financed using a mix of 70% debt and 30% equity which translates into approximately \$1.1 billion in credit card-related debt based on Signet's 2014 receivables of \$1.6 billion. This includes the \$600 million ABS facility. Retail-related debt therefore is composed of corporate debt that is not allocated to the credit card business and leases capitalized using 8.0x rent expense. Even assuming a 60% debt/40% equity funded receivables portfolio would result in retail adjusted leverage of 3.5x.

Implicit in this assumption is that if Signet ever sold its receivables portfolio, it would pay down debt directly secured by credit card receivables as well as allocated unsecured corporate debt to a level consistent with Fitch's assumption. As a result, core retail debt/EBITDAR is expected to improve to the low 3.0x range over the next 24 months from a 2014 level of 3.4x, based on projected EBITDA of approximately \$1 billion and no increase in debt.

KEY ASSUMPTIONS
--Fitch expects that Signet's retail adjusted leverage (as detailed below), will improve to the low 3.0x range over the next 24 months from a 2014 level of 3.4x, based on projected EBITDA of approximately \$1 billion and no increase in debt.
--Fitch expects Signet on a standalone basis will continue to generate mid-single-digit top-line growth over the next two to three years. Fitch expects revenue for Zale-related brands to grow in the mid-single-digit range, mainly on same-store sales.
--Fitch expects FCF in 2015 to be in the \$150 million range, with the potential to decline to \$50 million in 2016 and 2017 due to increased capex and dividends.

RATING SENSITIVITIES

A positive rating action could result in the event of better than expected top-line and profitability trends and/or higher than expected debt reduction that would lead to retail adjusted leverage of under 3x.

A negative rating action could result in the event of one or more of the following: (i) worse than expected top-line and profitability trends, (ii) execution issues related to the Zale acquisition that impede the company from realizing stated synergies or improving the profitability at acquired units, and (iii) the inability to maintain retail adjusted leverage below 3.5x.

LIQUIDITY

Signet had \$194 million in cash at the end of 2014, no borrowings under its \$400 million unsecured revolving credit facility, and a fully drawn \$600 million asset-backed securitization facility. The company has generated positive free cash flow (FCF) over the past four years, although the amount declined to \$7.5 million in 2014, versus an average of \$130 million in 2011 to 2013. This was the result of higher working capital needs particularly to support increased credit sales, higher capex of \$220 million from the \$100 million to \$150 million range to fund store growth and investments in Zale, as well as increasing dividends that were instituted in 2011. Fitch expects FCF in 2015 to be in the \$150 million range, with the potential to decline to \$50 million in 2016 and 2017. This reflects growth in EBITDA, offset by increasing dividends and higher capex levels.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions on Signet:

Signet Jewelers Limited (Signet):
--Long-term Issuer Default Rating (IDR) assigned at 'BBB-'.

Signet UK Finance plc:
--IDR of 'BBB-' withdrawn;
--Guaranteed senior unsecured debt securities affirmed at
'BBB-'.