Signet Jewelers Limited — Q1 FY2022 Form 10-Q
Reporting period: 13 weeks ended May 1, 2021; comparison is the 13 weeks ended May 2, 2020. Amounts are in U.S. dollars unless stated otherwise. Signet is a jewelry retailer operating primarily in the U.S., U.K. and Canada. Results are seasonal, with the fourth quarter historically generating about 35%–40% of annual sales.
Key financial results
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Sales | $1,688.8 million | $852.1 million |
| Gross margin | $678.4 million; 40.2% of sales | $204.2 million; 24.0% of sales |
| Operating income (loss) | $168.7 million; 10.0% of sales | $(299.6) million; (35.2)% of sales |
| Net income (loss) | $138.4 million | $(197.1) million |
| Diluted EPS | $2.23 | $(3.96) |
| Operating cash flow | $161.1 million | $(7.6) million |
| Free cash flow (non-GAAP) | $149.8 million | $(15.3) million |
Sales increased 98.2% year over year; same-store sales rose 106.5%. E-commerce sales increased 110.3% to $346.3 million and represented 20.5% of sales. The prior-year quarter was heavily affected by COVID-19 store closures, so the reported rebound is against a significantly disrupted comparison. North America sales rose 107.1%; International sales fell 11.6% as reported, reflecting U.K. store closures.
Gross margin improvement reflected reduced clearance activity, sourcing savings, product mix and fixed-cost leverage. SG&A was $512.0 million, or 30.3% of sales, versus $358.4 million, or 42.1%; higher advertising, incentive compensation and staffing costs were partly offset by structural savings. Management reported approximately $300 million of annual structural cost savings achieved through the Path to Brilliance plan.
Financial position and liquidity
- Cash and cash equivalents were $1,298.4 million at May 1, 2021, up from $1,172.5 million at January 30, 2021.
- Long-term debt was $146.8 million, consisting of senior notes; the ABL revolving facility and FILO term loan were fully repaid by fiscal year-end 2021. Signet reported non-GAAP net cash of $1,151.6 million.
- Available borrowing capacity under the $1.5 billion ABL facility was approximately $1.2 billion; $19 million of letters of credit were outstanding. The company reported compliance with debt covenants.
- Inventory was $2,019.0 million, compared with $2,032.5 million at fiscal year-end and $2,392.2 million a year earlier. Total liabilities were $4,209.3 million; redeemable preferred shares were carried at $650.9 million.
- Operating cash flow was $161.1 million. Investing cash outflow was $24.8 million, including $14.4 million for the Rocksbox acquisition and $11.3 million of capital expenditures. Financing cash outflow was $13.7 million.
Material changes, outlook and commentary
The prior-year quarter included store shutdowns, $136.3 million of asset impairments and a substantial CARES Act tax benefit. In Q1 FY2022, impairment charges were $1.5 million and income tax expense was $26.5 million, compared with a $109.5 million tax benefit in the prior-year period. Results therefore reflect both business recovery and unusually difficult prior-year comparatives.
Management attributed strong sales to strategic initiatives, stimulus and tax refunds, vaccine rollouts, improved online capabilities, higher conversion and transaction values, and new products and customization. It cautioned that the strength may not persist: discretionary spending could shift toward experiences as the economy reopens, and renewed COVID-19 restrictions, supply-chain disruption, unemployment and consumer-spending conditions could affect results. The filing provides no specific full-year revenue or earnings guidance. Signet expected FY2022 capital expenditures of $175 million–$200 million, primarily for technology, banner differentiation and innovation, and anticipated increased marketing investment. It believed available cash, operating cash flows and ABL availability would meet requirements for at least the next 12 months.
Signet reinstated its common-share dividend beginning in Q2 FY2022 and declared the Q1 preferred dividend payable in cash. On May 17, 2021, it amended credit-card program agreements with Comenity and Genesis, effective July 1, 2021, with initial terms through December 31, 2025. These arrangements change the origination and servicing structure for prime and non-prime customer credit.
Risks, contingencies and unusual items
- COVID-19 effects remained uncertain, including store restrictions, potential resurgence, consumer behavior and supply-chain exposure, particularly in India.
- A long-running employment-practices arbitration concerning compensation and promotion claims remained unresolved; the company said any potential loss or range of loss could not be estimated.
- Rocksbox, a jewelry rental subscription business, was acquired for $14.4 million net of cash acquired; the company recorded $1.1 million of acquisition-related costs.
- Approximately $64 million of deferred rent remained at May 1, 2021 and was expected to be substantially repaid by fiscal year-end.
- The 5% cumulative preferred shares carry a liquidation preference of approximately $665 million at May 1, 2021. Common dividends had been suspended during the pandemic before reinstatement was announced.
Important facts for investors to verify
- How much of the exceptional sales growth and margin recovery is sustainable after normalizing for prior-year COVID-19 closures and stimulus effects.
- Whether the new Comenity and Genesis credit programs operate as planned, and the effect on credit availability, customer conversion, receivables and economics.
- Progress against the $175 million–$200 million capital expenditure plan, cash generation, dividend commitments and stated leverage objective.
- Developments in the employment-practices arbitration, COVID-19 restrictions and supply-chain conditions.
- The impact of the preferred shares’ cumulative dividends and liquidation preference on cash available to common shareholders.