REG - Signet Jewelers Ltd - Form 10Q <Origin Href="QuoteRef">SIG.N</Origin> - Part 5
29/10/2014 11:09
- Part 5: For the preceding part double click ID:nRSK4136Rd
sales
In the second quarter of Fiscal 2015, the UK Jewelry division's total sales were $162.9 million compared to $139.1 million
in the second quarter of Fiscal 2014, up $23.8 million or 17.1% and up 5.6% at constant exchange rates. Same store sales
increased 4.4% compared to a decrease of 2.4% in the second quarter of Fiscal 2014. Sales were driven by strategic
initiatives to grow diamond sales and the continuing success of the watch business. The number of merchandise transactions
increased primarily due to fashion and gold jewelry and beads in H.Samuel and fashion watches in Ernest Jones combined with
more effective store events. The decline in average transaction value was primarily driven by sales mix. eCommerce sales
were $9.5 million compared to $5.9 million in the second quarter of Fiscal 2014, up $3.6 million or 61.0%. See the table
below for further analysis of sales.
H.Samuel 2.6 % (1.0 )% 1.6 % 11.1 % 12.7 % $ 81.8
Ernest Jones(3) 6.4 % 3.6 % 10.0 % 12.0 % 22.0 % $ 81.1
UK Jewelry division 4.4 % 1.2 % 5.6 % 11.5 % 17.1 % $ 162.9
22.0 %
$ 81.1
UK Jewelry division
4.4 %
1.2 %
5.6 %
11.5 %
17.1 %
$ 162.9
(1) Includes all sales from stores not open for 12 months.
(2) Non-GAAP measure, discussed herein.
(3) Includes stores selling under the Leslie Davis nameplate.
H.Samuel £ 73 £ 75 (2.7 )% 1.4 % 3.0 % (5.4 )%
Ernest Jones(3) £ 268 £ 277 (3.2 )% (8.9 )% 11.8 % 2.2 %
UK Jewelry division £ 115 £ 116 (0.9 )% (2.5 )% 4.8 % (4.0 )%
Fiscal 2014
H.Samuel
£ 73
£ 75
(2.7 )%
1.4 %
3.0 %
(5.4 )%
Ernest Jones(3)
£ 268
£ 277
(3.2 )%
(8.9 )%
11.8 %
2.2 %
UK Jewelry division
£ 115
£ 116
(0.9 )%
(2.5 )%
4.8 %
(4.0 )%
(1) Average merchandise transaction value is defined as net merchandise sales divided by the total number of customer
transactions.
(2) Net merchandise sales include all merchandise product sales, including VAT, net of discounts and returns. In addition,
excluded from net merchandise sales are repairs, warranty, insurance, employee and other miscellaneous sales.
(3) Includes stores selling under the Leslie Davis nameplate.
Zale sales (as Zale Corporation was acquired during Fiscal 2015, there is no comparable period)
The Zale division's total sales were $247.5 million second quarter of Fiscal 2015 including $11.5 million in eCommerce
sales. Zale division consists of two operating segments: Zale Jewelry and Piercing Pagoda. In the second quarter, Zale
Jewelry contributed $215.0 million of revenues and Piercing Pagoda contributed $32.5 million of revenues. Total Zale
division included purchase accounting adjustments of $(9.3) million related to deferred revenue associated with extended
warranty sales. The Zale division same store sales decreased 0.9%. Total Zale division sales were driven by branded sales
in bridal and fashion in the Zale Jewelry operating segment offset by non-branded merchandise. The overall sales
performance was affected by disruptions due to the merger and management changes and a change in promotional cadence in
both bridal and fashion versus the prior year period. See the table below for further analysis of sales.
Zales (1.0 )% $ 158.3
Gordon's (5.7 )% $ 12.7
Zale US Jewelry (1.3 )% $ 171.0
Peoples 3.9 % $ 37.0
Mappins (4.3 )% $ 7.0
Zale Canada Jewelry 2.5 % $ 44.0
Total Zale Jewelry (0.6 )% $ 215.0
Piercing Pagoda (2.8 )% $ 32.5
Zale division(1) (0.9 )% $ 247.5
Zale division(1)
(0.9 )%
$ 247.5
(1) The Zale division same store sales includes merchandise and repair sales and excludes warranty and insurance revenues.
Year to date sales
In the year to date, Signet's same store sales increased 4.1% and total sales were $2,282.0 million compared to $1,873.8
million in the 26 weeks ended August 3, 2013. The increase in total sales was primarily driven by the addition of the Zale
division which added $247.5 million of sales, including purchasing accounting adjustments, to the year to date period.
Organic same store sales increased 4.7% compared to an increase of 5.1% in the prior year comparable period and organic
total sales of $2,034.5 million increased $160.7 million or 8.6% compared to an increase of 6.8% in the prior year period.
eCommerce sales were $89.2 million, which included $11.5 million of Zale eCommerce sales, compared to $62.3 million in the
prior year comparable period. Organic eCommerce sales were $77.7 million, a 24.7% increase over prior year second quarter.
The breakdown of the sales performance is set out in the table below.
Sterling Jewelers division 4.8 % 2.4 %(2) 7.2 % - % 7.2 % $ 1,713.9
UK Jewelry division 4.3 % 0.1 %(2) 4.4 % 10.4 % 14.8 % $ 314.6
Zale Jewelry (0.6 )% - % - % - % - % $ 215.0
Piercing Pagoda (2.8 )% - % - % - % - % $ 32.5
Zale division (0.9 )% - % - % - % - % $ 247.5
Other(5) - % nm nm - % nm $ 6.0
Signet 4.1 % 15.9 %(3) 20.0 % 1.8 % 21.8 % $ 2,282.0
Organic Signet 4.7 % 2.3 %(2) 7.0 % 1.6 % 8.6 % $ 2,034.5
21.8 %
$ 2,282.0
Organic Signet
4.7 %
2.3 %(2)
7.0 %
1.6 %
8.6 %
$ 2,034.5
(1) Based only on stores open for at least 12 months.
