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SIG > SEC Filings for SIG > Form 10-Q on 20-Nov-2012All Recent SEC Filings

Show all filings for SIGNET JEWELERS LTD

Form 10-Q for SIGNET JEWELERS LTD


20-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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," "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, including but not limited to general economic conditions, the merchandising, pricing and inventory policies followed by Signet, the reputation of Signet and its brands, the level of competition in the jewelry sector, the cost and availability of diamonds, gold and other precious metals, regulations relating to consumer credit, seasonality of Signet's business, financial market risks, deterioration in consumers' financial condition, exchange rate fluctuations, changes in consumer attitudes regarding jewelry, management of social, ethical and environmental risks, security breaches and other disruptions to Signet's information technology infrastructure and databases, inadequacy in and disruptions to internal controls and systems, changes in assumptions used in making accounting estimates relating to items such as extended service plans and pensions, and risks relating to Signet being a Bermuda corporation.

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" section of Signet's Fiscal 2012 Annual Report on Form 10-K filed with the SEC on March 22, 2012. Signet undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.

OVERVIEW

Signet is the largest specialty retail jeweler in the US and UK. Signet manages its business as two geographical segments, the US and the UK divisions.

In the US, Signet operated 1,337 stores in 50 states at October 27, 2012. Its store brands are located nationally in malls and off-mall locations as Kay Jewelers ("Kay"), and regionally under a number of well-established mall-based brands. Destination superstores are operated nationwide as Jared The Galleria Of Jewelry ("Jared").

In the UK, Signet's store brands are "H.Samuel," "Ernest Jones," and "Leslie Davis," which are situated in prime "High Street" locations (main shopping thoroughfares with high pedestrian traffic) or major shopping malls. The UK division operated 520 stores at October 27, 2012, including 14 stores in the Republic of Ireland and 3 in the Channel Islands.

Non-GAAP measures

Signet provides certain non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. Management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitute for, financial information prepared in accordance with US GAAP.

Exchange translation impact

Signet has historically used constant exchange rates to compare period-to-period changes in certain financial data. Management considers this a useful measure for analyzing and explaining changes and trends in Signet's results. The impact of the re-calculation, including a reconciliation to Signet's US GAAP results, is analyzed below.


Table of Contents
                                                                                                                                           13 weeks               Change at
                                                                                                                                            ended                 constant
                                                                                                                   Impact of           October 29, 2011           exchange
                                                                                                                   exchange              at constant                rates
                                                                                                                     rate               exchange rates              (non-
                                                               13 weeks ended                    Change            movement               (non-GAAP)                GAAP)
                                                      October 27,           October 29,
(in millions, except per share amounts)                  2012                  2011
Sales:
US                                                   $       575.6         $       563.0             2.2 %        $        -          $            563.0                 2.2 %
UK                                                           140.6                 147.5            (4.7 )%              (3.7 )                    143.8                (2.2 )%

                                                             716.2                 710.5             0.8 %               (3.7 )                    706.8                 1.3 %
Cost of sales                                               (480.8 )              (480.6 )            -                   2.7                     (477.9 )              (0.6 )%

Gross margin                                                 235.4                 229.9             2.4 %               (1.0 )                    228.9                 2.8 %
Selling, general and administrative expenses                (222.6 )              (219.6 )          (1.4 )%               1.3                     (218.3 )              (2.0 )%
Other operating income, net                                   39.7                  32.2            23.3 %                 -                        32.2                23.3 %

Operating income/(loss):
US                                                            67.9                  56.4            20.4 %                 -                        56.4                20.4 %
UK                                                            (5.5 )                (5.0 )         (10.0 )%               0.1                       (4.9 )             (12.2 )%
Unallocated                                                   (9.9 )                (8.9 )         (11.2 )%               0.2                       (8.7 )             (13.8 )%

                                                              52.5                  42.5            23.5 %                0.3                       42.8                22.7 %
Interest expense, net                                         (0.9 )                (0.4 )            nm                   -                        (0.4 )                nm

Income before income taxes                                    51.6                  42.1            22.6 %                0.3                       42.4                21.7 %
Income taxes                                                 (16.7 )               (16.0 )          (4.4 )%              (0.1 )                    (16.1 )              (3.7 )%

Net income                                           $        34.9         $        26.1            33.7 %        $       0.2         $             26.3                32.7 %

