REFERENCES
Unless the context otherwise requires, references to “Signet” or the “Company,” refer to Signet Jewelers Limited (and before September 11, 2008 to Signet Group plc) and its consolidated subsidiaries. References to the “Parent Company” are to Signet Jewelers Limited.
PRESENTATION OF FINANCIAL INFORMATION
All references to “dollars,” “US dollars,” “$,” “cents”dollars” and “c”“$” are to the lawful currency of the United States of America.America (“US”). Signet prepares its financial statements in US dollars. All references to “British pound,pound(s),” “pounds,” “British pounds,” “£,” “pence” and “p”“£” are to the lawful currency of the United Kingdom.Kingdom (“UK”). All references to “Canadian dollar” or “C$” are to the lawful currency of Canada.
Percentages in tables have been rounded and accordingly may not add up to 100%. Certain financial data may have been rounded. As a result of such rounding, the totals of data presented in this document may vary slightly from the actual arithmetical totals of such data.
Throughout this Annual Report on Form 10-K, financial data has been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). However, Signet gives certain additional non-GAAP measures in order to provide increased insight into the underlying or relative performance of the business. An explanation of each non-GAAP measure used can be found in Item 6.
Fiscal year and fourth quarter
Signet’s fiscal year ends on the Saturday nearest to January 31. As used herein, “Fiscal 2020,” “Fiscal 2019,” “Fiscal 2018,” “Fiscal 2017,” “Fiscal 2016,” “Fiscal 2015,” “Fiscal 2014,” “Fiscal 2013”2016” and “Fiscal 2012”2015” refer to the 52 week periods ending February 1, 2020 and February 2, 2019, the 53 week period ending February 3, 2018, and the 52 week periods ending January 28, 2017, January 30, 2016 and January 31, 2015, February 1, 2014, the 53 week period ending February 2, 2013 and the 52 week period ending January 28, 2012, respectively. Fourth quarter references the 13 weeks ended January 30, 2016February 2, 2019 (“fourth quarter”) and the 1314 weeks ended January 31, 2015February 3, 2018 (“prior year fourth quarter”).
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Annual Report on Form 10-Kdocument 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: our ability to implement Signet's transformation initiative; the effect of US federal tax reform and adjustments relating to such impact on the completion of our quarterly and year-end financial statements; changes in interpretation or assumptions, and/or updated regulatory guidance regarding the US federal tax reform; the benefits and outsourcing of the credit portfolio sale including technology disruptions, future financial results and operating results; deterioration in the performance of individual businesses or of the company's market value relative to its book value, resulting in impairments of fixed assets or intangible assets or other adverse financial consequences, including tax consequences related thereto, especially in view of the Company’s recent market valuation; our ability to successfully integrate Zale Corporation and R2Net’s operations and to realize synergies from the Zale and R2Net transactions; general economic conditions; potential regulatory changes, global economic conditions or other developments related to the United Kingdom’s announced intention to negotiate a formal exit from the European Union; a decline in consumer spending or deterioration in consumer financial position; the merchandising, pricing and inventory policies followed by Signet,Signet; Signet’s relationships with suppliers and ability to obtain merchandise that customers wish to purchase; the reputation of Signet and its brands,banners; the level of competition and promotional activity in the jewelry sector,sector; the cost and availability of diamonds, gold and other precious metals,metals; changes in the supply and consumer acceptance of gem quality lab created diamonds; regulations relating to customer credit,credit; seasonality of Signet’s business,business; the success of recent changes in Signet’s executive management team; the performance of and ability to recruit, train, motivate and retain qualified sales associates; the impact of weather-related incidents on Signet’s business; financial market risks, deterioration in customers’ financial condition,risks; exchange rate fluctuations,fluctuations; changes in Signet’s credit rating,rating; changes in consumer attitudes regarding jewelry,jewelry; management of social, ethical and environmental risks,risks; the development and maintenance of Signet’s omni-channel retailing; the ability to optimize Signet’s real estate footprint; security breaches and other disruptions to Signet’s information technology infrastructure and databases, inadequacy in and disruptions to internal controls and systems,systems; changes in assumptions used in making accounting estimates relating to items such as credit outsourcing fees, extended service plans and pensions,pensions; risks relatingrelated to Signet being a Bermuda corporation,corporation; the impact of the acquisition of Zale Corporation on relationships, including with employees, suppliers, customers and competitors,competitors; Signet’s ability to protect its intellectual property; changes in taxation benefits, rules or practices in the impact of stockholder litigation with respectUS and jurisdictions in which Signet’s subsidiaries are incorporated, including developments related to the acquisitiontax treatment of Zale Corporation,companies engaged in Internet commerce; and our ability to successfully integrate Zale Corporation’s operationsan adverse development in legal or regulatory proceedings or tax matters, any new regulatory initiatives or investigations, and to realize synergies from the transaction.ongoing compliance with regulations and any consent orders or other legal or regulatory decisions.
For a discussion of these risks and other risks and uncertainties which could cause actual results to differ materially from those expressed in any forward lookingforward-looking statement, see Item 1A and elsewhere in this Annual Report on Form 10-K. Signet undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.
PART I
ITEM 1. BUSINESS
OVERVIEW
Signet Jewelers Limited (“Signet” or the “Company”) is the world’s largest retailer of diamond jewelry. Signet is incorporated in Bermuda and its address and telephone number are shown on the cover of this document. Its corporate website is www.signetjewelers.com, from where documents thatDuring the first quarter of Fiscal 2019, the Company realigned its organizational structure. The new structure is requireddesigned to file or furnishfacilitate further integration of operational and product development processes and to support growth strategies. In accordance with the US Securities and Exchange Commission (“SEC”) may be viewed or downloaded free of charge.
On May 29, 2014,this organizational change, the Company, acquired 100%with 3,334 stores and kiosks as of the outstanding shares of Zale Corporation (the “Zale Acquisition” or “Acquisition”) for $1,458.0 million, including $478.2 million to extinguish Zale Corporation’s existing debt. The Acquisition was funded by the Company through existing cash and the issuance of $1,400.0 million of long-term debt. The Acquisition aligned with each strategic pillar of the Company’s Vision 2020. See Notes 3and 19 of Item 8 for additional information related to the Acquisition and the issuance of long-term debt to finance the transaction, respectively.
The CompanyFebruary 2, 2019, now manages its business by store brand grouping,geography, a description of which follows:
The Sterling Jewelers division is one reportable segment. ItNorth America segment operated 1,540 stores2,729 locations in all 50the US states at January 30, 2016. Its stores operate nationallyand 128 locations in malls and off-mall locations principallyCanada as Kay Jewelers (“Kay”), Kay Jewelers Outlet, Jared The Galleria Of Jewelry (“Jared”) and Jared Vault. The division also operates a variety of mall-based regional brands.
The Zale division consists of two reportable segments:February 2, 2019.
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◦ | Zale Jewelry, which operated 977 jewelry stores at January 30, 2016, is located primarily in shopping malls in North America. Zale Jewelry includesIn the US, store brandthe segment primarily operates in malls and off-mall locations under the following banners: Kay (Kay Jewelers and Kay Outlet); Zales (Zales Jewelers and Zales Outlet),; Jared (Jared The Galleria Of Jewelry and Jared Vault); a variety of mall-based regional banners; and James Allen, which was acquired in the R2Net acquisition in Fiscal 2018. Additionally, in the US, the segment operates in all 50 US states, andmall-based kiosks under the Canada store brand Peoples Jewellers, which operates in nine provinces. The division also operates regional brands Gordon’s Jewelers and Mappins.Piercing Pagoda banner. |
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◦ | Piercing Pagoda, which operated 605 mall-based kiosks at January 30, 2016,In Canada, the segment primarily operates under the Peoples banner (Peoples Jewellers), as well as the Mappins Jewellers regional banner. |
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◦ | The North America segment is located in shopping malls inentirely comprised of the USSterling Jewelers and Puerto Rico.Zale divisions reported under the Company’s previous reportable segment structure. |
The UK Jewelry division is one reportable segment. ItInternational segment operated 503477 stores at January 30, 2016. Its stores operatein the United Kingdom, Republic of Ireland and Channel Islands as of February 2, 2019. The segment primarily operates in shopping malls and off-mall locations (i.e. high street) principally asunder the H.Samuel and Ernest Jones.Jones banners. The International segment is entirely comprised of the UK Jewelry division reported under the Company’s previous reportable segment structure.
Certain company activities (e.g. diamond sourcing) are managed as a separate operating segment and are aggregated with unallocated corporate administrative functions in the segment “Other” for financial reporting purposes. Signet’s diamond sourcing function includes our diamond polishing factory in Botswana. See Note 46 of Item 8 for additional information regarding the Company’s reportable segments.
MISSION & STRATEGY COMPETITIVE STRENGTHS AND OBJECTIVES
Signet’s mission is to help guestscustomers “Celebrate Life and Express Love.” Our Vision 2020 strategyvision is a road map for on-going take the lead and be the world’s premier jeweler by relentlessly connecting with customers, earning their trust with every interaction everywhere.
Signet success which includes five strategic pillars:
Maximize mid-market
Best in bridal
Best in class digital ecosystem
Expand footprint
People, purpose and passion
These strategic pillars guide Signet in building profitable market share. Maximizing the mid-market drives our competitive strengths focused on merchandising initiatives, marketing, store growth and productivity. We define the mid-market jewelry sector based on the value of products that consumers purchase. We consider this marketcontinues to be defined bythe market share leader in North America in a large, growing and fragmented category, with the opportunity for additional growth as we leverage our strengths and competitive advantages. However, Signet believes that to realize this opportunity, it must transform its business from that of a legacy mall retailer to a modern OmniChannel category leader.
As a result, in Fiscal 2019, Signet launched a three-year comprehensive transformation plan, “Signet’s Path to Brilliance,” to reposition the company to be the OmniChannel jewelry purchases with price points ranging from $100 to $10,000, which essentially excludes costume and luxury jewelry categories.category leader. The vast majority of Signet’s sales (95%) are in this range of price points. This subset of the total US jewelry market is $41.2 billion or over half the total US market. In pursuit of this strategic pillar, we continuously review our US national store brands performance and have concluded that our customer population has several distinct shopping and purchasing characteristics or customer identities. Consequently, we attempt to maximize our share of the mid-market by differentiating customers based on attitudes and behaviors, versus demographic information. This approach to customer segmentation results in distinct customer identities:
The “Sentimentalist” - a seeker of high-quality, timeless jewelry which invokes sentimental value.
The “Gifter” - a customer that is not highly knowledgeable of jewelry but purchases for others.
The “Influencer” - a customer that uses jewelry to show status and is knowledgeable of brands. The Influencer is a customer focused on both self-purchase and gifting.
The “Stylish Shopper” - a customer that wears jewelry often and considers it an essential aspect of fashion.
The “Practical Shopper” - a customer that focuses on inexpensive, everyday jewelry.
Although eachgoal of our US national store brand customers share many of these five customer traits, each store brand attracts a heavier weighting of certain types of customers. This customer segmentation approach empowers Signettransformation plan is to define our highest-prioritydrive sustained growth opportunities within the mid-market (i.e., where Signet will play),by delivering inspiring products and ideal online and in-store shopping experiences to differentiate and optimize our store brands, including guest experience, merchandise brands and marketing.
Our brand discussion included within Item 1 includes alignment of these customer identities with our US national store brands.
Being the best in bridal is an ongoing journey, not a destination. In jewelry, bridal represents the closest thing to a necessity for our customers. We continuously look to develop differentiated bridal jewelry products, increasing targeted marketing programs, deliveringFunding for the best guest experience by our sales associates, advancing vertical integrationimprovements we need in our supply chainsystems, capabilities, product and offering credit financing. Our omni-channel approach to educating, selling and serving of customers is uniquely important in jewelry retail because the purchase of jewelry is personal, intimate and typically viewed as an important experience. The internet often represents the first interaction a customer or prospective guest will have with us when a jewelry-buying occasion arises. As trust is the most important factor in why people buy jewelry where they do, customers overwhelmingly complete their purchases in our stores with our trusted knowledgeable sales associates. Enhancing our digital eco-system and simplifying and accelerating our guest’s engagement with our brands is a crucial step of our omni-channel approach. Expanding our geographic footprint is expected to come from cost savings - driving out costs customers don’t see and care about, to invest in what they do. We believe this plan will enable cross-collaboration among and between our domestic and international teams and furtherthe Company to deliver long-term sustainable, profitable sales growth and diversification ofcreate value for shareholders.
To achieve our real estate portfolio. In orderPath to truly accomplish our core mission of helping our guests “Celebrate Life and Express Love,”Brilliance goals, we believe we must have people with high capabilityrelentlessly focus on the following three strategic pillars which define our key priorities and passion. We will continueinvestment focus areas:
Customer First: A resolute focus on our efforts to attract, develop and retain the best and the brightest individuals in the jewelry and watch industry.
The expression of romance and appreciation through bridal jewelry and gift giving are very important to our guests, as is self-reward. Guests associate Signet’s brands with high quality jewelry and an outstanding guest experience. As a result, the training of sales associates to understand the guests’ requirements, communicate the value of the merchandise selected and ensure guest needs are met remains a high priority. Signet increases the attraction of its store brands to guests through the use of branded differentiated and exclusive merchandise, while offering a compelling value proposition in more basic ranges. Signet accomplishes this by utilizing its supply chain and merchandising expertise, scale and balance sheet strength. The Company intends to further develop national television advertising, digital media and customer relationship marketing, which it believes are the most effective and cost efficient forms of marketing available to grow its market share. Management follows the operating principles of excellence in execution, testing before investing, continuous improvement and disciplined investment in all aspects of the business.business, including product assortment, targeted and personalized marketing, promotions and communications, through consumer‐inspired innovation and advanced data analytics.
OmniChannel: Become a leading OmniChannel retailer creating a seamless shopping experience by enhancing our digital and in-store capabilities, towards the vision of a seamless experience across all points of customer engagement.
Culture of Efficiency & Agility: Unleash the capabilities of Signet’s diverse workplace to be agile, innovative, deliver operational excellence and efficiency with increased resource productivity.
Over the last few months we have performed a detailed review of our Fiscal 2019 performance and the foundational capabilities developed in Year 1 of Path to Brilliance. Additionally, we have restructured parts of the organization and made leadership changes aimed to position us for success. We believe that Path to Brilliance is the right strategy, and that we must move faster and more aggressively to achieve our goals. The learnings from this last year have been incorporated into our forward plans to improve both execution and financial performance.
Our plan for Year 2 of Path to Brilliance is to build on the capabilities developed during Year 1, while accelerating growth initiatives to drive customer relevance, aggressively addressing our cost structure and bolstering our balance sheet. We have plans under each of our three strategic pillars to change the trajectory of our same store sales, stabilize and expand margins and improve our cash generation.
Key components of the transformation plan include:
Leading innovation and customer value. In early Fiscal 2019, Signet launched its innovation engine whose goal is to develop new solutions to customers’ jewelry needs to become an innovative disruptor in our category. In addition, we believe investments in data analytics and consumer insights including a system to track customer net promoter score, Signet’s “Voice of Customer” program, will allow us to better service our customers. The Company has begun reinvigorating its merchandise and value proposition focusing on 1) inspiring flagship brands, 2) right value and 3) on-trend product. Signet will continue to build on Fiscal 2019 key learnings and implement new programs designed to delight customers during their four key journeys (bridal, gifting, self-purchasing and repair). Combined with customer-inspired banner repositioning work, this is expected to allow the Company to make further progress in tailoring new product, marketing and promotional strategies unique to each store banner. In addition, investments will also focus on creating an in-store environment that resonates with today’s customer, better integrating technology to create a compelling, seamless OmniChannel experience.
Enhancing Signet's eCommerce and OmniChannel capabilities. Signet will continue to invest in platforms and becoming the leading jewelry retailer across channels. Building a best in class mobile experience and driving digital innovation is an important component of our Path to Brilliance. New initiatives aimed to drive increased digital traffic and improve conversion include a move to a more contemporary, dynamic platform for Jared and Kay that will be designed to enable better customer experience through faster speeds and high-quality imagery. In addition, we expect that investments in on-line jewelry customization tools, enhanced mobile experience, and continued greater personalization of content and product offering utilizing behavioral data management and machine learning will drive a better customer experience. This is also expected to enable and enhance digital marketing return on investments through greater visibility of customer's multi-touch journey. Signet aims to grow digital sales as a percentage of total revenues to 15% in Fiscal 2021, compared to 8% in Fiscal 2018.
Optimizing real estate footprint. Following an evaluation of its real estate footprint, utilization, and cost structure, Signet intends to optimize its portfolio to drive greater store productivity. We are working toward a portfolio of fewer, better stores, that provide a positive customer experience by delivering a fully connected OmniChannel journey. Our objective is to ensure our store base is located appropriately, providing sufficient returns to justify our investment and most importantly providing a delightful customer experience. Efforts include development and implementation of innovative store concepts to improve the in-store shopping experience, execution of opportunistic store relocations and store closures aimed at exiting under-performing stores, reducing the Company’s mall-based exposure and exiting regional brands. Store closing decisions are informed by strategic considerations and data analytics, including store performance, sales transference potential, mall grade and trend. In Fiscal 2019, Signet closed 262 stores, the majority of which were in malls where we operate another Signet banner store. Signet will continue to optimize its portfolio with more than 150 store closures expected in Fiscal 2020. At the end of the three-year transformation plan, Signet will have a leaner, more diversified footprint and more compelling and connected store experiences that we believe will be better aligned to our strategic banner positionings.
Reducing non-customer facing costs. In line with Signet’s goal of creating a Culture of Agility and Efficiency, the Company implemented initiatives across its operations, including strategic sourcing, distribution and warehousing, and corporate and support functions to drive cost savings and operational efficiencies. These include procurement savings with respect to merchandise and indirect spend, consolidating facilities and payroll savings as a result of implementing simplified organization structures with wider spans of control and fewer layers of management. The Company expects its transformation plan to deliver $200-$225 million net cost savings (excludes cost reductions associated with store closures) by the end of Fiscal 2021. In Fiscal 2019, Signet realized $85 million of net costs savings. The gross savings from these initiatives will be used to fund needed investments in technology, capabilities, and store experience.
Strengthening employee engagement and building capabilities. Our team and organization are key to accomplishing the company's transformation goals. Signet has hired and promoted several executives to fill key leadership roles, is investing in building e-commerce, analytics and innovation capabilities, and is focusing on reigniting employee engagement in our store operations and throughout the entire organization through cultural initiatives, leadership and skills training, and enhanced career development opportunities.
Competition and Signet Competitive Strengths
Jewelry retailing is highly fragmented and competitive. We compete against other specialty jewelers, as well as other retailers that sell jewelry, including department stores, mass merchandisers, discount stores, apparel and accessory fashion stores, brand retailers, online retail and auction sites, shopping clubs, home shopping television channels and direct home sellers, and online retailers and auction sites.sellers. The jewelry category competes for customers’ share-of-wallet with other consumer sectors such as electronics, clothing and furniture, as well as travel and restaurants. This competition for consumers’ discretionary spending is particularly relevant to gift giving.
We believe that Signet’s competitive strengths include: strong store brands,banner recognition, outstanding guestcustomer experience, branded differentiated and exclusive merchandise, sector-leading marketing and advertising, diversified real estate portfolio, supply chain leadership, and a full spectrum of services including financing and lease purchase options, extended service plans, repair and customer finance programs,design, and financial strength and flexibility.piercing.
Operational Strategy
In setting financial objectives for Fiscal 2017, consideration was given to several factors including the Zale integration, Signet’s Vision 2020 strategy and the economic environments in which the Company does business. The economies of the US, Canada and UK have improved slightly over the past year due to relatively low unemployment, inflation, interest rates and energy prices, offset by higher food and health care costs and higher consumer savings. Certain sectors of the U.S. and Canadian economies have declined during Fiscal 2016, including the Oil & Gas industry. We believe this decline has had a disproportionate impact within our Zale Jewelry segment due to the concentration of retail locations within affected regions such as Edmonton, Calgary, the “Dakota’s” region (Southern Saskatoon, North Dakota and Western Colorado), West Texas, and the Houston region.
Signet will execute on its strategic priorities and continue to make strategic investments for the future. The cost of diamonds, Signet’s most significant input cost, is currently expected to increase at low-to-mid single digit rates. Consumer credit is important for Signet. Signet takes a hybrid approach to credit by assuming the risk and reward of owning in-house accounts receivable for its Sterling Jewelers division while primarily using third party financing programs for its other divisions. Financing will continue to support sales growth and we expect the receivables portfolio to grow and perform strongly. Signet intends to improve results through realization of synergies associated with the Zale Acquisition and other initiatives around merchandising, real estate optimization, channel expansion and cost control.
Signet’s goal in Fiscal 2017 is to deliver strong results building on our recent performance, while making strategic investments necessary for future growth. Financial objectives for the business in Fiscal 2017 are to position the Company for long-term growth by:
Expanding our gross margin rate through higher sales and realization of synergies.
Leveraging our selling, general and administrative expense to sales ratio, by executing effective multi-channel marketing programs, through implementing organizational design efficiencies and workforce management.
Gaining profitable market share through brand differentiation and market segmentation, product cost control and asset management.
Advancing our integration activities of Zale, including continued realization of cost and operating synergies. Signet anticipates realizing $225 million to $250 million in cumulative 3-year synergies through January 2018. Approximately 70% of that cumulative goal is expected to be realized by the end of Fiscal 2017.
Investing $315 to $365 million of capital in new stores, store remodels, enhancing information technology infrastructure to drive future growth and expanding our Akron-based store support center.
Signet has the opportunity to take advantage of its competitive position as one of the world’s largest and most profitable jewelry retailers. Signet’s ability to deliver sales growth allows the business to strengthen relationships with suppliers, facilitate the ability to develop further branded differentiated and exclusive merchandise, improve the efficiency of its supply chain, support marketing investments and improve operating margins. Signet’s financial flexibility and access to capital markets allow it to take advantage of investment opportunities, including space growth and strategic developments that meet investment criteria.
Capital Strategy
The tenets of Signet’s capital strategy allocation priorities continue to be as follows: 1) invest in its business to drive growth; 2) protect business from economic downturns by ensuring adequate liquidity; and 3) return excess cash to shareholders. Over time, Signet is committed to achieving an investment grade profile. Part of Signet’s capital strategy is to maintain the Company’s expected long-term adjusted debt(1)/ adjusted EBITDAR(1) (“adjusted leverage ratio”) of 3.0x to 3.5x. As previously announced, the Company exceeded the high end of its target leverage range in Fiscal 2019. The Company expects to exceed the high end of the target range in Fiscal 2020 but believes it will reach approximately 3.5x by the end of the three-year transformation plan.
Based on projected investments and liquidity needs, the Company expects to maintain a strong balance sheet that provides the flexibility to execute its strategic priorities, invest in its business, and then return excess cash to shareholders while ensuring adequate liquidity. Signet is committed to maintaining its investment grade rating because long-term, it intends to pursue value-enhancing strategic growth initiatives. Among the key tenetsquarterly dividend rate of Signet’s capital strategy:
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• | Achieve adjusted debt1/ adjusted EBITDAR1 (“adjusted leverage ratio”) of 3.5x or below. This would allow the Company to utilize available sources of debt in Fiscal 2017 and beyond.
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• | Distribute 70% to 80% of annual free cash flow1 in the form of stock repurchases or dividends assuming no other strategic uses of capital.
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Consistently increase the dividend annually assuming no other strategic uses of capital.
$0.37 per share but does not anticipate share buybacks for Fiscal 2020. The Company has a remaining share repurchase authorization as of the end of Fiscal 20162019 of $135.6$165.6 million. In February 2016, the Company’s Board of Directors authorized an additional $750 million of share repurchases to be executed in a manner that aligns with leverage and free cash flow targets.
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1(1)
| Adjusted debt, Adjusted EBITDAR, and free cash flow are non-GAAP measures. Signet believes they are useful measures to provide insight into how the Company intends to use capital. See Item 6 for reconciliation. |
BACKGROUND
Operating segments
The business is currently managed as fivethree reportable segments: the Sterling Jewelers division (60.9%North America segment (90.3% of sales and 102.1%81.2% of operating income)loss), the Zale division, which is comprised of the Zale JewelryInternational segment (23.9%(9.2% of sales and 6.3%(1.7)% of operating income)loss) and the Piercing PagodaOther segment. The Other reportable segment (3.7%consists of salesall non-reportable segments, including subsidiaries involved in the purchasing and 1.1%conversion of operating income)rough diamonds to polished stones and the UK Jewelry division (11.3% of sales and 8.7% of operating income).unallocated corporate administrative functions. All divisionssegments are managed by an executive committee, which is chaired by Signet’s Chief Executive Officer, who reports to the Board of Directors of Signet (the “Board”). The executive committee is responsible for operating decisions within parameters established by the Board. Additionally, as a result of the acquisition of a diamond polishing factory in Gaborone, Botswana in Fiscal 2014, management established a separate reportable segment (“Other”) (0.2% of sales and (18.2)% of operating income). Other consists of all non-reportable segments, including subsidiaries involved in the purchasing and conversion of rough diamonds to polished stones and unallocated corporate administrative function. See Note 46 of Item 8 for additional information regarding the Company’s segments.segments as well as disclosure detailing and reconciling the components of operating income.
Trademarks and trade names
Signet is not dependent on any material patents or licenses in any of its divisions.segments. Signet has several well-established trademarks and trade names which are significant in maintaining its reputation and competitive position in the jewelry retailing industry. Some of these registered trademarks and trade names include the following:
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• | Kay Jewelers®; Kay Jewelers Outlet®; Jared The Galleria Of Jewelry®; Jared VaultTM®; Jared Jewelry BoutiqueTM®; JB Robinson® Jewelers; Marks & Morgan Jewelers®; Every kiss begins with Kay®; He went to Jared Eternity®TM; Celebrate Life. Express Love.®; the Leo® Diamond; Hearts Desire®; Artistry Diamonds®; Charmed Memories®; Diamonds in Rhythm®; Open Hearts by Jane Seymour®; Radiant Reflections®; Colors in Rhythm®; Chosen by JaredTM®; Now and Forever®; and Ever Us®; James Allen®; Tolkowsky®; Long Live LoveTM; Dare to be DevotedTM; Love + Be LovedTM; and Brilliant Moments®. |
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• | Zales®; Zales JewelersTM; Zales the Diamond Store®; Zales Outlet®; Gordon’s Jewelers®; Peoples Jewellers®; Peoples the Diamond Store®; Peoples Outlet the Diamond Store®; Mappins®; Piercing Pagoda®; Arctic Brilliance Canadian Diamonds®; Candy Colored JewelryBrilliant Buy®; Brilliant Value®; Celebration Diamond®; Expressionist®; From This Moment®; Let Love Shine®; The Celebration Diamond Collection®; Unstoppable Love®; and Endless Brilliance®. |
H.Samuel; Ernest Jones; Ernest Jones Outlet Collection; Leslie Davis; and Forever Diamonds. | |
• | H.Samuel®; Ernest Jones®; Ernest Jones Outlet CollectionTM; Commitment®; Forever Diamonds®; Kiss Collection®; Princessa Collection®; Radiance®; Secrets of the Sea®; Shades of Gold®; Viva Colour®; and Helps You Say It BetterTM. |
Store locations
Signet operates retail jewelry stores in a variety of real estate formats including mall-based, free-standing, strip center and outlet store locations. As of January 30, 2016,February 2, 2019, Signet operated 3,6252,760 stores and 574 kiosks across 5.04.7 million square feet of retail space.space in the US, UK and Canada. This represented an increasea decrease of 1.3%6.2% and 3.3%a decrease of 5.7% in locations and retail space, respectively, due to new store growth. Duringfrom Fiscal 2016, Signet opened 108 stores and closed 62 stores.2018. Store locations by country and territory as of January 30, 2016,February 2, 2019 are as follows:disclosed in Item 2.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sterling Jewelers division | | Zale division | | UK Jewelry division | | Signet |
| Kay | | Jared | | Regional brands | | Total | | Zales | | Peoples | | Regional brands | | Total Zale Jewelry | | Piercing Pagoda | | Total | | H.Samuel | | Ernest Jones | | Total | | Total stores |
US | 1,129 |
| | 270 |
| | 141 |
| | 1,540 |
| | 720 |
| | — |
| | 58 |
| | 778 |
| | 591 |
| | 1,369 |
| | — |
| | — |
| | — |
| | 2,909 |
|
Canada | — |
| | — |
| | — |
| | — |
| | — |
| | 145 |
| | 43 |
| | 188 |
| | — |
| | 188 |
| | — |
| | — |
| | — |
| | 188 |
|
Puerto Rico | — |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 1 |
| | 11 |
| | 14 |
| | 25 |
| | — |
| | — |
| | — |
| | 25 |
|
United Kingdom | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 279 |
| | 195 |
| | 474 |
| | 474 |
|
Republic of Ireland | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 20 |
| | 6 |
| | 26 |
| | 26 |
|
Channel Islands | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 1 |
| | 3 |
| | 3 |
|
Total | 1,129 |
| | 270 |
| | 141 |
| | 1,540 |
| | 730 |
| | 145 |
| | 102 |
| | 977 |
| | 605 |
| | 1,582 |
| | 301 |
| | 202 |
| | 503 |
| | 3,625 |
|
Store locations by US state, Canadian province and Puerto Rico, as of January 30, 2016, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sterling Jewelers division | | Zale division | | Signet |
| Kay | | Jared | | Regional brands | | Total | | Zales | | Peoples | | Regional brands | | Total Zale Jewelry | | Piercing Pagoda | | Total | | Total Stores |
Alabama | 23 |
| | 2 |
| | 4 |
| | 29 |
| | 12 |
| | — |
| | — |
| | 12 |
| | 2 |
| | 14 |
| | 43 |
|
Alaska | 3 |
| | — |
| | 1 |
| | 4 |
| | 2 |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
| | 6 |
|
Arizona | 19 |
| | 9 |
| | 1 |
| | 29 |
| | 15 |
| | — |
| | — |
| | 15 |
| | 12 |
| | 27 |
| | 56 |
|
Arkansas | 8 |
| | 1 |
| | — |
| | 9 |
| | 10 |
| | — |
| | 4 |
| | 14 |
| | — |
| | 14 |
| | 23 |
|
California | 79 |
| | 18 |
| | 3 |
| | 100 |
| | 59 |
| | — |
| | — |
| | 59 |
| | 34 |
| | 93 |
| | 193 |
|
Colorado | 16 |
| | 6 |
| | 2 |
| | 24 |
| | 16 |
| | — |
| | — |
| | 16 |
| | 4 |
| | 20 |
| | 44 |
|
Connecticut | 13 |
| | 2 |
| | 2 |
| | 17 |
| | 9 |
| | — |
| | — |
| | 9 |
| | 14 |
| | 23 |
| | 40 |
|
Delaware | 4 |
| | 2 |
| | — |
| | 6 |
| | 4 |
| | — |
| | 2 |
| | 6 |
| | 6 |
| | 12 |
| | 18 |
|
Florida | 81 |
| | 23 |
| | 9 |
| | 113 |
| | 56 |
| | — |
| | 5 |
| | 61 |
| | 70 |
| | 131 |
| | 244 |
|
Georgia | 48 |
| | 13 |
| | 4 |
| | 65 |
| | 19 |
| | — |
| | — |
| | 19 |
| | 8 |
| | 27 |
| | 92 |
|
Hawaii | 7 |
| | — |
| | — |
| | 7 |
| | 7 |
| | — |
| | — |
| | 7 |
| | — |
| | 7 |
| | 14 |
|
Idaho | 4 |
| | 1 |
| | — |
| | 5 |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | 6 |
|
Illinois | 44 |
| | 12 |
| | 5 |
| | 61 |
| | 26 |
| | — |
| | — |
| | 26 |
| | 21 |
| | 47 |
| | 108 |
|
Indiana | 26 |
| | 6 |
| | 7 |
| | 39 |
| | 12 |
| | — |
| | — |
| | 12 |
| | 11 |
| | 23 |
| | 62 |
|
Iowa | 15 |
| | 1 |
| | 1 |
| | 17 |
| | 6 |
| | — |
| | — |
| | 6 |
| | 4 |
| | 10 |
| | 27 |
|
Kansas | 9 |
| | 2 |
| | — |
| | 11 |
| | 7 |
| | — |
| | — |
| | 7 |
| | 4 |
| | 11 |
| | 22 |
|
Kentucky | 19 |
| | 3 |
| | 6 |
| | 28 |
| | 8 |
| | — |
| | — |
| | 8 |
| | 7 |
| | 15 |
| | 43 |
|
Louisiana | 16 |
| | 3 |
| | 1 |
| | 20 |
| | 16 |
| | — |
| | 8 |
| | 24 |
| | — |
| | 24 |
| | 44 |
|
Maine | 6 |
| | 1 |
| | 1 |
| | 8 |
| | 1 |
| | — |
| | — |
| | 1 |
| | 2 |
| | 3 |
| | 11 |
|
Maryland | 30 |
| | 9 |
| | 7 |
| | 46 |
| | 14 |
| | — |
| | — |
| | 14 |
| | 22 |
| | 36 |
| | 82 |
|
Massachusetts | 24 |
| | 5 |
| | 3 |
| | 32 |
| | 10 |
| | — |
| | — |
| | 10 |
| | 26 |
| | 36 |
| | 68 |
|
Michigan | 39 |
| | 9 |
| | 8 |
| | 56 |
| | 21 |
| | — |
| | — |
| | 21 |
| | 10 |
| | 31 |
| | 87 |
|
Minnesota | 17 |
| | 5 |
| | 3 |
| | 25 |
| | 9 |
| | — |
| | — |
| | 9 |
| | 8 |
| | 17 |
| | 42 |
|
Mississippi | 13 |
| | — |
| | — |
| | 13 |
| | 8 |
| | — |
| | — |
| | 8 |
| | — |
| | 8 |
| | 21 |
|
Missouri | 18 |
| | 5 |
| | — |
| | 23 |
| | 12 |
| | — |
| | 1 |
| | 13 |
| | 6 |
| | 19 |
| | 42 |
|
Montana | 3 |
| | — |
| | — |
| | 3 |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | 4 |
|
Nebraska | 7 |
| | — |
| | — |
| | 7 |
| | 3 |
| | — |
| | — |
| | 3 |
| | 1 |
| | 4 |
| | 11 |
|
Nevada | 11 |
| | 3 |
| | 1 |
| | 15 |
| | 6 |
| | — |
| | 2 |
| | 8 |
| | 5 |
| | 13 |
| | 28 |
|
New Hampshire | 11 |
| | 4 |
| | 2 |
| | 17 |
| | 6 |
| | — |
| | — |
| | 6 |
| | 8 |
| | 14 |
| | 31 |
|
New Jersey | 31 |
| | 7 |
| | — |
| | 38 |
| | 20 |
| | — |
| | — |
| | 20 |
| | 31 |
| | 51 |
| | 89 |
|
New Mexico | 5 |
| | 1 |
| | — |
| | 6 |
| | 9 |
| | — |
| | 4 |
| | 13 |
| | 4 |
| | 17 |
| | 23 |
|
New York | 65 |
| | 9 |
| | 4 |
| | 78 |
| | 40 |
| | — |
| | — |
| | 40 |
| | 65 |
| | 105 |
| | 183 |
|
North Carolina | 42 |
| | 12 |
| | 1 |
| | 55 |
| | 18 |
| | — |
| | 1 |
| | 19 |
| | 19 |
| | 38 |
| | 93 |
|
North Dakota | 4 |
| | — |
| | — |
| | 4 |
| | 4 |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
| | 8 |
|
Ohio | 57 |
| | 17 |
| | 27 |
| | 101 |
| | 13 |
| | — |
| | — |
| | 13 |
| | 23 |
| | 36 |
| | 137 |
|
Oklahoma | 8 |
| | 2 |
| | — |
| | 10 |
| | 10 |
| | — |
| | 5 |
| | 15 |
| | — |
| | 15 |
| | 25 |
|
Oregon | 15 |
| | 3 |
| | 1 |
| | 19 |
| | 5 |
| | — |
| | — |
| | 5 |
| | 4 |
| | 9 |
| | 28 |
|
Pennsylvania | 61 |
| | 11 |
| | 7 |
| | 79 |
| | 36 |
| | — |
| | 1 |
| | 37 |
| | 62 |
| | 99 |
| | 178 |
|
Rhode Island | 3 |
| | 1 |
| | — |
| | 4 |
| | 1 |
| | — |
| | — |
| | 1 |
| | 3 |
| | 4 |
| | 8 |
|
South Carolina | 25 |
| | 4 |
| | 2 |
| | 31 |
| | 9 |
| | — |
| | — |
| | 9 |
| | 6 |
| | 15 |
| | 46 |
|
South Dakota | 2 |
| | — |
| | — |
| | 2 |
| | 3 |
| | — |
| | — |
| | 3 |
| | 1 |
| | 4 |
| | 6 |
|
Tennessee | 25 |
| | 8 |
| | 4 |
| | 37 |
| | 17 |
| | — |
| | 1 |
| | 18 |
| | 3 |
| | 21 |
| | 58 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Texas | 71 |
| | 30 |
| | — |
| | 101 |
| | 97 |
| | — |
| | 24 |
| | 121 |
| | 21 |
| | 142 |
| | 243 |
|
Utah | 10 |
| | 3 |
| | — |
| | 13 |
| | 3 |
| | — |
| | — |
| | 3 |
| | 3 |
| | 6 |
| | 19 |
|
Vermont | 2 |
| | — |
| | — |
| | 2 |
| | 1 |
| | — |
| | — |
| | 1 |
| | 1 |
| | 2 |
| | 4 |
|
Virginia | 39 |
| | 10 |
| | 7 |
| | 56 |
| | 27 |
| | — |
| | — |
| | 27 |
| | 26 |
| | 53 |
| | 109 |
|
Washington | 19 |
| | 3 |
| | 7 |
| | 29 |
| | 14 |
| | — |
| | — |
| | 14 |
| | 10 |
| | 24 |
| | 53 |
|
West Virginia | 10 |
| | — |
| | 6 |
| | 16 |
| | 6 |
| | — |
| | — |
| | 6 |
| | 11 |
| | 17 |
| | 33 |
|
Wisconsin | 20 |
| | 4 |
| | 4 |
| | 28 |
| | 8 |
| | — |
| | — |
| | 8 |
| | 13 |
| | 21 |
| | 49 |
|
Wyoming | 2 |
| | — |
| | — |
| | 2 |
| | 3 |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| | 5 |
|
US | 1,129 |
| | 270 |
| | 141 |
| | 1,540 |
| | 720 |
| | — |
| | 58 |
| | 778 |
| | 591 |
| | 1,369 |
| | 2,909 |
|
| | | | | | | | | | | | | | | | | | | | | |
Alberta | — |
| | — |
| | — |
| | — |
| | — |
| | 24 |
| | 8 |
| | 32 |
| | — |
| | 32 |
| | 32 |
|
British Columbia | — |
| | — |
| | — |
| | — |
| | — |
| | 23 |
| | 4 |
| | 27 |
| | — |
| | 27 |
| | 27 |
|
Manitoba | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 1 |
| | 6 |
| | — |
| | 6 |
| | 6 |
|
New Brunswick | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
| | — |
| | 4 |
| | 4 |
|
Newfoundland | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 2 |
| | 2 |
|
Nova Scotia | — |
| | — |
| | — |
| | — |
| | — |
| | 8 |
| | 2 |
| | 10 |
| | — |
| | 10 |
| | 10 |
|
Ontario | — |
| | — |
| | — |
| | — |
| | — |
| | 68 |
| | 27 |
| | 95 |
| | — |
| | 95 |
| | 95 |
|
Prince Edward Island | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 1 |
| | 3 |
| | — |
| | 3 |
| | 3 |
|
Saskatchewan | — |
| | — |
| | — |
| | — |
| | — |
| | 9 |
| | — |
| | 9 |
| | — |
| | 9 |
| | 9 |
|
Canada | — |
| | — |
| | — |
| | — |
| | — |
| | 145 |
| | 43 |
| | 188 |
| | — |
| | 188 |
| | 188 |
|
| | | | | | | | | | | | | | | | | | | | | |
Puerto Rico | — |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 1 |
| | 11 |
| | 14 |
| | 25 |
| | 25 |
|
| | | | | | | | | | | | | | | | | | | | | |
Total North America | 1,129 |
| | 270 |
| | 141 |
| | 1,540 |
| | 730 |
| | 145 |
| | 102 |
| | 977 |
| | 605 |
| | 1,582 |
| | 3,122 |
|
GuestCustomer experience
The guestWe will strive at Signet to continue to be focused on driving an inspiring, full service, seamlessly connected customer experience, which is an essential element in the success of our business and Signet strives to continually improve the quality of the guest experience.business. Therefore, the ability to recruit, develop and retain qualified sales associatesjewelry consultants is an important element in enhancing guestcustomer satisfaction. We have in place comprehensive recruitment, training and incentive programs. We use employee and guest satisfaction metrics to monitor and improve performance, as well as conductingprograms in place, including an annual flagship training conference aheadin advance of the holiday season.
Digital ecosystemSignet continues to invest in technology to enhance the customer shopping experience to make it more personalized and journey specific. In Fiscal 2019, Signet implemented a multi-phase Voice of Customer program as a component of our Path to Brilliance and customer first strategies. The first phase focused on setting up the technology, establishing stable measurements for key customer journeys (net promoter score) and discovering how to effectively operationalize customer feedback.
OmniChannel
As a specialty jeweler, Signet’s business differs from many other retailers such that a purchase of merchandise from any of Signet’s stores is personal, intimate and typically viewed as an important experience. Due to this dynamic, guestscustomers often invest time on Signet websites and social media to experience the merchandise assortments prior to visiting brick-and-mortar stores to execute a purchase transaction. At times, particularlyParticularly related to high value transactions, guestscustomers will supplement their online experience with an in-store visit prior to finalizing a fashion or gift-giving decision. Distinguishing whether the Company’s performance is driven by the initial exposure to the on-line assortment versus the merchandising and experience with in-store professionals is not a primary focus of management, as electronic efforts are a support channel for all store brands.purchase.
Through Signet’s websites, we educate our customers and provide gueststhem with a source of information on products and brands, available merchandise, available, as well as the ability to buy online. Our websites are integrated with each division’ssegment’s stores, so that merchandise ordered online may be picked up at a store or delivered to the guest. Ourcustomer. Banner websites continue to make an important and growing contribution to the guestcustomer experience, as well as to each division’ssegment’s marketing programs. As in Fiscal 2019, the Company will continue to focus on:
Investments in technology, including eCommerce platforms, focused on improving the online journey. Customer journey enhancements include user generated content, enhanced personalization / behavioral targeting, creative execution and brand differentiation. In recent years, significant investmentsaddition, we are focused on OmniChannel wishlist, online merchandising, in-store appointment booking, bridal configuration and initiatives have been completed to drive sales growth. These investments include:much more.
Optimization of brand websites for both desktopmarketing through prioritizing dollars to digital spend and mobile devices with improved functionality in product search and navigation;targeted marketing through traditional media.
Increased merchandise assortment;
Investments in social media, including Facebook, Instagramuse of data analytics, clienteling and Twitter, as well asother key touch points to achieve a YouTube channel;more comprehensive view of the customer and
Improvements in store broadband allow us to enhance in-store eCommerce sales.anticipate their needs.
Signet’s supplier relationships allow it to display suppliers’ inventories on the brandbanner websites for sale to guestscustomers without holding the items in its inventory until the products are ordered by guests,customers, which are referred to as “virtual inventory.” Virtual inventory expands the choice of merchandise available to guestscustomers both online and in-store.
Raw materials
The jewelry industry generally is affected by fluctuations in the price and supply of diamonds, gold and, to a much lesser extent, other precious and semi-precious metals and stones. Diamonds account for about 45%52%, and gold about 14%, of Signet’s cost of merchandise sold, respectively.
Signet undertakes hedging for a portion of its requirement for gold through the use of net zero-costzero premium cost collar arrangements, forward contracts and commodity purchasing.participating forwards or swaps. It is not possible to hedge against fluctuations in the cost of diamonds. The cost of raw materials is only part of the costs involved in determining the retail selling price of jewelry, with labor costs also being a significant factor.
Diamond sourcing
Signet procures its diamonds mostly as finished jewelry and, to a smaller extent, as loose cut-and-polished stonespolished diamonds and rough stones.diamonds which are in turn polished in Signet’s Botswana factory.
Finished jewelry
Merchandise is purchased asSignet purchases finished product where the items are relatively more complex, have less predictable sales patterns or where it ismanagement has identified compelling value based on product design, cost effective to do so. Thisand availability, among other factors. Under certain types of arrangements, this method of buying inventorypurchasing also provides the Company with the opportunity to reserve inventory held by vendors and to make returns or exchanges with suppliers, thereby reducingwhich reduces the risk of over- or under-purchasing. Signet’s scale, strong balance sheet and robust procurement systems enable it to purchase merchandise at advantageous prices and on favorable terms.
Loose diamonds
Signet purchases loose polished diamonds in global markets (e.g. India, Israel) from a variety of sources (e.g. polishers, traders). Signet mounts stones in settings purchased from manufacturers using third parties and in-house resources. By using these approaches, the cost of merchandise is reduced and the consistency of quality is maintained enabling Signet to provide better value to guests.customers. Buying loose diamonds helps allow Signet’s buyers to gain a detailed understanding of the manufacturing cost structures and, in turn, leverage that knowledge with regard to negotiating better prices for the supply of finished products.
Rough diamonds
Signet continues to take steps to advance its vertical integration, which includes rough diamond sourcing and manufacturing.processing. Signet’s objective with this initiative is to secure additional, reliable and consistent supplies of diamonds for guests of all divisionscustomers worldwide while achieving further efficiencies in the supply chain. In Fiscal 2014, Signet acquiredowns a diamond polishing factory in Gaborone, BotswanaBotswana. The Company is a DeBeers sightholder, and established a diamond buying office in India. In Fiscal 2015, Signet was appointed a sightholder by DeBeers, which further increased Signet’s supply of rough diamonds. As of Fiscal 2016, Signet hasreceives contracted allocations of rough diamonds withfrom Rio Tinto, DeBeers and Alrosa. These developmentsSignet has also established a diamond liaison office in Signet’s long-termIndia and a diamond trading office in New York to further support its sourcing capabilities allow Signet to buy roughinitiative.
Rough diamonds are purchased directly from the miners and then have the stones marked, cut and polished in itsSignet’s own polishing facility. Any stones deemed unsuitable for Signet’s needs are sold to third parties with the objective of recovering the original cost of the stones. Signet’s sourcing initiative is primarily focused on supplying the diamond needs of the Sterling Jewelers division and has since been expanded to include all Signet divisions.
Merchandising and purchasing
Management believes that a competitive strength is our industry-leading merchandising. Merchandise selection, innovation, availability and value are all critical success factors for its business.factors. The range of merchandise offered and the high level of inventory availability are supported centrally by extensive and continuous research and testing. Signet established aSignet’s jewelry design center in New York which evaluates global design trends, innovates, and helps our merchant teams develop new jewelry collections that resonate with guests. An example of the design center’s work was the launch of the Ever Us collection.customers.
Ever Us was the biggest product introduction in our history. It is an example of Signet creating a trend in the jewelry industry which is a unique advantage that we possess as the largest diamond retailer in the world. Led by our New York-based design office, we identified a need in the jewelry industry through market research and developed the Ever Us collection which continues to be consistently marketed and tagged with each of our national store banners. The two-stone diamond ring, positioned to be for one’s “best friend and true love,” serves a variety of gift-giving occasions in the lives of couples. Launched in October 2015, Ever Us was purchased for anniversaries, birthdays, special mother-daughter events, and even engagement in some cases.
Best-selling products are identified and replenished rapidly through analysis of sales by stock keeping unit. This approach enables Signet to deliver a focused assortment of merchandise to maximize sales and inventory turn, and minimize the need for discounting. Signet believes it is better able to offer greater value and consistency of merchandise than its competitors, due to its supply chain strengths. In addition, in recent years management has continued to develop, refine and execute a strategy to increase the proportion of branded differentiated and exclusive merchandise sold, in response to guest demand.
The scale and information systems available to management and the gradual evolution of jewelry fashion trends allow for the careful testing of new merchandise in a range of representative stores. This enables management to make more informed investment decisions about which merchandise to select, thereby increasing Signet’s ability to satisfy guests’ requirements while reducing the likelihood of having to discount merchandise.
Merchandise mix
Details of merchandise mix (excluding repairs, warranty and other miscellaneous sales) are shown below:
|
| | | | | | | | | | | |
| Sterling Jewelers division | | Zale division | | UK Jewelry division | | Total Signet |
Fiscal 2016 | | | | | | | |
Diamonds and diamond jewelry | 77 | % | | 61 | % | | 34 | % | | 65 | % |
Gold and silver jewelry, including charm bracelets | 9 | % | | 27 | % | | 16 | % | | 9 | % |
Other jewelry | 8 | % | | 9 | % | | 18 | % | (1) | 17 | % |
Watches | 6 | % | | 3 | % | | 32 | % | | 9 | % |
| 100 | % | | 100 | % | | 100 | % | | 100 | % |
Fiscal 2015 | | | | | | | |
Diamonds and diamond jewelry | 76 | % | | 61 | % | | 31 | % | | 63 | % |
Gold and silver jewelry, including charm bracelets | 10 | % | | 26 | % | | 19 | % | | 14 | % |
Other jewelry | 8 | % | | 9 | % | | 17 | % | (1) | 11 | % |
Watches | 6 | % | | 4 | % | | 33 | % | | 12 | % |
| 100 | % | | 100 | % | | 100 | % | | 100 | % |
Fiscal 2014 | | | | | | | |
Diamonds and diamond jewelry | 75 | % | | n/a |
| | 30 | % | | 64 | % |
Gold and silver jewelry, including charm bracelets | 11 | % | | n/a |
| | 19 | % | | 15 | % |
Other jewelry | 8 | % | | n/a |
| | 18 | % | (1) | 8 | % |
Watches | 6 | % | | n/a |
| | 33 | % | | 13 | % |
| 100 | % | | n/a |
| | 100 | % | | 100 | % |
(1) UK Jewelry division’s other jewelry sales include gift category sales.
n/a Not applicable as Zale division was acquired on May 29, 2014. |
| | | | | | | | |
| North America | | International | | Consolidated |
Fiscal 2019 | | | | | |
Bridal | 49 | % | | 42 | % | | 48 | % |
Fashion | 44 | % | | 21 | % | | 42 | % |
Watches | 5 | % | | 35 | % | | 8 | % |
Other | 2 | % | | 2 | % | | 2 | % |
| 100 | % | | 100 | % | | 100 | % |
Fiscal 2018 | | | | | |
Bridal | 48 | % | | 36 | % | | 46 | % |
Fashion | 44 | % | | 28 | % | | 43 | % |
Watches | 5 | % | | 34 | % | | 8 | % |
Other | 3 | % | | 2 | % | | 3 | % |
| 100 | % | | 100 | % | | 100 | % |
The bridal category, which includes engagement, wedding and anniversary purchases, is predominantly diamond jewelry. TheLike fashion jewelry and watches, bridal category experiences stable demand, but is stillto an extent dependent on the economic environment as guestscustomers can trade up or down price points depending on their available budget. In Fiscal 2016, bridal growth was driven primarily by the branded bridal portfolio and bridalBridal represented approximately 50% of Signet’s total merchandise sales. Customer financingIn Fiscal 2019 the Enchanted Disney Fine Jewelry® collection, Vera Wang Love® collection, Neil Lane® collection, and solitaires performed well while the Ever Us® collection declined.