(2) Includes all sales from stores not opened and owned for 12 months.
(3) Includes all sales from stores not open for 12 months, in addition to all sales from Zale acquired stores.
(4) Non-GAAP measure, discussed herein.
(5) Includes sales from Signet's diamond sourcing initiative.
nm Not meaningful
Sterling Jewelers sales
In the year to date, Sterling Jewelers division's total sales were $1,713.9 million compared to $1,598.3 million in the
prior year comparable period, up $115.6 million or 7.2%. Same store sales increased 4.8% compared to an increase of 6.6% in
the comparable prior year period. Sterling Jewelers' sales increases were driven by particular strength in bridal brands,
fashion diamonds and watches. For the year to date, Kay and Jared experienced increases in both transaction counts and the
average transaction value in Kay and declined in Jared. The decline in average merchandise transaction value was driven
primarily by sales mix, including higher bead sales. eCommerce sales were $60.4 million compared to $50.9 million in the
prior year period up $9.5 million or 18.7%. See the table below for further analysis of sales.
Kay 6.0 % 3.0 % 9.0 % $ 1,058.9
Jared(2) 3.6 % 5.8 % 9.4 % $ 544.7
Regional brands (0.4 )% (14.2 )% (14.6 )% $ 110.3
Sterling Jewelers division 4.8 % 2.4 % 7.2 % $ 1,713.9
(14.6 )%
$ 110.3
Sterling Jewelers division
4.8 %
2.4 %
7.2 %
$ 1,713.9
(1) Includes all sales from stores not open for 12 months.
(2) Includes 33 stores that were converted from regional brands, which consist of 31 Jared Vaults, which operate in outlet
centers, and 2 Jared concept test stores. Reported sales in the prior year have been reclassified to align with current
year presentation.
Kay $ 402 $ 391 2.8 % 4.8 % 7.9 % 4.6 %
Jared $ 545 $ 554 (1.6 )% 2.0 % 14.6 % 5.8 %
Regional brands $ 410 $ 400 2.5 % 3.4 % (8.6 )% (12.6 )%
Sterling Jewelers division $ 439 $ 432 1.6 % 4.1 % 8.3 % 3.2 %
7.9 %
4.6 %
Jared
$ 545
$ 554
(1.6 )%
2.0 %
14.6 %
5.8 %
Regional brands
$ 410
$ 400
2.5 %
3.4 %
(8.6 )%
(12.6 )%
Sterling Jewelers division
$ 439
$ 432
1.6 %
4.1 %
8.3 %
3.2 %
(1) Average merchandise transaction value is defined as net merchandise sales divided by the total number of customer
transactions.
(2) Net merchandise sales include all merchandise product sales, net of discounts and returns. In addition, excluded from
net merchandise sales are sales tax in the US, repairs, warranty, insurance, employee and other miscellaneous sales.
UK Jewelry sales
In the year to date, the UK Jewelry division's total sales were $314.6 million compared to $274.1 million in the prior year
comparable period, up $40.5 million or 14.8% and up 4.4% at constant exchange rates. Same store sales increased 4.3%
compared to a decrease of 2.3% in the comparable prior year period. The total sales increase was primarily driven by
bridal, fashion diamond jewelry and watches. Similar to the second quarter, the number of transactions on a year to date
basis increased primarily due to beads and gold jewelry in H.Samuel and fashion watches in Ernest Jones. The decline in
average merchandise transaction was primarily driven by sales mix. eCommerce sales were $17.3 million compared to $11.4
million in the prior year comparable period, up $5.9 million or 51.8%. See the table below for further analysis of sales.
H.Samuel 2.9 % (1.6 )% 1.3 % 10.0 % 11.3 % $ 160.6
Ernest Jones(3) 5.7 % 2.3 % 8.0 % 10.6 % 18.6 % $ 154.0
UK Jewelry division 4.3 % 0.1 % 4.4 % 10.4 % 14.8 % $ 314.6
18.6 %
$ 154.0
UK Jewelry division
4.3 %
0.1 %
4.4 %
10.4 %
14.8 %
$ 314.6
(1) Includes all sales from stores not open for 12 months.
(2) Non-GAAP measure, discussed herein.
(3) Includes stores selling under the Leslie Davis nameplate.
H.Samuel £ 73 £ 75 (2.7 )% - 4.0 % (7.2 )%
Ernest Jones(3) £ 264 £ 275 (4.0 )% (9.5 )% 11.2 % 3.8 %
UK Jewelry division £ 113 £ 115 (1.7 )% (1.7 )% 5.4 % (5.2 )%
Fiscal 2014
H.Samuel
£ 73
£ 75
(2.7 )%
-
4.0 %
(7.2 )%
Ernest Jones(3)
£ 264
£ 275
(4.0 )%
(9.5 )%
11.2 %
3.8 %
UK Jewelry division
£ 113
£ 115
(1.7 )%
(1.7 )%
5.4 %
(5.2 )%
(1) Average merchandise transaction value is defined as net merchandise sales divided by the total number of customer
transactions.
(2) Net merchandise sales include all merchandise product sales, including VAT, net of discounts and returns. In addition,
excluded from net merchandise sales are repairs, warranty, insurance, employee and other miscellaneous sales.
(3) Includes stores selling under the Leslie Davis nameplate.
Zale sales (as Zale Corporation was acquired during Fiscal 2015, there is no comparable period)
As Zale Corporation was acquired on May 29, 2014, year to date and second quarter sales are the same.
