Signet Jewelers Limited — Q2 Fiscal 2012 Form 10-Q
Reporting period: 13 weeks ended July 30, 2011; year-to-date (YTD) covers 26 weeks. Amounts are in U.S. dollars. Fiscal 2012 ends January 28, 2012. Signet operates U.S. and U.K. jewelry retail businesses.
Financial results
| Metric | Q2 FY2012 | Q2 FY2011 | YTD FY2012 | YTD FY2011 |
|---|---|---|---|---|
| Sales ($m) | 797.6 | 719.7 | 1,684.9 | 1,525.1 |
| Gross margin ($m; % of sales) | 294.8; 37.0% | 237.2; 33.0% | 644.5; 38.3% | 530.8; 34.8% |
| Operating income ($m; % of sales) | 102.3; 12.8% | 60.7; 8.5% | 221.0; 13.1% | 143.5; 9.4% |
| Net income ($m) | 66.3 | 38.7 | 141.7 | 89.0 |
| Diluted EPS | $0.76 | $0.45 | $1.63 | $1.03 |
| Operating cash flow ($m) | 86.8 | 70.4 | 192.1 | 254.6 |
| Free cash flow ($m; company-defined non-GAAP) | 61.4 | 62.3 | 153.8 | 240.2 |
- Q2 sales rose 10.8% reported and 9.0% at constant exchange rates; same-store sales increased 9.9%. YTD reported sales grew 10.5% and same-store sales rose 10.1%.
- The U.S. drove performance: Q2 same-store sales increased 12.2% and U.S. operating income was $104.4m, versus $2.8m in the U.K. U.K. same-store sales rose 1.4%, but U.K. operating income declined from $4.7m to $2.8m. Stronger sterling increased reported U.K. sales.
- Q2 gross margin rate improved 400 basis points; management cited improved U.S. merchandise margins, lower discounting, better bad-debt performance and store-cost leverage. Higher commodity costs and VAT pressured U.K. merchandise margin.
- Q2 SG&A was $224.5m, up 10.2%, including increased advertising, store labor, 401(k) costs, IT and credit infrastructure investment. Other operating income rose to $32.0m, primarily on higher interest income from customer receivables.
Cash, debt and liquidity
- At July 30, 2011, cash and cash equivalents were $440.2m; short-term loans and overdrafts were $13.1m, with no long-term debt. Company-defined net cash was $427.1m.
- Signet had a new $400m five-year unsecured revolving credit facility, undrawn at period-end, with a potential $200m expansion option subject to conditions. Covenants require a leverage ratio no greater than 2.50:1 and fixed-charge coverage of at least 1.40:1.
- YTD operating cash flow fell to $192.1m from $254.6m, mainly reflecting a much smaller cash contribution from working-capital changes. Investing outflow rose to $38.3m, including $30.1m of property and equipment purchases.
- Accounts receivable were $906.8m, mainly U.S. customer financing receivables; inventories were $1,202.8m. The allowance for credit losses on U.S. in-house finance receivables was $67.8m. Management reported an improved YTD net bad-debt-to-U.S.-sales ratio of 2.9%, versus 3.8% a year earlier.
Outlook, risks and unusual items
- Management raised its FY2012 free-cash-flow estimate to $175m–$225m from $150m–$200m. It gave an anticipated effective tax rate of approximately 35.5%. No sales or earnings guidance is stated in the supplied filing text.
- Management said the U.S. consumer environment was stronger than the challenging U.K. environment and was monitoring possible effects of financial-market volatility. The business is highly seasonal: about 40% of annual sales normally occur in Q4, with December the most important month.
- Key exposures include consumer credit quality, gold and other commodity costs, foreign exchange, consumer demand, competition, and seasonal execution. Signet hedges some precious-metal and foreign-currency exposures; diamond price fluctuations are not hedged. It also noted potential counterparty risk on cash deposits amid financial-market instability.
- A U.S. employment-discrimination class action and an EEOC suit allege gender discrimination in pay and promotion practices. Signet denies the allegations and intends to defend them; the Second Circuit reversed a lower-court ruling on class arbitration, and Signet’s rehearing petition was pending.
- Signet corrected prior-period extended-service-plan accounting: it extended the deferral period and changed revenue and direct-cost recognition. Management said prior periods were not materially misstated, but the cumulative adjustment would be material to FY2011; comparative figures were adjusted.
- Q2 interest expense included a $1.3m write-off of deferred financing fees related to replacing the prior credit facility. The filing reports favorable recognition of tax benefits but gives differing amounts: the tax note cites $1.4m for the YTD reserve reversal, while MD&A cites $1.9m for favorable recognition in Q2.
- The board declared a quarterly dividend of $0.10 per share on August 24, 2011, payable November 29, 2011. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the tax-benefit amounts and confirm the effects of the extended-service-plan correction in the comparative financial statements.
- Track U.S. finance-receivable delinquency, loss allowances and collections, alongside the continued growth in receivables.
- Assess whether U.S. sales and margin strength can persist, and whether the U.K. business can stabilize despite weak consumer conditions and margin pressure.
- Compare realized cash flow and capital spending with the $175m–$225m FY2012 free-cash-flow estimate; review revolver covenant headroom.
- Monitor the employment-related litigation, commodity and foreign-exchange exposures, and the seasonal dependence on holiday-quarter performance.