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. 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 2021 Annual Report on Form 10-K filed with theSEC onMarch 19, 2021 . This management's discussion and analysis provides comparisons of material changes in the condensed consolidated financial statements for 13 weeks endedMay 1, 2021 and the 13 weeks endedMay 2, 2020 . 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, Signet's results of operation, 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 continues to have, 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 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 (specifically inIndia ), consumer behaviors such as willingness to congregate in shopping centers and shifts in spending away from the jewelry category and the impact on demand of our products, 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; financial market risks; our ability to optimize Signet's transformation strategies; a decline in consumer spending or deterioration in consumer financial position; 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 non-prime outsourcing agreement requiring transition to alternative arrangements through other providers or alternative payment options and our ability to successfully establish future arrangements for the forward-flow receivables; 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, 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, 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; 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; changes in consumer attitudes regarding jewelry and failure to anticipate and keep pace 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 sales associates; 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 33 -------------------------------------------------------------------------------- Table of Contents 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, business combination, major business or strategic initiative; 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, strikes, protests, riots or terrorism, acts of war 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 2021 Annual Report on Form 10-K filed with theSEC onMarch 19, 2021 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. OVERVIEWSignet Jewelers Limited ("Signet" or the "Company") is the world's largest retailer of diamond jewelry. Signet is incorporated inBermuda . The Company, with 2,833 stores and kiosks as ofMay 1, 2021 , manages its business by geography, a description of which follows: •The North America segment has 2,385 locations in the US and 97 locations inCanada as ofMay 1, 2021 . •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 ); JamesAllen.com; and Rocksbox. Additionally, in the US, the segment operates mall-based kiosks under the Piercing Pagoda banner. •In Canada, the segment primarily operates under the Peoples banner (Peoples Jewellers ). •The International segment has 351 stores in theUK ,Republic of Ireland andChannel Islands as ofMay 1, 2021 .Certain Company activities are managed in the "Other" segment for financial reporting purposes, including the Company's diamond sourcing function and its diamond polishing factory inBotswana . See Note 4 of Item 1 for additional information regarding the Company's reportable segments. Impacts of COVID-19 InDecember 2019 , a novel coronavirus ("COVID-19") was identified inWuhan, China . During Fiscal 2021, the Company experienced significant disruption to its business, specifically in its retail store operations through temporary closures during the first half of last year. By the end of the third quarter of Fiscal 2021, the Company had re-opened substantially all of its stores. However, during the fourth quarter of Fiscal 2021, both theUK and certain Canadian provinces re-established mandated temporary closure of non-essential businesses. TheUK stores began to reopen inApril 2021 , while certain Canadian stores continue to be impacted by these government restrictions through the date of this report. The Company continues to actively monitor and manage the situation related to its store and support center operations at the local level focusing on the best interests of its employees, customers, suppliers and shareholders. The COVID-19 pandemic significantly altered the retail climate and the Company has been navigating that change by accelerating its application of the key strategic initiatives developed over the past three years including the Company's focus on becoming an OmniChannel leader, focusing on the needs of its customers, removing non-customer facing costs, and optimizing its real estate footprint. The Company continues to maintain its cost diligence efforts and the three-year net structural cost savings through the end of Fiscal 2021 related to the Company's Path to Brilliance transformation plan were approximately$300 million . During Fiscal 2021, the Company also took numerous actions to maximize its financial flexibility, bolster its cash position and reduce operating expenditures, both strategically and as temporary measures as a result of COVID-19. Refer to the Liquidity and Capital Resources section below for further information. 