Signet Jewelers Limited — Q3 FY2021 Form 10-Q
Reporting period: 13 weeks ended October 31, 2020; year-to-date covers 39 weeks. Signet is a jewelry retailer operating primarily in North America and the UK. The quarter reflects recovery after COVID-19 store closures, with substantially all stores reopened by quarter-end. In early November, mandated UK closures resumed, then expected to last four weeks.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | 39 weeks FY2021 | 39 weeks FY2020 |
|---|---|---|---|---|
| Sales | $1,300.3m | $1,187.7m | $3,040.4m | $3,983.8m |
| Gross margin | $434.5m; 33.4% | $367.7m; 31.0% | $863.0m; 28.4% | $1,325.8m; 33.3% |
| Operating income (loss) | $39.7m; 3.1% | $(39.9)m; (3.4)% | $(349.6)m; (11.5)% | $(64.9)m; (1.6)% |
| Net income (loss) | $9.3m | $(35.5)m | $(269.5)m | $(81.6)m |
| Diluted EPS | $0.02 | $(0.84) | $(5.67) | $(2.05) |
- Quarterly same-store sales rose 15.1%; year-to-date same-store sales fell 20.4%. Q3 e-commerce sales increased 71.4% to $238.8m and represented 18.4% of sales, versus 11.7% a year earlier.
- Q3 gross margin improved on higher sales volume, fixed-cost leverage and lower occupancy costs. Year-to-date margin was pressured by store closures, lower sales and reduced service-plan revenue recognition.
- Q3 SG&A was $389.3m, down from $398.4m; year-to-date SG&A was $1,013.6m, down from $1,285.0m. Lower staffing and transformation savings were partly offset by advertising, incentive compensation and credit-loss provision.
- Q3 operating results included $5.6m of restructuring charges and $1.5m of impairments. Year-to-date included $46.6m of restructuring costs, $158.1m of impairments and a $7.5m net charge for shareholder litigation settlements. Adjusted EBITDA, a non-GAAP measure, was $90.9m for Q3 and $(11.2)m year-to-date.
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was $606.7m (prior year $113.5m), capital expenditures were $41.1m, and free cash flow, as defined by Signet, was $565.6m (prior year $18.2m). The cash-flow increase benefited from inventory reduction, higher accounts payable, rent deferrals and collection of insurance proceeds; it should not be read as solely reflecting earnings improvement.
- Cash and equivalents were $1,332.6m at October 31, 2020, versus $188.6m a year earlier. Debt was $1,041.2m, including $790.0m drawn on the ABL revolver; reported net cash was $292.8m. ABL availability was $483.1m, with $16.6m of letters of credit outstanding. Signet repaid a further $190m of ABL borrowings in November.
- Signet reported compliance with debt covenants. A fixed-charge coverage ratio of at least 1.00:1.00 applies if revolver availability falls below the specified threshold, approximately $132m at quarter-end. Management said liquidity was adequate for the next 12 months and expected cash, operations and available borrowing to meet business needs.
- Common dividends were suspended; preferred dividends for the first three quarters were paid in kind. The preferred shares carry a 5% cumulative dividend.
Changes, outlook and risks
- Q3 sales increased 9.5% year over year, but 39-week sales declined 23.7%, reflecting pandemic closures, permanent store closures and lower service revenue. North America Q3 sales rose 10.5%; International sales were up 0.6% reported but down 4.0% at constant exchange rates.
- Signet closed 316 locations year to date and had 2,893 stores and kiosks at quarter-end. The company said FY2021 net structural cost savings were on track to exceed $100m, and three-year Path to Brilliance savings were expected to reach at least $285m, above the original $225m target. Remaining plan costs were estimated at $8m–$12m.
- No formal sales or earnings guidance is provided in the supplied filing text. Management warned that holiday sales could be hurt by weaker store traffic, capacity limits and further closures; it did not expect the then-current UK shutdown to materially affect Q4 or full-year results.
- COVID-19 remains the principal uncertainty, affecting consumer traffic, supply chains, store operations, estimates and asset valuations. Signet recorded $158.1m of year-to-date impairments, including $83.3m on indefinite-lived intangibles and $10.7m on goodwill; management noted North American goodwill and trade names could face further impairment if conditions worsen.
- Other notable exposures include approximately $81m of rent payments deferred beyond FY2021, expected to be paid primarily by the end of Q2 FY2022; retention of certain new-customer non-prime receivables, expected to represent less than 2.5% of FY2021 revenue; and ongoing employment-practices arbitration for which the company said loss exposure could not be estimated. A separate $240m shareholder class settlement was funded in Q2, with insurance recoveries and a net company cost reflected in the filing.
- Management reported effective disclosure controls as of quarter-end. A new ERP system was implemented during the quarter; the filing identifies migration and system risks among its risk factors.
Investor verification priorities
- Check whether holiday-season demand, UK reopening and subsequent store restrictions matched management’s expectations.
- Assess the quality and repeatability of operating cash flow, especially the effects of working-capital actions, rent deferrals and litigation insurance proceeds.
- Monitor ABL availability, borrowing-base capacity, covenant headroom and debt repayments after quarter-end.
- Verify realization of projected cost savings and the remaining restructuring cash costs, while tracking further store closures.
- Review future impairment assumptions, non-prime receivable credit losses and the outcome or estimateability of pending employment litigation.