Signet Jewelers Limited — Form 10-Q Summary
Business context and reporting period
Signet is a jewelry retailer operating primarily in the United States, United Kingdom and Canada through Sterling Jewelers, Zale Jewelry, Piercing Pagoda, UK Jewelry and other businesses. This filing covers the 13 weeks ended April 30, 2016, the first quarter of fiscal 2017, compared with the 13 weeks ended May 2, 2015. Results are seasonal: nearly 40% of annual sales and normally 45%–55% of annual operating income occur in the fourth quarter.
Financial results and key metrics
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Sales | $1,578.9 million | $1,530.6 million |
| Same-store sales growth | 2.4% | 3.6% |
| Gross margin / rate | $600.4 million / 38.0% | $565.9 million / 37.0% |
| Operating income / margin | $212.0 million / 13.4% | $176.2 million / 11.5% |
| Net income | $146.8 million | $118.8 million |
| Diluted EPS | $1.87 | $1.48 |
| Operating cash flow | $114.4 million | $67.0 million |
| Free cash flow, company-defined non-GAAP | $75.1 million | $24.1 million |
- Sales rose 3.2% reported and 3.9% at constant exchange rates; same-store sales increased 2.4%. Growth came largely from branded bridal and diamond fashion jewelry. eCommerce sales were $80.1 million, 5.1% of sales.
- Gross margin rate improved 100 basis points. Management attributed adjusted gross-margin improvement to sourcing synergies, discount controls, favorable commodity costs and store-occupancy leverage. Operating margin expanded 190 basis points.
- Other operating income, net, increased to $74.3 million from $63.5 million, primarily reflecting higher interest income on customer receivables. Net interest expense was $11.8 million, versus $11.0 million.
- Cash and equivalents were $113.0 million at quarter-end, down from $137.7 million at fiscal year-end. Net debt was $1,308.6 million, versus $1,267.6 million a year earlier. Total debt and overdrafts were $1,430.6 million; long-term debt was $1,311.5 million.
- Current assets were $4,541.2 million and current liabilities $1,055.8 million. Current assets included $2,512.6 million of inventory and $1,689.3 million of receivables, primarily customer in-house financing.
Material changes versus the prior comparable period
- Net income increased 23.6% and diluted EPS rose from $1.48 to $1.87; average diluted shares declined to 78.7 million from 80.2 million, partly reflecting repurchases.
- Operating cash flow increased to $114.4 million, while capital spending was $39.3 million. The company-defined free cash flow measure increased to $75.1 million.
- Reported operating income included $5.3 million of purchase-accounting impacts and $5.3 million of integration costs. The prior-year period included $11.4 million of purchase-accounting impacts and $6.4 million of transaction and integration costs. Management’s adjusted figures are non-GAAP.
- Customer credit indicators warrant monitoring: net bad-debt expense rose to $33.6 million from $28.1 million; non-performing Sterling receivables were 3.6% of ending receivables versus 3.5%. The allowance was 6.6% of gross receivables versus 6.5%.
- The company repurchased $125.0 million of shares and declared a $0.26 per-share dividend, up from $0.22. It drew $44.0 million on its revolving credit facility; the prior-year quarter had no revolver balance reported.
Outlook, management commentary, risks and contingencies
- Management expected a fiscal 2017 effective tax rate of 27%–28%; the reported first-quarter rate was 26.7%. The filing provides no full-year sales, earnings or EPS guidance.
- Signet anticipated opening 145–178 stores gross (60–84 net of closures) in fiscal 2017, with net selling-space growth of 3%–4%, led by off-mall Kay and Jared stores. Planned closures include North American regional brands.
- Management cited IT modernization costs, consumer spending, competition, merchandise mix, customer credit quality, precious-metal and diamond costs, foreign exchange, seasonal concentration, cybersecurity and successful integration of Zale among relevant risks. It uses derivatives for currency, commodity and interest-rate risk, not trading.
- The $400 million revolving credit facility matures in 2019; $44.0 million was drawn at quarter-end, and $23.8 million of standby letters of credit reduced availability. The company reported compliance with debt covenants. On May 27, 2016, it extended the securitization facility’s revolving period by one year to May 2018.
- Significant employment litigation remains unresolved. A conditional Equal Pay Act collective action and Title VII-related proceedings involve Sterling Jewelers; the EEOC case was remanded for further proceedings and Signet sought Supreme Court review. A Zale wage-and-hour case received conditional collective and class certification. Signet said it could not estimate an outcome or possible loss or range of losses for the Sterling matters or the Zale case.
- The Delaware Supreme Court affirmed dismissal of the Zale acquisition stockholder litigation in May 2016. The appraisal action had previously settled, with $34.2 million paid in fiscal 2016.
- Management concluded disclosure controls were effective as of April 30, 2016, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track customer-financing performance, including bad-debt expense, charge-offs, collection rates, non-performing balances and the related interest income that supports operating results.
- Assess whether sales and margin gains persist, particularly given slower same-store sales growth versus the prior-year quarter and dependence on higher-priced merchandise mix and promotional execution.
- Review debt, revolving-credit availability, securitization renewal terms and cash needs alongside the substantial share-repurchase program and seasonal working-capital requirements.
- Monitor the employment and wage-and-hour litigation: potential exposure is unquantified in the filing.
- Distinguish GAAP results from management’s adjusted non-GAAP measures and account for purchase-accounting adjustments and integration costs in period comparisons.