Signet Jewelers Limited — Q2 FY2013 Form 10-Q
Reporting period: 13 weeks ended July 28, 2012; year-to-date (YTD) covers 26 weeks. Comparatives are the 13 and 26 weeks ended July 30, 2011. Amounts are in U.S. dollars; financial statements are unaudited.
Business context and results
Signet operates jewelry retail businesses in the U.S. (Kay, Jared and regional brands) and the U.K. (H.Samuel and Ernest Jones). At July 28, 2012, it operated 1,323 U.S. stores and 522 U.K. stores.
| Metric | Q2 FY2013 | Q2 FY2012 | YTD FY2013 | YTD FY2012 |
|---|---|---|---|---|
| Sales | $853.9m | $797.6m | $1,753.9m | $1,684.9m |
| Same-store sales growth | 7.1% | 9.9% | 4.0% | 10.1% |
| Gross margin | $311.2m; 36.4% | $294.8m; 37.0% | $664.9m; 37.9% | $644.5m; 38.3% |
| Operating income | $110.9m; 13.0% | $102.3m; 12.8% | $240.3m; 13.7% | $221.0m; 13.1% |
| Net income | $70.7m | $66.3m | $153.2m | $141.7m |
| Diluted EPS | $0.85 | $0.76 | $1.81 | $1.63 |
| Operating cash flow | $82.8m | $86.8m | $116.8m | $192.1m |
| Free cash flow | $46.6m | $61.4m | $62.0m | $153.8m |
Financial position and cash flows
- Cash and cash equivalents were $237.5m at July 28, down from $486.8m at January 28, 2012. Signet reported no loans or overdrafts and had no borrowings under its $400m revolving credit facility; net cash was $237.5m.
- YTD operating cash flow fell $75.3m year over year. Management cited inventory build and year-end inventory payments, higher tax payments, and changes in operating liabilities; stronger earnings and receivable collections partly offset these items. Capital spending was $54.8m, versus $38.3m a year earlier.
- YTD financing cash outflow was $311.6m, principally reflecting $287.2m of share repurchases and $19.0m of dividends paid. The company repurchased 6.43m shares at an average $44.70; $50.1m remained under the $350m authorization, which expires in January 2014.
- Net accounts receivable, primarily U.S. in-house customer financing, was $1,032.2m. The credit-loss allowance was $78.6m against $1,102.8m of gross U.S. customer finance receivables evaluated for impairment.
Material changes and management commentary
- Q2 sales rose 7.1%; U.S. sales increased 9.2% and U.K. sales declined 1.7% as reported. U.S. same-store sales increased 8.2%; U.K. same-store sales increased 2.1%. E-commerce sales grew 39.9% to $24.2m.
- U.S. operating income increased to $117.3m in Q2 and $255.0m YTD. The U.K. recorded operating losses of $0.3m in Q2 and $3.3m YTD, compared with profits in the prior-year periods.
- Gross margin rate declined, reflecting merchandise mix and promotional selling, particularly in the U.K. SG&A as a percentage of sales improved modestly due mainly to store-expense control. Other operating income rose, primarily due to interest income on customer receivables and a change in the mix of customer finance programs.
- Diluted EPS growth exceeded net-income growth, with lower weighted-average shares following repurchases. Q2 net interest expense was lower partly because the prior-year quarter included a $1.3m write-off of deferred financing fees.
Outlook, risks and contingencies
- The filing provides no specific full-year earnings or sales guidance. Management describes substantial seasonality: the fourth quarter normally contributes about 40% of annual sales and 45%–50% of annual operating income, with December the most important sales month.
- Risks identified include consumer spending and credit quality, competition, jewelry merchandising and inventory decisions, diamond and precious-metal costs, foreign exchange, consumer-credit regulation, seasonal dependence, information-technology and control disruptions, and estimation uncertainty.
- Signet hedges foreign-currency and precious-metal exposures but does not hedge diamond-cost fluctuations. At July 28, commodity derivatives had a net liability fair value of $3.1m; derivative losses also contributed to YTD other comprehensive income loss.
- Two employment-related discrimination matters involving the U.S. subsidiary remain ongoing: a private arbitration class proceeding and an EEOC lawsuit. Signet denies the allegations; the company stated that neither outcome nor potential loss could then be estimated.
- The U.K. defined-benefit pension plan received $7.0m in contributions YTD; the company expected to contribute at least $13.7m during FY2013. A U.S. diamond and gemstone warranty reserve rose to $17.6m from $12.7m a year earlier, with Q2 warranty expense of $4.6m versus $0.8m.
Investor facts to verify
- Whether receivable growth, delinquencies, charge-offs and the credit-loss allowance remain consistent with the company’s customer-financing risk.
- Whether U.K. trading and gross margins recover from the reported operating losses and promotional pressure.
- Whether cash generation improves after the YTD decline, while funding capital spending, dividends and repurchases.
- Developments in the discrimination proceedings, for which potential loss was not estimable, and in pension and warranty obligations.
- The extent to which holiday-season sales and profitability meet the business’s stated seasonal pattern.