UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Commission File Number 1-32349
Signet Jewelers Limited
(Exact name of Registrant as specified in its charter)
Clarendon House
2 Church Street
Hamilton HM11
Bermuda
(441) 296 5872
(Address and telephone number of principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of Common Shares, as of the latest practicable date.
Common Shares, $0.18 par value, 85,525,718 shares as of May 1, 2010
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1
Financial Statements
Unaudited Condensed Consolidated Income Statements
Unaudited Condensed Consolidated Balance Sheets
Unaudited Condensed Consolidated Statements of Cash Flows
Unaudited Condensed Consolidated Statement of Shareholders’ Equity
Unaudited Condensed Consolidated Statement of Comprehensive Income
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3
Quantitative and Qualitative Disclosures about Market Risk
Item 4
Controls and Procedures
PART II
OTHER INFORMATION
Legal Proceedings
Item 1A
Risk Factors
Item 6
Exhibits
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PART 1 FINANCIAL INFORMATION
Unaudited condensed consolidated income statements
Sales
Cost of sales
Gross margin
Selling, general and administrative expenses
Other operating income, net
Operating income, net
Interest income
Interest expense
Income before income taxes
Income taxes
Net income
Earnings per share – basic
– diluted
All of the above relate to continuing activities attributable to equity shareholders.
The accompanying notes are an integral part of these interim unaudited condensed consolidated financial statements.
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Unaudited condensed consolidated balance sheets
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Other receivables
Other current assets
Deferred tax assets
Inventories
Total current assets
Non-current assets:
Property, plant and equipment, net of accumulated depreciation of $577.8 million, $575.8 million and $566.0 million, respectively
Other intangible assets, net
Other assets
Total assets
Liabilities and Shareholders’ equity
Current liabilities:
Loans and overdrafts
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Deferred tax liabilities
Income taxes payable
Total current liabilities
Non-current liabilities:
Long-term debt
Other liabilities
Retirement benefit obligation
Total liabilities
Commitments and contingencies (see note 10)
Shareholders’ equity:
Common shares of $0.18 par value: authorized 500 million shares, 85.5 million shares issued and outstanding (May 2, 2009: 85.3 million shares issued and outstanding; January 30, 2010: 85.5 million shares issued and outstanding)
Additional paid-in capital
Other reserves
Treasury shares
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
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Unaudited condensed consolidated statements of cash flows
Cash flows from operating activities
Adjustments to reconcile net income to cash flows provided by operations:
Depreciation of property, plant and equipment
Amortization of other intangible assets
Pension expense
Share-based compensation expense
Deferred taxation
Facility fees included in net income
Other non-cash movements
Loss on disposal of property, plant and equipment
Changes in operating assets and liabilities:
Decrease in accounts receivable
Decrease in other receivables
Decrease/(increase) in other current assets
Decrease in inventories
Increase in accounts payable
Decrease in accrued expenses and other liabilities
Decrease in deferred revenue
Decrease in income taxes payable
Effect of exchange rate changes on currency swaps
Net cash provided by operating activities
Investing activities
Purchase of property, plant and equipment
Purchase of other intangible assets
Net cash flows used in investing activities
Financing activities
Proceeds from issue of common shares
Facility fees paid
Proceeds from/(repayment of) short-term borrowings
Repayment of long-term debt
Net cash flows used in financing activities
Cash and cash equivalents at beginning of period
Increase/(decrease) in cash and cash equivalents
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of period
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Unaudited condensed consolidated statement of shareholders’ equity
Balance at January 30, 2010
Foreign currency translation adjustments
Changes in fair value of derivative instruments, net
Actuarial gain on pension plan, net
Share options exercised
Balance at May 1, 2010
Unaudited condensed consolidated statements of comprehensive income
Foreign currency translation
Changes in fair value of derivative instruments
Actuarial gain
Prior service cost
Deferred tax on items recognized in equity
Comprehensive income
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Notes to the interim unaudited condensed consolidated financial statements
1. Principal accounting policies and basis of preparation
Basis of preparation
Signet Jewelers Limited (the “Company”) and its subsidiary undertakings (collectively, “Signet”) is a leading retailer of jewelry, watches and associated services. Signet manages its business as two geographical segments, being the United States of America (the “US”) and the United Kingdom (the “UK”). The US segment operates retail stores under brands including Kay Jewelers, Jared the Galleria of Jewelry and various regional brands while the UK segment’s retail stores operate under brands including H.Samuel and Ernest Jones.
These interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended January 30, 2010, filed with the Securities and Exchange Commission (“SEC”) on March 30, 2010.
These interim financial statements of the Group are unaudited. They have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, certain information and footnote disclosures normally included in complete consolidated financial statements prepared in accordance with US GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments (consisting of normal recurring accruals and adjustments) that are, in the opinion of management, necessary to fairly state the results of the interim periods. Subsequent events have been evaluated up to the date of issue of these interim financial statements.
Use of estimates in interim financial statements
The preparation of interim financial statements, in conformity with US GAAP and SEC regulations for interim reporting, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated interim financial statements and reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are primarily made in relation to the valuation of receivables, the valuation of inventory, depreciation and asset impairment, the valuation of employee benefits, income taxes and contingencies.
Seasonality
Signet’s business is highly seasonal with a very significant proportion of its sales and operating profit generated during its fourth quarter, which includes the Christmas season. Management expects such a seasonal fluctuation in sales and profit to continue. Therefore, operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.
New accounting pronouncements to be adopted in future periods
Revenue recognition – multi-deliverable arrangements
In October 2009, the FASB issued ASU 2009-13, which amends ASC 605-25 “Revenue Recognition – Multi-Deliverable Arrangements”. ASU 2009-13 requires arrangement consideration to be allocated to all deliverables at inception using a relative selling price method and establishes a selling price hierarchy for determining the selling price of a deliverable. The update also expands the disclosure requirements to include additional detail regarding the deliverables, method of calculation of selling price and the timing of revenue recognition. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of this amendment is not expected to have a material impact on Signet.
2. Segmental information
The consolidated sales are derived from the retailing of jewelry, watches, other products and services. Signet is managed as two geographical operating segments, being the US and UK divisions. These segments represent channels of distribution that offer similar merchandise and service and have similar marketing and distribution strategies. Both divisions are managed by executive committees, which report through a divisional Chief Executive to Signet’s Chief Executive who in turn reports to the Board. Each divisional executive committee is responsible for operating decisions within parameters set by the Board. The performance of each segment is regularly evaluated based on sales and operating income. The operating segments do not include certain central costs which is consistent with the treatment in Signet’s management accounts. There are no material transactions between the operating segments.
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Notes to the interim unaudited condensed consolidated financial statements—(Continued)
Sales:
US
UK
Total sales
Operating income, net:
Unallocated(1)
Total operating income, net
Total assets:
Unallocated
3. Exchange rates
The exchange rates used in these interim financial statements for the translation of UK pound sterling transactions and balances into US dollars are as follows:
Income statement (average rate)
Balance sheet (closing rate)
4. Taxation
Signet has business activity in all states within the US and files income tax returns for the US federal jurisdiction and all applicable states. Signet also files income tax returns in the UK and certain other foreign jurisdictions. Signet is subject to US federal and state examinations by tax authorities for tax years after October 29, 2005 and is subject to examination by the UK tax authority for tax years after January 31, 2005.
As of January 30, 2010, Signet had approximately $14.9 million of unrecognized tax benefits in respect of uncertain tax positions, all of which would favorably affect the effective income tax rate if resolved in Signet’s favor. These unrecognized tax benefits relate to financing arrangements and intra-group charges which are subject to different and changing interpretations of tax law. There has been no material change in the amount of unrecognized tax benefits in respect of uncertain tax positions during the 13 weeks ended May 1, 2010.