Cost of sales and gross margin
In the second quarter, gross margin was $409.0 million or 33.4% of sales compared to $309.7 million or 35.2% of sales in
the prior year second quarter. Of the $99.3 million increase in gross margin, $69.0 million was due to the addition of the
Zale division. Organic gross margin was $340.0 million or 34.8% of sales. The gross margin rate decrease was primarily due
to the lower gross margins associated with the Zale division and purchase accounting adjustments. Zale operates with a
lower gross margin structure than Sterling Jewelers and represents an area of focus on applying best practices for
improvement. The organic gross margin change was driven by the following:
• Gross margin dollars in the Sterling Jewelers division increased by $26.2 million compared to prior year and increased as
percentage of sales by 10 basis points. The gross margin rate was favorably impacted by sales mix and lower commodity
costs. These benefits were partially offset by the recognition of gold hedge losses incurred in Fiscal 2014 and lower gold
spot prices that reduced the recovery on trade-ins and inventory. The net bad debt ratio as a percentage of the division's
total sales increased to 5.2% of sales from 4.9% of sales in the prior year second quarter. The increase in the ratio was
primarily due to the growth in the outstanding receivable balance from increased credit penetration as the credit portfolio
continues to perform strongly.
• In the UK Jewelry division, gross margin dollars increased $4.4 million compared to the second quarter of Fiscal 2014 and
decreased as a percentage of sales by 120 basis points. The gross margin rate was impacted primarily by higher sales
associated with strategic initiatives around diamond and gold merchandise that, although reduced the divisional gross
margin rate, successfully drove incremental gross margin dollars. In addition, the gross margin rate was also impacted by a
shift in merchandise mix as a result of strong watch sales. Both of these factors were partially offset by leverage on
store occupancy.
In the year to date, gross margin was $816.2 million or 35.8% of sales compared to $692.5 million or 37.0% of sales in the
prior year to date period. Organic gross margin was $747.2 million or 36.7% of sales. The organic gross margin change was
driven by the following:
• Gross margin dollars in the Sterling Jewelers division increased by $45.5 million compared to the prior year to date and
was flat as a percentage of sales. Benefits from sales mix and lower commodity costs were offset by the gold hedge losses
and lower gold spot prices discussed previously. The net bad debt ratio as a percentage of the division's total sales was
3.7% compared to 3.6% in prior year period.
• In the UK Jewelry division, gross margin dollars increased $9.8 million compared to the prior year and declined by 30
basis points primarily for the reasons discussed in the quarter to date period.
Selling, general and administrative expenses ("SGA")
In the second quarter of Fiscal 2015, SGA expenses were $379.2 million compared to $250.5 million in the prior year second
quarter, up $128.7 million. As a percentage of sales, SGA increased by 250 basis points to 31.0%. The $128.7 million SGA
increase was primarily made up of: $81.8 million from the Zale division, $17.1 million from transaction costs, and $13.7
million from severance costs, partially offset by a $3.0 million SGA reduction from purchase accounting adjustments.
Organic SGA was $269.6 million or 27.6% of sales compared to the prior year quarter SGA rate of 28.5%. The decrease in the
organic SGA rate of 90 basis points was driven primarily by leverage in both the Sterling Jewelers and UK Jewelry division
of store staff costs due to higher sales.
In the year to date, SGA expenses were $689.7 million compared to $537.5 million in the prior year to date period, up
$152.2 million, and as a percentage of sales increased by 150 basis points to 30.2%. Organic SGA was $571.7 million or
28.1% of sales compared to the prior year rate SGA rate of 28.7%. The decrease in the SGA rate of 60 basis points was
primarily due to leverage on store staff costs previously discussed in the quarter to date period. Partially offsetting
this benefit in rate was higher advertising expense of $13.5 million primarily due to timing of production costs between
the fourth quarter of prior year and the first quarter of Fiscal 2015.
Other operating income, net
In the second quarter of Fiscal 2015, other operating income, net was $53.7 million or 4.4% of sales compared to $46.3
million or 5.3% of sales in the prior year second quarter. Other operating income, net as percentage of organic sales was
5.5%. This increase was primarily due to higher interest income earned from higher outstanding receivable balances.
In the year to date, other operating income, net was $107.7 million or 4.7% of sales compared to $93.3 million or 5.0% of
sales in the prior year to date period. Other operating income, net as percentage of organic sales was 5.3%.
Operating income
In the second quarter of Fiscal 2015, operating income was $83.5 million or 6.8% of sales compared to $105.5 million or
12.0% of sales in the prior year second quarter. Organic operating income was $124.1 million or 12.7% of sales. Operating
income consisted of the following components:
• Sterling Jewelers division's operating income was $129.9 million or 16.0% of sales compared to $111.9 million or 15.1% of
sales in the prior year second quarter.
• UK Jewelry division's operating income was $1.1 million or 0.7% of sales compared to an operating loss of $0.8 million or
(0.6)% of sales in the prior year second quarter.
• Zale division's operating loss was $9.8 million or (4.0)% of sales which includes a loss of $11.5 million related to
acquisition accounting adjustments. Excluding the impact from accounting adjustments, Zale division's operating income was
$1.7 million or 0.7% of sales. The Zale division operating income included $1.4 million from Zale Jewelry or 0.6% of sales
and $0.3 million from Piercing Pagoda or 0.9% of sales.
• The Other operating segment was an operating loss of $37.7 million compared to $5.6 million in the prior year second
quarter which included $30.8 million related to transaction and severance costs.
In the year to date, operating income was $234.2 million or 10.3% of sales compared to $248.3 million or 13.3% of sales in
the prior year to date period. Organic operating income was $283.2 million or 13.9% of sales. Year to date operating income
consisted of the following components:
• Sterling Jewelers division's operating income was $296.2 million or 17.3% of sales compared to $264.7 million or 16.6% of
sales in the prior year period.
• UK Jewelry division's operating income was $1.1 million or 0.3% of sales compared to an operating loss of $4.9 million or
(1.8)% of sales in the prior year period.
• Zale division's operating loss was $9.8 million or (4.0)% of sales which includes a loss of $11.5 million related to
acquisition accounting adjustments. Excluding the impact from accounting adjustments, Zale division's operating income was
$1.7 million or 0.7% of sales. The Zale division operating income, excluding accounting adjustments, was comprised of $1.4
million or 0.6% of sales from Zale jewelry and $0.3 million or 0.9% of sales from Piercing Pagoda.