Earnings per share - basic                           $        0.43         $        0.30            43.3 %        $        -          $             0.30                43.3 %
Earnings per share - diluted                         $        0.43         $        0.30            43.3 %        $        -          $             0.30                43.3 %

nm - not meaningful


Table of Contents
                                                                                                                                     39 weeks             Change at
                                                                                                                                      ended               constant
                                                                                                               Impact of         October 29, 2011         exchange
                                                                                                               exchange            at constant              rates
                                                                                                                 rate             exchange rates            (non-
                                                                39 weeks ended                 Change          movement             (non-GAAP)              GAAP)
                                                        October 27,         October 29,
(in millions, except per share amounts)                    2012                2011
Sales:
US                                                     $     2,029.0       $     1,944.0           4.4 %      $        -        $          1,944.0               4.4 %
UK                                                             441.1               451.4          (2.3 )%           (11.2 )                  440.2               0.2 %

                                                             2,470.1             2,395.4           3.1 %            (11.2 )                2,384.2               3.6 %
Cost of sales                                               (1,569.8 )          (1,521.0 )        (3.2 )%             8.1                 (1,512.9 )            (3.8 )%

Gross margin                                                   900.3               874.4           3.0 %             (3.1 )                  871.3               3.3 %
Selling, general and administrative expenses                  (727.4 )            (707.9 )        (2.8 )%             3.7                   (704.2 )            (3.3 )%
Other operating income, net                                    119.9                97.0          23.6 %               -                      97.0              23.6 %

Operating income/(loss):
US                                                             322.9               287.0          12.5 %               -                     287.0              12.5 %
UK                                                              (8.8 )              (2.4 )          nm                0.1                     (2.3 )              nm
Unallocated                                                    (21.3 )             (21.1 )        (0.9 )%             0.5                    (20.6 )            (3.4 )%

                                                               292.8               263.5          11.1 %              0.6                    264.1              10.9 %
Interest expense, net                                           (2.5 )              (3.8 )        34.2 %               -                      (3.8 )            34.2 %

Income before income taxes                                     290.3               259.7          11.8 %              0.6                    260.3              11.5 %
Income taxes                                                  (102.2 )             (91.9 )       (11.2 )%            (0.2 )                  (92.1 )           (11.0 )%

Net income                                             $       188.1       $       167.8          12.1 %      $       0.4       $            168.2              11.8 %

Earnings per share - basic                             $        2.27       $        1.94          17.0 %      $      0.01       $             1.95              16.4 %
Earnings per share - diluted                           $        2.26       $        1.93          17.1 %      $        -        $             1.93              17.1 %

nm - not meaningful

Free cash flow

Free cash flow is a non-GAAP measure defined as the net cash (used in)/provided by operating activities less net cash flows used in investing activities. Management considers that it is 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 does not represent the residual cash flow available for discretionary expenditure.

                                                13 weeks ended                            39 weeks ended
                                       October 27,          October 29,          October 27,          October 29,
(in millions)                             2012                 2011                 2012                 2011
Net cash (used in)/provided by
operating activities                  $       (16.6 )      $       (78.5 )      $       100.2        $       113.6
Net cash used in investing
activities                                    (46.1 )              (34.7 )             (100.9 )              (73.0 )

Free cash flow                        $       (62.7 )      $      (113.2 )      $        (0.7 )      $        40.6


Table of Contents

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Financial Statements and the related notes in Part I of this Quarterly Report on Form 10-Q, as well as the financial and other information included in Signet's Fiscal 2012(1) Annual Report on Form 10-K.

Third Quarter Highlights ("third quarter" is the 13 weeks ended October 27, 2012)

Same store sales: up 1.4%

Operating income: $52.5 million, up $10.0 million, an increase of 23.5%

Diluted earnings per share: up by 43.3% to $0.43

Year to Date Highlights

Same store sales: up 3.2%

Operating income: $292.8 million, up $29.3 million, an increase of 11.1%

Diluted earnings per share: up by 17.1% to $2.26

(1) Fiscal 2013 is the year ending February 2, 2013 and Fiscal 2012 is the year ended January 28, 2012.

Certain operating data as a percentage of sales were as follows:

Operating Data

                                                        Third Quarter              Year To Date
                                                     Fiscal       Fiscal       Fiscal       Fiscal
                                                      2013         2012         2013         2012
                                                        %            %            %            %
Sales                                                  100.0        100.0        100.0        100.0
Cost of sales                                          (67.1 )      (67.6 )      (63.6 )      (63.5 )

Gross margin                                            32.9         32.4         36.4         36.5
Selling, general and administrative expenses           (31.1 )      (30.9 )      (29.4 )      (29.6 )
Other operating income, net                              5.5          4.5          4.9          4.1

Operating income                                         7.3          6.0         11.9         11.0
Interest expense, net                                   (0.1 )       (0.1 )       (0.1 )       (0.2 )