The fashion category is an important elementsignificantly impacted by gift giving in enabling Signet’s bridal business.
Gift giving is particularly important during the Holiday Season, Valentine’s Day and Mother’s Day. In Fiscal 2016, Signet had several successful fashion jewelryDay time periods and represented 42% of Signet’s total merchandise sales.
The Other category primarily includes beads and represented 2% of Signet’s total merchandise versus 3% in the prior year primarily due to a strategic reduction of owned brand bead collections including Ever UsTM, Diamondsas well as declines in Rhythm® and Unstoppable Love® (not all collections are sold in every store brand).branded bead collections.
A further categorization of merchandise
Merchandise is categorized as non-branded, merchandise, third party branded, as well asand branded differentiated and exclusive. Non-branded merchandise includes items and styles such as bracelets, gold necklaces, solitaire diamond rings, and diamond stud earrings. Third party branded merchandise includes mostly watches, but also includes ranges of charm bracelets. Branded differentiated and exclusive merchandise are items that are branded and exclusive to Signet within its marketplaces, or that are not widely available in other jewelry retailers.retailers (e.g Vera Wang Love, Neil Lane, Disney Enchanted).
Branded differentiated and exclusive ranges
Management believes that the development of branded differentiated and exclusive merchandise raises the profile of Signet’s stores,banners, helps to drive sales and provides its well-trained sales associates with a powerful selling proposition. NationalDigital marketing and national television advertisements include elements that drive brand awareness and purchase intent of these ranges. Management believes that Signet’s scale and proven record of success in developing branded differentiated and exclusive merchandise attracts offers of such programs from jewelry manufacturers, designers and others ahead of competing retailers, and enables it to leverage its supply chain strengths. Management plans to develop additional branded differentiated and exclusive ranges as appropriate and to further expand and refine those already launched.
Branded differentiated and exclusive merchandise offered in our various store brands includes:
| |
• | Artistry Diamonds®, genuine diamonds in an ultimate palette of colors;
|
| |
• | Celebration Diamond® Collection, diamond jewelry that has been expertly cut to maximize its brilliance and beauty;
|
| |
• | Charmed Memories®, a create your own charm bracelet collection;
|
| |
• | Diamonds in Rhythm®, diamonds set at a precise angle to allow for continuous movement of the center diamond and amazing effect;
|
| |
• | Ever UsTM, a collection of two stone rings, with one diamond for your best friend, one diamond for your true love;
|
| |
• | Jared Vivid® Diamonds, the brilliance of diamonds combined with the vitality of color;
|
| |
• | Le Vian®exclusive collections of jewelry, famed for its handcrafted unique designs and colors;
|
| |
• | Leo Diamond® collection, the first diamond to be independently and individually certified to be visibly brighter;
|
| |
• | Lois Hill®, reaches back through the centuries and across the globe to create her collection of jewelry;
|
| |
• | Miracle Links®, a collection designed with interlinking circles to symbolize the unique connection between a mother and her child;
|
| |
• | Neil Lane Bridal®, a vintage-inspired bridal collection by the celebrated jewelry designer Neil Lane;
|
| |
• | Neil Lane Designs®, hand-crafted diamond rings, earrings and necklaces inspired by Hollywood’s glamorous past;
|
| |
• | Open Hearts by Jane Seymour®, a collection of jewelry designed by the actress and artist Jane Seymour;
|
| |
• | Tolkowsky®, an ideal cut diamond “Invented by Tolkowsky, Perfected by Tolkowsky”®;
|
| |
• | Unstoppable Love®, features shimmering diamonds in movable settings that sparkle with every turn;
|
| |
• | Vera Wang LOVE® collection, bridal jewelry designed by the most recognizable name in the wedding business, Vera Wang.
|
Merchandise held on consignment
Merchandise held on consignment is used to enhance product selection and test new designs. This minimizes exposure to changes in fashion trends and obsolescence, and provides the flexibility to return non-performing merchandise. PrimarilyVirtually all of Signet’s consignment inventory is held in the US.
Suppliers
In Fiscal 2016,2019, the five largest suppliers collectively accounted for 16.5%19.7% of total purchases, with the largest supplier comprising 3.9%6.4%. Signet transacts business with suppliers on a worldwide basis at various stages of the supply chain with third party diamond cutting and jewelry manufacturing being predominantly carried out in Asia.
Marketing and advertising
Customers’ confidence in our retail brands, store brandbanner name recognition and advertising of branded differentiated and exclusive ranges are important factors in determining buying decisions in the jewelry industry where the majority of merchandise is unbranded. Therefore, Signet continues to strengthen and promote its store brandsbanners and merchandise brands by focusing on delivering superior customer service and building brand name recognition. The Company’s OmniChannel approach leverages marketing channels used includeinvestments in television, digital media (desktop, mobile and social), radio, print, catalog, direct mail, point of sale signage and in-store displays, as well as coupon books and outdoor signage for the Outlet channels, leading to an omni-channel approach.displays.
While marketingMarketing activities are undertaken throughout the year, digital capabilities provide insight into customer journeys enabling personalized journey-based communications at the levelmost appropriate moment through social media and digital marketing. We plan to transform and modernize our marketing model in Fiscal 2020 by re-balancing the timing and mix of activity is concentratedour media investments, leveraging a more personalized journey-based approach, and modernizing our content and messaging. In fact, Fiscal 2020 will be the first year that Signet spends more on digital and social marketing than on television advertising. Building on successful “Always On” bridal tests at periods when guests are expectedKay, we plan to be most receptive to marketing messages, which is aheadgrow our share of Christmas Day, Valentine’s Day and Mother’s Day. Recent efforts focused in the Fall seasongifting occasions with a targeted focus on bridal marketing (“Engagement Season”) have been successfulspecial occasion milestones like birthdays and an increased levelanniversaries.
We will also aim to significantly improve the effectiveness of sales activity has been generated during this period ofour creative campaigns, building on the year. A significant majority ofbanner differentiation work launched in Fiscal 2019. Within the expenditure is spentpast year, we’ve brought on national television advertising, which is usednew creative agencies for every North America banner as well as a new data savvy media agency. Together, we are evolving our campaigns with more sophisticated, journey specific content and using data science to promote the store brands. Within such advertisements, Signet also promotes certain merchandise ranges, in particular its branded differentiated and exclusive merchandise and other branded products. Statistical and technology-based systems are employed to support customer relationship marketing programs that use a proprietary database to build guest loyalty and strengthen the relationship with guests through mail, telephone, email and social media communications. The programsmore efficiently target current guests with special savings and merchandise offers during key sales periods. Our targeted marketing efforts are aligned with our customer segmentation approach which, as discussed previously, differentiates our brands by focusing on customer attitudes and behaviors, rather than demographic information. In addition, invitations to special in-store promotional events are extended throughout the year.spend.
Details of gross advertising, advertising before vendor contributions, by divisionsegment is shown below:
|
| | | | | | | | | | | | | | | | | | |
| | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
| | Gross advertising spending | as a % of divisional sales | | Gross advertising spending | as a % of divisional sales | | Gross advertising spending | as a % of divisional sales |
| | (in millions) | | | (in millions) | | | (in millions) | |
Sterling Jewelers division | | $ | 261.2 |
| 6.5 | % | | $ | 246.6 |
| 6.6 | % | | $ | 233.6 |
| 6.6 | % |
Zale division | | 98.7 |
| 5.4 | % | | 64.6 |
| 5.3 | % | | n/a |
| n/a |
|
UK Jewelry division | | 24.3 |
| 3.3 | % | | 21.8 |
| 2.9 | % | | 20.2 |
| 3.0 | % |
Signet | | $ | 384.2 |
| 5.9 | % | | $ | 333.0 |
| 5.8 | % | | $ | 253.8 |
| 6.0 | % |
n/a Not applicable as Zale division was acquired on May 29, 2014. |
| | | | | | | | | | | | | | | | | | |
| | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 |
(in millions) | | Gross advertising spending | as a % of segment sales | | Gross advertising spending | as a % of segment sales | | Gross advertising spending | as a % of segment sales |
North America | | $ | 368.5 |
| 6.5 | % | | $ | 340.4 |
| 6.1 | % | | $ | 358.8 |
| 6.2 | % |
International | | 19.3 |
| 3.3 | % | | 20.1 |
| 3.3 | % | | 21.8 |
| 3.4 | % |
Signet | | $ | 387.8 |
| 6.2 | % | | $ | 360.5 |
| 5.8 | % | | $ | 380.6 |
| 5.9 | % |
Customer finance
In our North American markets, we sell ourSignet sells products for cash and for payment through major credit cards, online payment systems and third-party financing like PayPal.lease purchase options. In addition, we offer ourthe Company has partnerships with third-party providers who directly extend credit to its customers, financing through proprietaryand who also manage and service the customers’ accounts.
Comenity Bank provides credit programs that areand services to the Zales and Piercing Pagoda banners and to prime-only credit quality customers for Kay and Jared banners. Genesis Financial Solutions (“Genesis”) provides a second look program for applicants declined by Comenity Bank.
For Kay and Jared banners, Signet originates non-prime receivables and sells them subject to a contractually agreed upon discount rate to funds managed by CarVal Investors (“CarVal”), the majority investor and Castlelake, L.P. (“Castlelake”), the minority investor. Servicing of the non-prime receivables prior to sale to the investors, including operational interfaces and customer servicing, is provided either in-house or through outsourced relationships with selected major lenders.
Our consumer credit programs are an integral part of our business and enable incremental sales as well as building customer loyalty. We also generate revenues from finance charges and other fees on these credit programs. In addition, we save on interchange fees that Signet would incur if our customers used major credit cards only.by Genesis.
Real estate
Management has specific operating and financial criteria that have tomust be satisfied before investing in new stores or renewing leases on existing stores. Substantially all the stores operated by Signet are leased. In Fiscal 2016, global netSignet continues to, over time, reposition its portfolio in a manner that it believes will drive greater store space increased 3.3% as a resultproductivity. These efforts include development and implementation of newinnovative store growth. The greatest opportunity for newconcepts to improve the in-store shopping experience, execution of opportunistic store relocations and store closures aimed at exiting under-performing stores, is in locations outside traditional covered malls.reducing the Company’s mall-based exposure and exiting regional brands.
Recent investment in the store portfolio is set out below:
|
| | | | | | | | | | | | | | | |
(in millions) | Sterling Jewelers division | | Zale division | | UK Jewelry division | | Total Signet |
Fiscal 2016 | | | | | | | |
New store capital investment | $ | 48.3 |
| | $ | 12.1 |
| | $ | 3.3 |
| | $ | 63.7 |
|
Remodels and other store capital investment | 50.6 |
| | 25.0 |
| | 16.3 |
| | 91.9 |
|
Total store capital investment | $ | 98.9 |
| | $ | 37.1 |
|
| $ | 19.6 |
| | $ | 155.6 |
|
| | | | | | | |
Fiscal 2015 | | | | | | | |
New store capital investment | $ | 52.6 |
| | 4.4 |
| | $ | 2.4 |
| | $ | 59.4 |
|
Remodels and other store capital investment | 52.6 |
| | 15.1 |
| | 11.3 |
| | 79.0 |
|
Total store capital investment | $ | 105.2 |
| | $ | 19.5 |
| | $ | 13.7 |
| | $ | 138.4 |
|
| | | | | | | |
Fiscal 2014 | | | | | | | |
New store capital investment | $ | 54.0 |
| | n/a |
| | $ | 1.5 |
| | $ | 55.5 |
|
Remodels and other store capital investment | 46.3 |
| | n/a |
| | 10.3 |
| | 56.6 |
|
Total store capital investment | $ | 100.3 |
| | n/a |
| | $ | 11.8 |
| | $ | 112.1 |
|
n/aNot applicable as Zale division was acquired on May 29, 2014. See Note 3 of Item 8 for additional information. |
| | | | | | | | | | | |
(in millions) | North America | | International | | Total Signet |
Fiscal 2019 | | | | | |
New store capital investment | $ | 15.3 |
| | $ | 1.8 |
| | $ | 17.1 |
|
Remodels and other store capital investment | 50.1 |
| | 3.0 |
| | 53.1 |
|
Total store capital investment | $ | 65.4 |
| | $ | 4.8 |
| | $ | 70.2 |
|
| | | | | |
Fiscal 2018 | | | | | |
New store capital investment | $ | 47.1 |
| | $ | 1.4 |
| | $ | 48.5 |
|
Remodels and other store capital investment | 63.8 |
| | 10.7 |
| | 74.5 |
|
Total store capital investment | $ | 110.9 |
| | $ | 12.1 |
| | $ | 123.0 |
|
| | | | | |
Fiscal 2017 | | | | | |
New store capital investment | $ | 65.1 |
| | $ | 2.5 |
| | $ | 67.6 |
|
Remodels and other store capital investment | 83.0 |
| | 15.3 |
| | $ | 98.3 |
|
Total store capital investment | $ | 148.1 |
| | $ | 17.8 |
| | $ | 165.9 |
|
Seasonality
Signet’s sales are seasonal, with the first quarter slightly exceeding 20% of annual sales, the second and third quarters each approximating 20% and the fourth quarter accounting for almost 40%approximately 35-40% of annual sales, with December being by far the most importanthighest volume month of the year. The “Holiday Season” consists of results for the months of November and December. As a result approximately 45% to 55% of Signet’s annualour transformation initiatives, we anticipate our operating income normally occursprofit will be almost entirely generated in the fourth quarter, comprised of nearly all of the UK Jewelry and Zale divisions’ annual operating income and about 40% to 45% of the Sterling Jewelers division’s annual operating income.quarter.
Employees
In Fiscal 2016,2019, the average number of full-time equivalent persons employed was 29,057.22,989. In addition, Signet usually employs a limited number of temporary employees during its fourth quarter. None of Signet’s employees in the UK and less than 1% of Signet’s employees in the US and Canada are covered by collective bargaining agreements. Signet considers its relationship with its employees to be excellent.
| | | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 |
Average number of employees:(1) | | | | | | | | | | |
Sterling Jewelers | 16,140 |
| | 16,147 |
| | 14,829 |
| |
Zale(2) | 9,309 |
| | 9,241 |
| | n/a |
| |
UK Jewelry | 3,370 |
| | 3,292 |
| | 3,104 |
| |
North America(2) | | 19,689 |
| | 21,440 |
| | 25,944 |
|
International | | 3,125 |
| | 3,265 |
| | 3,398 |
|
Other(3) | 238 |
| | 269 |
| | 246 |
| 175 |
| | 183 |
| | 224 |
|
Total | 29,057 |
| | 28,949 |
| | 18,179 |
| 22,989 |
| | 24,888 |
| | 29,566 |
|
| |
(1) | Full-time equivalents (“FTEs”). |
| |
(2) | Includes 1,585844 FTEs, 821 FTEs and 1,051 FTEs employed in Canada.Canada in Fiscal 2019, Fiscal 2018 and Fiscal 2017, respectively. |
| |
(3) | Includes corporate employees and employees employed at the diamond polishing plant located in Botswana. |
n/a Not applicable as Zale division was acquired on May 29, 2014.
Regulation
Signet is required to comply with numerous laws and regulations covering areas such as consumer protection, consumer privacy, data protection, consumer credit, consumer credit insurance, health and safety, waste disposal, supply chain integrity, truth in advertising and employment. Management monitors changes in these laws to endeavor to comply with applicable requirements.
Markets
Signet operates in the US, Canada and UK markets.
In 2015, we concluded a market and customer segmentation study in the US and validated that Signet’s long-term growth opportunities should be directed to the mid-market. Instead of basing our view on the household income of consumers, we refined our mid-market thinking according to the value of the products they buy. From that perspective, mid-market jewelry represents products in the $100 to $10,000 range — essentially excluding costume and luxury. Ninety-five percent of Signet’s merchandise sales land within that range. In total, the mid-market in the US, which is a subset of the total US jewelry industry that excludes costume jewelry and luxury jewelry, is approximately $41 billion. Signet sees the mid-market of the industry as its core market.
US
According to the US Bureau of Economic Analysis, and Census Bureau, the total jewelry and watch market was approximately $75$83 billion at the end of 2015,2018, up approximately 2%nearly 8% from the prior year. This implies a Signet jewelry market share of more thanapproximately 7%. Since 2000,2008, the industry average annual growth rate is 3.2%2.5%. Nearly 85%Around 83% of the market is represented by jewelry, with the balance being attributable to watches. ThereAccording to the latest data from the US Labor Department, there were nearly 21,000close to 20,400 jewelry stores in the country, down approximately 1%0.9% from the prior year.
Canada
The jewelry market in Canada, according to Euromonitor, has grown steadily over the past five years, rising to an estimated C$7.28.2 billion in 2014, the latest data available to Signet.2018. This represents a compound annual growth ratean increase of 4.6%. Euromonitor estimates that 2014 was up 3% in dollars and 2% in units.2.9% from the prior year.
UK
In the UK, the jewelry and watch market standswas estimated at about £4.1£5.7 billion in 2018, up 2.9% from the prior year, according to Mintel. That market saw a recovery in 2015 with growth of 1.2%.Growth was driven by continued demand for luxury and high-ticket items. Self-purchasing among young women and gifting among men represent the largest parts of the precious jewelry market. The growth represents a slight slowdown from that achieved in 2014 due to a shift towards lighter-weight pieces and a decrease in average selling prices.
NORTH AMERICA SEGMENT
14
STERLING JEWELERS DIVISIONmall-based regional banners.
Sterling JewelersNorth America store brandbanner reviews
Store activity by brandbanner
|
| | | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 | |
Kay | 42 |
| | 58 |
| | 63 |
| |
Jared | 18 |
| | 17 |
| | 13 |
| |
Regional brands | — |
| | — |
| | 35 |
| (1) |
Total stores opened or acquired during the year | 60 |
| | 75 |
| | 111 |
| |
| | | | | | |
Kay | (7 | ) | | (20 | ) | | (22 | ) | |
Jared | (1 | ) | | — |
| | — |
| |
Regional brands | (16 | ) | | (22 | ) | | (61 | ) | (1) |
Total stores closed during the year | (24 | ) | | (42 | ) | | (83 | ) | |
| | | | | | |
Kay | — |
| | 1 |
| | 65 |
| |
Jared | — |
| | 33 |
| | — |
| |
Regional brands | — |
| | (34 | ) | | (65 | ) | |
Total logo conversions | — |
| | — |
| | — |
|
|
| | | | | | |
Kay | 1,129 |
| | 1,094 |
| | 1,055 |
| |
Jared | 270 |
| | 253 |
| | 203 |
| |
Regional brands | 141 |
| | 157 |
| | 213 |
| |
Total stores open at the end of the year | 1,540 |
| | 1,504 |
| | 1,471 |
| |
| | | | | | |
Kay | $ | 2.178 |
| | $ | 2.112 |
| | $ | 2.033 |
| |
Jared(2) | $ | 4.650 |
| | $ | 4.794 |
| | $ | 5.299 |
| |
Regional brands | $ | 1.333 |
| | $ | 1.318 |
| | $ | 1.243 |
| |
Average sales per store (millions)(3) | $ | 2.518 |
| | $ | 2.467 |
| | $ | 2.361 |
| |
| | | | | | |
Kay | 1,697 |
| | 1,597 |
| | 1,489 |
| |
Jared | 1,153 |
| | 1,089 |
| | 983 |
| |
Regional brands | 175 |
| | 196 |
| | 276 |
| |
Total net selling square feet (thousands) | 3,025 |
| | 2,882 |
| | 2,748 |
| |
| | | | | | |
Increase in net store selling space | 5.0 | % | | 4.9 | % | | 4.8 | % | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | February 2, 2019 | | Openings | | Closures | | February 3, 2018 | | Openings | | Closures | | January 28, 2017 |
Mall | | | | | | | | | | | | | | |
Kay | | 690 |
| | — |
| | (41 | ) | | 731 |
| | 4 |
| | (24 | ) | | 751 |
|
Zales | | 510 |
| | 2 |
| | (37 | ) | | 545 |
| | 5 |
| | (48 | ) | | 588 |
|
Jared | | 3 |
| | — |
| | (6 | ) | | 9 |
| | — |
| | (1 | ) | | 10 |
|
Piercing Pagoda(1) | | 574 |
|
| — |
|
| (24 | ) |
| 598 |
|
| 13 |
|
| (31 | ) | | 616 |
|
Peoples | | 123 |
| | 2 |
| | (8 | ) | | 129 |
| | 2 |
| | (16 | ) | | 143 |
|
Regional banners(2) | | 32 |
| | 1 |
| | (69 | ) | | 100 |
| | — |
| | (97 | ) | | 197 |
|
North America segment | | 1,932 |
| | 5 |
| | (185 | ) | | 2,112 |
| | 24 |
| | (217 | ) | | 2,305 |
|
| | | | | | | | | | | | | | |
Off-mall and outlet | | | | | | | | | | | | | | |
Kay | | 524 |
| | 36 |
| | (28 | ) | | 516 |
| | 80 |
| | (5 | ) | | 441 |
|
Zales | | 148 |
| | — |
| | (11 | ) | | 159 |
| | 6 |
| | (10 | ) | | 163 |
|
Jared | | 253 |
| | 1 |
| | (13 | ) | | 265 |
| | 3 |
| | (3 | ) | | 265 |
|
North America segment | | 925 |
| | 37 |
| | (52 | ) | | 940 |
| | 89 |
| | (18 | ) | | 869 |
|
| | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | |
Kay | | 1,214 |
| | 36 |
| | (69 | ) | | 1,247 |
| | 84 |
| | (29 | ) | | 1,192 |
|
Zales | | 658 |
| | 2 |
| | (48 | ) | | 704 |
| | 11 |
| | (58 | ) | | 751 |
|
Jared | | 256 |
| | 1 |
| | (19 | ) | | 274 |
| | 3 |
| | (4 | ) | | 275 |
|
Piercing Pagoda(1) | | 574 |
| | — |
| | (24 | ) | | 598 |
| | 13 |
| | (31 | ) | | 616 |
|
Peoples | | 123 |
| | 2 |
| | (8 | ) | | 129 |
| | 2 |
| | (16 | ) | | 143 |
|
Regional banners(2) | | 32 |
| | 1 |
| | (69 | ) | | 100 |
| | — |
| | (97 | ) | | 197 |
|
North America segment | | 2,857 |
| | 42 |
| | (237 | ) | | 3,052 |
| | 113 |
| | (235 | ) | | 3,174 |
|
| | | | | | | | | | | | | | |
| | February 2, 2019 | | | | | | February 3, 2018 | | | | | | January 28, 2017 |
Kay | | 1,864 |
| | | | | | 1,931 |
| | | | | | 1,826 |
|
Zales | | 916 |
| | | | | | 977 |
| | | | | | 1,039 |
|
Jared | | 1,139 |
| | | | | | 1,181 |
| | | | | | 1,177 |
|
Piercing Pagoda | | 108 |
| | | | | | 112 |
| | | | | | 115 |
|
Peoples | | 166 |
| | | | | | 171 |
| | | | | | 190 |
|
Regional banners | | 38 |
| | | | | | 121 |
| | | | | | 233 |
|
Total net selling square feet (thousands)(3) | | 4,231 |
| | | | | | 4,493 |
| | | | | | 4,580 |
|
| | | | | | | | | | | | | | |
Increase in net store selling space | | (5.8 | )% | | | | | | (1.9 | )% | | | | | | 2.8 | % |
| |
(1) | Piercing Pagoda operates through mall-based kiosks. |
| |
(2) | Includes one James Allen location. |
(3) Includes the remaining 30 Ultra stores not converted to the Kay brand171 thousand, 191 thousand and 227 thousand square feet of net selling space in Canada in Fiscal 2014.2019, Fiscal 2018 and Fiscal 2017, respectively.
|
| | | | | | | | | | | | |
Average sales per store (millions) | | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 |
Kay | | $ | 1.905 |
| | $ | 1.908 |
| | $ | 2.124 |
|
Zales | | $ | 1.519 |
| | $ | 1.408 |
| | $ | 1.327 |
|
Jared(1) | | $ | 4.085 |
| | $ | 4.110 |
| | $ | 4.379 |
|
Piercing Pagoda | | $ | 0.479 |
| | $ | 0.417 |
| | $ | 0.506 |
|
Peoples | | $ | 1.467 |
| | $ | 1.444 |
| | $ | 1.267 |
|
Regional banners | | $ | 1.332 |
| | $ | 1.182 |
| | $ | 1.242 |
|
North America segment(2) | | $ | 1.692 |
| | $ | 1.673 |
| | $ | 1.739 |
|
| |
(1) | Includes sales from all Jared store formats, including the smaller square footage and lower average sales per store concepts of Jared 4.0, Jared Jewelry Boutique and Jared Vault. |
(2)Includes sales from all Jared store formats, including the smaller square footage and lower average sales per store concepts of Jared 4.0, Jared Jewelry Boutique and Jared Vault.
(3) Based only upon stores operated for the full fiscal year and calculated on a 52-week basis.
Sales data by brand
|
| | | | | | | | | |
| | | Change from previous year |
Fiscal 2016 | Sales (millions) | | Total sales | | Same store sales |
Kay | $ | 2,530.3 |
| | 7.8 | % | | 5.7 | % |
Jared | 1,252.9 |
| | 5.0 | % | | 0.6 | % |
Regional brands | 205.5 |
| | (8.7 | )% | | (1.2 | )% |
Sterling Jewelers | $ | 3,988.7 |
| | 5.9 | % | | 3.7 | % |
Kay Jewelers (“Kay”)Kay Jewelers
Kay accounted for 39% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 41%) and operated 1,129 stores in 50 states as of January 30, 2016 (January 31, 2015: 1,094 stores). Since 2004, Kay has beenis the largest specialty retail jewelry store brand in the US based on sales,sales. Kay operates in malls and has subsequently increased its leadership position. Like the rest of our store banners, Kay targets a mid-market jewelry customer. But where Kay differs is that it particularly targets a customer, we identify as a “gifter,” who knows they need to buy jewelry but does not enjoy shoppingoff-mall stores. Off-mall stores primarily are located in outlet malls and needs help to get it done right.
Details of Kay’s performance over the last three years is shown below:
|
| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
Sales (millions) | $ | 2,530.3 |
| | $ | 2,346.2 |
| | $ | 2,157.8 |
|
Average sales per store (millions) | $ | 2.178 |
| | $ | 2.112 |
| | $ | 2.033 |
|
Stores at year end | 1,129 |
| | 1,094 |
| | 1,055 |
|
Total net selling square feet (thousands) | 1,697 |
| | 1,597 |
| | 1,489 |
|
power centers. Kay mall stores typically occupy about 1,600 square feet and have approximately 1,300 square feet of selling space, whereas Kay off-mall stores typically occupy about 2,200 square feet and have approximately 1,800 square feet of selling space.
Kay accounted for 39% of Signet’s sales in Fiscal 2019 (Fiscal 2018: 39%).
Zales Jewelers (“Zales”)
Zales Jewelers operates primarily in shopping malls and off-mall stores. Off-mall stores primarily are locatedoffers a broad range of bridal, diamond solitaire and fashion jewelry. Zales Outlet operates in outlet malls and neighborhood power centers. Management believescenters and capitalizes on Zales Jewelers’ national marketing and brand recognition. Zales Jewelers and Zales Outlet are collectively referred to as “Zales.”
Zales is positioned as “The Diamond Store” given its emphasis on diamond jewelry, especially in bridal and fashion. Zales mall stores typically occupy about 1,700 square feet and have approximately 1,300 square feet of selling space, whereas Zales off-mall expansion is supported by the willingnessstores typically occupy about 2,400 square feet and have approximately 1,700 square feet of guests to shopselling space.
Zales accounted for jewelry at a variety 20%of real estate locations and that increased diversification is important for growth as increasing the store count further leverages the strong Kay brand, marketing support and the central overhead.
The following table summarizes the current composition of stores as of January 30, 2016 and net openings (closures)Signet’s sales in the past three years:
|
| | | | | | | | | | | |
| Stores at | | Net openings (closures) |
| January 30, 2016 | | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
Mall | 755 |
| | 6 |
| | 2 |
| | 5 |
|
Off-mall and outlet | 374 |
| | 29 |
| | 37 |
| | 101 |
|
Total | 1,129 |
| | 35 |
| | 39 |
| | 106 |
|
Fiscal 2019 (Fiscal 2018: 20%).Jared The Galleria Of Jewelry (“Jared”)
With 270 stores in 40 states asJared, which offers the broadest selection of January 30, 2016 (January 31, 2015: 253 stores), Jaredmerchandise, is the fourth largest US specialty retail jewelry brand by sales and is a leading off-mall destination specialty retail jewelry store chain, based on sales. Jared accounted for 19% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 21%). The first Jared store was opened in 1993, and since its roll-out began in 1998, it has grown to become the fourth largest US specialty retail jewelry brand by sales. Like the rest of our store banners, Jared targets a mid-market jewelry customer. But where Jared differs is that it particularly targets a customer, we identify as a “sentimentalist,” who enjoys shopping for jewelry and cares very much about the details of the product and shopping process.
Details of Jared’s performance over the last three years is shown below:
|
| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
Sales (millions) | $ | 1,252.9 |
| | $ | 1,188.8 |
| | $ | 1,064.7 |
|
Average sales per store (millions)(1)(2) | $ | 4.650 |
| | $ | 4.794 |
| | $ | 5.299 |
|
Stores at year end | 270 |
| | 253 |
| | 203 |
|
Total net selling square feet (thousands) | 1,153 |
| | 1,089 |
| | 983 |
|
(1) In Fiscal 2016 and Fiscal 2015, average sales per store reflect the impact of Jared outlet and mall store concepts.
(2) Includes sales from all Jared store formats, including the smaller square footage and lower average sales per store concepts of Jared 4.0, Jared Jewelry Boutique and Jared Vault.
Jared offers superior guest service and enhanced selection of merchandise.chain. Every Jared store has an on-site design and service center where most repairs are completed within the same day. Each store also has at least one diamond salon, a children’s play area, and complimentary refreshments.
The typical Jared store has about 4,800 square feet of selling space and approximately 6,000 square feet of total space. Jared locations are normally free-standing sites with high visibility and traffic flow, positioned close to major roads within shopping developments. Jared stores usually operate in retail centers that contain strong retail co-tenants, including big box, destination stores and some smaller specialty units.
Jared also operates Jared Jewelry Boutiques within malls. These mall stores have a smaller footprint than standard Jared locations and generally less than 2,000 square feet of selling space. In addition, a similar off-mall concept known as Jared 4.0, is being tested currently, which utilizes approximately 3,600 square feet of selling space, allows for more store openings in smaller markets, expands the Jared brand and increases the return on Jared advertising investment. Finally, Jared operates an outlet-mall concept known as Jared Vault.Vault which utilizes approximately 1,600 square feet of selling space. These stores converted from a previous outlet store acquisition, are smaller than off-mall Jareds and offer a mix of identical products as Jared, as well as different, outlet-specific products at lower prices.
The following table summarizes the current composition Jared accounted for 18%of stores as of January 30, 2016 and net openings (closures)Signet’s sales in Fiscal 2019 (Fiscal 2018: 19%).
Piercing Pagoda
Piercing Pagoda operates through mall-based kiosks in the past three years:US. Piercing Pagodas are generally located in high traffic areas that are easily accessible and visible within regional shopping malls. Piercing Pagoda offers a selection of gold, silver and diamond jewelry in basic styles at moderate prices.
Piercing Pagoda accounted for 5% of Signet’s sales in Fiscal 2019 (Fiscal 2018: 5%). |
| | | | | | | | | | | |
| Stores at | | Net openings (closures) |
| January 30, 2016 | | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
Mall | 11 |
| | 3 |
| | 8 |
| | — |
|
Off-mall and outlet | 259 |
| | 14 |
| | 42 |
| | 13 |
|
Total | 270 |
| | 17 |
| | 50 |
| | 13 |
|
JamesAllen.com (“James Allen”)Sterling Jewelers regional brandsJames Allen is an online retailer that was acquired by the Company during Fiscal 2018 as part of the R2Net acquisition. Unlike the rest of our store banners, James Allen does not principally operate in physical retail stores. During Fiscal 2019, the first James Allen concept store and showroom was launched in Washington D.C. featuring advances in digital technology and a millennial-inspired shopping experience. This store is an opportunity to test new concepts and incorporate innovation in new store design plans for all of our banners.
James Allen accounted for 4% of Signet’s sales in Fiscal 2019 (Fiscal 2018: 1%).
Peoples Jewellers (“Peoples”)
Peoples is Canada’s largest jewelry retailer, offering jewelry at affordable prices. Peoples is positioned as “Canada’s #1 Diamond Store” emphasizing its diamond business while also offering a wide selection of gold jewelry, gemstone jewelry and watches. Peoples stores typically occupy about 1,600 square feet and have approximately 1,300 square feet of selling space.
Peoples accounted for 3%of Signet’s sales in Fiscal 2019 (Fiscal 2018: 3%).
Regional banners
The Sterling Jewelers divisionNorth America segment also operates 32 mall stores under a variety of established regional nameplates. Regional brands in the Sterling Jewelers division accounted for 3% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 4%) and as of January 30, 2016, include 141 regional brand stores in 31 states (January 31, 2015: 157 stores in 32 states). The leading brands include JB Robinson Jewelers, Marks & Morgan Jewelers, Belden Jewelers and Belden Jewelers.Gordon’s Jewelers, in the US, and Mappins Jewellers (“Mappins”), in Canada. Also included in the regional nameplates are Goodman Jewelers, LeRoy’s Jewelers, Osterman Jewelers, Rogers Jewelers, Shaw’s Jewelers and Weisfield Jewelers. The Company expects the number ofCompany’s strategy is to reduce regional brandsbrand locations to continue to decline through conversion to national store brands or through closure upon lease expiration.
Details Regional banners in the North America segment accounted for 1%of the regional brands’ performance over the last three years is shown below:Signet’s sales in Fiscal 2019 (Fiscal 2018:1%).
|
| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
Sales (millions) | $ | 205.5 |
| | $ | 230.0 |
| | $ | 295.1 |
|
Average sales per store (millions) | $ | 1.333 |
| | $ | 1.318 |
| | $ | 1.243 |
|
Stores at year end | 141 |
| | 157 |
| | 213 |
|
Total net selling square feet (thousands) | 175 |
| | 196 |
| | 276 |
|
Sterling JewelersNorth America operating review
Other sales
Custom design services represent less than 5% of sales but provide higher than average profitability. Our custom jewelry initiative has a proprietary computer selling system and in-store design capabilities. Design & Service Centers, located in Jared stores, are staffed with skilled artisans who support the custom business generated by other Sterling Jewelers divisionNorth America segment stores, as well as the Jared stores in which they are located. The custom design and repair function has its own field management and training structure.
Repair services represent less than 5% of sales, and approximately 30%20% of transactions and are an important opportunity to build customer loyalty. The Jared Design & Service Centers, open the same hours as the store, also support other Sterling Jewelers and approximately 200 Zale divisionNorth America segment stores’ repair business.
The Sterling Jewelers divisionNorth America segment sells extended service plans covering lifetime repair service for jewelry and jewelry replacement plans. The lifetime repair service plans cover services such as ring sizing, refinishing and polishing, rhodium plating of white gold, earring repair, chain soldering and the resetting of diamonds and gemstones that arise due to the normal usage of the merchandise.merchandise or a replacement option if the merchandise cannot be repaired. The extended service plans have a higher rate of profitability than merchandise sales and are a significant component of Signet’s operating income. Jewelry replacement plans require the issuance of new replacement merchandise if the original merchandise is determined to be defective or damaged within a defined period in accordance with the plan agreement. Any repair work is performed in-house.
ConsumerCustomer finance
General
Our in-house consumer financing program provides Signet with a competitive advantage through the enabling of incremental profitable sales that would not occur without a consumer financing program. Several factors inherent in the US jewelry business support the circumstances through which we believe Signet is uniquely positioned to generate profitable incremental business through its partner supported consumer financing program.payment programs. These factors include a high average transaction value;value and a significant population of customers seeking to finance merchandise, primarily in the bridal category; and the minimum scale necessary to administer credit programs efficiently. In addition, our credit program provides other benefits to our business overall, including:
complementing our “Best in Bridal” strategy in that 50% of merchandise sales are bridal and 75% of Sterling Jewelers division bridal sales utilize our credit as form of tender;
retaining of control in establishing high levels of service in managing the accounts receivable portfolio;
providing a database of regular guests and spending habits; and
establishing collection policies designed to minimize risk and maximize future sales as opposed to a focus on maximizing earnings from outstanding balances.
The lifetime value of a customer obtained through the in-house credit program is estimated to be 3.5 times that of a customer not obtained through the in-house credit program. For our in-house credit program, as of January 30, 2016 and January 31, 2015, 52.7% and 50.5%, respectively, of balances due were from customers who were acquired as users of our credit program more than 12 months prior to their most recent purchase.
Our in-house consumer financing program has been centralized since 1990 and is fully integrated into the management of the Sterling Jewelers division. It is not a separate operating division nor does it report separate results. Investments are geared towards best in class technology, system support and strategy analytics with the objective of maximizing efficiency and effectiveness, resulting in continuous optimization of profitable sales enabled by the program. All assets and liabilities relating to consumer financing are shown on the balance sheet and there are no associated off-balance sheet arrangements. In addition to interest-bearing transactions that involve the use of in-house customer finance, a portion of credit sales are made using interest-free financing for one year, subject to certain conditions. In most US states, guests also are offered optional third-party credit insurance.
Underwriting
The majority of credit applications originate in one of our retail locations and are approved or denied automatically based on proprietary origination models. Origination and purchase authorization strategies are designed by a dedicated Risk Management team, which is separate and distinct from our retail sales organization ensuring that financing decisions are not influenced by sales driven objectives. Our underwriting process considers one or more of the following elements: credit bureau information; income and address verification; current income and debt levels. We have developed and refined proprietary statistical models that provide standardized credit decisions, and drive the optimization of credit limit assignment, down payment requirements and more significant debt service requirements as compared to general consumer lending standards. For certain credit applicants that may have past credit problems or lack credit history, we use stricter underwriting criteria. These additional requirements may include items such as verification of employment and minimum down payment levels. Part of our ability to control delinquency and net charge-offs is based on the level of required down payments, tailored credit limits and more significant debt service requirements as mentioned above. Underwriting risk tolerance has not been altered in the past 10 years. Several factors can influence portfolio risk outside of the initial origination and subsequent authorization decisions including macro-economic conditions, regulatory environment, operational system stability and strategy execution, store execution, and the ability of marketing and prospecting activities to attract a consistent risk weighed mix of new applicants to the receivable.
The scores of Fair Isaac Corporation (“FICO”), a widely-used financial metric for assessing a person’s credit rating are used to benchmark portfolio and origination risk over time. Ten to twenty point ranges tend to be grouped together to form tiers of risk and scores can range from a low of 0 to over 800. The following aggregate FICO metrics for the portfolio demonstrate the overall consistency of our financing strategy approach:
|
| | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
Balance weighted FICO score - New Additions | 684 | | 685 | | 690 |
Balance weighted FICO score - Portfolio | 662 | | 663 | | 665 |
Credit monitoring and collections
Our objective is to facilitate the sale of jewelry and to collect the outstanding credit balance as quickly as possible, minimizing risk and enabling the customer to make additional jewelry purchases using their credit facility. On average, our receivable portfolio turns every 9 months. We closely monitor the credit portfolio to identify delinquent accounts early, and dedicate resources to contacting customers concerning past due
accounts when they are as few as 5 days in arrears. Collectors are focused on a quality customer experience using risk-based calling and strategic account segmentation.
The quality of our credit loan portfolio at any time reflects, among other factors: 1) the creditworthiness of our customers, 2) general economic conditions, 3) the success of our account management and collection activities, and 4) a variety of variables that change over time such as the proportion of new versus seasoned accounts or changes in the relative growth rate in sales between our various retail brands or formats. Cash flows associated with the granting of credit to guests of the individual store are included in the projections used when considering store investment proposals.
Portfolio aging
Since inception of its in-house financing, Signet measures delinquency and establishes loss allowances using a form of the recency method. This form of the recency method relies upon qualifying payments determined by management to measure delinquency. In general, an account will not remain current unless a qualifying payment is received. A customer is aged to the next delinquency level if they fail to make a qualifying payment by their monthly aging. A customer’s account ages each month five days after their due date listed on their statement, allowing for a grace period before collection efforts begin. A qualifying payment can be no less than 75% of the scheduled payment, increasing with the delinquency level. If an account holder is two payments behind, then they must make a full minimum payment to return to current status. If an account holder is three payments behind, then they must make three full payments before returning to a current status. If an account holder is more than three payments behind, then the entire past due amount is required to return to a current status. Establishing qualifying payment methods in accounting for delinquencies is appropriate considering the high minimum payments that are required of customers. The weighted average minimum payment required as a percentage of the outstanding balance was 9% at year end fiscal 2016. The minimum payment does not decline as the balance declines. These two facts combined (higher scheduled payment requirement and no decline in payment requirement as balance decreases) allow Signet to collect on the receivable significantly faster than other retail/bank card accounts, which require a 3%-5% minimum payment, reducing risk and more quickly freeing up customer open to buy for additional purchases. Of all payments received in the fiscal year, 97% were equal to or greater than the scheduled monthly payment compared to 97% last year. While guests can make payments through online or mobile channels, via telephone or through the mail, 25% of payments are made in one of our retail locations.
See Note 1 of Item 8 for additional information regarding qualifying payments.
Allowances for uncollectible amounts are recorded as a charge to cost of goods sold in the income statement. The allowance is calculated using a model that analyzes factors such as delinquency rates and recovery rates. An allowance for amounts 90 days aged and under on a recency basis is established based on historical loss experience and payment performance information. A 100% allowance is made for any amount aged more than 90 days on a recency basis and any amount associated with an account the owner of which has filed for bankruptcy. An account is 90 days aged on a recency basis when there has not been a qualifying payment made within 90 days of the billing date. The net bad debt expensed on the income statement is equal to the sum of the total change in the allowance for uncollectible accounts and the total amount of charged off balances less any recoveries for accounts previously charged off. The allowance calculation is reviewed by management to assess whether, based on economic events, additional analysis is required to appropriately estimate losses inherent in the portfolio.
We deem accounts to be uncollectible and charge off when the account is both more than 120 days aged on a recency basis and 240 days aged on a contractual basis at the end of a month. Over the last 12 months, we have recovered 18% of charged-off amounts through our collection activities and the sale of previously charged off accounts. We track our charge-offs both gross, before recoveries, and net, after recoveries.
Customer financing statistics(1)
|
| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
Total sales (millions) | $ | 3,988.7 |
| | $ | 3,765.0 |
| | $ | 3,517.6 |
|
Credit sales (millions) | $ | 2,451.2 |
| | $ | 2,277.1 |
| | $ | 2,028.0 |
|
Credit sales as % of total Sterling Jewelers sales(2) | 61.5 | % | | 60.5 | % | | 57.7 | % |
Net bad debt expense (millions)(3) | $ | 190.5 |
| | $ | 160.0 |
| | $ | 138.3 |
|
Opening receivables (millions) | $ | 1,666.0 |
| | $ | 1,453.8 |
| | $ | 1,280.6 |
|
Closing receivables (millions) | $ | 1,855.9 |
| | $ | 1,666.0 |
| | $ | 1,453.8 |
|
Number of active credit accounts at year end(4) | 1,423,619 |
| | 1,352,298 |
| | 1,256,003 |
|
Average outstanding account balance at year end | $ | 1,319 |
| | $ | 1,245 |
| | $ | 1,175 |
|
Average monthly collection rate | 11.5 | % | | 11.9 | % | | 12.1 | % |
Ending bad debt allowance as a % of ending accounts receivable(1) | 7.0 | % | | 6.8 | % | | 6.7 | % |
Net charge-offs as a % of average gross accounts receivable(1)(5) | 9.9 | % | | 9.3 | % | | 9.4 | % |
Non performing receivables as a % of ending accounts receivable(1) | 4.0 | % | | 3.8 | % | | 3.7 | % |
| | | | | |
Credit portfolio impact: | | | | | |
Net bad debt expense (millions)(3) | $ | (190.5 | ) | | $ | (160.0 | ) | | $ | (138.3 | ) |
Late charge income (millions) | $ | 33.9 |
| | $ | 31.3 |
| | $ | 29.4 |
|
Interest income from in-house customer finance programs (millions)(6) | $ | 252.5 |
| | $ | 217.9 |
| | $ | 186.4 |
|
| $ | 95.9 |
| | $ | 89.2 |
| | $ | 77.5 |
|
(1) See Note 10 of Item 8 for additional information.
(2) Including any deposits taken at the time of sale.
(3) Net bad expense is defined as the charge for the provision for bad debt less recoveries.
(4) The number of active accounts is based on credit cycle end date closest to the fiscal year end date.
(5) Net charge-offs calculated as gross charge-offs less recoveries. See Note 10 of Item 8 for additional information.
(6) See Note 9 of Item 8. Primary component of other operating income, net, on the consolidated income statement.
ZALE DIVISION
The Zale division consists of two reportable segments: Zale Jewelry and Piercing Pagoda. Zale Jewelry operates jewelry stores located primarily in shopping malls throughout the US, Canada and Puerto Rico. Piercing Pagoda operates through mall-based kiosks throughout the US and Puerto Rico. In Fiscal 2016, approximately 9% of goods purchased in the Zale division were denominated in Canadian dollars.
On May 29, 2014, Signet acquired 100% of the outstanding shares of Zale Corporation and Zale Corporation became a wholly-owned consolidated subsidiary of Signet. As such, Fiscal 2016 reflects the first full year of results as Fiscal 2015 reflects only the results since the Acquisition.
Zale store brand reviews
Store activity by brand
|
| | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | |
Zales | 24 |
| | 731 |
| |
Peoples | 2 |
| | 146 |
| |
Regional brands | — |
| | 139 |
| |
Total Zale Jewelry | 26 |
| | 1,016 |
| |
Piercing Pagoda | 12 |
| | 615 |
| |
Total stores opened or acquired during the year | 38 |
| | 1,631 |
| |
| | | | |
Zales | (10 | ) | | (15 | ) | |
Peoples | (1 | ) | | (2 | ) | |
Regional brands | (10 | ) | | (27 | ) | |
Total Zale Jewelry | (21 | ) | | (44 | ) | |
Piercing Pagoda | (12 | ) | | (10 | ) | |
Total stores closed during the year | (33 | ) | | (54 | ) | |
| | | | |
Zales | 730 |
| | 716 |
| |
Peoples | 145 |
| | 144 |
| |
Regional brands | 102 |
| | 112 |
| |
Total Zale Jewelry | 977 |
| | 972 |
| |
Piercing Pagoda | 605 |
| | 605 |
| |
Total stores open at the end of the year | 1,582 |
| | 1,577 |
| |
| | | | |
Zales | $ | 1.467 |
| | $ | 0.942 |
| (2) |
Peoples | $ | 1.353 |
| | $ | 1.096 |
| (2) |
Regional brands | $ | 0.942 |
| | $ | 0.682 |
| (2) |
Total Zale Jewelry | $ | 1.394 |
| | $ | 0.934 |
| (2) |
Piercing Pagoda | $ | 0.376 |
| | $ | 0.228 |
| (2) |
Average sales per store (millions)(1) | $ | 1.003 |
| | $ | 0.662 |
| (2) |
| | | | |
Zales | 1,010 |
| | 990 |
| |
Peoples | 193 |
| | 192 |
| |
Regional brands | 112 |
| | 125 |
| |
Total Zale Jewelry | 1,315 |
| | 1,307 |
| |
Piercing Pagoda | 114 |
| | 115 |
| |
Total net selling square feet (thousands) | 1,429 |
| | 1,422 |
| |
| | | | |
Increase in net store selling space | 0.5 | % | | n/a |
| |
(1) Based only upon stores operated for the full fiscal year and calculated on a 52-week basis.
(2) Fiscal 2015 average sales per store calculated based on sales since date of the Acquisition.
Sales data by brand
|
| | | | | | |
Fiscal 2016 | Sales (millions) | | Same store sales |
Zales | $ | 1,241.0 |
| | 5.5% |
Peoples | 214.8 |
| | 3.4% |
Regional brands | 112.4 |
| | (5.7)% |
Total Zale Jewelry | $ | 1,568.2 |
| | 4.3% |
Piercing Pagoda | 243.2 |
| | 7.5% |
Zale division(1) | $ | 1,811.4 |
| | 4.8% |
(1) The Zale division same store sales includes merchandise and repair sales and excludes warranty and insurance revenues.
Zale Jewelry
Zale Jewelry is comprised of three core national brands, Zales Jewelers, Zales Outlet and Peoples Jewellers and two regional brands, Gordon’s Jewelers and Mappins Jewellers. Each brand specializes in jewelry and watches, with merchandise and marketing emphasis focused on diamond products.
Zales Jewelers, including Zales Outlet
Zales Jewelers operates primarily in shopping malls and offers a broad range of bridal, diamond solitaire and fashion jewelry. Zales Outlet operates in outlet malls and neighborhood power centers and capitalizes on Zales Jewelers’ national marketing and brand recognition. Like the rest of our store banners, Zales targets a mid-market jewelry customer. But where Zales differs is that it particularly targets a customer, we identify as a “stylish shopper,” for whom trend and leading styles are very important.
Zales Jewelers and Zales Outlet are collectively referred to as “Zales.”
Zales accounted for 19% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 14%) and operated a total of 730 stores, including 720 stores in the United States and 10 stores in Puerto Rico as of January 30, 2016 (January 31, 2015: 716 total stores). Zales is positioned as “The Diamond Store” given its emphasis on diamond jewelry, especially in bridal and fashion. The Zales brand complements its merchandise assortments with promotional strategies to increase sales during traditional gift-giving periods and throughout the year.
Details of Zales’ performance since the Acquisition in Fiscal 2015 is shown below:
|
| | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
Sales (millions) | $ | 1,241.0 |
| | $ | 800.9 |
|
Average sales per store (millions)(1) | $ | 1.467 |
| | $ | 0.942 |
|
Stores at year end | 730 |
| | 716 |
|
Total net selling square feet (thousands) | 1,010 |
| | 990 |
|
(1) Fiscal 2015 average sales per store calculated based on sales since date of the Acquisition.
Zales mall stores typically occupy about 1,700 square feet and have approximately 1,300 square feet of selling space, whereas Zales off-mall stores typically occupy about 2,400 square feet and have approximately 1,700 square feet of selling space.
The following table summarizes the current composition of stores as of January 30, 2016 and net openings (closures) since the Acquisition:
|
| | | | | | | | | |
| | Stores at | | Net openings (closures) |
| | January 30, 2016 | | Fiscal 2016 | | Fiscal 2015 |
Mall | | 601 |
| | 9 |
| | (6 | ) |
Off-mall and outlet | | 129 |
| | 5 |
| | — |
|
Total | | 730 |
| | 14 |
| | (6 | ) |
Peoples Jewellers
Founded in 1919, Peoples Jewellers (“Peoples”) is Canada’s largest jewelry retailer, offering jewelry at affordable prices. Peoples accounted for 3% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 3%) and operated 145 stores in Canada as of January 30, 2016 (January 31, 2015: 144 stores). Peoples is positioned as “Canada’s #1 Diamond Store” emphasizing its diamond business while also offering a wide selection of gold jewelry, gemstone jewelry and watches.