• The Other operating segment was an operating loss of $53.3 million compared to $11.5 million in the prior year period
which included $39.2 million related to transaction and severance costs.
Interest expense, net
In the second quarter of Fiscal 2015, net interest expense was $13.7 million compared to $1.0 million in the prior year
second quarter. The increase in interest expense was driven by the addition of $1,400 million of debt financing at a
weighted average interest cost of 2.6% related to the Zale acquisition. Included in interest expense was a write-off of
fees of $3.2 million related to the $800 million bridge facility that was subsequently replaced with permanent financing
instruments as well as $0.7 million associated with the previous credit facility. In the year to date, net interest expense
was $15.5 million compared to $1.9 million in the prior year to date period with the increase driven by the same factors as
those in the quarterly period in addition to $0.8 million of expense in the first quarter related to pre-acquisition
financing costs.
Income before income taxes
In the second quarter of Fiscal 2015, income before income taxes was $69.8 million or 5.7% of sales compared $104.5 million
or 11.9% in the prior year second quarter. Organic income before income taxes was $123.4 million or 12.6% of sales. In the
year to date, income before income taxes was $218.7 million or 9.6% of sales compared to $246.4 million or 13.2% of sales
in the prior year to date period. Year to date organic income before income taxes was $281.5 million or 13.8% of sales.
Income taxes
In the second quarter of Fiscal 2015, income tax expense was $11.8 million compared to $37.1 million in the prior year
second quarter. The effective tax rate was 16.9% compared to 35.5% in the prior year second quarter. Organic income tax
expense was $43.5 million with an effective tax rate of 35.2%. In the year to date period, income tax expense was $64.1
million, an effective tax rate 29.3% compared to $87.2 million, an effective tax rate of 35.4% in the prior year to date
period. Organic income tax expense for the year to date period was $97.7 million with an effective tax rate of 34.7%.
The forecast effective tax rate for the Fiscal 2015 full year is 29.3%, which is lower than the effective tax rate of 35.1%
applied as of the first quarter of Fiscal 2015. This reduction of 5.8% in Signet's effective tax rate primarily reflects
the benefit of Signet's amended capital structure and financing arrangements utilized to fund the acquisition of Zale
Corporation.
Net income
In the second quarter of Fiscal 2015, net income was $58.0 million or 4.7% of sales compared to $67.4 million or 7.7% of
sales in the prior year second quarter. Organic net income in the second quarter was $79.9 million or 8.2% of sales. In the
year to date period, net income was $154.6 million or 6.8% of sales compared to $159.2 million or 8.5% of sales in the
prior year to date period. Organic net income in the year to date period was $183.8 million or 9.0% of sales.
Earnings per share
In the second quarter of Fiscal 2015, diluted earnings per share were $0.72 compared to $0.84 in the prior year second
quarter. Organic diluted earnings per share were $1.00, a 19.0% growth rate over the prior year second quarter. The
weighted average diluted number of common shares outstanding was 80.2 million compared to 80.7 million in the prior year
second quarter. Signet repurchased 93,664 shares in the second quarter of Fiscal 2015 under its share buyback program
compared to 374,613 shares the prior year second quarter.
In the year to date, diluted earnings per share were $1.93 compared to $1.97 in the prior year to date period. The weighted
average diluted number of common shares outstanding was 80.2 million compared to 81.0 million in the prior year to date
period. Organic diluted earnings per share were $2.29, a 16.2% growth rate over the prior year to date period. Signet
repurchased 220,132 shares in the 26 weeks ended August 2, 2014 compared to 1,123,858 shares in the 26 weeks ended August
3, 2013.
Dividends per share
In the second quarter of Fiscal 2015, dividends of $0.18 were approved by the Board of Directors compared to $0.15 in the
second quarter of Fiscal 2014. In the year to date, dividends of $0.36 were approved by the Board of Directors compared to
$0.30 in the 26 weeks ended August 3, 2013.
LIQUIDITY AND CAPITAL RESOURCES
Set out in the table below is a summary of Signet's cash flow activity for the year to date for Fiscal 2015 and Fiscal
2014.
Summary cash flow
Net cash provided by operating activities $ 183.9 $ 58.5
Net cash used in investing activities (1,519.4 ) (52.2 )
Net cash provided by (used in) financing activities 1,303.4 (94.6 )
Decrease in cash and cash equivalents (32.1 ) (88.3 )
Cash and cash equivalents at beginning of period 247.6 301.0
Effect of exchange rate changes on cash and cash equivalents (0.5 ) 0.2
Cash and cash equivalents at end of period $ 215.0 $ 212.9
Cash and cash equivalents at end of period
$ 215.0
$ 212.9
Operating activities
Net cash provided by operating activities was $183.9 million compared to $58.5 million in the prior year comparable period.
Net income decreased by $4.6 million to $154.6 million from $159.2 million with depreciation and amortization increasing
$13.4 million to $64.5 million from $51.1 million in the prior year comparable period. The primary drivers of cash provided
by operating activities were as follows:
• Inventory and inventory related items decreased by $17.1 million compared to an increase of $57.4 million in the prior
year comparable period. The change in inventory cash flows is primarily attributed to the prior year balance reflecting
higher inventory levels to support outlet stores, expansion of bridal programs and Signet's strategic sourcing initiative.
Total inventory as of August 2, 2014 was $2,345.3 million compared to the year-end Fiscal 2014 balance of $1,488.0 million
and prior year comparable quarter balance of $1,417.7 million. The increase in inventory from these periods is primarily
attributed to acquisition of Zale division which increased inventory by $841.3. The remainder of the increase was driven in
part by expansion of bridal and branded merchandise to support higher sales and new store growth.
• Accrued expenses and liabilities decreased by $19.0 million compared to a decrease of $57.1 million in the prior year
comparable period primarily driven by increased debt-related accrued expenses, including interest, as well as increased
payroll-related liabilities, including severance.
