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Signet Jewelers Reports Second Quarter Fiscal 2019 Financial Results

August 30, 2018

HAMILTON, Bermuda--(BUSINESS WIRE)--Aug 30, 2018--Signet Jewelers Limited (“Signet”) (NYSE:SIG), the world’s largest retailer of diamond jewelry, today announced its results for the 13 weeks ended August 4, 2018 (“second quarter Fiscal 2019”).

Summary:

Same store sales (“SSS”) up 1.7% versus prior year quarter 1 GAAP diluted earnings per share (“EPS”) of $(0.56), including a ($1.08) combined impact of a loss recognized upon completion of the sale of non-prime receivables, restructuring charges and associated tax benefits Non-GAAP diluted EPS of $0.52 2 Completed non-prime credit outsourcing transaction, receiving $445.5 million in proceeds Repurchased $485 million in shares year to date, representing 14.6% of outstanding shares Raising Fiscal 2019 guidance to same store sales of down 1.5% to flat, total sales of $6.2 billion-$6.3 billion Raising Fiscal 2019 GAAP EPS guidance to $(7.47)-$(7.09) and non-GAAP EPS guidance to $4.05-$4.40

Virginia C. Drosos, Chief Executive Officer, commented, “While it is still early in our journey, we are encouraged by our improving year-to-date performance as we execute against our Path to Brilliance transformation plan. During the second quarter, we continued to see stabilization in same store sales, and we remain confident that we have the right strategies in place to continue to drive operational improvement over the long-term. To reflect our improved second quarter performance, we are modestly raising our revenue and earnings guidance for the year. For the fourth quarter, however, where a vast majority of our annual operating profit is generated, we are remaining appropriately cautious in our outlook as many of our Path to Brilliance initiatives are being launched later in the year.”

Drosos continued, “Another highlight of the second quarter was the completion of our transition to a fully outsourced credit structure. Our teams are now able to fully focus on optimizing performance within the new credit structure which will be critical to driving a successful holiday season. As a reminder, transaction proceeds from the full outsourcing of credit over the past year were $1.4 billion, which enabled the company to repurchase 25% of its outstanding shares.”

Second Quarter 2019 Financial Highlights

Signet’s total sales were $1.42 billion, up 1.5%, in the 13 weeks ended August 4, 2018 on a reported basis and up 1.1% on a constant currency basis. Total same store sales performance was 1.7% versus the prior year quarter, inclusive of a positive impact of 40 bps due to planned shifts in timing of promotions at Jared and a negative impact of approximately 160 bps due to transition issues related to the October 2017 credit outsourcing. Same store sales performance reflected the impact of initiatives to increase newness and refocus the product assortment, as well as incremental clearance sales to make room for new product. Incremental clearance had a positive impact on same store sales of 240 bps.

The increase in total sales of $20.5 million in the quarter was positively impacted by 1) same store sales performance; 2) the addition of James Allen (acquired in September 2017); 3) the application of new revenue recognition accounting standards; and 4) foreign exchange translation benefit. These factors were partially offset by the negative impact of a calendar shift due to the 53rd week in Fiscal 2018 and net store closures.

eCommerce sales in the second quarter including James Allen were $150.3 million, up 82.8% on a reported basis. James Allen sales were $54.4 million in the quarter, up 25.3% compared to the prior year quarter, and had a positive 80 bps impact on total company same store sales. eCommerce sales increased across all segments and accounted for 10.6% of second quarter sales, up from 5.9% of total sales in the prior year second quarter.

By operating segment:

North America

Same store sales increased 2.1%, including the impact of initiatives across banners to increase newness and refocus the product assortment and James Allen sales growth which contributed 90 bps. Average transaction value (“ATV”) increased 6.5% and the number of transactions declined (3.0)%. Incremental clearance sales positively impacted same store sales by approximately 270 bps, and a planned shift in timing of promotions at Jared contributed 40 bps. Same store sales were negatively impacted by approximately 175 bps, as a result of transition issues related to the October 2017 credit outsourcing. Same store sales increased at Zales by 7.1%, and Piercing Pagoda by 11.5%. Jared grew by 1.2%, including a positive impact of 195 bps due to a planned shift in the timing of promotions. Kay same store sales decreased (2.1)%. Bridal and fashion sales increased in the quarter, benefiting from a greater percentage of newness in the core product assortment and higher clearance sales. This increase was partially offset by declines in the Other product category driven by a strategic reduction of owned brand beads, as well as declines in other branded beads. Bridal performance was driven by strength in solitaires and the Enchanted Disney Fine Jewelry® collection partially offset by declines in the Ever Us® collection. Fashion performance was primarily driven by gold, particularly chains and bracelets, and diamond jewelry items.