Details of Peoples’ performance since the Acquisition in Fiscal 2015 is shown below:
|
| | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
Sales (millions) | $ | 214.8 |
| | $ | 174.5 |
|
Average sales per store (millions)(1) | $ | 1.353 |
| | $ | 1.096 |
|
Stores at year end | 145 |
| | 144 |
|
Total net selling square feet (thousands) | 193 |
| | 192 |
|
(1) Fiscal 2015 average sales per store calculated based on sales since date of the Acquisition.
Peoples stores typically occupy about 1,600 square feet and have approximately 1,300 square feet of selling space.
Zale Jewelry regional brands
The Zale division also operates the regional store brands Gordon’s Jewelers (“Gordon’s”), in the US and Mappins Jewellers (“Mappins”), in Canada. Regional brands in the Zale Jewelry segment accounted for 2% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 2%) and operated a total of 102 stores, including 58 stores in the US, 43 stores in Canada and 1 store in Puerto Rico as of January 30, 2016 (January 31, 2015: 112 total stores). The Company expects the number of regional brands locations to continue to decline through conversion to national store brands or through closure upon lease expiration.
Details of regional brands’ performance since the Acquisition is shown below:
|
| | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
Sales (millions) | $ | 112.4 |
| | $ | 93.3 |
|
Average sales per store (millions)(1) | $ | 0.942 |
| | $ | 0.682 |
|
Stores at year end | 102 |
| | 112 |
|
Total net selling square feet (thousands) | 112 |
| | 125 |
|
(1) Fiscal 2015 average sales per store calculated based on sales since date of the Acquisition.
Piercing Pagoda
Piercing Pagoda operates through mall-based kiosks in the US and Puerto Rico. Piercing Pagoda accounted for 4% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 3%) and operated a total of 605 stores, including 591 stores in the United States and 14 stores in Puerto Rico as of January 30, 2016 (January 31, 2015: 605 total stores). Details of Piercing Pagoda’s performance since the Acquisition in Fiscal 2015 is shown below:
|
| | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
Sales (millions) | $ | 243.2 |
| | $ | 146.9 |
|
Average sales per store (millions)(1) | $ | 0.376 |
| | $ | 0.228 |
|
Stores at year end | 605 |
| | 605 |
|
Total net selling square feet (thousands) | 114 |
| | 115 |
|
(1) Fiscal 2015 average sales per store calculated based on sales since date of the Acquisition.
Piercing Pagodas are generally located in high traffic areas that are easily accessible and visible within regional shopping malls. The typical customer is the female self-purchaser. Piercing Pagoda offers a selection of gold, silver and diamond jewelry in basic styles at moderate prices.
Zale operating review
Other sales
Repair services represent less than 3% of sales and are an important opportunity to build customer loyalty. During Fiscal 2016, Zale utilized the Jared Design & Service Centers to support its repair business for approximately 200 stores, with plans to fully in-source repairs in Fiscal 2017. The Zale division also sells lifetime extended service plans on certain products which cover ring sizing and breakage on fine jewelry. These plans also include an option to purchase theft protection for a two-year period. Other plans offered to guests of Zale Jewelry include two year watch warranties and credit insurance for private label credit card guests. Zale Jewelry and Piercing Pagoda also offer a one year breakage warranty program.
Customer finance
category. Our consumer credit program isand lease programs are an integral part of our business and is a major driver of customer loyalty. GuestsCustomers are offered revolving and interest freepromotional credit plans under our private label credit card programs offeredand a lease purchase option provided by Progressive Lease allowing Signet to offer payment options that meet each customer’s individual needs.
Below is a summary of the payment participation rate in conjunction with Comenity BankNorth America which reflects activity for in-house and TD Bank Services in Canada, in conjunction with other alternative finance vehicles including Signet’s in-house consumeroutsourced credit program customers in late Fiscal 2016, that allow theNorth America, including legacy Sterling Jewelers, Zale division to provide guests with a wide varietyJewelry and Piercing Pagoda customers, as well as lease purchase customers:
|
| | | | | | | |
| Fiscal 2019 | | Fiscal 2018 |
Total North America sales (excluding James Allen)(1) (millions) | $ | 5,418.0 |
| | $ | 5,527.0 |
|
Credit and lease purchase sales (millions) | $ | 2,799.5 |
| | $ | 2,889.0 |
|
Credit and lease purchase sales as % of total North America sales(1) | 51.7 | % | | 52.3 | % |
(1) See Note 14 of financing options. Participation of the Zale division in Signet’s in-house consumer credit program was not material during Fiscal 2016. Approximately 42% of sales in the US were financed by private label customer credit in Fiscal 2016 (Fiscal 2015: 40%). Canadian private label credit card sales represented approximately 29% of Canadian sales in Fiscal 2016 (Fiscal 2015: 21%).Item 8 for additional information.
UK JEWELRY DIVISIONINTERNATIONAL SEGMENT
The UK Jewelry divisionInternational segment transacts mainly in British pounds, as sales and the majority of operating expenses are incurred in that currency and its results are then translated into US dollars for external reporting purposes. In Fiscal 2016,2019, approximately 25%31% of goods purchased were made in US dollars (Fiscal 2015: 20%2018: 27%). The following information for the UK Jewelry divisionInternational segment is given in British pounds as management believes that this presentation assists in the understanding of the performance of the UK Jewelry division.International segment. Movements in the US dollar to British pound exchange rate therefore may have an impact on the results of Signet, particularly in periods of exchange rate volatility. See Item 6 for analysis of results at constant exchange rates; non-GAAP measures.
UKInternational market
Ernest Jones and H.Samuel compete with a large number of independent jewelry retailers, as well as catalog showroom operators, discount jewelry retailers, supermarkets,online retail and auction sites, apparel and accessory fashion stores, online retailerscatalog showroom operators and auction sites.supermarkets.
UK JewelryInternational store brandbanner reviews
Store activity by brand
|
| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
H.Samuel | 2 |
| | — |
| | — |
|
Ernest Jones(1) | 8 |
| | 8 |
| | 2 |
|
Total stores opened or acquired during the year | 10 |
| | 8 |
| | 2 |
|
| | | | | |
H.Samuel | (3 | ) | | (2 | ) | | (14 | ) |
Ernest Jones(1) | (2 | ) | | (1 | ) | | (6 | ) |
Total stores closed during the year | (5 | ) | | (3 | ) | | (20 | ) |
| | | | | |
H.Samuel | 301 |
| | 302 |
| | 304 |
|
Ernest Jones(1) | 202 |
| | 196 |
| | 189 |
|
Total stores open at the end of the year | 503 |
| | 498 |
| | 493 |
|
| | | | | |
H.Samuel | £ | 0.763 |
| | £ | 0.760 |
| | £ | 0.742 |
|
Ernest Jones(1) | £ | 1.142 |
| | £ | 1.092 |
| | £ | 1.033 |
|
Average sales per store (millions)(2) | £ | 0.910 |
| | £ | 0.887 |
| | £ | 0.853 |
|
| | | | | |
H.Samuel | 326 |
| | 327 |
| | 328 |
|
Ernest Jones(1) | 194 |
| | 185 |
| | 175 |
|
Total net selling square feet (thousands) | 520 |
| | 512 |
| | 503 |
|
| | | | | |
Increase (decrease) in net store selling space | 1.5 | % | | 1.8 | % | | (2.5 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | February 2, 2019 | | Openings | | Closures | | February 3, 2018 | | Openings | | Closures | | January 28, 2017 |
H.Samuel | | 288 |
| | — |
| | (13 | ) | | 301 |
| | 2 |
| | (5 | ) | | 304 |
|
Ernest Jones | | 189 |
| | 3 |
| | (17 | ) | | 203 |
| | 1 |
| | (2 | ) | | 204 |
|
International segment | | 477 |
| | 3 |
| | (30 | ) | | 504 |
| | 3 |
| | (7 | ) | | 508 |
|
| | | | | | | | | | | | | | |
H.Samuel | | 313 |
| | | | | | 327 |
| | | | | | 329 |
|
Ernest Jones | | 186 |
| | | | | | 197 |
| | | | | | 197 |
|
Total net selling square feet (thousands) | | 499 |
| | | | | | 524 |
| | | | | | 526 |
|
| | | | | | | | | | | | | | |
Increase in net store selling space | | (4.8 | )% | | | | | | (0.4 | )% | | | | | | 1.0 | % |
| | | | | | | | | | | | | | |
| | Fiscal 2019 | | | | | | Fiscal 2018 | | | | | | Fiscal 2017 |
H.Samuel | | £ | 0.651 |
| | | | | | £ | 0.698 |
| | | | | | £ | 0.748 |
|
Ernest Jones | | £ | 1.061 |
| | | | | | £ | 1.066 |
| | | | | | £ | 1.114 |
|
Average sales per store (millions)(1) | | £ | 0.811 |
| | | | | | £ | 0.847 |
| | | | | | £ | 0.894 |
|
| |
(1) | Includes stores selling under the Leslie Davis nameplate. |
| |
(2)
| Based only upon stores operated for the full fiscal year and calculated on a 52-week basis. |
Sales data by brand
|
| | | | | | | | | | | | |
| | | Change from previous year |
Fiscal 2016 | Sales (millions) | | Total sales | | Total sales at constant exchange rates(1)(2) | | Same store sales |
H.Samuel | £ | 247.4 |
| | (3.5 | )% | | 3.0 | % | | 2.8 | % |
Ernest Jones(3) | 237.9 |
| | 2.2 | % | | 9.2 | % | | 7.3 | % |
UK Jewelry | £ | 485.3 |
| | (0.8 | )% | | 5.9 | % | | 4.9 | % |
| |
(1)
| Non-GAAP measure, see Item 6. |
| |
(2)
| The exchange translation impact on total sales of H.Samuel was (6.5)% and on Ernest Jones was (7.0)%. |
| |
(3)
| Includes stores selling under the Leslie Davis nameplate. |
H.Samuel
H.Samuel accounted for 6% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 7%), and is the largest specialty retail jewelry store brand in the UK by number of stores. H.Samuel has 150 years of jewelry heritage, and its customers typically have an annual household income of between £15,000 and £40,000.with a target customer focused on inexpensive fashion-trend oriented, everyday jewelry. H.Samuel continues to focus on larger store formats in regional shopping centers. The typical store selling space is 1,100 square feet.
H.Samuel continues to focus on larger store formatsaccounted for 5% of Signet’s sales in regional shopping centers, and the number of H.Samuel stand alone ‘High Street’ locations has therefore declined as leases expire. Details of H.Samuel’s performance over the last three years is shown below:
|
| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
Sales (millions) | £ | 247.4 |
| | £ | 240.3 |
| | £ | 233.1 |
|
Average sales per store (millions) | £ | 0.763 |
| | £ | 0.760 |
| | £ | 0.742 |
|
Stores at year end | 301 |
| | 302 |
| | 304 |
|
Total net selling square feet (thousands) | 326 |
| | 327 |
| | 328 |
|
Fiscal 2019 (Fiscal 2018: 5%).Ernest Jones
Ernest Jones accounted for 6% of Signet’s sales in Fiscal 2016 (Fiscal 2015: 6%), and(including stores selling under the Leslie Davis nameplate) is the second largest specialty retail jewelry store brandbanner in the UK by number of stores. It serves the upper middle market, and its customers typically have an annual household income of between £30,000 and £65,000.with a target customer focused on high-quality, timeless jewelry. The typical store selling space is 900 square feet.
Ernest Jones had six store openings(including stores selling under the Leslie Davis nameplate) accounted for 5% of Signet’s sales in Fiscal 2016 with an emphasis on its new outlet concept, Ernest Jones The Outlet Collection. Details of Ernest Jones’ performance over the last three years is shown below:2019 (Fiscal 2018: 5%),
|
| | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
Sales (millions) | £ | 237.9 |
| | £ | 217.8 |
| | £ | 200.3 |
|
Average sales per store (millions) | £ | 1.142 |
| | £ | 1.092 |
| | £ | 1.033 |
|
Stores at year end | 202 |
| | 196 |
| | 189 |
|
Total net selling square feet (thousands) | 194 |
| | 185 |
| | 175 |
|
UK JewelryInternational operating review
Customer finance
In Fiscal 2016,2019, approximately 7%8% of the division’ssegment’s sales were made through a customer finance program provided through a third party (Fiscal 2015: 5%2018: 9%). Signet does not provide this service itself in the UK due to low demand for customer finance.
OTHER
Other consists of all non-reportable operating segments, including activities related to the direct sourcing of rough diamonds, and is aggregated with unallocated corporate administrative functions.
IMPACT OF CLIMATE CHANGE
Signet recognizes that climate change is a major risk to society and therefore continues to take steps to reduce Signet’s climatic impact. Management believes that climate change has a limited influence on Signet’s performance and that it is of limited significance to the business.
AVAILABLE INFORMATION
Signet files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the SEC. Prior to February 1, 2010, Signet filed annual reports on Form 20-FUS Securities and furnished other reports on Form 6-K with the SEC.Exchange Commission (“SEC”). Such information, and amendments to reports previously filed or furnished, is available free of charge from our corporate website, www.signetjewelers.com, as soon as reasonably practicable after such materials are filed with or furnished to the SEC. The SEC also maintains an internet site at www.sec.gov that contains the Company’s filings.
ITEM 1A. RISK FACTORS
Spending on goods that are, or are perceived to be “luxuries,” such as jewelry, is discretionary and is affected by general economic conditions. Therefore, aA decline in consumer spending may unfavorably impact Signet’s future sales and earnings.
Jewelry purchases are discretionary and are dependent on consumers’ perceptions of general economic conditions, particularly as jewelry is often perceived to be a luxury purchase. Adverse changes in the economy and periods when discretionary spending by consumers may be under pressure could unfavorably impact sales and earnings. We may respond by increasing discounts or initiating marketing promotions to reduce excess inventory, which could have a material adverse effect on our margins and operating results.
The success of Signet’s operations depends to a significant extent upon a number of factors relating to discretionary consumer spending. These include economic conditions, and perceptions of such conditions by consumers, consumer confidence, level of customer traffic in shopping malls and other retail centers, employment, the level of consumers’ disposable income, business conditions, interest rates, consumer debt and asset values, availability of credit and levels of taxation for the economy as a whole and in regional and local markets where we operate.
As 11%10% of Signet’s sales are accounted for by its UK Jewelry division,International segment, economic conditions in the eurozone have a significant impact on the UK economy even though the UK is not a member of the eurozone. Therefore, developments ineurozone, including uncertainty regarding the eurozonetiming and terms of the planned withdrawal of the UK from the European Union, could adversely impact trading in the UK Jewelry division,International segment, as well as adversely impact the US economy. In addition, the UK may seek to leave the European Union (“EU”) and adopt an as yet unknown relationship with the EU. If this occurred, it could affect economic or market conditions throughout Europe and beyond and could contribute to instability in global credit markets. Any such exit by the UK from the EU could have a material adverse affect on Signet.
More than half of sales in the Sterling Jewelers division and approximately 40% of sales in the Zale division are made utilizing customer financing provided or facilitated by Signet. Therefore anyAny deterioration in consumers’ financial position or changes to the regulatory requirements regarding the granting of credit to customers could adversely impact the Company’s sales, earnings and the collectability of accounts receivable.
More thanApproximately half of Signet’s sales in the US and Canada utilize its in-house or third-party customer financing programs and an additional 25%36% of purchases are made using third party bank cards. Any significant deterioration in general economic conditions or increase in consumer debt levels may inhibit consumers’ use of credit and decrease consumers’ ability to satisfy Signet’s requirement for access to customer finance andwhich could in turn have an adverse effect on the Company’s sales. Furthermore, any downturn in general or local economic conditions, in particular an increase in unemployment in the markets in which the Signet operates, may adversely affect its collectionthe merchant discount rate paid by Signet related to the sale of outstanding accounts receivable, its net bad debt charge and hence earnings.the non-prime receivables, as well as the value of any assets contingent on the performance of the non-prime receivables.
Additionally, Signet’s ability to extend credit to customers and the terms on which it is achieved depends on many factors, including compliance with applicable laws and regulations in the US and Canada, any of which may change from time to time, and such changes could adversely affect sales and income. In addition, other restrictions arising from applicable law could cause limitations in credit terms currently offered or a reduction in the level of credit granted by the Company, or by third parties, and this could adversely impact sales, income or cash flow.
The US Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into law in July 2010. Among other things,Any new regulatory initiatives or investigations by the Dodd-Frank Act created a Bureau of Consumer Financial Protection (“CFPB”) or other state authority, or ongoing compliance with broad rule-makingthe Consent Order entered into on January 16, 2019 with the CFPB and supervisory authoritythe Attorney General for a wide rangethe State of consumer financial services, including Signet’s customer financing programs. The Bureau’s authority became effective in July 2011. Any new regulatory initiatives byNew York relating to the BureauCompany’s in-store credit practices, promotions, and payment protection products could impose additional costs and/or restrictions on credit practices of the Sterling Jewelers and Zale divisions,North America segment, which could adversely affect their ability to conduct its business.
Signet’s share price may be volatile.
Signet’s share price has fluctuated and may fluctuate substantially as a result of variations in the actual or anticipated results and financial conditions of Signet and other companies in the retail industry and the stock market’s view of the acquisition of Zale Corporation.industry. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks in a manner unrelated, or disproportionate, to the operating performance of these companies.
Signet provides public guidance on its expected operating and financial results for future periods. Although Signet believes that this guidance provides investors and analysts with a better understanding of management’s expectations for the future and is useful to its stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Signet’s actual results may not always be in line with or exceed the provided guidance or the expectations of our investors and analysts, especially in times of economic uncertainty. In the past, when the Company has reduced its previously provided guidance, the market price of Signet’s common stock has declined. If, in the future, Signet’s operating or financial results for a particular period do not meet our guidance or the expectations of our investors and analysts or if we reduce our guidance for future periods, the market price of our common stock may decline.
In addition, Signet may fail to meet the expectations of its stockholders or of analysts at some time in the future.analysts. If the analysts that regularly follow the Company’s stock lower their rating or lower their projections for future growth and financial performance, the Company’s stock price could decline.
The concentration ofSignet’s sales, operating income, cash and inventory levels fluctuate on a significant proportion of salesseasonal basis and an even larger share of profits in the fourth quarter means results are dependent on performance during that period.can be adversely impacted by increased competition and promotional activity.
Signet’s business is highly seasonal, with a significant proportion of its sales and operating profit generated during its fourth quarter, which includes the Holiday Season. Management expects Signet to continue to experience a seasonal fluctuation in its sales and earnings. Therefore, there is limited ability for Signet to compensate for shortfalls in fourth quarter sales or earnings by changes in its operations and strategies in other quarters, or to recover from any extensive disruption, for example, due to sudden adverse changes in consumer confidence, inclement weather conditions having an impact on a significant number of stores in the last few days immediately before Christmas Day or disruption to warehousing and store replenishment systems. A significant shortfall in results for the fourth quarter of any fiscal year would therefore be expected to have a material adverse effect on the annual results of operations.operations as well as cash and inventory levels. Disruption at lesser peaks in sales at Valentine’s Day and Mother’s Day would also be expected to impact the results to a lesser extent.results. Additionally, in anticipation of increased sales activity in the Holiday Season, Signet incurs certain significant incremental expenses prior to and during peak selling seasons, including advertising and costs associated with hiring a substantial number of temporary employees to supplement our existing workforce. Increased competition and promotional activity during holiday periods has impacted and could in the future result in adverse impacts to Signet’s sales, profitability and market share.
Deterioration in ourthe Company’s capital structure or financial performance could result in constraints on capital or financial covenant breaches. In addition, a portion of the Company’s debt is variable rate and volatility in benchmark interest rates could adversely impact the Company’s financial results.
While Signet has a strong balance sheet with adequate liquidity to meet its operating requirements, the creditCredit ratings agencies periodically review our capital structure and the quality and stability of our earnings. A deterioration in Signet’s capital structure or the quality and stability of earnings could result in a downgrade of Signet’s credit rating. Any negative ratings actions could also constrain the capital available to the Company, could limit the Company’s access to funding for its operations, funding dividends and share repurchases, and increase the Company’s financing costs. Changes in general credit market conditions could also affect Signet’s ability to access capital rates at rates and on terms we determine to be attractive. If our ability to access capital becomes constrained, our interest costs will likely increase, which could have a material adverse effect on our results of operations, financial condition and cash flows. Additionally, as a result of the Company’s exposure to variable interest rate debt, volatility in benchmark interest rates could adversely impact the Company’s financial results.
Signet’s borrowing agreements include various financial covenants and operating restrictions. A material deterioration in its financial performance could result in a covenant being breached. If Signet were to breach, or believed it was going to breach, a financial covenant it would have to renegotiate its terms with current lenders or find alternative sources of financing if current lenders required cancellation of facilities or early repayment.
Movements
Global economic conditions and regulatory changes following the United Kingdom’s announced intention to exit from the European Union could adversely impact Signet’s business and results of operations located in, or closely associated with, the United Kingdom.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union (often referred to as Brexit) in a national referendum. In March 2017, the United Kingdom invoked Article 50 of the Lisbon Treaty, which commenced a two-year negotiation period that culminated in an agreement upon the withdrawal terms, which was subject to approval by British Parliament. Parliament rejected the agreement and the British Prime Minister requested to extend the March 29, 2019 effective date for Brexit to June 30, 2019. On March 21, 2019, the leaders of the other member countries of the European Union agreed to extend the deadline for Brexit until April 12, 2019. However, if British Parliament approves the previously rejected terms of the withdrawal, then the deadline would be further extended to May 22, 2019. Additionally, if the United Kingdom agrees to hold elections for European Parliament that are scheduled for May 23, 2019, the deadline could be further extended. The referendum and ongoing negotiations have created significant uncertainty about the future relationship between the United Kingdom and the European Union. This includes uncertainty with respect to the laws and regulations, including regulations applicable to Signet’s business, that will apply in the United Kingdom in the event of a withdrawal. The referendum has also given rise to calls for the governments of other European Union member states to consider a referendum on withdrawal from the European Union for their territory. These developments, or the perception that any of them could occur, could adversely impact global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity, which could adversely impact our business, financial condition and results of operations especially those located in, or closely associated with, the United Kingdom. Brexit could lead to long-term volatility in the currency markets and there could be long-term detrimental effects on the value of the British pound. Brexit could also impact other currencies. Signet uses foreign currency derivative instruments to hedge certain exposures to currency exchange rate risks. The results of the Brexit referendum could increase Signet’s exposure to foreign currency rate exchange risks and reduce its ability to effectively use certain derivative instruments as a way to hedge risks.
Fluctuations in foreign exchange rates could adversely impact the Company’s results of operations and balance sheet of Signet.financial condition.
Signet publishes its consolidated annual financial statements in US dollars. At January 30, 2016,February 2, 2019, Signet held approximately 83%90% of its total assets in entities whose functional currency is the US dollar and generated approximately 85%87% of its sales and 92%substantially all of its operating income (loss) in US dollars for the fiscal year then ended. All the remaining assets, sales and operating income are in UK British pounds and Canadian dollars. Therefore, itsthe Company’s results of operations and balance sheet are subject to fluctuations in the exchange rates between the US dollar and both the British pound and Canadian dollar. Accordingly, any decrease in the weighted average value of the British pound or Canadian dollar against the US dollar, including due to Brexit as discussed above, would decrease reported sales and operating income.
The monthly average exchange rates are used to prepare the income statement and are calculated each month frombased on the weekly averagedaily exchange rates weightedexperienced by sales of the UK Jewelry divisionInternational segment and the Canadian subsidiaries of the Zale division.North America segment in the fiscal month.
Where British pounds or Canadian dollars are held or used to fund the cash flow requirements of the business, any decrease in the weighted average value of the British pound or Canadian dollar against the US dollar would reduce the amount of cash and cash equivalents.
In addition, the prices of certain materials and products bought on the international markets by Signet are denominated in foreign currencies. As a result, Signet and its subsidiaries have exposures to exchange rate fluctuations on its cost of goods sold, as well as volatility of input prices if foreign manufacturers and suppliers are impacted by exchange rate fluctuations.
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 natural diamonds, gold and, to a lesser extent, other precious and semi-precious metals and stones. In particular, diamonds accounted for about 45%52%, and gold about 14%, of Signet’s merchandise costs in Fiscal 2016.2019.
In Fiscal 2016,2019, prices for the assortment of polished diamonds utilized by Signet were relatively flat withdecreased slightly compared to prior year. 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 in the gold price in recent years, including a decline during Fiscal 2016.years. 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 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 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, 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.
Additionally, a material increase in the supply of gem quality lab created diamonds, combined with increased consumer acceptance thereof, could impact the supply and pricing in the natural diamond supply chain, as well as retail pricing.
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 affected companies that file with the SEC to make specified country of origin inquiries of our suppliers, and otherwise to exercise reasonable due diligence in determining the country of origin and certain other information relating to any of the statutorily designated minerals (gold, tin, tantalum and tungsten), that are used in products sold by Signet in the US and elsewhere. On May 28, 2015,25, 2018, Signet filed with the SEC its Form Specialized Disclosure (“SD”) and accompanying Conflict Minerals Report in accordance with the SEC’s rules, which together describe our country of origin inquiries and due diligence measures relating to the source and chain of custody of those designated minerals Signet deemed necessary to the functionality or production of our products, the results of those activities and our related determinations with respect to the calendar year ended December 31, 2014.2017.
There may be reputational risks associated with the potential negative response of our customers and other stakeholders to future disclosures by Signet in the event that, due to the complexity of the global supply chain, Signet is unable to sufficiently verify the origin of the relevant metals. Also, if future responses to verification requests by suppliers of any of the covered minerals used in our products are inadequate or adverse, Signet’s ability to obtain merchandise may be impaired and our compliance costs may increase. The final rules also cover tungsten and tin, which are contained in a small proportion of items that are sold by Signet. It is possible that other minerals, such as diamonds, could be subject to similar rules.
Price increasesSignet’s pricing compared to competitors, the increased price transparency in the market and the highly fragmented competitive nature of the retail jewelry industry, may have an adverse impact on Signet’s performance.
IfCritical to maintaining an optimal customer experience is a multi-faceted value proposition that focuses on customer service, attractive brand and category assortments, availability of financing, and deep customer service and relationship building with our guest service professionals, as well as competitive pricing. Although not a singular differentiator to our value proposition, if significant price increases are implemented by any divisionsegment or across a wide range of merchandise, the impact on earnings will depend on, among other factors, the pricing by competitors of similar products in the same geographic area and the response by customers to higher prices. Such price increases may result in lower sales and adversely impact earnings.
The retail jewelry industry is competitive. Signet’s competitors are specialty jewelry retailers, as well as other jewelry retailers, including department stores, mass merchandisers, discount stores, apparel and accessory fashion stores, brand retailers, shopping clubs, home shopping television channels, direct home sellers, online retailers and auction sites. In addition, other retail categories and other forms of expenditure, such as electronics and travel, also compete for consumers’ discretionary expenditure, particularly during the holiday gift giving season. Therefore, the price of jewelry relative to other products influences the proportion of consumers’ expenditure that is spent on jewelry. If the relative price of jewelry increases, or if Signet’s competitive position deteriorates. Signet’s sales and earnings may decline.
Signet faces significant competition from independent and regional specialty jewelry retailers that are able to adjust their competitive stance, for example on pricing, to local market conditions. This can put individual Signet stores at a competitive disadvantage as Signet segments have a national pricing strategy.
Consumers are increasingly shopping or starting their jewelry buying experience online, which makes it easier for them to compare prices with other jewelry retailers. If Signet’s brands do not offer the same or similar item at the lowest price, consumers may purchase their jewelry from competitors, which would adversely impact the Company’s sales and results of operations.
The failureCompany’s ability to satisfy the accounting requirements for “hedge accounting”,accounting,” or the default or insolvency of a counterparty to a hedging contract, could adversely impact results.
Signet hedges a portion of its purchases of gold for both its Sterling JewelersNorth America and UK Jewelry divisionsInternational segments and hedges the US dollar requirements of its UK Jewelry division.International segment. The failure to satisfy the requirements of the appropriate accounting requirements, or a default or insolvency of a counterparty to a contract, could increase the volatility of results and may impact the timing of recognition of gains and losses in the income statement.
The Company’s inability of Signet to obtain merchandise that customers wish to purchase particularly ahead of and during the fourth quarter, wouldcould adversely impact sales.sales and earnings.
The abrupt loss or disruption of any significant supplier during the three month period (August to October) leading up to the fourth quarter could result in a material adverse effect on Signet’s business.
Also, if management misjudges expected customer demand or fails to identify changes in customer demand and/or its supply chain does not respond in a timely manner, it could adversely impact Signet’s results by causing either a shortage of merchandise or an accumulation of excess inventory.inventory could occur, which could adversely impact Signet’s results.
Signet benefits from close commercial relationships with a number of suppliers. Damage to, or loss of, any of these relationships could have a detrimental effect on results. Management holds regular reviews with major suppliers. Signet’s most significant supplier accounts for 3.9%approximately 6% of merchandise. Government requirements regarding sources of commodities, such as those required by the Dodd-Frank Act, could result in Signet choosing to terminate relationships with suppliers in the future due to a change in a supplier’s sourcing practices or Signet’s compliance with laws and internal policies.
Luxury and prestige watch manufacturers and distributors normally grant agencies the right to sell their ranges on a store-by-store basis. The watch brands sold by Ernest Jones, and to a lesser extent Jared, help attract customers and build sales in all categories. Therefore, an inability to obtain or retain watch agencies for a location could harm the performance of that particular store. In the case of Ernest Jones, the inability to gain additional prestige watch agencies is an important factor in, and may reduce the likelihood of, opening new stores, which could adversely impact sales growth.
The growth in importance of branded merchandise within the jewelry market may adversely impact Signet’s sales and earnings if it is unable to obtain supplies of branded merchandise that the customer wishes to purchase. In addition, if Signet loses the distribution rights to an important branded jewelry range, it could adversely impact sales and earnings.
Signet has had success in recent years in the development of branded merchandise that is exclusive to its stores. If Signet is not able to further develop such branded merchandise or is unable to successfully develop further suchrelated initiatives, it may adversely impact sales and earnings.
An inabilityThe Company’s ability to recruit, train, motivate and retain suitably qualified sales associates could adversely impact sales and earnings.
Management regards the customer experience as an essential element in the success of its business. Competition for suitable individualssales associates or changes in labor and healthcare laws could require us to incur higher labor costs. ThereforeHigher labor costs and the execution of transformational initiatives, including those designed to improve the customer experience, could result in disruptions to the performance of sales associates and an inability to recruit, train, motivate and retain suitably qualified sales associates, which could adversely impact sales and earnings.
Loss of confidence by consumers in Signet’s brand names, poor execution of marketing programs and reduced marketing expenditure could have a detrimental impact on sales.
Primary factors in determining customer buying decisions in the jewelry sector include customer confidence in the retailer and in the brands it sells, together with the level and quality of customer service. The ability to differentiate Signet’s stores and merchandise from competitors by its branding, marketing and advertising programs is an important factor in attracting consumers. If these programs are poorly executed, the level of support for them is reduced, or the customer loses confidence in any of Signet’s brands for whateverany reason, it could unfavorably impact sales and earnings.
Long-term changes in consumer attitudes totoward jewelry could be unfavorable and harm jewelry sales.
Consumer attitudes totoward diamonds, gold and other precious metals and gemstones also influence the level of Signet’s sales. Attitudes could be affected by a variety of issues including concern over the source of raw materials; the impact of mining and refining of minerals on the environment, the local community and the political stability of the producing country; labor conditions in the supply chain; and the availability of and consumer attitudes toabout substitute products such as cubic zirconia, moissanite and laboratorylaboratory-created diamonds. An inability to effectively address a rapid and significant increase in consumer acceptance of lab created diamonds. Adiamonds as well as a negative change in consumer attitudes toward jewelry could adversely impact Signet’s sales and earnings.
The Company’s inability to jewelryoptimize its real estate footprint to support its OmniChannel strategy could adversely impact sales and earnings.
The retail jewelry industry is highly fragmented and competitive. Aggressive discounting by competitors may adversely impact Signet’s performance in the short term.
The retail jewelry industry is competitive. If Signet’s competitive position deteriorates, operating results or financial condition could be adversely affected.
Aggressive discounting by competitors may adversely impact Signet’s performance in the short term. This is particularly the case for easily comparable pieces of jewelry, of similar quality, sold through stores that are situated near to those that Signet operates.
Signet faces significant competition from independent and regional specialty jewelry retailers that are able to adjust their competitive stance, for example on pricing, to local market conditions. This can put individual Signet stores at a competitive disadvantage as Signet division’s have a national pricing strategy.
The inability to rent stores that satisfy management’s operational and financial criteria could harm sales, as could changes in locations where customers shop.
Signet’s results are dependent on a number of factors relating to its stores. These include the availability of desirable property, the demographic characteristics of the area around the store, the design and maintenance of the stores, the availability of attractive locations within the shopping centermarkets/trade areas that also meet the operational and financial criteria of management, the terms of leases and Signet’s relationship with major landlords. If Signet is unable to rent storesmaintain a real estate portfolio that satisfysatisfies its strategic, operational and financial criteria, through cost-effective strategic store closings and targeted, limited store openings, or if there is a disruption in its relationship with its major landlords, sales could be adversely affected.
Given the length of property leases that Signet enters into, itSignet is dependent upon the continued popularity of particular retail locations. As Signet tests and develops new types of store locations and designs, there is no certainty as to their success. The majority of long-term space growth opportunities in the US are in new developments and therefore future store space is in part dependent on the investment by real estate developers in new projects. Limited new real estate development taking place would make it challenging to identify and secure suitable new store locations. The UK Jewelry division has a more diverse range of store locations than in the US or Canada, including some exposure to smaller retail centers which do not justify the investment required to refurbish the site to the current store format. Consequently, the UK Jewelry division is gradually closing stores in such locations as leases expire or satisfactory property transactions can be executed; however, the ability to secure such property transactions is not certain.
The rate of new store developmentfootprint optimization is dependent on a number of factors including obtaining suitable real estate, the capital resources of Signet, the availability of appropriate staff and management, estimated sales transference rate and the level of the financial return on investment required by management.
Signet’s success is dependent on the strength and effectiveness of its relationships with its various stakeholders whose behavior may be affected by its management of social, ethical and environmental risks.
Social, ethical and environmental matters influence Signet’s reputation, demand for merchandise by consumers, the ability to recruit staff, relations with suppliers and standing in the financial markets. Signet’s success is dependent on the strength and effectiveness of its relationships with its various stakeholders: customers, shareholders, employees and suppliers. In recent years, stakeholder expectations have increased and Signet’s success and reputation will depend on its ability to meet these higher expectations. Signet’s success also depends upon its reputation for integrity in sourcing its merchandise, which, if adversely affected could impact consumer sentiment and willingness to purchase Signet’s merchandise.
Inadequacies in and disruption to systems could result in lower sales and increased costs or adversely impact the reporting and control procedures.
Signet is dependent on the suitability, reliability and durability of its systems and procedures, including its accounting, information technology, data protection, warehousing and distribution systems, and those of our service providers. If support ceased for a critical externally supplied software package or system, management would have to implement an alternative software package or system or begin supporting the software internally. Disruption to parts of the business could result in lower sales and increased costs.
Signet is in the process of substantially modifying our enterprise resource planning systems and certain web platforms, which involves updating or replacing legacy systems with successor systems over the course of several years. These system changes and upgrades can require significant capital investments and dedication of resources. While Signet follows a disciplined methodology when evaluating and making such changes, there can be no assurances that the Company will successfully implement such changes, that such changes will occur without disruptions to its operations or that the new or upgraded systems will achieve the desired business objectives. Any damage, disruption or shutdown of the Company’s information systems, or the failure to successfully implement new or upgraded systems, could have a direct material adverse effect on Signet’s results of operations.
An inability to successfully develop and maintain a relevant OmniChannel experience for customers or a failure to comply with applicable regulations could adversely impact Signet’s business and results of operations.
Signet’s business has evolved from an in-store experience to interaction with customers across numerous channels, including in-store, online, mobile and social media, among others. OmniChannel retailing is rapidly evolving and Signet must keep pace with changing customer expectations and new developments by our competitors. Our customers are increasingly using computers, tablets, mobile phones and other devices to comparison shop, determine product availability and complete purchases online. Signet must compete by offering a consistent and convenient shopping experience for our customers regardless of the ultimate sales channel and by investing in, providing and maintaining digital tools for our customers that have the right features and are reliable and easy to use. If Signet is unable to make, improve, develop or acquire relevant customer-facing technology in a timely manner, the Company’s ability to compete and its results of operations could be materially and adversely affected. In addition, if Signet’s online activities or other customer-facing technology systems do not function as designed or deemed to not comply with applicable state and federal regulations concerning automated outbound contacts such as text messages and the sale, advertisement and promotion of the jewelry we sell, the Company may experience a loss of
customer confidence, data security breaches, regulatory fines, lawsuits, lost sales or be exposed to fraudulent purchases, any of which could materially and adversely affect our business operations, reputation and results of operations.
Security breaches and other disruptions to Signet’s information technology infrastructure and databases could interfere with Signet’s operations, and could compromise Signet’s and its customers’ and suppliers’ information, exposing Signet to liability which would cause Signet’s business and reputation to suffer.
Signet operates in multiple channels and, in the Sterling Jewelers division, maintains its own customer financing operation. Signet is also increasingly using mobile devices, social media and other online activities to connect with customers, staff and other stakeholders. Therefore, in the ordinary course of business, Signet relies upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including eCommerce sales, supply chain, merchandise distribution, customer invoicing and collection of payments. Signet uses information technology systems to record, process and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. Additionally, Signet collects and stores sensitive data, including intellectual property, proprietary business information, the propriety business information of our customers and suppliers, as well as personally identifiable information of Signet’s customers and employees, in data centers and on information technology networks. The secure operation of these networks, and the processing and maintenance of this information is critical to Signet’s business operations and strategy. Despite security measures and business continuity plans, we may not timely anticipate evolving techniques used to effect security breaches that may result in damage, disruptions or shutdowns of Signet’s and our
third-party vendors’ networks and infrastructure due to attacks by hackers, including phishing or other cyber-attacks, or breaches due to employee error or malfeasance, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. The occurrence of any of these events could compromise Signet’s networks and the information stored there, including personal, proprietary or confidential information about Signet, our customers or our third-party vendors, and personally identifiable information of Signet’s customers and employees could be accessed, manipulated, publicly disclosed, lost or stolen, exposing our customers to the risk of identity theft and exposing Signet or our third-party vendors to a risk of loss or misuse of this information. ToSignet has experienced successful attacks and breaches from time to time, however to date, these attacks or breaches have not had a material impact on Signet’s business or operations; however, any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, significant breach-notification costs, lost sales and a disruption to operations (including our ability to process consumer transactions and manage inventories), media attention, and damage to Signet’s reputation, which could adversely affect Signet’s business. In addition, it could harm Signet’s reputation and ability to execute its business through service and business interruptions, management distraction and/or damage to physical infrastructure, which could adversely impact sales, costs and earnings. If Signet is the target of a material cybersecurity attack resulting in unauthorized disclosure of our customer data, we may be required to undertake costly notification and credit monitoring procedures. Compliance with these laws will likely increase the costs of doing business.
The regulatory environment related to information security, data collection and privacy is becoming increasingly demanding, with new and changing requirements applicable to Signet’s business, and compliance with those requirements could result in additional costs, such as costs related to organizational changes, implementing additional protection technologies, training employees and engaging consultants.
These risks could have a material adverse effect on Signet’s results of operations, financial condition and cash flow.
An adverse decision in legal proceedings, and/or tax matters, and/or regulatory or other state investigations could reduce earnings.earnings and cash, as well as negatively impact debt covenants and leverage ratios.
Signet is involved in legal proceedings incidental to its business. Litigation is inherently unpredictable. Any actual or potential claims against us, whether meritorious or not, or regulatory or other state investigations, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. In March 2008, private plaintiffs filed a class action lawsuit for an unspecified amount against Sterling Jewelers Inc. (“Sterling”), a subsidiary of Signet, in US District Court for the Southern District of New York, which has been referred to private arbitration. In September 2008, the US Equal Employment Opportunities Commission filed a lawsuit against Sterling in US District Court for the Western District of New York. Sterling denies the allegations from both parties and has been defending these cases vigorously. If, however, it is unsuccessful in either defense, Sterling could be required to pay substantial damages. At this point, no outcome or amount of loss is able to be estimated. See Note 24 in Item 8.
At any point in time, various tax years are subject to, or are in the process of, audit by various taxing authorities. To the extent that management’s estimates of settlements change or the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax in the period in which such determinations are made.
Additionally, new tax treatment of companies engaged in Internet commerce has and may continue to adversely affect the commercial use of JamesAllen.com, the online retailer we acquired during Fiscal 2018. Specifically, in June 2018, the U.S. Supreme Court decided the South Dakota v. Wayfair, Inc. sales tax nexus case. As a result of the Supreme Court ruling, some states have adopted laws and other states now have the ability to adopt laws requiring taxpayers to collect and remit sales tax on a basis of economic nexus, even in states in which the taxpayer has no presence. New taxes required to be collected by JamesAllen.com also has created significant increases in internal costs necessary to capture data and collect and remit taxes. These events has had and will continue to have an adverse effect on JamesAllen.com.
Failure to comply with labor regulations could harmadversely affect the Company’s business.
State, federal and global laws and regulations regarding employment change frequently and the ultimate cost of compliance cannot be precisely estimated. Failure by Signet to comply with labor regulations could result in fines and legal actions. In addition, the ability to recruit and retain staff could be harmed.
Collective bargaining activity could disrupt ourthe Company’s operations, increase our labor costs or interfere with the ability of our management to focus on executing our business strategies.
The employees of our diamond polishing factory in Garborone, Botswana are covered by a collective bargaining agreement. If relationships with these employees become adverse, operations at the factory could experience labor disruptions such as strikes, lockouts, boycotts and public demonstrations. Labor regulation and the negotiation of new or existing collective bargaining agreements could lead to higher wage and benefit costs, changes in work rules that raise operating expenses, legal costs and limitations on our ability to take cost saving measures during economic downturns.
FailureThe Company’s ability to comply with changes in lawlaws and regulations could adversely affect theour business.
Signet’s policies and procedures are designed to comply with all applicable laws and regulations. Changing legal and regulatory requirements in the US and other jurisdictions in which Signet operates have increased the complexity of the regulatory environment in which the business operates and the cost of compliance. Failure to comply with the various regulatory requirements may result in damage to Signet’s reputation, civil and criminal liability, fines and penalties, and further increase the cost of regulatory compliance.
Changes in existing taxation benefits, rules or practices may adversely affect the Company’s financial results.
The Company operates through various subsidiaries in numerous countries throughout the world. Consequently, Signet is subject to changes in tax laws, treaties or regulations or the interpretation or enforcement thereof in the United States or jurisdictions where any subsidiaries operate or are incorporated. Tax laws, treaties and regulations are highly complex and subject to interpretation. The Company’s income tax expense is based upon interpretation of the tax laws in effect in various countries at the time such expense was incurred. If these tax laws, treaties or regulations were to change or any tax authority were to successfully challenge our assessment of the effects of such laws, treaties and regulations in any country, this could result in a higher effective tax rate on the Company’s taxable earnings, which could have a material adverse effect on the Company’s results of operations.
In addition, the Organization for Economic Co-Operation and Development (“OECD”) has published an action plan seeking multilateral cooperation to reform the taxation of multinational companies. Countries already have begun to implement some of these action items, and likely will continue to adopt more of them over the next several years. This may result in unilateral or uncoordinated local country application of the action items. Any such inconsistencies in the tax laws of countries where the Company operates or is incorporated may lead to increased uncertainty with respect to tax positions or otherwise increase the potential for double taxation. Proposals for US tax reform also potentially could have a significant adverse effect on us. In addition, the European Commission has conducted investigations in multiple countries focusing on whether local country tax legislation or rulings provide preferential tax treatment in violation of European Union state aid rules. Any impacts of these actions could increase the Company’s tax liabilities, which in turn could have a material adverse effect on the Company’s results of operations and financial condition.
The Parent Company is incorporated in Bermuda. The directors intend to conduct the Parent Company’s affairs such that, based on current law and practice of the relevant tax authorities, the Parent Company will not becomeresident for tax purposes in any other territory. At the present time, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by the Parent Company or by its shareholders in respect of its common shares. The Parent Company has obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 31, 2035, be applicable to it or to any of its operations or to its shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or is payable by it in respect of real property owned or leased by it in Bermuda. Given the limited duration of the Minister of Finance’s assurance, the Parent Company cannot be certain that it will not be subject to Bermuda tax after March 31, 2035. In the event the Parent Company were to become subject to any Bermuda tax after such date, it could have a material adverse effect on the Parent Company’s results of operations and financial condition.
Likewise, Signet’s non-US subsidiaries operate in a manner that they should not be subject to US income tax because none of them should be treated as engaged in a trade or business in the US If, despite this, the IRS were to successfully contend that the Parent Company or any of its non-US subsidiaries are engaged in a trade or business in the US, such entity could be subject to U.S. corporate income and branch profits taxes on the portion of its earnings effectively connected to such US business, which could adversely impact Signet’s profitability and cash flows. Further, proposed tax changes that may be enacted inaffect the future could adversely impact Signet’s current or future tax structure and effective tax rates.Company’s results of operations.
Investors may face difficulties in enforcing proceedings against Signet Jewelers Limited as it is domiciled in Bermuda.
It is doubtful whether courts in Bermuda would enforce judgments obtained by investors in other jurisdictions, including the US, Canada and the UK, against the Parent Company or its directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against the Parent Company or its directors or officers under the securities laws of other jurisdictions.
Any difficulty executing or integrating an acquisition, a business combination or a major business initiative may result in expected returns and other projected benefits from such an exercise not being realized.
Any difficulty in executing or integrating an acquisition, a business combination, or a major business initiative including our direct diamond sourcing capabilities, or a transformation plan, such as our Path to Brilliance transformation plan, may result in expected returns and other projected benefits from such an exercise not being realized. The acquisition of companies with operating margins lower than that of Signet may cause an overall lower operating margin for Signet. A significant transaction could also disrupt the operation of our current activities and divert significant management time and resources. Signet’s current borrowing agreements place certain limited constraints on our ability to make an acquisition or enter into a business combination, and future borrowing agreements could place tighter constraints on such actions.
Additional indebtedness relating toA significant transaction could also disrupt the acquisition of Zale Corporation reduces the availability of cash to fund other business initiatives.
Signet’s additional indebtedness to fund the acquisition of Zale Corporation has significantly increased Signet’s outstanding debt. This additional indebtedness requires us to dedicate a portionoperation of our cash flowcurrent activities and divert significant management time and resources. For example, Signet experienced disruptions in its information technology systems and processes during its credit outsourcing transition in 2017, including server interruptions and downtime, which resulted in calls to servicing this debt, which may impact the availability of cashcustomer service centers leading to fund otherlong wait times. In addition, Signet announced a new transformation plan in 2018. Any such difficulty in executing an acquisition, business initiatives, including dividends and share repurchases. Significant changes tocombination, a major business initiative or a transformation plan could have a direct material adverse effect on Signet’s financial condition as a result of global economic changes or difficulties in the integration or execution of strategies of the acquired business may affect our ability to satisfy the financial covenants included in the terms of the financing arrangements.
Failure to successfully combine Signet’s and Zale Corporation’s businesses in the expected time frame may adversely affect the future results of the combined company, and there is no assurance that we will be able to fully achieve integration-related efficiencies or that those achieved will offset transaction-related costs.operations.
The success of the transaction will depend, in part, on ourCompany’s ability to successfully combine the Signet and Zale businesses in order to realize the anticipated benefits and synergies from combination. If the combined company is not able to achieve these objectives, or is not able to achieve these objectives on a timely basis, the anticipated benefits of the transaction may not be realized fully. In addition, we have incurred a number of substantial transaction and intergration-related costs associated with completing the transaction, combining the operations of the two companies and taking steps to achieve desired synergies. Transaction costs include, but are not limited to, fees paid to legal, financial, accounting and integration advisors, regulatory filing fees and printing costs. Additional unanticipated costs may be incurred in the integration of our and Zale Corporation’s businesses. There can be no assurance that the realization of other efficiencies related to the integration of the two businesses, as well as the elimination of certain duplicative costs, will offset the incremental transaction-related costs over time. Thus, any net benefit may not be achieved in the near term, the long term, or at all.
Additionally, these integration difficulties could result in declines in the market value of our common stock.
Litigation related to our acquisition of Zale Corporation if unfavorably decided could result in substantial cost to us.
In connection with the Zale Corporation acquisition, a consolidated lawsuit on behalf of a purported class of former Zale Corporation stockholders was filed in the Delaware Court of Chancery. The lawsuit names as defendants Signet and the members of the board of directors of Zale Corporation, among others. On October 29, 2015, the Court dismissed the lawsuit against all defendants and currently an appeal of that decision is pending in the Delaware Supreme Court. Additional lawsuits may be filed against Zale Corporation, Signet, Signet’s merger subsidiary and Zale Corporation’s directors related to the transaction. The defense or settlement of, or an unfavorable judgment in, any lawsuit or claim could result in substantial costs and could adversely affect the combined company’s business, financial condition or results of operations. At this point, no outcome or range of loss is able to be estimated.
Our inability or failure to protect intellectual property could have a negative impact on our brands, reputation and operating results.
Signet’s trade names, trademarks, copyrights, patents and other intellectual property are important assets and an essential element of the Company’s strategy. The unauthorized reproduction, theft or misappropriation of Signet’s intellectual property could diminish the value of its brands or reputation and cause a decline in sales. Protection of Signet’s intellectual property and maintenance of distinct branding are particularly important as they distinguish our products and services from those of our competitors. The costs of defending our intellectual property may adversely affect the Company’s operating results. In addition, any infringement or other intellectual property claim made against Signet, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays, or require the Company to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on Signet’s operating results.
If ourthe Company’s goodwill or indefinite-lived intangible assets become impaired, we may be required to record significant charges to earnings.
We have a substantial amount of goodwill and indefinite-lived intangible assets on our balance sheet as a result of the Zale Corporation acquisition.acquisitions. We review goodwill and indefinite-lived intangible assets for impairment annually or whenever events or circumstances indicate impairment may have occurred. Application of the impairment test requires judgment, including the identification of reporting units, assignment of assets, liabilities and goodwill to reporting units, and the determination of fair value of each reporting unit. There is a risk that a significant deterioration in a key estimate or assumption or a less significant deterioration to a combination of assumptions or the sale of a part of a reporting unit could result in an impairment charge in the future, which could have a significant adverse impact on our reported earnings. Additionally, a general decline in the market valuation of the Company’s common shares could impact the assumptions used to perform the evaluation of its indefinite-lived intangible assets, including goodwill and trade names.
For further information on our testing for goodwill impairment, see “Critical Accounting Policies” under Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Loss of one or moreadditional key executive officers or employees could be disruptive to, or cause uncertainty in, its business or adversely impact performance, as could the appointment of an inappropriate successor or successors.performance.
