Business context and reporting period
Signet Jewelers Limited is a global jewelry retailer operating Kay, Zales, Jared, James Allen, Peoples, H.Samuel and Ernest Jones, among other banners. This 10-K covers fiscal 2019, the 52 weeks ended February 2, 2019; fourth-quarter results cover 13 weeks. The comparable prior fiscal year and fourth quarter had an extra week, which added $84.3 million in sales and about $0.12 diluted EPS for fiscal 2018.
Key financial metrics
- Full-year sales: $6.247 billion, down 0.1% reported from $6.253 billion. Same-store sales fell 0.1%. North America sales rose 0.5%; International sales declined 6.5%.
- Fourth-quarter sales: $2.155 billion, down 6.0% reported; same-store sales declined 2.0%. E-commerce sales were $260.6 million, or 12.1% of quarterly sales.
- Profit and margins: Fiscal 2019 gross margin was $2.161 billion, or 34.6% of sales, versus $2.190 billion, or 35.0%, in fiscal 2018. Operating loss was $764.6 million, compared with operating income of $579.9 million; net loss was $657.4 million, versus net income of $519.3 million. Diluted loss per share was $12.62, versus earnings of $7.44. Fourth-quarter operating loss was $83.5 million and net loss was $107.9 million; diluted loss per share was $2.25.
- Major reported charges: $735.4 million of goodwill and intangible impairments, $125.9 million of transformation-related restructuring charges (including inventory write-downs), and a $167.4 million net loss associated with selling non-prime receivables. Management reported $85 million of transformation cost savings.
- Cash flow: Operating cash flow was $697.7 million, down from $1.941 billion; capital expenditures were $133.5 million and reported free cash flow was $564.2 million. These figures included $445.5 million of proceeds from the non-prime receivables sale. Fiscal 2018 operating cash flow and free cash flow included $952.5 million of prime-receivables sale proceeds.
- Liquidity and debt: Cash was $195.4 million; reported net debt was $533.0 million, compared with $507.1 million a year earlier. Total debt was $734.0 million. Working capital was $1.823 billion, down from $2.409 billion. Revolving facility availability was $685.4 million, net of letters of credit. The company reported compliance with its debt covenants.
- Other capital items: Adjusted leverage was 4.3x, above the company’s 3.0x–3.5x long-term target range. The balance sheet included $615.3 million of redeemable convertible preferred shares. Operating lease commitments totaled $2.535 billion.
Material changes versus the prior comparable period
- Sales were broadly flat for the full year, but fourth-quarter reported sales fell 6.0%; comparisons are affected by the prior year’s extra week and current-year store closures.
- Profitability deteriorated sharply, reflecting impairment and restructuring charges, the receivables-sale loss, credit-outsourcing costs, lower sales leverage, and promotional and clearance activity. The filing also notes that fiscal 2018 benefited from the extra week and prior-year credit-portfolio sale effects.
- E-commerce sales increased to $682.4 million, or 10.9% of annual sales, from $497.7 million, or 8.0%. The company closed 262 stores during fiscal 2019 and reduced net selling space.
- Cash flow and free cash flow were substantially lower than fiscal 2018; both years’ figures were materially influenced by one-time receivables-sale proceeds. Inventory rose to $2.387 billion from $2.281 billion.
Outlook, management commentary, risks and contingencies
- Management launched its three-year Path to Brilliance transformation plan, targeting $200–$225 million of net cost savings by fiscal 2021, excluding savings from store closures. It expects more than 150 additional store closures in fiscal 2020 and aims for digital sales to reach 15% of revenue by fiscal 2021, compared with 8% in fiscal 2018.
- Management said holiday sales missed expectations, leaving elevated inventory; it expected inventory to be up year over year in fiscal 2020’s first quarter and planned to reduce it by year-end. It warned that a broader, value-focused gifting assortment and extended-service-plan revenue timing would pressure profit in the first half of fiscal 2020. No specific fiscal 2020 revenue or EPS guidance is provided in the supplied filing text.
- The company expected fiscal 2020 adjusted leverage to remain above its target range, with a goal of reaching approximately 3.5x by the end of the transformation plan. It expected to maintain the $0.37 quarterly common dividend and did not anticipate fiscal 2020 share repurchases.
- Key risks include discretionary consumer spending, competition and discounting, customer-financing economics and regulation, execution of the transformation and digital investments, inventory and commodity costs, Brexit and currency movements, and potential further impairment charges. The company expects to adopt lease accounting in fiscal 2020, estimating recognition of approximately $1.8–$2.2 billion of lease liabilities.
- A January 2019 CFPB and New York Attorney General consent order required $11 million in civil penalties, paid in February 2019, and ongoing compliance measures. Employment-practices and shareholder litigation remained pending; Signet said it could not estimate a possible loss or range for certain matters.
Important facts for investors to verify
- Separate underlying operating trends from the large impairment, restructuring and receivables-sale charges; review the company’s non-GAAP reconciliations and assumptions.
- Assess comparable sales, transaction counts, clearance levels and inventory reduction progress, accounting for the prior-year extra week and store closures.
- Reconcile cash generation excluding receivables-sale proceeds and monitor inventory, liquidity, debt covenants and leverage.
- Track delivery of planned savings, store closures and digital-sales targets, as well as the expected first-half fiscal 2020 margin pressures.
- Monitor outcomes and costs related to the CFPB consent order and pending litigation, and the effects of lease-accounting adoption on reported liabilities.