Signet Jewelers Limited — Form 10-Q summary
Reporting period: Second quarter of Fiscal 2021, the 13 weeks ended August 1, 2020; year-to-date figures cover 26 weeks. Comparisons are with the periods ended August 3, 2019. Signet operates jewelry retail businesses in North America and the UK, as well as diamond sourcing operations.
Key financial metrics
| Metric | Quarter ended Aug. 1, 2020 | Prior-year quarter | 26 weeks ended Aug. 1, 2020 | Prior-year 26 weeks |
|---|---|---|---|---|
| Sales | $888.0 million | $1,364.4 million | $1,740.1 million | $2,796.1 million |
| Gross margin | $224.3 million; 25.3% | $458.7 million; 33.6% | $428.5 million; 24.6% | $958.1 million; 34.3% |
| Operating loss | $89.7 million | $22.4 million | $389.3 million | $25.0 million |
| Net loss | $81.7 million | $36.1 million | $278.8 million | $46.1 million |
| Loss per common share, diluted | $1.73 | $0.86 | $5.69 | $1.21 |
| Operating cash flow | Not separately shown here | Not separately shown here | $156.1 million | $246.6 million |
| Free cash flow (company-defined) | Not separately shown here | Not separately shown here | $132.5 million | $194.4 million |
At August 1, cash and cash equivalents were $1.204 billion and gross debt was $1.342 billion, producing reported net debt of $136.7 million. Debt included $1.090 billion drawn on the asset-based revolver and a $100 million FILO term loan. Revolver availability was $274.9 million, after $14.9 million of letters of credit. Total current assets were $3.863 billion and current liabilities were $1.499 billion. Operating lease liabilities totaled $1.654 billion.
Material changes and business performance
- Quarterly sales fell 34.9%; same-store sales fell 31.3%. Year-to-date sales fell 37.8%, with same-store sales down 35.2%.
- COVID-19 store closures and reduced service-plan revenue recognition weighed on sales. More than 90% of stores had reopened by the report date. Quarterly e-commerce sales rose 72.1% to $270.1 million and represented 30.4% of sales, versus 11.5% a year earlier.
- Gross margin rate declined, reflecting lower sales and service revenue, and deleveraging of fixed occupancy costs. Lower staff, advertising and other costs partly offset the effects.
- First-half results included $156.6 million of asset impairments, including $83.3 million for indefinite-lived intangibles, $10.7 million for goodwill and $62.6 million for long-lived assets. First-half restructuring charges were $41.6 million.
- First-half operating cash flow was below the prior year. Cash generation included inventory reductions and insurance proceeds related to litigation; cash outflows included the litigation settlement payment. Cash rose to $1.204 billion, substantially supported by net borrowings, including a $900 million revolver draw in March.
Outlook, commentary, risks and unusual items
- Management said it expected a gradual business recovery during the remainder of Fiscal 2021, while emphasizing that the duration and effects of COVID-19 were uncertain. Management believed liquidity and business plans were adequate for the 12 months following the report date.
- Management expected Fiscal 2021 net structural cost savings to exceed $100 million and cumulative three-year savings to be at least $285 million, versus an original $225 million target. The company had closed 293 locations during the first half.
- The Path to Brilliance plan had incurred $246 million of costs through August 1; the company expected a further $15–$20 million during the remainder of Fiscal 2021, including $14–$18 million in cash charges.
- Signet suspended common dividends and elected to pay preferred dividends in-kind for the first two quarters; it intended to continue in-kind preferred dividends through the third quarter. The preferred shares carry a cumulative 5% annual dividend.
- The CARES Act contributed to a first-half tax benefit; the filing attributes $106.5 million of anticipated CARES Act benefit, partly offset by a $56.7 million valuation allowance against certain U.S. and state deferred tax assets.
- A $240 million securities class-action settlement was funded in the second quarter; Signet’s contribution was approximately $35 million net of insurance proceeds and foreign currency effects. The filing also records a $7.5 million net charge in anticipation of settlements of four related investor actions. A separate employment-practices arbitration remained unresolved, with no loss or range estimable.
- Key risks include renewed store closures or weak traffic, supply-chain disruption, further impairments, liquidity and borrowing-covenant pressures, lease obligations, and the June 2021 expiry of revised non-prime receivables purchase agreements. The company reported compliance with debt covenants at quarter-end.
Important facts for investors to verify
- Whether reopened stores, consumer traffic and e-commerce can support a sustained sales and margin recovery, particularly through the holiday season.
- Cash availability, revolver borrowing-base capacity and covenant headroom as operating conditions and debt levels change.
- Realization of management’s cost-savings targets and the remaining cash costs of restructuring and store closures.
- Potential additional impairment charges and the assumptions underlying store, goodwill and brand valuations.
- Final insurance recoveries and payments for litigation matters, and the outcome of the unresolved employment arbitration.
- Credit-loss performance on receivables Signet began retaining and the terms or replacement arrangements for non-prime receivables after June 2021.