Signet Jewelers Limited — Form 10-Q Summary
Business context and period: Signet is a global jewelry retailer operating primarily in the U.S., U.K. and Canada, through North America, International and Other segments. This filing covers the 13 and 26 weeks ended August 3, 2019 (Fiscal 2020 second quarter and year to date); comparisons are to the periods ended August 4, 2018. Figures are in U.S. dollars unless stated otherwise.
Financial performance
- Second-quarter sales: $1.364 billion, down 3.9% reported and 3.4% at constant currency. Same-store sales declined 1.5%. E-commerce sales rose 4.4% to $156.9 million, or 11.5% of sales.
- Second-quarter earnings: Gross margin was $458.7 million, or 33.6% of sales, versus $427.0 million, or 30.1%. Operating loss was $22.4 million versus $58.1 million; net loss was $36.1 million versus $23.0 million. Loss per diluted share was $0.86 versus $0.56. Adjusted operating income, a non-GAAP measure, was $53.1 million versus $48.6 million; adjusted EBITDA was $96.6 million versus $90.4 million.
- Year-to-date sales and earnings: Sales were $2.796 billion, down 3.6%; same-store sales declined 1.4%. Gross margin was $958.1 million, or 34.3% of sales, versus $911.8 million, or 31.4%. Operating loss was $25.0 million versus $632.3 million; net loss was $46.1 million versus $519.6 million. Diluted loss per share was $1.21 versus $9.27. Adjusted operating income was $77.3 million versus $72.7 million, and adjusted EBITDA was $160.4 million versus $162.3 million.
- Cash flow and liquidity: For the first half, operating cash flow was $246.6 million, capital expenditures were $52.2 million and free cash flow was $194.4 million, versus $452.6 million, $56.1 million and $396.5 million, respectively. The prior-year cash flow included $445.5 million of proceeds from the non-prime receivables sale. Cash was $271.5 million at August 3, 2019; net debt was $410.9 million.
- Debt: Total debt was $687.2 million, including $399.1 million of senior notes, $277.1 million of term loans and $11.0 million of overdrafts. The $700 million revolving facility was undrawn; the company reported compliance with its debt covenants.
- Other balance-sheet items: Inventory was $2.272 billion, down from $2.387 billion at February 2, 2019. Adoption of lease accounting added $1.729 billion of operating lease right-of-use assets and $1.824 billion of lease liabilities at quarter-end.
Material changes and operating drivers
- North America sales fell 3.6% in the quarter; same-store sales declined 1.0%. E-commerce grew, while brick-and-mortar same-store sales declined. Piercing Pagoda grew; Kay and Jared were weaker.
- International sales fell 13.3% reported and 8.9% at constant currency; same-store sales declined 7.0%. Management cited a difficult U.K. operating environment and fewer transactions.
- Gross-margin improvement versus the prior-year quarter partly reflects the prior period’s $63.2 million inventory restructuring charge; the current period recorded $4.4 million of related inventory charges. SGA fell, primarily on lower store staffing costs and transformation savings, partly offset by higher credit costs.
- The year-to-date operating comparison also reflects prior-year goodwill and intangible impairments of $448.7 million and $167.0 million of credit-transaction losses, versus a current-year $47.7 million goodwill adjustment.
Outlook, risks and unusual items
- Guidance and seasonality: Management expects Fiscal 2020’s full-year effective tax rate to be 17%–19%. The filing gives no specific sales or earnings guidance. The fourth quarter typically represents 35%–40% of annual sales; management expects operating profit to be almost entirely generated in that quarter.
- Transformation plan: The three-year Path to Brilliance plan is expected to incur $200–$220 million in pretax charges, including $105–$115 million in cash charges. Cumulative charges were $180.5 million through August 3, 2019. Signet expected approximately 150 store closures in Fiscal 2020; 66 locations had closed and 16 opened in the first half.
- Goodwill adjustment: Signet recorded a $47.7 million non-cash out-of-period charge related to an error in its Fiscal 2019 goodwill impairment calculation ($35.2 million for Zales and $12.5 million for R2Net). It reduced quarterly diluted EPS by $0.91. Signet said its interim impairment assessment identified no additional impairment, but noted certain goodwill and trade names could remain at risk if valuation assumptions weaken.
- Refinancing: The company announced plans for new, fully committed five-year, $1.6 billion asset-based credit facilities to refinance existing facilities, fund a tender offer for its 2024 notes, and support general corporate purposes. Completion remains subject to final documentation and customary conditions.
- Legal and regulatory matters: Employment-practices arbitration and shareholder securities litigation remain ongoing; the company said potential losses could not be estimated. An $11 million CFPB and New York Attorney General settlement payment was made in February 2019; compliance may entail further costs.
- Key risks: The filing highlights consumer demand, U.K. market and Brexit uncertainty, tariffs and trade tensions, credit outsourcing, further impairments, execution of the transformation plan, and legal and regulatory proceedings. Signet reported effective disclosure controls as of August 3, 2019.
Important facts for investors to verify
- Reconcile the $47.7 million out-of-period goodwill adjustment, its $0.91 per-share effect, and the related prior-period impairment calculation error.
- Track sales and same-store sales by segment, especially International performance, and whether e-commerce growth offsets store declines.
- Confirm execution, final terms and closing conditions for the proposed refinancing and tender offer.
- Monitor remaining Path to Brilliance costs, planned store closures, cash generation and lease obligations.
- Follow the outcomes of employment and shareholder litigation, ongoing regulatory compliance, and the potential for further impairment charges.