Signet’s future success will partly depend upon the ability of senior management and other key employees to implement an appropriate business strategy. While Signet has entered into termination protection agreements with such key personnel, the retention of their services cannot be guaranteed and the loss of such services could have a material adverse effect on Signet’s ability to conduct its business. CompetitionIf the Company is not effective in succession planning, there may be a negative impact on the Company's ability to successfully hire for key personnelexecutive management roles in the retail industry is intense, and Signet’s future success will also depend on our ability to attract and retain talented personnel.a timely manner. In addition, any new executives may wish, subject to Board approval, to change the strategy of Signet. The appointment of new executives may therefore adversely impact performance.
Signet’s business could be affected by extreme weather conditions or natural disasters.
Extreme weather conditions in the areas in which the Company’s stores are located could negatively affect the Company’s business and results of operations. For example, frequent or unusually heavy snowfall, ice storms, or other extreme weather conditions, whether as a result of climate change or otherwise, over a prolonged period could make it difficult for the Company’s customers to travel to its stores and thereby reduce the Company’s sales and profitability.
In addition, natural disasters such as hurricanes, tornadoes, earthquakes, or wildfires, or a combination of these or other factors, could damage or destroy the Company’s facilities or make it difficult for customers to travel to its stores, thereby negatively affecting the Company’s business and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The following table provides the location, use and size of our distribution, corporate and other non-retail facilities required to support the Company’s global operations as of February 2, 2019:
|
| | | | | | | | | |
Location | | Function | | Approximate square footage | | Lease or Own | | Lease expiration |
Akron, Ohio | | Corporate and distribution | | 460,000 |
| | Lease | | 2048 |
Akron, Ohio | | Credit(1) | | 86,000 |
| | Lease | | 2048 |
Akron, Ohio | | Training | | 11,000 |
| | Lease | | 2048 |
Akron, Ohio | | Repair facility | | 38,000 |
| | Own | | N/A |
Akron, Ohio | | Corporate | | 32,000 |
| | Lease | | 2022 |
Barberton, Ohio | | Non-merchandise fulfillment | | 135,000 |
| | Lease | | 2032 |
New York City, New York | | Design | | 4,600 |
| | Lease | | 2021 |
New York City, New York | | Diamond trading | | 1,000 |
| | Lease | | 2021 |
New York City, New York | | Corporate | | 10,000 |
| | Lease | | 2023 |
New York City, New York | | Corporate | | 8,000 |
| | Lease | | 2027 |
Dallas, Texas | | Repair facility | | 31,000 |
| | Lease | | 2029 |
Dallas, Texas | | Corporate | | 190,000 |
| | Lease | | 2029 |
Frederick, Maryland | | Customer service | | 7,716 |
| | Lease | | 2021 |
Toronto, Ontario (Canada) | | Distribution and fulfillment | | 26,000 |
| | Lease | | 2019 |
Birmingham, UK | | Corporate, distribution and e-commerce fulfillment | | 235,000 |
| | Own | | N/A |
Borehamwood, Hertfordshire (UK) | | Corporate | | 36,200 |
| | Lease | | 2021 |
Gaborone, Botswana | | Diamond polishing | | 34,200 |
| | Own | | N/A |
Mumbai, India | | Diamond liaison | | 3,000 |
| | Lease | | 2019 |
Mumbai, India | | Diamond liaison | | 2,936 |
| | Lease | | 2019 |
Ramat-Gan, Israel | | Technology center | | 1,000 |
| | Lease | | 2021 |
Herzelia, Israel | | Technology center | | 12,700 |
| | Lease | | 2023 |
| |
(1) | In October 2017, Signet, through its subsidiary Sterling, completed the sale of the prime-only credit quality portion of Sterling’s in-house finance receivable portfolio. In conjunction with this transaction, the indicated property has been subleased to multiple third party service providers. See Note 3 of Item 8 for further details. |
Sufficient distribution exists in all geographies to meet the respective needs of the Company’s operations.
Global retail property
Signet attributes great importance to the location and appearance of its stores. Accordingly, in each of Signet’s divisions, which collectively operate in the US, Canada, Puerto Rico and UK, investment decisions on selecting sites and refurbishing stores are made centrally, and strict real estate and investment criteria are applied. Below is a summary of property details by geography for our retail operations.operations as of February 2, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America segment | | International segment | | Signet |
| Kay | | Zales | | Peoples | | Jared | | Piercing Pagoda | | Regional banners(1) | | Total | | H.Samuel | | Ernest Jones | | Total | | Total stores |
US | 1,214 |
| | 658 |
| | — |
| | 256 |
| | 574 |
| | 27 |
| | 2,729 |
| | — |
| | — |
| | — |
| | 2,729 |
|
Canada | — |
| | — |
| | 123 |
| | — |
| | — |
| | 5 |
| | 128 |
| | — |
| | — |
| | — |
| | 128 |
|
United Kingdom | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 278 |
| | 186 |
| | 464 |
| | 464 |
|
Republic of Ireland | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8 |
| | 2 |
| | 10 |
| | 10 |
|
Channel Islands | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 1 |
| | 3 |
| | 3 |
|
Total | 1,214 |
| | 658 |
| | 123 |
| | 256 |
| | 574 |
| | 32 |
| | 2,857 |
| | 288 |
| | 189 |
| | 477 |
| | 3,334 |
|
| |
(1) | Includes one James Allen location. |
Store locations by US state and Canadian province, as of February 2, 2019, are as follows: |
| | | | | | | | | | | | | | | | | | | | |
| North America segment | | Signet |
| Kay | | Zales | | Peoples | | Jared | | Piercing Pagoda | | Regional brands(1) | | Total Stores |
Alabama | 27 |
| | 12 |
| | — |
| | 4 |
| | 4 |
| | — |
| | 47 |
|
Alaska | 3 |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
Arizona | 19 |
| | 11 |
| | — |
| | 6 |
| | 9 |
| | — |
| | 45 |
|
Arkansas | 10 |
| | 9 |
| | — |
| | 1 |
| | — |
| | — |
| | 20 |
|
California | 81 |
| | 51 |
| | — |
| | 20 |
| | 39 |
| | — |
| | 191 |
|
Colorado | 16 |
| | 16 |
| | — |
| | 6 |
| | 4 |
| | — |
| | 42 |
|
Connecticut | 14 |
| | 10 |
| | — |
| | 1 |
| | 15 |
| | — |
| | 40 |
|
Delaware | 5 |
| | 4 |
| | — |
| | 2 |
| | 6 |
| | — |
| | 17 |
|
Florida | 86 |
| | 50 |
| | — |
| | 22 |
| | 70 |
| | 6 |
| | 234 |
|
Georgia | 51 |
| | 23 |
| | — |
| | 13 |
| | 12 |
| | — |
| | 99 |
|
Hawaii | 8 |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | 14 |
|
Idaho | 5 |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | 7 |
|
Illinois | 45 |
| | 20 |
| | — |
| | 11 |
| | 19 |
| | — |
| | 95 |
|
Indiana | 30 |
| | 13 |
| | — |
| | 6 |
| | 12 |
| | 2 |
| | 63 |
|
Iowa | 21 |
| | 4 |
| | — |
| | 2 |
| | 4 |
| | — |
| | 31 |
|
Kansas | 9 |
| | 7 |
| | — |
| | 2 |
| | 5 |
| | — |
| | 23 |
|
Kentucky | 21 |
| | 8 |
| | — |
| | 3 |
| | 5 |
| | 2 |
| | 39 |
|
Louisiana | 21 |
| | 14 |
| | — |
| | 3 |
| | — |
| | 1 |
| | 39 |
|
Maine | 6 |
| | 1 |
| | — |
| | 1 |
| | 2 |
| | — |
| | 10 |
|
Maryland | 27 |
| | 14 |
| | — |
| | 9 |
| | 23 |
| | — |
| | 73 |
|
Massachusetts | 25 |
| | 10 |
| | — |
| | 4 |
| | 20 |
| | — |
| | 59 |
|
Michigan | 42 |
| | 16 |
| | — |
| | 9 |
| | 9 |
| | 2 |
| | 78 |
|
Minnesota | 16 |
| | 7 |
| | — |
| | 4 |
| | 7 |
| | — |
| | 34 |
|
Mississippi | 15 |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | 21 |
|
Missouri | 22 |
| | 10 |
| | — |
| | 3 |
| | 5 |
| | — |
| | 40 |
|
Montana | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
Nebraska | 7 |
| | 3 |
| | — |
| | — |
| | 1 |
| | — |
| | 11 |
|
Nevada | 10 |
| | 7 |
| | — |
| | 3 |
| | 5 |
| | — |
| | 25 |
|
New Hampshire | 12 |
| | 5 |
| | — |
| | 4 |
| | 7 |
| | 1 |
| | 29 |
|
New Jersey | 28 |
| | 17 |
| | — |
| | 7 |
| | 32 |
| | — |
| | 84 |
|
New Mexico | 5 |
| | 9 |
| | — |
| | 1 |
| | 3 |
| | — |
| | 18 |
|
New York | 67 |
| | 39 |
| | — |
| | 7 |
| | 59 |
| | — |
| | 172 |
|
North Carolina | 51 |
| | 19 |
| | — |
| | 11 |
| | 19 |
| | — |
| | 100 |
|
North Dakota | 4 |
| | 3 |
| | — |
| | — |
| | 1 |
| | — |
| | 8 |
|
Ohio | 70 |
| | 19 |
| | — |
| | 15 |
| | 22 |
| | 2 |
| | 128 |
|
Oklahoma | 14 |
| | 9 |
| | — |
| | 2 |
| | 2 |
| | 1 |
| | 28 |
|
Oregon | 15 |
| | 4 |
| | — |
| | 2 |
| | 5 |
| | — |
| | 26 |
|
Pennsylvania | 61 |
| | 30 |
| | — |
| | 9 |
| | 54 |
| | — |
| | 154 |
|
Rhode Island | 4 |
| | 2 |
| | — |
| | 1 |
| | 3 |
| | — |
| | 10 |
|
South Carolina | 25 |
| | 10 |
| | — |
| | 3 |
| | 7 |
| | — |
| | 45 |
|
South Dakota | 3 |
| | 3 |
| | — |
| | — |
| | 1 |
| | — |
| | 7 |
|
Tennessee | 30 |
| | 17 |
| | — |
| | 8 |
| | 5 |
| | — |
| | 60 |
|
Texas | 79 |
| | 91 |
| | — |
| | 31 |
| | 19 |
| | 6 |
| | 226 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Utah | 9 |
| | — |
| | — |
| | 3 |
| | 3 |
| | — |
| | 15 |
|
Vermont | 2 |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 4 |
|
Virginia | 34 |
| | 22 |
| | — |
| | 10 |
| | 24 |
| | — |
| | 90 |
|
Washington | 19 |
| | 11 |
| | — |
| | 3 |
| | 13 |
| | 1 |
| | 47 |
|
Washington D.C.(1) | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
West Virginia | 10 |
| | 4 |
| | — |
| | — |
| | 6 |
| | 2 |
| | 22 |
|
Wisconsin | 25 |
| | 7 |
| | — |
| | 3 |
| | 12 |
| | — |
| | 47 |
|
Wyoming | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
US | 1,214 |
| | 658 |
| | — |
| | 256 |
| | 574 |
| | 27 |
| | 2,729 |
|
Alberta | — |
| | — |
| | 19 |
| | — |
| | — |
| | — |
| | 19 |
|
British Columbia | — |
| | — |
| | 19 |
| | — |
| | — |
| | 1 |
| | 20 |
|
Manitoba | — |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
New Brunswick | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Newfoundland | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Nova Scotia | — |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | 4 |
|
Ontario | — |
| | — |
| | 65 |
| | — |
| | — |
| | 4 |
| | 69 |
|
Saskatchewan | — |
| | — |
| | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
Canada | — |
| | — |
| | 123 |
| | — |
| | — |
| | 5 |
| | 128 |
|
Total North America | 1,214 |
| | 658 |
| | 123 |
| | 256 |
| | 574 |
| | 32 |
| | 2,857 |
|
| |
(1) | Includes one James Allen location. |
North America retail property
Signet’s Sterling Jewelers, Zale Jewelry and Piercing Pagoda segments operateNorth America segment operates stores and kiosks in the US and Canada, with substantially all of the locations being leased. In addition to a minimum annual rent cost, the majority of mall stores are also liable to pay rent based on sales above a specified base level. In Fiscal 2016,2019, most of the mall stores and kiosks only made base rental payments. Under the terms of a typical lease, the Company is required to conform and maintain its usage to agreed standards, including meeting required advertising expenditure as a percentage of sales, and are responsible for its proportionate share of expenses associated with common area maintenance, utilities and taxes of the mall.
The initial term of a mall store lease is generally ten years for Sterling Jewelers and Zale JewelryNorth America. Off-mall locations, excluding Jareds, typically have an initial term of ten years with a five year termination right and one to five years for Piercing Pagoda kiosks. Towards the end of a lease, management evaluates whether to renew a lease and refit the store, using similar operational and investment criteria as for a new store. Where management is uncertain whether the location will meet management’s required return on investment, but the store is profitable, the leases may be renewed for one to five years, during which time the store’s performance is further evaluated. There are typically about 250 to 300 such mall stores at any one time in the Sterling Jewelers segment, as well as the Zale JewelryNorth America segment. Jared stores are normally opened on 15fifteen to 20twenty year leases with options to extend the lease, and rents are not sales related. A refurbishment of a Jared store is normally undertaken every five to ten years. The Zale Jewelry segment operates stores in Canada and Puerto Rico, all under operating leases, with terms and characteristics similar to the US locations described above. The Piercing Pagoda segment operates kiosks in Puerto Rico, all under operating leases, with terms and characteristics similar to the US locations described above.
At January 30, 2016,February 2, 2019, the average unexpired lease term of US leased premises for the Sterling JewelersNorth America segment was 5.1approximately 4 years for Kay mall and over 54%6 years for off-mall Kay and Jared locations. Approximately 56% of these leases had terms expiring within five years. The average unexpired lease term of leased premises for Zales and Piercing Pagoda locations were 3 and 2 years, respectively. Approximately 85% of these leases had terms expiring within five years. The cost of remodeling a Kay mall store is similar to the cost of a new mall store, which is typically between $610,000$0.1 million and $1,000,000,$0.5 million, depending on the scope of the remodel project. Jared refurbishments typically cost on average $120,000. New Jared stores are typically ground leases which cost between $2,100,000 and $2,700,000. In Fiscal 2016, the level of store remodels increased with 95 locations being completed (Fiscal 2015: 77 locations). The investment was financed by cash flow from operating activities.
At January 30, 2016, the average unexpired lease term of leased premises for Zale Jewelry and Piercing Pagoda segments was 3 and 2 years, respectively, with approximately 70% of these leases having terms expiring within five years. The cost of remodeling a Zale Jewelry mall store is similar to the cost of a new mall store, which is typically between $325,000$0.3 million and $650,000.$0.7 million. The cost of a new Piercing Pagoda kiosk isapproximates $0.1 million. Jared refurbishments typically cost on average less than $0.1 million. New Jared stores typically cost between $90,000$2.1 million and $120,000.$3.3 million. In Fiscal 2016,2019, a total of 105store locations were remodeled (Fiscal 2018: 78 locations). In Fiscal 2019, store remodels were completed at 45 Zale Jewelry stores and 749 Piercing Pagoda kiosks. In Fiscal 2015, store remodels were completed at 31 Zale Jewelry stores and 63 Piercing Pagoda kiosks.kiosks (Fiscal 2018: 53 locations).
In the US, the Sterling Jewelers, Zale Jewelry and Piercing Pagoda segmentsNorth America segment collectively leaseleases approximately 20%15% of store and kiosk locations from a single lessor. In Canada, Zale Jewelryit leases approximately 50% of its store locations from four lessors, with no individual lessor relationship exceeding 15% of its store locations. The segmentssegment had no other relationship with any lessor relating to 10% or more of its locations. At January 30, 2016, the Sterling Jewelers segment had 3.03 million square feet of net selling space (January 31, 2015: 2.88 million), while the Zale Jewelry and Piercing Pagoda segments had 1.07 million and 0.11 million square feet, respectively, of net selling space in the US (January 31, 2015: 1.07 million and 0.11 million square feet, respectively). The Zale Jewelry segment also had 0.24 million square feet of net selling space in Canada (January 31, 2015: 0.24 million).
During the past five fiscal years, the Company generally has been successful in renewing its store leases as they expire and has not experienced difficulty in securing suitable locations for its stores. No store lease is individually material to Signet’s Sterling Jewelers, Zale Jewelry or Piercing PagodaNorth America operations.
UKInternational retail property
At January 30, 2016, Signet’s UK Jewelry division operated from 6 freehold premises and 522 leasehold premises. The division’sInternational segment’s stores are generally leased under full repairing and insuring leases (equivalent to triple net leases in the US). Wherever possible, Signet is shortening the length of new leases that it enters into, or including break clauses in order to improve the flexibility of its lease commitments. At January 30, 2016,February 2, 2019, the average unexpired lease term of UK JewelryInternational premises was 6 years, and a majority of leases had either break clauses or terms expiring within five years. Rents are usually subject to upward review every five years if market conditions so warrant. An increasing proportion of rents also have an element related to the sales of a store, subject to a minimum annual value. For details of assigned leases and sublet premises, see Note 24 of Item 8.
At the end of the lease period, subject to certain limited exceptions, UK JewelryInternational leaseholders generally have statutory rights to enter into a new lease of the premises on negotiated terms. As current leases expire, Signet believes that it will be able to renew leases, if desired, for present store locations or to obtain leases in equivalent or improved locations in the same general area. Signet has not experienced difficulty in securing leases for suitable locations for its UK JewelryInternational stores. No store lease is individually material to Signet’s UK JewelryInternational operations.
A typical UK JewelryInternational store undergoes a major remodel every ten years and a less costly refurbishment every five years. It is intended that these investments will be financed by cash from operating activities. The cost of remodeling a regular store is typically between £150,000$0.2 million and £600,000$0.8 million for both H.Samuel and Ernest Jones, while remodels in prestigious locations typically doubles those costs.
The UK Jewelry divisionInternational segment has no relationship with any lessor relating to 10% or more of its store locations. At January 30, 2016, the UK Jewelry division has 0.52 million square feet of net selling space (January 31, 2015: 0.51 million).
Other
The following table provides the location, use and size of additional facilities requiredCompany has entered into agreements to support the Company’s global operationsassign or sublease certain premises as of January 30, 2016:February 2, 2019. See Note 26 of Item 8 for additional information.
|
| | | | | | | | | |
Location | | Function | | Approximate square footage | | Lease or Own | | Lease expiration |
Akron, Ohio | | Corporate and distribution | | 460,000 |
| | Lease | | 2047 |
Akron, Ohio | | Credit | | 86,000 |
| | Lease | | 2047 |
Akron, Ohio | | Training | | 12,000 |
| | Lease | | 2047 |
Akron, Ohio | | Repair Center | | 38,000 |
| | Own | | N/A |
Akron, Ohio | | Corporate | | 34,900 |
| | Lease | | 2019 |
Barberton, Ohio | | Non-merchandise fulfillment | | 135,000 |
| | Lease | | 2031 |
New York City, New York | | Design office | | 4,600 |
| | Lease | | 2020 |
New York City, New York | | Diamond trading | | 2,000 |
| | Lease | | 2021 |
Irving, Texas(1) | | Corporate and distribution | | 414,000 |
| | Lease | | 2018 |
Toronto, Ontario (Canada) | | Distribution and fulfillment | | 26,000 |
| | Lease | | 2019 |
Birmingham, UK | | Corporate and eCommerce fulfillment | | 255,000 |
| | Own | | N/A |
Borehamwood, Hertfordshire (UK) | | Corporate and distribution | | 36,200 |
| | Lease | | 2020 |
London, UK | | Corporate | | 3,350 |
| | Lease | | 2023 |
Gaborone, Botswana | | Diamond polishing | | 34,200 |
| | Own | | N/A |
Mumbai, India | | Diamond trading | | 3,000 |
| | Lease | | 2018 |
| |
(1)
| Signet will be relocating the Dallas headquarters to a new 250,000 square foot facility upon expiration of the existing lease for the facility in Irving, Texas. The lease for this new headquarters will expire in 2028. Additionally, Signet is currently building a 31,000 square foot freestanding repair facility in Dallas, Texas, similar to the repair center in Akron, Ohio. It is scheduled to open for operation in March 2017 with the new lease set to expire in 2028. |
Sufficient distribution exists in all geographies to meet the respective needs of the Company’s operations.
ITEM 3. LEGAL PROCEEDINGS
See discussion of legal proceedings in Note 2426 of Item 8.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market and dividend information
The principal trading market for the Company’s common shares is(symbol: SIG) are traded on the New York Stock Exchange (symbol: SIG). The Company also maintained a standard listing of its common shares on the London Stock Exchange (symbol: SIG) during Fiscal 2016.Exchange.
The following table sets forth the high and low closing share price on each stock exchange for the periods indicated:
|
| | | | | | | | | | | | | | | | |
| New York Stock Exchange Price per share | | London Stock Exchange Price per share | |
| High | | Low | | High | | Low | |
Fiscal 2015 | | | | | | | | |
First quarter | $ | 107.11 |
| | $ | 75.28 |
| | £ | 64.48 |
| | £ | 46.05 |
| |
Second quarter | $ | 112.55 |
| | $ | 97.56 |
| | £ | 65.66 |
| | £ | 57.96 |
| |
Third quarter | $ | 120.01 |
| | $ | 102.10 |
| | £ | 75.04 |
| | £ | 60.76 |
| |
Fourth quarter | $ | 132.12 |
| | $ | 119.62 |
| | £ | 86.38 |
| | £ | 74.34 |
| |
Full year | $ | 132.12 |
| | $ | 75.28 |
| | £ | 86.38 |
| | £ | 46.05 |
| |
| | | | | | | | |
Fiscal 2016 | | | | | | | | |
First quarter | $ | 139.78 |
| | $ | 117.39 |
| | £ | 94.15 |
| | £ | 77.42 |
| |
Second quarter | $ | 137.62 |
| | $ | 118.62 |
| | £ | 89.46 |
| | £ | 77.14 |
| |
Third quarter | $ | 150.94 |
| | $ | 117.56 |
| | £ | 98.05 |
| | £ | 75.94 |
| |
Fourth quarter | $ | 149.73 |
| | $ | 113.39 |
| | £ | 98.03 |
| | £ | 76.61 |
| |
Full year | $ | 150.94 |
| | $ | 113.39 |
| | £ | 98.05 |
| | £ | 75.94 |
| |
On February 16, 2016, the Company filed a voluntary application with the United Kingdom’s Financial Conduct Authority to delist its common shares from the London Stock Exchange (“LSE”). Signet took this action as a result of less than 1% of the Company’s annual trading volume being executed on the LSE. As a result, the benefit of LSE listing is outweighed by the monetary expense, regulatory burdens and time spent on LSE-driven activity. Common shares of the Company continued to trade on the LSE until close of business on March 15, 2016.
Number of holders
As of March 18, 2016, there were 7,576 stockholders of record.
Dividends
On February 26, 2016, the Board of Directors (the “Board”) declared an 18% increase in the first quarter dividend, resulting in an increase from $0.22 to $0.26 per Signet common share. The following table contains the Company’s dividends declared for Fiscal 2016, Fiscal 2015 and Fiscal 2014:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
(in millions, except per share amounts) | Cash dividend per share | | Total dividends | | Cash dividend per share | | Total dividends | | Cash dividend per share | | Total dividends |
First quarter | $ | 0.22 |
| | $ | 17.6 |
| | $ | 0.18 |
| | $ | 14.4 |
| | $ | 0.15 |
| | $ | 12.1 |
|
Second quarter | 0.22 |
| | 17.6 |
| | 0.18 |
| | 14.4 |
| | 0.15 |
| | 12.1 |
|
Third quarter | 0.22 |
| | 17.5 |
| | 0.18 |
| | 14.5 |
| | 0.15 |
| | 12.0 |
|
Fourth quarter(1) | 0.22 |
| | 17.5 |
| | 0.18 |
| | 14.4 |
| | 0.15 |
| | 12.0 |
|
Total | $ | 0.88 |
| | $ | 70.2 |
| | $ | 0.72 |
| | $ | 57.7 |
| | $ | 0.60 |
| | $ | 48.2 |
|
| |
(1)
| Signet’s dividend policy results in the dividend payment date being a quarter in arrears from the declaration date. As a result, the dividend declared in the fourth quarter of each fiscal year is paid in the subsequent fiscal year. The dividends are reflected in the consolidated statement of cash flows upon payment. |
Future payments of quarterly dividends will be based on Signet’s ability to satisfy all applicable statutory and regulatory requirements and its continued financial strength. Any future payment of cash dividends will depend upon such factors as Signet’s earnings, capital requirements, financial condition, restrictions under Signet’s credit facility, legal restrictions and other factors deemed relevant by the Board.
Number of common shareholders
As of March 28, 2019, there were approximately 7,028 shareholders of record.
Repurchases of equity securities
The following table contains the Company’s repurchases of equity securitiescommon shares in the fourth quarter of Fiscal 2016:2019:
|
| | | | | | | | | | | |
Period | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs(1) | | Approximate dollar value of shares that may yet be purchased under the plans or programs |
November 1, 2015 to November 28, 2015 | — |
| | $ | — |
| | — |
| | $153,650,234 |
November 29, 2015 to December 26, 2015 | 150,243 |
| | $ | 120.24 |
| | 150,243 |
| | $135,585,319 |
December 27, 2015 to January 30, 2016 | — |
| | $ | — |
| | — |
| | $135,585,319 |
Total | 150,243 |
| | $ | 120.24 |
| | 150,243 |
| | $135,585,319 |
|
| | | | | | | | | | | |
Period | Total number of shares purchased(1) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs(2) | | Approximate dollar value of shares that may yet be purchased under the plans or programs |
November 4, 2018 to December 1, 2018 | 415 |
| | $ | 52.06 |
| | — |
| | $165,586,651 |
December 2, 2018 to December 29, 2018 | — |
| | $ | — |
| | — |
| | $165,586,651 |
December 30, 2018 to February 2, 2019 | — |
| | $ | — |
| | — |
| | $165,586,651 |
Total | 415 |
| | $ | 52.06 |
| | — |
| | $165,586,651 |
| |
(1) | OnIncludes 415 shares delivered to Signet by employees to satisfy minimum tax withholding obligations due upon the vesting or payment of stock awards under share-based compensation programs. These are not repurchased in connection with any publicly announced share repurchase programs. |
| |
(2) | In June 14, 2013,2017, the Board of Directors authorized the repurchase of up to $350$600.0 million of Signet’s common shares (the “2013“2017 Program”). The 20132017 Program may be suspended or discontinued at any time without notice. See Note 9 of Item 8 for additional information. |
In February 2016, the Board of Directors authorized an additional $750 million of share repurchases to be executed in a manner that aligns with the Company’s leverage and free cash flow targets.
Performance graph
The following performance graph and related information shall not be deemed “soliciting material” or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that Signet specifically incorporates it by reference into such filing.
Historical share price performance should not be relied upon as an indication of future share price performance. The following graph compares the cumulative total return to holders of Signet’s common shares against the cumulative total return of the S&P 500 Index and the S&P 500 Specialty Retail Index for the five year period ended January 30, 2016.February 2, 2019. The comparison of the cumulative total returns for each investment assumes that $100 was invested in Signet’s common shares and the respective indices on January 29, 2011February 1, 2014 through January 30, 2016.February 2, 2019.
Exchange controlsRelated Shareholder Matters
The Parent Company is classified by the Bermuda Monetary Authority as a non-resident of Bermuda for exchange control purposes. The transferIssues and transfers of common shares betweeninvolving persons regarded as resident outsidenon-residents of Bermuda for exchange control purposes may be effected without specific consent under the Exchange Control Act 1972 Bermuda and regulations thereunder and the issuance of common shares to persons regarded as resident outside Bermuda for exchange control purposes may also be effected without specific consent under the Exchange Control Act 1972 and regulations thereunder. Issues and transfers of common shares involving any personpersons regarded as residentresidents in Bermuda for exchange control purposes may require specific prior approval under the Exchange Control Act 1972.1972 of Bermuda and regulations thereunder.
The owners of common shares who are ordinarily resident outsidenon-residents of Bermuda are not subject to any restrictions on their rights to hold or vote their shares. Because the Parent Company has been designatedis classified as a non-resident of Bermuda for Bermuda exchange control purposes, there are no restrictions on its ability to transfer funds into and out of Bermuda or to pay dividends, to US residents who are holders of common shares, other than in respect of local Bermuda currency.
Taxation
The following are briefThere is no reciprocal tax treaty between Bermuda and general summaries of the United States and United Kingdom taxation treatment of holding and disposing of common shares. The summaries are based onregarding withholding taxes. Under existing Bermuda law, including statutes, regulations, administrative rulings and court decisions, and whatthere is understood to be current Internal Revenue Service (“IRS”) and HM Revenue & Customs (“HMRC”) practice, all as in effect on the date of this document. Future legislative, judicialno Bermuda income or administrative changes or interpretations could alter or modify statements and conclusions set forth below, and these changes or interpretations could be retroactive and could affect the tax consequences of holding and disposing of common shares. The summaries do not consider the consequences of holding and disposing of common shares under tax laws of countries other than the US (or any US laws other than those pertaining to federal income tax), the UK and Bermuda, nor do the summaries consider any alternative minimum tax, state or local consequences of holding and disposing of common shares.
The summaries provide general guidance to US holders (as defined below) who hold common shares as capital assets (within the meaning of section 1221 of the US Internal Revenue Code of 1986, as amended (the “US Code”)) and to persons resident and domiciled for tax purposes in the UK who hold common shares as an investment, and not to any holders who are taxable in the UK on a remittance basis or who are subject to special tax rules, such as banks, financial institutions, broker-dealers, persons subject to mark-to-market treatment, UK resident individuals who hold their common shares under a personal equity plan, persons that hold their common shares as a position in part of a straddle, conversion transaction, constructive sale or other integrated investment, US holders whose “functional currency” is not the US dollar, persons who received their common shares by exercising employee share options or otherwise as compensation, persons who have acquired their common shares by virtue of any office or employment, S corporations or other pass-through entities (or investors in S corporations or other pass-through entities), mutual funds, insurance companies, tax-exempt organizations, US holders subject to the alternative minimum tax, certain expatriates or former long-term residents of the US, and US holders that directly or by attribution hold 10% or more of the voting power of the Parent Company’s shares. This summary does not address US federal estate tax, state or local taxes, or the 3.8% Medicare tax on net investment income.
The summaries are not intended to provide specific advice and no action should be taken or omitted to be taken in reliance upon it. If you are in any doubt about your taxation position, or if you are resident or domiciled outside the UK or resident or otherwise subject to taxation in a jurisdiction outside the UK or the US, you should consult your own professional advisers immediately.
The Parent Company is incorporated in Bermuda. The directors intend to conduct the Parent Company’s affairs such that, based on current law and practice of the relevant tax authorities, the Parent Company will not becomeresident for tax purposes in any other territory. This guidance is written on the basis that the Parent Company does not become resident in a territory other than Bermuda.
US taxation
As used in this discussion, the term “US holder” means a beneficial owner of common shares who is for US federal income tax purposes: (i) an individual US citizen or resident; (ii) a corporation, or entity treated as a corporation, created or organized in or under the laws of the United States; (iii) an estate whose income is subject to US federal income taxation regardless of its source; or (iv) a trust if either: (a) a court within the US is able to exercise primary supervision over the administration of such trust and one or more US persons have the authority to control all substantial decisions of such trust; or (b) the trust has a valid election in effect to be treated as a US resident for US federal income tax purposes.
If a partnership (or other entity classified as a partnership for US federal tax income purposes) holds common shares, the US federal income tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. Partnerships, and partners in partnerships, holding common shares are encouraged to consult their tax advisers.
Dividends and other distributions upon common shares
Distributions made with respect to common shares will generally be includable in the income of a US holder as ordinary dividend income, to the extent paid out of current or accumulated earnings and profits of the Parent Company as determined in accordance with US federal income tax principles. The amount of such dividends will generally be treated partly as US-source and partly as foreign-source dividend income, for US foreign tax credit purposes, in proportion to the earnings from which they are considered paid for as long as 50% or more of the Parent Company’s shares are directly or indirectly owned by US persons. Dividend income received from the Parent Company will not be eligible for the “dividends received deduction” generally allowed to US corporations under the US Code. Subject to applicable limitations, including a requirement that the common shares be listed for trading on the NYSE, the NASDAQ Stock Market, or another qualifying US exchange, dividends with respect to common shares so listed that are paid to non-corporate US holders will generally be taxable at a current maximum tax rate of 20%.
Sale or exchange of common shares
Gain or loss realized by a US holder on the sale or exchange of common shares generally will be subject to US federal income tax as capital gain or loss in an amount equal to the difference between the US holder’s tax basis in the common shares and the amount realized on the disposition. Such gain or loss will be long-term capital gain or loss if the US holder held the common shares for more than one year. Gain or loss, if any, will generally be US source for foreign tax credit purposes. The deductibility of capital losses is subject to limitations. Non-corporate US holders are eligible for a current maximum 20% long-term capital gains taxation rate.
Information reporting and backup withholding
Payments of dividends on, and proceeds from a sale or other disposition of, common shares, may, under certain circumstances, be subject to information reporting and backup withholding at a rate of 28% of the cash payable to the holder, unless the holder provides proof of an applicable exemption or furnishes its taxpayer identification number, and otherwise complies with all applicable requirements of the backup withholding rules. Any amounts withheld from payments to a US holder under the backup withholding rules are not additional tax and should be allowed as a refund or credit against the US holder’s US federal income tax liability, provided the required information is timely furnished to the IRS.
Passive foreign investment company status
A non-US corporation will be classified as a passive foreign investment company (a “PFIC”) for any taxable year if at least 75% of its gross income consists of passive income (such as dividends, interest, rents, royalties or gains on the disposition of certain minority interests), or at least 50% of the average value of its assets consists of assets that produce, or are held for the production of, passive income. For the purposes of these rules, a non-US corporation is considered to hold and receive directly its proportionate share of the assets and income of any other corporation of whose shares it owns at least 25% by value. Consequently, the Parent Company’s classification under the PFIC rules will depend primarily upon the composition of its assets and income.
If the Parent Company is characterized as a PFIC, US holders would suffer adverse tax consequences, and US federal income tax consequences different from those described above may apply. These consequences may include having gains realized on the disposition of common shares treated as ordinary income rather than capital gain and being subject to punitive interest charges on certain distributions and on the proceeds of the sale or other disposition of common shares. The Parent Company believes that it is not a PFIC and that it will not be a PFIC for the foreseeable future. However, since the tests for PFIC status depend upon facts not entirely within the Parent Company’s control, such as the amounts and types of its income and values of its assets, no assurance can be provided that the Parent Company will not become a PFIC. US holders of PFIC shares are required to file IRS Form 8621 annually. US holders should consult their own tax advisers regarding the potential application of the PFIC rules to common shares.
Foreign financial asset reporting requirement
An individual that is a US holder, or is a specific type of nonresident alien, (each a “specified individual”) and holds certain foreign financial assets (including Signet’s common shares) must file IRS Form 8938 to report the ownership of such assets if the total value of those assets exceeds the applicable threshold amounts, generally $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Certain domestic entities that are 80% owned, directly, indirectly or constructively, by a specified individual, or have specified individuals as beneficiaries (“specified domestic entities”), and that hold certain foreign financial assets also must file IRS Form 8938. Some specified individuals may be subject to a greater threshold before reporting is required and constructive ownership rules may apply to determine reporting thresholds relating to specified domestic entities. However, in general, such form is not required to be filed with respect to Signet’s common shares if they are held through a domestic financial institution.
Taxpayers who fail to make the required disclosure with respect to any taxable year are subject to a penalty of $10,000 for such taxable year, which may be increased up to $50,000 for a continuing failure to file the form after being notified by the IRS. In addition, the failure to file Form 8938 will extend the statute of limitations for a taxpayer’s entire related income tax return (and not just the portion of the return that relates to the omission) until at least three years after the date on which the Form 8938 is filed.
All specified individuals and specified domestic entities are urged to consult with their own tax advisors with respect to the application of this reporting requirement to their circumstances.
UK taxation
Chargeable gains
A disposal of common shares by a shareholder who is resident in the UK may, depending on individual circumstances (including the availability of exemptions or allowable losses), give rise to a liability to (or an allowable loss for the purposes of) UK taxation of chargeable gains.
Any chargeable gain or allowable loss on a disposal of the common shares should be calculated taking into account the allowable cost to the holder of acquiring his common shares. In the case of corporate shareholders, to this should be added, when calculating a chargeable gain but not an allowable loss, indexation allowance on the allowable cost. (Indexation allowance is not available for non-corporate shareholders.)
Individuals who hold their common shares within an individual savings account (“ISA”) and are entitled to ISA-related tax relief in respect of the same, will generally not be subject to UK taxation of chargeable gains in respect of any gain arising on a disposal of common shares.
Taxation of dividends on common shares
Under current UK law and practice, UK withholding tax is not imposed on dividends.
Subject to anti-avoidance rules and the satisfaction of certain conditions, UK resident shareholders who are within the charge to UK corporation tax will in general not be subject to corporation tax on dividends paid by the Parent Company to its shareholders. Furthermore, under existing Bermuda law, no Bermuda tax is levied on the sale or transfer of Signet common shares.
A UK resident individual shareholder who is liable to UK income tax at no more than the basic rate will be liable to income tax on dividends paid by the Parent Company on the common shares at the dividend ordinary rate (10% in tax year 2015/16). A UK resident individual shareholder who is liable to UK income tax at the higher rate will be subject to income tax on the dividend income at the dividend upper rate (32.5% in 2015/16). A further rate of income tax (the “additional rate”) will apply to individuals with taxable income over a certain threshold, which is currently £150,000 for 2015/16. A UK resident individual shareholder subject to the additional rate will be liable to income tax on their dividend income at the dividend additional rate of 37.5% (in 2015/16, as from the start of this tax year on April 6, 2015) of the gross dividend to the extent that the gross dividend when treated as the top slice of the shareholder’s income falls above the current £150,000 threshold.
UK resident individuals in receipt of dividends from the Parent Company, if they own less than a 10% shareholding in the Parent Company, will be entitled to a non-payable dividend tax credit (currently at the rate of 1/9th of the cash dividend paid (or 10% of the aggregate of the net dividend and related tax credit)). Assuming that there is no withholding tax imposed on the dividend (as to which see the section on Bermuda taxation below), the individual is treated as receiving for UK tax purposes gross income equal to the cash dividend plus the tax credit. The tax credit is set against the individual’s tax liability on that gross income. The result is that a UK resident individual shareholder who is liable to UK income tax at no more than the basic rate will have no further UK income tax to pay on a Parent Company dividend. A UK resident individual shareholder who is liable to UK income tax at the higher rate will have further UK income tax to pay of 22.5% of the dividend plus the related tax credit (or 25% of the cash dividend, assuming that there is no withholding tax imposed on that dividend). A UK resident individual subject to income tax at the additional rate for 2015/16 will have further UK income tax to pay of 27.5% of the dividend plus the tax credit (or 30 5/9% of the cash dividend, assuming that there is no withholding tax imposed on that dividend), to the extent that the gross dividend falls above the threshold for the 45% rate of income tax.
Individual shareholders who hold their common shares in an ISA and are entitled to ISA-related tax relief in respect of the same will not be taxed on the dividends from those common shares but are not entitled to recover the tax credit on such dividends from HMRC.
Stamp duty/stamp duty reserve tax (“SDRT”)
In practice, stamp duty should generally not need to be paid on an instrument transferring common shares. No SDRT will generally be payable in respect of any agreement to transfer common shares or Depositary Interests. The statements in this paragraph summarize the current position on stamp duty and SDRT and are intended as a general guide only. They assume that the Parent Company will not be UK managed and controlled and that the common shares will not be registered in a register kept in the UK by or on behalf of the Parent Company. The Parent Company has confirmed that it does not intend to keep such a register in the UK.
Bermuda taxation
At the present time, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by the Parent Company or by its shareholders in respect of its common shares. The Parent Company has obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 31, 2035, be applicable to it or to any of its operations or to its shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or is payable by it in respect of real property owned or leased by it in Bermuda.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The financial data included below for Fiscal 2016,2019, Fiscal 20152018 and Fiscal 20142017 has been derived from the audited consolidated financial statements included in Item 8. The financial data for these periods should be read in conjunction with the financial statements, including the notes thereto, and Item 7. The financial data included below for Fiscal 20132016 and Fiscal 20122015 has been derived from the previously published consolidated audited financial statements not included in this document.
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| | | | | | | | | | | | | | | | | | | |
FINANCIAL DATA: | Fiscal 2016 | | Fiscal 2015 | (1) | Fiscal 2014 | | Fiscal 2013 | (2) | Fiscal 2012 |
Income statement (in millions): | | | | | | | | | |
Sales | $ | 6,550.2 |
| | $ | 5,736.3 |
| | $ | 4,209.2 |
| | $ | 3,983.4 |
| | $ | 3,749.2 |
|
Cost of sales | (4,109.8 | ) | | (3,662.1 | ) | | (2,628.7 | ) | | (2,446.0 | ) | | (2,311.6 | ) |
Gross margin | 2,440.4 |
| | 2,074.2 |
| | 1,580.5 |
| | 1,537.4 |
| | 1,437.6 |
|
Selling, general and administrative expenses | (1,987.6 | ) | | (1,712.9 | ) | | (1,196.7 | ) | | (1,138.3 | ) | | (1,056.7 | ) |
Other operating income, net | 250.9 |
| | 215.3 |
| | 186.7 |
| | 161.4 |
| | 126.5 |
|
Operating income | 703.7 |
| | 576.6 |
| | 570.5 |
| | 560.5 |
| | 507.4 |
|
Interest expense, net | (45.9 | ) | | (36.0 | ) | | (4.0 | ) | | (3.6 | ) | | (5.3 | ) |
Income before income taxes | 657.8 |
| | 540.6 |
| | 566.5 |
| | 556.9 |
| | 502.1 |
|
Income taxes | (189.9 | ) | | (159.3 | ) | | (198.5 | ) | | (197.0 | ) | | (177.7 | ) |
Net income | $ | 467.9 |
| | $ | 381.3 |
| | $ | 368.0 |
| | $ | 359.9 |
| | $ | 324.4 |
|
Adjusted EBITDA(3) | $ | 891.5 |
| | $ | 762.9 |
| | $ | 680.7 |
| | $ | 659.9 |
| | $ | 599.8 |
|
| | | | | | | | | |
Income statement (as a % of sales): | |
Sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | (62.7 | ) | | (63.8 | ) | | (62.5 | ) | | (61.4 | ) | | (61.7 | ) |
Gross margin | 37.3 |
| | 36.2 |
| | 37.5 |
| | 38.6 |
| | 38.3 |
|
Selling, general and administrative expenses | (30.4 | ) | | (29.9 | ) | | (28.4 | ) | | (28.6 | ) | | (28.2 | ) |
Other operating income, net | 3.8 |
| | 3.7 |
| | 4.4 |
| | 4.1 |
| | 3.4 |
|
Operating income | 10.7 |
| (4) | 10.0 |
| (4) | 13.5 |
| (4) | 14.1 |
| | 13.5 |
|
Interest expense, net | (0.7 | ) | | (0.6 | ) | | (0.1 | ) | | (0.1 | ) | | (0.1 | ) |
Income before income taxes | 10.0 |
| | 9.4 |
| | 13.4 |
| | 14.0 |
| | 13.4 |
|
Income taxes | (2.9 | ) | | (2.8 | ) | | (4.7 | ) | | (5.0 | ) | | (4.7 | ) |
Net income | 7.1 | % | | 6.6 | % | | 8.7 | % | | 9.0 | % | | 8.7 | % |
Adjusted EBITDA(3) | 13.6 | % | | 13.3 | % | | 16.2 | % | | 16.6 | % | | 16.0 | % |
| | | | | | | | | |
Per share data: | | | | | | | | | |
Earnings per share: | | | | | | | | | |
Basic | $ | 5.89 |
| | $ | 4.77 |
| | $ | 4.59 |
| | $ | 4.37 |
| | $ | 3.76 |
|
Diluted | $ | 5.87 |
| | $ | 4.75 |
| | $ | 4.56 |
| | $ | 4.35 |
| | $ | 3.73 |
|
Weighted average common shares outstanding (in millions): | | | | | | | | | |
Basic | 79.5 |
| | 79.9 |
| | 80.2 |
| | 82.3 |
| | 86.2 |
|
Diluted | 79.7 |
| | 80.2 |
| | 80.7 |
| | 82.8 |
| | 87.0 |
|
Dividends declared per share | $ | 0.88 |
| | $ | 0.72 |
| | $ | 0.60 |
| | $ | 0.48 |
| | $ | 0.20 |
|
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| | | | | | | | | | | | | | | | | | | |
FINANCIAL DATA: | Fiscal 2019 | | Fiscal 2018(1) | | Fiscal 2017 | | Fiscal 2016 | | Fiscal 2015(2) |
Income statement: | (in millions) |
Sales | $ | 6,247.1 |
| | $ | 6,253.0 |
| | $ | 6,408.4 |
| | $ | 6,550.2 |
| | $ | 5,736.3 |
|
Gross margin | $ | 2,160.8 |
| | $ | 2,190.0 |
| | $ | 2,360.8 |
| | $ | 2,440.4 |
| | $ | 2,074.2 |
|
Selling, general and administrative expenses | $ | (1,985.1 | ) | | $ | (1,872.2 | ) | | $ | (1,880.2 | ) | | $ | (1,987.6 | ) | | $ | (1,712.9 | ) |
Operating income (loss) | $ | (764.6 | ) | (4) | $ | 579.9 |
| | $ | 763.2 |
| | $ | 703.7 |
| | $ | 576.6 |
|
Net income (loss) attributable to common shareholders | $ | (690.3 | ) | | $ | 486.4 |
| | $ | 531.3 |
| | $ | 467.9 |
| | $ | 381.3 |
|
Adjusted EBITDA(3) | $ | 393.5 |
| | $ | 770.3 |
| | $ | 955.0 |
| | $ | 891.5 |
| | $ | 762.9 |
|
Same store sales percentage increase (decrease) | (0.1 | )% | | (5.3 | )% | | (1.9 | )% | | 4.1 | % | | 4.1 | % |
| | | | | | | | | |
| (Income statement as a % of sales) |
Sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Gross margin | 34.6 | % | | 35.0 | % | | 36.8 | % | | 37.3 | % | | 36.2 | % |
Selling, general and administrative expenses | (31.8 | )% | | (29.9 | )% | | (29.3 | )% | | (30.4 | )% | | (29.9 | )% |
Operating income (loss) | (12.2 | )% | | 9.3 | % | | 11.9 | % | | 10.7 | % | | 10.0 | % |
Net income (loss) attributable to common shareholders | (11.0 | )% | | 7.8 | % | | 8.3 | % | | 7.1 | % | | 6.6 | % |
Adjusted EBITDA(3) | 6.3 | % | | 12.3 | % | | 14.9 | % | | 13.6 | % | | 13.3 | % |
| | | | | | | | | |
Per share data: | | | | | | | | | |
Earnings (loss) per common share: | | | | | | | | | |
Basic | $ | (12.62 | ) | | $ | 7.72 |
| | $ | 7.13 |
| | $ | 5.89 |
| | $ | 4.77 |
|
Diluted | $ | (12.62 | ) | | $ | 7.44 |
| | $ | 7.08 |
| | $ | 5.87 |
| | $ | 4.75 |
|
Dividends declared per common share | $ | 1.48 |
| | $ | 1.24 |
| | $ | 1.04 |
| | $ | 0.88 |
| | $ | 0.72 |
|
| | | | | | | | | |
Weighted average common shares outstanding: | (in millions) |
Basic | 54.7 |
| | 63.0 |
| | 74.5 |
| | 79.5 |
| | 79.9 |
|
Diluted | 54.7 |
| | 69.8 |
| | 76.7 |
| | 79.7 |
| | 80.2 |
|
| | | | | | | | | |
Balance sheet: | (in millions) |
Total assets | $ | 4,420.1 |
| | $ | 5,839.6 |
| | $ | 6,597.8 |
| | $ | 6,464.9 |
| | $ | 6,203.0 |
|
Total liabilities | $ | 2,603.2 |
| | $ | 2,726.2 |
| | $ | 3,495.7 |
| | $ | 3,404.2 |
| | $ | 3,392.6 |
|
Series A redeemable convertible preferred shares | $ | 615.3 |
| | $ | 613.6 |
| | $611.9 | | n/a | | n/a |
Net (debt) cash(3) | $ | (533.0 | ) | | $ | (507.1 | ) | | $ | (1,310.3 | ) | | $ | (1,241.0 | ) | | $ | (1,256.4 | ) |
Working capital | $ | 1,822.8 |
| | $ | 2,408.9 |
| | $ | 3,438.9 |
| | $ | 3,437.0 |
| | $ | 3,210.3 |
|
Common shares outstanding | 51.9 |
| | 60.5 |
| | 68.3 |
| | 79.4 |
| | 80.3 |
|
| |
(1) | On September 12, 2017, the Company completed the acquisition of R2Net. Fiscal 2018 results include R2Net’s results since the date of acquisition. See Note 5 of Item 8 for additional information. |
| |
(2) | On May 29, 2014, the Company completed the acquisition of Zale Corporation. Fiscal 2015 results include Zale Corporation’s results since the date of acquisition. |
(3) Adjusted EBITDA and net (debt) cash are non-GAAP measures; see “GAAP and non-GAAP Measures” below.
| |
(4) | Fiscal 2019 operating loss includes goodwill and intangible impairments of $735.4 million, a loss of $167.4 million related to the sale of the non-prime in-house accounts receivable and $125.9 million in restructuring charges related to inventory write-downs, severance, professional fees and impairment of certain IT assets. |
| |
n/a | Not applicable as Series A redeemable convertible preferred shares were issued in October 2016. |
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| | | | | | | | | | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018(1) | | Fiscal 2017 | | Fiscal 2016 | | Fiscal 2015(2) |
Other financial data: | | | | | | | | | |
Free cash flow (in millions)(3) | $ | 564.2 |
| | $ | 1,703.1 |
| | $ | 400.3 |
| | $ | 62.8 |
| | $ | 82.8 |
|
Effective tax rate | 18.1 | % | | 1.5 | % | (4) | 23.9 | % | | 28.9 | % | | 29.5 | % |
ROCE(3) | 6.7 | % | (5) | 19.1 | % | | 21.4 | % | | 21.0 | % | | 19.5 | % |
Adjusted leverage ratio(3) | 4.3x |
| | 3.1x |
| | 3.6x |
| | 3.3x |
| | 3.5x |
|
| | | | | | | | | |
Store and employee data: | | | | | | | | | |
Store locations (at end of period) | 3,334 |
| | 3,556 |
| | 3,682 |
| | 3,625 |
| | 3,579 |
|
Number of employees (full-time equivalents)(6) | 22,989 |
| | 24,888 |
| | 29,566 |
| | 29,057 |
| | 28,949 |
|
| | | | | | | | | |
| |
(1) | On September 12, 2017, the Company completed the acquisition of R2Net. Fiscal 2018 results include R2Net’s results since the date of acquisition. See Note 35 of Item 8 for additional information. |
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(2) | Fiscal 2013 was a 53 week period. The 53rd week added $56.4 million in net sales and decreased diluted earnings per share by approximately $0.02 for fiscal period. |
(3) Adjusted EBITDA is a non-GAAP measure, see “GAAP and non-GAAP Measures” below.
