SIGNET JEWELERS LIMITED The discussion and analysis in this Item 2 is intended to provide the reader with information that will assist in understanding the significant factors affecting the Company's consolidated operating results, financial condition, liquidity and capital resources. This discussion should be read in conjunction with our condensed consolidated financial statements and notes to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, as well as the financial and other information included in Signet's Fiscal 2022 Annual Report on Form 10-K filed with theSEC onMarch 17, 2022 . This discussion contains forward-looking statements and information. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed in the "Forward-Looking Statements" below and elsewhere in this report, as well as in the "Risk Factors" section within Signet's Fiscal 2022 Annual Report on Form 10-K.
This management's discussion and analysis provides comparisons of material
changes in the condensed consolidated financial statements for the 13 weeks
ended
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements based upon management's beliefs and expectations as well as on assumptions made by and data currently available to management, appear in a number of places throughout this document and include statements regarding, among other things, results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which Signet operates. The use of the words "expects," "intends," "anticipates," "estimates," "predicts," "believes," "should," "potential," "may," "preliminary," "forecast," "objective," "plan," or "target," and other similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties which could cause the actual results to not be realized, including, but not limited to: the negative impacts that the COVID-19 pandemic has had, and could have in the future, on Signet's business, financial condition, profitability and cash flows; the effect of steps we take in response to the pandemic; the severity, duration and potential resurgence of the pandemic (including through variants), including whether it is necessary to temporarily reclose our stores, distribution centers and corporate facilities or for our suppliers and vendors to temporarily reclose their facilities; the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein, including without limitation risks relating to disruptions in our supply chain, our ability to attract and retain labor especially if COVID-19 vaccine mandates are implemented, consumer behaviors such as willingness to congregate in shopping centers and shifts in spending away from the jewelry category toward more experiential purchases, the impacts of the expiration of government stimulus on overall consumer spending, our level of indebtedness and covenant compliance, availability of adequate capital, our ability to execute our business plans, our lease obligations and relationships with our landlords, and asset impairments; general economic or market conditions, including impacts of inflation or other pricing environment factors on the Company's commodity costs (including diamonds) or other operating costs; a prolonged slowdown in the growth of the jewelry market or the overall economy; financial market risks; a decline in consumer discretionary spending or deterioration in consumer financial position, including the impacts of inflation and rising prices on necessities such as gas and groceries; our ability to optimize Signet's transformation strategies; changes to regulations relating to customer credit; disruption in the availability of credit for customers and customer inability to meet credit payment obligations; our ability to achieve the benefits related to the outsourcing of the credit portfolio, including due to technology disruptions, future financial results and operating results and/or disruptions arising from changes to or termination of the relevant outsourcing agreements; deterioration in the performance of individual businesses or of the Company's market value relative to its book value, resulting in impairments of long-lived assets or intangible assets or other adverse financial consequences; the volatility of our stock price; the impact of financial covenants, credit ratings or interest volatility on our ability to borrow; our ability to maintain adequate levels of liquidity for our cash needs, including debt obligations, payment of dividends, planned share repurchases (including execution of accelerated share repurchases) and capital expenditures as well as the ability of our customers, suppliers and lenders to access sources of liquidity to provide for their own cash needs; changes in our credit rating; potential regulatory changes; future legislative and regulatory requirements in the US and globally relating to climate change, including any new climate related disclosure or compliance requirements, such as those recently proposed by theSEC ; global economic conditions or other developments related to theUnited Kingdom's exit from theEuropean Union ; exchange rate fluctuations; the cost, availability of and demand for diamonds, gold and other precious metals, including any impact on the global market supply of diamonds due to the ongoingRussia -Ukraine conflict or related sanctions; stakeholder reactions to disclosure regarding the source and use of certain minerals; seasonality of Signet's business; the merchandising, pricing and inventory policies followed by Signet and failure to manage inventory levels; Signet's relationships with suppliers including the ability to continue to utilize extended payment terms and the ability to obtain merchandise that customers wish to purchase; the failure to adequately address the impact of existing tariffs and/or the imposition of additional duties, tariffs, taxes and other charges or other barriers to trade or impacts from trade relations; the level of competition and promotional activity in the jewelry sector; our ability to optimize Signet's multi-year strategy to gain market share, expand and improve existing services, innovate and achieve sustainable, long-term growth; the maintenance and continued innovation of Signet's OmniChannel retailing and ability to increase digital sales, as well as management of its digital marketing costs; changes in consumer attitudes regarding jewelry and failure to anticipate and keep pace 28
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with changing fashion trends; changes in the supply and consumer acceptance of and demand for gem quality lab created diamonds and adequate identification of the use of substitute products in our jewelry; ability to execute successful marketing programs and manage social media; the ability to optimize Signet's real estate footprint; the ability to satisfy the accounting requirements for "hedge accounting," or the default or insolvency of a counterparty to a hedging contract; the performance of and ability to recruit, train, motivate and retain qualified team members - particularly in regions experiencing low unemployment rates; management of social, ethical and environmental risks; the reputation of Signet and its banners; inadequacy in and disruptions to internal controls and systems, including related to the migration to new information technology systems which impact financial reporting; security breaches and other disruptions to Signet's information technology infrastructure and databases; an adverse development in legal or regulatory proceedings or tax matters, including any new claims or litigation brought by employees, suppliers, consumers or shareholders, regulatory initiatives or investigations, and ongoing compliance with regulations and any consent orders or other legal or regulatory decisions; failure to comply with labor regulations; collective bargaining activity; changes in corporate taxation rates, laws, rules or practices in the US and jurisdictions in which Signet's subsidiaries are incorporated, including developments related to the tax treatment of companies engaged in Internet commerce or deductions associated with payments to foreign related parties that are subject to a low effective tax rate; risks related to international laws and Signet being aBermuda corporation; difficulty or delay in executing or integrating an acquisition, including Diamonds Direct, or executing other major business or strategic initiatives; risks relating to the outcome of pending litigation; our ability to protect our intellectual property or physical assets; changes in assumptions used in making accounting estimates relating to items such as extended service plans and pensions; or the impact of weather-related incidents, natural disasters, organized crime or theft, strikes, protests, riots or terrorism, acts of war (including the ongoing Russian-Ukraine conflict), or another public health crisis or disease outbreak, epidemic or pandemic on Signet's business. For a discussion of these and other risks and uncertainties which could cause actual results to differ materially from those expressed in any forward looking statement, see the "Risk Factors" and "Forward-Looking Statements" sections of Signet's Fiscal 2022 Annual Report on Form 10-K filed with theSEC onMarch 17, 2022 and quarterly reports on Form 10-Q and the "Safe Harbor Statements" in current reports on Form 8-K filed with theSEC . Signet undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.
