Signet Jewelers Limited — Q1 FY2020 Form 10-Q
Reporting period: 13 weeks ended May 4, 2019; comparable period ended May 5, 2018. Signet is a jewelry retailer operating primarily in North America and the UK, with 3,300 stores and kiosks at period-end. Its business is seasonal: the fourth quarter represents approximately 35%–40% of annual sales, and management expects operating profit to be generated almost entirely in that quarter.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Sales | $1,431.7 million | $1,480.6 million |
| Gross margin | $499.4 million; 34.9% | $484.8 million; 32.7% |
| Operating income (loss) | $(2.6) million | $(574.2) million |
| Net income (loss) | $(10.0) million | $(496.6) million |
| Net loss attributable to common shareholders / diluted EPS | $(18.2) million / $(0.35) | $(504.8) million / $(8.48) |
| Operating cash flow | $105.4 million | $27.9 million |
| Capital expenditures / free cash flow | $24.6 million / $80.8 million | $26.1 million / $1.8 million |
- Sales fell 3.3% reported and 2.6% at constant exchange rates; same-store sales declined 1.3%. E-commerce sales rose 5.3% to $154.3 million, or 10.8% of sales.
- Gross margin improved 220 basis points. Management attributed a 320-basis-point benefit to credit outsourcing, partly offset by third-party diamond sales and service-plan revenue timing.
- SG&A declined to $475.2 million but increased as a share of sales to 33.2% from 32.6%. Credit-transition costs and advertising contributed to the expense level.
- Adjusted EBITDA, a non-GAAP measure, was $63.8 million versus $71.9 million. Non-GAAP operating income was $24.2 million versus $24.1 million.
- Operating cash flow improved year over year, while cash and equivalents were $195.1 million at May 4, 2019, nearly unchanged from February 2, 2019.
Balance sheet, debt and liquidity
- Total debt was $687.8 million, including $399.1 million of senior notes, $286.0 million on the term loan and $2.7 million of overdrafts. Cash less loans and debt yielded net debt of $487.6 million, down from $598.1 million a year earlier.
- The $700 million revolving credit facility was undrawn. The credit facility matures in July 2021; $14.6 million of standby letters of credit reduced availability. The company reported compliance with debt covenants.
- Inventory was $2.394 billion. Current assets were $2.823 billion and current liabilities were $1.362 billion.
- Adoption of the lease accounting standard added $1.823 billion of operating lease right-of-use assets and $1.948 billion of operating lease liabilities at May 4, 2019. Lease costs for the quarter totaled $148.1 million.
- Series A redeemable convertible preferred shares had a $615.7 million carrying value and a 5% cumulative dividend; quarterly preferred dividends were $7.8 million. Common dividends declared were $0.37 per share.
Changes, outlook and notable items
- The prior-year comparison included $448.7 million of goodwill and intangible impairment charges and $143.1 million of credit-transaction charges. These largely explain the much smaller reported loss this quarter; the prior-year impairments were non-cash.
- The three-year Path to Brilliance transformation plan is expected to incur $200 million–$220 million of pre-tax charges, including $105 million–$115 million in cash charges. Q1 charges were $26.8 million, primarily for store closures, severance and professional services. Management expects approximately 150 net store closures in FY2020.
- Management expects a FY2020 effective tax rate of 12.0%–15.5%, expects to maintain the $0.37 quarterly common dividend, and does not anticipate share buybacks in FY2020. It expects adjusted leverage to exceed its 3.0x–3.5x long-term target in FY2020 and reach approximately 4.0x by FY2021 year-end.
- Management cited difficult UK trading conditions, lower transaction counts, and declines in legacy collections. North America same-store sales fell 0.9%; International same-store sales fell 5.2%.
- Impairment risk remains: the filing notes a subsequent-quarter decline in market valuation and warns that weaker sales trends or other valuation inputs could lead to further impairment charges.
- Legal matters include ongoing employment-arbitration and securities litigation; the company said potential losses could not be estimated. A shareholder derivative action dismissal was appealed. Sterling paid $10 million to the CFPB and $1 million to the New York Attorney General under a January 2019 consent order and continues compliance work.
- Other disclosed risks include consumer demand, credit-program transition and participation, tariffs on imported goods, UK/EU developments, foreign exchange and precious-metal prices, and execution of the transformation and omnichannel initiatives.
Investor verification priorities
- Assess underlying sales and margin trends, including store versus e-commerce performance and the effect of credit outsourcing.
- Review cash generation, inventory levels and working-capital movements, and distinguish recurring performance from timing effects and transformation costs.
- Track debt, lease obligations, covenant compliance, revolving-credit availability and progress toward management’s leverage targets.
- Verify store-closure execution, transformation cash costs and expected savings, and whether the outlook for a heavily fourth-quarter-weighted profit remains achievable.
- Monitor impairment assumptions and outcomes of the employment, securities and derivative litigation, along with ongoing CFPB consent-order compliance.