(4) The acquisition of Zale and Ultra Stores Inc., with operating margins lower than that of Signet, caused an overall lower operating margin for Signet.
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| | | | | | | | | | | | | | | | | | | |
(in millions) | Fiscal 2016 |
| Fiscal 2015 | (1) | Fiscal 2014 | | Fiscal 2013 | | Fiscal 2012 |
Balance sheet: | | | | | | | | | |
Total assets(2) | $ | 6,474.4 |
| | $ | 6,214.3 |
| | $ | 3,916.1 |
| | $ | 3,616.5 |
| | $ | 3,506.6 |
|
Total liabilities(2) | 3,413.7 |
| | 3,403.9 |
| | 1,353.0 |
| | 1,286.6 |
| | 1,227.5 |
|
Total shareholders’ equity | 3,060.7 |
| | 2,810.4 |
| | 2,563.1 |
| | 2,329.9 |
| | 2,279.1 |
|
Working capital | 3,437.0 |
| | 3,210.3 |
| | 2,467.0 |
| | 2,292.2 |
| | 2,292.4 |
|
Cash and cash equivalents | 137.7 |
| | 193.6 |
| | 247.6 |
| | 301.0 |
| | 486.8 |
|
Loans and overdrafts | (59.5 | ) | | (97.5 | ) | | (19.3 | ) | | — |
| | — |
|
Long-term debt | (1,328.7 | ) | | (1,363.8 | ) | | — |
| | — |
| | — |
|
Net (debt) cash(3) | $ | (1,250.5 | ) | | $ | (1,267.7 | ) | | $ | 228.3 |
| | $ | 301.0 |
| | $ | 486.8 |
|
Common shares outstanding | 79.4 |
| | 80.3 |
| | 80.2 |
| | 81.4 |
| | 86.9 |
|
Cash flow: | | | | | | | | | |
Net cash provided by operating activities | $ | 443.3 |
| | $ | 283.0 |
| | $ | 235.5 |
| | $ | 312.7 |
| | $ | 325.2 |
|
Net cash used in investing activities | (228.7 | ) | | (1,652.6 | ) | | (160.4 | ) | | (190.9 | ) | | (97.8 | ) |
Net cash (used in) provided by financing activities | (266.6 | ) | | 1,320.9 |
| | (124.8 | ) | | (308.1 | ) | | (40.0 | ) |
(Decrease) increase in cash and cash equivalents | $ | (52.0 | ) | | $ | (48.7 | ) | | $ | (49.7 | ) | | $ | (186.3 | ) | | $ | 187.4 |
|
Free cash flow | $ | 216.8 |
| | $ | 62.8 |
| | $ | 82.8 |
| | $ | 178.5 |
| | $ | 227.4 |
|
| | | | | | | | | |
Ratios: | | | | | | | | | |
Operating margin | 10.7 | % | | 10.0 | % | | 13.5 | % | | 14.1 | % | | 13.5 | % |
Effective tax rate | 28.9 | % | | 29.5 | % | | 35.0 | % | | 35.4 | % | | 35.4 | % |
ROCE(3) | 21.0 | % | | 19.5 | % | | 25.2 | % | | 28.1 | % | | 28.6 | % |
Adjusted Leverage(3) | 3.7x |
| | 4.0x |
| | 2.0x |
| | 2.0x |
| | 2.1x |
|
|
| | | | | | | | | | | | | | |
Store data: | Fiscal 2016 | | Fiscal 2015 | (1) | Fiscal 2014 | | Fiscal 2013 | | Fiscal 2012 |
Store locations (at end of period): | | | | | | | | | |
Sterling Jewelers | 1,540 |
| | 1,504 |
| | 1,471 |
| | 1,443 |
| | 1,318 |
|
Zale Jewelry | 977 |
| | 972 |
| | n/a |
| | n/a |
| | n/a |
|
Piercing Pagoda | 605 |
| | 605 |
| | n/a |
| | n/a |
| | n/a |
|
UK Jewelry | 503 |
| | 498 |
| | 493 |
| | 511 |
| | 535 |
|
Signet | 3,625 |
| | 3,579 |
| | 1,964 |
| | 1,954 |
| | 1,853 |
|
Percentage increase (decrease) in same store sales: | | | | | | | | | |
Sterling Jewelers | 3.7 | % | | 4.8 | % | | 5.2 | % | | 4.0 | % | | 11.1 | % |
Zale Jewelry | 4.3 | % | | 1.7 | % | | n/a |
| | n/a |
| | n/a |
|
Piercing Pagoda | 7.5 | % | | 0.2 | % | | n/a |
| | n/a |
| | n/a |
|
UK Jewelry | 4.9 | % | | 5.3 | % | | 1.0 | % | | 0.3 | % | | 0.9 | % |
Signet | 4.1 | % | | 4.1 | % | | 4.4 | % | | 3.3 | % | | 9.0 | % |
Number of employees (full-time equivalents) | 29,057 |
| (4) | 28,949 |
| (5) | 18,179 |
| (6) | 17,877 |
| (7) | 16,555 |
|
| |
(1)
| On May 29, 2014, the Company completed the acquisition of Zale Corporation. Fiscal 2015 includesresults include Zale Corporation’s results since the date of acquisition. |
(3) Free cash flow, ROCE and adjusted leverage ratio are non-GAAP measures; see “GAAP and non-GAAP Measures” below.
| |
(4) | Effective tax rate in Fiscal 2018 includes favorable impact of the TCJ Act enacted by the US government in December 2017. See Note 312 of Item 8 for additional information. |
| |
(2)(5)
| Results reclassifiedROCE in accordanceFiscal 2019 was adjusted to exclude the impact of goodwill and intangible impairments totaling $735.4 million and $160.4 million of valuation losses associated with Signet’s adoptionsale of Accounting Standards Update 2015-17, which requires the classification of all deferred tax assets and liabilities as non-current.non-prime in-house accounts receivable portfolio recognized during the year. See Note 217 and Note 4 of Item 8 for additional information. |
(3) Net (debt) cash, ROCE and adjusted leverage are non-GAAP measures, see “GAAP and non-GAAP Measures” below.
(4) Number of employees includes 194 full-time equivalents employed in the diamond polishing plant located in Botswana.
(5) Number of employees includes 226 full-time equivalents employed in the diamond polishing plant located in Botswana.
(6) Number of employees includes 211 full-time equivalents employed in the diamond polishing plant located in Botswana.
(7) Number of employees includes 830 full-time equivalents employed by Ultra Stores, Inc.
n/a Not applicable as Zale division was acquired on May 29, 2014.
| |
(6) | Number of employees includes 142, 127, 163, 194 and 226 full-time equivalents employed in the diamond polishing plant located in Botswana for Fiscal 2019, Fiscal 2018, Fiscal 2017, Fiscal 2016 and Fiscal 2015, respectively. |
GAAP AND NON-GAAP MEASURES
The discussion and analysis of Signet’s results of operations, financial condition and liquidity contained in this Report are based upon the consolidated financial statements of Signet which are prepared in accordance with US GAAP and should be read in conjunction with Signet’s financial statements and the related notes included in Item 8. A number of non-GAAP measures are used by management to analyze and manage the performance of the business, and the required disclosures for these non-GAAP measures are shown below. In particular, the terms “at constant exchange rates,” “underlying” and “underlying at constant exchange rates” are used in a number of places. “At constant exchange rates” is used to indicate where items have been adjusted to eliminate the impact of exchange rate movements on translation of British pound and Canadian dollar amounts to US dollars. “Underlying” is used to indicate where adjustments for significant, unusual and non-recurring items have been made and “underlying at constant exchange rates” indicates where the underlying items have been further adjusted to eliminate the impact of exchange rate movements on translation of British pound and Canadian dollar amounts to US dollars.
Signet provides such 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 substitution for, financial information prepared in accordance with GAAP.
1. Income Statements at Constant Exchange Rates
Movements in the US dollar to British pound and Canadian dollar exchange rates have an impact on Signet’s results. The UK Jewelry division is managed in British pounds and the Canadian reporting unit of the Zale Jewelry segment in Canadian dollars as sales and a majority of operating expenses are incurred in those foreign currencies. The results for each are then translated into US dollars for external reporting purposes. Management believes it assists in understanding the performance of Signet and its segments if constant currency figures are given. This is particularly so in periods when exchange rates are volatile. The constant currency amounts are calculated by retranslating the prior year figures using the current year’s exchange rate. Management considers it useful to exclude the impact of movements in the British pound and Canadian dollar to US dollar exchange rates to analyze and explain changes and trends in Signet’s underlying business, which is consistent with the manner in which management evaluates performance of its businesses which do not operate using the US dollar as their functional currency. Additionally, in connection with management’s evaluation of its attainment of performance goals, currency effects are excluded.
(a) Fiscal 2016 percentage change in results at constant exchange rates
|
| | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share amounts) | Fiscal 2016 | | Fiscal 2015 | | Change % | | Impact of exchange rate movement | | Fiscal 2015 at constant exchange rates (non-GAAP) | | Fiscal 2016 change at constant exchange rates (non-GAAP) % |
Sales by segment: | | | | | | | | | | | |
Sterling Jewelers | $ | 3,988.7 |
| | $ | 3,765.0 |
| | 5.9 | % | | $ | — |
| | $ | 3,765.0 |
| | 5.9 | % |
Zale Jewelry | 1,568.2 |
| | 1,068.7 |
| | 46.7 |
| | (31.7 | ) | | 1,037.0 |
| | 51.2 |
|
Piercing Pagoda | 243.2 |
| | 146.9 |
| | 65.6 |
| | — |
| | 146.9 |
| | 65.6 |
|
UK Jewelry | 737.6 |
| | 743.6 |
| | (0.8 | ) | | (47.3 | ) | | 696.3 |
| | 5.9 |
|
Other | 12.5 |
| | 12.1 |
| | 3.3 |
| | — |
| | 12.1 |
| | 3.3 |
|
Total sales | 6,550.2 |
| | 5,736.3 |
| | 14.2 |
| | (79.0 | ) | | 5,657.3 |
| | 15.8 |
|
Cost of sales | (4,109.8 | ) | | (3,662.1 | ) | | (12.2 | ) | | 56.2 |
| | (3,605.9 | ) | | (14.0 | ) |
Gross margin | 2,440.4 |
| | 2,074.2 |
| | 17.7 |
| | (22.8 | ) | | 2,051.4 |
| | 19.0 |
|
Selling, general and administrative expenses | (1,987.6 | ) | | (1,712.9 | ) | | (16.0 | ) | | 21.2 |
| | (1,691.7 | ) | | (17.5 | ) |
Other operating income, net | 250.9 |
| | 215.3 |
| | 16.5 |
| | 0.2 |
| | 215.5 |
| | 16.4 |
|
Operating income (loss) by segment: | | | | | | | | | | | |
Sterling Jewelers | 718.6 |
| | 624.3 |
| | 15.1 |
| | — |
| | 624.3 |
| | 15.1 |
|
Zale Jewelry(1) | 44.3 |
| | (1.9 | ) | | nm |
| | 0.3 |
| | (1.6 | ) | | nm |
|
Piercing Pagoda(2) | 7.8 |
| | (6.3 | ) | | nm |
| | — |
| | (6.3 | ) | | nm |
|
UK Jewelry | 61.5 |
| | 52.2 |
| | 17.8 |
| | (2.0 | ) | | 50.2 |
| | 22.5 |
|
Other(3) | (128.5 | ) | | (91.7 | ) | | (40.1 | ) | | 0.3 |
| | (91.4 | ) | | (40.6 | ) |
Total operating income | 703.7 |
| | 576.6 |
| | 22.0 |
| | (1.4 | ) | | 575.2 |
| | 22.3 |
|
Interest expense, net | (45.9 | ) | | (36.0 | ) | | (27.5 | ) | | — |
| | (36.0 | ) | | (27.5 | ) |
Income before income taxes | 657.8 |
| | 540.6 |
| | 21.7 |
| | (1.4 | ) | | 539.2 |
| | 22.0 |
|
Income taxes | (189.9 | ) | | (159.3 | ) | | (19.2 | ) | | 0.1 |
| | (159.2 | ) | | (19.3 | ) |
Net income | $ | 467.9 |
| | $ | 381.3 |
| | 22.7 | % | | $ | (1.3 | ) | | $ | 380.0 |
| | 23.1 | % |
Basic earnings per share | $ | 5.89 |
| | $ | 4.77 |
| | 23.5 | % | | $ | (0.01 | ) | | $ | 4.76 |
| | 23.7 | % |
Diluted earnings per share | $ | 5.87 |
| | $ | 4.75 |
| | 23.6 | % | | $ | (0.01 | ) | | $ | 4.74 |
| | 23.8 | % |
| |
(1)
| Zale Jewelry includes net operating loss impact of $23.1 million and $35.1 million for purchase accounting adjustments in Fiscal 2016 and Fiscal 2015, respectively. |
(2) Piercing Pagoda includes net operating loss impact of $3.3 million and $10.8 million for purchase accounting adjustments in Fiscal 2016 and Fiscal 2015, respectively.
| |
(3)
| Other includes $78.9 million and $59.8 million of transaction and integration expenses in Fiscal 2016 and Fiscal 2015, respectively. Transaction and integration costs include expenses associated with advisor fees for legal, tax, accounting, information technology implementation, consulting, severance, as well as the legal settlement of $34.2 million over appraisal rights in Fiscal 2016. |
(b) Fourth quarter Fiscal 2016 percentage change in results at constant exchange rates
|
| | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share amounts) | 13 weeks ended January 30, 2016 | | 13 weeks ended January 31, 2015 | | Change % | | Impact of exchange rate movement | | 13 weeks ended January 31, 2015 at constant exchange rates (non-GAAP) | | 13 weeks ended January 30, 2016 change at constant exchange rates (non-GAAP) % |
Sales by segment: | | | | | | | | | | | |
Sterling Jewelers | $ | 1,452.5 |
| | $ | 1,358.3 |
| | 6.9 | % | | $ | — |
| | $ | 1,358.3 |
| | 6.9 | % |
Zale Jewelry | 577.0 |
| | 564.6 |
| | 2.2 |
| | (16.3 | ) | | 548.3 |
| | 5.2 |
|
Piercing Pagoda | 78.1 |
| | 72.1 |
| | 8.3 |
| | — |
| | 72.1 |
| | 8.3 |
|
UK Jewelry | 282.6 |
| | 278.0 |
| | 1.7 |
| | (11.1 | ) | | 266.9 |
| | 5.9 |
|
Other | 2.4 |
| | 3.4 |
| | (29.4 | ) | | — |
| | 3.4 |
| | (29.4 | ) |
Total sales | 2,392.6 |
| | 2,276.4 |
| | 5.1 |
| | (27.4 | ) | | 2,249.0 |
| | 6.4 |
|
Cost of sales | (1,376.6 | ) | | (1,364.3 | ) | | (0.9 | ) | | 18.0 |
| | (1,346.3 | ) | | (2.3 | ) |
Gross margin | 1,016.0 |
| | 912.1 |
| | 11.4 |
| | (9.4 | ) | | 902.7 |
| | 12.6 |
|
Selling, general and administrative expenses | (686.6 | ) | | (634.5 | ) | | (8.2 | ) | | 7.7 |
| | (626.8 | ) | | (9.5 | ) |
Other operating income, net | 63.7 |
| | 54.1 |
| | 17.7 |
| | 0.2 |
| | 54.3 |
| | 17.3 |
|
Operating income (loss) by segment: | | | | | | | | | | | |
Sterling Jewelers | 305.4 |
| | 260.0 |
| | 17.5 |
| | — |
| | 260.0 |
| | 17.5 |
|
Zale Jewelry(1) | 54.2 |
| | 32.8 |
| | 65.2 |
| | 0.4 |
| | 33.2 |
| | 63.3 |
|
Piercing Pagoda(2) | 8.8 |
| | 3.3 |
| | 166.7 |
| | — |
| | 3.3 |
| | 166.7 |
|
UK Jewelry | 57.8 |
| | 53.8 |
| | 7.4 |
| | (2.0 | ) | | 51.8 |
| | 11.6 |
|
Other(3) | (33.1 | ) | | (18.2 | ) | | (81.9 | ) | | 0.1 |
| | (18.1 | ) | | (82.9 | ) |
Total operating income | 393.1 |
| | 331.7 |
| | 18.5 |
| | (1.5 | ) | | 330.2 |
| | 19.0 |
|
Interest expense, net | (12.1 | ) | | (7.9 | ) | | (53.2 | ) | | (0.1 | ) | | (8.0 | ) | | (51.3 | ) |
Income before income taxes | 381.0 |
| | 323.8 |
| | 17.7 |
| | (1.6 | ) | | 322.2 |
| | 18.2 |
|
Income taxes | (109.1 | ) | | (95.8 | ) | | (13.9 | ) | | 0.2 |
| | (95.6 | ) | | (14.1 | ) |
Net income | $ | 271.9 |
| | $ | 228.0 |
| | 19.3 | % | | $ | (1.4 | ) | | $ | 226.6 |
| | 20.0 | % |
Basic earnings per share | $ | 3.43 |
| | $ | 2.85 |
| | 20.4 | % | | $ | (0.01 | ) | | $ | 2.84 |
| | 20.8 | % |
Diluted earnings per share | $ | 3.42 |
| | $ | 2.84 |
| | 20.4 | % | | $ | (0.01 | ) | | $ | 2.83 |
| | 20.8 | % |
| |
(1)
| Zale Jewelry includes net operating loss impact of $6.0 million and $14.7 million for purchase accounting adjustments in Fiscal 2016 and Fiscal 2015, respectively. |
(2) Piercing Pagoda includes net operating loss impact of $0.2 million and $6.1 million for purchase accounting adjustments in Fiscal 2016 and Fiscal 2015, respectively.
| |
(3)
| Other includes $19.1 million and $9.2 million of transaction and integration expenses in Fiscal 2016 and Fiscal 2015, respectively. Transaction and integration costs include expenses associated with legal, tax, accounting, information technology implementation, consulting and severance. |
(c) Fiscal 2015 percentage change in results at constant exchange rates
|
| | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share amounts) | Fiscal 2015 | | Fiscal 2014 | | Change % | | Impact of exchange rate movement | | Fiscal 2014 at constant exchange rates (non-GAAP) | | Fiscal 2015 change at constant exchange rates (non-GAAP) % |
Sales by segment: | | | | | | | | | | | |
Sterling Jewelers | $ | 3,765.0 |
| | $ | 3,517.6 |
| | 7.0 | % | | $ | — |
| | $ | 3,517.6 |
| | 7.0 | % |
Zale Jewelry | 1,068.7 |
| | n/a |
| | nm |
| | nm |
| | n/a |
| | nm |
|
Piercing Pagoda | 146.9 |
| | n/a |
| | nm |
| | nm |
| | n/a |
| | nm |
|
UK Jewelry | 743.6 |
| | 685.6 |
| | 8.5 |
| | 18.0 |
| | 703.6 |
| | 5.7 |
|
Other | 12.1 |
| | 6.0 |
| | 101.7 |
| | — |
| | 6.0 |
| | 101.7 |
|
Total sales | 5,736.3 |
| | 4,209.2 |
| | 36.3 |
| | 18.0 |
| | 4,227.2 |
| | 35.7 |
|
Cost of sales | (3,662.1 | ) | | (2,628.7 | ) | | (39.3 | ) | | (14.9 | ) | | (2,643.6 | ) | | (38.5 | ) |
Gross margin | 2,074.2 |
| | 1,580.5 |
| | 31.2 |
| | 3.1 |
| | 1,583.6 |
| | 31.0 |
|
Selling, general and administrative expenses | (1,712.9 | ) | | (1,196.7 | ) | | (43.1 | ) | | (6.3 | ) | | (1,203.0 | ) | | (42.4 | ) |
Other operating income, net | 215.3 |
| | 186.7 |
| | 15.3 |
| | — |
| | 186.7 |
| | 15.3 |
|
Operating income (loss) by segment: | | | | | | | | | | | |
Sterling Jewelers | 624.3 |
| | 553.2 |
| | 12.9 |
| | — |
| | 553.2 |
| | 12.9 |
|
Zale Jewelry(1) | (1.9 | ) | | n/a |
| | nm |
| | nm |
| | n/a |
| | nm |
|
Piercing Pagoda(2) | (6.3 | ) | | n/a |
| | nm |
| | nm |
| | n/a |
| | nm |
|
UK Jewelry | 52.2 |
| | 42.4 |
| | 23.1 |
| | (3.2 | ) | | 39.2 |
| | 33.2 |
|
Other(3) | (91.7 | ) | | (25.1 | ) | | (265.3 | ) | | — |
| | (25.1 | ) | | (265.3 | ) |
Total operating income | 576.6 |
| | 570.5 |
| | 1.1 |
| | (3.2 | ) | | 567.3 |
| | 1.6 |
|
Interest expense, net | (36.0 | ) | | (4.0 | ) | | (800.0 | ) | | — |
| | (4.0 | ) | | (800.0 | ) |
Income before income taxes | 540.6 |
| | 566.5 |
| | (4.6 | ) | | (3.2 | ) | | 563.3 |
| | (4.0 | ) |
Income taxes | (159.3 | ) | | (198.5 | ) | | 19.7 |
| | 0.8 |
| | (197.7 | ) | | 19.4 |
|
Net income | $ | 381.3 |
| | $ | 368.0 |
| | 3.6 | % | | $ | (2.4 | ) | | $ | 365.6 |
| | 4.3 | % |
Basic earnings per share | $ | 4.77 |
| | $ | 4.59 |
| | 3.9 | % | | $ | (0.03 | ) | | $ | 4.56 |
| | 4.6 | % |
Diluted earnings per share | $ | 4.75 |
| | $ | 4.56 |
| | 4.2 | % | | $ | (0.03 | ) | | $ | 4.53 |
| | 4.9 | % |
| |
(1)
| Zale Jewelry includes net operating loss impact of $35.1 million for purchase accounting adjustments. |
(2) Piercing Pagoda includes net operating loss impact of $10.8 million for purchase accounting adjustments.
| |
(3)
| Other includes $59.8 million of transaction and integration expenses in Fiscal 2015. Transaction and integration costs include expenses associated with legal, tax, accounting, information technology implementation, consulting and severance. |
| |
nm | Not meaningful. As the Company completed the acquisition of Zale Corporation on May 29, 2014, Fiscal 2015 includes Zale Corporation’s results since the date of acquisition. |
n/a Not applicable as Zale division was acquired on May 29, 2014.
(d) Fourth quarter Fiscal 2015 percentage change in results at constant exchange rates
|
| | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share amounts) | 13 weeks ended January 31, 2015 | | 13 weeks ended February 1, 2014 | | Change % | | Impact of exchange rate movement | | 13 weeks ended February 1, 2014 change at constant exchange rates (non-GAAP) | | 13 weeks ended January 31, 2015 change at constant exchange rates (non-GAAP) % |
Sales by segment: | | | | | | | | | | | |
Sterling Jewelers | $ | 1,358.3 |
| | $ | 1,288.0 |
| | 5.5 | % | | $ | — |
| | $ | 1,288.0 |
| | 5.5 | % |
Zale Jewelry | 564.6 |
| | n/a |
| | nm |
| | nm |
| | n/a |
| | nm |
|
Piercing Pagoda | 72.1 |
| | n/a |
| | nm |
| | nm |
| | n/a |
| | nm |
|
UK Jewelry | 278.0 |
| | 272.2 |
| | 2.1 |
| | (14.0 | ) | | 258.2 |
| | 7.7 |
|
Other | 3.4 |
| | 3.8 |
| | (10.5 | ) | | — |
| | 3.8 |
| | (10.5 | ) |
Total sales | 2,276.4 |
| | 1,564.0 |
| | 45.5 |
| | (14.0 | ) | | 1,550.0 |
| | 46.9 |
|
Cost of sales | (1,364.3 | ) | | (915.2 | ) | | (49.1 | ) | | 8.8 |
| | (906.4 | ) | | (50.5 | ) |
Gross margin | 912.1 |
| | 648.8 |
| | 40.6 |
| | (5.2 | ) | | 643.6 |
| | 41.7 |
|
Selling, general and administrative expenses | (634.5 | ) | | (425.8 | ) | | (49.0 | ) | | 2.7 |
| | (423.1 | ) | | (50.0 | ) |
Other operating income, net | 54.1 |
| | 47.6 |
| | 13.7 |
| | — |
| | 47.6 |
| | 13.7 |
|
Operating income (loss) by segment: | | | | | | | | | | | |
Sterling Jewelers | 260.0 |
| | 227.9 |
| | 14.1 |
| | — |
| | 227.9 |
| | 14.1 |
|
Zale Jewelry(1) | 32.8 |
| | n/a |
| | nm |
| | nm |
| | n/a |
| | nm |
|
Piercing Pagoda(2) | 3.3 |
| | n/a |
| | nm |
| | nm |
| | n/a |
| | nm |
|
UK Jewelry | 53.8 |
| | 51.7 |
| | 4.1 |
| | (2.6 | ) | | 49.1 |
| | 9.6 |
|
Other(3) | (18.2 | ) | | (9.0 | ) | | (102.2 | ) | | 0.1 |
| | (8.9 | ) | | (104.5 | ) |
Total operating income | 331.7 |
| | 270.6 |
| | 22.6 |
| | (2.5 | ) | | 268.1 |
| | 23.7 |
|
Interest expense, net | (7.9 | ) | | (1.2 | ) | | (558.3 | ) | | (0.1 | ) | | (1.3 | ) | | (507.7 | ) |
Income before income taxes | 323.8 |
| | 269.4 |
| | 20.2 |
| | (2.6 | ) | | 266.8 |
| | 21.4 |
|
Income taxes | (95.8 | ) | | (94.2 | ) | | (1.7 | ) | | 0.7 |
| | (93.5 | ) | | (2.5 | ) |
Net income | $ | 228.0 |
| | $ | 175.2 |
| | 30.1 | % | | $ | (1.9 | ) | | $ | 173.3 |
| | 31.6 | % |
Basic earnings per share | $ | 2.85 |
| | $ | 2.20 |
| | 29.5 | % | | $ | (0.03 | ) | | $ | 2.17 |
| | 31.3 | % |
Diluted earnings per share | $ | 2.84 |
| | $ | 2.18 |
| | 30.3 | % | | $ | (0.02 | ) | | $ | 2.16 |
| | 31.5 | % |
| |
(1)
| Zale Jewelry includes net operating loss impact of $14.7 million for purchase accounting adjustments in Fiscal 2015. |
(2) Piercing Pagoda includes net operating loss impact of $6.1 million for purchase accounting adjustments in Fiscal 2015.
| |
(3)
| Other includes $9.2 million of transaction and integration expenses in Fiscal 2015. Transaction and integration costs include expenses associated with legal, tax, accounting, information technology implementation, consulting and severance. |
| |
nm | Not meaningful. As the Company completed the acquisition of Zale Corporation on May 29, 2014, Fiscal 2015 includes Zale Corporation’s results since the date of acquisition. |
n/a Not applicable as Zale division was acquired on May 29, 2014.
2. Operating data reflecting the impact of material acquisitions and acquisition-related costs
The below table reflects the impact of costs associated with the acquisition of Zale Corporation, along with certain other accounting adjustments made. Management finds the information useful to analyze the results of the business excluding these items in order to appropriately evaluate the performance of the business without the impact of significant and unusual items. Management views acquisition-related impacts as events that are not necessarily reflective of operational performance during a period. In particular, management believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses.
(a) Fiscal 2016 operating data reflecting the impact of acquisition-related costs and accounting adjustments
|
| | | | | | | | | | | | | | | | | | | | | |
Fiscal 2016 (in millions, except per share amount and % of sales) | Adjusted Signet | | Accounting adjustments(1) | | Transaction/Integration costs(2) | | Signet consolidated, as reported |
Sales | $ | 6,577.4 |
| | 100.0 | % | | $ | (27.2 | ) | | $ | — |
| | $ | 6,550.2 |
| | 100.0 | % |
Cost of sales | (4,101.4 | ) | | (62.4 | )% | | (8.4 | ) | | — |
| | (4,109.8 | ) | | (62.7 | )% |
Gross margin | 2,476.0 |
| | 37.6 | % | | (35.6 | ) | | — |
| | 2,440.4 |
| | 37.3 | % |
Selling, general and administrative expenses | (1,917.9 | ) | | (29.1 | )% | | 9.2 |
| | (78.9 | ) | | (1,987.6 | ) | | (30.4 | )% |
Other operating income, net | 250.9 |
| | 3.8 | % | | — |
| | — |
| | 250.9 |
| | 3.8 | % |
Operating income (loss) | 809.0 |
| | 12.3 | % | | (26.4 | ) | | (78.9 | ) | | 703.7 |
| | 10.7 | % |
Interest expense, net | (45.9 | ) | | (0.7 | )% | | — |
| | — |
| | (45.9 | ) | | (0.7 | )% |
Income before income taxes | 763.1 |
| | 11.6 | % | | (26.4 | ) | | (78.9 | ) | | 657.8 |
| | 10.0 | % |
Income taxes | (216.0 | ) | | (3.3 | )% | | 9.3 |
| | 16.8 |
| | (189.9 | ) | | (2.9 | )% |
Net income (loss) | 547.1 |
| | 8.3 | % | | (17.1 | ) | | (62.1 | ) | | 467.9 |
| | 7.1 | % |
Diluted earnings per share | $ | 6.86 |
| | | | $ | (0.21 | ) | | $ | (0.78 | ) | | $ | 5.87 |
| | |
| |
(1)
| Includes deferred revenue adjustments related to acquisition accounting which resulted in a reset of deferred revenue associated with extended service plans previously sold by Zale Corporation. Similar to Signet’s Sterling Jewelers division, historically, Zale Corporation deferred the revenue generated by the sale of lifetime warranties and recognized revenue in relation to the pattern of costs expected to be incurred, which included a profit margin on activities related to the initial selling effort. In acquisition accounting, deferred revenue is only recognized when a legal performance obligation is assumed by the acquirer. The fair value of deferred revenue is determined based on the future obligations associated with the outstanding plans at the time of the Acquisition. The acquisition accounting adjustment resulted in a reduction to the deferred revenue balance from $183.8 million to $93.3 million as of May 29, 2014, as the fair value was determined through the estimation of costs remaining to be incurred, plus a reasonable profit margin on the estimated costs. Revenues generated from the sale of extended services plans subsequent to the Acquisition are recognized in revenue in a manner consistent with Signet’s methodology. Additionally, accounting adjustments include the recognition of a portion of the inventory fair value step-up of $32.2 million and amortization expense of intangibles. |
| |
(2)
| Transaction and integration costs are primarily attributable to the legal settlement of $34.2 million over appraisal rights, expenses associated with advisor fees for legal, tax, accounting, information technology implementation, consulting, as well as severance costs. These costs are included within Signet’s Other segment. |
(b) Fourth quarter Fiscal 2016 operating data reflecting the impact of acquisition-related costs and accounting adjustments
|
| | | | | | | | | | | | | | | | | | | | | |
Fourth Quarter Fiscal 2016 (in millions, except per share amount and % of sales) | Adjusted Signet | | Accounting adjustments(1) | | Transaction/Integration costs(2) | | Signet consolidated, as reported |
Sales | $ | 2,397.8 |
| | 100.0 | % | | $ | (5.2 | ) | | $ | — |
| | $ | 2,392.6 |
| | 100.0 | % |
Cost of sales | (1,377.1 | ) | | (57.4 | )% | | 0.5 |
| | — |
| | (1,376.6 | ) | | (57.5 | )% |
Gross margin | 1,020.7 |
| | 42.6 | % | | (4.7 | ) | | — |
| | 1,016.0 |
| | 42.5 | % |
Selling, general and administrative expenses | (666.0 | ) | | (27.8 | )% | | (1.5 | ) | | (19.1 | ) | | (686.6 | ) | | (28.7 | )% |
Other operating income, net | 63.7 |
| | 2.6 | % | | — |
| | — |
| | 63.7 |
| | 2.6 | % |
Operating income (loss) | 418.4 |
| | 17.4 | % | | (6.2 | ) | | (19.1 | ) | | 393.1 |
| | 16.4 | % |
Interest expense, net | (12.1 | ) | | (0.5 | )% | | — |
| | — |
| | (12.1 | ) | | (0.5 | )% |
Income before income taxes | 406.3 |
| | 16.9 | % | | (6.2 | ) | | (19.1 | ) | | 381.0 |
| | 15.9 | % |
Income taxes | (117.8 | ) | | (4.9 | )% | | 1.8 |
| | 6.9 |
| | (109.1 | ) | | (4.5 | )% |
Net income (loss) | 288.5 |
| | 12.0 | % | | (4.4 | ) | | (12.2 | ) | | 271.9 |
| | 11.4 | % |
Diluted earnings per share | $ | 3.63 |
| | | | $ | (0.06 | ) | | $ | (0.15 | ) | | $ | 3.42 |
| | |
| |
(1)
| Includes deferred revenue adjustments related to acquisition accounting which resulted in a reset of deferred revenue associated with extended service plans previously sold by Zale Corporation. Similar to Signet’s Sterling Jewelers division, historically, Zale Corporation deferred the revenue generated by the sale of lifetime warranties and recognized revenue in relation to the pattern of costs expected to be incurred, which included a profit margin on activities related to the initial selling effort. In acquisition accounting, deferred revenue is only recognized when a legal performance obligation is assumed by the acquirer. The fair value of deferred revenue is determined based on the future obligations associated with the outstanding plans at the time of the Acquisition. The acquisition accounting adjustment resulted in a reduction to the deferred revenue balance from $183.8 million to $93.3 million as of May 29, 2014, as the fair value was determined through the estimation of costs remaining to be incurred, plus a reasonable profit margin on the estimated costs. Revenues generated from the sale of extended services plans subsequent to the Acquisition are recognized in revenue in a manner consistent with Signet’s methodology. Additionally, accounting adjustments include the amortization of acquired intangibles. |
| |
(2)
| Transaction and integration costs include expenses associated with information technology implementations and consulting as well as severance costs to drive synergies. These costs are included within Signet’s Other segment. |
(c) Fiscal 2015 operating data reflecting the impact of acquisition-related costs and accounting adjustments
|
| | | | | | | | | | | | | | | | | | | | | |
Fiscal 2015 (in millions, except per share amount and % of sales) | Adjusted Signet | | Accounting adjustments(1) | | Transaction/Integration costs(2) | | Signet consolidated, as reported |
Sales | $ | 5,769.9 |
| | 100.0 | % | | $ | (33.6 | ) | | $ | — |
| | $ | 5,736.3 |
| | 100.0 | % |
Cost of sales | (3,638.4 | ) | | (63.1 | )% | | (23.7 | ) | | — |
| | (3,662.1 | ) | | (63.8 | )% |
Gross margin | 2,131.5 |
| | 36.9 | % | | (57.3 | ) | | — |
| | 2,074.2 |
| | 36.2 | % |
Selling, general and administrative expenses | (1,664.5 | ) | | (28.8 | )% | | 11.4 |
| | (59.8 | ) | | (1,712.9 | ) | | (29.9 | )% |
Other operating income, net | 215.3 |
| | 3.7 | % | | — |
| | — |
| | 215.3 |
| | 3.7 | % |
Operating income (loss) | 682.3 |
| | 11.8 | % | | (45.9 | ) | | (59.8 | ) | | 576.6 |
| | 10.0 | % |
Interest expense, net | (36.0 | ) | | (0.6 | )% | | — |
| | — |
| | (36.0 | ) | | (0.6 | )% |
Income before income taxes | 646.3 |
| | 11.2 | % | | (45.9 | ) | | (59.8 | ) | | 540.6 |
| | 9.4 | % |
Income taxes | (195.2 | ) | | (3.4 | )% | | 17.4 |
| | 18.5 |
| | (159.3 | ) | | (2.8 | )% |
Net income (loss) | 451.1 |
| | 7.8 | % | | (28.5 | ) | | (41.3 | ) | | 381.3 |
| | 6.6 | % |
Diluted earnings per share | $ | 5.63 |
| | | | $ | (0.36 | ) | | $ | (0.51 | ) | | $ | 4.75 |
| | |
| |
(1)
| Includes deferred revenue adjustments related to acquisition accounting which resulted in a reset of deferred revenue associated with extended service plans previously sold by Zale Corporation. Similar to Signet’s Sterling Jewelers division, historically, Zale Corporation deferred the revenue generated by the sale of lifetime warranties and recognized revenue in relation to the pattern of costs expected to be incurred, which included a profit margin on activities related to the initial selling effort. In acquisition accounting, deferred revenue is only recognized when a legal performance obligation is assumed by the acquirer. The fair value of deferred revenue is determined based on the future obligations associated with the outstanding plans at the time of the Acquisition. The acquisition accounting adjustment resulted in a reduction to the deferred revenue balance from $183.8 million to $93.3 million as of May 29, 2014, as the fair value was determined through the estimation of costs remaining to be incurred, plus a reasonable profit margin on the estimated costs. Revenues generated from the sale of extended services plans subsequent to the Acquisition are recognized in revenue in a manner consistent with Signet’s methodology. Additionally, accounting adjustments include the recognition of a portion of the inventory fair value step-up of $32.2 million and amortization expense of intangibles. |
| |
(2)
| Transaction and integration costs include expenses associated with advisor fees for legal, tax, accounting, information technology implementation and consulting. Severance costs related to Zale and other management changes are also included to conform with current year presentation. These costs are included within Signet’s Other segment. |
(d) Fourth quarter Fiscal 2015 operating data reflecting the impact of acquisition-related costs and accounting adjustments
|
| | | | | | | | | | | | | | | | | | | | | |
Fourth Quarter Fiscal 2015 (in millions, except per share amount and % of sales) | Adjusted Signet | | Accounting adjustments(1) | | Transaction/Integration costs(2) | | Signet consolidated, as reported |
Sales | $ | 2,289.2 |
| | 100.0 | % | | $ | (12.8 | ) | | $ | — |
| | $ | 2,276.4 |
| | 100.0 | % |
Cost of sales | (1,352.3 | ) | | (59.1 | )% | | (12.0 | ) | | — |
| | (1,364.3 | ) | | (59.9 | )% |
Gross margin | 936.9 |
| | 40.9 | % | | (24.8 | ) | | — |
| | 912.1 |
| | 40.1 | % |
Selling, general and administrative expenses | (629.3 | ) | | (27.5 | )% | | 4.0 |
| | (9.2 | ) | | (634.5 | ) | | (27.9 | )% |
Other operating income, net | 54.1 |
| | 2.4 | % | | — |
| | — |
| | 54.1 |
| | 2.4 | % |
Operating income (loss) | 361.7 |
| | 15.8 | % | | (20.8 | ) | | (9.2 | ) | | 331.7 |
| | 14.6 | % |
Interest expense, net | (10.7 | ) | | (0.5 | )% | | 2.8 |
| | — |
| | (7.9 | ) | | (0.4 | )% |
Income before income taxes | 351.0 |
| | 15.3 | % | | (18.0 | ) | | (9.2 | ) | | 323.8 |
| | 14.2 | % |
Income taxes | (105.4 | ) | | (4.6 | )% | | 6.8 |
| | 2.8 |
| | (95.8 | ) | | (4.2 | )% |
Net income (loss) | 245.6 |
| | 10.7 | % | | (11.2 | ) | | (6.4 | ) | | 228.0 |
| | 10.0 | % |
Diluted earnings per share | $ | 3.06 |
| | | | $ | (0.14 | ) | | $ | (0.08 | ) | | $ | 2.84 |
| | |
| |
(1)
| Includes deferred revenue adjustments related to acquisition accounting which resulted in a reset of deferred revenue associated with extended service plans previously sold by Zale Corporation. Similar to Signet’s Sterling Jewelers division, historically, Zale Corporation deferred the revenue generated by the sale of lifetime warranties and recognized revenue in relation to the pattern of costs expected to be incurred, which included a profit margin on activities related to the initial selling effort. In acquisition accounting, deferred revenue is only recognized when a legal performance obligation is assumed by the acquirer. The fair value of deferred revenue is determined based on the future obligations associated with the outstanding plans at the time of the Acquisition. The acquisition accounting adjustment resulted in a reduction to the deferred revenue balance from $183.8 million to $93.3 million as of May 29, 2014, as the fair value was determined through the estimation of costs remaining to be incurred, plus a reasonable profit margin on the estimated costs. Revenues generated from the sale of extended services plans subsequent to the Acquisition are recognized in revenue in a manner consistent with Signet’s methodology. Additionally, accounting adjustments include the recognition of a portion of the inventory fair value step-up of $32.2 million and amortization expense of intangibles. |
| |
(2)
| Transaction and integration costs include expenses associated with advisor fees for legal, tax, accounting, information technology implementation and consulting. Severance costs related to Zale and other management changes are also included to conform with current year presentation. These costs are included within Signet’s Other segment. |
3. Net Cash (Debt)
Net cash (debt) is the total of cash and cash equivalents less loans, overdrafts and long-term debt. Management considers this metric to be helpful in understanding the total indebtedness of the Company after consideration of liquidity available from cash balances on-hand.
|
| | | | | | | | | | | |
(in millions) | January 30, 2016 | | January 31, 2015 | | February 1, 2014 |
Cash and cash equivalents | $ | 137.7 |
| | $ | 193.6 |
| | $ | 247.6 |
|
Loans and overdrafts | (59.5 | ) | | (97.5 | ) | | (19.3 | ) |
Long-term debt | (1,328.7 | ) | | (1,363.8 | ) | | — |
|
Net (debt) cash | $ | (1,250.5 | ) | | $ | (1,267.7 | ) | | $ | 228.3 |
|
4. Return on Capital Employed Excluding Goodwill (“ROCE”)
ROCE is calculated by dividing the 52 week annual operating income by the average quarterly capital employed and is expressed as a percentage. Capital employed includes accounts and other receivables, inventories, property, plant and equipment, other assets, accounts payable, accrued expenses and other current liabilities, other liabilities, deferred revenue and retirement benefit asset/obligation. This is a key performance indicator used by management for assessing the effective operation of the business and is considered a useful disclosure for investors as it provides a measure of the return on Signet’s operating assets. Further, this metric is utilized in evaluating management performance and incorporated into management’s long-term incentive plan metrics.
|
| | | | | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 | | Fiscal 2013 | | Fiscal 2012 |
ROCE | 21.0 | % | | 19.5 | % | | 25.2 | % | | 28.1 | % | | 28.6 | % |
5. Free Cash Flow
Free cash flow is a non-GAAP measure defined as the net cash provided by operating activities less purchases of property, plant and equipment. Management considers that this 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 is an indicator used by management frequently in evaluating its overall liquidity and determining appropriate capital allocation strategies. Free cash flow does not represent the residual cash flow available for discretionary expenditure.
|
| | | | | | | | | | | |
(in millions) | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 |
Net cash provided by operating activities | $ | 443.3 |
| | $ | 283.0 |
| | $ | 235.5 |
|
Purchase of property, plant and equipment | (226.5 | ) | | (220.2 | ) | | (152.7 | ) |
Free cash flow | $ | 216.8 |
| | $ | 62.8 |
| | $ | 82.8 |
|
6. Leverage Ratio
The leverage ratio is a non-GAAP measure calculated by dividing Signet’s adjusted debt by adjusted EBITDAR. Adjusted debt is a non-GAAP measure defined as debt recorded in the consolidated balance sheet, plus an adjustment for operating leases (8x annual rent expense), less 70% of outstanding in-house finance receivables recorded in the consolidated balance sheet. Adjusted EBITDAR is a non-GAAP measure. Adjusted EBITDAR is defined as earnings before interest and income taxes (operating income), depreciation and amortization, and non-cash acquisition-related accounting adjustments (“Adjusted EBITDA”) and further excludes rent expense for properties occupied under operating leases, non-cash share-based compensation expense and income earned on receivable balances related to the in-house credit program. Adjusted EBITDA and Adjusted EBITDAR are considered important indicators of operating performance as they exclude the effects of financing and investing activities by eliminating the effects of interest, depreciation and amortization costs and accounting adjustments. Management believes these financial measures are helpful to enhancing investors’ ability to analyze trends in Signet’s business and evaluate Signet’s performance relative to other companies. Management also utilizes these metrics to evaluate its current credit profile, which is a view consistent with rating agency methodologies.
|
| | | | | | | | | | | | | | | | | | | |
(in millions) | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 | | Fiscal 2013 | | Fiscal 2012 |
Adjusted Debt: | | | | | | | | | |
Long-term debt | $ | 1,328.7 |
| | $ | 1,363.8 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Loans and Overdrafts | 59.5 |
| | 97.5 |
| | 19.3 |
| | — |
| | — |
|
Adjustments: | | | | | | | | | |
8x rent expense | 4,205.6 |
| | 3,703.2 |
| | 2,589.6 |
| | 2,528.0 |
| | 2,473.0 |
|
70% of financing receivables related to in-house credit program | (1,217.7 | ) | | (1,087.1 | ) | | (949.2 | ) | | (835.0 | ) | | (754.2 | ) |
Adjusted Debt | $ | 4,376.1 |
| | $ | 4,077.4 |
| | $ | 1,659.7 |
| | $ | 1,693.0 |
| | $ | 1,718.8 |
|
|
| | | | | | | | | | | | | | | | | | | |
(in millions) | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 | | Fiscal 2013 | | Fiscal 2012 |
Operating income | $ | 703.7 |
| | $ | 576.6 |
| | $ | 570.5 |
| | $ | 560.5 |
| | $ | 507.4 |
|
Depreciation and amortization on property, plant and equipment(1) | 161.4 |
| | 140.4 |
| | 110.2 |
| | 99.4 |
| | 92.4 |
|
Amortization of definite-lived intangibles(1)(2) | 13.9 |
| | 9.3 |
| | — |
| | — |
| | — |
|
Amortization of unfavorable leases and contracts(2) | (28.7 | ) | | (23.7 | ) | | — |
| | — |
| | — |
|
Other non-cash accounting adjustments(2) | 41.2 |
| | 60.3 |
| | — |
| | — |
| | — |
|
Adjusted EBITDA | $ | 891.5 |
| | $ | 762.9 |
| | $ | 680.7 |
| | $ | 659.9 |
| | $ | 599.8 |
|
Rent expense | 525.7 |
| | 462.9 |
| | 323.7 |
| | 316.0 |
| | 309.1 |
|
Share-based compensation expense | 16.4 |
| | 12.1 |
| | 14.4 |
| | 15.7 |
| | 17.0 |
|
Finance income from in-house credit program | (252.6 | ) | | (217.9 | ) | | (186.4 | ) | | (159.7 | ) | | (125.4 | ) |
Adjusted EBITDAR | $ | 1,181.0 |
| | $ | 1,020.0 |
| | $ | 832.4 |
| | $ | 831.9 |
| | $ | 800.5 |
|
Adjusted Leverage ratio | 3.7x |
| | 4.0x |
| | 2.0x |
| | 2.0x |
| | 2.1x |
|
| |
(1)
| Total amount of depreciation and amortization reflected on the consolidated statement of cash flows for Fiscal 2016 and Fiscal 2015 equals $175.3 million and $149.7 million, respectively which includes $13.9 million and $9.3 million, respectively, related to the amortization of definite-lived intangibles, primarily favorable leases and trade names. |
| |
(2)
| Total net operating loss relating to Acquisition accounting adjustments is $26.4 million and $45.9 million for Fiscal 2016 and Fiscal 2015, respectively, as reflected in the non-GAAP tables above. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Annual Report on Form 10-K 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, a decline in consumer spending, 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 customer credit, seasonality of Signet’s business, financial market risks, deterioration in customers’ financial condition, exchange rate fluctuations, changes in Signet’s credit rating, 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, risks related to Signet being a Bermuda corporation, the impact of the acquisition of Zale Corporation on relationships, including with employees, suppliers, customers and competitors, the impact of stockholder litigation with respect to the acquisition of Zale Corporation and our ability to successfully integrate Zale Corporation’s operations and to realize synergies from the transaction.
For a discussion of these risks and other risks and uncertainties which could cause actual results to differ materially from those expressed in any forward looking statement, see Item 1A and elsewhere in this Annual Report on Form 10-K. Signet undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.
GAAP AND NON-GAAP MEASURES
The discussion and analysis of Signet’s results of operations, financial condition and liquidity contained in this Annual Report on Form 10-K are based upon the consolidated financial statements of Signet which are prepared in accordance with US GAAP and should be read in conjunction with Signet’s financial statements and the related notes included in Item 8. A number of non-GAAP measures are used by management to analyze and manage the performance of the business, and the required disclosures for these non-GAAP measures are shown below.
Signet provides such 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 substitution for, financial information prepared in accordance with GAAP.