Investing activities
Net cash used in investing activities was $1,519.4 million, compared to $52.2 million in the prior year comparable period.
Cash used for the Zale Corporation acquisition was $1,429.2 million. Capital expenditures increased by $36.4 million to
$90.0 million from $53.6 million. In the Sterling Jewelers division, capital additions were $76.2 million compared to $48.6
million in the prior year. This increase was primarily due to timing of capital spend in Fiscal 2014 associated with the
integration and conversion of Ultra stores in which the timing of the capital spend primarily occurred in the second half
of the year. In the UK Jewelry division, capital additions were $4.7 million compared to $5.0 million in the prior year
comparable period. Zale had capital expenditures of $8.5 million as well as capital additions in the Other operating
segment of $0.6 million.
Stores opened and closed in the 26 weeks ended August 2, 2014:
Store count:
Kay 1,055 - 31 - (10 ) 1,076
Jared 203 - 4 33 - 240
Regional brands 213 - - (33 ) (9 ) 171
Sterling Jewelers division 1,471 (2) - 35 - (19 ) 1,487
Zales - 722 3 - (2 ) 723
Gordon's - 91 - - (7 ) 84
Peoples - 145 - - (1 ) 144
Mappins - 48 - - (1 ) 47
Zale Jewelry - 1,006 3 - (11 ) 998
Piercing Pagoda - 613 - - (2 ) 611
Zale division - (2) 1,619 3 - (13 ) 1,609
H. Samuel 304 - - - - 304
Ernest Jones(3) 189 - - - - 189
UK Jewelry division 493 (2) - - - - 493
Signet 1,964 1,619 38 - (32 ) 3,589
Signet
1,964
1,619
38
-
(32 )
3,589
(1) Includes 33 stores that were converted from regional brands, which consist of 31 Jared Vaults, which operate in outlet
centers, and two Jared concept test stores.
(2) The annual net change in selling square footage for Fiscal 2014 for Sterling Jewelers division and UK Jewelry division
was 5% and (3)%, respectively. As the Acquisition was took place during Fiscal 2015, the Zale division does not have a
comparable prior period to show the net change in selling square footage.
(3) Includes stores selling under the Leslie Davis nameplate.
Planned store count changes for the remainder of Fiscal 2015:
Store count:
Kay 1,076 28 (4 ) 1,100
Jared 240 13 (1) - 253
Regional brands 171 - (18 ) 153
Sterling Jewelers division 1,487 (2) 41 (22 ) 1,506
Zales 723 7 (17 ) 713
Gordon's 84 - (22 ) 62
Peoples 144 1 (1 ) 144
Mappins 47 - (2 ) 45
Zale Jewelry 998 8 (42 ) 964
Piercing Pagoda 611 1 (20 ) 592
Zale division 1,609 (2) 9 (62 ) 1,556
H. Samuel 304 - (4 ) 300
Ernest Jones(3) 189 4 (1 ) 192
UK Jewelry division 493 (2) 4 (5 ) 492
Signet 3,589 54 (89 ) 3,554
3,554
(1) Includes seven Jared The Galleria Of Jewelry store openings, as well as six Jared concept test store openings.
(2) The expected annual net change in selling square footage for Fiscal 2015 for Sterling Jewelers division, Zale division
and UK Jewelry division is 5%, (3)% and 0%, respectively.
(3) Includes stores selling under the Leslie Davis nameplate.
Free cash flow
Free cash flow is net cash provided by operating activities less purchases of property and equipment, net; see non-GAAP
measures discussed herein. Free cash flow was $48.5 million compared to $(17.0) million in the prior year second quarter.
Year to date free cash flow was $93.9 million compared to $4.9 million for the 26 weeks ended August 3, 2013.
Financing activities
Dividends
During the 26 weeks ended August 2, 2014, the Company's dividend activity was as follows:
First quarter(1) $ 0.18 $ 14.4 (2) $ 0.15 $ 12.1
Second quarter $ 0.18 $ 14.4 (3) $ 0.15 $ 12.1
Cash dividend
per share
Total
dividends
(in millions)
(in millions)
First quarter(1)
$ 0.18
$ 14.4 (2)
$ 0.15
$ 12.1
Second quarter
$ 0.18
$ 14.4 (3)
$ 0.15
$ 12.1
(1) Signet's dividend policy results in the dividend payment date being a quarter in arrears from the declaration date. As
a result, the fourth quarter Fiscal 2014 $0.15 per share cash dividend was paid on February 27, 2014 in the aggregate
amount of $12.0 million.
(2) The first quarter Fiscal 2015 $0.18 per share cash dividend was paid on May 28, 2014 in the aggregate amount of $14.4
million.
(3) As of August 2, 2014, $14.4 million has been recorded in accrued expenses and other current liabilities in the
condensed consolidated balance sheets reflecting the cash dividend declared for the second quarter of Fiscal 2015, which
has a record date of August 1, 2014 and a payment date of August 27, 2014.
Share repurchase
During the 26 weeks ended August 2, 2014, the Company's share repurchase activity was as follows:
2013 Program(1) $ 350 220,132 $ 22.4 $ 101.57 374,613 $ 25.0 $ 66.74
2011 Program(2) $ 350 n/a n/a n/a 749,245 50.1 66.92
Total 220,132 $ 22.4 1,123,858 $ 75.1
$ 350
n/a
n/a
n/a
749,245
50.1
66.92
Total
220,132
$ 22.4
1,123,858
$ 75.1
(1) In June 2013, the Board of Directors authorized the repurchase of up to $350 million of Signet's common shares (the
"2013 Program"). The 2013 Program may be suspended or discontinued at any time without notice. The 2013 Program had $273.0
million remaining as of August 2, 2014.
