Signet Jewelers Reports First Quarter Fiscal 2019 Financial Results
Jun. 06, 2018
HAMILTON, Bermuda--(BUSINESS WIRE)--Jun 6, 2018--Signet Jewelers Limited (“Signet”) (NYSE:SIG), the world's largest retailer of diamond jewelry, today announced its results for the 13 weeks ended May 5, 2018 (“first quarter Fiscal 2019”).
Summary:Same store sales ("SSS") essentially flat with prior year quarter 1 GAAP diluted earnings per share ("EPS") of $(8.48), including the impact of a non-cash impairment charge related to goodwill and intangibles, loss recognized on held for sale non-prime receivables and restructuring charges Non-GAAP EPS of $0.10 2 Reiterates Fiscal 2019 guidance of same store sales of down low-to-mid single digits, total sales of $5.9 billion-$6.1 billion Revises Fiscal 2019 GAAP EPS guidance to $(7.30)-$(7.90) due to goodwill and intangibles impairment charge and reiterates non-GAAP EPS guidance of $3.75-$4.25 Company continues to expect $475 million in share repurchases in Fiscal 2019, of which $60 million were repurchased in the first quarter Company continues to expect sale of non-prime receivables to close in second quarter of Fiscal 2019
“As we begin to implement our Signet Path to Brilliance transformation plan, we remain focused on driving operational improvement by executing on our Customer First, OmniChannel and Culture of Agility and Efficiency pillars,” said Signet Jewelers Chief Executive Officer Virginia C. Drosos. “In the first quarter, we saw signs of stabilization in our overall sales and once again achieved double digit growth in eCommerce.”
She continued, “Looking ahead, we expect second quarter revenues to be impacted by a tougher prior year same store sales comparison and calendar shifts. We are maintaining our full year 2019 guidance and are intensely focused on laying the foundation to support improved performance in the holiday season. While progress will continue to be gradual and incremental, we are confident Signet is on the right path to achieve long-term sustainable, profitable growth.”
First Quarter 2019 Financial Highlights
Signet's total sales were $1.5 billion, up 5.5%, in the 13 weeks ended May 5, 2018 ("first quarter Fiscal 2019") on a reported basis and up 4.3% on a constant currency basis. Total same store sales performance was (0.1)% versus the prior year quarter. Total same store sales included a benefit of approximately 175 bps due to planned shifts in timing of promotions and a negative impact of 105 bps as a result of credit outsourcing transition issues. The impact of credit outsourcing was a sequential improvement versus an approximately 300 bps negative impact in the fourth quarter of Fiscal 2018.
The increase in total sales of $77.2 million in the quarter was positively impacted by 1) the addition of James Allen (acquired in September 2017), 2) a calendar shift due to the 53rd week in Fiscal 2018, 3) the application of new revenue recognition accounting standards and 4) foreign exchange translation benefit. These factors were partially offset by the impact of net store closures and same store sales performance.
eCommerce sales in the first quarter including James Allen were $146.5 million, up 80.9% on a reported basis. James Allen sales were $53.3 million in the quarter up 29.4% compared to the prior year quarter, and had a positive 85 bps impact on total company same store sales. eCommerce sales increased across all segments and accounted for 9.9% of first quarter sales, up from 5.8% of total sales in the prior year first quarter.
By operating segment:
North AmericaSame store sales increased 0.6%, with average transaction value ("ATV") increasing 5.0% and the number of transactions declining (2.9)%. Same store sales were positively impacted by 95 bps due to James Allen sales growth and 195 bps due to a planned shift in timing of promotions. Same store sales were negatively impacted by 115 bps as a result of credit outsourcing transition issues. Same store sales increased at Zales and Piercing Pagoda by 8.9% and 7.2% respectively. Kay same store sales decreased (1.9)%, including 430 bps benefit from a planned shift in timing of promotions and Jared same store sales decreased (7.8)%, including a negative impact of 180 bps due to a planned shift in the timing of promotions. Bridal and Fashion sales increased in the quarter as they benefited from a greater percentage of newness in product assortment, offset by declines in the Other product category driven by a strategic reduction of owned brand beads. Bridal performance was driven by strength in solitaires, the Enchanted Disney Fine Jewelry®, Neil Lane® and Vera Wang Love® collections partially offset by declines in the Ever Us® collection. Fashion performance was primarily driven by gold jewelry items and new fashion rings.
InternationalInternational same store sales decreased (6.7)%, with ATV increasing 2.9% and the number of transactions decreasing (8.3)%. The same store sales decline was driven by lower sales in diamond jewelry and fashion watches, partially offset by higher sales in prestige watches and eCommerce.
Gross profit was $484.8 million, or 32.7% of sales, down 230 basis points and included a 60 bps unfavorable impact related to James Allen, which carries a lower gross margin rate. Additional factors impacting gross margin rate include 1) a negative 70 bps impact related to the discontinuation of credit insurance; 2) a negative 50 bps impact from higher year over year bad debt expense; 3) a negative 20 bps due primarily to calendar shifts of promotions into the first quarter and 4) a negative 10 bps impact related to adopting new revenue recognition accounting standards.