Signet recognizes accrued interest and, where appropriate, penalties related to unrecognized tax benefits within income tax expense. As of January 30, 2010 Signet had accrued interest of $2.2 million and there has been no material change in the amount of accrued interest as of May 1, 2010.
Over the next twelve months management believes that it is reasonably possible that there could be a reduction of substantially all of the unrecognized tax benefits as of January 30, 2010, due to settlement of the uncertain tax positions with the tax authorities.
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5. Earnings per share
Net income ($million)
Basic weighted average number of shares in issue (million)
Dilutive effect of share options (million)
Diluted weighted average number of shares in issue (million)
Earnings per share – diluted
Raw materials
Finished goods
Total inventory
Warranty deferred revenue
Other
Total deferred revenue
Disclosed as:
Current liabilities
Non-current liabilities
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Warranty deferred revenue, beginning of period
Warranties sold
Revenues recognized
Warranty deferred revenue, end of period
8. Derivative instruments and hedging activities
Signet is exposed to foreign currency exchange risk arising from various currency exposures. Signet enters into forward foreign currency exchange contracts and foreign currency option contracts, principally in US dollars, in order to limit the impact of movements in foreign exchange rates on its forecast foreign currency purchases. The total notional amount of these foreign currency contracts outstanding as at May 1, 2010 was $31.5 million (May 2, 2009: $43.6 million; January 30, 2010: $37.2 million). These contracts have been designated as cash flow hedges and will be settled over the next 14 months (May 2, 2009: 15 months; January 30, 2010: 17 months).
Signet enters into forward purchase contracts, and option purchase contracts for commodities in order to reduce its exposure to significant movements in the price of the underlying precious metal raw material. The total notional amount of commodity contracts outstanding as at May 1, 2010 was $74.8 million (May 2, 2009: $88.9 million; January 30, 2010: $100.0 million). These contracts have been designated as cash flow hedges and will be settled over the next 9 months (May 2, 2009: 9 months; January 30, 2010: 12 months).
For derivatives that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period in which the hedged item affects net income or loss. Gains and losses on derivatives that do not qualify for hedge accounting, together with any hedge ineffectiveness, are recognized immediately in other operating income, net. Signet does not hold derivative contracts for trading purposes.
Foreign currency contracts not designated as cash flow hedges are used to hedge currency flows through Signet’s bank accounts to ensure Signet is not exposed to foreign currency exchange risk in its cash and borrowings.
The bank counterparties to the foreign exchange forward contracts expose the Company to credit-related losses in the event of their nonperformance. However, to mitigate that risk, the Company only contracts with counterparties that meet certain minimum requirements under its counterparty risk assessment process. As of May 1, 2010 credit risk did not materially change the fair value of the foreign currency or commodity contracts.
The following table summarizes the fair value and presentation of derivative instruments in the condensed consolidated balance sheets:
Derivatives designated as hedging instruments:
Foreign currency contracts
Commodity contracts
Derivatives not designated as hedging instruments:
Total derivative assets
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Total derivative liabilities
The following tables summarize the effect of derivative instruments on the unaudited condensed consolidated income statements:
Derivatives in cash flow hedging relationships:
Total
The ineffective portion of hedging instruments taken to other operating income, net was $nil in the current and comparative periods.
There was no gain or loss recognized on derivatives not designated as hedging instruments to be reported within other operating income in the income statement in the current and comparative periods.
