Signet Jewelers Limited — Q2 Fiscal 2023 10-Q
Reporting period: 13 and 26 weeks ended July 30, 2022; comparisons are with the corresponding periods ended July 31, 2021. Signet is a jewelry retailer operating primarily in the US, UK and Canada, with North America, International and Other reporting segments.
Key financial results
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Sales | $1,754.9m | $1,788.1m | $3,593.2m | $3,476.9m |
| Gross margin | $664.7m; 37.9% | $717.6m; 40.1% | $1,388.4m; 38.6% | $1,396.0m; 40.2% |
| Operating income | $186.8m | $225.4m | $187.0m | $394.1m |
| Net income | $145.4m | $224.6m | $61.9m | $363.0m |
| Diluted EPS | $2.58 | $3.60 | $0.90 | $5.84 |
- Q2 sales declined 1.9%; same-store sales fell 8.2%. First-half sales rose 3.3%, primarily reflecting the addition of Diamonds Direct, while same-store sales fell 3.0%.
- Q2 gross margin rate declined 2.2 percentage points. Management cited lower same-store sales and occupancy-cost deleverage, Diamonds Direct’s relatively lower-margin bridal mix, technology investments and the absence of prior-year UK tax abatements; cost savings partially offset the declines.
- SG&A was $477.3m in Q2 and $1,010.4m for the first half. Management said lower payroll costs and structural savings offset increased advertising and digital/IT spending.
- First-half results include a $190m pre-tax charge for a proposed employment-practices settlement and $132.8m of non-cash pension settlement charges. The first-half effective tax rate was negative 46.3%, reflecting, among other items, tax benefits associated with these charges and share-based compensation.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was negative $114.9m, versus positive $458.5m a year earlier; capital expenditures were $58.2m and free cash flow was negative $173.1m. Working-capital outflows included $146.6m for inventory and $221.2m from lower accounts payable. Q2 operating cash flow alone was positive $20.6m.
- Cash was $851.7m at July 30, 2022, down from $1,418.3m at fiscal year-end. Signet reported $147.7m of long-term debt, $704.5m of non-GAAP net cash, and $1.3bn of available ABL revolving capacity. The $1.5bn facility matures in 2026; senior notes mature in 2024. The company reported compliance with debt covenants.
- Inventory was $2,190.8m, up from $2,060.4m at fiscal year-end. Management attributed the first-half inventory cash use partly to earlier merchandise receipts intended to mitigate supply-chain disruption and improve in-stock levels.
- Financing uses included $291.0m of share repurchases and $34.7m of common and preferred dividends. The company said cash, operating cash flow and available borrowing capacity were expected to cover requirements for at least 12 months after the report date.
Outlook, developments and risks
- Management expected jewelry-industry revenue to be flat to slightly down for the remainder of FY2023, citing continuing pressure on discretionary spending. The filing provides no specific company sales or earnings guidance.
- Management pointed to inflation, higher costs, reduced government stimulus, consumer shifts toward travel and experiences, possible weaker demand across price points, labor availability, supply-chain disruption, COVID-19 and the Russia-Ukraine conflict as uncertainties. Signet’s business is seasonal; the fourth quarter historically accounts for about 35–40% of annual sales and a substantial portion of operating profit.
- On August 19, 2022, after quarter-end, Signet completed its acquisition of Blue Nile for $398.2m cash, net of cash acquired and subject to customary adjustments. The quarter’s balance sheet and results do not include Blue Nile.
- A proposed settlement of an employment-practices arbitration includes payments of approximately $175m and remains subject to final approval; the company recorded a $190m charge. Final approval was scheduled for November 15, 2022, with funding expected in Q4 FY2023 if approved.
- The UK pension scheme settlement process generated $132.8m of first-half non-cash charges. Signet expected to settle remaining obligations and wind up the scheme by fiscal year-end.
Important facts for investors to verify
- Final approval, timing and cash funding of the employment-practices settlement.
- Blue Nile purchase-price adjustments, integration progress, synergies and effect on liquidity and margins.
- Whether consumer demand, same-store sales and gross margins stabilize amid inflation and reduced discretionary spending.
- Inventory levels, working-capital trends and the company’s ability to generate operating cash flow after repurchases and dividends.
- Completion and final costs of the pension scheme wind-up, and continuing compliance with debt covenants and liquidity requirements.