Income before income taxes                               7.2          5.9         11.8         10.8
Income taxes                                            (2.3 )       (2.2 )       (4.2 )       (3.8 )

Net income                                               4.9          3.7          7.6          7.0

Third quarter sales

In the third quarter of Fiscal 2013, Signet's same store sales were up 1.4% compared to an increase of 10.6% in the 13 weeks ended October 29, 2011 ("third quarter of Fiscal 2012"). Total sales were $716.2 million compared to $710.5 million in the third quarter of Fiscal 2012, up $5.7 million or 0.8% compared to an increase of 10.7% in the third quarter of Fiscal 2012. eCommerce sales were $19.6 million compared to $14.5 million in the third quarter of Fiscal 2012, up $5.1 million or 35.2%. The breakdown of the sales performance is set out in the table below.

                                                                 Change from previous year
                                                                      Total sales  at
                                Same                                      constant            Exchange             Total               Total
                               store             Non same                 exchange           translation           sales               sales
Third quarter of Fiscal 2013   sales       store  sales, net(1)           rate (2)            impact(2)         as reported        (in millions)
US division                       1.2 %                      1.0 %                 2.2 %               -                 2.2 %    $         575.6
UK division                       2.3 %                     (4.5 )%               (2.2 )%            (2.5 )%            (4.7 )%   $         140.6

Signet                            1.4 %                     (0.1 )%                1.3 %             (0.5 )%             0.8 %    $         716.2

(1) Includes all sales from stores not open for 12 months.

(2) Non-GAAP measure, discussed herein.


Table of Contents

US sales

In the third quarter of Fiscal 2013, the US division's sales were $575.6 million compared to $563.0 million in the third quarter of Fiscal 2012, up $12.6 million or 2.2%. Same store sales increased 1.2% compared to an increase of 13.9% in the third quarter of Fiscal 2012, driven primarily by Kay same store sales increase of 5.5%. Same store sales at Jared declined 4.1%, primarily due to a one-time watch event in Fiscal 2012 and discontinuation of the associated watch line. The loss of these sales reduced Jared same store sales by approximately 9.6% and US total same store sales by 3.5%. Across both Kay and Jared, same store sales were strong in the fashion jewelry and bridal categories, driven by branded and exclusive merchandise. See the table below for further analysis of sales.

                                                       Change from previous year
                                              Same             Non same             Total               Total
                                             store           store sales,         sales  as             sales
Third quarter of Fiscal 2013                 sales             net (1)            reported          (in millions)
Kay                                              5.5 %                 1.8 %             7.3 %     $         337.2
Jared                                           (4.1 )%                1.6 %            (2.5 )%    $         189.8
Regional brands                                 (5.0 )%               (5.2 )%          (10.2 )%    $          48.6

US division                                      1.2 %                 1.0 %             2.2 %     $         575.6

(1) Includes all sales from stores not open for 12 months.

UK sales

In the third quarter of Fiscal 2013, the UK division's sales were $140.6 million compared to $147.5 million in the third quarter of Fiscal 2012, down $6.9 million or 4.7%. Same store sales increased 2.3% compared to a decrease of 0.5% in the third quarter of Fiscal 2012. The primary driver was a strong performance in prestige and fashion watches. See the table below for further analysis of sales.

                                                               Change from previous year
                                Same          Non same           Total sales  at          Exchange              Total              Total
                               store        store sales,            constant             translation          sales  as            sales
Third quarter of Fiscal 2013   sales          net (1)           exchange  rate(2)         impact(2)           reported         (in millions)
H.Samuel                          1.3 %              (4.2 )%                  (2.9 )%            (2.5 ) %           (5.4 )%   $          74.1
Ernest Jones(3)                   3.6 %              (5.1 )%                  (1.5 )%            (2.4 ) %           (3.9 )%   $          66.5

UK division                       2.3 %              (4.5 )%                  (2.2 )%            (2.5 ) %           (4.7 )%   $         140.6

(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.

Year to date sales

In the year to date, Signet's same store sales increased 3.2% compared to an increase of 10.2% in the comparable period last year. In the year to date, total sales were $2,470.1 million compared to $2,395.4 million in the 39 weeks ended October 29, 2011, up $74.7 million or 3.1%. eCommerce sales were $65.9 million compared to $49.1 million in the 39 weeks ended October 29, 2011, up $16.8 million or 34.2%. The breakdown of the sales performance is set out in the table below.


