Signet Jewelers Limited — Fiscal 2013 Form 10-K
Business and period: Signet is a specialty jewelry retailer operating in the US and UK, primarily through Kay, Jared, H.Samuel and Ernest Jones. Fiscal 2013 was the 53 weeks ended February 2, 2013; the comparable year had 52 weeks. The fourth quarter included 14 weeks versus 13 weeks in the prior-year quarter. The US generated 82% of sales and 93% of operating income.
Financial performance and liquidity
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Sales | $3,983.4 million | $3,749.2 million |
| Same-store sales | +3.3% | +9.0% |
| Gross margin | $1,537.4 million; 38.6% | $1,437.6 million; 38.3% |
| Operating income / margin | $560.5 million / 14.1% | $507.4 million / 13.5% |
| Net income | $359.9 million | $324.4 million |
| Diluted EPS | $4.35 | $3.73 |
| Operating cash flow | $312.7 million | $325.2 million |
| Capital expenditures | $134.2 million | $97.8 million |
| Free cash flow (non-GAAP) | $178.5 million | $227.4 million |
Cash and cash equivalents were $301.0 million at year-end, down from $486.8 million. The company had no borrowings or long-term debt and reported $301.0 million of net cash. It had a $400 million revolving credit facility, undrawn apart from $9.5 million of standby letters of credit. Working capital was $2,164.2 million. The current ratio, while calculable from the balance sheet, is not stated by the filing.
Material changes and notable items
- Sales rose 6.2%, including a 1.5% contribution from the extra fiscal week and the contribution of acquired Ultra stores. Excluding currency translation, sales increased 6.4%.
- The extra week contributed $56.4 million in sales and reduced diluted EPS by approximately $0.02. Reported fourth-quarter sales increased 11.8% to $1,513.3 million, while same-store sales increased 3.5%.
- US sales increased 7.9% to $3,273.9 million, with same-store sales up 4.0%. UK sales decreased 0.8% to $709.5 million, or 0.2% at constant exchange rates; same-store sales rose 0.3%.
- US operating income grew 14.6% to $547.8 million. UK operating income fell 28.7% at constant exchange rates to $40.0 million, reflecting weaker margins and a challenging trading environment.
- Signet acquired Ultra on October 29, 2012 for $56.7 million net of acquired cash. Ultra contributed $45.7 million of sales. Purchase accounting was preliminary, including $24.6 million of goodwill; acquisition-related expenses were approximately $3.0 million.
- Operating cash flow declined modestly, while investing cash outflow increased to $190.9 million, reflecting higher capital investment and the Ultra acquisition. The company repurchased 6.4 million shares for $287.2 million and paid $39.5 million in dividends. The annual dividend increased 20% to $0.12 per share quarterly.
Management outlook, risks and contingencies
For Fiscal 2014, management aimed to deliver record results, increase sales and gain profitable share, manage gross margin, control selling and administrative expense, and continue investing for growth. Planned capital investment was $180 million to $195 million for stores, remodeling, Ultra conversion and technology. Management expected the US economy to show improvement but cited payroll-tax and fiscal-policy uncertainty; it expected the UK environment to remain challenging. It planned to convert most Ultra stores to Kay Jewelers Outlets and expected approximately 70 new US stores, 76 refurbishments and the conversion of most of the 110 Ultra stores.
- Consumer credit: 56.9% of US sales used Signet’s in-house financing. Net bad-debt expense rose to $122.4 million, or 3.7% of US sales, from 3.4%; receivables and collection performance are key sensitivities.
- Commodities and suppliers: Diamond and gold costs, availability, and the ability to pass cost increases through to customers may affect margins and working capital. Diamonds are not hedged; supplier disruption ahead of the holiday season could materially affect performance.
- Seasonality and execution: About 40% of annual sales and 45%–50% of operating income typically occur in the fourth quarter. Weather, supply-chain disruption, or weak holiday demand could have a disproportionate effect.
- Other exposures: Sterling-dollar exchange movements, competitive discounting, consumer spending, lease commitments, regulatory changes, and cybersecurity or systems disruption are identified risks. Future outcomes are not guaranteed by management’s forward-looking statements.
- Legal matters: Sterling faced private arbitration and an EEOC lawsuit alleging gender discrimination in compensation and promotions. The company denied the allegations; the filing said the outcome and potential loss could not be estimated. A $3.9 million favorable De Beers antitrust settlement was recorded in Fiscal 2013.
- Commitments: Operating lease obligations totaled $2,057.1 million, including $295.8 million due within one year. The company also disclosed $33.6 million of capital commitments and possible liability on certain assigned or sublet UK leases.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management’s and the auditor’s internal-control assessment excluded Ultra, whose assets were under 3% of consolidated assets and sales under 2% of consolidated sales.
Investor verification priorities
- Separate underlying sales and earnings trends from the extra week, Ultra’s partial-year contribution, and share repurchases; confirm the comparability of periods.
- Track US credit receivables, delinquencies, allowance adequacy, collection rates, and bad debt expense as a proportion of sales.
- Assess the UK margin decline and whether merchandising, store rationalization, and cost initiatives stabilize results.
- Verify Ultra’s final purchase-price allocation, integration and conversion costs, store performance, and returns on investment.
- Compare Fiscal 2014 capital spending and growth plans with cash generation, free cash flow, and shareholder distributions.
- Monitor the discrimination proceedings, commodity and supplier risks, lease commitments, and the company’s controls as Ultra is integrated.