Signet Jewelers Limited — Form 10-Q Summary
Reporting period: Fiscal 2014 second quarter, the 13 weeks ended August 3, 2013; year to date (YTD), the 26 weeks ended August 3, 2013. Comparatives are the corresponding periods ended July 28, 2012. Amounts are in U.S. dollars unless stated otherwise. Signet operates jewelry retail businesses in the U.S. and U.K., including Kay, Jared, H.Samuel and Ernest Jones; Ultra, acquired in October 2012, is included in current-period results.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | YTD FY2014 | YTD FY2013 |
|---|---|---|---|---|
| Sales | $880.2 million | $853.9 million | $1,873.8 million | $1,753.9 million |
| Gross margin | $309.7 million; 35.2% | $311.2 million; 36.4% | $692.5 million; 37.0% | $664.9 million; 37.9% |
| Operating income | $105.5 million; 12.0% | $110.9 million; 13.0% | $248.3 million; 13.3% | $240.3 million; 13.7% |
| Net income | $67.4 million | $70.7 million | $159.2 million | $153.2 million |
| Diluted EPS | $0.84 | $0.85 | $1.97 | $1.81 |
| Operating cash flow | $13.4 million | $82.8 million | $58.5 million | $116.8 million |
| Free cash flow (non-GAAP) | $(17.0) million | $46.6 million | $4.9 million | $62.0 million |
- Quarterly sales and demand: Reported sales rose 3.1%; same-store sales increased 3.6%, while e-commerce sales grew 28.9% to $31.2 million. U.S. same-store sales rose 4.9%; U.K. same-store sales fell 2.4%. U.S. growth was led by bridal, colored diamonds and watches. U.K. results faced weaker traffic and bead sales, store closures, lower Rolex availability and unfavorable currency translation.
- YTD sales: Reported sales grew 6.8%, and same-store sales increased 5.1%; e-commerce sales rose 34.6% to $62.3 million. Reported U.S. sales increased 10.1%, including Ultra; U.K. sales declined 8.8% as reported and 5.8% at constant exchange rates.
- Profitability: Q2 net income and operating income declined despite higher sales. Gross margin rate fell 120 basis points, reflecting Ultra’s lower margin, merchandise margin pressure and occupancy-cost deleverage. SG&A rose $10.2 million in Q2, including $13.5 million attributable to Ultra. YTD net income increased, but gross and operating margins narrowed.
- Ultra: In Q2, Ultra contributed $29.5 million in sales and a $7.8 million operating loss; excluding Ultra, operating income was $113.3 million, up 2.2%, and diluted EPS was $0.90. YTD Ultra contributed $63.5 million in sales and an $11.6 million operating loss; excluding Ultra, operating income was $259.9 million, up 8.2%, and diluted EPS was $2.06. Management said Ultra’s lower productivity and integration costs weighed on margins, and expected Ultra SG&A to decline as integration progressed.
Financial position, cash flow and capital allocation
- At August 3, 2013, cash and cash equivalents were $212.9 million, versus $301.0 million at February 2, 2013. Net cash, a company-defined non-GAAP measure, was $211.2 million after $1.7 million of loans and overdrafts.
- The $400 million revolving credit facility was undrawn, with no intra-period borrowings. Standby letters of credit were $9.5 million. The facility matures in May 2016 and includes leverage and fixed-charge coverage covenants; the filing reports compliance status only indirectly and does not provide actual covenant ratios.
- YTD operating cash flow fell to $58.5 million from $116.8 million. Management cited inventory growth, payment timing for accounts payable, higher tax payments and seasonal liability movements. Inventory-related cash use was $57.4 million, including $28.5 million related to closed hedges to be recognized in future earnings as inventory turns.
- YTD capital expenditure was $53.6 million. Financing cash outflow included $75.1 million in share repurchases and $21.9 million in dividends paid. The Board authorized a new $350 million repurchase program in June; $325.0 million remained at quarter-end. The quarterly dividend was $0.15 per share, up from $0.12.
- Accounts receivable, primarily U.S. customer in-house financing, totaled $1,152.1 million net. The U.S. credit-loss allowance was $89.1 million, or 7.2% of the evaluated receivable balance, compared with 6.8% at February 2, 2013. Q2 U.S. net bad-debt expense was 4.9% of sales versus 4.5% a year earlier; management cited receivable growth, slightly weaker collection efficiency and a changed credit mix.
Outlook, risks and contingencies
- The filing provides no specific full-year earnings, sales or margin guidance. Management emphasized that the business is highly seasonal: roughly 40% of annual sales and 45%–50% of annual operating income normally occur in Q4, with December the most important sales month.
- Management identified exposure to consumer credit conditions, competition, jewelry and precious-metal costs and availability, foreign exchange, consumer demand, seasonality, information-technology and control disruptions, and estimates for service plans, pensions and other accounting items.
- Signet uses currency and commodity derivatives for risk management. It had no commodity derivative contracts outstanding at August 3, 2013. Commodity hedge losses in accumulated other comprehensive income included losses on terminated contracts; approximately $22.1 million of net pre-tax derivative losses were expected to be reclassified into earnings over the next 12 months.
- Two gender-discrimination matters concerning U.S. store-level pay and promotions remained unresolved: a private class-action proceeding in arbitration and an EEOC lawsuit. Signet denied the allegations and said it was defending the cases; the potential outcome and loss could not be estimated.
- The company stated that its market-risk profile had not materially changed since February 2, 2013, and that there were no material changes to previously disclosed risk factors or contractual obligations outside the ordinary course. Management concluded disclosure controls were effective as of August 3, 2013.
Most important facts for investors to verify
- Whether U.S. sales and customer-financing growth can sustain performance while the receivable balance, allowance and bad-debt ratio rise.
- Whether Ultra integration improves its operating results and margins, given its reported operating losses and lower gross margin.
- Whether the U.K. division stabilizes after same-store sales declines, store closures and reduced Rolex availability.
- Whether cash conversion improves after the substantial YTD decline in operating and free cash flow, and how planned repurchases and dividends affect liquidity.
- How the gender-discrimination proceedings develop and whether any loss exposure becomes estimable.
- The timing and earnings impact of the expected $22.1 million pre-tax derivative-loss reclassification.