(2) In October 2011, the Board of Directors authorized the repurchase of up to $300 million of Signet's common shares (the
"2011 Program"), which authorization was subsequently increased to $350 million. The 2011 Program was completed as of May
4, 2013.
n/a Not applicable.
Proceeds from exercise of share options
During the 26 weeks ended August 2, 2014, $2.0 million was received for the exercise of share options pursuant to Signet's
equity compensation programs compared to $5.2 million in the 26 weeks ended August 3, 2013. Other than equity based
compensation awards granted to employees and directors, Signet has not issued common shares as a financing activity for
over ten years.
Movement in cash and indebtedness
Net debt was $1,195.3 million as of August 2, 2014 compared to net cash of $211.2 million as of August 3, 2013; see
non-GAAP measures discussed herein.
Cash and cash equivalents at August 2, 2014 were $215.0 million compared to $212.9 million as of August 3, 2013. Signet has
significant amounts of cash and cash equivalents invested in various 'AAA' rated liquidity funds and at a number of
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.
At August 2, 2014, Signet had $1,400 million of outstanding debt, which was incurred to finance the acquisition of Zale
Corporation. The debt is comprised of $400 million of senior unsecured notes, $600 million of an asset-backed
securitization facility and a $400 million term loan facility. In connection with the issuance of the debt, Signet incurred
and capitalized fees totaling $16.3 million, of which $14.4 million was paid and $1.9 million was accrued as of August 2,
2014. Additionally, the debt financing replaced commitments for an $800 million unsecured bridge facility extended to
Signet to finance the transaction prior to the finalization of the current financing arrangements. Signet incurred and
capitalized fees totaling $4.0 million related to this facility. During the 26 week period ended August 2, 2014,
amortization expense related to capitalized fees associated with the debt and bridge facility was $0.6 million and $4.0
million, respectively. In conjunction with the financing activities, Signet also amended its existing $400 million
revolving credit facility and extended the maturity date to 2019. At August 2, 2014, the credit facility was undrawn with
no intra-period borrowings and stand-by letters of credit of $20.3 million. At August 3, 2013, the Company's credit
facility entered into in May 2011 was undrawn with no intra-period borrowings and stand-by letters of credit of $9.5
million.
OBLIGATIONS AND COMMITMENTS
Signet's contractual obligations and commitments at August 2, 2014 and the effects such obligations and commitments are
expected to have on Signet's liquidity and cash flows in future periods have changed from those disclosed in Signet's
Annual Report on Form 10-K for the year ended February 1, 2014, filed with the SEC on March 27, 2014. In addition to those
previously disclosed on Form 10-K, in May 2014, the Company issued long-term debt in connection with its acquisition of
Zale Corporation. Zale also has existing contractual obligations consisting of capital lease obligations, operating leases,
an IT operations services agreement and other long-term liabilities. The following table provides the payments due by
period for only these incremental obligations and commitments as of May 29, 2014.
New contractual obligations as of May 29, 2014
Long-term debt obligations (excluding capital $ 20.8 $ 637.6 $ 197.6 $ 733.4 $ - $ 1,589.4
leases)(2)
Operating lease obligations(3) 124.1 259.8 150.0 163.0 - 696.9
Capital lease obligations 0.7 1.2 - - - 1.9
Operations services agreement(4) 4.9 10.6 - - - 15.5
Other long-term liabilities(5) - - - - 5.8 5.8
Total $ 150.5 $ 909.2 $ 347.6 $ 896.4 $ 5.8 $ 2,309.5
Total
$ 150.5
$ 909.2
$ 347.6
$ 896.4
$ 5.8
$ 2,309.5
(1) Amounts included in this column represent obligations from the period May 29, 2014 through January 31, 2015.
(2) Includes principal payments on all long-term obligations and interest payments on fixed-rate obligations only.
Contractual interest payments on variable-rate obligations and commitment fees on the unused portion of the revolving
credit facility have been excluded since the payments can fluctuate due to various circumstances.
(3) Like the other Signet divisions, Zale operating lease obligations relate to minimum payments due under store lease
arrangements. Most store operating leases require payment of real estate taxes, insurance and common area maintenance fees.
Real estate taxes, insurance and common area maintenance fees were approximately 35% of base rentals for Fiscal 2014. These
are not included in the table above. Some operating leases also require additional payments based on a percentage of
sales.
(4) The operations services agreement is with a third party for the management of client server systems, local area
networks operations, wide area network management and technical support.
(5) Other long-term liabilities reflect loss reserves related to credit insurance services provided by insurance
subsidiaries. We have reflected these payments under "Other", as the timing of the future payments is dependent on the
actual processing of the claims.
Not included in the table above are obligations under employment agreements and ordinary course purchase orders for
merchandise.
SEASONALITY
Signet's sales are seasonal, with the first quarter slightly exceeding 20% of annual sales, the second and third quarters
approximating 20% and the fourth quarter accounting for almost 40% of annual sales, with December being by far the most
important month of the year. Sales made in November and December are known as the "Holiday Season." Due to sales leverage,
Signet's operating income is even more seasonal; about 45% to 55% of Signet's operating income normally occurs in the
fourth quarter, comprised of nearly all of the UK Jewelry and Zale divisions' operating income and about 40% to 45% of the
Sterling Jewelers division's operating income.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with US GAAP requires management to adopt accounting policies and
make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many
cases, there are alternative policies or estimation techniques that could be used. Management maintains a process to review
the application of Signet's accounting policies and to evaluate the appropriateness of the many estimates that are required
to prepare the financial statements of a multinational organization. However, even under optimal circumstances, estimates
routinely require adjustment based on changing circumstances and the receipt of new or better information. There have been
no material changes to the policies and estimates as discussed in Signet's Annual Report on Form 10-K for the year ended
February 1, 2014, filed with the SEC on March 27, 2014 except as noted below:
Revenue recognition
Extended service plans and lifetime warranty agreements
Signet recognizes revenue related to lifetime warranty sales in proportion to when the expected costs will be incurred. The
deferral period for lifetime warranty sales in each division is determined from patterns of claims costs, including
estimates of future claims costs expected to be incurred. Management reviews the trends in claims to assess whether changes
are required to the revenue and cost recognition rates utilized. A significant change in estimates related to the time
period or pattern in which warranty-related costs are expected to be incurred could adversely impact revenues. All direct
costs associated with the sale of these plans are deferred and amortized in proportion to the revenue recognized and
disclosed as either other current assets or other assets.