1. Net Debt
Net debt is a non-GAAP measure defined as the total of cash and cash equivalents less loans, overdrafts and long-term debt. Management considers this metric to be helpful in understanding the total indebtedness of the Company after consideration of liquidity available from cash balances on-hand.
|
| | | | | | | | | | | |
(in millions) | February 2, 2019 | | February 3, 2018 | | January 28, 2017 |
Cash and cash equivalents | $ | 195.4 |
| | $ | 225.1 |
| | $ | 98.7 |
|
Loans and overdrafts | (78.8 | ) | | (44.0 | ) | | (91.1 | ) |
Long-term debt | (649.6 | ) | | (688.2 | ) | | (1,317.9 | ) |
Net debt | $ | (533.0 | ) | | $ | (507.1 | ) | | $ | (1,310.3 | ) |
2. Return on Capital Employed Excluding Goodwill (“ROCE”)
ROCE is a non-GAAP measure calculated by dividing the 52 week annual operating income by the average quarterly capital employed and is expressed as a percentage. Capital employed includes accounts and other receivables, inventories, property, plant and equipment, other assets, accounts payable, accrued expenses and other current liabilities, other liabilities, deferred revenue and retirement benefit asset/obligation. This is a key performance indicator used by management for assessing the effective operation of the business and is considered a useful disclosure for investors as it provides a measure of the return on Signet’s operating assets. Further, this metric is utilized in evaluating management performance and incorporated into management’s long-term incentive plan metrics.
|
| | | | | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 | | Fiscal 2016 | | Fiscal 2015 |
ROCE | 6.7 | % | (1) | 19.1 | % | | 21.4 | % | | 21.0 | % | | 19.5 | % |
| |
(1) | ROCE in Fiscal 2019 was adjusted to exclude the impact of goodwill and intangible impairments totaling $735.4 million and $160.4 million of valuation losses associated with sale of the non-prime in-house accounts receivable portfolio recognized during the year. See Note 17 and Note 4 of Item 8 for additional information. |
3. Free Cash Flow
Free cash flow is a non-GAAP measure defined as the net cash provided by operating activities less purchases of property, plant and equipment. Management considers that this 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 is an indicator used by management frequently in evaluating its overall liquidity and determining appropriate capital allocation strategies. Free cash flow does not represent the residual cash flow available for discretionary expenditure. In Fiscal 2019, net cash provided by operating activities included $445.5 million in proceeds received in connection with the sale of the Company’s non-prime receivable portfolio. In Fiscal 2018, net cash provided by operating activities included $952.5 million in proceeds received in connection with the sale of the Company’s prime receivable portfolio. See Note 4 of Item 1 for additional information regarding the sale of the prime and non-prime receivable portfolios.
|
| | | | | | | | | | | |
(in millions) | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 |
Net cash provided by operating activities | $ | 697.7 |
| | $ | 1,940.5 |
| | $ | 678.3 |
|
Purchase of property, plant and equipment | (133.5 | ) | | (237.4 | ) | | (278.0 | ) |
Free cash flow | $ | 564.2 |
| | $ | 1,703.1 |
| | $ | 400.3 |
|
4. Leverage Ratio
The leverage ratio is a non-GAAP measure calculated by dividing Signet’s adjusted debt by adjusted EBITDAR. Adjusted debt is a non-GAAP measure defined as debt recorded in the consolidated balance sheet, plus Series A redeemable convertible preferred shares, plus an adjustment for operating leases (5x annual rent expense). Prior to the termination of the asset-backed securitization in Fiscal 2018, this measure was also reduced by 70% of outstanding in-house finance receivables recorded in the consolidated balance sheet. Adjusted EBITDAR is a non-GAAP measure. Adjusted EBITDAR is defined as earnings before interest and income taxes, depreciation and amortization, and non-cash accounting adjustments (“Adjusted EBITDA”) and further excludes rent expense for properties occupied under operating leases. Prior to Fiscal 2018, this measure also excluded non-cash share-based compensation expense and the income statement impact of the finance receivables related to the in-house credit program. Adjusted EBITDA and Adjusted EBITDAR are considered important indicators of operating performance as they exclude the effects of financing and investing activities by eliminating the effects of interest, depreciation and amortization costs and accounting adjustments. Management believes these financial measures are helpful to enhancing investors’ ability to analyze trends in Signet’s business and evaluate Signet’s performance relative to other companies. Management also utilizes these metrics to evaluate its current credit profile, which is similar to rating agency methodologies.
|
| | | | | | | | | | | | | | | | | | | |
(in millions) | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 | | Fiscal 2016 | | Fiscal 2015 |
Adjusted debt: | | | | | | | | | |
Long-term debt | $ | 649.6 |
| | $ | 688.2 |
| | $ | 1,317.9 |
| | $ | 1,321.0 |
| | $ | 1,354.3 |
|
Loans and overdrafts | 78.8 |
| | 44.0 |
| | 91.1 |
| | 57.7 |
| | 95.7 |
|
Series A redeemable convertible preferred shares(1) | 615.3 |
| | 613.6 |
| | 611.9 |
| | n/a |
| | n/a |
|
Adjustments: | | | | | | | | | |
5x Rent expense(3) | 2,551.5 |
| | 2,640.5 |
| |
| |
| |
|
8x Rent expense(3) | n/a |
| | n/a |
| | 4,195.2 |
| | 4,205.6 |
| | 3,703.2 |
|
70% of in-house credit program financing receivables | n/a |
| | n/a |
| | (1,269.3 | ) | | (1,208.2 | ) | | (1,087.0 | ) |
Adjusted debt | $ | 3,895.2 |
| | $ | 3,986.3 |
| | $ | 4,946.8 |
| | $ | 4,376.1 |
| | $ | 4,066.2 |
|
| | | | | | | | | |
Adjusted EBITDAR: | | | | | | | | | |
Net income (loss) | $ | (657.4 | ) | | $ | 519.3 |
| | $ | 543.2 |
| | $ | 467.9 |
| | $ | 381.3 |
|
Income taxes | (145.2 | ) | | 7.9 |
| | 170.6 |
| | 189.9 |
| | 159.3 |
|
Interest expense, net | 39.7 |
| | 52.7 |
| | 49.4 |
| | 45.9 |
| | 36.0 |
|
Depreciation and amortization on property, plant and equipment(2) | 179.6 |
| | 194.1 |
| | 175.0 |
| | 161.4 |
| | 140.4 |
|
Amortization of definite-lived intangibles(2) | 4.0 |
| | 9.3 |
| | 13.8 |
| | 13.9 |
| | 9.3 |
|
Amortization of unfavorable leases and contracts | (7.9 | ) | | (13.0 | ) | | (19.7 | ) | | (28.7 | ) | | (23.7 | ) |
Other non-cash accounting adjustments(3) | 980.7 |
| | — |
| | 22.7 |
| | 41.2 |
| | 60.3 |
|
Adjusted EBITDA | $ | 393.5 |
| | $ | 770.3 |
| | $ | 955.0 |
| | $ | 891.5 |
| | $ | 762.9 |
|
Rent expense | 510.3 |
| | 528.1 |
| | 524.4 |
| | 525.7 |
| | 462.9 |
|
Share-based compensation expense(4) | n/a |
| | n/a |
| | 8.0 |
| | 16.4 |
| | 12.1 |
|
Finance income from in-house credit program | n/a |
| | n/a |
| | (277.6 | ) | | (252.5 | ) | | (217.9 | ) |
Late charge income | n/a |
| | n/a |
| | (36.0 | ) | | (33.9 | ) | | (31.3 | ) |
Net bad debt expense | n/a |
| | n/a |
| | 212.1 |
| | 190.5 |
| | 160.0 |
|
Adjusted EBITDAR | $ | 903.8 |
| | $ | 1,298.4 |
| | $ | 1,385.9 |
| | $ | 1,337.7 |
| | $ | 1,148.7 |
|
|
|
| | | | | | | | |
Adjusted Leverage ratio(5) | 4.3x |
| | 3.1x |
| | 3.6x |
| | 3.3x |
| | 3.5x |
|
| |
(1) | Series A redeemable convertible preferred shares were issued in October 2016. |
| |
(2) | Total amount of depreciation and amortization reflected on the consolidated statement of cash flows for Fiscal 2019, Fiscal 2018 and Fiscal 2017 equals $183.6 million, $203.4 million and $188.8 million, respectively, which includes $4.0 million, $9.3 million and $13.8 million, respectively, related to the amortization of definite-lived intangibles, primarily favorable leases and trade names. |
| |
(3) | Fiscal 2019 includes: 1) $735.4 million related to the goodwill and intangible impairments; 2) $160.4 million from the valuation losses related to the sale of eligible non-prime in-house accounts receivable; and 3) $84.9 million related to charges recorded in conjunction with the Company’s restructuring activities. |
| |
(4) | Adjusted debt and adjusted EBITDA have been recalculated to align with methodologies commonly utilized by credit rating agencies and others in evaluating leverage. |
| |
(5) | Adjusted leverage ratio would have been as follows in the comparable periods if adjusted debt reflected 5x rent expense: Fiscal 2017: 2.4x, Fiscal 2016: 2.1x and Fiscal 2015: 2.3x. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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: our ability to implement Signet's transformation initiative; the effect of US federal tax reform and adjustments relating to such impact on the completion of our quarterly and year-end financial statements; changes in interpretation or assumptions, and/or updated regulatory guidance regarding the US federal tax reform; the benefits and outsourcing of the credit portfolio sale including technology disruptions, future financial results and operating results; deterioration in the performance of individual businesses or of the company's market value relative to its book value, resulting in impairments of fixed assets or intangible assets or other adverse financial consequences, including tax consequences related thereto, especially in view of the Company’s recent market valuation; our ability to successfully integrate Zale Corporation and R2Net’s operations and to realize synergies from the Zale and R2Net transactions; general economic conditions; potential regulatory changes, global economic conditions or other developments related to the United Kingdom’s announced intention to negotiate a formal exit from the European Union; a decline in consumer spending or deterioration in consumer financial position; the merchandising, pricing and inventory policies followed by Signet; Signet’s relationships with suppliers and ability to obtain merchandise that customers wish to purchase; the reputation of Signet and its banners; the level of competition and promotional activity in the jewelry sector; the cost and availability of diamonds, gold and other precious metals; changes in the supply and consumer acceptance of gem quality lab created diamonds; regulations relating to customer credit; seasonality of Signet’s business; the success of recent changes in Signet’s executive management team; the performance of and ability to recruit, train, motivate and retain qualified sales associates; the impact of weather-related incidents on Signet’s business; financial market risks; exchange rate fluctuations; changes in Signet’s credit rating; changes in consumer attitudes regarding jewelry; management of social, ethical and environmental risks; the development and maintenance of Signet’s omni-channel retailing; the ability to optimize Signet’s real estate footprint; 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 credit outsourcing fees, extended service plans and pensions; risks related to Signet being a Bermuda corporation; the impact of the acquisition of Zale Corporation on relationships, including with employees, suppliers, customers and competitors; Signet’s ability to protect its intellectual property; changes in taxation benefits, rules or practices in the US and jurisdictions in which Signet’s subsidiaries are incorporated, including developments related to the tax treatment of companies engaged in Internet commerce; and an adverse development in legal or regulatory proceedings or tax matters, any new regulatory initiatives or investigations, and ongoing compliance with regulations and any consent orders or other legal or regulatory decisions.
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 Item 1A and elsewhere in this Annual Report on Form 10-K. Signet undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.
GAAP AND NON-GAAP MEASURES
The following discussion and analysis of the results of operations, financial condition and liquidity is based upon the consolidated financial statements of Signet which are prepared in accordance with US GAAP. The following information should be read in conjunction with Signet’s financial statements and the related notes included in Item 8.
A number of non-GAAP measures are used by management to analyze and manage the performance of the business. See Item 6 for the required disclosures related to these measures. Signet provides such non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. The Company’s management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitution for, financial information prepared in accordance with GAAP.
Exchange Translation Impact
The monthly average exchange rates are used to prepare the income statement and are calculated each month from the weekly average exchange rates weighted by sales. In Fiscal 2017,2020, it is anticipated a five percent movement in the British pound to US dollar exchange rate would impact income before income taxes by approximately $3.2$1.1 million, while a five percent movement in the Canadian dollar to US dollar exchange rate would have a negligible impact on income before income taxes.taxes by approximately $0.3million.
Transactions Affecting Comparability
Market and Operating Conditions
We face a highly competitive and dynamic retail landscape throughout the geographies where we do business, as well as an uncertain macro-economic and political environment in our UK market. Fiscal 2019 holiday sales results did not meet our expectations, and as a result, we ended the year in an elevated inventory position and do expect inventory to be up year over year in the first quarter. As we continue to work through legacy product and engage in incremental clearance activity, we do expect to reduce our inventory position by year end Fiscal 2020. A key learning from Fiscal 2019 is the need to have a broader price focused assortment for the value-oriented gifting shopper in key weeks around major holidays, which could negatively impact profit. Additionally, a timing shift related to revenue recognition for extended service plan revenues, which have a higher margin rate, are expected to have a negative impact on profit in the first half of ResultsFiscal 2020. This timing shift of Operations and Liquidity and Capital Resources
The comparabilityservice plan revenue is the result of the Company’s operating results for historical claims experience shifting away from the earlier years of the service plans to later years of the coverage period.
Fiscal 2016, Fiscal 2015 and Fiscal 2014 presented herein has been affected by certain transactions, including:2019 Overview
The Zale Acquisition that closed on May 29, 2014, as describedSimilar to many other retailers, Signet follows the retail 4-4-5 reporting calendar, which included an extra week in Note 3 of Item 8, resulting in Zale contributing 247 days of performance during the year-to-date periodfourth quarter of Fiscal 2015 based on the timing of the acquisition;
Certain transaction and integration costs;
Zale Acquisition financing as described in Note 3 and Note 19 of Item 8, including global financing arrangements; and
Certain purchase accounting adjustments.
Fiscal 2016 Overview
Results reflect the addition of Zale Corporation from the date of the Acquisition on May 29, 2014. Same store sales increased 4.1% compared to an increase of 4.1% also in Fiscal 2015; total sales were up 14.2% to $6,550.2 million compared to $5,736.32018 (the “53rd week”). The 53rd week added $84.3 million in Fiscal 2015. The current yearnet sales results reflect a full year of Zale which added $1,811.4 million of sales, compared to a partial prior year of $1,215.6 million. Operating marginand increased 70 basis points to 10.7% compared to 10.0% in Fiscal 2015. Operating income increased 22.0% to $703.7 million compared to $576.6 million in Fiscal 2015. Diluteddiluted earnings per share increased 23.6% to $5.87 compared to $4.75 inby approximately $0.12 for both the quarter and Fiscal 2015. Higher profit dollars and
the increased operating margin rate were also driven by the continued integration of Zale and investments in field operational and support initiatives to improve efficiencies and leverage operating expense. See “GAAP and Non-GAAP Measures” section in Item 6 for additional information.
Signet’s long-term debt was $1,328.7 million at January 30, 2016 and $1,363.8 million at January 31, 2015. Cash and cash equivalents were $137.7 million and $193.6 million, as of January 30, 2016 and January 31, 2015, respectively. During Fiscal 2016, Signet repurchased approximately 1.0 million shares at an average cost of $127.63 per share, which represented 1.3% of the shares outstanding at the start of Fiscal 2016, as compared to 0.3 million shares repurchased in Fiscal 2015 at an average cost of $103.37.2018.
Drivers of Operating Profitability
The key measures and drivers of operating profitability are:
total sales - driven by the change in same store sales, and net store selling space;space and mix of product and services;
gross margin;margin - including the mix of results by store banner including brick-and-mortar locations and online; and
level of selling, general and administrative expenses.
Same Store Sales
Same store sales growth is calculated by comparison of sales in stores that were open in both the current and the prior fiscal year. Sales from stores that have been open for less than 12 months including acquisitions, are excluded from the comparison until their 12-month anniversary. Sales after the 12-month anniversary are compared against the equivalent prior period sales within the comparable store sales comparison. Stores closed in the current financial period are included up to the date of closure and the comparative period is correspondingly adjusted. Stores that have been relocated or expanded, but remain within the same local geographic area, are included within the comparison with no adjustment to either the current or comparative period. Stores that have been refurbished are also included within the comparison except for the period when the refurbishment was taking place, when those stores are excluded from the comparison both for the current year and for the comparative period. Sales to employees are also excluded. Comparisons at divisional level are made in local currency and consolidated comparisons are made at constant exchange rates and exclude the effect of exchange rate movements by recalculating the prior period results as if they had been generated at the weighted average exchange rate for the current period. eCommerce sales are included in the calculation of same store sales for the period and the comparative figures from the anniversary of the launch of the relevant website. Same store sales exclude the 53rd week in the fiscal year in which it occurs. Management considers same store sales useful as it is a major benchmark used by investors to judge performance within the retail industry.
Net Store Selling Space
| | | Sterling Jewelers division | | Zale division | | UK Jewelry division | | Total Signet | | | North America | | International | | Total Signet |
Fiscal 2016 | | | | | | | | | |
Fiscal 2019 | | | | | | | |
Openings | 60 |
| | 38 |
| | 10 |
| | 108 |
| | | 42 |
| | 3 |
| | 45 |
|
Closures | (24 | ) | | (33 | ) | | (5 | ) | | (62 | ) | | | (237 | ) | | (30 | ) | | (267 | ) |
Net change in store selling space | 5.0 | % | | 0.5 | % | | 1.5 | % | | 3.3 | % | | | (5.8 | )% | | (4.8 | )% | | (5.7 | )% |
Fiscal 2015 | | | | | | | | | |
Fiscal 2018 | | | | | | | |
Openings | 75 |
| | 12 |
| | 8 |
| | 95 |
| | | 113 |
| | 3 |
| | 116 |
|
Closures | (42 | ) | | (54 | ) | | (3 | ) | | (99 | ) | | | (235 | ) | | (7 | ) | | (242 | ) |
Net change in store selling space | 4.9 | % | | n/a |
| | 1.8 | % | | 48.1 | % | (1) | | (1.9 | )% | | (0.4 | )% | | (1.7 | )% |
Fiscal 2014 | | | | | | | | | |
Fiscal 2017 | | | | | | | |
Openings | 81 |
| | n/a |
| | 2 |
| | 83 |
| | | 153 |
| | 9 |
| | 162 |
|
Closures | (53 | ) | | n/a |
| | (20 | ) | | (73 | ) | | | (101 | ) | | (4 | ) | | (105 | ) |
Net change in store selling space | 4.8 | % | | n/a |
| | (2.5 | )% | | 3.6 | % | | | 2.8 | % | | 1.0 | % | | 2.6 | % |
(1) Excluding Zale division, net change in store selling space for Signet was 4% in Fiscal 2015.
n/aNot applicable as Zale division was acquired on May 29, 2014. See Note 3 of Item 8 for additional information.
Cost of Sales and Gross Margin
Cost of sales is mostly composed of merchandise costs (net of discounts and allowances). Cost of sales also contains:
Occupancy costs such as rent, common area maintenance, depreciation and real estate tax.
Net bad debt expense and customers’ late payments primarily under the Sterling Jewelers customer finance program. | |
• | Net bad debt expense and customers’ late payments prior to Signet outsourcing credit.(1) |
Store operating expenses such as utilities, displays and merchant credit costs.
Distribution and warehousing costs including freight, processing, inventory shrinkage and inventory shrinkage.related payroll.
| |
(1) | Signet recognized two months of net bad debt expense, customer late payment and finance interest income (presented within other operating income) in the first quarter of Fiscal 2019 prior to the non-prime receivables being reclassified as receivables held for sale. |
As the classification of cost of sales or selling, general and administrative expenses varies from retailer to retailer, and few retailers have in-house customer finance programs, Signet’s gross margin percentage may not be directly comparable to other retailers.
Factors that influence gross margin include pricing, promotional environment, changes in merchandise costs (principally diamonds), changes in non-merchandise components of cost of sales (as described above), changes in sales mix, foreign exchange, gold and currency hedges and the economics of services such as repairs and extended service plans. The price of diamonds varies depending on their size, cut, color and clarity. Demand for diamonds is primarily driven by the manufacture and sale of diamond jewelry and their future price is uncertain. At times, Signet uses gold and currency hedges to reduce its exposure to market volatility in the cost of gold and the pound sterling to the US dollar exchange rate, but it is not able to do so for diamonds. For gold and currencies, the hedging period can extend to 24 months, although the majority of hedge contracts will normally be for a maximum of 12 months.
The percentage mix of the merchandise cost component of cost of sales, based on US dollars, is as follows:
| | | | Sterling Jewelers division | | Zale division | | UK Jewelry division | | Total Signet | | North America | | International | | Total Signet |
Fiscal 2016 | | | | | | | | | |
Diamonds | | 53 | % | | 39 | % | | 15 | % | | 45 | % | |
Fiscal 2019 | | | | | | | |
Diamond | | | 55 | % | | 19 | % | | 52 | % |
Gold | | | 14 | % | | 12 | % | | 14 | % |
All Other(1) | | | 31 | % | | 69 | % | | 34 | % |
Fiscal 2018 | | | | | | | |
Diamond | | | 48 | % | | 16 | % | | 45 | % |
Gold | | 14 | % | | 14 | % | | 16 | % | | 14 | % | | 14 | % | | 15 | % | | 14 | % |
All Other | | 33 | % | | 47 | % | | 69 | % | | 41 | % | | 38 | % | | 69 | % | | 41 | % |
Fiscal 2015 | | | | | | | | | |
Diamonds | | 52 | % | | 43 | % | | 10 | % | | 45 | % | |
Gold | | 15 | % | | 16 | % | | 15 | % | | 15 | % | |
All Other | | 33 | % | | 41 | % | | 75 | % | | 40 | % | |
| |
(1) | Decrease in North America reflects the Company strategy to exit low-priced owned branded beads and increase investments in bridal and certain fashion collections. |
Signet uses an average cost inventory methodology and, as jewelry inventory turns slowly, the impact of movements in the cost of diamonds and gold takes time to be fully reflected in the gross margin. Signet’s inventory turns faster in the fourth quarter than in the other three quarters, therefore, changes in the cost of merchandise areis more quickly reflected inimpactful on the gross margin in that quarter. Furthermore, Signet’s hedging activities result in movements in the purchase cost of merchandise taking some time before being reflected in the gross margin. An increase in inventory turn would accelerate the rate at which commodity costs impact gross margin.
Accounts receivable comprise a large volume of transactions with no one customer representing a significant balance. The net US bad debt expense includes an estimate of the allowance for losses as of the balance sheet date. The allowance is calculated using a proprietary model that analyzes factors such as delinquency rates and recovery rates. A 100% allowance is made for any amount that is more than 90 days aged on a recency basis and any amount associated with an account the owner of which has filed for bankruptcy, as well as an allowance for those 90 days aged and under based on historical loss information and payment performance. Near the end of the current year, a portion of sales under the Zale banners were financed through our in-house customer programs, however represented an immaterial amount of the Company’s credit sales, receivable balance or bad debt expense.
Selling, General and Administrative Expense (“SGA”)
SGA expense primarily includes store staff and store administrative costs as well as advertising and promotional costs. It also includes field support center expenses such as information technology, in-house credit operations prior to the Company’s outsourcing initiatives in the third quarter of Fiscal 2018 and third-party outsourcing fees and credit sales subsequent to the outsourcing initiative, finance, eCommerce and other operating expenses not specifically categorized elsewhere in the consolidated income statements.
The primary drivers of staffing costs are the number of full time equivalent employees employed and the level of compensation, taxes and other benefits paid. Management varies, on a store by store basis, the hours worked based on the expected level of selling activity, subject to minimum staffing levels required to operate the store. Non-store staffing levels are less variable. A significant element of compensation is performance based and is primarily dependent on sales and operating profit.
The level of advertising expenditure can vary. The largest element of advertising expenditure ishas historically been national television advertising and is determined by management’s judgment of the appropriate level of advertising impressions and the cost of purchasing media.
Other Operating Income
OtherPrior to the third quarter of Fiscal 2018, other operating income iswas predominantly comprised of interest income arising from in-house customer finance provided to the customers of the Sterling Jewelers division. Its level is dependentNorth America segment. In the third quarter of Fiscal 2018, the Company completed the sale of the prime portion of the in-house finance receivables.In the second quarter of Fiscal 2019, the Company completed the sale of the non-prime in-house accounts receivable. Subsequent to these transactions, the Company experienced a material reduction in the amount of interest income it recognized. See Note 4 in Item 8 for further detail on the rate of interest charged, theCompany’s credit program selected by the customer and the level of outstanding balances. The level of outstanding balances is primarily dependent on the sales of the Sterling Jewelers division, the proportion of sales that use the in-house customer finance and the monthly collection rate.transactions.
Operating Income
To maintain current levels of operating income, Signet needs to achieve same store sales growth sufficient to offset any adverse movement in gross margin, any increase in operating costs, the impact of any immature selling space and any adverse changes in other operating income. Same store sales growth above the level required to offset the factors outlined above allows the business to achieve leverage of its cost base and improve operating income. Slower sales growth or a sales decline would normally result in reduced operating income. When foreseen, Signet may be able to reduce costs to help offset the impact of slow or negative sales growth. A key factor in driving operating income is the level of average sales per store, with higher productivity allowing leverage of expenses incurred in performing store and central functions. The acquisition of Zale, with operating margins lower than that of Signet, caused an overall lower operating margin for Signet.
The impact on operating income of a sharp, unexpected increase or decrease in same store sales performance can be significant. This is particularly so when it occurs in the fourth quarter due to the seasonality of the business. In the medium term, there is more opportunity to adjust costs to the changed sales level, but the time it takes varies depending on the type of cost. An example of where it can take a number of months to adjust costs is expenditure on national network television advertising in the US, where Signet makes most of its commitments for the year ahead during its second quarter. Additionally, while Signet has improved flexibility involving lease costs in recent years as off-mall locations have increased, Signet’s ability to adjust base lease costs is stll limited in the short term (and to a lesser extent the medium term), as leases in US malls are typically for one to ten years, Jared sites for 15-20 years and in the UK for a minimum of five years.expenses.
Results of Operations
| | | Fiscal 2016 | | Fiscal 2015(1) | | Fiscal 2014 | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 |
(in millions) | $ | | % of sales | | $ | | % of sales | | $ | | % of sales | $ | | % of sales | | $ | | % of sales | | $ | | % of sales |
Sales | $ | 6,550.2 |
| | 100.0 | % | | $ | 5,736.3 |
| | 100.0 | % | | $ | 4,209.2 |
| | 100.0 | % | $ | 6,247.1 |
| | 100.0 | % | | $ | 6,253.0 |
| | 100.0 | % | | $ | 6,408.4 |
| | 100.0 | % |
Cost of sales | (4,109.8 | ) | | (62.7 | ) | | (3,662.1 | ) | | (63.8 | ) | | (2,628.7 | ) | | (62.5 | ) | (4,024.1 | ) | | (64.4 | ) | | (4,063 | ) | | (65.0 | ) | | (4,047.6 | ) | | (63.2 | ) |
Restructuring charges - cost of sales | | (62.2 | ) | | (1.0 | ) | | — |
| | — |
| | — |
| | — |
|
Gross margin | 2,440.4 |
| | 37.3 |
| | 2,074.2 |
| | 36.2 |
| | 1,580.5 |
| | 37.5 |
| 2,160.8 |
| | 34.6 |
| | 2,190.0 |
| | 35.0 |
| | 2,360.8 |
| | 36.8 |
|
Selling, general and administrative expenses | (1,987.6 | ) | | (30.4 | ) | | (1,712.9 | ) | | (29.9 | ) | | (1,196.7 | ) | | (28.4 | ) | (1,985.1 | ) | | (31.8 | ) | | (1,872.2 | ) | | (29.9 | ) | | (1,880.2 | ) | | (29.3 | ) |
Credit transaction, net | | (167.4 | ) | | (2.7 | ) | | 1.3 |
| | — |
| | — |
| | — |
|
Restructuring charges | | (63.7 | ) | | (1.0 | ) | | — |
| | — |
| | — |
| | — |
|
Goodwill and intangible impairments | | (735.4 | ) | | (11.8 | ) | | — |
| | — |
| | — |
| | — |
|
Other operating income, net | 250.9 |
| | 3.8 |
| | 215.3 |
| | 3.7 |
| | 186.7 |
| | 4.4 |
| 26.2 |
| | 0.4 |
| | 260.8 |
| | 4.2 |
| | 282.6 |
| | 4.4 |
|
Operating income | 703.7 |
| | 10.7 |
| | 576.6 |
| | 10.0 |
| | 570.5 |
| | 13.5 |
| |
Operating income (loss) | | (764.6 | ) | | (12.2 | ) | | 579.9 |
| | 9.3 |
| | 763.2 |
| | 11.9 |
|
Interest expense, net | (45.9 | ) | | (0.7 | ) | | (36.0 | ) | | (0.6 | ) | | (4.0 | ) | | (0.1 | ) | (39.7 | ) | | (0.6 | ) | | (52.7 | ) | | (0.9 | ) | | (49.4 | ) | | (0.8 | ) |
Income before income taxes | 657.8 |
| | 10.0 |
| | 540.6 |
| | 9.4 |
| | 566.5 |
| | 13.4 |
| |
Income taxes | (189.9 | ) | | (2.9 | ) | | (159.3 | ) | | (2.8 | ) | | (198.5 | ) | | (4.7 | ) | |
Net income | $ | 467.9 |
| | 7.1 | % | | $ | 381.3 |
| | 6.6 | % | | $ | 368.0 |
| | 8.7 | % | |
Other non-operating income | | 1.7 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Income (loss) before income taxes | | (802.6 | ) | | (12.8 | ) | | 527.2 |
| | 8.4 |
| | 713.8 |
| | 11.1 |
|
Income tax benefit (expense) | | 145.2 |
| | 2.3 |
| | (7.9 | ) | | (0.1 | ) | | (170.6 | ) | | (2.6 | ) |
Net income (loss) | | $ | (657.4 | ) | | (10.5 | )% | | $ | 519.3 |
| | 8.3 | % | | $ | 543.2 |
| | 8.5 | % |
(1) Fiscal 2015 results include Zale Corporation’s performance since the date of acquisition. See Note 3 of Item 8 for additional information.
COMPARISON OF FISCAL 20162019 TO FISCAL 20152018
Same store sales: up 4.1%down 0.1%.
| |
• | Diluted earnings (loss) per share: $(12.62) compared to $7.44 in Fiscal 2018. Operating income: up 22.0% to $703.7 million. Adjusted(1) operating income: up 18.6% to $809.0 million.
|
| |
• | Operating margin: increased to 10.7%, up 70 basis points. Adjusted(1) operating margin: up 50 basis points to 12.3%.
|
| |
• | Diluted earnings per share: up 23.6% to $5.87. Adjusted(1) diluted earnings per share: up 21.8% to $6.86.
|
| |
(1)
| Non-GAAP measure, see Item 6. The Company uses adjusted metrics, which adjust for purchase accounting and costs incurred principally in relation to the Zale Acquisition including transaction and integration expenses. |
In Fiscal 2016,2019, Signet’s same store sales increaseddecreased by 4.1%0.1%, compared to an increasea decrease of 4.1%5.3% in Fiscal 2015.2018, which excluded the impact of the 53rd week from its calculation. Total sales were $6,550.2$6.25 billion, down $5.9 million or 0.1%, compared to $5,736.3 million$6.25 billion in Fiscal 2015, up $813.92018. The total sales decline was positively impacted by $111.2 million or 14.2% comparedattributable to an increasethe new US GAAP revenue recognition accounting standard and $135.6 million from the addition of 36.3%James Allen (acquired in Fiscal 2015. Bridal salesSeptember 2017). These factors were nearly halfoffset by net store closures of total merchandise sales, down 10 basis points versus$160.4 million and the negative impact of comparison against a 53rd week in the prior year due to strong sales of fashion jewelry collections such as Ever Us.$84.3 million. eCommerce sales were $359.6$682.4 million and 5.5%10.9% of sales compared to $283.6$497.7 million and 4.9%8.0% of sales in Fiscal 2015. 2018.
The breakdown of Signet’s sales performance is set out in the table below.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Change from previous year | | | | |
Fiscal 2016 | Same store sales(1) | | Non-same store sales, net(2) | | Total sales at constant exchange rate(3) | | Exchange translation impact(3) | | Total sales as reported | | Total sales (in millions) |
Sterling Jewelers division | 3.7 | % | | 2.2 | % | | 5.9 | % | | — | % | | 5.9 | % | | $ | 3,988.7 | |
Zale Jewelry | 4.3 | % | | | | | | | | | | | | | $ | 1,568.2 | |
Piercing Pagoda | 7.5 | % | | | | | | | | | | | | | $ | 243.2 | |
Zale division(4) | 4.8 | % | | | | | | | | | | | | | $ | 1,811.4 | |
UK Jewelry division | 4.9 | % | | 1.0 | % | | 5.9 | % | | (6.7 | )% | | (0.8 | )% | | $ | 737.6 | |
Other(5) | — | | | nm |
| | nm | | | — | % | | nm | | | $ | 12.5 | |
Signet | 4.1 | % | | 11.7 | % | | 15.8 | % | | (1.6 | )% | | 14.2 | % | | $ | 6,550.2 | |
Adjusted Signet(3) | | | | | | | | | | | $ | 6,577.4 | |
(1) Based on stores open for at least 12 months. eCommerce sales are included in the calculation of same store sales for the period and comparative figures from the anniversary of the launch of the relevant website.
(2) Includes all sales from stores not open for 12 months.
(3) Non-GAAP measure, see Item 6.
(4) Zale division results in the prior year reflect the 247 days of performance subsequent to the acquisition of Zale Corporation as of May 29, 2014.
(5) Includes sales from Signet’s diamond sourcing initiative.
nm Not meaningful.
Sterling Jewelers sales
In Fiscal 2016, Sterling Jewelers total sales were up 5.9% to $3,988.7 million compared to $3,765.0 million in Fiscal 2015, and same store sales increased 3.7% compared to an increase of 4.8% in Fiscal 2015. Sales increases were broad based and driven by a combination of factors primarily in Kay Jewelers stores. Growth was led by fashion jewelry such as Ever Us, Diamonds in Rhythm, and non-branded earrings and bracelets. Bridal also grew led by Neil Lane, Vera Wang Love, and non-branded rings. Branded, differentiated, and exclusive (“branded”) merchandise in Sterling Jewelers increased 30 basis points to 32.6% of Sterling Jeweler’s merchandise sales. The average merchandise transaction value increased driven by improved mix with particular strength in diamond jewelry coupled with declines in select lower average selling price point collections such as Charmed Memories. The number of merchandise transactions decreased due to the same dynamic. Mix of merchandise increased for higher-value, less-transactional collections (e.g. Ever Us) in lieu of higher-transactional, lower-value collections (e.g. Charmed Memories). This trend of higher average merchandise transaction value and lower transactions existed for Kay as well as for Sterling Jewelers overall. In Jared, the average merchandise transaction value was flat to prior year and the number of merchandise transactions decreased due to merchandise mix.below:
|
| | | | | | | | | | | | | | |
| Changes from previous year | | |
Fiscal 2016 | Same store sales(1) | | Non-same store sales, net(2) | | Total sales as reported | | Total sales (in millions) |
Kay | 5.7 | % | | 2.1 | % | | 7.8 | % | | $ | 2,530.3 | |
Jared(3) | 0.6 | % | | 4.4 | % | | 5.0 | % | | $ | 1,252.9 | |
Regional brands | (1.2 | )% | | (7.5 | )% | | (8.7 | )% | | $ | 205.5 | |
Sterling Jewelers division | 3.7 | % | | 2.2 | % | | 5.9 | % | | $ | 3,988.7 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Change from previous year | | |
Fiscal 2019 | Same store sales(1) | | Non-same store sales, net | | Impact of 53rd week on total sales | | Total sales at constant exchange rate | | Exchange translation impact | | Total sales as reported | | Total sales (in millions) |
Kay | (1.4 | )% | | 2.2 | % | | (1.2 | )% | | (0.4 | )% | | na |
| | (0.4 | )% | | $ | 2,417.8 |
|
Zales | 4.8 | % | | (1.9 | )% | | (1.6 | )% | | 1.3 | % | | na |
| | 1.3 | % | | $ | 1,260.7 |
|
Jared | (4.6 | )% | | 1.8 | % | | (1.5 | )% | | (4.3 | )% | | na |
| | (4.3 | )% | | $ | 1,141.4 |
|
Piercing Pagoda | 13.1 | % | | (3.0 | )% | | (1.4 | )% | | 8.7 | % | | na |
| | 8.7 | % | | $ | 302.5 |
|
James Allen(2) | 14.6 | % | | | | | | | | | | | | $ | 223.7 |
|
Peoples | 1.8 | % | | (1.9 | )% | | (1.6 | )% | | (1.7 | )% | | (1.5 | )% | | (3.2 | )% | | $ | 208.5 |
|
Regional banners | (12.7 | )% | | (34.7 | )% | | (0.9 | )% | | (48.3 | )% | | (0.1 | )% | | (48.4 | )% | | $ | 87.1 |
|
North America segment | 0.5 | % | | 1.3 | % | | (1.3 | )% | | 0.5 | % | | — | % | | 0.5 | % | | $ | 5,641.7 |
|
H.Samuel | (4.8 | )% | | (1.5 | )% | | (1.6 | )% | | (7.9 | )% | | 0.5 | % | | (7.4 | )% | | $ | 284.0 |
|
Ernest Jones | (5.6 | )% | | 0.9 | % | | (1.7 | )% | | (6.4 | )% | | 0.8 | % | | (5.6 | )% | | $ | 292.5 |
|
International segment | (5.2 | )% | | (0.3 | )% | | (1.7 | )% | | (7.2 | )% | | 0.7 | % | | (6.5 | )% | | $ | 576.5 |
|
Other(3) | | | | | | | | | | | 37.0 | % | | $ | 28.9 |
|
Signet | (0.1 | )% | | 1.4 | % | | (1.4 | )% | | (0.1 | )% | | — | % | | (0.1 | )% | | $ | 6,247.1 |
|
| |
(1) | Based on stores open for at least 12 months. eCommerce sales are includedThe 53rd week in Fiscal 2018 has resulted in a shift in Fiscal 2019, as the calculation offiscal year began a week later than the previous fiscal year. As such, same store sales for Fiscal 2019 are being calculated by aligning the period and comparative figures from the anniversaryweeks of the launch ofquarter to the relevant website.same weeks in the prior year. Total reported sales continue to be calculated based on the reported fiscal periods. |
| |
(2) | Includes allSame store sales from stores not openpresented for 12 months.James Allen to provide comparative performance measure. |
| |
(3) | Includes smaller concept Jared stores such as Jared Vault and Jared Jewelry Boutique.sales from Signet’s diamond sourcing initiative. |
|
| | | | | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value(1)(2) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fiscal 2016 | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2016 | | | Fiscal 2015 |
Kay | $ | 429 |
| | $ | 401 |
| | 7.0 | % | | 4.7 | % | | (2.4 | )% | | 2.0 | % |
Jared | $ | 553 |
| | $ | 553 |
| | — | % | | 0.7 | % | | (0.4 | )% | | 4.1 | % |
Regional brands | $ | 425 |
| | $ | 407 |
| | 4.4 | % | | 2.2 | % | | (6.0 | )% | | (1.6 | )% |
Sterling Jewelers division | $ | 462 |
| | $ | 441 |
| | 4.8 | % | | 3.3 | % | | (2.1 | )% | | 2.3 | % |
(1) Average merchandise transaction value (“ATV”) is defined as net merchandise sales on a same store basis divided by the total number of customer transactions. As such, changes from the prior year do not recompute within the table below.
|
| | | | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value(1)(2) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fiscal Year | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2019 | | Fiscal 2018 |
Kay | $ | 506 |
| | $ | 466 |
| | 8.6 | % | | 1.5 | % | | (8.6 | )% | | (10.2 | )% |
Zales | $ | 480 |
| | $ | 470 |
| | 1.9 | % | | 2.0 | % | | 3.5 | % | | (4.3 | )% |
Jared | $ | 659 |
| | $ | 594 |
| | 10.2 | % | | 6.1 | % | | (13.0 | )% | | (11.0 | )% |
Piercing Pagoda | $ | 69 |
| | $ | 63 |
| | 9.5 | % | | 8.6 | % | | 3.2 | % | | (5.0 | )% |
James Allen(3) | $ | 3,738 |
| | $ | 4,079 |
| | (11.0 | )% | | (1.6 | )% | | 28.8 | % | | 34.4 | % |
Peoples(4) | C$ | 429 |
| | C$ | 429 |
| | (0.9 | )% | | 5.4 | % | | 2.8 | % | | (3.7 | )% |
Regional banners | $ | 477 |
| | $ | 447 |
| | 5.1 | % | | 3.5 | % | | (16.0 | )% | | (20.3 | )% |
North America segment | $ | 386 |
| | $ | 364 |
| | 4.3 | % | | 2.5 | % | | (3.0 | )% | | (7.8 | )% |
H.Samuel(5) | £ | 83 |
| | £ | 84 |
| | (4.6 | )% | | 9.1 | % | | (0.3 | )% | | (14.4 | )% |
Ernest Jones(5) | £ | 359 |
| | £ | 349 |
| | (2.2 | )% | | 12.2 | % | | (3.4 | )% | | (15.8 | )% |
International segment(5) | £ | 137 |
| | £ | 136 |
| | (4.2 | )% | | 9.7 | % | | (0.9 | )% | | (14.7 | )% |
| |
(2)(1)
| Net merchandise sales within the North America segment include all merchandise product sales, net of discounts and returns. In addition, excluded from net merchandise sales are sales tax in the US, repair, extended service plan, insurance, employee and other miscellaneous sales. As a result, the sum of the changes will not agree to change in same store sales. |
| |
(2) | Net merchandise sales within the International segment include all merchandise product sales, including value added tax (“VAT”), net of discounts and returns. In addition, excluded from net merchandise sales are repairs, warranty, insurance, employee and other miscellaneous sales. As a result, the sum of the changes will not agree to change in same store sales. |
| |
(3) | ATV presented for James Allen to provide comparative performance measure. |
| |
(4) | Amounts for Peoples stores are denominated in Canadian dollars. |
| |
(5) | Amounts for the International segment, including H.Samuel and Ernest Jones, are denominated in British pounds. |
Zale divisionNorth America sales
As Zale was acquired May 29, 2014, there is no comparable period presented. The Zale division’s Fiscal 2016North America segment’s total sales were $1,811.4 million. Zale Jewelry contributed $1,568.2 million and Piercing Pagoda contributed $243.2 million of revenues. Total Zale division sales included purchase accounting adjustments of $(27.2) million related$5.64 billion compared to a reduction of deferred revenue associated with extended warranty sales.$5.62 billion in the prior year, up 0.5%. Same store sales increased 4.8%. Similar0.5% compared to Sterling Jewelers, Zale sales growth was led by fashion jewelry particularlya decrease of 5.2% in collections that were cross-sold between divisions such as Ever Us and LeVian. Bridal alsothe prior year. North America’s ATV increased led by Vera Wang Love. Zale division average merchandise transaction value increased 4.6%4.3%, while the number of transactions decreased 3.0%.
Same store sales results were flat. Like Sterling, Zale had greaterpositively impacted by approximately 175 bps of incremental clearance sales productivitypartially offset by 20 bps of unfavorable impact related to the shift of service plan revenue. eCommerce sales increased 43.1% on a reported basis (inclusive of James Allen which was acquired in high-value, lower-transactional collections (e.g.September 2017) and brick and mortar sales declined 1.1% on a same store sales basis.
The percentage of sales from new merchandise increased during the year, but this performance was broadly offset by declines in legacy collections. Bridal and fashion sales each increased on a same store sales basis. Within bridal, The Enchanted Disney Fine Jewelry® collection, Vera Wang Love® collection, Neil Lane® collection, and solitaires performed well, while the Ever Us)Us® collection declined. In fashion, gold fashion jewelry performed well, offset by declines in LeVian® and other legacy collections. The Other product category declined driven by a strategic reduction of owned brand beads, as well as declines in Pandora®.
International sales
In Fiscal 2019, the International segment’s total sales were $576.5 million, down 6.5%, compared to $616.7 million in Fiscal 2018. The same store sales decline was driven by lower sales in bridal jewelry, fashion jewelry and fashion watches, partially offset by higher sales in prestige watches. Same store sales decreased by 5.2% compared to a decrease of 6.0% in Fiscal 2018. ATV decreased 4.2% while the number of transaction decreased 0.9%. ThiseCommerce sales increased 8.0% and brick and mortar sales declined 6.6% on a same store sales basis.
Fourth Quarter Sales
In the fourth quarter, Signet’s total sales were $2.15 billion, down $138.4 million or 6.0%, compared to an increase of 1.0% in the prior year fourth quarter. Same store sales were down 2.0% compared to a decrease of 5.2% in the prior year fourth quarter. The total sales decrease was especiallypositively impacted by $35.2 million attributable to the casenew US GAAP revenue recognition accounting standard offset by the comparison against a 14th week in Piercing Pagoda (average merchandise transaction value up 10.9%;Fiscal 2018 which contributed $84.3 million in sales in Fiscal 2018, $60.9 million from net store closures and $16.5 million of unfavorable foreign exchange translation. eCommerce sales in the fourth quarter were $260.6 million or 12.1% of total sales, compared to $253.8 million or 11.2% of total sales in the prior year fourth quarter. The breakdown of the sales performance is set out in the table below.
|
| | | | | | | | | | | | | | | | | | | | | |
| Change from previous year | | |
Fourth Quarter of Fiscal 2019 | Same store sales(1) | | Non-same store sales, net | | Impact of 14th week on total sales | | Total sales at constant exchange rate | | Exchange translation impact | | Total sales as reported | | Total sales (in millions) |
Kay | (1.6 | )% | | 2.1 | % | | (3.4 | )% | | (2.9 | )% | | na |
| | (2.9 | )% | | $ | 837.4 |
|
Zales | 2.0 | % | | (2.3 | )% | | (4.2 | )% | | (4.5 | )% | | na |
| | (4.5 | )% | | $ | 461.4 |
|
Jared | (8.4 | )% | | 2.8 | % | | (4.4 | )% | | (10.0 | )% | | na |
| | (10.0 | )% | | $ | 382.2 |
|
Piercing Pagoda | 17.1 | % | | (3.7 | )% | | (4.5 | )% | | 8.9 | % | | na |
| | 8.9 | % | | $ | 99.1 |
|
James Allen | (1.4 | )% | | — | % | | — | % | | (1.4 | )% | | na |
| | (1.4 | )% | | $ | 63.5 |
|
Peoples | 2.1 | % | | (0.9 | )% | | (4.6 | )% | | (3.4 | )% | | (4.8 | )% | | (8.2 | )% | | $ | 74.3 |
|
Regional banners | (15.4 | )% | | (31.4 | )% | | (3.1 | )% | | (49.9 | )% | | (0.3 | )% | | (50.2 | )% | | $ | 25.0 |
|
North America segment | (1.4 | )% | | (0.2 | )% | | (3.7 | )% | | (5.3 | )% | | (0.2 | )% | | (5.5 | )% | | $ | 1,942.9 |
|
H.Samuel | (5.8 | )% | | (1.1 | )% | | (4.5 | )% | | (11.4 | )% | | (4.5 | )% | | (15.9 | )% | | $ | 102.8 |
|
Ernest Jones | (8.9 | )% | | 1.3 | % | | (5.2 | )% | | (12.8 | )% | | (4.6 | )% | | (17.4 | )% | | $ | 92.2 |
|
International segment | (7.3 | )% | | 0.1 | % | | (4.8 | )% | | (12.0 | )% | | (4.6 | )% | | (16.6 | )% | | $ | 195.0 |
|
Other(2) | | | | | | | | | | | 479.3 | % | | $ | 16.8 |
|
Signet | (2.0 | )% | | 0.4 | % | | (3.8 | )% | | (5.4 | )% | | (0.6 | )% | | (6.0 | )% | | $ | 2,154.7 |
|
| |
(1) | The 14th week in Fiscal 2018 has resulted in a shift in Fiscal 2019, as the fiscal year began a week later than the previous fiscal year. As such, same store sales for Fiscal 2019 are being calculated by aligning the weeks of the quarter to the same weeks in the prior year. Total reported sales continue to be calculated based on the reported fiscal periods. |
| |
(2) | Includes sales from Signet’s diamond sourcing initiative. |
|
| | | | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value(1)(2) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fiscal Year | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2019 | | Fiscal 2018 |
Kay | $ | 473 |
| | $ | 438 |
| | 8.2 | % | | 1.2 | % | | (9.3 | )% | | (13.8 | )% |
Zales | $ | 435 |
| | $ | 436 |
| | (0.5 | )% | | 3.6 | % | | 2.3 | % | | 2.4 | % |
Jared | $ | 607 |
| | $ | 546 |
| | 11.8 | % | | 1.9 | % | | (18.4 | )% | | (8.4 | )% |
Piercing Pagoda | $ | 74 |
| | $ | 67 |
| | 10.4 | % | | 8.1 | % | | 5.3 | % | | (2.6 | )% |
James Allen | $ | 3,674 |
| | $ | 4,034 |
| | (13.2 | )% | | (1.3 | )% | | 13.6 | % | | 37.2 | % |
Peoples(3) | C$ | 384 |
| | C$ | 395 |
| | (3.3 | )% | | 5.9 | % | | 6.0 | % | | (1.7 | )% |
Regional banners | $ | 430 |
| | $ | 418 |
| | 1.2 | % | | 0.7 | % | | (17.0 | )% | | (23.1 | )% |
North America segment | $ | 374 |
| | $ | 369 |
| | 2.2 | % | | 1.9 | % | | (4.0 | )% | | (7.1 | )% |
H.Samuel(4) | £ | 80 |
| | £ | 84 |
| | (4.8 | )% | | 7.7 | % | | (0.8 | )% | | (15.6 | )% |
Ernest Jones(4) | £ | 314 |
| | £ | 315 |
| | (1.6 | )% | | 4.7 | % | | (8.5 | )% | | (13.5 | )% |
International segment(4) | £ | 123 |
| | £ | 129 |
| | (5.4 | )% | | 6.6 | % | | (2.3 | )% | | (15.2 | )% |
| |
(1) | Net merchandise sales within the North America segment include all merchandise product sales, net of discounts and returns. In addition, excluded from net merchandise sales are sales tax in the US, repair, extended service plan, insurance, employee and other miscellaneous sales. As a result, the sum of the changes will not agree to change in same store sales. |
| |
(2) | Net merchandise sales within the International segment include all merchandise product sales, including value added tax (“VAT”), net of discounts and returns. In addition, excluded from net merchandise sales are repairs, warranty, insurance, employee and other miscellaneous sales. As a result, the sum of the changes will not agree to change in same store sales. |
| |
(3) | Amounts for Peoples stores are denominated in Canadian dollars. |
| |
(4) | Amounts for the International segment, including H.Samuel and Ernest Jones, are denominated in British pounds. |
North America sales
The North America segment’s total sales were $1.94 billion compared to $2.06 billion in the prior year, down 5.5%. Same store sales decreased 1.4% compared to a decrease of 4.7% in the prior year. The North America segment’s ATV increased 2.2%, while the number of transactions down 1.2%) anddecreased 4.0%.
Same store sales results include a favorable impact of 65 bps of incremental clearance, a favorable impact of 40 bps due to a lesser degreeplanned shift in timing of promotions at Zales and Peoples and a 25 bps unfavorable impact related to a timing shift of service plan revenue recognized as discussed above. eCommerce sales increased 6.9% and brick and mortar sales declined 2.5% on a same store sales basis.
The percentage of sales from new merchandise increased during the Zale Jewelry segment (average merchandise transaction value up 2.8%;quarter, but this performance was more than offset by declines in legacy collections. Bridal sales were flat on a same store sales basis. Within bridal, engagement sales increased while anniversary sales declined. Anniversary sales were unfavorably impacted by declines in the Ever Us® collection. The Enchanted Disney Fine Jewelry® collection, Vera Wang Love® collection, Neil Lane® collection, and solitaires performed well. Fashion category sales decreased, with gold fashion jewelry, Disney fashion jewelry, and the Love + Be LovedTM collectionperforming well, offset by declines in the LeVian® and other legacy collections. The Other product category declined, driven by a strategic reduction of owned brand beads, as well as declines in Pandora®.
International sales
The International segment’s total sales decreased 16.6% to $195.0 million compared to $233.9 million in the prior year and decreased 12.0% at constant exchange rates. Same store sales decreased 7.3% compared to a decrease of 9.2% in the prior year. The same store sales decline was driven by lower sales in bridal jewelry, fashion jewelry and fashion watches, partially offset by higher sales in prestige watches. In the International segment’s ATV decreased 5.4%, while the number of transactions decreased 2.3%. eCommerce sales declined 6.9% and brick and mortar sales declined 7.3% on a same store sales basis.
Cost of Sales and Gross Margin
In Fiscal 2019, gross margin was $2.16 billion or 34.6% of sales compared to $2.19 billion or 35.0% of sales in Fiscal 2018. Gross margin was negatively impacted by $62.2 million, or 100 bps, in restructuring charges related to net inventory write-downs taken during the year.The write-downs relate to brands and collections that the Company is discontinuing as part of its transformation plan to increase newness across merchandise categories. Transformation cost savings related to direct sourcing and distribution were offset by sales deleverage and higher mix of clearance inventory sales and impact of promotional environment. In addition, lower store occupancy due to store closures also favorably impacted gross margin. Additional factors impacting gross margin rate include: 1) a positive 220 basis point impact related to discontinuing the recognition of bad debt expense and late charge income; 2) a negative 40 basis point impact related to James Allen, which carries a lower gross margin rate; and 3) a negative 40 basis point impact from the discontinuation of credit insurance.
