Signet Jewelers Limited — Form 10-Q Summary
Business context and reporting period
Signet is a jewelry retailer operating in the U.S. and U.K. through brands including Kay, Jared, H.Samuel and Ernest Jones. This unaudited report covers the 13 weeks ended May 4, 2013 (Fiscal 2014 first quarter), compared mainly with the 13 weeks ended April 28, 2012. Fiscal 2014 is a 52-week year ending February 1, 2014.
Financial performance and liquidity
| Metric | Quarter ended May 4, 2013 | Comparable 2012 quarter |
|---|---|---|
| Sales | $993.6 million | $900.0 million |
| Gross margin | $382.8 million; 38.5% of sales | $353.7 million; 39.3% |
| Operating income | $142.8 million; 14.4% of sales | $129.4 million; 14.4% |
| Net income | $91.8 million; 9.2% of sales | $82.5 million; 9.2% |
| Diluted EPS | $1.13 | $0.96 |
| Operating cash flow | $45.1 million | $34.0 million |
| Capital expenditures | $23.2 million | $18.6 million |
| Free cash flow (company-defined, non-GAAP) | $21.9 million | $15.4 million |
Same-store sales rose 6.4%; reported sales increased 10.4%. U.S. sales rose 14.3% to $858.6 million, including $34.0 million from Ultra. U.K. sales fell 9.1% to $135.0 million, including a 3.6% adverse currency translation impact. E-commerce sales increased 40.7% to $31.1 million.
Gross margin declined 80 basis points, reflecting Ultra’s lower initial margin and mix and promotional effects in the core business. SG&A rose to $287.0 million but fell as a share of sales to 28.9% from 29.4%. Higher other operating income, mainly from interest earned on higher customer receivables, also supported operating income. Net income increased 11.3%; diluted EPS rose 17.7%, supported in part by lower weighted-average shares outstanding following repurchases.
Cash and cash equivalents were $263.7 million at May 4, 2013, down from $301.0 million at February 2, 2013. Loans and overdrafts were $5.7 million, giving company-defined net cash of $258.0 million. The $400 million revolving facility, expiring May 2016, was undrawn; $9.5 million of standby letters of credit were outstanding. No material change in contractual obligations was reported.
Material changes versus the comparable period
- U.S. same-store sales increased 8.1%; U.K. same-store sales declined 2.3%. U.S. growth reflected broad-based strength, while U.K. weakness was concentrated particularly at H.Samuel.
- Ultra contributed $34.0 million in sales and a $3.8 million operating loss (net loss of $2.3 million; diluted EPS impact of approximately negative $0.03). Management said Ultra’s lower margin reflected lower store productivity and integration effects, and expected improvement as integration and conversion to Kay outlets progressed.
- Inventory increased $54.7 million during the quarter, versus $25.6 million in the prior-year quarter. Management attributed much of the year-over-year balance-sheet increase to Ultra inventory and rough diamonds held for strategic sourcing.
- The company repurchased 749,245 shares for $50.1 million and completed its $350 million repurchase program. The quarterly dividend was raised to $0.15 per share from $0.12.
Outlook, commentary, risks and unusual items
The filing provides no quantified earnings or sales guidance. Management noted that Ultra margins should improve with integration and conversion work. Signet’s business is highly seasonal: approximately 40% of annual sales and 45%–50% of operating income normally occur in the fourth quarter, with December the key sales month.
Signet cited risks including consumer demand and credit quality, competition, diamond and precious-metal costs and availability, currency movements, consumer-credit regulation, seasonality, information-technology and control disruptions, and estimates for extended-service plans and pensions. Its U.S. customer in-house finance receivables were $1,145.9 million net; the allowance was $79.6 million, and net bad-debt expense was 2.5% of U.S. sales, unchanged year over year.
An unusual hedging item was a $19.6 million loss associated with terminated commodity forward contracts, recognized in other comprehensive income; accumulated OCI included $19.3 million of commodity-derivative losses at quarter-end. The company also faces ongoing class and EEOC gender-discrimination proceedings involving its U.S. subsidiary. Signet denies the allegations; it said the outcome and potential loss could not be estimated.
Management reported effective disclosure controls as of May 4, 2013, and no material change in internal control over financial reporting. It reported no material change in risk factors from its Fiscal 2013 Form 10-K.
Most important facts for investors to verify
- Whether U.S. sales momentum and the 6.4% company-wide same-store sales increase persist, and whether U.K. weakness improves.
- Whether Ultra integration and store conversions deliver the expected margin improvement, given its reported quarterly operating loss.
- Trends in customer receivables, delinquency and credit losses, and the adequacy of the allowance for credit losses.
- Inventory growth, including Ultra and strategic-source diamond inventory, and its implications for cash conversion and margins.
- Commodity-hedge losses, future hedge settlements and the timing of reclassification into earnings.
- Developments in the employment-related legal proceedings, for which the company could not estimate a loss.