OVERVIEW
•The North America segment has 2,413 locations in the US and 94 locations in
•In the US, the segment primarily operates in malls and off-mall locations under the following banners: Kay (Kay Jewelers and Kay Outlet ); Zales (Zales Jewelers and Zales Outlet ); Jared (Jared The Galleria Of Jewelry andJared Vault ); Diamonds Direct; JamesAllen.com; and Rocksbox. Additionally, in the US, the segment operated mall-based kiosks under the Banter by Piercing Pagoda banner.
•In Canada, the segment primarily operates under the Peoples banner (
•The International segment has 347 stores in theUK ,Republic of Ireland andChannel Islands . Its stores operate in shopping malls and off-mall locations (i.e. high street) principally under the H. Samuel andErnest Jones banners.
Diamonds Direct acquisition
OnNovember 17, 2021 , the Company finalized its acquisition ofDiamonds Direct USA Inc. ("Diamonds Direct") for cash consideration of$503.1 million , net of cash acquired. Diamonds Direct is an off-mall, destination jeweler in the US operating with a highly productive, efficient operating model with demonstrated growth and profitability. Diamonds Direct has been immediately accretive to Signet following the acquisition date. Diamonds Direct's strong value proposition, extensive bridal offering and customer centric, high-touch shopping experience is a destination for younger, luxury-oriented bridal shoppers. Diamonds Direct strategically expands Signet's market in accessible luxury and bridal, provides access to a new customer base and furthers Signet's opportunity to build lifetime customer relationships. Signet plans to grow Diamonds Direct while driving operating margin expansion over time through operating synergies in purchasing, targeted marketing and connected commerce. 29
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Overall performance
Signet's sales grew 8.9% during the first quarter of Fiscal 2023 compared to the same quarter of Fiscal 2022, as the Company's growth continues to be fueled by the addition of Diamonds Direct to Signet's portfolio in the fourth quarter of Fiscal 2022. In addition, organic growth of 2.6% in the first quarter was driven by the reopening of theUK and Canadian stores which were closed for most of the first quarter in the prior year; however, this growth was tempered by the impacts of lapping benefits from last year's government stimulus, shifts in consumer spending to experiences and travel, and inflationary factors on consumer spending, which was particularly apparent in categories with lower price points. The Company's overall performance continues to reflect sustainable enhancements to Signet's connected commerce capabilities, digital marketing effectiveness, the strength of Signet's banner differentiation and inventory management. The Company's focus on its connected commerce shopping experience, both online and in-store, helped maintain strong conversion rates and improve average transaction values during the first quarter of Fiscal 2023. During Fiscal 2023, the Company will continue to execute the initiatives under its Inspiring Brilliance strategy, which is focused on the achievement of sustainable, industry leading growth. As described in the Purpose and Strategy section within Item 1 of Annual Report on Form 10-K for the year endedJanuary 29, 2022 with theSEC onMarch 17, 2022 , through its Inspiring Brilliance strategy, the Company will focus on leveraging its core strengths that it developed over the past four years with the goal of creating a broader mid-market and increasing Signet's share of that larger market as the industry leader.
Refer to the "Results of Operations" section below for further information on performance during the first quarter of Fiscal 2023.
Outlook
As noted above, Signet's performance during the first quarter of Fiscal 2023
reflected the lapping of some of the benefits from last year's government
stimulus, mitigating the impact of inflation, and concurrent shifts in increased
consumer spending to experiences and travel. Following a year of heightened
growth, jewelry industry revenues are expected to be flat to down slightly for
the remainder of Fiscal 2023, as consumer discretionary spending on categories
such as jewelry is expected to decline, in favor of experience related spending.