The Sterling Jewelers division sells extended service plans where it is obliged, subject to certain conditions, to perform
repair work over the lifetime of the product. Revenue from the sale of extended service plans is deferred over 14 years,
with approximately 45% of revenue recognized within the first two years.
The Zale division also sells extended service plans. Zale Jewelry customers are offered lifetime warranties on certain
products that cover sizing and breakage with an option to purchase theft protection for a two-year period. Revenue from the
sale of lifetime extended service plans is deferred over 10 years. Revenues related to the optional theft protection are
recognized over the two-year contract period on a straight-line basis. Zale Jewelry customers are also offered a two-year
watch warranty and a one-year warranty that covers breakage. Piercing Pagoda customers are also offered a one-year warranty
that covers breakage. Revenue from the two-year watch warranty and one-year breakage warranty is recognized on a
straight-line basis over the respective contract terms.
Goodwill
Goodwill represents the excess of the purchase price of acquisitions over the Company's interest in the fair value of the
identifiable assets and liabilities acquired. Goodwill is recorded by the Company's reporting units based on the
acquisitions made by each. Goodwill is not amortized, but is reviewed for impairment and is required to be tested at least
annually or whenever events or changes in circumstances indicate it is more likely than not that a reporting unit's fair
value is less than its carrying value. The annual testing date for goodwill allocated to the Sterling Jewelers reporting
unit is the last day of the fourth quarter. The annual testing date for goodwill allocated to the reporting units
associated with the Zale Corporation acquisition and the Other reporting unit is May 31.
The Company may elect to perform a qualitative assessment for each reporting unit to determine whether it is more likely
than not that the fair value of the reporting unit is greater than its carrying value. If a qualitative assessment is not
performed, or if as a result of a qualitative assessment it is not more likely than not that the fair value of a reporting
unit exceeds its carrying value, then the reporting unit's fair value is compared to its carrying value. Fair value is
determined through the income approach using discounted cash flow models or market-based methodologies. Significant
estimates used in these discounted cash flow models include: the weighted average cost of capital; long-term growth rates;
expected changes to selling prices, direct costs and profitability of the business; and working capital requirements.
Management estimates discount rates using post-tax rates that reflect assessments of the time value of money and
Company-specific risks. If the carrying value exceeds the estimated fair value, the Company determines the fair value of
all assets and liabilities of the reporting unit, including the implied fair value of goodwill. If the carrying value of
goodwill exceeds the implied fair value, the Company recognizes an impairment charge equal to the difference.
See Note 20 of the Condensed Consolidated Financial Statements for additional discussion of the goodwill recorded by the
Company during the second quarter of Fiscal 2015. There have been no goodwill impairment losses recorded during the fiscal
periods presented in the condensed consolidated income statements. If future economic conditions are different than those
projected by management, future impairment charges may be required. See Note 10 of the Condensed Consolidated Financial
Statements for additional information.
Intangible assets
Intangible assets with definite lives are amortized and reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. If the estimated undiscounted future cash flows
related to the asset are less than the carrying amount, the Company recognizes an impairment loss equal to the difference
between the carrying value and the estimated fair value, usually determined by the estimated discounted future cash flows
of the asset.
Intangible assets with indefinite lives are reviewed for impairment each year in the fourth quarter and may be reviewed
more frequently if certain events occur or circumstances change. First, pursuant to ASU No. 2012-02, "Testing
Indefinite-Lived Intangible Assets for Impairment", the Company performs a qualitative assessment to determine whether it
is more likely than not that the indefinite-lived intangible asset is impaired. If the Company determines that it is more
likely than not that the fair value of the asset is less than its carrying amount, the Company estimates the fair value,
usually determined by the estimated discounted future cash flows of the asset, compares that value with its carrying amount
and records an impairment charge, if any.
If future economic conditions are different than those projected by management, future impairment charges may be required.
See Note 10 for additional information on intangible assets.
Capital Lease Obligations
In the Zale division, capital leases are entered into related to vehicles for field management. The vehicles are included
in property, plant and equipment in the accompanying condensed consolidated balance sheets and are depreciated over a
four-year life. Capital leases, net of accumulated depreciation, included in property, plant and equipment as of August 2,
2014 totaled $1.7 million. The Acquisition occurred on May 29, 2014, and therefore amounts are not included as of February
1, 2014 or August 3, 2013.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Signet is exposed to market risk from fluctuations in foreign currency exchange rates, interest rates and precious metal
prices, which could affect its consolidated financial position, earnings and cash flows. Signet manages its exposure to
market risk through its regular operating and financing activities and, when deemed appropriate, through the use of
derivative financial instruments. Signet uses derivative financial instruments as risk management tools and not for trading
purposes.
As certain of the UK Jewelry division's purchases are denominated in US dollars and its net cash flows are in British
pounds, Signet's policy is to enter into foreign currency forward exchange contracts and foreign currency swaps to manage
the exposure to the US dollar. Signet also hedges a significant portion of forecasted merchandise purchases using commodity
forward contracts. Additionally, the Zale division occasionally enters into foreign currency contracts to manage the
currency fluctuations associated with purchases for our Canadian operations. These contracts are entered into with large,
reputable financial institutions, thereby minimizing the credit exposure from our counterparties.
Signet has significant amounts of cash and cash equivalents invested at several financial institutions. The amount invested
at each financial institution takes into account the long-term credit rating and size of the financial institution.
However, with the current financial environment and the possible instability of financial institutions, Signet cannot be
assured that it will not experience any losses on these balances. The interest rates earned on cash and cash equivalents
will fluctuate in line with short-term interest rates.
