Signet Jewelers Limited — Q1 Fiscal 2018 Form 10-Q
Reporting period: 13 weeks ended April 29, 2017; comparative period was the 13 weeks ended April 30, 2016. Figures are in U.S. dollars unless noted. The filing is unaudited. Signet operated 3,665 stores and kiosks across its Sterling, Zale, Piercing Pagoda and UK Jewelry businesses, and noted that results are highly seasonal, with nearly 40% of annual sales normally occurring in the fourth quarter.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Sales | $1,403.4 million | $1,578.9 million |
| Same-store sales | Down 11.5% | Up 2.4% |
| Gross margin | $491.2 million; 35.0% of sales | $600.4 million; 38.0% |
| Operating income and margin | $115.3 million; 8.2% | $212.0 million; 13.4% |
| Net income | $78.5 million | $146.8 million |
| Net income attributable to common shareholders | $70.3 million | $146.8 million |
| Diluted EPS | $1.03 | $1.87 |
| Net cash from operating activities | $56.8 million | $114.4 million |
| Free cash flow, as defined by Signet | $0.6 million | $75.1 million |
- Sales fell 11.1% reported and 10.1% at constant exchange rates. Management attributed about $51 million, or 330 basis points of same-store sales, to the later timing of Mother’s Day; it estimated the calendar shift reduced diluted EPS by $0.17.
- Gross margin rate declined 300 basis points, mainly from lower sales and fixed-cost deleverage, including store occupancy; Sterling also experienced higher bad-debt expense. SG&A dollars decreased to $452.8 million, but SG&A rose to 32.3% of sales from 29.3% as sales fell.
- Segment sales and operating income: Sterling $871.0 million and $129.5 million; Zale Jewelry $333.7 million and $2.1 million; Piercing Pagoda $69.7 million and $3.2 million; UK Jewelry $122.5 million and a $2.5 million operating loss. Sterling operating income fell from $198.3 million; Zale Jewelry from $18.3 million; and Piercing Pagoda from $7.8 million.
- Interest expense was $12.6 million versus $11.8 million. The effective tax rate was 23.6%, compared with 26.7%.
Balance sheet, liquidity and capital
- At April 29, 2017, cash was $99.7 million; accounts receivable, primarily customer in-house financing, were $1,726.3 million; inventory was $2,432.4 million; and current assets totaled $4,507.8 million versus current liabilities of $1,015.9 million.
- Total debt, including loans and overdrafts, was $1,451.3 million; reported net debt was $1,343.4 million. Debt included $600 million under the securitization facility, $398.8 million of senior notes, $344.1 million of term loans, $63 million drawn on the revolving facility and $45.4 million of bank overdrafts. The company reported compliance with all debt covenants.
- Operating cash flow decreased year over year despite $132.0 million of cash generated by lower receivables. Capital spending was $56.2 million, compared with $39.3 million a year earlier. Cash increased $3.8 million during the quarter.
- Sterling’s customer-credit indicators weakened year over year: average monthly collections were 11.4% versus 12.3%; net charge-offs were 2.9% versus 2.6%; non-performing receivables were 4.0% versus 3.6%; and the allowance was 7.0% versus 6.6% of ending receivables. Net bad-debt expense rose to $42.6 million from $33.6 million.
- Common dividends declared were $0.31 per share, up from $0.26. Preferred shares carry a 5% cumulative dividend; $8.2 million of preferred dividends and related deemed dividend reduced income attributable to common shareholders. No common shares were repurchased under the announced program during the quarter.
Outlook, developments and risks
- Signet forecast a Fiscal 2018 effective tax rate of 24%–25%; the filing did not provide full-year sales or earnings guidance. The company planned to close 165–170 stores and open 90–115 during Fiscal 2018, targeting flat to 1% lower selling square footage.
- On May 25, 2017, Signet agreed to sell the approximately $1 billion prime-only portion of its Sterling private-label credit portfolio to Comenity Bank, subject to regulatory approval and other closing conditions; closing was expected in October 2017. Signet expected a gain upon reclassification of the receivables as held for sale and planned to repay its $600 million securitization facility when the transaction is finalized. A separate letter of intent contemplated Genesis servicing existing non-prime accounts; definitive terms remained to be negotiated.
- The ongoing gender-pay and promotion arbitration had 10,456 employee opt-ins; Signet said it could not estimate an outcome or potential loss. The EEOC matter was resolved by a May 2017 consent decree imposing employment-practice, training, reporting and compliance obligations for three years and three months, with no monetary payment required. Consolidated shareholder securities lawsuits remained pending, and the company said potential liability could not be estimated.
- Management cited soft Valentine’s Day demand, lower mall traffic, delayed tax refunds, consumer spending, credit quality, foreign exchange, commodity costs, reputation, competition and technology/security risks. It said no material changes had occurred to the risk factors in its prior Form 10-K. Disclosure controls were concluded effective as of April 29, 2017.
Most important facts for investors to verify
- Whether sales and traffic trends improve, and how much of the reported decline was attributable to the holiday-calendar shift versus underlying demand.
- Credit portfolio performance, including collections, delinquencies, charge-offs and allowance adequacy, and the terms, approvals, timing and accounting effects of the Comenity transaction.
- Liquidity and debt after the planned portfolio sale and securitization repayment, including any effects on financing income and earnings.
- Progress and potential exposure in the employment arbitration and shareholder litigation, as well as compliance costs under the EEOC consent decree.
- Whether planned store closures, capital spending and other operating actions stabilize margins and cash flow through the seasonally important holiday quarter.