The estimated fair value of Signet’s financial instruments held or issued to finance Signet’s operations is summarized below. Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown below are not necessarily indicative of the amounts that Signet would realize upon disposition nor do they indicate Signet’s intent or ability to dispose of the financial instrument. Assets and liabilities that are carried at fair value are required to be classified and disclosed in one of the following three categories:
Level 1 - quoted market prices in active markets for identical assets and liabilities
Level 2 - observable market based inputs or unobservable inputs that are corroborated by market data
Level 3 - unobservable inputs that are not corroborated by market data
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Signet determines fair value based upon quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The methods Signet uses to determine fair value on an instrument-specific basis are detailed below:
Assets:
Forward foreign currency contracts and swaps
Forward commodity contracts
Liabilities:
Borrowings
The fair value of derivative financial instruments has been determined based on market value equivalents at the balance sheet date, taking into account the current interest rate environment, current foreign currency forward rates or current commodity forward rates. These are held as assets and liabilities within other receivables and other payables, and all contracts have a maturity of less than eighteen months. Signet’s long-term debt consists of $229.1 million of fixed rate investor certificate notes (“Private Placement Notes”) under a Note Purchase Agreement. The fair value of this debt is determined by discounting to present value the known future coupon and final Note redemption amounts at market yields as of the balance sheet date. The carrying amounts of cash and cash equivalents, accounts receivable, other receivables, accounts payable and accrued liabilities approximate fair value because of the short term maturity of these amounts.
9. Pensions
Signet operates a defined benefit pension scheme in the UK (the “Group Scheme”). The components of net periodic pension cost were as follows:
Components of net periodic benefit cost:
Service cost
Interest cost
Expected return on Group Scheme assets
Amortization of unrecognized prior service cost
Amortization of unrecognized actuarial loss
Net periodic benefit cost
Signet expects to contribute a minimum of $15.2 million to the Group Scheme in fiscal 2011.
10. Commitments and contingencies
Legal proceedings
In March 2008, private plaintiffs filed a class action lawsuit for an unspecified amount against Sterling Jewelers Inc. (“Sterling”), a subsidiary of Signet, in the U.S. District Court for the Southern District of New York federal court alleging that US store-level employment practices are discriminatory as to compensation and promotional activities. On September 23, 2008, the US Equal Employment Opportunities Commission (“EEOC”) filed a lawsuit against Sterling in the U.S. District Court for the Western District of New York. The EEOC’s lawsuit alleges that Sterling engaged in a pattern or practice of gender discrimination with respect to pay and promotions of female retail store employees from January 1, 2003 to the present. The EEOC asserts claims for unspecified monetary relief and non-monetary relief against the Company on behalf of a class of female employees subjected to these alleged practices. Sterling denies the allegations from both parties and intends to defend them vigorously.
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11. Share-based compensation expense
Signet recorded net share-based compensation expense of $2.3 million and $0.7 million for the 13 weeks ended May 1, 2010 and May 2, 2009. This is after charging $0.1 million (13 weeks ended May 2, 2009: $nil) that relates to the change in fair value during the period of certain awards that have an inflation condition and are accounted for as liability awards.
12. Long-term debt
In accordance with its borrowing agreements, Signet made a prepayment to its private placement note holders on March 9, 2010 of $50.9 million. Following this prepayment there were $229.1 million of private placement notes outstanding. A change was agreed with Signet’s Revolving Credit Facility banking group that the facility would be reduced to $300 million from $370 million on March 19, 2010.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains statements which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, based upon management’s beliefs and expectations as well as on assumptions made by and data currently available to management, appear in a number of places throughout this document and include statements regarding, among other things, our results of operation, financial condition, liquidity, prospects, growth, strategies and the industry in which Signet operates. The use of the words “expects,” “intends,” “anticipates,” “estimates,” “predicts,” “believes,” “should,” “potential,” “may,” “forecast,” “objective,” “plan” or “target,” and other similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, including but not limited to general economic conditions, the merchandising, pricing and inventory policies followed by Signet, the reputation of Signet and its brands, the level of competition in the jewelry sector, the cost and availability of diamonds, gold and other precious metals, regulations relating to consumer credit, seasonality of Signet’s business and financial market risks.