International

International same store sales decreased (2.4)%, with ATV increasing 6.3% and the number of transactions decreasing (7.8%). The same store sales decline was driven by lower sales in diamond jewelry and fashion watches, partially offset by higher sales in prestige watches.

Gross margin was $427.0 million, or 30.1% of sales, down 260 basis points. Gross margin was negatively impacted by $63.2 million, or 440 bps, due to restructuring charges related to an inventory charge. The charge relates to brands and collections that the Company is discontinuing as part of its transformation plan to increase newness across our categories. Excluding this charge, gross margin was $490.2 million or 34.5% of sales, up 180 basis points. Transformation cost savings related to direct sourcing, distribution and store occupancy offset sales deleverage and higher mix of clearance inventory sales. Additional factors impacting gross margin rate include 1) a positive 350 bps impact related to no longer recognizing bad debt expense and late charge income; 2) a negative 80 bps impact related to James Allen, which carries a lower gross margin rate; 3) a negative 60 bps impact related to the discontinuation of credit insurance; and 4) a negative 20 bps impact related to adopting new revenue recognition accounting standards.

SGA was $444.8 million, or 31.3% of sales, compared to $409.0 million, or 29.2% of sales in the prior year. SGA increased primarily due to 1) a $6 million increase in advertising expense; 2) a $6 million increase in store staff costs; and 3) a $9 million increase in incentive compensation expense. In addition, credit outsourcing costs of $32.6 million were partially offset by savings of $10.4 million related to in-house credit operations. Increases in SGA, including the impact of foreign exchange, were partially offset by transformation cost savings.

Other operating income was $3.2 million compared to $71.9 million in the prior year second quarter and includes a $3.2 million gain on the sale of an asset. The decrease is primarily due to the sale of the prime accounts receivable in the third quarter of Fiscal 2018, which resulted in less interest income earned from a reduced receivable portfolio.

In the second quarter, Signet’s GAAP operating income/(loss) was $(58.1) million or (4.1)% of sales, compared to $135.6 million, or 9.7% of sales in the prior year second quarter. The operating income margin decline was driven by 1) $82.8 million in restructuring charges due to inventory charges, severance, professional fees and impairment of IT assets related to the Path to Brilliance transformation plan; 2) a $39 million impact from the credit outsourcing transaction due to the loss of finance charge income and credit outsourcing costs; 3) a $23.9 million loss related to marking the non-prime receivables at fair value; 4) the impact of the discontinuation of credit insurance; and 5) higher SGA expense. These declines were partially offset by transformation cost savings. Additionally, prior year results included a net benefit of $10.1 million related to a net gain on the prime credit transaction and certain one-time corporate and transaction costs.

Non-GAAP operating income was $48.6 million, or 3.4% of sales, compared to $135.6 million, or 9.7% of sales in prior year second quarter. Non-GAAP operating income excluded a $23.9 million loss on sale of non-prime receivables and $82.8 million in restructuring charges related to the Path to Brilliance transformation plan.

Income tax benefit was $44.0 million on a GAAP basis for an effective tax rate of 65.7%, compared to income tax expense of $28.7 million or an effective tax rate of 23.5% in the prior year second quarter. The current year GAAP effective tax rate was driven primarily by restructuring charges related to the transformation plan, a loss recognized in the U.S. associated with the write-down of the non-prime receivables held for sale, and pre-tax earnings mix by jurisdiction. On a non-GAAP basis, income tax expense was $2.6 million for an effective tax rate of 6.5%, driven by pre-tax earnings mix by jurisdiction.