In addition, the Company anticipates that discretionary spending in jewelry will
continue to be adversely impacted by rising prices on necessities such as gas
and groceries, as well as less disposable income by consumers as a result of the
expiration of government stimulus programs, particularly on the Company's
product assortments at lower price points. However, the magnitude and timing of
both inflationary factors and the shift in spending are difficult to predict, as
is whether these pressures will ultimately impact other product categories, such
as those at higher price points. The Company believes that its banner value
propositions and differentiation, including the addition of Diamonds Direct to
Signet's portfolio, the strength of the Company's product assortment and its
investments in digital capabilities and flexible fulfillment methods are
expected to continue fueling a strong response from customers across most
merchandise categories and banners in Fiscal 2023. Furthermore, the Company will
continue its diligent and effective efforts to drive structural cost savings and
mitigate supply chain disruption.
The Company continues to monitor the potential impacts of the novel coronavirus
("COVID-19") and other macroeconomic factors on its business, such as inflation
and the conflict in Ukraine . Continued uncertainties exist that could impact the
Company's results of operations or cash flows in the future, such as potential
resurgence of COVID-19 in key trade areas, pricing and inflationary environment
changes impacting the Company (including, but not limited to, materials, labor,
fulfillment and advertising costs) or the consumers' ability to spend described
above, the Company's ability to recruit and retain qualified team members,
organized retail crime, or extended duration of heightened unemployment in
certain trade areas.
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RESULTS OF OPERATIONS
The following should be read in conjunction with the condensed consolidated financial statements and related notes in Item 1 of this Quarterly Report on Form 10-Q, as well as the financial and other information included in Signet's Fiscal 2022 Annual Report on Form 10-K.
Comparison of First Quarter Fiscal 2023 to First Quarter Fiscal 2022
•Same store sales: Up 2.5%.
•Total sales:
•Operating income:
•Diluted earnings (loss) per share:$(1.89) compared to$2.23 in the prior year. First Quarter Fiscal 2023 Fiscal 2022 (in millions) $ % of sales $ % of sales Sales$ 1,838.3 100.0 %$ 1,688.8 100.0 % Cost of sales (1,114.6) (60.6) (1,010.4) (59.8) Gross margin 723.7 39.4 678.4 40.2 Selling, general and administrative expenses (533.1) (29.0) (512.0) (30.3) Other operating income (expense) (190.4) (10.4) 2.3 0.1 Operating income 0.2 - 168.7 10.0 Interest expense, net (4.4) (0.2) (3.9) (0.2) Other non-operating income (expense) (134.5) (7.3) 0.1 - Income (loss) before income taxes (138.7) (7.5) 164.9 9.8 Income taxes 55.2 3.0 (26.5) (1.6) Net income (loss)$ (83.5) (4.5) %$ 138.4 8.2 % Dividends on redeemable convertible preferred shares (8.6) nm (8.6) nm
Net income (loss) attributable to common shareholders
(5.0) %$ 129.8 7.7 % nm Not meaningful. First quarter sales Signet's total sales increased 8.9% year over year to$1.84 billion in the 13 weeks endedApril 30, 2022 . Total sales at constant exchange rates increased 9.1%. This growth reflects the initiatives the Company has driven in bridal and accessible luxury under its Inspiring Brilliance strategy, primarily due to the addition of Diamonds Direct to Signet's portfolio. Signet's same store sales increased 2.5% which reflects an increase in foot traffic back to the stores, particularly in theUK andCanada , which were closed or restricted for most of the first quarter of Fiscal 2022, as well as continued strong performance from the repair and services business. eCommerce sales in the first quarter of Fiscal 2023 were$320.5 million , down$25.8 million or 7.5%, compared to$346.3 million in the prior year first quarter. eCommerce sales accounted for 17.4% of first quarter sales, down from 20.5% of total sales in the prior year first quarter which was offset by the brick and mortar same store sales increase of 5.2% from the prior year first quarter. This shift reflects an increase in foot traffic back to the stores, particularly in theUK andCanada , as noted above. The breakdown of the sales performance by segment is set out in the table below: Change from previous year Same Non-same Total sales Exchange Total Total store store sales, at constant exchange translation sales sales First Quarter of Fiscal 2023 sales net (2) rate impact as reported (in millions) North America segment (0.9) % 6.3 % 5.4 % - % 5.4 %$ 1,705.0 International segment 102.6 % (0.8) % 101.8 % (10.2) % 91.6 %$ 110.0 Other segment (1) nm nm nm nm nm $ 23.3 Signet 2.5 % 6.6 % 9.1 % (0.2) % 8.9 %$ 1,838.3
(1) Includes sales from Signet's diamond sourcing initiative. (2) Includes sales from acquired businesses which were not included in the results for the full comparable periods presented.
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nm Not meaningful.
Average merchandise transaction value ("ATV") is defined as net merchandise sales on a same store basis divided by the total number of customer transactions. As such, changes from the prior year do not recompute within the table below.