For a discussion of these and other risks and uncertainties which could cause actual results to differ materially, see the “Risk Factors” section of Signet’s fiscal 2010 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 30, 2010. Actual results may differ materially from those anticipated in such forward-looking statements. Signet undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.
Our business
Signet is the world’s largest specialty retail jeweler by sales, with stores in the US, UK, Republic of Ireland and Channel Islands. Signet manages its business as two geographical segments, being the UK and the US.
In the US, Signet operated 1,354 stores in 50 states at May 1, 2010. Its stores trade nationally in malls and off-mall locations as Kay Jewelers (“Kay”), and regionally under a number of well-established mall-based brands. Destination superstores trade nationwide as Jared The Galleria Of Jewelry (“Jared”).
In the UK, the stores trade as “H.Samuel,” “Ernest Jones” and “Leslie Davis,” and are situated in prime “High Street” locations (main shopping thoroughfares with high pedestrian traffic) or major shopping malls. The UK division operated 550 stores at May 1, 2010, including 14 stores in the Republic of Ireland and 3 in the Channel Islands.
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Overview
First quarter fiscal 2011 highlights(1)
Same store sales: up 5.8%
Total sales: $810.0 million, up 6.2% and 5.2% at constant exchange rates(2)
Income before income taxes: $76.8 million, up 85.5%
Basic and diluted earnings per share: $0.61 and $0.60, up 96.8% and 93.5%
Free cash flow now expected to be towards the top end of the anticipated $150 million to $200 million range for fiscal 2011(2)
The following discussion should be read in conjunction with the Financial Statements and the related notes in Part I of this Form 10-Q as well as the financial and other information included in Signet’s fiscal 2010 Annual Report on Form 10-K.
Non-GAAP measures
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 given below. Management does not, nor does it suggest investors should consider such non-GAAP measures in isolation from, or in substitute for, information prepared in accordance with GAAP.
Exchange translation impact
In particular, Signet has historically used constant exchange rates to compare period-to-period changes in certain financial data. Management considers this a useful measure for analyzing and explaining changes and trends in Signet’s results. The impact of the re-calculation of sales; cost of sales; gross margin; selling, general and administrative expenses; operating income; income before taxes; net income and earnings per share at constant exchange rates, including a reconciliation to Signet’s GAAP results, is analyzed below.
US sales
UK sales
Earnings per share—basic
Earnings per share—diluted
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Operating income/(loss), net
Net income adjusted for non-cash items
Net income adjusted for non-cash items shows the amount of net cash flow generated from Signet’s operating activities before changes in operating assets and liabilities. It is a useful measure to summarize the cash generated from activities reported in the income statement.
Net cash or net debt
Net cash or net debt is the total of loans and overdrafts, long term debt and cash and cash equivalents, and it is helpful in providing a measure of indebtedness of the business.
Net cash/(net debt)
Free cash flow
Free cash flow is a non-GAAP measure defined as the net cash provided by operating activities less net cash flows used in investing activities. Management considers that it is helpful in understanding how the business is generating cash from its operating and investing activities that can be used to meet the financing needs of the business. Free cash flow does not represent the residual cash flow available for discretionary expenditure.
RESULTS OF OPERATIONS
Quarterly performance
During the first quarter Signet made good progress towards achieving its financial objectives for fiscal 2011. These are:
$150 million to $200 million positive free cash flow;
Capital expenditure of about $80 million;
Controllable costs(1) to be little changed from fiscal 2010 at constant exchange rates.
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Certain operating data as a percentage of sales were as follows:
Net sales
Gross profit
Other operating income
Net financing costs
Same store sales were up 5.8%, an encouraging start to fiscal 2011. Total sales rose by 6.2% to $810.0 million (13 weeks to May 2, 2009: $762.6 million), reflecting an underlying increase of 5.2% at constant exchange rates; non-GAAP measure see page 13. The breakdown of the performance was as follows:
Sales, million
% of total
Same store sales
Change in net store space
Change at constant exchange rates
Exchange translation(1)
Total sales growth as reported
The US division’s sales were up by 6.8% to $667.1 million (13 weeks to May 2, 2009: $624.9 million), see table below for analysis.