34 -------------------------------------------------------------------------------- Table of Contents Outlook Signet's same store sales grew 106.5% during the first quarter of Fiscal 2022 compared to the comparable quarter of Fiscal 2021, reflecting a combination of traction from strategic initiatives as well as tailwinds from stimulus, tax refunds and consumer enthusiasm on the heels of vaccine rollouts. Higher conversion rates and transaction values, both online and in-store, also helped to drive overall sales performance during the first quarter of Fiscal 2022. During the remainder of Fiscal 2022, the Company will continue implementing its Inspiring Brilliance strategies, which are focused on 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 30, 2021 filed with theSEC onMarch 19, 2021 , through its Inspiring Brilliance strategies, the Company will focus on leveraging its core strengths that it developed over the past three years with the goal of creating a broader mid-market and increasing Signet's share of that larger market as the industry leader. The full extent of the COVID-19 pandemic impacts on the Company's business during the remainder of Fiscal 2022 or longer term, and whether the strong results in the first quarter of Fiscal 2022 will continue, especially toward the latter part of Fiscal 2022, remains unclear. As the vaccine rollout matures, the Company believes there will be a shift of consumer discretionary spending away from the jewelry category toward experience-oriented categories, the magnitude and timing of which is difficult to predict. As such, the Company is planning for increased marketing expenses to continue to fuel momentum from the first half of Fiscal 2022 as well as to proactively manage against shifts in consumer spending as the year progresses. In addition, continued uncertainties exist that could impact the Company's result of operations or cash flows in Fiscal 2022, such as potential resurgence of COVID-19 in key trade areas, extended duration of heightened unemployment, supply chain disruptions and macro or governmental influences on consumers' ability to spend. 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 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 (debt) Net cash (debt) 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) May 1, 2021 January 30, 2021 May 2, 2020 Cash and cash equivalents$ 1,298.4 $ 1,172.5$ 1,066.6 Less: Loans and overdrafts - - (22.2) Less: Long-term debt (146.8) (146.7) (1,336.0) Net cash (debt)$ 1,151.6 $ 1,025.8$ (291.6) 35
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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 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 and determining appropriate
capital allocation strategies. Free cash flow does not represent the residual
cash flow available for discretionary purposes.
13 weeks ended
(in millions) May 1, 2021 May 2, 2020 Net cash provided by (used in) operating activities$ 161.1 $
(7.6)
Purchase of property, plant and equipment (11.3) (7.7) Free cash flow$ 149.8 $ (15.3) 3. Earnings before interest, income taxes, depreciation and amortization ("EBITDA") and Adjusted EBITDA EBITDA is a non-GAAP measure defined as earnings before interest and income taxes (operating income), 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, as revised by the Company in Fiscal 2021, is a non-GAAP measure, defined as earnings before interest and income taxes, depreciation and amortization, share-based compensation 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. The revisions made in Fiscal 2021 and the Company's overall methodology are further described in Item 7 of the Signet's Fiscal 2021 Annual Report on Form 10-K. All periods below have been presented consistently with the revised calculation of Adjusted EBITDA, as defined above. 13 weeks ended (in millions) May 1, 2021 May 2, 2020 Net income (loss)$ 138.4 $ (197.1) Income tax expense (benefit) 26.5 (109.5) Other non-operating income, net (0.1) (0.1) Interest expense, net 3.9 7.1 Depreciation and amortization 42.1 37.3 Amortization of unfavorable contracts (1.4) (1.4) EBITDA$ 209.4 $ (263.7) Share-based compensation 8.0 1.4 Other accounting adjustments Restructuring charges - cost of sales - (0.4) Restructuring charges (0.7) 12.7 Asset impairments, net (1) (0.2) 136.3 Rocksbox acquisition-related costs 1.1 - Shareholder settlement - 8.5 Adjusted EBITDA$ 217.6 $ (105.2)
(1) Includes asset impairments, net recorded due to the 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.
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4. Non-GAAP operating income (loss)
Non-GAAP operating income (loss) is a non-GAAP measure defined as operating
income (loss) 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) May 1, 2021 May 2, 2020
Operating income (loss) $ 168.7 $ (299.6)
Restructuring charges - cost of sales - (0.4)
Restructuring charges (0.7) 12.7
Asset impairments, net (1) (0.2) 136.3
Rocksbox acquisition-related costs 1.1 -
Shareholder settlement - 8.5
Non-GAAP operating income (loss)
(1) Includes asset impairments, net recorded due to the 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.
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RESULTS OF OPERATIONS
The following should be read in conjunction with the 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 2021 Annual Report
on Form 10-K.
Comparison of First Quarter Fiscal 2022 to First Quarter Fiscal 2021
•Same store sales: Up 106.5%.
•Total sales: $1.69 billion , increased 98.2%.
•Operating income (loss): $168.7 million compared to $(299.6) million in the
prior year.
•Diluted earnings (loss) per share: $2.23 compared to $(3.96) in the prior year.
