Signet Jewelers Limited — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the 13 weeks ended April 30, 2022; comparisons are with the 13 weeks ended May 1, 2021. Signet is a jewelry retailer operating primarily in the U.S., U.K. and Canada. Results include Diamonds Direct, acquired in November 2021.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Sales | $1,838.3 million | $1,688.8 million |
| Gross margin | $723.7 million; 39.4% of sales | $678.4 million; 40.2% |
| Operating income | $0.2 million | $168.7 million |
| Net income (loss) | $(83.5) million | $138.4 million |
| Net income (loss) attributable to common shareholders | $(92.1) million | $129.8 million |
| Diluted EPS | $(1.89) | $2.23 |
| Net cash used in operating activities | $(135.5) million | Net cash provided of $161.1 million |
| Free cash flow (non-GAAP) | $(156.3) million | $149.8 million |
Sales rose 8.9% (9.1% at constant exchange rates), while same-store sales increased 2.5%. The gross margin rate declined 0.8 percentage points. E-commerce sales fell 7.5% to $320.5 million and represented 17.4% of sales, versus 20.5% a year earlier, as customers returned to stores.
Operating results included a $190.0 million pre-tax employment-litigation charge. Other non-operating expense included a $131.9 million non-cash pension settlement charge. Excluding specified unusual items, adjusted EBITDA (non-GAAP) was $244.6 million, compared with $217.6 million; non-GAAP operating income was $194.6 million, compared with $168.9 million. These measures are not substitutes for GAAP results.
Liquidity, debt and capital
- At April 30, 2022, cash and cash equivalents were $927.6 million, compared with $1,418.3 million at January 29, 2022. Gross debt was $147.7 million ($147.1 million carrying value); reported net cash, a non-GAAP measure, was $780.5 million.
- Signet reported $1.2 billion of available borrowing capacity under its $1.5 billion asset-based revolving facility, which matures in July 2026. It reported compliance with debt covenants.
- Operating cash use reflected, among other items, a $167.3 million inventory cash outflow and a $125.6 million use of cash from income taxes. Inventory was $2,216.2 million, up from $2,019.0 million a year earlier.
- Financing activities used $325.6 million, including $268.2 million of common-share repurchases and $17.2 million of common and preferred dividends. The company said it expected available cash, operating cash flows and borrowing capacity to cover requirements for at least 12 months after the report date.
Material changes and unusual items
- Diamonds Direct contributed to sales growth; Signet described the acquisition as immediately accretive. It recorded $4.4 million of acquisition-related inventory fair-value step-up costs in the quarter.
- On June 8, 2022, after quarter-end, Signet and claimants reached a proposed settlement of approximately $175 million in the employment-practices arbitration. The settlement is subject to preliminary and final court approval. Signet recorded a $190.0 million pre-tax charge in Q1, including estimated related costs, and expected funding in Q3 FY2023.
- The pension-plan settlement charge arose from partial risk transfer in the U.K. defined-benefit plan. Signet expected to complete the remaining settlement and wind-up by fiscal year-end.
- Signet completed changes to its credit-card arrangements and said it would no longer originate customer credit receivables.
Outlook, commentary and risks
The filing provides no specific full-year revenue or earnings guidance. Management expected jewelry-industry revenue to be flat to slightly down for the remainder of FY2023, citing reduced government stimulus, inflation and consumer spending shifting toward travel and other experiences. Lower-price-point products were particularly affected. Signet cited its banner differentiation, Diamonds Direct, product assortment and digital and flexible-fulfillment investments as supports for demand, and planned up to $250 million of FY2023 capital investments.
Risks highlighted include weaker discretionary spending, inflation and higher input costs, supply-chain disruption, labor recruitment and retention, COVID-19 uncertainty, competition and promotional activity, and seasonality. Historically, the fourth quarter accounts for approximately 35%–40% of annual sales and a substantial share of operating profit. The filing also notes ongoing legal matters and uncertainty in estimates, including those for warranties, extended service plans, pensions and contingencies.
Key facts for investors to verify
- Whether the proposed employment-litigation settlement receives court approval, and its final amount and payment timing.
- Whether demand softness, especially at lower price points, persists and affects holiday-season sales and margins.
- Inventory levels, working-capital cash use and liquidity as the company executes its capital-return and investment plans.
- Progress on integrating and growing Diamonds Direct, and delivery of planned synergies and capital investments.
- Completion and funding of the U.K. pension-plan wind-up and the terms and performance of the outsourced credit arrangements.