Signet Jewelers Limited — Fiscal 2017 Third-Quarter Form 10-Q
Reporting period: 13 and 39 weeks ended October 29, 2016, compared with the periods ended October 31, 2015. Signet operates jewelry retail businesses in the U.S., U.K. and Canada. Results are seasonal: nearly 40% of annual sales and typically 45%–55% of operating income occur in the fourth quarter.
Financial performance and position
| Metric | Third quarter | 39 weeks year to date |
|---|---|---|
| Sales | $1,186.2 million, down 2.5%; same-store sales down 2.0%. Constant-currency sales declined 0.5%. | $4,138.5 million, down 0.5%; same-store sales down 0.4%. Constant-currency sales rose 0.9%. |
| Gross margin | $350.0 million; 29.5% of sales versus 30.2%. | $1,415.3 million; 34.2% versus 34.3%. |
| Operating income | $32.1 million versus $33.6 million; margin 2.7% versus 2.8%. Adjusted operating income was $43.8 million versus $47.1 million. | $364.0 million versus $310.6 million; margin 8.8% versus 7.5%. Adjusted operating income was $396.0 million versus $390.6 million. |
| Net income and diluted EPS | Net income $17.0 million versus $15.0 million; diluted EPS $0.20 versus $0.19. After $2.2 million of preferred dividends, income attributable to common shareholders was $14.8 million. Adjusted diluted EPS was $0.30 versus $0.33. | Net income $245.7 million versus $196.0 million; diluted EPS $3.18 versus $2.45. Common-shareholder income was $243.5 million; adjusted diluted EPS was $3.44 versus $3.24. |
Cash flow: Year-to-date operating cash flow was $360.9 million versus $88.7 million. Capital expenditures were $195.6 million, yielding reported free cash flow of $165.3 million versus negative $82.1 million. Cash ended at $82.7 million, down from $137.7 million at fiscal year-end.
Debt and liquidity: Total debt was $1,621.8 million, including $288.8 million of current loans and overdrafts; net debt was $1,530.3 million. Current assets were $4,555.0 million and current liabilities $1,335.0 million. Signet reported compliance with debt covenants. The revolving credit facility was expanded from $400 million to $700 million and extended to July 2021; the securitization facility was extended to May 2018.
Material changes and drivers
- Quarterly sales weakness reflected underperformance in select stores, including Jared and regional brands, softer energy-dependent markets, and declines in certain collections and watches. Fashion jewelry and select bridal performed better. E-commerce sales were $51.6 million, or 4.4% of sales.
- U.K. sales fell 12.8% in reported dollars, but rose 4.2% at constant exchange rates; sterling translation was a significant drag. Zale division sales grew 1.8%, including strong Piercing Pagoda performance, while Sterling sales declined 2.9%.
- Management attributed lower gross-margin rates to lower sales, higher bad-debt expense and store occupancy deleverage, partly offset by merchandise costs and mix. Sterling customer-finance net bad-debt expense rose to $146.1 million year to date from $130.6 million; net charge-offs were 8.1% of average gross receivables versus 7.5%.
- Year-to-date reported operating income benefited from lower acquisition-related and integration costs than the prior year. Adjusted year-to-date operating income increased only 1.4%, while adjusted third-quarter operating income declined 7.0%.
- Year-to-date financing included $1.0 billion of common-share repurchases, $57.5 million of common dividends and $625 million raised through preferred shares. The October accelerated repurchase was $525 million; settlement remained subject to the pricing period. Common dividends declared were $0.26 per share in the quarter, up from $0.22.
Outlook, risks and unusual items
- Management expected a Fiscal 2017 effective tax rate of 25%–26%, compared with 28.9% in Fiscal 2016. The filing does not provide a clear full-year sales, earnings or EPS forecast.
- Fiscal 2017 store plans called for 145–176 gross openings and 55–89 net additions, with net selling-space growth of 3.0%–3.5%, principally from off-mall Kay stores. Holiday-season results are especially important to annual performance.
- On October 5, Signet issued $625 million of Series A convertible preferred shares to affiliates of Leonard Green. They carry a cumulative 5% annual dividend and conversion rights; the filing reports a $611.7 million balance-sheet carrying amount. Changes to certain preferred-holder rights were approved after quarter-end, on November 2.
- Significant risks include consumer spending and credit quality, jewelry-sector competition, commodity and currency movements, Brexit-related uncertainty, seasonality, information-technology and control disruptions, and successful Zale integration.
- Employment-practices litigation includes a conditionally certified Equal Pay Act collective action with 10,345 opt-ins; related outcomes or possible losses were not estimable. A separate securities class action alleges inadequate disclosure concerning jewelry in Signet’s custody for repairs, customer confidence and competition; Signet disputes the allegations and could not estimate potential liability. A Zale wage-and-hour case also proceeded as certified classes.
- Other unusual items include $18.5 million of year-to-date integration costs and $13.5 million of purchase-accounting operating-income effects. Management stated that contractual obligations had not materially changed outside the ordinary course.
Important facts for investors to verify
- Whether holiday sales and same-store trends recover, particularly at Jared, regional brands and Sterling, and whether reported U.K. results remain materially affected by currency translation.
- Credit portfolio performance: bad-debt provisions, charge-offs, collection rates, receivables and the effect of extended-payment promotions.
- The final share count and cash or share settlement of the $525 million accelerated repurchase, remaining repurchase authorization, and the effect of buybacks on liquidity and leverage.
- Preferred-share dividend, conversion, redemption and governance terms, including the post-quarter amendments and potential dilution.
- Developments and financial exposure in the employment, wage-and-hour and securities litigation; the filing provides no estimable loss range for the principal matters discussed.
- Progress against store-expansion plans, integration spending and the stated tax-rate outlook; reported and adjusted measures should be considered separately.