First Quarter
Fiscal 2022 Fiscal 2021
(in millions) $ % of sales $ % of sales
Sales $ 1,688.8 100.0 % $ 852.1 100.0 %
Cost of sales (1,010.4) (59.8) (648.3) (76.1)
Restructuring charges - cost of sales - - 0.4 -
Gross margin 678.4 40.2 204.2 24.0
Selling, general and administrative expenses (512.0) (30.3) (358.4) (42.1)
Restructuring charges 0.7 - (12.7) (1.5)
Asset impairments, net (1.5) (0.1) (136.3) (16.0)
Other operating income, net 3.1 0.2 3.6 0.4
Operating income (loss) 168.7 10.0 (299.6) (35.2)
Interest expense, net (3.9) (0.2) (7.1) (0.8)
Other non-operating income, net 0.1 - 0.1 -
Income (loss) before income taxes 164.9 9.8 (306.6) (36.0)
Income tax benefit (expense) (26.5) (1.6) 109.5 12.9
Net income (loss) $ 138.4 8.2 % $ (197.1) (23.1) %
Dividends on redeemable convertible preferred shares (8.6) nm (8.2) nm
Net income (loss) attributable to common shareholders
7.7 %$ (205.3) (24.1) % nm Not meaningful. First quarter sales Signet's total sales increased 98.2% year over year to$1.69 billion in the 13 weeks endedMay 1, 2021 . Total sales at constant exchange rates increased 96.4%. Signet's same store sales increased 106.5%, compared to a decrease of 38.9% in the prior year quarter. This growth reflects a combination of traction from strategic initiatives as well as jewelry market trends being currently strong, benefiting from stimulus and rollout of vaccines returning shoppers to the mall. eCommerce sales in the first quarter of Fiscal 2022 were$346.3 million , up$181.6 million or 110.3%, compared to$164.7 million in the prior year quarter. eCommerce sales accounted for 20.5% of first quarter sales, up from 19.3% of total sales in the prior year first quarter. Brick and mortar same store sales increased 105.7% from prior year first quarter. The increase in eCommerce sales reflects the accelerated enhancement of eCommerce capabilities and a digital first focus, related to the Connected Commerce strategies, that began in Fiscal 2021 and is resonating with customers. The brick and mortar sales increase was driven by a combination of factors including new product launches and expanded customization options during the first quarter of Fiscal 2022. In addition, sales in all channels were negatively impacted in the first quarter of Fiscal 2021 by the temporary closures of all stores inMarch 2020 . 38
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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 2022 sales net rate impact as reported (in millions)
North America segment 117.2 % (10.5) % 106.7 % 0.4 % 107.1 % $ 1,618.0
International segment (12.2) % (7.1) % (19.3) % 7.7 % (11.6) % $ 57.4
Other segment (1) nm nm nm nm nm $ 13.4
Signet 106.5 % (10.1) % 96.4 % 1.8 % 98.2 % $ 1,688.8
(1) Includes sales from Signet's diamond sourcing initiative.
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 2022 Fiscal 2021 Fiscal 2022 Fiscal 2021 Fiscal 2022 Fiscal 2021
North America segment $ 418 $ 359 15.2 % (6.5) % 90.0 % (34.5) %
International segment (3) £ 165 £ 150 5.8 % 2.7 % (16.6) % (41.2) %
(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, repair, extended service
plan, insurance, employee and other miscellaneous 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.
North America sales
The North America segment's total sales were $1.62 billion compared to $0.78
billion in the prior year, or an increase of 107.1%. Same store sales increased
117.2% compared to a decrease of 39.0% in the prior year. North America's ATV
and number of transactions increased 15.2% and 90.0%, respectively. Reflecting
progress of the Company's Path to Brilliance and the Inspiring Brilliance
strategies, the Company is effectively differentiating its banners, with Kay and
Zales delivering double digit revenue growth versus two years ago on a smaller
store base. The Company is expanding both the top and bottom tiers of the
market. Piercing Pagoda continued its substantial sales growth in the first
quarter of Fiscal 2022, and Jared continued to grow as it appeals to customers
through accessible luxury. The increase year over year also reflects the impact
from the temporary closures of all North America stores beginning March 23, 2020
for the remainder of the first quarter of Fiscal 2021.
eCommerce sales increased 113.4%, while brick and mortar same store sales
increased 118.4%.