Average Merchandise Transaction Value(1)(2) Merchandise Transactions
Average Value Change from previous year Change from previous year
First Quarter Fiscal 2023 Fiscal 2022 Fiscal 2023 Fiscal 2022 Fiscal 2023 Fiscal 2022
North America segment $ 496 $ 418 19.2 % 15.2 % (18.6) % 90.0 %
International segment (3) £ 199 £ 165 1.5 % 5.8 % 99.7 % (16.6) %
(1) Net merchandise sales within the North America segment include all
merchandise product sales, net of discounts and returns. In addition, excluded
from net merchandise sales are sales tax in the US, repairs, extended service
plans, insurance, employee and other miscellaneous sales. As a result, the sum
of the changes will not agree to change in same store sales.
(2) Net merchandise sales within the International segment include all
merchandise product sales, including value added tax ("VAT"), net of discounts
and returns. In addition, excluded from net merchandise sales are repairs,
warranty, insurance, employee and other miscellaneous sales. As a result, the
sum of the changes will not agree to change in same store sales.
(3) Amounts for the International segment are denominated in British pounds.
TheNorth America segment's total sales were$1.71 billion compared to$1.62 billion in the prior year, or an increase of 5.4%. This growth reflects the initiatives the Company has driven in bridal and accessible luxury under its Inspiring Brilliance strategy, primarily due to the addition of Diamonds Direct to Signet's portfolio, as well as an increased ATV of 19.2% compared to prior year. Same store sales decreased 0.9% compared to an increase of 117.2% in the prior year. TheNorth America segment's same store sales performance during the first quarter of Fiscal 2023 reflected the impacts of lapping benefits from last year's government stimulus, shifts in consumer spending to experiences and travel, and inflationary factors on consumer spending, which was particularly apparent in categories with lower price points. Overall, this resulted in the number of transactions decreasing by 18.6% year over year.
International sales
The International segment's total sales increased 91.6% to$110.0 million compared to$57.4 million in the prior year and increased 101.8% at constant exchange rates. Same store sales increased 102.6% compared to a decrease of 12.2% in the prior year. In the International segment, the ATV increased 1.5% year over year, while the number of transactions increased 99.7%. The sales growth reflects the increase in foot traffic in the current year as theUK stores were substantially closed during the first quarter of Fiscal 2022.
Gross margin
In the first quarter of Fiscal 2023, gross margin was$723.7 million or 39.4% of sales compared to$678.4 million or 40.2% of sales in the prior year comparable period. The slight decrease in gross margin rate for the 13 weeks endedApril 30, 2022 , compared to prior year, reflects similar merchandise margin to the prior year within organic banners and the strength of Diamonds Direct's bridal business, which carries a lower relative margin. In addition, the gross margin also reflects the lapping of benefits received in theUK in Fiscal 2022 from COVID-related tax abatements. This decrease was partially offset by the continued benefits of cost savings and leveraging of fixed costs across the Company.
Selling, general and administrative expenses ("SG&A")
In the first quarter of Fiscal 2023, SG&A was$533.1 million or 29.0% of sales compared to$512.0 million or 30.3% of sales in the prior year quarter. The increase in SG&A compared to the prior year quarter was primarily due to higher advertising, payroll and investments in digital/IT. This was partially offset by the benefits of structural cost savings from the Company's transformation activities, including the benefits of the Company's restructured outsourced credit agreements, finalized in the second quarter of Fiscal 2022, as well as the impact of the efficiency of Diamonds Direct's operating model.
Other operating income (expense)
For the 13 weeks ended
Operating income
For the 13 weeks endedApril 30, 2022 , operating income was$0.2 million or 0.0% of sales, compared to$168.7 million or 10.0% of sales in the prior year first quarter. This decrease was primarily driven by the pre-tax litigation charges of$190.0 million offset by the impact of the addition of Diamonds Direct to Signet's portfolio and the benefits of cost savings discussed above. 32
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Signet's operating income by segment for the first quarter is as follows:
Fiscal 2023 Fiscal 2022
% of segment % of segment
(in millions) $ sales $ sales
North America segment (1) $ 24.8 1.5 % $ 212.0 13.1 %
International segment (6.4) (5.8) % (19.7) (34.3) %
Other segment 3.0 nm (0.9) nm
Corporate and unallocated expenses (21.2) nm (22.7) nm
Operating income $ 0.2 - % $ 168.7 10.0 %
(1) Operating income during the 13 weeks ended
Operating income during the 13 weeks endedMay 1, 2021 includes$1.1 million of acquisition-related expenses in connection with the Rocksbox acquisition; a$0.7 million credit to restructuring expense, primarily related adjustments previously recognize restructuring liabilities; and$1.5 million of net asset impairments. nm Not meaningful. Interest expense, net
For the 13 weeks ended
Other non-operating income (expense)
In the first quarter of Fiscal 2023, other non-operating expense was$134.5 million compared to other non-operating income of$0.1 million in the prior year comparable period. The other non-operating expenses primarily consisted of a non-cash, pre-tax settlement charge of$131.9 million related to the partial buy-out of the Pension Scheme. Refer to Note 22 for additional information.
Income taxes
In the first quarter of Fiscal 2023, income tax benefit was$55.2 million , an effective tax rate ("ETR") of 39.8%, compared to income tax expense of$26.5 million , an ETR of 16.1%, in the prior year comparable period. The ETR for the 13 weeks endedApril 30, 2022 was higher than the US federal income tax rate, primarily as a result of the discrete tax benefits related to litigation charges of$47.7 million , the reclassification of the pension settlement loss out of AOCI of$25.0 million and the excess tax benefit for share based compensation which vested during the year of$13.0 million . The ETR for the 13 weeks endedMay 1, 2021 was lower than the US federal income tax rate primarily due to the favorable impact of foreign rate differences and benefits from its global reinsurance arrangements.
