Signet Jewelers Limited — Q3 FY2020 Form 10-Q
Business context and reporting period
Signet is a jewelry retailer operating primarily in the U.S., U.K. and Canada through North America, International and Other segments. The quarter was the 13 weeks ended November 2, 2019; year-to-date (“YTD”) covers 39 weeks. The business is highly seasonal: management says the fourth quarter generates approximately 35%–40% of annual sales, with December the largest sales month.
Financial and operating highlights
| Metric | Q3 FY2020 | Q3 FY2019 | YTD FY2020 | YTD FY2019 |
|---|---|---|---|---|
| Sales | $1,187.7m | $1,191.7m | $3,983.8m | $4,092.4m |
| Gross margin | $367.7m; 31.0% | $371.2m; 31.1% | $1,325.8m; 33.3% | $1,283.0m; 31.4% |
| Operating income (loss) | $(39.9)m | $(48.8)m | $(64.9)m | $(681.1)m |
| Net income (loss) | $(35.5)m | $(29.9)m | $(81.6)m | $(549.5)m |
| Loss per diluted share | $(0.84) | $(0.74) | $(2.05) | $(10.31) |
| Operating cash flow | $(133.1)m | $(139.1)m | $113.5m | $313.5m |
- Q3 same-store sales rose 2.1%; reported sales fell 0.3% (up 0.2% at constant exchange rates). E-commerce sales increased 11.4% to $139.3m, or 11.7% of sales.
- YTD same-store sales fell 0.4%; reported sales declined 2.7%. E-commerce sales grew 6.8% to $450.5m, 11.3% of sales.
- North America Q3 sales increased 0.6%, while International sales fell 12.4% reported and 8.4% at constant exchange rates. Management described U.K. trading conditions as difficult.
- Q3 adjusted EBITDA, a non-GAAP measure, was $13.0m versus $4.0m; YTD adjusted EBITDA was $173.4m versus $166.3m. YTD non-GAAP operating income was $48.0m versus $33.8m.
- At November 2, cash was $188.6m. Total debt was $795.5m and net debt, a non-GAAP measure, was $605.2m. The new ABL revolving facility had $871.2m of available borrowing capacity, after $543.0m drawn and $15.5m of letters of credit. The company reported compliance with debt covenants.
- YTD free cash flow, defined by Signet as operating cash flow less capital expenditures, was $18.2m versus $220.1m. The prior-year comparison included $445.5m of proceeds from the sale of non-prime receivables.
Material changes versus the prior comparable period
- Q3 operating loss narrowed by $8.9m, but net loss attributable to common shareholders widened to $43.7m from $38.1m, and diluted loss per share increased to $0.84 from $0.74. Lower SG&A and transformation savings helped; clearance activity, advertising and weaker International sales were offsets.
- YTD GAAP operating loss improved substantially from the prior year, which included $448.7m of impairment charges and $167.4m of credit-transaction charges. Current YTD results include a $47.7m non-cash goodwill impairment adjustment and $65.2m of Path to Brilliance plan costs.
- YTD gross margin rate improved 1.9 percentage points. Management cited credit outsourcing benefits, transformation savings and lower inventory charges; Q3 gross margin rate was nearly flat, with lower merchandise margin and increased clearance sales weighing on results.
- YTD operating cash flow declined $200.0m year over year. The prior period included receivable-sale proceeds; current-period cash use also reflected inventory investment and payment timing. Cash used for capital expenditures was $95.3m.
- In September 2019, Signet refinanced its prior credit facility with a five-year, $1.5bn asset-based revolving facility and a $100m FILO term loan, and repurchased $239.6m principal amount of its 2024 notes. Q3 other non-operating income included a $6.7m net gain related to the refinancing.
Outlook, management commentary, risks and unusual items
- No specific full-year sales or earnings guidance is stated in the supplied filing text. Management expects operating profit to be generated almost entirely in Q4, reflecting seasonality and its credit outsourcing and transformation initiatives. For FY2020, Signet expected approximately 150 store closures and 35 openings; 86 stores had closed and 26 opened YTD.
- The five-year forward-flow agreement for non-prime receivables could be terminated by investors if specified yield thresholds are missed. Management expected the December 31, 2019 measurement to fall temporarily below the threshold, giving investors a termination right, but said investors had indicated they did not intend to terminate at that date, subject to reservation of rights. Signet said termination would not be expected to have a material adverse impact, but this is not assured.
- The Path to Brilliance transformation plan is expected to incur $200m–$220m in pre-tax charges over three years, including $105m–$115m in cash charges. Cumulative plan expenses were $191.1m through November 2, 2019.
- Signet adopted lease accounting in FY2020, recognizing $1,684.0m of operating lease right-of-use assets and $1,773.8m of lease liabilities at November 2. This accounting change materially increased reported assets and liabilities relative to prior-year presentation.
- Goodwill and trade names remain exposed to further impairment if business performance, market capitalization or valuation assumptions weaken. The company recorded a $47.7m non-cash out-of-period goodwill adjustment in the second quarter related to an error in the prior-year impairment calculation.
- Legal exposure remains uncertain. On November 18, 2019, an appeals court reversed and remanded a decision vacating certification of a gender-related Title VII class; Signet said it could not estimate any possible loss. Securities class-action and related shareholder matters also remain pending. The CFPB and New York Attorney General settlement required $11m in penalties, paid in February 2019; compliance obligations continue.
- Signet identified tariffs on jewelry imported from China as a risk: a 15% tariff took effect September 1, 2019, with additional duties potentially due December 15, 2019. The filing also highlights consumer demand, credit outsourcing, competition, U.K. conditions, foreign exchange, commodity prices and execution of the transformation plan as risks.
Important facts for investors to verify
- Holiday-quarter sales, margins, cash generation and the extent to which management’s expectation of Q4-concentrated operating profit is achieved.
- Forward-flow receivable yield performance, investor decisions at contractual measurement dates, and availability and terms of alternative credit providers.
- ABL borrowing-base availability, seasonal borrowing needs, covenant headroom and refinancing-related interest costs.
- Progress and remaining cash costs under the transformation plan, store closures, and whether margin and sales improvements persist without one-time adjustments.
- Developments in the employment and securities litigation, including any change in the currently unestimable potential loss.
- Effects of China tariffs and any further impairment indicators for goodwill and trade names.