International sales
The International segment's total sales decreased 11.6% to $57.4 million
compared to $64.9 million in the prior year and decreased 19.3% at constant
exchange rates. Same store sales decreased 12.2% compared to a decrease of 37.5%
in the prior year. In the International segment, the ATV increased 5.8% year
over year, while the number of transactions decreased 16.6%. The declines noted
reflect the impact of government-imposed temporary closures of all UK stores, as
a result of COVID-19, beginning on January 5, 2021 through April 2021 . In the
prior year first quarter, all UK stores temporarily closed on March 24, 2020 for
the remainder of the first quarter of Fiscal 2022.
Gross margin
In the first quarter of Fiscal 2022, gross margin was $678.4 million or 40.2% of
sales compared to $204.2 million or 24.0% of sales in the prior year comparable
period. The increase in gross margin rate for the first quarter of Fiscal 2022,
compared to prior year quarter, was primarily driven by reduced clearance,
sourcing savings and product mix, partially offset by lower margin mix between
banners. Current year gross margin rate also benefited from the leveraging of
fixed costs, such as occupancy costs.
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Selling, general and administrative expenses ("SG&A")
In the first quarter of Fiscal 2022, SG&A was $512.0 million or 30.3% of sales
compared to $358.4 million or 42.1% of sales in prior year quarter. SG&A
increased primarily due to sales returning to pre-pandemic levels which drove
higher advertising costs and higher incentive compensation. In addition,
staffing costs were overall higher in the current year quarter, as a substantial
portion of the Company's workforce was furloughed beginning in April 2020 . This
was partially offset by the benefits of permanent cost savings from the
Company's transformation activities, such as more efficient operating hours and
corresponding labor, contributing to the improvement in the current year SG&A as
a percentage of sales.
Restructuring charges
During the first quarter of Fiscal 2019, Signet launched a three-year
comprehensive transformation plan, called "Signet Path to Brilliance" (the
"Plan"), to, among other objectives, reposition the Company to be a share
gaining, OmniChannel jewelry category leader. The Plan was substantially
completed as of the end of Fiscal 2021. Credits to restructuring expense of $0.7
million and restructuring expenses of $12.7 million were recognized in the 13
weeks ended May 1, 2021 and May 2, 2020 , respectively, primarily related to
store closures, severance costs, and professional fees for legal and consulting
services related to the Plan. See Note 5 for additional information.
Asset impairments, net
During the first quarter of Fiscal 2022, the Company recorded net non-cash,
pre-tax asset impairment charges of $1.5 million , primarily related to
long-lived assets. For the 13 weeks ended May 2, 2020 , the Company recorded
non-cash, pre-tax asset impairment charges of $136.3 million . The charge related
to the impairment of goodwill, intangible assets and long-lived assets of $10.7
million , $83.3 million and $42.3 million , respectively, for the quarter ended
May 2, 2020 . See Notes 13 and 15 for additional information on the asset
impairments.
Other operating income, net
During the 13 weeks ended May 1, 2021 , other operating income, net, was $3.1
million primarily driven by interest income on the Company's non-prime credit
card portfolio, and offset primarily by foreign exchange losses. For the 13
weeks ended May 2, 2020 , other operating income, net was $3.6 million primarily
driven by gains recognized as a result of the Company liquidating derivative
financial instruments primarily related to forecasted commodity purchases that
were deemed no longer effective in light of the economic impacts of the COVID-19
pandemic. These gains were offset by a charge related to the proposed settlement
of previously disclosed shareholder litigation matters. See Note 16 and Note 21
for additional information on these matters.
Operating income (loss)
In the first quarter of Fiscal 2022, operating income (loss) was $168.7 million
or 10.0% of sales, compared to $(299.6) million or (35.2)% of sales in the prior
year first quarter. This increase reflects sales returning to pre-pandemic
levels as well as permanent cost savings, driven by lower fixed occupancy costs,
staff related costs and supply chain savings partially offset by higher
incentive compensation and higher advertising costs. For the 13 weeks ended
May 2, 2020 operating income reflects the impact of the temporary closure of all
stores as a result of the COVID-19 pandemic as of March 24, 2020 through the end
of such quarter, inclusive of impacts of lower sales and asset impairment
charges, offset by lower staff costs and other variable costs.