NON-GAAP MEASURES
Signet provides certain non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. The Company believes that non-GAAP financial measures, when reviewed in conjunction with GAAP financial measures, can provide more information to assist investors in evaluating historical trends and current period performance. For these reasons, internal management reporting also includes non-GAAP measures. Items may be excluded from GAAP financial measures when the Company believes this provides greater clarity to management and investors. These non-GAAP financial measures should be considered in addition to, and not superior to or as a substitute for the GAAP financial measures presented in the Company's condensed consolidated financial statements and other publicly filed reports. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies.
1. Net cash
Net cash is a non-GAAP measure defined as the total of cash and cash equivalents less loans, overdrafts and long-term debt. Management considers this metric to be helpful in understanding the total indebtedness of the Company after consideration of liquidity available from cash balances on-hand. (in millions) April 30, 2022 January 29, 2022 May 1, 2021 Cash and cash equivalents$ 927.6 $ 1,418.3$ 1,298.4 Less: Long-term debt (147.1) (147.1) (146.8) Net cash$ 780.5 $ 1,271.2$ 1,151.6 33
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2. Free cash flow
Free cash flow is a non-GAAP measure defined as the net cash provided by
operating activities less purchases of property, plant and equipment. Management
considers this metric to be helpful in understanding how the business is
generating cash from its operating and investing activities that can be used to
meet the financing needs of the business. Free cash flow is an indicator
frequently used by management in evaluating its overall liquidity needs and
determining appropriate capital allocation strategies. Free cash flow does not
represent the residual cash flow available for discretionary purposes.
13 weeks ended
April 30,
(in millions) 2022 May 1, 2021
Net cash (used in) provided by operating activities $ (135.5) $ 161.1
Purchase of property, plant and equipment (20.8) (11.3)
Free cash flow $ (156.3) $ 149.8 3. Earnings before interest, income taxes, depreciation and amortization ("EBITDA") and adjusted EBITDA
EBITDA is a non-GAAP measure defined as earnings before interest, income taxes,
depreciation and amortization. EBITDA is an important indicator of operating
performance as it excludes the effects of financing and investing activities by
eliminating the effects of interest, depreciation and amortization costs.
Adjusted EBITDA is a non-GAAP measure, defined as earnings before interest,
income taxes, depreciation and amortization, share-based compensation expense,
non-operating income (expense) and certain non-GAAP accounting adjustments.
Reviewed in conjunction with net income (loss) and operating income (loss),
management believes that EBITDA and adjusted EBITDA help in enhancing investors'
ability to evaluate and analyze trends regarding Signet's business and
performance based on its current operations.
13 weeks ended
(in millions) April 30, 2022 May 1, 2021
Net income (loss) $ (83.5) $ 138.4
Income tax (benefit) expense (55.2) 26.5
Interest expense, net 4.4 3.9
Depreciation and amortization 40.0 42.1
Amortization of unfavorable contracts (0.5) (1.4)
EBITDA$ (94.8) $ 209.5 Other non-operating expense (income) (3) 134.5 (0.1) Share-based compensation 10.5 8.0 Other accounting adjustments Restructuring charges - (0.7) Asset impairments, net (1) - (0.2) Acquisition-related costs (2) 4.4 1.1 Litigation charges (4) 190.0 - Adjusted EBITDA$ 244.6 $ 217.6
(1) Includes right-of-use ("ROU") asset impairment gains, net recorded due to various impacts of COVID-19 to the Company's business and related gains on terminations or modifications of leases, resulting from previously recorded impairments of the right of use assets in Fiscal 2021.
(2) Acquisition-related costs include the impact of the fair value step-up for inventory from Diamonds Direct in the first quarter of Fiscal 2023, as well as professional fees for direct transaction-related costs incurred for the acquisition of Rocksbox in the first quarter of Fiscal 2022.
(3) Includes the pension settlement charge of
(4) Refer to Note 21 for additional information.
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4. Non-GAAP operating income
Non-GAAP operating income is a non-GAAP measure defined as operating income
excluding the impact of significant and unusual items which management believes
are not necessarily reflective of operational performance during a period.
Management finds the information useful when analyzing financial results in
order to appropriately evaluate the performance of the business without the
impact of significant and unusual items. In particular, management believes the
consideration of measures that exclude such expenses can assist in the
comparison of operational performance in different periods which may or may not
include such expenses.
13 weeks ended
(in millions) April 30, 2022 May 1, 2021
Operating income $ 0.2 $ 168.7
Restructuring charges - (0.7)
Asset impairments, net (1) - (0.2)
Acquisition-related costs (2) 4.4 1.1
Litigation charges (3) 190.0 -
Non-GAAP operating income $ 194.6 $ 168.9 (1) Includes right-of-use ("ROU") asset impairment gains, net recorded due to various impacts of COVID-19 to the Company's business and related gains on terminations or modifications of leases, resulting from previously recorded impairments of the right of use assets in Fiscal 2021.