SGA was $482.8 million, or 32.6% of sales, compared to $452.8 million or 32.3% of sales in the prior year and reflected the inclusion of James Allen in the current year quarter. SGA increased due to a $12 million increase in advertising expense and a $9 million increase in incentive compensation expense which included $6 million in one-time cash awards to non-managerial hourly team members. In addition, credit outsourcing costs of $24.5 million were partially offset by savings of $12.4 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 $22.1 million compared to $76.9 million in the prior year first quarter, down $54.8 million or 71.3%. 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 first quarter, Signet's GAAP operating income/(loss) was $(574.2) million or (38.8)% of sales, compared to $115.3 million or 8.2% of sales in prior year first quarter. The operating income margin decline was driven by 1) a goodwill and intangible impairment charge of $448.7 million; 2) a $143.1 million loss related to marking the non-prime receivables at fair value upon reclassification to held for sale including transaction costs; 3) $6.5 million in restructuring charges due to severance and professional fees related to the Path to Brilliance transformation plan; 4) a $69 million impact from the credit outsourcing transaction due to the loss of finance charge income and higher bad debt expense; 5) the impact of the discontinuation of credit insurance and 6) higher SGA expense. These declines were partially offset by sales leverage and transformation cost savings. Please see below for a discussion of the impairment charge.
Non-GAAP operating income was $24.1 million or 1.6% of sales, compared to $115.3 million or 8.2% of sales in the prior year first quarter. Non-GAAP operating income excluded a $448.7 million impairment charge, a $143.1 million loss on non-prime receivables reclassified as held for sale in the first quarter and $6.5 million in restructuring charges related to the Path to Brilliance transformation plan.
Income tax benefit was $85.9 million on a GAAP basis compared to a $24.2 million expense in the prior year first quarter, driven primarily by the impairment charge and a loss recognized in the U.S. associated with the write-down of the non-prime receivables held for sale. On a non-GAAP basis, income tax expense was $1.6 million for an effective tax rate of 10.1%.
GAAP EPS was $(8.48) including a $6.44 charge related to a goodwill and intangible asset impairment, a $2.05 impact related to a loss on non-prime receivables reclassified as held for sale in the quarter and a $0.09 charge related to the Path to Brilliance transformation plan. Excluding these charges, EPS was $0.10 on a non-GAAP basis. Foreign exchange translation had less than a $0.01 impact on both GAAP and non-GAAP EPS.
GAAP and non-GAAP EPS in the quarter excluded the preferred dividend from net income and the preferred shares from the share count. The preferred shares were anti-dilutive due to the level of first quarter net income and, as such, the common shares they can be converted into were excluded from the EPS calculation in accordance with GAAP.
Balance Sheet and Statement of Cash Flows
Net cash provided by operating activities was $27.9 million in the quarter and free cash flow was $1.8 million. Cash and cash equivalents were $153.9 million compared to $99.7 million at the prior year quarter-end.
Net accounts receivable were $6.8 million as of May 5, 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 portfolio of $960 million in the third quarter of Fiscal 2018 and reclassifying the non-prime receivables to held for sale in the first quarter of Fiscal 2019.
Net inventories were $2.4 billion, down 0.3% compared to $2.4 billion at the prior year quarter-end and up 6.5% compared to $2.3 billion at year end Fiscal 2018. The increase in inventory versus year-end Fiscal 2018 was due to investments in new merchandise related to bridal initiatives across store banners.
Long term debt was $679.7 million, down $631.9 million compared to $1.3 billion in the prior year quarter-end primarily due to the repayment of the $600.0 million asset back securitization in the third quarter of Fiscal 2018.
In the first quarter, Signet deployed cash of $60.0 million to repurchase outstanding common stock, or 1.5 million shares, at an average cost of $39.62 per share. As of May 5, 2018, there was $590.6 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 preliminary estimates for pre-tax charges related to cost reduction activities over the next three fiscal years is a range of $170 million - $190 million, of which $105 million - $120 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 fourth quarter. In Fiscal 2019, the Company's preliminary estimates for pre-tax charges related to cost reduction activities is a range of $125 million - $135 million of which $60 million - $65 million are expected to be cash charges.
Non-Prime Credit Outsourcing Update
As announced previously, the Company reached an agreement to sell its non-prime, in-house credit card receivables to investment funds managed by CarVal Investors and Castlelake L.P. As part of the agreement, funds managed by CarVal Investors will purchase the non-prime receivables comprising 70% of Signet’s existing accounts and funds managed by Castlelake L.P. will purchase 30%.
Signet reclassified the non-prime credit receivables to assets held for sale in the second month of the first quarter of Fiscal 2019. In connection with the transaction, a loss of $143.1 million inclusive of transaction costs was recognized related to the difference between the net book value and the fair value of the receivables at which they will be sold to investment funds managed by CarVal Investors and Castlelake L.P. at closing. Receivables originated during the second quarter prior to closing will also be adjusted to fair value based on the amounts expected to be realized on the accounts up to the time they are sold, as well as an estimate of the proceeds received on the remainder of the balances upon close, resulting in losses on each of these new receivables until closing. The total loss in connection with the transaction is estimated to be $165 million - $170 million which includes $45 million - $55 million of servicing costs included in the expected sale price. The anticipated loss recognized also includes transaction costs of approximately $7 million.
Signet also entered into a five-year forward flow purchase agreement with funds managed by CarVal Investors and Castlelake L.P., in which they are obligated to purchase newly originated receivables arising from Signet’s non-prime accounts at a discount rate determined in accordance with the agreement. Investment funds managed by CarVal Investors will purchase 70% of the forward flow non-prime receivables and funds managed by Castlelake L.P. will purchase 30%.
The Company continues to expect the non-prime credit outsourcing transaction to close in the second quarter of Fiscal 2019 subject to certain closing conditions. The closing of the transaction with Castlelake and CarVal will occur simultaneously. The Company has updated its estimate of expected proceeds from the sale to $420 million - $435 million inclusive of servicing costs and before transaction costs of $7 million from $401-$435 million previously.
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