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Signet's operating income (loss) by segment for the first quarter is as follows:
Fiscal 2022 Fiscal 2021
% of segment % of segment
(in millions) $ sales $ sales
North America segment (1) $ 212.0 13.1 % $ (234.2) (30.0) %
International segment (2) (19.7) (34.3) % (38.6) (59.5) %
Other segment (0.9) nm (0.3) nm
Corporate and unallocated expenses (3) (22.7) nm (26.5) nm
Operating income (loss) $ 168.7 10.0 % $ (299.6) (35.2) %
(1) Operating income (loss) during the 13 weeks ended May 1, 2021 includes:
$1.1 million of acquisition-related expenses in connection with the Rocksbox
acquisition; $0.7 million of credits to restructuring expense, primarily related
to adjustments to previously recognized restructuring liabilities; and
$1.5 million of net asset impairments. See Note 5 and Note 13 for additional
information.
Operating income (loss) during the 13 weeks ended May 2, 2020 includes a $0.4
million benefit recognized due to a change in inventory reserves previously
recognized as part of the Company's restructuring activities, charges of
$8.9 million primarily related to severance and professional services recorded
in conjunction with the Company's restructuring activities, and asset impairment
charges of $117.9 million . See Note 5, Note 13, and Note 15 for additional
information.
(2) Operating income (loss) during the 13 weeks ended May 2, 2020 includes
charges of $3.6 million primarily related to severance and professional services
recorded in conjunction with the Company's restructuring activities and asset
impairment charges of $18.4 million . See Note 5, Note 13, and Note 15 for
additional information.
(3) Operating income (loss) during the 13 weeks ended May 2, 2020 includes a
charge of $8.5 million related to the settlement of previously disclosed
shareholder litigation matters and charges of $0.2 million primarily related to
severance and professional services recorded in conjunction with the Company's
restructuring activities. See Note 5 and Note 21 for additional information.
nm Not meaningful.
Interest expense, net
In the 13 weeks ended May 1, 2021 , net interest expense was $3.9 million ,
compared to $7.1 million in the 13 weeks ended May 2, 2020 . The decrease is
primarily due to lower average borrowings compared to prior year quarter.
Income taxes
In the first quarter of Fiscal 2022, income tax expense was $26.5 million , an
effective tax rate ("ETR") of 16.1%, compared to the income tax benefit of
$109.5 million , an ETR of 35.7% in the prior year comparable period. The ETR for
the 13 weeks ended May 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. The ETR for the 13 weeks ended May 2,
2020 was primarily impacted by the anticipated benefit of the CARES Act
recognized in the first quarter of Fiscal 2021 offset by the unfavorable impact
of the valuation allowance recorded against certain US and state deferred tax
assets and the impairment of goodwill which was not deductible for tax purposes.
Refer to Note 10 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 of May 1, 2021 , the Company
had approximately $1.3 billion of cash and cash equivalents and $147.6
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 reduce its adjusted leverage ratio (a non-GAAP
measure as defined in Item 7 of the Signet's Fiscal 2021 Annual Report on
Form 10-K) to below 3.0x.
During the past three years under its Path-to-Brilliance transformation plan,
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 and momentum beginning in the second half of Fiscal 2021,
including prioritizing digital investments in both technology and talent,
enhancing its new and modernized eCommerce platform and optimizing the
OmniChannel shopping journey for its customers. The Company's cash discipline
has also 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 during the past three
years of the Company's transformation strategy generated annual costs savings of
$300 million which are now embedded in the business.
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As the Company transitions to 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 costs savings opportunities, all of which are expected to be used
to fuel strategic investments, grow the business, and enhance liquidity.
The Company has declared the first quarter Fiscal 2022 preferred share dividend
(payable during the second quarter of Fiscal 2022) payable in cash. Signet has
also elected to reinstate the dividend program on the common shares beginning in
the second quarter of Fiscal 2022.
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 Company's share repurchase program.
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 prime credit
portfolio and a substantial portion of its non-prime credit portfolio, and it
receives cash from its outsourced financing partners (net of applicable fees)
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.