(2) Acquisition-related costs include the impact of the fair value step-up for inventory from Diamonds Direct in the first quarter of Fiscal 2023, as well as professional fees for direct transaction-related costs incurred for the acquisition of Rocksbox in the first quarter of Fiscal 2022.
(3) Refer to Note 21 for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company's primary sources of liquidity are cash on hand, cash provided by operations and availability under its senior unsecured asset-based revolving credit facility (the "ABL Revolving Facility"). As ofApril 30, 2022 , the Company had$927.6 million of cash and cash equivalents and$147.7 million of outstanding debt, with$1.2 billion of availability under its ABL Revolving Facility. The tenets of Signet's capital strategy are: 1) investing in its business to drive growth in line with the Company's overall business strategy; 2) ensuring adequate liquidity through a strong cash position and financial flexibility under its debt arrangements; and 3) returning excess cash to shareholders. Over time, Signet's strategy is to sustain an adjusted leverage ratio (a non-GAAP measure as defined in Item 7 of the Signet's Fiscal 2022 Annual Report on Form 10-K) below 3.0x.
Investing in growth
Since the Company's transformation strategies began in Fiscal 2019, the Company delivered substantially against its strategic priorities to establish the Company as the OmniChannel jewelry category leader and position its business for sustainable long-term growth. The investments and new capabilities built during the past three years laid the foundation for stronger than expected results during Fiscal 2022, including prioritizing digital investments in both technology and talent, enhancing its new and modernized eCommerce platform and optimizing a connected commerce shopping journey for its customers. The Company's cash discipline has led to more efficient working capital, through both the extension of payment days with the Company's vendor base, as well through continued inventory reduction efforts. In addition, structural cost reductions since the Company's transformation strategy began in Fiscal 2019 have generated annual structural costs savings of over$400 million . As the Company continues to implement and execute on the next phase of its strategy, Inspiring Brilliance, it will continue to focus on working capital efficiency, optimizing its real estate footprint, and prioritizing transformational productivity to drive future cost savings opportunities, all of which are expected to be used to fuel strategic investments, grow the business, and enhance liquidity. In addition, the Company invested over$190 million for capital investments in Fiscal 2022, which included approximately$130 million for capital expenditures and approximately$60 million related to investments in digital and cloud IT. Additional capital investments of up to$250 million are planned for Fiscal 2023. In addition, during Fiscal 2022, the Company made two acquisitions in line with its "Inspiring Brilliance" strategy. OnMarch 29, 2021 , the Company acquired all of the outstanding shares ofRocksbox Inc. ("Rocksbox"), a jewelry rental subscription business, for cash consideration of$14.6 million , net of cash acquired. The acquisition was driven by Signet's initiatives to accelerate growth in its services offerings. OnNovember 17, 2021 , the Company acquired Diamonds Direct for cash consideration of$503.1 million , net of 35
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Liquidity and financial flexibility
During Fiscal 2022, the Company made significant progress in line with its
Inspiring Brilliance growth strategy through two key financial milestones.
First, the Company renegotiated its
Second, as described in Note 11, the Company entered into amended and restated receivable purchase agreements with CarVal andCastlelake regarding the purchase of add-on receivables on such Investors' existing accounts, as well as the purchase of the Company-owned credit card receivables portfolio for accounts that had been originated through Fiscal 2021. These agreements provide Signet with improved terms for the next two years, as well as remove consumer credit risk from the balance sheet. InMarch 2022 , the Company entered into amended and restated receivable purchase agreements with the Investors regarding the purchase of add-on receivables on such Investors' existing accounts. Under the amended and restated agreements, TheBank of Missouri will be the issuer for the add-on receivables on these existing accounts and the Investors will purchase the receivables from TheBank of Missouri . In conjunction with the above agreements inMarch 2022 , the Company entered into agreements with the Investors to transfer all existing cardholder accounts previously originated by Signet to TheBank of Missouri . Therefore, the Company will no longer originate any credit receivables with customers.
Returning excess cash to shareholders
The Company remains committed to its goal to return excess cash to shareholders. During Fiscal 2022 and Fiscal 2023 to date, the Company has declared all preferred share dividends payable in cash, and beginning in the second quarter of Fiscal 2022, elected to reinstate the dividend program on its common shares. In addition, beginning in the third quarter of Fiscal 2022, the Board of Directors authorized a reinstatement of share repurchases under the 2017 Program as well as increased authorization under the 2017 Program by approximately$560 million during Fiscal 2022, as well as authorized an additional$500 million inJune 2022 . Since this time, the Company has repurchased approximately 7.5 million shares for$580.0 million under the Program, including$268.2 million to date in Fiscal 2023. See Note 7 for further information related to the share repurchases. The Company believes that cash on hand, cash flows from operations and available borrowings under the ABL Revolving Facility will be sufficient to meet its ongoing business requirements for at least the 12 months following the date of this report, including funding working capital needs, projected investments in the business (including capital expenditures), debt service, and returns to shareholders through either dividends or the share repurchases.