Signet's market risk profile as of August 2, 2014 has not materially changed since February 1, 2014. The market risk
profile as of February 1, 2014 is disclosed in Signet's Fiscal 2014 Annual Report on Form 10-K, filed with the SEC on March
27, 2014.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended. Based on this review, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of August 2, 2014.
Changes in Internal Control over Financial Reporting
The acquisition of Zale Corporation was significant to the Company and was consummated effective May 29, 2014. Upon
consummation, Zale became a consolidated subsidiary. The Company currently expects to include Zale within management's
annual assessment of internal control over financial reporting for the year ending January 31, 2015; however, the Company
intends to take a period of time to fully incorporate Zale's operations into its evaluation of internal control over
financial reporting. In connection with the foregoing evaluation by the Company's Chief Executive Officer and its Chief
Financial Officer, other than as noted above, no changes were identified in the Company's "internal control over financial
reporting" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)) that occurred during the
Company's fiscal quarter ended August 2, 2014, that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding legal proceedings is incorporated by reference from Note 17 of the Condensed Consolidated Financial
Statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of Signet's Fiscal 2014
Annual Report on Form 10-K, filed with the SEC on March 27, 2014, except that the risk factors set forth below include any
material changes to, and supersede, to the extent included below, the description of, the risk factors disclosed in Part I,
Item 1A of Signet's Fiscal 2014 Annual Report on Form 10-K. In addition, the risk factor entitled "If Signet's financing
for the transaction becomes unavailable, the transaction may not be completed and we may be in breach of the Merger
Agreement" disclosed in Part I, Item 1A of Signet's Fiscal 2014 Annual Report on Form 10-K is hereby deleted.
Fluctuations in the availability and pricing of commodities, particularly polished diamonds and gold, which account for the
majority of Signet's merchandise costs, could adversely impact its earnings and cash availability.
The jewelry industry generally is affected by fluctuations in the price and supply of diamonds, gold and, to a lesser
extent, other precious and semi-precious metals and stones. In particular, diamonds account for about 47% of Signet's
merchandise costs, and gold about 15% in Fiscal 2014.
In Fiscal 2014, polished diamond prices experienced a single digit percentage increase when compared to Fiscal 2013 levels,
unlike as had occurred in prior years. Industry forecasts indicate that over the medium and longer term, the demand for
diamonds will probably increase faster than the growth in supply, particularly as a result of growing demand in countries
such as China and India. Therefore, the cost of diamonds is anticipated to rise over time, although fluctuations in price
are likely to continue to occur. The mining, production and inventory policies followed by major producers of rough
diamonds can have a significant impact on diamond prices, as can the inventory and buying patterns of jewelry retailers and
other parties in the supply chain.
While jewelry manufacturing is the major final demand for gold, management believes that the cost of gold is predominantly
impacted by investment transactions which have resulted in significant volatility and overall increases in gold cost over
the past several years followed by somewhat of a decline in Fiscal 2014. Signet's cost of merchandise and potentially its
earnings may be adversely impacted by investment market considerations that cause the price of gold to significantly
escalate.
The availability of diamonds is significantly influenced by the political situation in diamond producing countries,
including the impact of current and potential new sanctions on Russia, and by the Kimberley Process, an inter-governmental
agreement for the international trading of rough diamonds. Until acceptable alternative sources of diamonds can be
developed, any sustained interruption in the supply of diamonds from significant producing countries, or to the trading in
rough and polished diamonds which could occur as a result of disruption to the Kimberley Process, could adversely affect
Signet, as well as the retail jewelry market as a whole. In 2012, the Kimberley Process, chaired by the United States,
initiated a process to review ways to strengthen and reform the Kimberley Process, including reviewing the definition of a
conflict diamond. In January 2013, South Africa became the chair, and the review process was expected to continue; however,
no reform efforts were achieved. In 2014, the Kimberley Process is being chaired by China, which will be followed by Angola
in 2015. In addition, the current Kimberley Process decision making procedure is dependent on reaching a consensus among
member governments, which can result in the protracted resolution of issues, and there is little expectation of significant
reform over the long-term. The impact of this review process on the supply of diamonds, and consumers' perception of the
diamond supply chain, is unknown. In addition to the Kimberley Process, the supply of diamonds to the US is also impacted
by certain governmental trade sanctions imposed on Zimbabwe.
The possibility of constraints in the supply of diamonds of a size and quality Signet requires to meet its merchandising
requirements may result in changes in Signet's supply chain practices, for example its rough sourcing initiative. In
addition, Signet may from time to time choose to hold more inventory, to purchase raw materials at an earlier stage in the
supply chain or enter into commercial agreements of a nature that it currently does not use. Such actions could require the
investment of cash and/or additional management skills. Such actions may not result in the expected returns and other
projected benefits anticipated by management.
An inability to increase retail prices to reflect higher commodity costs would result in lower profitability. Historically
jewelry retailers have been able, over time, to increase prices to reflect changes in commodity costs. However, in general,
particularly sharp increases in commodity costs may result in a time lag before increased commodity costs are fully
reflected in retail prices. As Signet uses an average cost inventory methodology, volatility in its commodity costs may
also result in a time lag before cost increases are reflected in retail prices. There is no certainty that such price
increases will be sustainable, so downward pressure on gross margins and earnings may occur. In addition, any sustained
increases in the cost of commodities could result in the need to fund a higher level of inventory or changes in the
merchandise available to the customer.
In August 2012, the SEC, pursuant to the Dodd-Frank Act, issued final rules, which require annual disclosure and reporting
on the source and use of certain minerals, including gold, from the Democratic Republic of Congo and adjoining countries.
The gold supply chain is complex and, while management believes that the rules currently cover less than 1% of annual
worldwide gold production (based upon recent estimates), the final rules require Signet and other jewelry retailers and
manufacturers that file with the SEC to make specified country
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