Signet Jewelers Limited — Q3 Fiscal 2013 Form 10-Q
Reporting period: 13 and 39 weeks ended October 27, 2012. Fiscal 2013 is the 53-week year ending February 2, 2013. Signet operates jewelry retail businesses in the US and UK, including Kay, Jared, H.Samuel and Ernest Jones.
Financial results
| Metric | 13 weeks ended Oct. 27, 2012 | 13 weeks ended Oct. 29, 2011 | 39 weeks ended Oct. 27, 2012 | 39 weeks ended Oct. 29, 2011 |
|---|---|---|---|---|
| Sales | $716.2 million | $710.5 million | $2,470.1 million | $2,395.4 million |
| Gross margin | $235.4 million; 32.9% | $229.9 million; 32.4% | $900.3 million; 36.4% | $874.4 million; 36.5% |
| Operating income | $52.5 million | $42.5 million | $292.8 million | $263.5 million |
| Net income | $34.9 million | $26.1 million | $188.1 million | $167.8 million |
| Diluted EPS | $0.43 | $0.30 | $2.26 | $1.93 |
| Operating cash flow | $(16.6) million | $(78.5) million | $100.2 million | $113.6 million |
| Free cash flow, as defined by Signet | $(62.7) million | $(113.2) million | $(0.7) million | $40.6 million |
- Quarterly sales increased 0.8%; same-store sales rose 1.4%. E-commerce sales were $19.6 million, up 35.2%. Year-to-date sales increased 3.1%, same-store sales rose 3.2%, and e-commerce sales reached $65.9 million, up 34.2%.
- Quarterly operating income increased 23.5% and diluted EPS increased 43.3%. Year-to-date operating income rose 11.1% and diluted EPS rose 17.1%. The reduction in weighted-average diluted shares, reflecting repurchases, also supported EPS growth.
- Quarterly gross margin rate improved 50 basis points, primarily on US merchandise mix; year-to-date gross margin rate declined 10 basis points. SG&A was $222.6 million for the quarter and $727.4 million year to date. Other operating income was $39.7 million and $119.9 million, respectively, primarily reflecting interest income on customer receivables and changes in customer finance-program mix.
- US quarterly same-store sales rose 1.2%, with Kay up 5.5% and Jared down 4.1%. Jared was affected by the prior-year watch event and discontinued watch line. UK same-store sales rose 2.3%, but reported UK sales fell 4.7%, including adverse currency translation.
- The US generated quarterly operating income of $67.9 million; the UK reported an operating loss of $5.5 million. Year to date, US operating income was $322.9 million while the UK operating loss widened to $8.8 million.
Cash, debt and liquidity
- Cash and cash equivalents were $166.0 million at October 27, 2012, down from $486.8 million at January 28, 2012 and $349.6 million a year earlier. Total assets were $3,421.1 million and total liabilities were $1,271.0 million.
- Year-to-date investing cash outflow was $100.9 million, including $100.9 million of property and equipment purchases, versus $73.0 million of investment outflow in the prior comparable period. Management cited increased planned IT and store investment.
- Year-to-date financing cash outflow was $318.9 million, principally reflecting $287.2 million spent repurchasing 6.4 million shares and $28.6 million of dividends paid. No shares were repurchased in the third quarter. The board-authorized program had $50.1 million remaining.
- No borrowings were outstanding under the $400 million revolving credit facility, which matures in May 2016; standby letters of credit were $8.2 million. The filing reports no outstanding interest-rate protection agreements.
- US customer in-house finance receivables, net, were $987.6 million. The related allowance was $80.2 million; receivables more than 90 days past due were fully reserved. Year-to-date credit-loss provision was $98.0 million.
Management commentary, outlook and material items
- Management did not provide specific full-year sales, earnings or EPS guidance in the supplied filing text. It stated that the fourth quarter normally contributes about 40% of annual sales and 45%–50% of operating income, with December the most important sales month.
- Management expected a 35.4% effective tax rate for Fiscal 2013, consistent with Fiscal 2012. It expected to contribute at least $13.7 million to the UK pension plan during Fiscal 2013; $10.3 million had been contributed through the reported 39 weeks.
- On October 29, 2012, after quarter-end, Signet acquired Ultra Stores for $58.4 million in cash. Ultra operated 107 stores and 33 licensed jewelry departments; Signet said the acquisition would increase its US outlet-channel presence. The transaction and results were not part of the period-end balance sheet and subsequent operating results were to be included in the US division.
- Quarterly SG&A included $2.5 million of acquisition-related professional fees and a favorable $3.9 million De Beers antitrust-litigation settlement. The filing also reports a change in credit-cycle processing in Q1, affecting the year-to-date US net bad-debt-to-sales comparison.
- Two employment-related cases allege discrimination in compensation and promotion practices at US stores. Sterling denies the allegations and intends to defend the cases; management said neither outcome nor potential loss could then be estimated. Management also said substantially all of $4.8 million in unrecognized tax benefits might be reduced over the next 12 months through settlements.
- Disclosed risks include consumer demand and credit conditions, competition, jewelry pricing and inventory decisions, the cost and availability of diamonds and precious metals, foreign exchange movements, seasonality, and IT and control disruptions. Signet hedges certain currency and gold exposures; it does not hedge diamond-cost fluctuations.
Most important facts for investors to verify
- Whether US sales, margins and customer-credit performance remain sound, and whether the UK operating losses improve.
- Holiday-season sales and profitability, given the business’s pronounced fourth-quarter seasonality.
- Cash conversion and working-capital needs: year-to-date operating cash flow was positive, but free cash flow was slightly negative after capital spending.
- Ultra Stores’ integration, purchase economics and contribution to sales and earnings after the acquisition.
- Progress and potential exposure in the employment litigation, for which no loss estimate was available.
- Repurchase-program use and remaining authorization, alongside cash levels and liquidity after the acquisition.