Primary sources and uses of operating cash flows
Operating activities provide the primary source of cash for the Company and are influenced by a number of factors, the most significant of which are operating income and changes in working capital items, such as:
•changes in the level of inventory as a result of sales and other strategic initiatives;
•changes and timing of accounts payable and accrued expenses, including variable compensation; and
•changes in deferred revenue, reflective of the revenue from performance of extended service plans.
Signet derives most of its operating cash flows through the sale of merchandise
and extended service plans. As a retail business, Signet receives cash when it
makes a sale to a customer or when the payment has been processed by Signet or
the relevant bank if the payment is made by third-party credit or debit card. As
further discussed in Note 11, the Company has outsourced its entire credit card
portfolio, and it receives cash from its outsourced financing partners (net of
applicable fees) generally within two days of the customer sale. Offsetting
these receipts, the Company's largest operating expenses are the purchase of
inventory, store occupancy costs (including rent), and payroll and
payroll-related benefits.
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Summary cash flow
The following table provides a summary of Signet's cash flow activity for Fiscal
2023 and Fiscal 2022:
13 weeks ended
(in millions) April 30, 2022 May 1, 2021
Net cash (used in) provided by operating activities $ (135.5) $ 161.1
Net cash used in investing activities (22.2) (24.8)
Net cash used in financing activities (325.6) (13.7)
(Decrease) increase in cash and cash equivalents $
(483.3)
Cash and cash equivalents at beginning of period$ 1,418.3 $ 1,172.5 (Decrease) increase in cash and cash equivalents (483.3) 122.6 Effect of exchange rate changes on cash and cash equivalents (7.4) 3.3 Cash and cash equivalents at end of period $ 927.6$ 1,298.4 Operating activities Net cash used in operating activities was$135.5 million compared to net cash provided by operating activities of$161.1 million in the prior year comparable period. This decrease, as further described below, is primarily due to reduced cash inflows from working capital compared to the prior period as the Company worked to preserve cash as a result of business disruptions from the impacts of the pandemic, partially offset by higher income from operations in the current year period. •Net loss was$83.5 million compared to net income of$138.4 million in the prior year period, a decrease of$221.9 million . This decrease was primarily related to a non-cash, pre-tax pension settlement charge of$131.9 million and pre-tax litigation charges of$190.0 million during Fiscal 2023. See Note 20 for details. •Changes in current income taxes was a use of$125.6 million in the current period compared to a use of$8.4 million in the prior year. The year over year change was primarily the result of income tax payments of$85.4 million in the current year. Refer to Note 10 for more information. •Cash used by inventory was$167.3 million compared to a source of$19.3 million in the prior year period. Inventory increased in the current year as a result of higher merchandise costs and pull forward of purchases to mitigate potential supply chain disruptions. •Cash used by accounts payable was$23.6 million compared to a use of$122.2 million in the prior year period. In the prior year period, as a result of cash management initiatives implemented as a result of the COVID-19, the Company continued to utilize extended terms with its vendors and have maintained these extended terms throughout the current year. •Cash provided by accrued expenses and other liabilities was$105.1 million in Fiscal 2023, compared to a source of$18.0 million in the prior year period. The change in the current year period was driven by accrued litigation charges of$190.0 million . Investing activities Net cash used in investing activities for the 13 weeks endedApril 30, 2022 was$22.2 million compared to net cash used in investing activities of$24.8 million in the prior period. Cash used in Fiscal 2023 was primarily related to capital expenditures of$20.8 million . Capital expenditures are associated with new stores, remodels of existing stores, and strategic capital investments in digital and IT. Signet has planned Fiscal 2023 capital investments of up to$250 million , of which approximately$200 million relates to capital expenditures for technology and banner differentiation, and approximately$50 million relates to digital and cloud innovation. In Fiscal 2022, net cash used in investing activities included$14.4 million for the acquisition of Rocksbox.
Stores opened and closed in the 13 weeks ended
Store count by segment January 29, 2022 Openings Closures April 30, 2022 North America segment (1) 2,506 14 (13) 2,507 International segment (1) 348 1 (2) 347 Signet 2,854 15 (15) 2,854
(1) The net change in selling square footage for Fiscal 2023 year to date for
the
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Financing activities
Net cash used in financing activities for the 13 weeks endedApril 30, 2022 was$325.6 million , consisting of the repurchase of common shares of$268.2 million , payments for withholding taxes related to the settlement of the Company's share-based compensation awards of$40.2 million , and preferred and common dividends paid of$17.2 million .
Net cash used in financing activities for the 13 weeks ended
Movement in cash and indebtedness
Cash and cash equivalents atApril 30, 2022 were$927.6 million compared to$1.3 billion as ofMay 1, 2021 . Signet has cash and cash equivalents invested in various 'AAA' rated government money market funds and at a number of large, highly rated financial institutions. The amount invested in each liquidity fund or at each financial institution takes into account the credit rating and size of the liquidity fund or financial institution and is invested for short-term durations. As further described in Note 18, onJuly 28, 2021 , the Company entered into an agreement to amend the ABL Revolving Facility. The amendment extends the maturity of the ABL Revolving Facility toJuly 28, 2026 and allows the Company to increase the size of the ABL Revolving Facility by up to$600 million .