GAAP EPS was $(0.56), including a $23.9 million loss on sale of non-prime receivables and a $82.8 million charge related to the Path to Brilliance transformation plan and associated tax benefits. Excluding these charges, EPS was $0.52 on a non-GAAP basis.

GAAP and non-GAAP EPS in the quarter is based on net income (loss) available to common shareholders as the preferred shares are anti-dilutive and excluded from the ending share count due to the level of second quarter net income.

Balance Sheet and Statement of Cash Flows

Net cash provided by operating activities was $452.6 million year to date and free cash flow was $396.5 million, including $445.5 million in proceeds from the sale of the non-prime receivables. Excluding these proceeds, adjusted free cash flow was $(49.0) million. Cash and cash equivalents were $134.1 million, compared to $119.1 million at the prior year quarter-end.

Net accounts receivable, including accounts receivable held for sale, were $11.1 million as of August 4, 2018, compared to $1.7 billion at the prior year quarter-end. The decrease in receivables is primarily driven by the sale of the prime and non-prime portfolios.

Net inventories were $2.4 billion, up 3.6% compared to $2.3 billion at the prior year quarter-end and up 3.7% compared to $2.3 billion at year end Fiscal 2018, inclusive of the $63.2 million inventory reserve. The increase in inventory versus year-end Fiscal 2018 was primarily due to investments in new merchandise related to bridal initiatives across store banners which began to positively impact sales in the quarter.

Short-term debt was $111.4 million, a decrease of $828 million, compared to $939.4 million in the prior year quarter end. Prior year short-term debt included a $600 million ABS facility that was repaid in the third quarter of Fiscal 2018 and $303 million in borrowings on the revolver. Current year quarter short-term debt includes $71 million of revolver borrowings. Long-term debt was $671.1 million, down $34.2 million, compared to $705.3 million in the prior year quarter end.

In the second quarter, Signet deployed cash of $425 million to repurchase outstanding common stock, or 7.3 million shares, at an average cost of $58.26 per share. Fiscal year to date, Signet has repurchased 8.8 million shares at an average cost per share of $55.06 or $485 million. As of August 4, 2018, there was $165.6 million remaining under Signet’s share repurchase authorization.

Signet Path to Brilliance Expected Savings and Restructuring Costs

In March of 2018, the Company announced a three-year Signet Path to Brilliance transformation plan to reposition the Company to be a share gaining, OmniChannel jewelry category leader. The Company continues to expect its transformation plan to deliver $200 million - $225 million of net cost savings over the next three fiscal years. The Company’s estimates for pre-tax charges over the next three fiscal years is a range of $170 million - $190 million, of which $80 million - $95 million are expected to be cash charges.

In Fiscal 2019, the Company continues to expect net costs savings of $85 million - $100 million, with further incremental net cost savings of $115 million - $125 million by the end of the three-year program. The majority of the Fiscal 2019 savings are expected to be realized in the second half of the fiscal year with approximately one third achieved year to date. In Fiscal 2019, the Company’s preliminary estimates for pre-tax charges related to cost reduction activities and inventory charges ranges from $125 million - $135 million, of which $40 million - $45 million are expected to be cash charges.

Non-Prime Credit Outsourcing Update

On June 29, 2018, Signet completed the final phase of its strategic outsourcing of credit through the sale of its existing non-prime receivables and implementation of a forward flow purchase arrangement for future non-prime receivables with funds managed by CarVal Investors and Castlelake, L.P.

Signet received $445.5 million in cash proceeds from the sale of existing non-prime receivables, excluding transaction costs, net of a 5 percent holdback. The holdback may be paid out at the end of two years depending on the performance of such receivables in that period. The Company used the proceeds, along with cash on hand, to repurchase $485 million in shares.

During the second quarter, Signet recognized a loss of $23.9 million, including transaction costs, to adjust its remaining receivable portfolio to fair value through the closing date of June 29 th, at which time receivable balances were transferred to the purchasers for the aforementioned cash consideration.

Fiscal 2019 Financial Guidance

The above current Fiscal 2019 GAAP guidance reflects the following assumptions:

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