In the fourth quarter, the consolidated gross margin was $877.8 million or 40.7% of sales compared to $919.8 million or 40.1% of sales in the prior year fourth quarter. Factors impacting gross margin rate include: 1) a positive 250 bps impact related to no longer recognizing bad debt expense and late charge income; 2) a negative 40 bps impact related to an inventory write-down; 3) a negative 30 bps impact related to adopting the new US GAAP revenue recognition accounting standard, including higher revenue share payments associated with the prime credit outsourcing arrangement; and 4) a negative 10 bps impact related to a timing shift of revenue recognized on service plans. The residual factors impacting gross margin rate include deleverage from lower sales and the impact of promotional and incremental clearance sales partially offset by transformation cost savings. See Note 7 of Item 8 for additional information regarding the Company’s restructuring activities.
Selling, General and Administrative Expenses (“SGA”)
Selling, general and administrative expenses for Fiscal 2019 were $1.99 billion or 31.8% of sales compared to $1.87 billion or 29.9% of sales in Fiscal 2018, up 1.6%). Branded merchandise$112.9 million. SGA increased primarily due to: 1) a $100 million increase in credit costs related to the transition to an outsourced credit model; 2) a $30 million increase in advertising expense; 3) a $20 million increase in incentive compensation expense, which included $6 million of one-time cash awards to non-managerial hourly team members; and an $11 million charge related to the resolution of a previously disclosed regulatory matter. Increases in SGA were partially offset by a $15 million decrease in store staff costs and transformation cost savings, net of investments. Prior year SGA included $30.5 million in expense related to the 53rd week.
In the fourth quarter, SGA expense was 42.9%$647.2 million or 30.0% of sales compared to $634.5 million or 27.7% of sales in the prior year fourth quarter. Factors impacting SGA include: 1) a $42 million, or 200 bps, increase in credit costs related to the transition to an outsourced credit model; 2) an $11 million, or 50 bps, charge related to the resolution of a previously disclosed regulatory matter; and 3) a $3 million, or 10 bps, decrease in incentive compensation. Increases in SGA were partially offset by transformation net cost savings and lower store staff costs primarily due to closed stores. Prior year SGA included $30.5 million in expense related to the 14th week.
Credit transaction, net
In June 2018, the Company completed the sale of all eligible non-prime in-house accounts receivable. During Fiscal 2019, the Company recognized charges of $167.4 million as a result of the sale of the non-prime in-house accounts receivable. This included total valuation losses of $160.4 million representing adjustments to the asset fair value and other transaction-related costs of $7.0 million. See Note 4 of Item 8 for additional information.
Restructuring charges
During the first quarter of Fiscal 2019, Signet launched a three-year comprehensive transformation plan, the “Signet Path to Brilliance” plan (the “Plan”), to reposition the Company to be a share gaining, OmniChannel jewelry category leader. During Fiscal 2019, restructuring charges of $63.7 million were recognized, $22.7 million of which were non-cash charges, primarily related to professional fees for legal and consulting services, severance and impairment of information technology assets related to the Plan. Additionally, during Fiscal 2019, the Company recorded charges of $62.2 million in non-cash restructuring charges related to inventory write-offs within cost of sales.
In the fourth quarter, restructuring charges of $28.1 million, of which $11.7 million were non-cash charges, were recognized primarily related to store closure costs, professional fees for legal and consulting services, and severance related to the Plan. Additionally, during the fourth quarter, the Company recorded a net non-cash adjustment of $(1.0) million to charges related to prior period inventory write-offs within cost of sales. See Note 7 of Item 8 for additional information.
Goodwill and intangible impairments
In Fiscal 2019, the Company recorded non-cash goodwill and intangible asset impairment pre-tax charges of $735.4 million, of which $448.7 million were recorded in the first quarter of Fiscal 2019 and $286.7 million were recorded in the fourth quarter of Fiscal 2019.
The first quarter charge was related to the write down of goodwill and intangible assets recognized in the North America segment as part of the Zale division’s merchandise sales.Corporation acquisition, as well as goodwill associated with the acquisition of Ultra Stores, Inc. The decline in the Company’s market capitalization during the first quarter created a triggering event for impairment assessment purposes. Revised long-term projections associated with finalizing certain initial aspects of our Path to Brilliance transformation plan in the first quarter combined with a higher discount rate driven by risk premium utilized in the valuation, resulted in lower than previously projected long-term future cash flows for these businesses, which required an adjustment to the goodwill and intangible asset balances.
The fourth quarter charge was related to the write down of goodwill and intangible assets recognized in the North America segment as part of the R2Net acquisition (James Allen) and intangible assets recognized as part of the Zale Corporation acquisition. The decline in the Company’s market capitalization during the fourth quarter created a triggering event for impairment assessment purposes. Revised long-term projections and a higher discount rate driven by risk premium utilized in the valuation associated with James Allen resulted in lower than previously projected long-term future cash flows for this business, which required a $261.4 million adjustment to the goodwill and intangible asset balances. The revised outlook for James Allen is a result of a higher than expected unfavorable impact related to sales tax implementation as well as a more competitive online jewelry marketplace. The remaining impairment charge of $25.3 million is attributable to intangibles associated with the Zale acquisition and goodwill recognized as part of the acquisition of the Company's diamond polishing factory in Botswana.
The impairment charges above did not have an impact on the Company’s day to day operations or liquidity. See Note 17 of Item 8 for additional information on the impairments.
Other Operating Income, Net
In Fiscal 2019, other operating income, net was $26.2 million or 0.4% of sales compared to $260.8 million or 4.2% of sales in Fiscal 2018. In the fourth quarter, other operating income, net was $0.7 million or 0.0% of sales compared to $39.5 million or 1.7% of sales in the prior year fourth quarter. The year-over-year decrease was primarily driven by $28.0 million in other expense related to the sale of the prime-only credit quality portion of Sterling’s in-house finance receivable portfolio during the third quarter of Fiscal 2018, partially offset by the 53rd week which added $1.3 million of other income in Fiscal 2018. See Note 4 of Item 8 for additional information regarding the Company’s credit transaction.
Operating Income (Loss)
In Fiscal 2019, operating income (loss) was $(764.6) million or (12.2)% of sales compared to $579.9 million or 9.3% of sales in Fiscal 2018. The prior year operating income includes a favorable impact from the 53rd week of $9.3 million. Excluding the 53rd week impact, the decline was driven by the following: 1) the $735.4 million goodwill and intangible impairment charge; 2) $125.9 million in restructuring charges related to inventory write-downs, severance, professional fees and impairment of certain IT assets related to the three year transformation plan; 3) $167.4 million loss related to marking the non-prime receivables to fair value that were sold in the second quarter; 4) $11.0 million charge related to the resolution of a previously disclosed regulatory matter; 6) the discontinuation of credit insurance; 7) $167.0 million net unfavorable impact related to the outsourcing of credit; and 8) impact of higher promotions and incremental clearance sales on gross margin and lastly higher SGA due primarily to advertising and higher incentive compensation. These declines were partially offset by transformation net cost savings of $85.0 million.
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| | | | | | | | | | | | | | |
| Change from previous year | | |
Fiscal 2016 | Same store sales(1) | | Non-same store sales, net | | Total sales at constant exchange rate | | Exchange translation impact | | Total sales as reported | | Total sales (in millions) |
Zales | 5.5 | % | | | | | | | | | | $ | 1,241.0 |
|
Gordon’s | (7.0 | )% | | | | | | | | | | $ | 78.5 |
|
Zale US Jewelry | 4.7 | % | | | | | | | | | | $ | 1,319.5 |
|
Peoples | 3.4 | % | | | | | | | | | | $ | 214.8 |
|
Mappins | (2.5 | )% | | | | | | | | | | $ | 33.9 |
|
Zale Canada Jewelry | 2.6 | % | | | | | | | | | | $ | 248.7 |
|
Total Zale Jewelry | 4.3 | % | | | | | | | | | | $ | 1,568.2 |
|
Piercing Pagoda | 7.5 | % | | | | | | | | | | $ | 243.2 |
|
Zale division | 4.8 | % | | | | | | | | | | $ | 1,811.4 |
|
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| | | | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018 |
(in millions) | $ | | % of sales | | $ | | % of sales |
North America segment(1) | $ | (621.1 | ) | | (11.0 | )% | | $ | 656.1 |
| | 11.7 | % |
International segment(2) | 12.9 |
| | 2.2 | % | | 33.1 |
| | 5.4 | % |
Other(3) | (156.4 | ) | | nm |
| | (109.3 | ) | | nm |
|
Operating income (loss) | $ | (764.6 | ) | | (12.2 | )% | | $ | 579.9 |
| | 9.3 | % |
| |
(1) | For Fiscal 2019, includes: 1) $731.8 million related to the goodwill and intangible impairments; 2) $52.7 million related to inventory charges recorded in conjunction with the Company’s restructuring activities; and 3) $160.4 million from the valuation losses related to the sale of eligible non-prime in-house accounts receivable. See Note 17, Note 7 and Note 4, respectively, of Item 8 for additional information. Fiscal 2018 amount includes $20.7 million gain related to the reversal of the allowance for credit losses for the in-house receivables sold, as well as the $10.2 million gain upon recognition of beneficial interest in connection with the sale of the prime portion of in-house receivables. See Note 4 of Item 8 for additional information. |
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(2) | Fiscal 2019 includes $3.8 million related to inventory charges recorded in conjunction with the Company’s restructuring activities. See Note 7 of Item 8 for additional information. |
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(3) | For Fiscal 2019, includes: 1) $69.4 million related to charges recorded in conjunction with the Company’s restructuring activities including inventory charges; 2) $11.0 million related to the resolution of a previously disclosed regulatory matter; 3) $7.0 million representing transaction costs associated with the sale of the non-prime in-house accounts receivable; and 4) $3.6 million of goodwill and intangible impairments. See Note 7, Note 26, Note 4 and Note 17 of Item 8 for additional information. For Fiscal 2018, Other includes $29.6 million of transaction costs related to the credit transaction, $8.6 million of R2Net acquisition costs, and $3.4 million of CEO transition costs. See Note 4 and Note 5 of Item 8 for additional information regarding credit transaction and acquisition of R2Net, respectively. |
In the fourth quarter, operating income (loss) was $(83.5) million or (3.9)% of sales compared to $323.5 million or 14.1% of sales in prior year fourth quarter. The prior year operating income includes a favorable impact from the 14th week of $9.3 million. Excluding the 14th week impact, the decline was driven by the following: 1) $286.7 million goodwill and intangible impairment charge; 2) $27.1 million in restructuring charges related to store closures costs, severance and professional fees related to the three year transformation plan; 3) $11 million charge related to the resolution of a previously disclosed regulatory matter; 4) $13 million net unfavorable impact related to the outsourcing of credit; and 5) an $8.8 million inventory write-down. The residual factors impacting operating income include the impact of lower sales and higher promotions and clearance sales partially offset by transformation net cost savings.
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| | | | | | | | | | | | | |
| Fourth Quarter Fiscal 2019 | | Fourth Quarter Fiscal 2018 |
(in millions) | $ | | % of sales | | $ | | % of sales |
North America segment(1) | $ | (60.1 | ) | | (3.1 | )% | | 305.9 |
| | 14.9 | % |
International segment | 31.0 |
| | 15.9 | % | | 35.0 |
| | 15.0 | % |
Other(2) | (54.4 | ) | | nm |
| | (17.4 | ) | | nm |
|
Operating income (loss) | $ | (83.5 | ) | | (3.9 | )% | | $ | 323.5 |
| | 14.1 | % |
| |
(1) | Fiscal 2019 includes $286.7 million and $1.0 million related to the goodwill and intangible impairments recognized in the fourth quarter and net adjustment to to charges recorded in conjunction with the Company’s restructuring activities including inventory charges, respectively. See Note 15 and Note 7, respectively, of Item 8 for additional information. |
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(2) | Fiscal 2019 includes a $28.1 million and $11.0 million related to charges recorded in conjunction with the Company’s restructuring activities and the resolution of a previously disclosed regulatory matter, respectively. See Note 7 of Item 8 for additional information. |
Interest Expense, Net
In Fiscal 2019, net interest expense was $39.7 million compared to $52.7 million in Fiscal 2018 driven primarily by the repayment of the $600 million asset-backed securitization facility in the third quarter of Fiscal 2018. The weighted average interest rate for the Company’s debt outstanding was 4.0% compared to 3.2% in the prior year.
In the fourth quarter, net interest expense was $10.8 million compared to $10.0 million in the prior year fourth quarter. The weighted average interest rate for the Company’s debt outstanding was 4.1% compared to 3.6% in the prior year fourth quarter.
Income (Loss) Before Income Taxes
In Fiscal 2019, income (loss) before income taxes decreased $1.33 billion to $(802.6) million or (12.8)% of sales compared to $527.2 million or 8.4% of sales in Fiscal 2018.
In the fourth quarter, income (loss) before income taxes decreased $(407.5) million to $(94.0) million or (4.4)% of sales compared to $313.5 million or 13.7% of sales in the prior year fourth quarter.
Income Taxes
Income tax benefit for Fiscal 2019 was $145.2 million compared to expense of $7.9 million in Fiscal 2018, with an effective tax rate of 18.1% for Fiscal 2019 compared to 1.5% in Fiscal 2018. In the fourth quarter, income tax benefit was $13.9 million compared to expense of $37.8 million in the prior year fourth quarter. The higher effective tax rates were driven primarily by 1) the impact of the non-deductible goodwill impairment charge; 2) pre-tax earnings mix by jurisdiction; and 3) an out of period correction related to a deferred tax liability associated with the Zale acquisition. The prior year fourth quarter tax benefit was driven by the favorable impact of the Tax Cuts and Jobs Act of 2017 together with pre-tax earnings mix by jurisdiction.
On December 22, 2017, the U.S. government enacted “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” which is commonly referred to as “The Tax Cuts and Jobs Act” (the “TCJ Act”). The TCJ Act provides for comprehensive tax legislation which significantly modifies the U.S. corporate income tax system. Due to the timing of the enactment and the complexity involved in applying the provisions of the TCJ Act, we made reasonable estimates of its effects and recorded provisional amounts in the consolidated financial statements for the year ended February 3, 2018, consistent with applicable SEC guidance. We have completed these analyses during the year ended February 2, 2019, and no material adjustment to the provisional estimate recorded in the prior year was required.
We anticipate that the effective tax rate in future years will be favorably impacted by the lower federal statutory corporate tax rate of 21.0 percent offset by limitations of certain deductions and the base broadening changes. See Note 12 of Item 8 for additional information regarding the Company’s income taxes and the impact of the TCJ Act.
Net Income (Loss)
Net income (loss) for Fiscal 2019 was down 226.6% to $(657.4) million or (10.5)% of sales compared to $519.3 million or 8.3% of sales in Fiscal 2018.
For the fourth quarter, net income (loss) was down 130.7% to $(107.9) million or (5.0)% of sales compared to $351.3 million or 15.3% of sales in the prior year fourth quarter.
Earnings (Loss) per Share (“EPS”)
For Fiscal 2019, diluted earnings (loss) per share were $(12.62) compared to $7.44 in Fiscal 2018. The weighted average diluted number of common shares outstanding was 54.7 million compared to 69.8 million in Fiscal 2018. Signet repurchased 8.8 million shares in Fiscal 2019 compared to 8.1 million shares in Fiscal 2018. Diluted EPS for Fiscal 2019 includes a loss of $12.26 related to the goodwill and intangible impairments, a loss of $2.11 related to the sale of non-prime receivables, a loss of $1.77 related to the Path to Brilliance transformation plan and a loss of $0.20 related to the resolution of a previously disclosed regulatory matter.
For the fourth quarter, diluted earnings (loss) per share were $(2.25) compared to $5.24 in the prior year fourth quarter, down 143.0%. The weighted average diluted number of common shares outstanding was 51.6 million compared to 67.0 million in the prior year fourth quarter. Diluted EPS in the fourth quarter of Fiscal 2019 includes a loss of $4.78 related to the goodwill and intangible impairments, a loss of $0.37 related to the Path to Brilliance transformation plan and a loss of $0.20 related to the resolution of a previously disclosed regulatory matter.
The Company issued preferred shares on October 5, 2016, which include a cumulative dividend right and may be converted into common shares. The Company’s computation of diluted earnings per share includes the effect of potential common shares for outstanding awards issued under the Company’s share-based compensation plans and preferred shares upon conversion, if dilutive. In computing diluted EPS, the Company also adjusts the numerator used in the basic EPS computation, subject to anti-dilution requirements, to add back the dividends (declared or cumulative undeclared) applicable to the preferred shares. For the fourth quarter and year to date Fiscal 2019 periods, the dilutive effect related to preferred shares was excluded from the earnings per share computation as the preferred shares were anti-dilutive. For the fourth quarter and year to date Fiscal 2018 periods, the preferred shares were more dilutive if conversion was assumed. See Item 8 for additional information related to the preferred shares (Note 8) or the calculation of earnings per share (Note 10).
Dividends per Common Share
In Fiscal 2019, total dividends of $1.48 were declared by the Board of Directors compared to $1.24 in Fiscal 2018.
COMPARISON OF FISCAL 2018 TO FISCAL 2017
Same store sales: down 5.3%.
Diluted earnings per share: up 5.1% to $7.44.
In Fiscal 2018, Signet’s same store sales, which excluded the impact of the 53rd week from its calculation, decreased by 5.3%, compared to a decrease of 1.9% in Fiscal 2017. Total sales were $6.25 billion compared to $6.41 billion in Fiscal 2017, down $155.4 million or 2.4% compared to a decrease of 2.2% in Fiscal 2017. Merchandise categories and collections were broadly lower, partially offset by eCommerce, Piercing Pagoda total sales increase, the benefit of the 53rd week which contributed $84.3 million of sales and the addition of R2Net (acquired in September 2017) which contributed $88.1 million in sales for the year. eCommerce sales were $497.7 million and 8.0% of sales compared to $363.1 million and 5.7% of sales in Fiscal 2017.
The breakdown of Signet’s sales performance is set out in the table below.
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| | | | | | | | | | | | | | | | | | | | | |
| Change from previous year | | |
Fiscal 2018 | Same store sales(1) | | Non-same store sales, net | | Impact of 53rd week on total sales | | Total sales at constant exchange rate | | Exchange translation impact | | Total sales as reported | | Total sales (in millions) |
Kay | (8.0 | )% | | 2.5 | % | | 1.1 | % | | (4.4 | )% | | na |
| | (4.4 | )% | | $ | 2,428.1 |
|
Zales | (2.0 | )% | | (0.6 | )% | | 1.6 | % | | (1.0 | )% | | na |
| | (1.0 | )% | | $ | 1,244.3 |
|
Jared | (5.5 | )% | | 1.1 | % | | 1.5 | % | | (2.9 | )% | | na |
| | (2.9 | )% | | $ | 1,192.1 |
|
Piercing Pagoda | 3.0 | % | | 1.4 | % | | 1.5 | % | | 5.9 | % | | na |
| | 5.9 | % | | $ | 278.5 |
|
James Allen | 29.9 | % | | | | | | | | | | | | $ | 88.1 |
|
Peoples | 2.6 | % | | (1.7 | )% | | 1.7 | % | | 2.6 | % | | 2.5 | % | | 5.1 | % | | $ | 215.4 |
|
Regional banners | (18.1 | )% | | (15.5 | )% | | 0.7 | % | | (32.9 | )% | | 0.2 | % | | (32.7 | )% | | $ | 168.7 |
|
North America segment | (5.2 | )% | | 1.6 | % | | 1.3 | % | | (2.3 | )% | | 0.1 | % | | (2.2 | )% | | $ | 5,615.2 |
|
H.Samuel | (6.5 | )% | | 0.6 | % | | 1.6 | % | | (4.3 | )% | | (0.9 | )% | | (5.2 | )% | | $ | 306.7 |
|
Ernest Jones | (5.6 | )% | | 1.1 | % | | 1.6 | % | | (2.9 | )% | | (1.3 | )% | | (4.2 | )% | | $ | 310.0 |
|
International segment | (6.0 | )% | | 0.8 | % | | 1.6 | % | | (3.6 | )% | | (1.1 | )% | | (4.7 | )% | | $ | 616.7 |
|
Other(2) | | | | | | | | | | | 16.6 | % | | $ | 21.1 |
|
Signet | (5.3 | )% | | 1.6 | % | | 1.3 | % | | (2.4 | )% | | — | % | | (2.4 | )% | | $ | 6,253.0 |
|
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(1) | Based on stores open for at least 12 months. eCommerce sales are included in the calculation of same store sales for the period and comparative figures from the anniversary of the launch of the relevant website. The North America segment includes James Allen sales for the 145 days since the date of acquisition. |
UK Jewelry(2) Includes sales from Signet’s diamond sourcing initiative.
ATV is defined as net merchandise sales on a same store basis divided by the total number of customer transactions. As such, changes from the prior year do not recompute within the table below.
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| | | | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value(1)(2) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fiscal Year | Fiscal 2018 | | Fiscal 2017 | | Fiscal 2018 | | Fiscal 2017 | | Fiscal 2018 | | Fiscal 2017 |
Kay | $ | 466 |
| | $ | 458 |
| | 1.5 | % | | 6.5 | % | | (10.2 | )% | | (8.4 | )% |
Zales | $ | 470 |
| | $ | 460 |
| | 2.0 | % | | 2.0 | % | | (4.3 | )% | | (3.2 | )% |
Jared | $ | 594 |
| | $ | 556 |
| | 6.1 | % | | (0.4 | )% | | (11.0 | )% | | (5.1 | )% |
Piercing Pagoda | $ | 63 |
| | $ | 58 |
| | 8.6 | % | | 13.7 | % | | (5.0 | )% | | (6.2 | )% |
Peoples(3) | C$ | 429 |
| | C$ | 401 |
| | 5.4 | % | | 6.6 | % | | (3.7 | )% | | (10.9 | )% |
Regional banners | $ | 447 |
| | $ | 414 |
| | 3.5 | % | | 4.3 | % | | (20.3 | )% | | (14.0 | )% |
North America segment | $ | 364 |
| | $ | 347 |
| | 2.5 | % | | 4.2 | % | | (7.8 | )% | | (6.8 | )% |
H.Samuel(4) | £ | 84 |
| | £ | 77 |
| | 9.1 | % | | 2.7 | % | | (14.4 | )% | | (4.9 | )% |
Ernest Jones(4) | £ | 349 |
| | £ | 309 |
| | 12.2 | % | | 14.0 | % | | (15.8 | )% | | (11.3 | )% |
International segment(4) | £ | 136 |
| | £ | 124 |
| | 9.7 | % | | 6.0 | % | | (14.7 | )% | | (6.3 | )% |
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(1) | Net merchandise sales within the North America segment include all merchandise product sales, net of discounts and returns. In addition, excluded from net merchandise sales are sales tax in the US, repair, extended service plan, insurance, employee and other miscellaneous sales. As a result, the sum of the changes will not agree to change in same store sales. |
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(2) | Net merchandise sales within the International segment include all merchandise product sales, including value added tax (“VAT”), net of discounts and returns. In addition, excluded from net merchandise sales are repairs, warranty, insurance, employee and other miscellaneous sales. As a result, the sum of the changes will not agree to change in same store sales. |
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(3) | Amounts for Peoples stores are denominated in Canadian dollars. |
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(4) | Amounts for the International segment, including H.Samuel and Ernest Jones, are denominated in British pounds. |
North America sales
In Fiscal 2016,2018, the UK Jewelry division’sNorth America segment’s total sales were $5.62 billion, down 0.8% to $737.6 million2.2%, compared to $743.6$5.74 billion in Fiscal 2017, and same store sales decreased 5.2% compared to a decrease of 1.0% in Fiscal 2017. North America’s ATV increased 2.5%, while the number of transactions decreased 7.8%. Sales declines were driven by weakness in bridal in Kay and Jared, including lower year over year sales of the Ever Us collection. The decrease in bridal was disproportionately affected by systems and process disruptions associated with the outsourcing of credit services. These declines were partially offset by strength in diamond fashion jewelry, most notably in the Disney Enchanted and Vera Wang Love collections in Zales and improved performance of gold fashion jewelery in Piercing Pagoda.
International sales
In Fiscal 2018, the International segment’s total sales were $616.7 million, down 4.7%, compared to $647.1 million in Fiscal 20152017. Sales declines were due principally to bridal and up 5.9% at constant exchange rates (non-GAAP measure, see Item 6).diamond fashion jewelry partially offset by higher sales in select prestige watch brands and strength in eCommerce. Same store sales increaseddecreased by 4.9%6.0% compared to an increase of 5.3%0.1% in Fiscal 2015. Sales performance in the UK Jewelry division was driven2017. ATV increased 9.7%, offset by growth in average merchandise transaction value and number of transactions, 2.7% and 1.8% respectively, led by branded diamond jewelry and watches. In H.Samuel, average merchandise transaction value increased 1.4% driven by strong diamond sales. Increasesa 14.7% decrease in the number of transactionstransactions.
Fourth Quarter Sales
In the fourth quarter, Signet’s total sales were $2.29 billion, down $23.2 million or 1.0%, compared to a decrease of 1.9%5.1% in the prior year fourth quarter. Same store sales were influenced by higherdown 5.2% compared to a decrease of 4.5% in the prior year fourth quarter. The total sales of beads and Perfect Fit, the entry-level priced engagement ring collection. In Ernest Jones, the average merchandise transaction value and number of transactions increased 6.3% and 1.4%, respectively. The sales mix shifted toward jewelry brands and prestige watches. Transaction increases in Ernest Jones wereincrease was driven by strength across jewelry and watch categories duethe 14th week in partsales, which contributed $84.3 million of sales, as well as the addition of R2Net which contributed $64.4 million in sales in the quarter, offset by the year-over-year decline in base same store sales. eCommerce sales in the fourth quarter were $253.8 million or 11.1% of total sales, compared to new product assortment and new television advertising.$161.8 million or 7.1% of total sales in the prior year fourth quarter. The breakdown of the sales performance is set out in the table below.
| | | Change from previous year | | | Change from previous year | | |
Fiscal 2016 | Same store sales(1) | | Non-same store sales, net(2) | | Total sales at constant exchange rate(3) | | Exchange translation impact(3) | | Total sales as reported | | Total sales (in millions) | |
Fourth quarter of Fiscal 2018 | | Same store sales(1) | | Non-same store sales, net | | Impact of 14th week on total sales | | Total sales at constant exchange rate | | Exchange translation impact | | Total sales as reported | | Total sales (in millions) |
Kay | | (11.0 | )% | | 2.1 | % | | 3.1 | % | | (5.8 | )% | | na |
| | (5.8 | )% | | $ | 862.0 |
|
Zales | | 5.1 | % | | (2.8 | )% | | 4.5 | % | | 6.8 | % | | na |
| | 6.8 | % | | $ | 483.2 |
|
Jared | | (6.4 | )% | | 0.8 | % | | 4.2 | % | | (1.4 | )% | | na |
| | (1.4 | )% | | $ | 424.5 |
|
Piercing Pagoda | | 4.6 | % | | (0.6 | )% | | 4.8 | % | | 8.8 | % | | na |
| | 8.8 | % | | $ | 91.1 |
|
James Allen(2) | | 35.0 | % | | | | | | | | | | | | $ | 64.4 |
|
Peoples | | 3.8 | % | | (3.5 | )% | | 4.6 | % | | 4.9 | % | | 5.6 | % | | 10.5 | % | | $ | 80.9 |
|
Regional banners | | (22.8 | )% | | (18.6 | )% | | 2.5 | % | | (38.9 | )% | | (0.3 | )% | | (39.2 | )% | | $ | 50.2 |
|
North America segment | | (4.7 | )% | | 1.8 | % | | 3.6 | % | | 0.7 | % | | 0.3 | % | | 1.0 | % | | $ | 2,056.3 |
|
H.Samuel | 2.8 | % | | 0.2 | % | | 3.0 | % | | (6.5 | )% | | (3.5 | )% | | $ | 375.8 | | (9.2 | )% | | (0.3 | )% | | 3.9 | % | | (5.6 | )% | | 7.8 | % | | 2.2 | % | | $ | 122.3 |
|
Ernest Jones | 7.3 | % | | 1.9 | % | | 9.2 | % | | (7.0 | )% | | 2.2 | % | | $ | 361.8 | | (9.3 | )% | | 0.2 | % | | 4.5 | % | | (4.6 | )% | | 8.0 | % | | 3.4 | % | | $ | 111.6 |
|
UK Jewelry division | 4.9 | % | | 1.0 | % | | 5.9 | % | | (6.7 | )% | | (0.8 | )% | | $ | 737.6 | | |
International segment | | (9.2 | )% | | (0.2 | )% | | 4.2 | % | | (5.2 | )% | | 8.0 | % | | 2.8 | % | | $ | 233.9 |
|
Other(3) | | | | | | | | | | | | (48.2 | )% | | $ | 2.9 |
|
Signet | | (5.2 | )% | | 1.5 | % | | 3.7 | % | | — | % | | 1.0 | % | | 1.0 | % | | $ | 2,293.1 |
|
| |
(1) | Based on stores open for at least 12 months. eCommerce sales are included in the calculation of same store sales for the period and comparative figures from the anniversary of the launch of the relevant website. |
(2) Includes allSame store sales from stores not openpresented for James Allen, acquired September 12, months.2017, to provide comparative performance measure.
(3) Non-GAAP measure, see Item 6.Includes sales from Signet’s diamond sourcing initiative.
|
| | | | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value(1)(2) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fiscal 2016 | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2016 | | Fiscal 2015 |
H.Samuel | £ | 75 |
| | £ | 74 |
| | 1.4 | % | | 2.8 | % | | 1.9 | % | | 1.3 | % |
Ernest Jones | £ | 268 |
| | £ | 252 |
| | 6.3 | % | | (2.4 | )% | | 1.4 | % | | 9.2 | % |
UK Jewelry division | £ | 115 |
| | £ | 112 |
| | 2.7 | % | | 1.9 | % | | 1.8 | % | | 2.9 | % |
(1) Average merchandise transaction valueATV is defined as net merchandise sales on a same store basis divided by the total number of customer transactions. As such, changes from the prior year do not recompute within the table below.
|
| | | | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value(1)(2) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fiscal Year | Fiscal 2018 | | Fiscal 2017 | | Fiscal 2018 | | Fiscal 2017 | | Fiscal 2018 | | Fiscal 2017 |
Kay | $ | 438 |
| | $ | 429 |
| | 1.2 | % | | 6.5 | % | | (13.8 | )% | | (10.8 | )% |
Zales | $ | 436 |
| | $ | 421 |
| | 3.6 | % | | 0.7 | % | | 2.4 | % | | (5.1 | )% |
Jared | $ | 546 |
| | $ | 530 |
| | 1.9 | % | | 7.7 | % | | (8.4 | )% | | (10.8 | )% |
Piercing Pagoda | $ | 67 |
| | $ | 62 |
| | 8.1 | % | | 12.7 | % | | (2.6 | )% | | (5.6 | )% |
Peoples(3) | C$ | 395 |
| | C$ | 367 |
| | 5.9 | % | | 6.1 | % | | (1.7 | )% | | (13.4 | )% |
Regional banners | $ | 418 |
| | $ | 388 |
| | 0.7 | % | | 7.5 | % | | (23.1 | )% | | (19.6 | )% |
North America segment | $ | 369 |
| | $ | 346 |
| | 1.9 | % | | 4.8 | % | | (7.1 | )% | | (9.1 | )% |
H.Samuel(4) | £ | 84 |
| | £ | 78 |
| | 7.7 | % | | 4.0 | % | | (15.6 | )% | | (10.3 | )% |
Ernest Jones(4) | £ | 315 |
| | £ | 299 |
| | 4.7 | % | | 18.2 | % | | (13.5 | )% | | (17.5 | )% |
International segment(4) | £ | 129 |
| | £ | 121 |
| | 6.6 | % | | 8.0 | % | | (15.2 | )% | | (11.8 | )% |
| |
(1) | Net merchandise sales within the North America segment include all merchandise product sales, net of discounts and returns. In addition, excluded from net merchandise sales are sales tax in the US, repair, extended service plan, insurance, employee and other miscellaneous sales. As a result, the sum of the changes will not agree to change in same store sales. |
| |
(2) | Net merchandise sales within the International segment include all merchandise product sales, including value added tax (“VAT”), net of discounts and returns. In addition, excluded from net merchandise sales are repairs, warranty, insurance, employee and other miscellaneous sales. As a result, the sum of the changes will not agree to change in same store sales. |
| |
(3) | Amounts for Peoples stores are denominated in Canadian dollars. |
| |
(4) | Amounts for the International segment, including H.Samuel and Ernest Jones, are denominated in British pounds. |
Fourth Quarter Sales
North America sales
In the fourth quarter, Signet’sthe North America segment’s total sales were $2.06 billion, up 1%, compared to $2.04 billion in the prior year, due primarily to the current year quarter including 14 weeks whereas the prior year quarter included 13 weeks. Same store sales decreased 4.7% compared to a decrease of 4.6% in the prior year. The North America segment’s ATV increased 1.9%, while the number of transactions decreased 7.1%. Across banners, same store sales were up 4.9%, compared to an increasedriven by weakness in bridal and beads, including year over year lower sales of 4.2%Ever Us collection. The decrease in bridal in Kay and Jared was disproportionately affected by systems and process disruptions associated with the outsourcing of credit services that occurred at the end of the third quarter in the prior yearFiscal 2018. In Zales, diamond fashion jewelry, most notably Disney Enchanted and Vera Wang Love collections outperformed but more than offset by weakness across bridal and beads. Gold fashion was the primary driver in same store sales of Pagoda.
International sales
In the fourth quarter, andthe International segment’s total sales increasedwere up by 5.1%2.8% to $2,392.6$233.9 million compared to $2,276.4$227.6 million in the prior year fourth quarter. Growth was led bySame store sales decreased 9.2% compared to a decrease of 3.8% in the prior year fourth quarter due principally to diamond and fashion jewelry, such as Ever Us, diamond earrings, and diamond bracelets. Bridal sales also increased but at a lesser pace than fashion. eCommercepartially offset by higher sales in select prestige watch brands and strength in eCommerce. Average merchandise transaction value increased 6.6% and the fourth quarter were $166.3 millionnumber of transactions decreased 15.2%.
Cost of Sales and 7.0%Gross Margin
Fiscal 2018, gross margin was $2.19 billion or 35.0% of sales compared to $149.6$2.36 billion or 36.8% of sales in Fiscal 2017. The decrease in gross margin was attributable to a 1) decline in the gross merchandise margin rate in part due the inclusion of R2Net which carries a lower gross margin rate and in addition to higher promotions and unfavorable merchandise mix, 2) de-leverage on store occupancy and fixed costs as a result of lower sales and 3) higher costs associated with the disposition of inventory in part due to the distribution center consolidation in North America.
In the fourth quarter, gross margin was $919.8 million or 40.1% of sales compared to $945.5 million or 41.7% of sales in the prior year. The decrease in gross margin was attributable to 1) inclusion of R2Net which carries a lower gross margin rate which negatively impacted the rate by 70 bps, 2) unfavorable merchandise mix and 6.6%3) de-leverage on store occupancy and fixed costs as a result of lower sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for Fiscal 2018 were $1.87 billion or 29.9% of sales compared to $1.88 billion or 29.3% of sales in Fiscal 2017, down $8.0 million. The decrease was attributable to decreased store staff costs and advertising expense partially offset by increased central costs. The increase in central costs was primarily driven by the inclusion of the 53rd week which added $30.5 million of expense, an additional $16.2 million of selling, general and administrative expense related to R2Net and other one-time costs of $12.0 million related to CEO separation and the R2Net acquisition.
In the fourth quarter, SGA expense was $634.5 million or 27.7% of sales compared to $615.3 million or 27.1% of sales in the prior year fourth quarter. The breakdownincrease in expense was primarily driven by the inclusion of the sales performance is set out14th week in the table below.
|
| | | | | | | | | | | | | | | | | | | | | | |
| Change from previous year | | | | |
Fourth quarter of Fiscal 2016 | Same store sales(1) | | Non-same store sales, net(2) | | Total sales at constant exchange rate(3) | | Exchange translation impact(3) | | Total sales as reported | | Total sales (in millions) |
Sterling Jewelers division | 5.0 | % | | 1.9 | % | | 6.9 | % | | — | % | | 6.9 | % | | $ | 1,452.5 | |
Zale Jewelry | 4.4 | % | | 0.8 | % | | 5.2 | % | | (3.0 | )% | | 2.2 | % | | $ | 577.0 | |
Piercing Pagoda | 6.4 | % | | 1.9 | % | | 8.3 | % | | — | % | | 8.3 | % | | $ | 78.1 | |
Zale division | 4.7 | % | | 0.9 | % | | 5.6 | % | | (2.7 | )% | | 2.9 | % | | $ | 655.1 | |
UK Jewelry division | 4.7 | % | | 1.2 | % | | 5.9 | % | | (4.2 | )% | | 1.7 | % | | $ | 282.6 | |
Other(4) | — | % | | nm |
| | nm |
| | — | % | | nm | | | $ | 2.4 | |
Signet | 4.9 | % | | 1.5 | % | | 6.4 | % | | (1.3 | )% | | 5.1 | % | | $ | 2,392.6 | |
Adjusted Signet(3) | | | | | | | | | | | $ | 2,397.8 | |
| |
(1)
| Based on stores open for at least 12 months. eCommerce sales are included in the calculation of same store sales for the period and comparative figures from the anniversary of the launch of the relevant website. |
(2) Includes all sales from stores not open for 12 months.quarter which added $30.5 million of expense and credit outsourcing costs of $21.0 million partially offset by savings of $25.0 million related to in-house credit operations, as well as lower advertising expense and store labor costs.
(3) Non-GAAP measure, see Item 6.Other Operating Income, Net
(4) IncludesIn Fiscal 2018, other operating income, net was $260.8 million or 4.2% of sales from Signet’s diamond sourcing initiative.
nm Not meaningful.
Sterling Jewelerscompared to $282.6 million or 4.4% of sales
in Fiscal 2017. In the fourth quarter, the Sterling Jewelers division’s totalother operating income, net was $39.5 million or 1.7% of sales were $1,452.5 million compared to $1,358.3$69.0 million in the prior year fourth quarter, up 6.9% and same storeor 3.0% of sales increased 5.0%, compared to an increase of 3.7% in the prior year fourth quarter. Sales increasesThe year-over-year decrease was primarily attributable to the 53rd week which added $1.3 million of other income offset by $28.0 million in other expense related to the fourthsale of the prime-only credit quality portion of the Company’s in-house finance receivable portfolio during the third quarter were driven byof Fiscal 2018.
Operating Income
In Fiscal 2018, operating income was $579.9 million or 9.3% of sales compared to $763.2 million or 11.9% of sales in Fiscal 2017. The year-over-year decrease was primarily attributable to a combination of factors described below which drove results across our Kay and Jared brands. Sterling Jewelers' average merchandise transaction value increased 6.0%decrease in sales volumes and the numberimpact of transactions decreased 2.3%. This was driven principally by strong salesthe credit outsourcing transaction during the third quarter of diamond fashion jewelry and select bridal brands. This was the case at Kay in addition to Sterling Jewelers overall. Jared average merchandise transaction value decreased 3.4% and number of transactions increased 3.5% due to higher sales concentration of lower average merchandise transaction value in diamond fashion assortments. Additionally, several qualitative factors supported overall favorable results across the Sterling Jewelers division including, but not limited to, sales team execution, marketing and credit.Fiscal 2018.
|
| | | | | | | | | | | | | | | | | |
| Change from previous year | | |
Fourth quarter of Fiscal 2016 | Same store sales(1) | | Non-same store sales, net(2) | | Total sales as reported | | Total sales (in millions) |
Kay | 7.4 | % | | 1.7 | % | | 9.1 | % | | $ | 940.8 | |
Jared(3) | 1.4 | % | | 3.9 | % | | 5.3 | % | | $ | 439.5 | |
Regional brands | (1.8 | )% | | (5.8 | )% | | (7.6 | )% | | $ | 72.2 | |
Sterling Jewelers division | 5.0 | % | | 1.9 | % | | 6.9 | % | | $ | 1,452.5 | |
|
| | | | | | | | | | | | | |
| Fiscal 2018 | | Fiscal 2017 |
(in millions) | $ | | % of sales | | $ | | % of sales |
North America segment | $ | 656.1 |
| | 11.7 | % | | $ | 789.2 |
| | 13.7 | % |
International segment | 33.1 |
| | 5.4 | % | | 45.6 |
| | 7.0 | % |
Other(1) | (109.3 | ) | | nm |
| | (71.6 | ) | | nm |
|
Operating income | $ | 579.9 |
| | 9.3 | % | | $ | 763.2 |
| | 11.9 | % |
| |
(1) | Based on stores open for at least 12 months. eCommerce sales are included in the calculation of same store sales for the period and comparative figures from the anniversary of the launch of the relevant website. |
(2) Includes all sales from stores not open or owned for 12 months.
(3) Includes smaller concept Jared stores such as Jared Vault and Jared Jewelry Boutique.
|
| | | | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value(1)(2) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fourth quarter of Fiscal 2016 | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2016 | | Fiscal 2015 |
Kay | $ | 403 |
| | $ | 366 |
| | 10.1 | % | | 5.8 | % | | (3.8 | )% | | (1.7 | )% |
Jared | $ | 488 |
| | $ | 505 |
| | (3.4 | )% | | 2.7 | % | | 3.5 | % | | 0.1 | % |
Regional brands | $ | 392 |
| | $ | 366 |
| | 7.1 | % | | 1.1 | % | | (8.9 | )% | | (2.4 | )% |
Sterling Jewelers division | $ | 425 |
| | $ | 401 |
| | 6.0 | % | | 4.7 | % | | (2.3 | )% | | (1.3 | )% |
(1) Average merchandise transaction value is defined as net merchandise sales on a same store basis 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. |
Zale sales
In the fourth quarter, the Zale division’s total sales were $655.1 million compared to $636.7 million in the prior year fourth quarter, up 2.9% and same store sales increased 4.7%, compared to an increase of 1.5% in the prior year fourth quarter. Zale Jewelry contributed $577.0 million and Piercing Pagoda contributed $78.1 million of revenues, an increase of 2.2% and 8.3%, respectively. Total Zale division sales included purchase accounting adjustments of $(5.2) million and $(12.8) million related to a reduction of deferred revenue associated with extended warranty sales in the fourth quarter of Fiscal 2016 and Fiscal 2015, respectively.
In the Zale Jewelry segment, average merchandise transaction value increased 6.2%, while the number of transactions decreased 2.1%. This was driven principally by strong sales of diamond fashion jewelry and bridal. In the Piercing Pagoda segment, average merchandise transaction value increased 10.0%, while the number of transactions decreased 2.7%. This was driven principally by strong sales of gold and diamond jewelry.
|
| | | | | | | | | | | | | | | | | | |
| Change from previous year | | |
Fourth quarter of Fiscal 2016 | Same store sales(1) | | Non-same store sales, net(2) | | Total sales at constant exchange rate(3) | | Exchange translation impact(3) | | Total sales as reported | | Total sales (in millions) |
Zales | 6.3 | % | | 1.7 | % | | 8.0 | % | | — | % | | 8.0 | % | | $ | 461.2 |
|
Gordon’s | (7.5 | )% | | (8.1 | )% | | (15.6 | )% | | — | % | | (15.6 | )% | | $ | 27.1 |
|
Zale US Jewelry | 5.4 | % | | 0.9 | % | | 6.3 | % | | — | % | | 6.3 | % | | $ | 488.3 |
|
Peoples | 0.3 | % | | 0.9 | % | | 1.2 | % | | (15.6 | )% | | (14.4 | )% | | $ | 77.0 |
|
Mappins | (7.6 | )% | | (2.4 | )% | | (10.0 | )% | | (14.0 | )% | | (24.0 | )% | | $ | 11.7 |
|
Zale Canada Jewelry | (0.8 | )% | | 0.4 | % | | (0.4 | )% | | (15.4 | )% | | (15.8 | )% | | $ | 88.7 |
|
Total Zale Jewelry | 4.4 | % | | 0.8 | % | | 5.2 | % | | (3.0 | )% | | 2.2 | % | | $ | 577.0 |
|
Piercing Pagoda | 6.4 | % | | 1.9 | % | | 8.3 | % | | — | % | | 8.3 | % | | $ | 78.1 |
|
Zale division(4) | 4.7 | % | | 0.9 | % | | 5.6 | % | | (2.7 | )% | | 2.9 | % | | $ | 655.1 |
|
| |
(1)
| Based on stores open for at least 12 months. eCommerce sales are included in the calculation of same store sales for the period and comparative figures from the anniversary of the launch of the relevant website. |
(2) Includes all sales from stores not open for 12 months.
(3) Non-GAAP measure.
(4) The Zale division same store sales includes merchandise and repair sales and excludes warranty and insurance revenues.
|
| | | | | | | | | | | | | |
| Average Merchandise Transaction Value(1)(2) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fourth quarter of Fiscal 2016 | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2016 | | Fiscal 2016 |
Zales | $ | 418 |
| | $ | 394 |
| | 6.1 | % | | (0.1 | )% |
Gordon’s | $ | 398 |
| | $ | 399 |
| | (0.3 | )% | | (7.9 | )% |
Peoples(3) | $ | 344 |
| | $ | 323 |
| | 6.5 | % | | (6.7 | )% |
Mappins(3) | $ | 292 |
| | $ | 296 |
| | (1.4 | )% | | (7.3 | )% |
Total Zale Jewelry | $ | 376 |
| | $ | 354 |
| | 6.2 | % | | (2.1 | )% |
Piercing Pagoda | $ | 55 |
| | $ | 50 |
| | 10.0 | % | | (2.7 | )% |
Zale division | $ | 220 |
| | $ | 206 |
| | 6.8 | % | | (2.4 | )% |
(1) Average merchandise transaction value is defined as net merchandise sales on a same store basis 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 repairs, warranty, insurance, employee and other miscellaneous sales. |
(3) Amounts for Zale Canada Jewelry stores are denominated in Canadian dollars.
UK Jewelry sales
In the fourth quarter, the UK Jewelry division’s total sales were up by 1.7% to $282.6 million compared to $278.0 million in the prior year fourth quarter and up 5.9% at constant exchange rates (non-GAAP measure, see Item 6). Same store sales increased 4.7% compared to an increase of 7.5% in the prior year fourth quarter. Average merchandise transaction value increased 3.7% and the number of transactions increased 1.1%. This was driven principally by strong sales of diamond jewelry and prestige watches in Ernest Jones.
Average merchandise transaction value and the number of transactions increased in H.Samuel 1.4% and 2.0%, respectively, due to strong sales of bridal, beads, and select watches. At Ernest Jones, average merchandise transaction value increased 9.1% and the number of transactions decreased 2.1% due to shift of merchandise mix toward diamond jewelry.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Change from previous year | | |
Fourth quarter of Fiscal 2016 | Same store sales(1) | | Non-same store sales, net(2) | | Total sales at constant exchange rate(3) | | Exchange translation impact(3) | | Total sales as reported | | Total sales (in millions) |
H.Samuel | 3.0 | % | | 0.6 | % | | 3.6 | % | | (4.2 | )% | | (0.6 | )% | | $ | 151.2 | |
Ernest Jones(4) | 6.6 | % | | 2.1 | % | | 8.7 | % | | (4.3 | )% | | 4.4 | % | | $ | 131.4 | |
UK Jewelry division | 4.7 | % | | 1.2 | % | | 5.9 | % | | (4.2 | )% | | 1.7 | % | | $ | 282.6 | |
(1) Based on stores open for at least 12 months. eCommerce sales are included in the calculation of same store sales for the period and comparative figures from the anniversary of the launch of the relevant website.
(2) Includes all sales from stores not open for 12 months.
(3) Non-GAAP measure, see Item 6.
(4) Includes stores selling under the Leslie Davis nameplate. |
| | | | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value(1)(2) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fourth quarter of Fiscal 2016 | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2016 | | Fiscal 2015 |
H.Samuel | £ | 75 |
| | £ | 74 |
| | 1.4 | % | | 7.2 | % | | 2.0 | % | | (0.8 | )% |
Ernest Jones(3) | £ | 251 |
| | £ | 230 |
| | 9.1 | % | | 0.4 | % | | (2.1 | )% | | 10.7 | % |
UK Jewelry division | £ | 111 |
| | £ | 107 |
| | 3.7 | % | | 7.0 | % | | 1.1 | % | | 1.5 | % |
(1) Average merchandise transaction value is defined as net merchandise sales on a same store basis divided by the total number of customer transactions.
| |
(2)
| Net merchandise sales include all merchandise product sales, including value added tax (“VAT”), net of discounts and returns. In addition, excluded from net merchandise sales are repairs, warranty, insurance, employee and other miscellaneous sales. |
(3) Includes stores selling under the Leslie Davis nameplate.
Cost of Sales and Gross Margin
In Fiscal 2016, gross margin was $2,440.4 million or 37.3% of sales compared to $2,074.2 million or 36.2% of sales in Fiscal 2015. Adjusted gross margin was $2,476.0 million or 37.6% of adjusted sales compared to 36.9% in the prior year (non-GAAP measure, see Item 6). The increase in the adjusted gross margin rate from prior year of 70 basis points was due to improved merchandise margin from commodity costs and synergies, as well as store occupancy cost leverage.
The Sterling Jewelers division gross margin dollars increased $107.7 million compared to Fiscal 2015, reflecting increased sales and a gross margin rate improvement of 50 basis points. The gross margin rate expansion was driven by an improvement in the merchandise margin due to favorable commodity costs and store occupancy cost leverage.
In the Zale division, gross margin dollars increased $255.6 million compared to Fiscal 2015. Included in gross margin were purchasing accounting adjustments totaling $35.6 million in Fiscal 2016 and $57.3 million in the prior year. Adjusted gross margin dollars increased $233.9 million compared to the prior year (prior year represents a partial year of ownership due to the acquisition date of May 29, 2014), reflecting an adjusted gross margin rate improvement of 170 basis points. Higher sales and synergies favorably affected merchandise margins, distribution costs, and store occupancy. This included initiatives focused on discount controls, vendor terms and allowances, supply chain cost efficiencies and rent savings.
In the UK Jewelry division, gross margin dollars increased $3.9 million compared to Fiscal 2015, reflecting gross margin rate improvement of 80 basis points. The increases in dollars and rate were driven principally by leverage on store occupancy.
In the fourth quarter, the consolidated gross margin was $1,016.0 million or 42.5% of sales compared to $912.1 million or 40.1% of sales in the prior year fourth quarter. Adjusted gross margin was $1,020.7 million or 42.6% of adjusted sales compared to 40.9% in the prior year fourth quarter (non-GAAP measure, see Item 6). The increase in the adjusted gross margin rate from prior year of 170 basis points was consistent with the full year, due primarily to gross margin synergies including sourcing and discount controls related mostly to the Zale division, as well as favorable commodity and leverage on store occupancy costs.
Gross margin dollars in the Sterling Jewelers division increased $57.4 million compared to the prior year fourth quarter, reflecting higher sales and a gross margin rate increase of 120 basis points. The gross margin rate expansion was driven by an improvement in the merchandise margin due primarily to favorable commodity costs and store occupancy cost leverage.
In the Zale division, gross margin dollars increased $41.8 million compared to prior year fourth quarter. Included in gross margin were purchase accounting adjustments totaling $4.7 million in current year fourth quarter compared to $24.8 million in prior year. Adjusted gross margin dollars in the Zale division increased $21.7 million compared to the prior year fourth quarter. The adjusted gross margin rate increased 270 basis points, as synergies favorably affected merchandise margins, distribution costs and store occupancy.