Table of Contents
                                                           Change from previous year
                            Same          Non same            Total sales  at           Exchange            Total              Total
                           store        store sales,             constant              translation        sales  as            sales
Year to Date Fiscal 2013   sales          net (1)          exchange  rate(2)(3)         impact(2)         reported         (in millions)
US division                   3.5 %               0.9 %                      4.4 %               -               4.4 %    $       2,029.0
UK division                   1.9 %              (1.7 )%                     0.2 %             (2.5 )%          (2.3 )%   $         441.1

Signet                        3.2 %               0.4 %                      3.6 %             (0.5 )%           3.1 %    $       2,470.1

(1) Includes all sales from stores not open for 12 months.

(2) Non-GAAP measure, discussed herein.

(3) The average US dollar to pound sterling exchange rate for the 39 weeks ended October 27, 2012 was $1.58 compared to $1.62 for the 39 weeks ended October 29, 2011.

US sales

In the year to date, the US division's sales were $2,029.0 million compared to $1,944.0 million in the 39 weeks ended October 29, 2011, up $85.0 million or 4.4%. Same store sales increased 3.5% compared to an increase of 12.8% in the prior year period. The impact of the one-time watch event in Fiscal 2012 and the discontinuation of the associated watch line reduced Jared same store sales by approximately 2.9% and US total same store sales by 1.0%. Branded and exclusive merchandise and bridal continue to be key drivers of US sales. See the table below for further analysis of sales.

                                      Change from previous year
                             Same             Non same            Total              Total
                            store           store sales,        sales  as            sales
Year to Date Fiscal 2013    sales             net (1)           reported         (in millions)
Kay                             6.8 %                 1.4 %            8.2 %    $       1,208.4
Jared                          (0.4 )%                1.6 %            1.2 %    $         643.8
Regional brands                (2.8 )%               (4.4 )%          (7.2 )%   $         176.8

US division                     3.5 %                 0.9 %            4.4 %    $       2,029.0

(1) Includes all sales from stores not open for 12 months.

UK sales

In the year to date, the UK division's sales were $441.1 million compared to $451.4 million in the 39 weeks ended October 29, 2011, down $10.3 million or 2.3%. Same store sales increased 1.9% compared to an increase of 0.4% in the prior year period. Branded jewelry, watches and bridal were key drivers of the sales increase. See the table below for further analysis of sales.

                                                           Change from previous year
                            Same          Non same            Total sales  at           Exchange            Total              Total
                           store        store sales,             constant              translation        sales  as            sales
Year to Date Fiscal 2013   sales          net (1)          exchange  rate(2)(3)         impact(2)         reported         (in millions)
H.Samuel                      1.1 %              (1.2 )%                    (0.1 )%            (2.5 )%          (2.6 )%   $         232.9
Ernest Jones(4)               2.9 %              (2.3 )%                     0.6 %             (2.5 )%          (1.9 )%   $         208.2

UK division                   1.9 %              (1.7 )%                     0.2 %             (2.5 )%          (2.3 )%   $         441.1

(1) Includes all sales from stores not open for 12 months.

(2) Non-GAAP measure, discussed herein.

(3) The average US dollar to pound sterling exchange rate for the 39 weeks ended October 27, 2012 was $1.58 compared to $1.62 for the 39 weeks ended October 29, 2011.

(4) Includes stores selling under the Leslie Davis nameplate.


Table of Contents

Cost of sales and gross margin

In the third quarter of Fiscal 2013, the gross margin was $235.4 million or 32.9% of sales, an increase of 50 basis points compared to $229.9 million or 32.4% of sales in the third quarter of Fiscal 2012. Gross margin dollars in the US increased $7.8 million compared to the third quarter of Fiscal 2012, reflecting a gross margin rate increase of 70 basis points. This improvement is primarily a result of an increase in the gross merchandise margin rate of 90 basis points over that of the third quarter of Fiscal 2012, principally due to favorable changes in sales mix. The US net bad debt to US sales ratio was unchanged at 5.4% compared to the third quarter of Fiscal 2012. In the UK, gross margin dollars decreased $2.3 million compared to the third quarter of Fiscal 2012, reflecting a gross margin rate decline of 30 basis points. The decrease in rate is a result of a decline in gross merchandise margin of 130 basis points, caused primarily by customers' preferences for promotional merchandise. Partially offsetting the decline were favorable store occupancy expenses due to store closures and negotiated rent reductions.

For the year to date, the gross margin was $900.3 million or 36.4% of sales compared to $874.4 million or 36.5% of sales in the 39 weeks ended October 29, 2011. Gross margin in the US increased $34.9 million compared to the 39 weeks ended October 29, 2011, primarily as a result of increased sales and an . . .

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