First quarter fiscal 2011
Kay
Regional brands
Jared
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While the wider economic environment in the US remains challenging, the division continued to benefit from both its sustainable competitive advantages, as many competitors are financially constrained, and the accelerated level of capacity reduction within the sector in recent years. Kay achieved a further increase in same store sales. Jared’s sales increase reflected a continued recovery in expenditure among households with above average incomes, and the impact of merchandising initiatives. Set out above is the sales performance by format. In the US division average selling price rose by 5.1%, excluding the charm bracelet category in Jared, as a result of changes in mix and selective price increases.
UK division’s sales were up by 3.8% to $142.9 million (13 weeks to May 2, 2009: $137.7 million). Same store sales were down 0.2%, see table below for analysis.
H.Samuel
Ernest Jones
The average unit selling price for H.Samuel was $82, for Ernest Jones was $387(3) and for the UK division was $136(3) .
The general economic environment during the quarter in the UK was more challenging than in the US, with uncertainty related to the general election having a detrimental impact on consumer confidence. H.Samuel’s same store sales were lower than the comparable quarter in fiscal 2010, while those of Ernest Jones were better. The charm bracelet category again performed well.
In the first quarter of fiscal 2011, the average unit selling price in the UK division rose by 11.3%, excluding the charm bracelet category in Ernest Jones. This reflected higher prices and merchandise mix changes.
Change in gross and operating margin
Q1 fiscal 2010 operating margin
Gross merchandise margin movement
Net bad debt movement
Leverage, primarily of store occupancy costs
Selling, general & administrative expenses
Q1 fiscal 2011 operating margin
Gross margin was $296.3 million (13 weeks to May 2, 2009: $255.5 million), up by 16.0% and by 15.0% at constant exchange rates; non-GAAP measure, see page 13. Gross margin rate increased by 310 basis points, the factors influencing the change are set out in the table above.
US gross merchandise margin was up 90 basis points, benefitting from price increases implemented during the quarter, lower average diamond inventory costs and favorable changes in the sales mix, offsetting a higher cost of gold. As a result of higher than anticipated diamond and gold costs, it is now expected that the US division’s gross merchandise margin for fiscal 2011 will be broadly similar to the level of fiscal 2010, however this remains subject to future movements in commodity costs.
Credit participation was little changed at 51.6% (13 weeks to May 2, 2009: 51.2%). The net bad debt to total sales ratio was down by 120 basis points over the comparable period in fiscal 2010, with an underlying improvement in performance being evident.
In the UK division, gross merchandise margin declined by 100 basis points, with an increase in the cost of gold, a higher value added tax rate and the impact of the weak pound sterling to US dollar exchange rate being partly offset by price changes. It
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continues to be anticipated that the UK division’s gross merchandise margin for fiscal 2011 will be somewhat lower than that of fiscal 2010, subject to future movements in commodity costs, exchange rates, and the value added tax rate, all potentially mitigated by possible price increases.
Selling, general and administrative expenses benefited from a further small decrease in controllable costs. US costs continued to be tightly managed and controllable expenses were slightly below last year, with a small benefit from the fiscal 2010 cost saving program continuing into the first quarter of fiscal 2011. The additional impact of the cost saving program in the balance of fiscal 2011 is expected to be minimal. In sterling terms, UK controllable costs were slightly lower.
Other operating income decreased by 6.7% to $27.7 million (13 weeks to May 2, 2009: $29.7 million) as a result of the comparable prior year figure including a gain on foreign exchange of $0.9 million and some of the unfavorable impact of the amendments to the Truth In Lending Act.
