Signet Jewelers Limited — Q3 Fiscal 2019 Form 10-Q
Reporting period: The 13 weeks ended November 3, 2018; year-to-date figures cover 39 weeks. Comparisons are with the 13 and 39 weeks ended October 28, 2017. Signet is a jewelry retailer operating primarily in the U.S., U.K. and Canada, with North America, International and Other reporting segments.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | 39 weeks FY2019 | 39 weeks FY2018 |
|---|---|---|---|---|
| Sales | $1,191.7 million | $1,156.9 million | $4,092.4 million | $3,959.9 million |
| Gross margin | $371.2 million; 31.1% | $321.1 million; 27.8% | $1,283.0 million; 31.4% | $1,270.2 million; 32.1% |
| Operating income (loss) | $(48.8) million | $5.5 million | $(681.1) million | $256.4 million |
| Net income (loss) | $(29.9) million | $(3.9) million | $(549.5) million | $168.0 million |
| EPS, diluted | $(0.74) | $(0.20) | $(10.31) | $2.24 |
Q3 sales rose 3.0% as reported; same-store sales increased 1.6%. E-commerce sales were $125.0 million, up 54.9%, and represented 10.5% of quarterly sales. North America sales grew 4.1%; International sales fell 5.5% as reported. Year-to-date same-store sales rose 1.0%.
Q3 gross margin improved year over year, helped substantially by no longer recognizing bad-debt expense and late-charge income following the credit outsourcing transition. SG&A rose to $410.3 million (34.4% of sales) from $375.9 million (32.5%), reflecting higher credit-transition costs, advertising and incentive compensation. Management attributed the quarterly operating loss to credit outsourcing impacts, costs and mix, and $9.5 million of restructuring charges.
The year-to-date operating loss includes $448.7 million of non-cash goodwill and intangible impairments, $98.8 million of restructuring expenses (including inventory charges), and $160.4 million of valuation losses on non-prime receivables. Adjusted EBITDA was $166.3 million year to date, versus $392.7 million; this non-GAAP measure excludes those and other specified charges. Q3 adjusted EBITDA was $4.0 million versus $52.0 million.
Cash flow, balance sheet and debt
- Year-to-date operating cash flow was $313.5 million, down from $1,482.3 million. It included $445.5 million of proceeds from the sale of non-prime receivables; the prior-year period included $960.2 million from the prime-receivables sale. Inventory absorbed $456.6 million of cash.
- Year-to-date capital expenditures were $93.4 million and reported free cash flow was $220.1 million. Cash and cash equivalents were $130.7 million at November 3, 2018, versus $225.1 million at fiscal year-end.
- Total debt was $989.0 million, including $282.0 million drawn on the revolving facility; net debt was $852.3 million. Current loans and overdrafts were $322.6 million and long-term debt was $660.4 million. The company reported compliance with debt covenants.
- Total current assets were $3,010.1 million and current liabilities $1,365.7 million; inventory was $2,647.1 million. Accounts receivable fell sharply following the sale of the in-house finance portfolios.
Material changes, outlook and risks
- Signet completed the sale of eligible non-prime in-house receivables in June 2018 at 72% of par, recording $160.4 million in valuation losses. It continues to originate non-prime credit for five years, with investment funds purchasing receivables forward; Genesis continues servicing.
- The three-year Signet Path to Brilliance transformation plan is expected to incur $170–$190 million in pre-tax charges, of which $80–$95 million are expected to be cash charges. Fiscal 2019 estimated charges were $129–$134 million, including $40–$45 million expected to be cash charges. The company anticipated approximately 200 net store closures in FY2019.
- Management expects the company to record an annual operating loss in FY2019, driven by first-quarter impairments and credit-outsourcing and transformation impacts. The fourth quarter typically generates 35–40% of annual sales; management expected operating profit to be almost entirely generated in that quarter. No specific full-year sales or EPS guidance is provided in the supplied filing text.
- Impairment estimates depend on projected cash flows, market valuation and other assumptions; further deterioration in sales trends or valuation inputs could lead to additional impairment. Signet also cited consumer demand, competition, commodity prices, foreign exchange, credit transition execution and technology/security disruptions among its risks.
- Employment-practices arbitration and shareholder litigation remain unresolved; the company said potential losses could not be estimated. The CFPB and New York Attorney General were discussing a possible settlement concerning credit practices and related products; Signet said it believed its practices were lawful and did not expect a material financial effect. The filing also disclosed approximately $2.8 billion of undiscounted operating lease commitments as of February 3, 2018; the company expected lease accounting adoption to significantly increase balance-sheet assets and liabilities.
Important facts for investors to verify
- Whether holiday-quarter sales and margins support management’s expectation that nearly all operating profit would be generated in Q4.
- Execution and cash cost of the Path to Brilliance plan, including store closures, inventory liquidation and projected savings.
- Credit-outsourcing economics, customer participation trends and performance of receivables sold, including the contingent deferred purchase price.
- Assumptions behind the $448.7 million impairment and the risk of further write-downs.
- Debt and seasonal revolver usage, cash generation excluding receivables-sale proceeds, and outcomes of pending litigation and regulatory discussions.