Signet Jewelers Limited — Form 10-Q Summary
Business context and reporting period
Signet is a specialty jewelry retailer operating primarily in the U.S. and U.K., including Kay Jewelers, Jared, H.Samuel and Ernest Jones. This unaudited filing covers the 13 weeks ended October 29, 2011 (Fiscal 2012 third quarter) and the 39 weeks ended that date; comparisons are with the corresponding 2010 periods. The business is highly seasonal, with about 40% of annual sales normally occurring in the fourth quarter, especially December.
Key financial metrics
| Metric | 13 weeks ended Oct. 29, 2011 | 39 weeks ended Oct. 29, 2011 |
|---|---|---|
| Sales | $710.5 million, +10.7% | $2,395.4 million, +10.5% |
| Gross margin | $229.9 million; 32.4% | $874.4 million; 36.5% |
| Operating income | $42.5 million; 6.0% margin | $263.5 million; 11.0% margin |
| Income before tax | $42.1 million | $259.7 million |
| Net income | $26.1 million | $167.8 million |
| Diluted EPS | $0.30 | $1.93 |
| Operating cash flow | $(78.5) million | $113.6 million |
| Capital expenditures | $34.7 million | $73.0 million |
- Quarterly same-store sales rose 10.6% overall: U.S. +13.9%, U.K. −0.5%. Year-to-date same-store sales rose 10.2%: U.S. +12.8%, U.K. +0.4%.
- At October 29, cash was $349.6 million and loans and overdrafts were $33.6 million, producing reported net cash of $316.0 million. The $400 million five-year revolving credit facility was undrawn; standby letters of credit were $8.5 million.
- Inventory was $1,414.0 million, up from $1,184.2 million at January 29, 2011. Net accounts receivable was $891.2 million, including $882.2 million of U.S. in-house finance receivables.
- Year-to-date free cash flow, defined by the company as operating cash flow less investing cash flow, was $40.6 million. The quarter’s comparable figure was $(113.2) million.
Material changes versus the prior comparable periods
- Quarterly sales increased 10.7% and net income rose to $26.1 million from $6.0 million. Year-to-date sales increased 10.5% and net income rose to $167.8 million from $95.0 million.
- Gross margin rate improved 220 basis points in the quarter and 310 basis points year to date. Management attributed improvement principally to occupancy-cost leverage and better U.S. receivables performance. Gross merchandise margin itself declined 50 basis points in the quarter, reflecting higher commodity costs and a one-time U.S. watch promotion, partly offset by price increases.
- U.S. operating income was $56.4 million for the quarter and $287.0 million year to date. U.K. operating losses widened to $5.0 million for the quarter; the U.K. reported a $2.4 million year-to-date operating loss versus $1.7 million operating income a year earlier.
- Net interest expense declined to $0.4 million for the quarter and $3.8 million year to date, mainly following repayment of the 8% U.S. Private Placement Notes in November 2010. Year-to-date expense includes a $1.3 million write-off of deferred financing fees related to replacing the prior credit facility.
- Year-to-date operating cash flow fell to $113.6 million from $196.9 million, principally because of seasonal inventory investment and less favorable movements in operating assets and liabilities. Inventory growth used $211.5 million of cash in the 39-week period.
- Year-to-date capital spending increased to $73.0 million from $41.2 million, reflecting planned increases. Cash at period-end was below the prior-year $414.9 million, while net cash was higher than the prior-year $148.2 million due mainly to debt repayment.
Outlook, management commentary, risks and unusual items
- Management said U.S. trading was stronger than the challenging U.K. consumer environment and cited U.S. competitive strengths, bridal products and branded and exclusive merchandise. U.K. disposable income remained under pressure. Management continued to monitor potential effects of financial-market volatility.
- The filing gives no clear full-year sales or earnings forecast. Management anticipated a Fiscal 2012 effective tax rate of approximately 35.4%.
- The Board authorized up to $300 million of share repurchases, funded from cash and liquidity sources. The program is scheduled to become effective January 16, 2012 and run for 24 months; the filing does not report repurchases under the program.
- The new $400 million revolving facility matures in May 2016 and includes leverage and fixed-charge-coverage covenants. The filing reports no amounts outstanding at quarter-end and no intra-period borrowings.
- Key risks identified include economic and consumer conditions, competition, jewelry demand, diamond and precious-metal costs and availability, consumer-credit regulation and credit performance, seasonality, foreign exchange and financial-market risks, and operational, systems and accounting-estimate risks. The company hedges some gold and currency exposures; diamond price fluctuations are not hedged.
- Signet disclosed private-plaintiff and EEOC lawsuits alleging gender discrimination in pay and promotion practices at its U.S. subsidiary. Sterling denies the allegations and intends to defend them; the private plaintiffs’ class-action matter remained subject to further appeal, and EEOC discovery was ongoing. The filing does not provide a clear estimate of potential loss.
- During the period, Signet paid $2.1 million to settle certain IRS financing-arrangement tax issues and recognized a $1.4 million tax benefit from reversing part of its reserve. Management considered reduction of substantially all recorded uncertain tax benefits reasonably possible over the following 12 months.
- Credit quality remains relevant: the allowance for U.S. in-house finance receivables was $72.2 million against $954.4 million gross receivables; amounts at least 90 days past due were fully reserved. Management reported improving U.S. receivables performance, but the receivables portfolio is substantial.
Most important facts for investors to verify
- Whether strong U.S. same-store sales and margin gains continued, and whether the U.K. division improved from its operating loss.
- Holiday-season sales and profitability, given the business’s pronounced fourth-quarter seasonality.
- Inventory levels, working-capital cash use and conversion of year-to-date earnings into cash flow.
- U.S. finance-receivable delinquency, charge-offs, allowance adequacy and collection trends.
- Commodity-cost and currency exposures, including the effects and timing of hedge settlements.
- Progress and any eventual use of the $300 million repurchase authorization, alongside liquidity and covenant headroom.
- Developments in the discrimination litigation and uncertain tax positions, including any material change in exposure.