Signet Jewelers Limited — Form 10-Q Summary
Reporting period: First quarter of Fiscal 2019, the 13 weeks ended May 5, 2018; unaudited. Comparable period: 13 weeks ended April 29, 2017. Signet is a jewelry retailer operating primarily in the U.S., U.K. and Canada. It reported three segments: North America, International and Other.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Sales | $1,480.6 million | $1,403.4 million |
| Gross margin | $484.8 million; 32.7% of sales | $491.2 million; 35.0% of sales |
| Operating income (loss) | $(574.2) million | $115.3 million |
| Net income (loss) | $(496.6) million | $78.5 million |
| Diluted EPS | $(8.48) | $1.03 |
| Adjusted EBITDA (non-GAAP) | $71.9 million | $160.7 million |
| Operating cash flow | $27.9 million | $56.8 million |
| Capital expenditures | $26.1 million | $56.2 million |
| Free cash flow (non-GAAP) | $1.8 million | $0.6 million |
- Reported sales rose 5.5% (4.3% at constant exchange rates), while same-store sales declined 0.1%. E-commerce sales increased 80.9% to $146.5 million, including $53.3 million from James Allen.
- North America sales increased 5.8%, with same-store sales up 0.6%; International sales increased 5.1% as reported but fell 6.1% at constant exchange rates, and same-store sales declined 6.7%.
- Gross margin rate fell 2.3 percentage points. Management cited the James Allen mix, discontinued credit insurance, higher bad-debt expense, promotion timing and revenue-accounting changes.
- Net cash decreased $66.8 million during the quarter to $153.9 million. Reported net debt was $598.1 million, versus $507.1 million at February 3, 2018 and $1,343.4 million a year earlier. Total debt was reported as $758.7 million; long-term debt on the balance sheet was $679.7 million. The company said it was in compliance with debt covenants.
- Current assets were $3,366.3 million and current liabilities $1,108.4 million. Inventory was $2,429.0 million. The balance sheet included $484.6 million of receivables held for sale.
Material changes and unusual items
- A $448.7 million non-cash goodwill and intangible impairment followed a decline in market capitalization and revised valuation assumptions. It comprised $308.8 million of goodwill impairment and $139.9 million of intangible-asset impairment, principally related to legacy North America businesses. Management said the charge did not affect day-to-day operations or liquidity; further impairment remains possible if key valuation inputs deteriorate.
- A $143.1 million net credit-transaction charge included $141.0 million of valuation losses on non-prime receivables held for sale and $2.1 million of transaction costs. The receivables were valued at approximately 70% of par at quarter end.
- Signet agreed to sell eligible non-prime receivables at 72% of par, with 95% of the purchase price expected in cash at closing and 5% deferred and subject to portfolio yield. Closing was expected in Q2 FY2019, subject to conditions. The company also appointed Castlelake to purchase 30% of the eligible receivables.
- Signet launched its three-year Path to Brilliance transformation plan. It estimated total pre-tax charges of $170–$190 million over the plan, including $105–$120 million of expected cash charges. For FY2019, it estimated $125–$135 million of charges, including $60–$65 million in cash charges, and expected approximately 200 net store closures.
- The company repurchased $60.0 million of common shares and declared a $0.37-per-share common dividend. The preferred shares carry a cumulative 5% annual dividend.
- Adoption of the new revenue standard increased reported quarterly revenue by $24.5 million through the presentation of customer trade-ins as revenue; other reported adoption effects were described as immaterial.
Outlook, risks and contingencies
- Signet expected the non-prime receivables sale to close in Q2 FY2019 and expected all FY2019 operating income to be generated in Q4, reflecting credit-outsourcing and transformation timing. The filing notes that almost 40% of annual sales normally occur in Q4, with December the key month.
- Credit outsourcing transition issues reduced North America same-store sales by 115 basis points, according to management. Credit and lease-purchase sales were 49.7% of North America sales, down from 53.4%; payment-plan participation also declined. Credit outsourcing costs and reduced finance-charge income weighed on results.
- Material risks include execution of the transformation and credit outsourcing, consumer demand and competition, inventory and pricing, credit performance, foreign exchange and commodity prices, market-value-driven impairments, IT and security disruptions, and U.K./Brexit developments.
- Legal matters include ongoing employment-practices arbitration and related appeals, securities and derivative shareholder actions, and a New York wage-and-hour matter. The company said it could not estimate a possible loss or range for certain litigation. The CFPB and New York Attorney General were investigating credit practices; Signet said the possibility of an unfavorable outcome in the CFPB/NYAG matters was remote as of May 5, 2018.
- Management concluded disclosure controls were effective as of May 5, 2018 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the receivables sale closed on the expected timetable and the final proceeds, deferred consideration and realized losses.
- Whether same-store sales, gross margin and credit-plan participation stabilize as outsourcing and promotional changes progress.
- Actual cash costs, savings, store closures and operating results under the Path to Brilliance plan, including the unusually Q4-weighted FY2019 outlook.
- Whether further goodwill or intangible impairments occur, given sensitivity to market capitalization, sales trends, discount rates and projected cash flows.
- Liquidity, debt and covenant headroom, and the outcomes or potential financial effects of the disclosed legal and regulatory matters.