Signet Jewelers Limited — Q1 FY2013 Form 10-Q
Reporting period: 13 weeks ended April 28, 2012; comparative period ended April 30, 2011. Unaudited. Signet operates jewelry retail businesses in the U.S. and U.K. Fiscal 2013 ends February 2, 2013.
Financial performance
Amounts in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Sales | $900.0 | $887.3 | Up 1.4% |
| Same-store sales | Up 1.2% | Up 10.2% | Growth moderated |
| Gross margin | $353.7; 39.3% | $349.7; 39.4% | Up $4.0; rate down 0.1 percentage point |
| Operating income | $129.4; 14.4% | $118.7; 13.4% | Up 9.0% |
| Income before taxes | $128.5 | $117.8 | Up 9.1% |
| Net income | $82.5 | $75.4 | Up 9.4% |
| Diluted EPS | $0.96 | $0.87 | Up 10.3% |
| Net cash from operations | $34.0 | $105.3 | Down $71.3 |
| Capital expenditures | $18.6 | $12.9 | Higher by $5.7 |
| Free cash flow | $15.4 | $92.4 | Down $77.0 |
- Sales by segment: U.S. sales were $751.5 million, up 1.8%; U.K. sales were $148.5 million, down 0.5% as reported but up 1.4% at constant exchange rates. U.S. operating income rose to $137.7 million from $126.2 million. The U.K. operating loss widened to $3.0 million from $0.2 million.
- Margins and costs: Operating margin improved to 14.4% from 13.4%, primarily reflecting U.S. improvement. Gross margin rate edged down, while SG&A as a share of sales improved to 29.4% from 29.7%. Other operating income rose to $40.2 million from $32.8 million, primarily due to increased interest income on higher customer receivable balances.
Liquidity, debt and capital
- Cash and cash equivalents were $399.0 million at April 28, versus $486.8 million at January 28, 2012 and $394.1 million a year earlier. The company reported no loans or overdrafts at quarter-end; net cash was $399.0 million.
- The $400 million five-year revolving credit facility, maturing May 2016, was undrawn, with no intra-period borrowings. Standby letters of credit totaled $8.2 million. The facility includes leverage and fixed-charge coverage covenants.
- Operating cash flow fell mainly because of working-capital movements, including inventory purchases, payments of expenses and income taxes, and timing-related decreases in accrued liabilities and accounts payable. Receivables declined $63.5 million during the quarter, while inventory increased $25.6 million.
- Financing cash outflow was $102.6 million, including $90.7 million for share repurchases. The company repurchased 1.94 million shares at an average $46.73; $196.6 million remained authorized for future repurchases. A $0.12-per-share dividend was approved for payment May 29, 2012.
Material changes, outlook and risks
- Management attributed an estimated $32 million, or 370 basis points, of same-store sales impact to the calendar shift of Mother’s Day, which moved a key U.S. promotion into Q2. The company also said a $4.7 million U.S. net bad-debt expense from a change in billing-cycle timing was expected to be offset by a broadly similar benefit in other operating income in Q4 FY2013.
- U.S. sales benefited from branded and exclusive merchandise, including bridal. U.K. same-store sales increased 1.2%, supported by promotional activity and merchandising, but U.K. gross margin was pressured by promotions, mix and currency effects. Management provided no formal full-year financial guidance in the supplied filing text.
- Seasonality is significant: the fourth quarter normally generates about 40% of annual sales and a larger share of operating income, particularly in the U.K. First-quarter results should be viewed in that context.
- Customer in-house financing receivables were $1,016.3 million net. The allowance was $70.8 million; receivables more than 90 days past due were fully reserved. Credit performance and consumer financial condition remain important risks.
- Signet uses foreign-currency and precious-metal derivatives to manage exposures, not for trading. Commodity contracts had a $193.9 million notional amount; foreign-currency contracts had a $57.6 million notional amount. The quarter included a $12.9 million loss recognized in OCI on cash-flow hedges, before amounts reclassified into earnings.
- Two employment-related matters involving Sterling Jewelers allege gender discrimination in pay and promotions: a private class-action arbitration and an EEOC lawsuit. Discovery was ongoing; Signet denied the allegations, and the company said the outcome and any loss could not be estimated.
- Management stated disclosure controls were effective as of April 28, 2012 and reported no material change in internal control over financial reporting. The filing identified economic conditions, competition, merchandise costs, consumer credit, currency, seasonality, IT security and other risks.
Most important facts for investors to verify
- Whether the Mother’s Day timing shift and billing-cycle bad-debt effect reversed as management anticipated in later quarters.
- Trends in U.S. customer-credit receivables, delinquency, loss provisions and collection rates, given the large in-house financing portfolio.
- Whether operating cash flow recovers after the quarter’s substantial working-capital outflows and whether inventory levels remain well managed.
- U.K. sales, gross margin and operating-loss trends, and the effect of promotional activity and currency movements.
- Progress and potential exposure in the employment-related legal proceedings; the filing provides no estimable loss range.
- Use of remaining share-repurchase authorization, cash levels and compliance with credit-facility covenants.