Business context and reporting period
Signet Jewelers Limited is a jewelry retailer operating Sterling Jewelers, Zale Jewelry, Piercing Pagoda and UK Jewelry, among other activities. This 10-Q covers the 13 and 26 weeks ended August 1, 2015—Signet’s second quarter and first half of fiscal 2016, despite the request’s “2015 Q2” label. The prior comparable period ended August 2, 2014. Results are unaudited. Comparisons are affected by the May 2014 Zale acquisition: the current quarter includes 26 more days of Zale operations than the prior-year quarter.
Financial results and key metrics
Amounts below are in millions of U.S. dollars except per-share data. Percentages are calculated from reported figures.
| Metric | 13 weeks ended Aug. 1, 2015 | 13 weeks ended Aug. 2, 2014 | 26 weeks ended Aug. 1, 2015 | 26 weeks ended Aug. 2, 2014 |
|---|---|---|---|---|
| Sales | $1,410.6 | $1,225.9 | $2,941.2 | $2,282.0 |
| Gross margin | $490.8; 34.8% | $409.0; 33.4% | $1,056.7; 35.9% | $816.2; 35.8% |
| Operating income | $100.8; 7.2% | $83.5; 6.8% | $277.0; 9.4% | $234.2; 10.3% |
| Net income | $62.2 | $58.0 | $181.0 | $154.6 |
| Diluted EPS | $0.78 | $0.72 | $2.26 | $1.93 |
| Operating cash flow | $143.6 | $110.4 | $210.6 | $183.9 |
| Capital expenditures | $56.0 | $61.9 | $98.9 | $90.0 |
| Free cash flow (company-defined non-GAAP) | $87.6 | $48.5 | $111.7 | $93.9 |
- Quarterly sales increased 15.1%; same-store sales rose 4.2%. First-half sales increased 28.9%, with same-store sales up 3.8%. Acquisition timing substantially affects reported growth.
- Quarterly gross margin rate improved 1.4 percentage points; first-half rate was nearly flat. Management attributed adjusted gross-margin improvement principally to higher sales and favorable commodity costs.
- Quarterly net income rose 7.2%; first-half net income rose 17.1%. Reported operating margin declined 0.9 percentage point year over year in the first half, while reported EPS increased.
- Quarterly SG&A was $452.8 million (32.1% of sales), versus $379.2 million (31.0%). First-half SG&A was $906.0 million (30.8%), versus $689.7 million (30.2%). Increases reflect Zale, integration spending and other costs.
- At August 1, cash was $159.8 million; current assets were $4,256.5 million and current liabilities $1,137.5 million. Inventory was $2,414.2 million and customer receivables, primarily Sterling in-house financing, were $1,493.2 million.
- Balance-sheet long-term debt was $1,348.7 million; loans and overdrafts were $82.0 million. Company-defined net debt was $1,270.9 million. The $400 million revolving credit facility was undrawn, with $21.9 million of letters of credit reducing availability. The company reported compliance with debt covenants.
- First-half cash from operations rose to $210.6 million. Investing used $97.2 million, versus $1,519.4 million in the prior-year period, which included $1,429.2 million for the Zale acquisition. Financing used $147.6 million, including $81.9 million for share repurchases and $32.1 million in dividends.
Material changes versus the prior comparable period
- Zale’s additional days of operations drove a significant portion of reported sales growth; first-half Zale sales were $826.4 million, compared with $247.5 million in the prior period after acquisition.
- Quarterly adjusted operating income was $149.5 million, up 18.8%, and adjusted diluted EPS was $1.28, up 19.6%, using company-defined non-GAAP adjustments. For the first half, adjusted operating income rose 20.6% to $343.5 million and adjusted diluted EPS rose 23.3% to $2.91. These measures exclude acquisition accounting and transaction costs and are not GAAP results.
- Quarterly net interest expense fell to $11.1 million from $13.7 million, partly because the prior-year quarter included a $3.2 million bridge-facility fee write-off. First-half interest expense rose to $22.1 million from $15.5 million, reflecting acquisition financing.
- Quarterly effective tax rate was 30.7%, versus 16.9%; the appraisal settlement was a nondeductible item. First-half effective tax rate was 29.0%, versus 29.3%.
- Signet repurchased approximately 629,000 shares for $81.9 million during the first half. The dividend declared per share increased to $0.22 per quarter from $0.18.
Outlook, management commentary, risks and unusual items
- Management forecast a full-year fiscal 2016 effective tax rate of 28%–29%. The filing does not provide clear full-year revenue or earnings guidance.
- Management anticipated 90–110 store openings during fiscal 2016, or 30–35 net openings, with net selling-square-footage growth of 2%–3%, led principally by Kay and Jared off-mall locations. The filing also describes the business as highly seasonal: nearly 40% of annual sales and approximately 45%–55% of annual operating income normally occur in the fourth quarter.
- A second-quarter change to Sterling extended-service-plan accounting for ring sizing aligned policies with Zale. The change affected revenue recognition and increased reported same-store sales by 60 basis points; management said it added $0.05 to adjusted diluted EPS. Sterling recognizes these plan revenues over an estimated 17-year claims period.
- Signet accrued $34.2 million for settlement of Zale appraisal litigation. The settlement was agreed and the case dismissed on August 12, after the quarter-end; the accrual was recorded at August 1. The company also reported pending employment-discrimination and wage-and-hour matters for which potential outcomes or loss ranges could not be estimated, and pending litigation challenging the Zale acquisition.
- Key stated risks include consumer spending and credit quality, competition, precious-metal and diamond costs, foreign exchange, seasonal performance, integration and realization of Zale synergies, litigation, cybersecurity and reliability of estimates for service-plan obligations.
- Management said disclosure controls were effective as of August 1, 2015, and reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Separate underlying same-store performance from acquisition-driven growth and assess the comparability of the company’s adjusted, non-GAAP results.
- Review the effect and sustainability of the extended-service-plan revenue-recognition change, including its 60-basis-point same-store-sales and $0.05 adjusted-EPS impacts.
- Track Zale integration costs, operating performance and synergy realization; reconcile the $34.2 million appraisal settlement and other unusual costs to reported earnings.
- Monitor Sterling customer-credit delinquencies, allowances and collections, alongside inventory levels and cash conversion.
- Confirm debt maturities, securitization-facility renewal and covenant headroom; distinguish reported debt from the company’s net-debt measure.
- Follow developments in the employment and acquisition-related litigation, where the filing says possible losses cannot be estimated.