Signet Jewelers Limited — Form 10-Q summary
Business context and reporting period. Signet is a jewelry and watch retailer operating in the U.S. and U.K. through brands including Kay, Jared, H.Samuel and Ernest Jones. This filing covers the 13 weeks ended November 2, 2013 (fiscal 2014 third quarter) and the 39 weeks ended that date, compared with the corresponding periods ended October 27, 2012. The fiscal year ends February 1, 2014.
Financial performance and liquidity
| Metric | Third quarter | 39 weeks year to date |
|---|---|---|
| Sales | $771.4 million, up 7.7% | $2,645.2 million, up 7.1% |
| Same-store sales | Up 3.2% | Up 4.5% |
| Gross margin | $239.2 million; 31.0% of sales, versus 32.9% | $931.7 million; 35.2% of sales, versus 36.4% |
| Operating income | $51.6 million, down 1.7%; 6.7% of sales, versus 7.3% | $299.9 million, up 2.4%; 11.3% of sales, versus 11.9% |
| Net income | $33.6 million, down 3.7%; diluted EPS $0.42 versus $0.43 | $192.8 million, up 2.5%; diluted EPS $2.39 versus $2.26 |
| Operating cash flow | Used $80.4 million, versus $16.6 million used | Used $21.9 million, versus $100.2 million provided |
| Capital expenditures and free cash flow | Capital expenditures $53.3 million; free cash flow used $133.7 million, versus $62.7 million used | Capital expenditures $106.9 million; free cash flow used $128.8 million, versus $0.7 million used |
At November 2, cash was $87.8 million, down from $301.0 million at fiscal year-end. Loans and overdrafts totaled $46.0 million, including $35.0 million drawn on the $400 million revolving facility and $11.0 million of bank overdrafts; reported net cash was $41.8 million. The company said it complied with facility covenants and anticipated repaying the seasonal borrowing in the fourth quarter as holiday cash collections came in. The facility matures in May 2016.
Current assets were $3,013.7 million and current liabilities $842.7 million. Inventory was $1,644.9 million; U.S. customer in-house finance receivables, net, were $1,111.8 million. Shareholders’ equity was $2,386.2 million. The company declared dividends of $0.15 per share in the quarter and $0.45 year to date; it repurchased 1.50 million shares for $100.1 million year to date.
Material changes and operating drivers
- U.S. sales rose 9.8% in the quarter, with same-store sales up 4.2%; management cited strength in bridal, colored diamonds and watches. U.K. sales fell 0.9%, with same-store sales also down 0.9%.
- For the first 39 weeks, U.S. sales grew 10.0%, while U.K. sales declined 6.3% as reported, including a 2.1% adverse currency translation impact. U.K. same-store sales fell 1.9%; management cited store closures, lower sales at H.Samuel, fewer Rolex locations at Ernest Jones, and lower bead transactions.
- Ultra, acquired in October 2012, contributed $28.0 million of third-quarter sales but a $3.9 million operating loss; year to date it contributed $91.5 million of sales and a $15.5 million operating loss. Excluding Ultra, third-quarter operating income was $55.5 million and diluted EPS $0.45; year-to-date operating income was $315.4 million and diluted EPS $2.51. These are company-presented supplemental comparisons.
- Consolidated gross margin rate declined, partly because Ultra had lower productivity and margins, and because of gold-related hedge effects, promotional mix and lower inventory recovery. U.S. net bad-debt expense also rose as a share of U.S. sales, which Signet attributed to higher receivables from increased credit penetration and a changing credit-program mix.
- Year-to-date operating cash flow weakened mainly with inventory investment, lower accrued expenses, and higher income-tax payments. Inventory growth reflected Ultra, bridal expansion, diamond sourcing and new-store growth; higher accounts payable partly offset the cash use.
Outlook, risks and unusual items
- No formal sales or earnings guidance is provided in the filing. Management emphasizes seasonality: the fourth quarter normally generates about 40% of annual sales and 45%–50% of operating income, with December the most important sales month.
- Management expected to repay the $35.0 million revolving-facility borrowing in the fourth quarter as holiday sales were collected. The filing also gives an expected fiscal 2014 effective tax rate of 35.1%.
- Commodity hedge losses were notable: year-to-date OCI included $25.8 million of losses on commodity contracts terminated before maturity. Signet expected about $23.2 million of net pre-tax derivative losses to be reclassified into earnings within 12 months, including $9.8 million in fiscal fourth quarter.
- Signet identified risks including consumer and economic conditions, competition, diamond and precious-metal cost and availability, consumer-credit regulation and receivable performance, seasonality, foreign exchange, cybersecurity and information-technology disruption, and estimates for service-plan obligations and pensions.
- Two employment-related gender discrimination matters involving Sterling Jewelers remained pending—private claimants’ arbitration and an EEOC lawsuit. Signet denied the allegations; management said no outcome or loss amount could then be estimated.
- After quarter-end, on November 4, 2013, Signet acquired a diamond-polishing factory in Botswana for $9.1 million to expand sourcing and processing capabilities.
Important facts for investors to verify
- Whether holiday trading and collections support the expected repayment of seasonal borrowing, given reduced cash and negative year-to-date operating and free cash flow.
- Whether gross-margin pressure, U.S. credit losses and Ultra’s operating losses improve, and how much of reported growth is comparable-store growth versus acquisition and other non-same-store sales.
- The timing and income-statement effects of the expected derivative-loss reclassifications, including the stated $9.8 million fourth-quarter amount.
- Developments in the discrimination cases, for which the filing provides no estimable loss, and progress toward the stated fiscal 2014 tax rate.