At
Available borrowings under the ABL Revolving Facility were
Net cash was$780.5 million as ofApril 30, 2022 compared to net cash of$1.2 billion as ofMay 1, 2021 . Refer to the non-GAAP measures discussed above for the definition of net cash (debt) and reconciliation to its most comparable financial measure presented in accordance with GAAP.
As of
SEASONALITY
Signet's business is seasonal, with the fourth quarter historically accounting for approximately 35-40% of annual sales as well as accounts for a substantial portion of the annual operating profit. The "Holiday Season" consists of results for the months of November and December, with December being the highest volume month of the year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to the valuation of inventories, deferred revenue, derivatives, employee benefits, income taxes, contingencies, asset impairments, leases, indefinite-lived intangible assets, depreciation and amortization of long-lived assets and accounting for business combinations. Management bases the estimates and judgments on historical experience and various other factors believed to be reasonable under the circumstances. Actual results may differ from these estimates. There have been no material changes to the critical accounting policies and estimates disclosed in Signet's Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 filed with theSEC onMarch 17, 2022 .
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company and certain of its subsidiaries, which are listed on Exhibit 22.1 to this Quarterly Report on Form 10-Q, have guaranteed obligations under the Senior Notes. The Senior Notes were issued bySignet UK Finance plc (the "Issuer"). The Senior Notes rank senior to the Preferred Shares (as defined in Note 6) and Common Shares. The Senior Notes are effectively subordinated to our existing and future secured indebtedness to the extent of the assets securing that indebtedness. The Senior Notes are fully and unconditionally guaranteed on a joint and several basis by the Company, as the parent entity ( the "Parent") of the Issuer, and certain of its subsidiary guarantors (each, a "Guarantor" and collectively, the "Guarantors"). The Senior Notes are structurally subordinated to all existing and future debt and other liabilities, including trade payables, of our subsidiaries that do not guarantee the Senior Notes (the "Non-Guarantors"). The Non-Guarantors will have no obligation, contingent or otherwise, to pay amounts due under the Senior Notes or to make funds available to pay those amounts. Certain Non-Guarantors may be limited in their ability to remit funds to us by means of dividends, advances or loans due to required foreign government and/or currency exchange board approvals or limitations in credit agreements or other debt instruments of those subsidiaries. 38 -------------------------------------------------------------------------------- Table of Contents The Guarantors jointly and severally irrevocably and unconditionally guarantee on a senior unsecured basis the performance and full and punctual payment when due of all obligations of Issuer, as defined in the Indenture, in accordance with the Senior Notes and the related Indentures, as supplemented, whether for payment of principal of or interest on the Senior Notes when due and any and all costs and expenses incurred by the trustee or any holder of the Senior Notes in enforcing any rights under the guarantees (collectively, the "Guarantees"). The Guarantees and Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions. Although the Guarantees provide the holders of Senior Notes with a direct unsecured claim against the assets of the Guarantors, under US federal bankruptcy law and comparable provisions of US state fraudulent transfer laws, in certain circumstances a court could cancel a Guarantee and order the return of any payments made thereunder to the Guarantors or to a fund for the benefit of its creditors. A court might take these actions if it found, among other things, that when the Guarantors incurred the debt evidenced by their Guarantee (i) they received less than reasonably equivalent value or fair consideration for the incurrence of the debt and (ii) any one of the following conditions was satisfied: •the Guarantor entity was insolvent or rendered insolvent by reason of the incurrence; •the Guarantor entity was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or •the Guarantor entity intended to incur or believed (or reasonably should have believed) that it would incur, debts beyond its ability to pay as those debts matured. In applying the above factors, a court would likely find that a Guarantor did not receive fair consideration or reasonably equivalent value for its Guarantee, except to the extent that it benefited directly or indirectly from the issuance of the Senior Notes. The determination of whether a Guarantor was or was not rendered insolvent when it entered into its Guarantee will vary depending on the law of the jurisdiction being applied. Generally, an entity would be considered insolvent if the sum of its debts (including contingent or unliquidated debts) is greater than all of its assets at a fair valuation or if the present fair salable value of its assets is less than the amount that will be required to pay its probable liability on its existing debts, including contingent or unliquidated debts, as they mature.
If a court canceled a Guarantee, the holders of the Senior Notes would no longer have a claim against that Guarantor or its assets.
Each Guarantee is limited, by its terms, to an amount not to exceed the maximum
amount that can be guaranteed by the applicable Guarantor without rendering the
Guarantee, as it relates to that Guarantor, voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally.
Each Guarantor is a consolidated subsidiary of Parent at the date of each
balance sheet presented. The following tables present summarized financial
information for Parent, Issuer, and the Guarantors on a combined basis after
elimination of (i) intercompany transactions and balances among Parent, Issuer,
and the Guarantors and (ii) equity in earnings from and investments in any
Non-Guarantor.
Summarized Balance Sheets
(in millions) April 30, 2022 January 29, 2022
Total current assets $ 3,302.1 $ 3,507.0
Total non-current assets 2,172.0 2,245.3
Total current liabilities 2,420.4 2,309.3
Total non-current liabilities 3,366.5 3,407.0
Redeemable preferred stock 652.6 652.1
Total due from Non-Guarantors (1) 381.0 311.4
Total due to Non-Guarantors (1) 1,706.1 1,666.9
(1) Amounts included in asset and liability subtotals above.
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