Business context and reporting period
Signet Jewelers Limited’s Form 10-K covers the 52-week fiscal year ended January 28, 2012 (Fiscal 2012); fourth-quarter comparisons are for the 13 weeks ended that date. Signet operates specialty jewelry stores in the US and UK, with US operations generating about 81% of annual sales. It operated 1,318 US stores and 535 UK stores at year-end.
Financial performance and liquidity
| Metric | Fiscal 2012 | Prior comparable period |
|---|---|---|
| Sales | $3,749.2 million | $3,437.4 million; up 9.1% |
| Same-store sales | Up 9.0% | Up 6.7% |
| Gross margin | $1,437.6 million; 38.3% of sales | $1,242.9 million; 36.2% |
| Operating income and margin | $507.4 million; 13.5% | $372.5 million; 10.8% |
| Net income | $324.4 million | $200.4 million |
| Diluted EPS | $3.73 | $2.32 |
| Cash from operating activities | $325.2 million | $323.1 million |
| Free cash flow | $227.4 million | $315.0 million, excluding the prior-year make-whole payment |
Sales rose 9.1% and operating income rose 36.2%. Gross margin improved mainly through store occupancy cost leverage, lower US bad debt expense and improved inventory-related costs; price increases largely offset higher commodity costs. SG&A increased 7.8% to $1,056.7 million, but declined to 28.2% of sales from 28.5%.
The US division delivered sales of $3,034.1 million, up 10.6%, and same-store sales growth of 11.1%. UK sales were $715.1 million, up 3.2% as reported but down 0.1% at constant exchange rates; UK same-store sales grew 0.9%. Total eCommerce sales increased 36.5% to $92.3 million.
Year-end cash was $486.8 million, versus $302.1 million a year earlier. Signet had no loans, overdrafts or long-term debt and reported net cash of $486.8 million. Its $400 million revolving credit facility was undrawn apart from $8.2 million of letters of credit. Working capital was $2,149.1 million. Receivables and inventory increased by $152.5 million and $115.2 million, respectively, during the year, contributing to cash-flow demands. Total operating lease commitments were $2,001.5 million.
Fourth quarter and changes versus prior period
Fourth-quarter sales were $1,353.8 million, up 6.6%, with same-store sales up 6.9%. Operating income increased 15.9% to $243.9 million, and net income rose 48.6% to $156.6 million. The prior-year quarter included a $47.5 million debt prepayment make-whole charge; excluding that unusual item, management reported fourth-quarter net income growth of 16.1% and diluted EPS growth of 15.5%.
Full-year reported pretax income increased 67.1% and diluted EPS increased 60.8%, but comparison is affected by the same $47.5 million make-whole charge in Fiscal 2011. Excluding it, pretax income rose 44.3% and diluted EPS rose 40.2%. The prior-year debt was prepaid in November 2010, reducing Fiscal 2012 net interest expense to $5.3 million from $72.1 million.
Outlook, risks and contingencies
For Fiscal 2013, management targeted sales growth and profitable market-share gains, a gross margin rate broadly similar to Fiscal 2012, and at least maintenance of the SG&A-to-sales ratio while increasing advertising and supporting new initiatives. Planned capital investment was $145 million to $165 million, including 45 US store openings and approximately 110 remodels or relocations. Management expected productivity and pricing to largely offset diamond and gold cost increases. It described the US economy as showing signs of strengthening but expected no near-term improvement in the UK economy.
Key risks include discretionary consumer spending and the highly seasonal Holiday quarter; the performance and collectability of Signet’s US customer-finance portfolio; diamond and gold cost, supply and sourcing risks; competition and pricing pressure; UK pound/dollar exchange-rate movements; supplier disruptions; and cybersecurity, regulatory and reputational risks. About 56% of US sales used Signet-provided financing. US net bad debt declined to 3.4% of US sales from 4.2%, while US finance receivables grew.
Two employment-related matters remain unresolved: a private class-action arbitration alleging discriminatory compensation and promotions, and an EEOC lawsuit alleging gender discrimination in pay and promotions. Signet denies the allegations; the filing states that neither outcome nor loss amount can be estimated. The company also disclosed potential exposure under assigned or sublet UK leases, with historical claims described as small and not material. Fiscal 2012 included a $1.4 million asset impairment charge. The auditor issued an unqualified opinion on the financial statements and internal controls; management reported effective controls.
Most important facts for investors to verify
- Whether sales and margin momentum can be sustained, particularly in the US and through the seasonal fourth quarter.
- How higher commodity costs, pricing and inventory turns affect gross margin and cash requirements.
- Credit-portfolio growth, delinquency and loss trends, and the assumptions underlying the allowance for uncollectible receivables.
- Progress and returns from the planned Fiscal 2013 capital program, alongside the $300 million share repurchase authorization and increased quarterly dividend.
- Developments in the employment cases, consumer-credit regulation and supply-chain sourcing requirements.
- The difference between reported and adjusted comparisons, especially the effect of the prior-year $47.5 million make-whole charge.