In the UK Jewelry division, gross margin dollars increased $4.0 million compared to Fiscal 2015, reflecting a gross margin rate improvement of 80 basis points. The increases in dollars and rate were driven principally by leverage on store occupancy.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for Fiscal 2016 were $1,987.6 million or 30.4% of sales compared to $1,712.9 million or 29.9% of sales in Fiscal 2015, up $274.7 million, which includes a full year of Zale SGA expense, compared to the partial year reported in the prior period due to the timing of the acquisition. In addition, included in SGA were favorable purchase accounting adjustments of $9.2 million offset by transaction and integration costs of $78.9 million, which includes the impact of the legal settlement of $34.2 million over appraisal rights, consulting and internal costs incurred in connection with the integration of Zale acquisition, severance costs and implementation costs incurred in connection with our IT modernization and standardization initiatives. Adjusted SGA was $1,917.9 million or 29.1% of adjusted sales compared to 28.8% in the prior year (non-GAAP measure, see Item 6). The increase in dollars and rate was driven primarily by central costs around product research and development, as well as incremental investments in advertising, IT support and employee benefits.
In the fourth quarter, SGA expense was $686.6 million or 28.7% of sales compared to $634.5 million or 27.9% of sales in the prior year fourth quarter. In addition, included in SGA were purchase accounting adjustments of $1.5 million and transaction and integration costs of $19.1 million, which includes consulting costs incurred in connection with the integration of Zale acquisition, severance costs and implementation costs associated with our IT modernization and standardization initiatives. Adjusted SGA was $666.0 million or 27.8% of adjusted sales compared to 27.5% in the prior year (non-GAAP measure, see Item 6). The 30 basis point increase in SGA rate was driven primarily by an increase in central costs associated with higher information technology recurring expense, product research and development, and harmonization of employee compensation among North America divisions. Partially offsetting these higher central costs was leverage on advertising and store payroll.
Other Operating Income, Net
In Fiscal 2016, other operating income was $250.9 million or 3.8% of sales compared to $215.3 million or 3.7% of sales in Fiscal 2015. This increase was primarily due to higher interest income earned from higher outstanding receivable balances.
Other operating income in the fourth quarter was $63.7 million or 2.6% of sales compared to $54.1 million or 2.4% of sales in the prior year fourth quarter. This increase was also primarily due to higher interest income earned from higher outstanding receivable balances.
Operating Income
In Fiscal 2016, operating income was $703.7 million or 10.7% of sales compared to $576.6 million or 10.0% of sales in Fiscal 2015. Included in operating income were purchase accounting adjustments of $26.4 million and transaction and integration costs of $78.9 million. Adjusted operating income was $809.0 million or 12.3% of adjusted sales compared to 11.8% in the prior year (non-GAAP measure, see Item 6).
|
| | | | | | | | | | | | | |
| Fiscal 2016 | | Fiscal 2015 |
(in millions) | $ | | % of sales | | $ | | % of sales |
Sterling Jewelers division | $ | 718.6 |
| | 18.0 | % | | $ | 624.3 |
| | 16.6 | % |
Zale division(1) | 52.1 |
| | 2.9 | % | | (8.2 | ) | | (0.7 | )% |
UK Jewelry division | 61.5 |
| | 8.3 | % | | 52.2 |
| | 7.0 | % |
Other(2) | (128.5 | ) | | nm |
| | (91.7 | ) | | nm |
|
Operating income | $ | 703.7 |
| | 10.7 | % | | $ | 576.6 |
| | 10.0 | % |
| |
(1)
| Zale division includes net operating loss impact of $26.4 million for purchase accounting adjustments. Excluding the impact from accounting adjustments, Zale division’s operating income was $78.5 million or 4.3% of sales. The Zale division operating income included $44.3 million from Zale Jewelry or 2.8% of sales and $7.8 million from Piercing Pagoda or 3.2% of sales. In the prior year, Zale division includes net operating loss impact of $45.9 million for purchase accounting adjustments. Excluding the impact from accounting adjustments, Zale division’s operating income was $37.7 million or 3.0% of sales. The Zale division operating loss included $1.9 million from Zale Jewelry or (0.2)% of sales and $6.3 million from Piercing Pagoda or (4.3)% of sales. |
| |
(2)
| Fiscal 2018, Other includes $78.9 million and $59.8$29.6 million of transaction costs related to the credit transaction, $8.6 million of R2Net acquisition costs, and integration expenses in Fiscal 2016 and 2015, respectively. Transaction and integration costs include legal settlement$3.4 million of $34.2 million over appraisal rights, and expenses associated with legal, tax, accounting, information technology implementation, consulting and severance.CEO transition costs. |
In the fourth quarter, operating income was $393.1$323.5 million or 16.4%14.1% of sales compared to $331.7$399.2 million or 14.6%17.6% of sales in prior year fourth quarter. Included in operating income were purchase accounting adjustments of $6.2 million and transaction and integration costs of $19.1 million. Adjusted operating income was $418.4 million or 17.4% of adjusted sales compared to 15.8% in the prior year (non-GAAP measure, see Item 6).
|
| | | | | | | | | | | | | |
| Fourth Quarter Fiscal 2016 | | Fourth Quarter Fiscal 2015 |
(in millions) | $ | | % of sales | | $ | | % of sales |
Sterling Jewelers division | $ | 305.4 |
| | 21.0 | % | | $ | 260.0 |
| | 19.1 | % |
Zale division(1) | 63.0 |
| | 9.6 | % | | 36.1 |
| | 5.7 | % |
UK Jewelry division | 57.8 |
| | 20.5 | % | | 53.8 |
| | 19.4 | % |
Other(2) | (33.1 | ) | | nm |
| | (18.2 | ) | | nm |
|
Operating income | $ | 393.1 |
| | 16.4 | % | | $ | 331.7 |
| | 14.6 | % |
| |
(1)
| Zale division includes net operating loss impact of $6.2 million for purchase accounting adjustments. Excluding the impact from accounting adjustments, Zale division’s operating income was $69.2 million or 10.6% of sales. The Zale division operating income included $54.2 million from Zale Jewelry or 9.4% of sales and $8.8 million from Piercing Pagoda or 11.3% of sales. In the prior year fourth quarter, Zale division includes net operating loss impact of $20.8 million for purchase accounting adjustments. Excluding the impact from accounting adjustments, Zale division’s operating income was $56.9 million or 8.7% of sales. The Zale division operating income included $32.8 million from Zale Jewelry or 5.8% of sales and $3.3 million from Piercing Pagoda or 4.6% of sales. |
| |
(2)
| Other includes $19.1 million and $9.2 million of transaction and integration expenses in Fiscal 2016 and 2015, respectively. Transaction and integration costs include expenses associated with legal, tax, information technology implementation, consulting and severance. |
Interest Expense, Net
In Fiscal 2016, net interest expense was $45.9 million compared to $36.0 million in Fiscal 2015. The increase in interest expensedecline was driven by de-leverage of fixed costs due to sales declines, the additionimpact of $1.4 billion of debt financing at a weighted average interest rate of 2.6%the credit outsourcing transaction and de-leverage related to R2Net, which carries a lower operating margin rate. The credit outsourcing transaction (excluding the Zale acquisition, which was outstanding for the full 12 monthssales impact of Fiscal 2016, versus only a partial year in the prior period.
In the fourth quarter, net interest expense was $12.1 million compared to $7.9credit transition) reduced operating income by $21.0 million in the prior year fourth quarter driven by the timing of repayments of our fourth quarter borrowings under our variable rate revolving credit facility, coupled with slightly higher interest rates. Further contributing to the increase was additional expense related to our interest rate hedging instrument which effectively converted a portion of variable-rate debt into fixed-rate debt during the first quarter of Fiscal 2016.
Income Before Income Taxes
For Fiscal 2016, income before income taxes was up 21.7% to $657.8 million or 10.0% of sales compared to $540.6 million or 9.4% of sales in Fiscal 2015.
For the fourth quarter, income before income taxes was up 17.7% to $381.0 million or 15.9% of sales compared to $323.8 million or 14.2% of sales in the prior year fourth quarter.
Income Taxes
Income tax expense for Fiscal 2016 was $189.9 million compared to $159.3 million in Fiscal 2015, with an effective tax rate of 28.9% for Fiscal 2016 compared to 29.5% in Fiscal 2015. This reduction of 60 basis points in Signet’s effective tax rate primarily reflects the full year benefit of Signet’s amended capital structure and financing arrangements utilized to fund the acquisition of Zale Corporation.
In the fourth quarter, income tax expense was $109.1 million compared to $95.8 million in the prior year fourth quarter. The fourth quarter effective tax rate was 28.6% compared to 29.6% in the prior year fourth quarter also driven principally by income mix by jurisdiction and increased effect of Signet’s global financing arrangements.
Net Income
Net income for Fiscal 2016 was up 22.7% to $467.9 million or 7.1% of sales compared to $381.3 million or 6.6% of sales in Fiscal 2015.
For the fourth quarter, net income was up 19.3% to $271.9 million or 11.4% of sales compared to $228.0 million or 10.0% of sales in the prior year fourth quarter.
Earnings Per Share
For Fiscal 2016, diluted earnings per share were $5.87 compared to $4.75 in Fiscal 2015, an increase of 23.6%. Adjusted diluted earnings per share were $6.86 compared to $5.63 in the prior year. The weighted average diluted number of common shares outstanding was 79.7 million compared to 80.2 million in Fiscal 2015. Signet repurchased 1,018,568 shares in Fiscal 2016 compared to 288,393 shares in Fiscal 2015.
For the fourth quarter, diluted earnings per share were $3.42 compared to $2.84 in the prior year fourth quarter, up 20.4%. Adjusted diluted earnings per share were $3.63 compared to $3.06 in the prior year fourth quarter. The weighted average diluted number of common shares outstanding was 79.4 million compared to 80.2 million in the prior year fourth quarter.
Dividends Per Share
In Fiscal 2016, dividends of $0.88 were approved by the Board of Directors compared to $0.72 in Fiscal 2015.
COMPARISON OF FISCAL 2015 TO FISCAL 2014
Same store sales: up 4.1%.
| |
• | Operating income: up 1.1% to $576.6 million. Adjusted(1) operating income: up 19.6% to $682.3 million.
|
| |
• | Operating margin: decreased to 10.0%, down 350 basis points. Adjusted(1) operating margin: down 170 basis points to 11.8%.
|
| |
• | Diluted earnings per share: up 4.2% to $4.75. Adjusted(1) diluted earnings per share: up 23.5% to $5.63.
|
(1) Non-GAAP measure, see Item 6. The Company uses adjusted metrics, which adjust for purchase accounting, transaction and integration costs principally in relation to the Zale acquisition to give investors information as to the Company’s results without regard to the expenses associated with the May 2014 acquisition of Zale Corporation and certain severance costs.
In Fiscal 2015, Signet’s same store sales increased by 4.1%, compared to an increase of 4.4% in Fiscal 2014. Total sales were $5,736.3 million compared to $4,209.2 million in Fiscal 2014, up $1,527.1 million or 36.3% compared to an increase of 5.7% in Fiscal 2014. The increase in sales was primarily driven by the addition of the Zale division which added $1,215.6 million of sales, including purchase accounting adjustments related to deferred revenue associated with extended warranty sales. eCommerce sales were $283.6 million, which included $82.0 million of Zale eCommerce sales, compared to $164.1 million in Fiscal 2014. The breakdown of Signet’s sales performance is set out in the table below.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Change from previous year |
Fiscal 2015 | Same store sales(1) | | Non-same store sales, net(2) | | Total sales at constant exchange rate(3) | | Exchange translation impact(3) | | Total sales as reported | | Total sales (in millions) |
Sterling Jewelers division | 4.8 | % | | 2.2 | % | | 7.0 | % | | — | % | | 7.0 | % | | $ | 3,765.0 | |
Zale Jewelry | 1.7 | % | | | | | | | | | | $ | 1,068.7 | |
Piercing Pagoda | 0.2 | % | | | | | | | | | | $ | 146.9 | |
Zale division | 1.5 | % | | | | | | | | | | $ | 1,215.6 | |
UK Jewelry division | 5.3 | % | | 0.4 | % | | 5.7 | % | | 2.8 | % | | 8.5 | % | | $ | 743.6 | |
Other(5) | — | | | nm |
| | nm | | | — | % | | nm | | | $ | 12.1 | |
Signet | 4.1 | % | | 31.6 | % | | 35.7 | % | | 0.6 | % | | 36.3 | % | | $ | 5,736.3 | |
Adjusted Signet(3) | | | | | | | | | | | $ | 5,769.9 | |
Adjusted Signet excluding Zale(3) | | | | | | | | | | | | | | | | $ | 4,520.7 | |
(1) Based on stores open for at least 12 months. eCommerce sales are included in the calculation of same store sales for the period and comparative figures from the anniversary of the launch of the relevant website.
(2) Includes all sales from stores not open for 12 months.
(3) Non-GAAP measure, see Item 6.
(4) Same store sales presented for Zale division to provide comparative performance measures. Year-over-year results not applicable because Signet did not own Zale division in prior year.
(5) Includes sales from Signet’s diamond sourcing initiative.
nm Not meaningful.
Sterling Jewelers sales
In Fiscal 2015, the Sterling Jewelers division’s total sales were up 7.0% to $3,765.0 million compared to $3,517.6 million in Fiscal 2014, and same store sales increased by 4.8% compared to an increase of 5.2% in Fiscal 2014. Sales increases were driven by a combination of factors which drove results at Kay and Jared. These factors included sales associate execution, compelling merchandise, marketing and credit. The average merchandise transaction value increased in Kay driven by particular strength in branded bridal as well as a decline in sales associated with lower average selling price units. The number of merchandise transactions increased in Kay due to branded bridal, branded fashion diamond collections and watches partially offset by a decline in units of lower average selling price points. In Jared, the average merchandise transaction value was relatively flat to prior year and the number of merchandise transactions increased. Strong branded and non-branded merchandise performance drove transactional increases in Jared. Branded differentiated and exclusive merchandise in Sterling Jewelers increased its participation by 120 basis points to 32.3% of Sterling Jeweler’s merchandise sales.
|
| | | | | | | | | | | | | | |
| Changes from previous year | | |
Fiscal 2015 | Same store sales | | Non-same store sales, net(1) | | Total sales as reported | | Total sales (in millions) |
Kay | 5.7 | % | | 2.9 | % | | 8.6 | % | | $ | 2,346.2 | |
Jared(2) | 3.8 | % | | 5.1 | % | | 8.9 | % | | $ | 1,188.8 | |
Regional brands | 0.3 | % | | (13.7 | )% | | (13.4 | )% | | $ | 230.0 | |
Sterling Jewelers division | 4.8 | % | | 2.2 | % | | 7.0 | % | | $ | 3,765.0 | |
(1) Includes all sales from stores not open or owned 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 two Jared concept test stores. Reported sales in the prior year have been reclassified to align with current year presentation. |
|
| | | | | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value(1)(2) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fiscal 2015 | Fiscal 2015 | | Fiscal 2014(3) | | Fiscal 2015 | | Fiscal 2014(3) | | Fiscal 2015 | | Fiscal 2014(3) |
Kay | $ | 398 |
| | $ | 382 |
| | 4.2 | % | | 3.5 | % | | 2.1 | % | | 2.4 | % |
Jared | $ | 540 |
| | $ | 539 |
| | 0.2 | % | | (1.1 | )% | | 4.2 | % | | 6.3 | % |
Regional brands | $ | 407 |
| | $ | 400 |
| | 1.8 | % | | 4.8 | % | | (1.3 | )% | | (4.9 | )% |
Sterling Jewelers division | $ | 435 |
| | $ | 422 |
| | 3.1 | % | | 2.4 | % | | 2.4 | % | | 2.7 | % |
(1) Average merchandise transaction value is defined as net merchandise sales on a same store basis 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. |
| |
(3)
| The Fiscal 2014 average merchandise transaction value and merchandise transactions, including the change from previous year have been recalculated to conform to the current year presentation which is calculated on a same store sales basis. |
UK Jewelry sales
In Fiscal 2015, the UK Jewelry division’s total sales were up 8.5% to $743.6 million compared to $685.6 million in Fiscal 2014 and up 5.7% at constant exchange rates (non-GAAP measure, see Item 6). Same store sales increased by 5.3% compared to an increase of 1.0% in Fiscal 2014. Sales performance in the UK Jewelry division was primarily driven by an increase in same store sales performance of the business in the fourth quarter. The UK Jewelry division experienced sales growth primarily in bridal and fashion diamond jewelry and fashion watches. The average merchandise transaction value increase in H.Samuel was driven by strong diamond and bridal sales with increases in the number of transactions influenced by higher bead, gold jewelry and watches. The average transaction value declined in Ernest Jones while the number of transactions increased over prior year. Transaction increases in Ernest Jones were driven by broad strength across the merchandise portfolio but with particular strength in fashion watches that also impacted the average transaction value.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Change from previous year | | |
Fiscal 2015 | Same store sales | | Non-same store sales, net(1) | | Total sales at constant exchange rate(2) | | Exchange translation impact(2) | | Total sales as reported | | Total sales (in millions) |
H.Samuel | 3.9 | % | | (0.9 | )% | | 3.0 | % | | 2.6 | % | | 5.6 | % | | $ | 389.6 | |
Ernest Jones | 7.0 | % | | 1.8 | % | | 8.8 | % | | 3.0 | % | | 11.8 | % | | $ | 354.0 | |
UK Jewelry division | 5.3 | % | | 0.4 | % | | 5.7 | % | | 2.8 | % | | 8.5 | % | | $ | 743.6 | |
(1) Includes all sales from stores not open for 12 months.
(2) Non-GAAP measure, see Item 6.
|
| | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value (1)(2) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fiscal 2015 | Fiscal 2015 | | Fiscal 2014(3) | | Fiscal 2015 | | Fiscal 2014(3) |
| | Fiscal 2015 | | Fiscal 2014(3) |
H.Samuel | £ | 74 |
| | £ | 72 |
| | 2.8% | | 0.0 | % | | 1.3% | | 0.2 | % |
Ernest Jones | £ | 249 |
| | £ | 259 |
| | (3.9)% | | (7.1)% |
| | 10.9% | | 9.5 | % |
UK Jewelry division | £ | 110 |
| | £ | 109 |
| | 0.9% | | (0.9)% |
| | 3.2% | | 1.8 | % |
(1) Average merchandise transaction value is defined as net merchandise sales on a same store basis divided by the total number of customer transactions.
| |
(2)
| Net merchandise sales include all merchandise product sales, including value added tax (“VAT”), net of discounts and returns. In addition, excluded from net merchandise sales are repairs, warranty, insurance, employee and other miscellaneous sales. |
| |
(3)
| The Fiscal 2014 average merchandise transaction value and merchandise transactions, including the change from previous year have been recalculated to conform to the current year presentation which is calculated on a same store sales basis. |
Zale division sales
As Zale Corporation was acquired May 29, 2014, there is no comparable prior period. The Zale division’s Fiscal 2015 sales were $1,215.6 million. Zale Jewelry contributed $1,068.7 million and Piercing Pagoda contributed $146.9 million of revenues. Total Zale division sales included purchase accounting adjustments of $(33.6) million related to a reduction of deferred revenue associated with extended warranty sales. Same store sales increased 1.5% driven in part by initial synergy initiatives surrounding sales associate training, merchandise assortment and new marketing creative. Merchandise sales were particularly strong in branded bridal and branded diamond fashion in the Zale Jewelry reportable segment. Branded differentiated and exclusive merchandise represented 30.5% of the Zale division’s merchandise sales.
|
| | | | | | |
Fiscal 2015 | Same store sales | | Total sales (in millions) |
Zales | 1.6 | % | | $ | 800.9 |
|
Gordon’s | (2.8 | )% | | $ | 62.3 |
|
Zale US Jewelry | 1.3 | % | | $ | 863.2 |
|
Peoples | 4.6 | % | | $ | 174.5 |
|
Mappins | (2.3 | )% | | $ | 31.0 |
|
Zale Canada Jewelry | 3.5 | % | | $ | 205.5 |
|
Total Zale Jewelry | 1.7 | % | | $ | 1,068.7 |
|
Piercing Pagoda | 0.2 | % | | $ | 146.9 |
|
Zale division(1) | 1.5 | % | | $ | 1,215.6 |
|
(1) The Zale division same store sales reflect results since the date of acquisition and include merchandise and repair sales and excludes warranty and insurance revenues.
Fourth Quarter Sales
In the fourth quarter, Signet’s same store sales were up 4.2%, compared to an increase of 4.3% in the prior year fourth quarter, and total sales increased by 45.5% to $2,276.4 million compared to $1,564.0 million in the prior year fourth quarter. The increase in sales was primarily driven by the addition of the Zale division which added $636.7 million of sales, including purchase accounting adjustments. eCommerce sales in the fourth quarter were $149.6 million, which included $54.8 million of Zale eCommerce sales, compared to $79.0 million in the prior year fourth quarter. The breakdown of the sales performance is set out in the table below.
|
| | | | | | | | | | | | | | | | | | | | | | |
| Change from previous year | | | | |
Fourth quarter of Fiscal 2015 | Same store sales(1) | | Non-same store sales, net(2) | | Total sales at constant exchange rate(3) | | Exchange translation impact(3) | | Total sales as reported | | Total sales (in millions) |
Sterling Jewelers division | 3.7 | % | | 1.8 | % | | 5.5 | % | | — | % | | 5.5 | % | | $ | 1,358.3 | |
Zale Jewelry | 3.8 | % | | | | | | | | | | $ | 564.6 | |
Piercing Pagoda | 2.7 | % | | | | | | | | | | $ | 72.1 | |
Zale division(4) | 3.7 | % | | | | | | | | | | $ | 636.7 | |
UK Jewelry division | 7.5 | % | | 0.2 | % | | 7.7 | % | | (5.6 | )% | | 2.1 | % | | $ | 278.0 | |
Other (5) | — | % | | nm |
| | nm |
| | — | % | | nm | | | $ | 3.4 | |
Signet | 4.2 | % | | 42.7 | % | | 46.9 | % | | (1.4 | )% | | 45.5 | % | | $ | 2,276.4 | |
Adjusted Signet(3) | | | | | | | | | | | $ | 2,289.2 | |
Adjusted Signet excluding Zale(3) | | | | | | | | | | | | | $ | 1,639.7 | |
(1) Based on stores open for at least 12 months. eCommerce sales are included in the calculation of same store sales for the period and comparative figures from the anniversary of the launch of the relevant website.
(2) Includes all sales from stores not open for 12 months.
(3) Non-GAAP measure, see Item 6.
| |
(4)
| Same store sales presented for Zale division to provide comparative performance measures. Year-over-year results not applicable because Signet did not own Zale division in prior year. |
(5) Includes sales from Signet’s diamond sourcing initiative.
nm Not meaningful.
Sterling Jewelers sales
In the fourth quarter, the Sterling Jewelers division’s total sales were $1,358.3 million compared to $1,288.0 million in the prior year fourth quarter, up 5.5% and same store sales increased 3.7%, compared to an increase of 4.0% in the prior year fourth quarter. Sales increases in the fourth quarter were driven by a combination of factors which drove results at Kay and Jared. These factors included sales team execution, compelling merchandise, marketing, and credit. The average merchandise transaction value increased in Kay driven by particular strength in bridal as well as a decline in sales associated with lower average selling price units. The number of merchandise transactions declined in Kay primarily due to a decline in units of lower average selling price points. In Jared, the average merchandise transaction value increased due to strong branded and non-branded merchandise performance. The number of merchandise transactions was relatively flat to prior year due to a decline in sales associated with lower average selling price units.
|
| | | | | | | | | | | | | | | | | |
| Change from previous year | | |
Fourth quarter of Fiscal 2015 | Same store sales | | Non-same store sales, net(1) | | Total sales as reported | | Total sales (in millions) |
Kay | 4.6 | % | | 2.4 | % | | 7.0 | % | | $ | 862.8 | |
Jared(2) | 2.6 | % | | 3.6 | % | | 6.2 | % | | $ | 416.7 | |
Regional brands | 0.0 | % | | (11.7 | )% | | (11.7 | )% | | $ | 78.8 | |
Sterling Jewelers division | 3.7 | % | | 1.8 | % | | 5.5 | % | | $ | 1,358.3 | |
(1) Includes all sales from stores not open or owned 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 two Jared concept test stores. Reported sales in the prior year have been reclassified to align with current year presentation. |
|
| | | | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fourth quarter of Fiscal 2015 | Fiscal 2015 | | Fiscal 2014(3) | | Fiscal 2015 | | Fiscal 2014 (3) | | Fiscal 2015 | Fiscal 2014 (3) |
Kay | $ | 364 |
| | $ | 344 |
| | 5.8 | % | | 2.4 | % | | (1.6 | )% | | 1.2 | % |
Jared | $ | 495 |
| | $ | 484 |
| | 2.3 | % | | (4.2 | )% | | 0.1 | % | | 9.0 | % |
Regional brands | $ | 369 |
| | $ | 366 |
| | 0.8 | % | | 6.8 | % | | (2.2 | )% | | (4.5 | )% |
Sterling Jewelers division | $ | 397 |
| | $ | 380 |
| | 4.5 | % | | 1.1 | % | | (1.2 | )% | | 2.6 | % |
(1) Average merchandise transaction value is defined as net merchandise sales on a same store basis 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. |
| |
(3)
| The Fiscal 2014 average merchandise transaction value and merchandise transactions, including the change from previous year have been recalculated to conform to the current year presentation which is calculated on a same store sales basis. |
UK Jewelry sales
In the fourth quarter, the UK Jewelry division’s total sales were up by 2.1% to $278.0 million compared to $272.2 million in the prior year fourth quarter and up 7.7% at constant exchange rates (non-GAAP measure, see Item 6). Same store sales increased 7.5% compared to an increase of 5.7% in the prior year fourth quarter. Sales performance in the fourth quarter was primarily driven by branded bridal, fashion diamond jewelry and fashion watches. The average merchandise transaction value increase in H.Samuel was driven by strong diamond and bridal sales with a slight decline in the number of transactions. The average transaction value declined slightly in Ernest Jones while the number of transactions increased over prior year period. Transaction increases in Ernest Jones were driven by broad strength across the merchandise portfolio but with particular strength in fashion watches that also impacted the average transaction value.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Change from previous year | | |
Fourth quarter of Fiscal 2015 | Same store sales | | Non-same store sales, net(1) | | Total sales at constant exchange rate(2) | | Exchange translation impact(2) | | Total sales as reported | | Total sales (in millions) |
H.Samuel | 6.0 | % | | (0.3 | )% | | 5.7 | % | | (5.3 | )% | | 0.4 | % | | $ | 152.1 | |
Ernest Jones(3) | 9.3 | % | | 0.8 | % | | 10.1 | % | | (5.8 | )% | | 4.3 | % | | $ | 125.9 | |
UK Jewelry division | 7.5 | % | | 0.2 | % | | 7.7 | % | | (5.6 | )% | | 2.1 | % | | $ | 278.0 | |
(1) Includes all sales from stores not open for 12 months.
(2) Non-GAAP measure, see Item 6.
(3) Includes stores selling under the Leslie Davis nameplate. |
| | | | | | | | | | | | | | | | | | | |
| Average Merchandise Transaction Value(1) | | Merchandise Transactions |
| Average Value | | Change from previous year | | Change from previous year |
Fourth quarter of Fiscal 2015 | Fiscal 2015 | | Fiscal 2014(4) | | Fiscal 2015 | | Fiscal 2014(4) | | Fiscal 2015 | | Fiscal 2014(4) |
H.Samuel | £ | 74 |
| | £ | 69 |
| | 7.2 | % | | — | % | | (0.8 | )% | | 3.6 | % |
Ernest Jones(3) | £ | 230 |
| | £ | 231 |
| | (0.4 | )% | | (2.5 | )% | | 11.6 | % | | 9.3 | % |
UK Jewelry division | £ | 107 |
| | £ | 100 |
| | 7.0 | % | | — | % | | 1.6 | % | | 4.6 | % |
(1) Average merchandise transaction value is defined as net merchandise sales on a same store basis divided by the total number of customer transactions.
| |
(2)
| Net merchandise sales include all merchandise product sales, including value added tax (“VAT”), net of discounts and returns. In addition, excluded from net merchandise sales are repairs, warranty, insurance, employee and other miscellaneous sales. |
(3) Includes stores selling under the Leslie Davis nameplate.
| |
(4)
| The Fiscal 2014 average merchandise transaction value and merchandise transactions, including the change from previous year have been recalculated to conform to the current year presentation which is calculated on a same store sales basis. |
Zale sales
As Zale Corporation was acquired May 29, 2014, there is no comparable period presented. The Zale division’s fourth quarter sales were $636.7 million. Zale Jewelry contributed $564.6 million and Piercing Pagoda contributed $72.1 million of revenues. Total Zale division sales included purchase accounting adjustments of $(12.8) million related to a reduction of deferred revenue associated with extended warranty sales. Same store sales increased 3.7% driven in part by initial synergy initiatives surrounding sales associate training, merchandise assortment and new marketing creative. Merchandise sales were particularly strong in branded bridal and branded diamond fashion in the Zale Jewelry reportable segment. Total Zale division sales were driven by branded sales in bridal and fashion in the Zale Jewelry reportable segment.
|
| | | | | | |
Fourth quarter of Fiscal 2015 | Same store sales | | Total sales (in millions) |
Zales | 3.7 | % | | $ | 427.1 |
|
Gordon’s | (2.3 | )% | | $ | 32.1 |
|
Zale US Jewelry | 3.2 | % | | $ | 459.2 |
|
Peoples | 7.1 | % | | $ | 90.0 |
|
Mappins | 3.5 | % | | $ | 15.4 |
|
Zale Canada Jewelry | 6.6 | % | | $ | 105.4 |
|
Total Zale Jewelry | 3.8 | % | | $ | 564.6 |
|
Piercing Pagoda | 2.7 | % | | $ | 72.1 |
|
Zale division(1) | 3.7 | % | | $ | 636.7 |
|
(1) The Zale division same store sales includes merchandise and repair sales and excludes warranty and insurance revenues.
Cost of Sales and Gross Margin
In Fiscal 2015, gross margin was $2,074.2 million or 36.2% of sales compared to $1,580.5 million or 37.5% of sales in Fiscal 2014. Adjusted gross margin was $2,131.5 million or 36.9% of adjusted sales (non-GAAP measure, see Item 6). The decrease in the adjusted gross margin rate from prior year of 60 basis points was due to the lower gross margins associated with the Zale division which reduced Signet’s adjusted gross margin rate by 70 basis points. Zale operates with a lower gross margin structure than Sterling Jewelers and represents an area of focus on applying best practices for improvement. The impact of Zale on Signet’s adjusted gross margin rate was partially offset by a higher gross margin rate in the Sterling Jewelers division.
The Sterling Jewelers division gross margin dollars increased $107.5 million compared to Fiscal 2014, reflecting increased sales and a gross margin rate improvement of 30 basis points. The gross margin rate expansion was driven by an improvement in the merchandise margin, leverage on store occupancy expenses from higher sales as well as favorable commodity costs.
In the UK Jewelry division, gross margin dollars increased $15.5 million compared to Fiscal 2014, reflecting higher sales partially offset by a gross margin rate decrease of 30 basis points. The increase in gross margin dollars was driven by higher sales which leveraged store occupancy and distribution costs. The gross margin rate decline was driven principally by a lower merchandise margin, as the division strategically realigned assortments and prices to better drive sales and gross margin dollars.
In the fourth quarter, the consolidated gross margin was $912.1 million or 40.1% of sales compared to $648.8 million or 41.5% of sales in the prior year fourth quarter. Adjusted gross margin was $936.9 million or 40.9% of adjusted sales (non-GAAP measure, see Item 6). The decrease in the adjusted gross margin rate from prior year of 60 basis points was due to the lower gross margins associated with the Zale division which reduced Signet’s adjusted gross margin rate by 110 basis points.The impact of Zale on Signet’s adjusted gross margin rate was partially offset by a higher gross margin rate in the Sterling Jewelers division.
Gross margin dollars in the Sterling Jewelers division increased $38.8 million compared to the prior year fourth quarter, reflecting higher sales and a gross margin rate increase of 70 basis points. The gross margin rate expansion was driven by an improvement in the merchandise margin, leverage on store occupancy expenses from higher sales as well as favorable commodity costs.
In the UK Jewelry division, gross margin dollars increased $1.6 million compared to Fiscal 2014, reflecting higher sales partially offset by a gross margin rate decrease of 20 basis points. As with the full year, the fourth quarter increase in gross margin dollars was driven by higher sales which leveraged store occupancy and distribution costs. The gross margin rate decline was driven principally by a lower merchandise margin, as the division strategically realigned assortments and prices to better drive sales and gross margin dollars.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for Fiscal 2015 were $1,712.9 million or 29.9% of sales compared to $1,196.7 million or 28.4% of sales in Fiscal 2014, up $516.2 million. The increase was primarily due to the additionloss of Zale in the current year. In addition, included in SGA were purchase accounting adjustments and transaction and integration costs of $48.4 million, or 0.8% of sales. Adjusted SGA was $1,664.5 million or 28.8% of adjusted sales (non-GAAP measure, see Item 6). The 40 basis points increase in the adjusted SGA rate compared to the prior year comparable period was driven primarily by the Zale division which unfavorably affected Signet’s adjusted SGA rate by 60 basis points. In both Sterling Jewelers and UK Jewelry divisions, SGA in total and expenses associated with store staff costs were leveraged due to higher sales.
In the fourth quarter, SGA expense was $634.5 million or 27.9% of sales compared to $425.8 million or 27.2% of sales in the prior year fourth quarter. The increase was primarily due to the addition of Zale in the current year. In addition, included in SGA were purchase accounting adjustments and transaction and integration costs of $5.2 million, or 0.2% of sales. Adjusted SGA was $629.3 million or 27.5% of adjusted sales. The 30 basis points increase in the adjusted SGA rate compared to the prior year comparable period was driven primarily by the Zale division which unfavorably affected Signet’s adjusted SGA rate by 70 basis points. In both Sterling Jewelers and UK Jewelry divisions, higher sales leveraged SGA.
Other Operating Income, Net
In Fiscal 2015, other operating income was $215.3 million or 3.7% of sales compared to $186.7 million or 4.4% of sales in Fiscal 2014. This increase was primarily due to higher interest income earned from higher outstanding receivable balances.
Other operating income in the fourth quarter was $54.1 million or 2.4% of sales compared to $47.6 million or 3.0% of sales in the prior year fourth quarter. This increase was also primarily due to higher interest income earned from higher outstanding receivable balances.
Operating Income
In Fiscal 2015, operating income was $576.6 million or 10.0% of sales compared to $570.5 million or 13.5% of sales in Fiscal 2014. Included in operating income were purchase accounting adjustments and transaction and integration costs of $105.7 million or (1.8)% of sales. Adjusted operating income was $682.3 million or 11.8% of adjusted sales (non-GAAP measure, see Item 6). The Zale division operating income was $37.7 million or 3.0% of Zale division sales excluding purchase accounting adjustments. Excluding Zale operations, operating income would have been $644.6 million or 14.3% of sales (non-GAAP measure, see Item 6).income.
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| | | | | | | | | | | | | |
| Fiscal 2015 | | Fiscal 2014 |
(in millions) | $ | | % of sales | | $ | | % of sales |
Sterling Jewelers division | $ | 624.3 |
| | 16.6 | % | | $ | 553.2 |
| | 15.7 | % |
UK Jewelry division | 52.2 |
| | 7.0 | % | | 42.4 |
| | 6.2 | % |
Zale division(1) | (8.2 | ) | | (0.7 | )% | | n/a |
| | n/a |
|
Other(2) | (91.7 | ) | | nm |
| | (25.1 | ) | | nm |
|
Operating income | $ | 576.6 |
| | 10.0 | % | | $ | 570.5 |
| | 13.5 | % |
|
| | | | | | | | | | | | | |
| Fourth Quarter Fiscal 2018 | | Fourth Quarter Fiscal 2017 |
(in millions) | $ | | % of sales | | $ | | % of sales |
North America segment | $ | 305.9 |
| | 14.9 | % | | $ | 369.7 |
| | 18.2 | % |
International segment | 35.0 |
| | 15.0 | % | | 42.6 |
| | 18.7 | % |
Other | (17.4 | ) | | nm |
| | (13.1 | ) | | nm |
|
Operating income | $ | 323.5 |
| | 14.1 | % | | $ | 399.2 |
| | 17.6 | % |
| |
(1)
| Zale division includes net operating loss impact of $45.9 million for purchase accounting adjustments. Excluding the impact from accounting adjustments, Zale division’s operating income was $37.7 million or 3.0% of sales. The Zale division operating loss included $1.9 million from Zale Jewelry or (0.2)% of sales and $6.3 million from Piercing Pagoda or (4.3)% of sales. |
| |
(2)
| Other includes $59.8 million of transaction and integration expense. Transaction and integration costs include expenses associated with severance, advisor fees for legal, tax, accounting, information technology implementation and consulting expenses. |
n/a Not applicable as Zale division was acquired on May 29, 2014.
In the fourth quarter, operating income was $331.7 million or 14.6% of sales compared to $270.6 million or 17.3% of sales in prior year fourth quarter. Included in operating income were purchase accounting adjustments and transaction costs of $30.0 million or 1.3% of sales. Adjusted operating income was $361.7 million or 15.8% of adjusted sales (non-GAAP measure, see Item 6). The Zale division operating income was $56.9 million or 8.7% of Zale division sales excluding purchase accounting adjustments. Excluding Zale operations, operating income would have been $304.8 million or 18.6% of sales.
|
| | | | | | | | | | | | | |
| Fourth Quarter Fiscal 2015 | | Fourth Quarter Fiscal 2014 |
(in millions) | $ | | % of sales | | $ | | % of sales |
Sterling Jewelers division | $ | 260.0 |
| | 19.1 | % | | $ | 227.9 |
| | 17.7 | % |
UK Jewelry division | 53.8 |
| | 19.4 | % | | 51.7 |
| | 19.0 | % |
Zale division(1) | 36.1 |
| | 5.7 | % | | n/a |
| | n/a |
|
Other(2) | (18.2 | ) | | nm |
| | (9.0 | ) | | nm |
|
Operating income | $ | 331.7 |
| | 14.6 | % | | $ | 270.6 |
| | 17.3 | % |
| |
(1)
| Zale division includes net operating loss impact of $20.8 million for purchase accounting adjustments. Excluding the impact from accounting adjustments, Zale division’s operating income was $56.9 million or 8.7% of sales. The Zale division operating income included $32.8 million from Zale Jewelry or 5.8% of sales and $3.3 million from Piercing Pagoda or 4.6% of sales. |
| |
(2)
| Other includes $9.2 million of transaction and integration expense. Transaction costs include expenses associated with severance, advisor fees for legal, tax, accounting, information technology implementation and consulting expenses. |
nm Not meaningful
n/a Not applicable as Zale division was acquired on May 29, 2014.
Interest Expense, Net
In Fiscal 2015,2018, net interest expense was $36.0$52.7 million compared to $4.0$49.4 million in Fiscal 2014.2017. The increase in interest expense was driven by the addition of $1.4 billion of debt financing at a weighted average interest rate of 2.4%for the Company’s debt outstanding was 3.2% compared to 2.8% in the prior year. The increase in expense relates to additional interest incurred under the unsecured term loan entered into by Signet to finance the R2Net acquisition transaction (the “bridge loan”), partially offset by a reduction in interest related to the Zale Acquisition. Includedsettlement of the Company’s asset-backed securitization facility, which was terminated in interest expense was a write-offthe third quarter of fees of $3.2 millionFiscal 2018. See Item 8 for additional information 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.loans and long-term debt (Note 22).
In the fourth quarter, net interest expense was $7.9$10.0 million compared to $1.2$13.0 million in the prior year fourth quarter. The weighted average interest rate for the Company’s debt outstanding was 3.6% compared to 2.9% in the prior year fourth quarter. The decrease in expense relates to a reduction in interest related to the settlement of the Company’s asset-backed securitization facility, which was terminated in the third quarter driven by the $1.4 billion of debt.Fiscal 2018.
Income Before Income Taxes
ForIn Fiscal 2015,2018, income before income taxes was down 4.6%decreased $186.6 million to $540.6$527.2 million or 9.4%8.4% of sales compared to $566.5$713.8 million or 13.4%11.1% of sales in Fiscal 2014.2017.
ForIn the fourth quarter, income before income taxes was up 20.2%decreased $72.7 million to $323.8$313.5 million or 14.2%13.7% of sales compared to $269.4$386.2 million or 17.2%17.0% of sales in the prior year fourth quarter.
Income Taxes
Income tax expense for Fiscal 20152018 was $159.3$7.9 million compared to $198.5$170.6 million in Fiscal 2014,2017, with an effective tax rate of 29.5%1.5% for Fiscal 20152018 compared to 35.0%23.9% in Fiscal 2014. This reduction of 550 basis points 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.
2017. In the fourth quarter, income tax expensebenefit was $95.8$37.8 million compared to $94.2expense of $88.7 million in the prior year fourth quarter. The fourth quarterlower effective tax rate was 29.6% compared to 35.0% in the prior year fourth quarter alsoFiscal 2018 was driven principally by factors around the Zale Acquisition.favorable impact of the Tax Cuts and Jobs Act in the United States and the pre-tax earnings mix by jurisdiction. Revaluation of net deferred tax liabilities due to the Tax Cuts and Jobs Act resulted in a one-time non-cash benefit of $64.7 million in the quarter.
On December 22, 2017, the U.S. government enacted “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” which is commonly referred to as “The Tax Cuts and Jobs Act” (the “TCJ Act”). The TCJ Act provides for comprehensive tax legislation which significantly modifies the U.S. corporate income tax system. Due to the timing of the enactment and the complexity involved in applying the provisions of the TCJ Act, we have made reasonable estimates of its effects and recorded provisional amounts for the year ended February 3, 2018, consistent with applicable SEC guidance.
The results for the fourth quarter and full year Fiscal 2018 include a net benefit of $86.2 million related to provisional estimates resulting directly from the TCJ Act. Within our calculations of the income tax effects of the TCJ Act, we used assumptions and estimates that may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the Financial Accounting Standards Board and/or various other taxing jurisdictions. In particular, we anticipate that the U.S. state jurisdictions will continue to determine and announce their conformity or decoupling from the Act, either in its entirety or with respect to specific provisions. All of these potential legislative and interpretive actions could result in adjustments to any of the provisional estimates when the accounting for the income tax effects of the TCJ Act is completed.
We anticipate that the effective tax rate in 2019 and in future years will be favorably impacted by the lower federal statutory corporate tax rate of 21.0 percent offset by limitations of certain deductions and the base broadening changes. See Note 12 of Item 8 for additional information regarding the Company’s income taxes and the impact of the TCJ Act.
Net Income
Net income for Fiscal 20152018 was up 3.6%down 4.4% to $381.3$519.3 million or 6.6%8.3% of sales compared to $368.0$543.2 million or 8.7%8.5% of sales in Fiscal 2014.2017.
For the fourth quarter, net income was up 30.1%18.1% to $228.0$351.3 million or 10.0%15.3% of sales compared to $175.2$297.5 million or 11.2%13.1% of sales in the prior year fourth quarter.
Earnings Perper Share
For Fiscal 2015,2018, diluted earnings per shareEPS were $4.75$7.44 compared to $4.56$7.08 in Fiscal 2014,2017, an increase of 4.2%5.1%. Adjusted diluted earningsEarnings per share were $5.63, which included a contribution of $0.27 per sharein Fiscal 2018 includes $0.93 related to the Zale division and a contributionimpact of $0.12 per share related to Signet’s capital structure, net of incremental financing expense (non-GAAP measure, see Item 6).revaluation on deferred taxes under the TCJ Act. The weighted average diluted number of common shares outstanding was 80.269.8 million compared to 80.776.7 million in Fiscal 2014.2017. Signet repurchased 288,3938.1 million shares in Fiscal 20152018 compared to 1,557,67311.2 million shares in Fiscal 2014.2017.
For the fourth quarter, diluted earnings per share were $2.84$5.24 compared to $2.18$3.92 in the prior year fourth quarter, up 30.3%33.7%. Adjusted diluted earningsEarnings per share were $3.06, which included a contributionin the fourth quarter of $0.43 per shareFiscal 2018 includes $0.96 related to the Zale divisionimpact of revaluation on deferred taxes under the Tax Cuts and a contribution of $0.15 per share related to Signet’s capital structure, net of incremental financing expense (non-GAAP measure, see Item 6).Jobs Act. The weighted average diluted number of common shares outstanding was 80.267.0 million compared to 80.375.8 million in the prior year fourth quarter.
The Company issued preferred shares on October 5, 2016, which include a cumulative dividend right and may be converted into common shares. The Company’s computation of diluted earnings per share includes the effect of potential common shares for outstanding awards issued under the Company’s share-based compensation plans and preferred shares upon conversion, if dilutive. In computing diluted EPS, the Company also adjusts the numerator used in the basic EPS computation, subject to anti-dilution requirements, to add back the dividends (declared or cumulative undeclared) applicable to the preferred shares. For the fourth quarter and year to date periods, the preferred shares were more dilutive if conversion was assumed. See Item 8 for additional information related to the preferred shares (Note 8) or the calculation of earnings per share (Note 10).
Dividends Perper Common Share
In Fiscal 2015,2018, total dividends of $0.72$1.24 were approveddeclared by the Board of Directors compared to $0.60$1.04 in Fiscal 2014.2017.
LIQUIDITY AND CAPITAL RESOURCES
Summary Cash Flow
The following table provides a summary of Signet’s cash flow activity for Fiscal 2016,2019, Fiscal 20152018 and Fiscal 2014:2017:
| | (in millions) | Fiscal 2016 | | Fiscal 2015 | | Fiscal 2014 | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 |
Net cash provided by operating activities | $ | 443.3 |
| | $ | 283.0 |
| | $ | 235.5 |
| $ | 697.7 |
| | $ | 1,940.5 |
| �� | $ | 678.3 |
|
Net cash used in investing activities | (228.7 | ) | | (1,652.6 | ) | | (160.4 | ) | (119.0 | ) | | (569.4 | ) | | (278.4 | ) |
Net cash (used in) provided by financing activities | (266.6 | ) | | 1,320.9 |
| | (124.8 | ) | |
Decrease in cash and cash equivalents | (52.0 | ) | | (48.7 | ) | | (49.7 | ) | |
Net cash used in financing activities | | (602.7 | ) | | (1,253.6 | ) | | (438.2 | ) |
Increase (decrease) in cash and cash equivalents | | (24.0 | ) | | 117.5 |
| | (38.3 | ) |
| | | | | | | | | | |
Cash and cash equivalents at beginning of period | 193.6 |
| | 247.6 |
| | 301.0 |
| 225.1 |
| | 98.7 |
| | 137.7 |
|
Decrease in cash and cash equivalents | (52.0 | ) | | (48.7 | ) | | (49.7 | ) | |
Increase (decrease) in cash and cash equivalents | | (24.0 | ) | | 117.5 |
| | (38.3 | ) |
Effect of exchange rate changes on cash and cash equivalents | (3.9 | ) | | (5.3 | ) | | (3.7 | ) | (5.7 | ) | | 8.9 |
| | (0.7 | ) |
Cash and cash equivalents at end of period | $ | 137.7 |
| | $ | 193.6 |
| | $ | 247.6 |
| $ | 195.4 |
| | $ | 225.1 |
| | $ | 98.7 |
|
| | | | | | |
Free cash flow(1) | | $ | 564.2 |
| | $ | 1,703.1 |
| | $ | 400.3 |
|
Operating activities provide the primary source of cash and are influenced by a number of factors, such as:
deferred revenue, reflective of the performance of extended service plan sales.
The change in inventory is primarily driven by the sales performance of the existing stores, the net change in store space and the seasonal pattern of sales. Other factors which drive changes to inventory include changes in new product launches, sourcing practices, commodity costs, foreign exchange and merchandise mix. To further enhance product selection, test new jewelry designs and working capital levels, Signet utilizesenters into consignment inventory.arrangements for merchandise. The majority of inventory held on consignment inventory is held in the US, which at January 30, 2016February 2, 2019 amounted to $441.9$726.8 million as compared to $434.6$606.4 million at January 31, 2015.February 3, 2018. The principal terms of the consignment agreements, which can generally be terminated by either party, are such that Signet can return any or all of the inventory to the relevant supplier without financial or commercial penalties. When Signet sells consignment inventory, it becomes liable to the supplier for the cost of the item. The sale of any such inventory is accounted for on a gross basis (see principal accounting policies, Item 8).
Signet’s working capital is also impacted by movements in deferred revenue associated with the sales of extended service plans sold in Sterling Jewelers and Zale divisions.the North America segment. Movements in deferred revenue reflect the level of divisionalsegment sales and the attachment rate of service plan sales. Therefore if sales increase, working capital would be expected to increase. Similarly, a decrease in sales would be expected to result in a reduction in working capital.
Signet’s largest class of operating expense relates to store and central payroll and benefits. These are typically paid on a weekly, biweekly or monthly basis, with annual bonus payments also being made. Operating lease payments in respect of stores occupied are normally paid on a monthly basis by the Sterling Jewelers and Zale divisionsNorth America segment and on a quarterly basis by the UK Jewelry division.International segment. Payment for advertising on television, radio or in newspapersprint is usually made between 30 and 60 days after the advertisement appears. Other expenses, none of which are material, have various payment terms.
Investment in new space requires significant investment in working capital, as well as fixed capital investment, due to the inventory turn, and the additional investment required to fund sales in the Sterling Jewelers and Zale divisions utilizing in-house customer finance.turn. Of the total investment required to open a new store in the US, between 50% and 60% is typically accounted for by working capital. New stores are usually opened in the third quarter or early in the fourth quarter of a fiscal year. A reduction in the number of store openings results in the difference between the level of funding required in the first half of a fiscal year and the peak level being lower, while an increase in the number of store openings would have the opposite impact.
investment in existing stores, reflecting the level of investment in sales-enhancing technology, and the number of store remodels and relocations carried out; and
When evaluating new store investment, management uses an investment hurdle rate of a 20% internal rate of return on a pre-tax basis over a five year period, assuming the release of working capital at the end of the five years. Capital expenditure accounts for about 45% of the investment in a new store in the Sterling Jewelers division.North America segment. The balance is accounted for by investment in inventory and the funding of customer financing. Signet typically carries out a remodel of its stores every 10 years but does have some discretion as to the timing of such expenditure. A remodel is evaluated using the same investment procedures as for a new store. Minor store refurbishments are typically carried out every five years. In addition to store remodels, Signet carries out minor store refurbishments where stores are profitable but do not satisfy the investment hurdle rate required for a full remodel; this is usually associated with a short term lease renewal. Where possible, the investment appraisal approach is also used to evaluate other investment opportunities.
Under Bermuda law, a company may not declare or pay dividends if there are reasonable grounds for believing that the company is, or would after the payment be, unable to pay its liabilities as they become due or that the realizable value of its assets would thereby be less than its liabilities.
Signet’s level of borrowings and cash balances fluctuates during the year reflecting the seasonality of its cash flow requirements and business performance. Management believes that cash balances and the committed borrowing facilities (described(including the Credit Facility described more fully above)in Note 22 of Item 8) currently available to the business are sufficient for both its present and near term requirements. The following table provides a summary of these items as of February 2, 2019, February 3, 2018 and January 30, 2016, January 31, 2015 and February 1, 2014:28, 2017: