Signet Jewelers Limited — Form 10-Q Summary
Business context and reporting period
Signet is a Bermuda-incorporated jewelry retailer operating primarily in the U.S., U.K. and Canada, through Sterling Jewelers, the Zale division (Zale Jewelry and Piercing Pagoda), UK Jewelry and other businesses. This filing covers the 13 and 39 weeks ended October 31, 2015—Signet’s fiscal 2016 third quarter and year to date—and compares them with the periods ended November 1, 2014. Zale was acquired on May 29, 2014, so year-to-date comparisons include Zale for a longer period in fiscal 2016.
Financial performance
| Metric | 13 weeks ended Oct. 31, 2015 | 39 weeks ended Oct. 31, 2015 | Prior comparable period |
|---|---|---|---|
| Sales | $1,216.4 million; up 3.3% | $4,157.6 million; up 20.2% | $1,177.9 million; $3,459.9 million |
| Same-store sales | Up 3.3% | Up 3.7% | Up 4.2% and 4.1%, respectively |
| Gross margin | $367.7 million; 30.2% of sales | $1,424.4 million; 34.3% of sales | $345.9 million; 29.4%; $1,162.1 million; 33.6% |
| Operating income | $33.6 million; 2.8% of sales | $310.6 million; 7.5% of sales | $10.7 million; 0.9%; $244.9 million; 7.1% |
| Net income (loss) | $15.0 million | $196.0 million | $(1.3) million; $153.3 million |
| Diluted EPS | $0.19 | $2.45 | $(0.02); $1.91 |
| Net cash from operating activities | $(121.9) million | $88.7 million | $(208.1) million; $(24.2) million |
Quarterly adjusted operating income, a non-GAAP measure, was $47.1 million versus $35.7 million; adjusted diluted EPS was $0.33 versus $0.21. Year-to-date adjusted operating income was $390.6 million versus $320.6 million, and adjusted diluted EPS was $3.24 versus $2.56. Adjustments principally reflect acquisition accounting and transaction and integration costs; reported and adjusted figures should not be treated as interchangeable.
Cash flow, liquidity and debt
- Year-to-date capital expenditures were $170.8 million, making free cash flow (operating cash flow less capital expenditures, a non-GAAP measure) negative $82.1 million, compared with negative $189.3 million in the prior-year period. Quarterly free cash flow was negative $193.8 million.
- Cash was $77.2 million at October 31, down from $193.6 million at fiscal year-end. Inventory was $2,727.0 million, up from $2,439.0 million at fiscal year-end.
- Balance-sheet loans, overdrafts and long-term debt totaled $1,588.5 million; less cash, net debt was $1,511.3 million. Long-term debt included $398.6 million of 2024 senior notes, $600.0 million under the securitization facility and $372.5 million on the term loan. The company also had $147.0 million drawn on its $400 million revolving facility and $70.1 million of bank overdrafts. The filing reports compliance with debt covenants.
- The securitization facility was extended by one year to May 2017. The revolving facility matures in 2019; the term loan matures in 2019. Signet reported a 2.6% weighted-average interest rate on debt for the current year-to-date period.
Material changes and management commentary
- Year-to-date reported sales growth largely reflects the Zale acquisition and the longer period of Zale ownership, rather than comparable-store growth alone. Signet reported same-store sales growth of 3.7%; Zale division same-store sales rose 4.8%.
- Quarterly sales were supported by branded bridal merchandise and Kay. Sterling’s sales rose 5.9%, while UK Jewelry sales fell 1.1% as reported but grew 4.9% at constant exchange rates. Piercing Pagoda sales increased 13.5%.
- Management said quarterly adjusted gross-margin rate was flat year over year. Higher bad-debt expense, associated with customer and brand credit mix, was offset by gross-margin synergies and favorable commodity costs. The filing says the credit portfolio continued to perform profitably and as expected.
- Year-to-date interest expense increased to $33.8 million from $28.1 million, primarily reflecting acquisition-related debt. The company repurchased 868,325 shares for $111.9 million year to date and declared dividends of $0.66 per share.
Outlook, risks and unusual items
- No full-year sales or earnings guidance is provided in the supplied filing text. Management forecast a fiscal 2016 effective tax rate of 28%–29% and planned 90–110 store openings, or 30–35 net additions, with 2%–3% net selling-square-footage growth.
- Signet says the holiday season is critical: the fourth quarter normally generates almost 40% of annual sales and approximately 45%–55% of annual operating income. This makes results highly seasonal.
- Fiscal 2016 year-to-date transaction and integration costs included a $34.2 million settlement of Zale appraisal claims, paid in the third quarter. Total year-to-date transaction-related and integration expenses were $59.8 million.
- Employment-related gender discrimination cases remain a material uncertainty. The EEOC case was remanded for further proceedings after an appellate decision; related claimant proceedings and other employment litigation also remained pending. Signet said it could not estimate any possible loss or range of losses.
- Other risks identified include consumer spending and credit quality, inventory and merchandise demand, foreign exchange and precious-metal prices, integration and realization of Zale synergies, cybersecurity and internal controls, and estimates for extended service plans. A change to Sterling extended-service-plan revenue recognition was made in the second quarter; the filing describes recognition over an estimated 17-year claims period.
Important facts for investors to verify
- Separate organic performance from acquisition-driven sales and earnings growth, including the effect of Zale’s shorter prior-year comparison period.
- Track customer credit quality, bad-debt provisioning and collections; receivables net of allowance were $1,451.5 million, and the filing discusses a lower average monthly collection rate year over year.
- Assess holiday-quarter trading and inventory execution, given the company’s pronounced seasonality and the increase in inventory from fiscal year-end.
- Reconcile reported results to non-GAAP adjusted measures, including the $34.2 million appraisal settlement and other acquisition-related accounting and integration costs.
- Monitor debt, revolver usage, covenant headroom and refinancing needs, as well as the outcome and potential financial impact of pending litigation, which the company says cannot presently be estimated.