Summary cash flow
The following table provides a summary of Signet's cash flow activity for Fiscal
2022 and Fiscal 2021:
13 weeks ended
(in millions) May 1, 2021 May 2, 2020
Net cash provided by (used in) operating activities $ 161.1 $ (7.6)
Net cash used in investing activities (24.8) (6.4)
Net cash (used in) provided by financing activities (13.7) 714.0
Increase in cash and cash equivalents $
122.6
Cash and cash equivalents at beginning of period$ 1,172.5 $ 374.5 Increase in cash and cash equivalents 122.6 700.0 Effect of exchange rate changes on cash and cash equivalents 3.3 (7.9) Cash and cash equivalents at end of period $
1,298.4
Operating activities Net cash provided by operating activities was$161.1 million during the first quarter of Fiscal 2022 compared to net cash used in operating activities of$7.6 million in the prior year comparable period, primarily due to higher operating income in the current year versus the prior comparable period, in which the Company experienced closures to all of its stores beginning at the end ofMarch 2020 and other business disruptions as a result of the impacts of the COVID-19 pandemic. •Net income was$138.4 million compared to net loss of$197.1 million in the prior year period, an increase of$335.5 million . •Deferred taxes was a source of$9.5 million in the current period, compared to a source of$83.3 million in the prior year period. Changes in current income taxes was a use of$8.4 million in the current period compared to a use of$192.7 million in the prior year. The change was primarily the result of the net operating loss carryback filed in the first quarter of Fiscal 2021 in accordance with the provisions of the CARES Act, offset by an increase in the valuation allowance related to certain 42 -------------------------------------------------------------------------------- Table of Contents deferred tax assets in the US. Refer to Note 10 for more details. The carryback was collected in the third quarter of Fiscal 2021. •Non-cash impairment charges were$1.5 million compared to$136.3 million in the prior year period. See Note 13 for additional information regarding asset impairments. •Cash provided by inventory was$19.3 million compared to cash used of$77.2 million in the prior year period. Inventory increased in the prior year due to the shut down of the stores in lateMarch 2020 as a result of the COVID-19 pandemic. •Cash used by accounts payable was$122.2 million compared to cash provided of$99.0 million in the prior year period, as the Company paid down a significant portion of its fourth quarter merchandise purchases from the Holiday Season. In the prior year first quarter, as a result of cash management initiatives implemented as a result of the COVID-19 pandemic, the Company began utilizing extended terms with its vendors. •Cash provided by accrued expenses and other current liabilities was$18.0 million compared to cash used of$40.1 million in the prior year period, primarily related to higher accruals for incentive compensation. •Cash used by changes in operating leases was$31.2 million in Fiscal 2022, compared to cash provided of$61.4 million in the prior year period, driven by the Company's deferral of rent payments due beginning inApril 2020 , which were partially repaid during the first quarter of Fiscal 2022. See Note 14 for further information. •Cash provided by deferred revenue was$34.4 million compared to cash used of$5.0 million in the prior year period, primarily due to increased warranty plan sales associated with the higher overall first quarter sales volume. Forward-Flow Receivables Outsourcing Agreement with Investors In conjunction with the sale of the majority of Signet's non-prime in-house accounts receivable to CarVal andCastlelake (collectively, the "Investors"), beginning inJune 2018 , the Investors began purchasing the majority of forward flow receivables of Signet's non-prime credit from Signet for a five-year term. During Fiscal 2021, the 2018 agreements pertaining to the purchase of forward flow receivables were terminated and new agreements were executed with both Investors which will remain effective untilJune 30, 2021 , unless terminated earlier by either party pursuant to the terms of respective agreements. The new agreements provide that the Investors will continue to purchase add-on receivables created on existing customer accounts at a discount rate determined in accordance with the new agreements. Signet began retaining all forward flow non-prime receivables created for new customers in the second quarter of Fiscal 2021. The termination of the previous agreements had no effect on the receivables that were previously sold to the Investors prior to the termination, except that Signet agreed to extend the Investors' payment obligation for the remaining 5% of the receivables previously purchased inJune 2018 until the new agreements terminate. The Company's agreement with the credit servicerGenesis Financial Solutions remains in place. InJanuary 2021 , the Company reached additional agreements with the Investors to further amend the purchase agreements described above throughJune 30, 2021 . CarVal continued to purchase add-on receivables for existing accounts and began to purchase 50% of new forward flow non-prime receivables. Genesis (becoming one of the "Investors") began to purchase the remaining 50% of new forward flow non-prime receivables throughJune 30, 2021 .Castlelake will continue to purchase add-on receivables for existing accounts throughJune 30, 2021 . Signet continued to retain add-on receivables for its existing accounts but is no longer retaining new forward flow non-prime receivables. InMarch 2021 , the Company provided notice to the Investors of its intent not to extend the respective agreements with such Investors beyond the expiration date ofJune 30, 2021 . EffectiveJuly 1, 2021 (the "New Program Start Date"), all new prime and non-prime account origination will occur in accordance with the amended and restatedComenity and Genesis agreements as further described in Note 11 and Note 22. The Company is currently in discussions with the Investors to extend the agreements related to the add-on purchases for their respective existing non-prime accounts that were originated prior to the New Program Start Date. Investing activities Net cash used in investing activities for the 13 weeks endedMay 1, 2021 was$24.8 million compared to net cash used in investing activities of$6.4 million in the prior period. Cash used in Fiscal 2022 was primarily related to the acquisition ofRocksbox Inc. for$14.4 million (net of cash acquired) and capital expenditures of$11.3 million . Capital expenditures are associated with new stores, remodels of existing stores, and strategic capital investments in digital and IT. The Company reduced planned capital expenditures in Fiscal 2021 due to uncertainty around COVID-19; however, it expects to spend between$175 million and$200 million in Fiscal 2022, focusing on technology, banner differentiation and innovation. 43 -------------------------------------------------------------------------------- Table of Contents Stores opened and closed in the 13 weeks endedMay 1, 2021 : Store count by segment January 30, 2021 Openings Closures May 1, 2021 North America segment (1) 2,481 9 (8) 2,482 International segment (1) 352 - (1) 351 Signet 2,833 9 (9) 2,833 (1) The net change in selling square footage for Fiscal 2022 year to date for theNorth America and International segments was (0.2%) and (0.3%), respectively. Financing activities Net cash used in financing activities for the 13 weeks endedMay 1, 2021 was$13.7 million , primarily due to activity related to the settlement of the Company's share-based compensation awards. Net cash provided by financing activities for the 13 weeks endedMay 2, 2020 was$714.0 million , consisted primarily of net borrowings of$746.0 million partially offset by$27.1 million for dividend payments on common and preferred shares. See further information on debt movements below. Movement in cash and indebtedness Cash and cash equivalents atMay 1, 2021 were$1.3 billion compared to$1.1 billion as ofMay 2, 2020 . 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. AtMay 1, 2021 , Signet had$147.6 million of outstanding debt, consisted entirely of$147.6 million of Senior Notes. AtMay 2, 2020 , Signet had$1.4 billion of outstanding debt, consisted of$147.5 million of Senior Notes,$1.1 billion on the ABL Revolving Facility,$100.0 million on the FILO Term Loan Facility and$22.2 million of bank overdrafts. OnMarch 19, 2020 , as a prudent measure in response to the COVID-19 pandemic to increase the Company's financial flexibility and bolster its cash position, the Company elected to access$900 million on the ABL Revolving Facility. Subsequently in Fiscal 2021, the Company fully repaid the$100 million FILO Term Loan Facility and the outstanding balance of the ABL Revolving Facility. Refer to Note 18 for further information regarding the Company's indebtedness. The Company had stand-by letters of credit outstanding of$19.0 million as ofMay 1, 2021 that reduces borrowing capacity under the ABL Revolving Facility. Net cash was$1.2 billion as ofMay 1, 2021 compared to net debt of$291.6 million as ofMay 2, 2020 . 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 ofMay 1, 2021 ,January 30, 2021 andMay 2, 2020 , the Company was in compliance with all debt covenants. 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 accounts receivables, 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 30, 2021 filed with theSEC onMarch 19, 2021 . 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 4.70% senior unsecured notes due in 2024 (the "Senior Notes"). 44 -------------------------------------------------------------------------------- Table of Contents 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. 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, underU.S. federal bankruptcy law and comparable provisions ofU.S. state fraudulent transfer laws, in certain circumstances a court could cancel a Guarantee and order the return of any payments made thereunder to the Guarantor 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. 45
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Summarized Balance Sheets
(in millions) May 1, 2021 January 30, 2021
Total current assets $ 3,687.0 $ 3,799.6
Total non-current assets 2,399.1 2,475.9
Total current liabilities 2,193.8 2,357.1
Total non-current liabilities 3,547.8 3,578.7
Redeemable preferred stock 650.9 642.3
Total due from Non-Guarantors (1) 307.1 395.9
Total due to Non-Guarantors (1) 1,673.7 1,695.0
(1) Amounts included in asset and liability subtotals above.
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