Operating income
Operating income increased by 63.2% to $85.5 million (13 weeks to May 2, 2009: $52.4 million which included a $4.0 million non-recurring, favorable impact from a change in US vacation entitlement policy), up 63.8% at constant exchange rates; non-GAAP measure, see page 13. Operating margin was 10.6% (13 weeks to May 2, 2009: 6.9%), the factors influencing the change in operating margin are set out in the table on page 16.
US operating income increased by 61.5% to $91.1 million (13 weeks to May 2, 2009: $56.4 million, which included a $4.0 million non-recurring, favorable impact from the change in vacation entitlement policy). The operating margin was 13.7% (13 weeks to May 2, 2009: 9.0%), see table on page 16 for an analysis of the movement in operating margin.
In the UK division there was an operating loss of $1.4 million (13 weeks to May 2, 2009: $1.3 million loss), see table on page 16 for an analysis of the movement in operating margin.
Unallocated costs, principally central costs, were $4.2 million (13 weeks to May 2, 2009: $2.7 million), reflecting the impact of the change in the average exchange translation rate and a gain on foreign exchange in the comparable prior year period.
Interest income and expense
Interest income was $0.1 million (13 weeks to May 2, 2009: $0.6 million). Interest expense of $8.8 million (13 weeks to May 2, 2009: $11.6 million) benefitted from the repayment of debt and lower fees.
Income before income tax rose by 85.5% to $76.8 million (13 weeks to May 2, 2009: $41.4 million).
Provision for income taxes
The charge to income taxes in the first quarter was $24.8 million (13 weeks to May 2, 2009: $15.1 million), an effective tax rate of 32.3% (13 weeks to May 2, 2009: 36.5%), which is the anticipated rate for fiscal 2011 and similar to the annual rate for fiscal 2010.
Earnings per share
Basic and diluted earnings per share increased by 96.8% and 93.5% to $0.61 and $0.60 respectively (13 weeks to May 2, 2009: basic and diluted $0.31).
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LIQUITY AND CAPITAL RESOURCES
Set out below is a summary of Signet’s cash flows for the first quarters of fiscal 2011 and fiscal 2010:
Adjustments to reconcile net income to net cash provided by operations
Net income adjusted for non-cash items(1)
Changes in operating assets and liabilities
Free cash flow(1)
Facility fees
Net change in Common Shares(2)
(Repayment)/proceeds of debt during period(3)
Non-GAAP measure; see page 14.
Reconciliation of changes in net debt(1)
Repayment/(proceeds) of debt during period(2)
Change in net debt during the period
Net debt at start of period
Net cash/(net debt) at end of period before effect of exchange rate changes
Effect of exchange rate changes on cash & cash equivalents
Effect of exchange rate changes on debt
Net cash/(net debt)(1)
Operating activities
Net income adjusted for non-cash items increased by $21.6 million to $84.7 million (13 weeks to May 2, 2009: $63.1 million); non-GAAP measure; see page 14. Changes in operating assets and liabilities generated cash flows of $99.5 million (13 weeks to May 2, 2009: $134.9 million). Inventories decreased by $38.9 million (13 weeks to May 2, 2009: $43.2 million decrease) as a result of a better than expected sales performance, store closures and timing differences that are expected to reverse in subsequent quarters. Accounts receivable decreased by $55.1 million (13 weeks to May 2, 2009: $55.3 million decline), reflecting a higher opening level of receivables and an improvement in collection rate offset by higher sales in the first quarter of fiscal 2011.
Net cash flow used in investing activities was $6.3 million (13 weeks to May 2, 2009: $8.4 million), the US division was $5.3 million (13 weeks to May 2, 2009: $7.0 million and the UK division was $1.0 million (13 weeks to May 2, 2009: $1.4 million). Capital expenditure for fiscal 2011 continues to be planned to be about $80 million, a level broadly consistent with maintenance capital expenditure. Changes in operating assets and liabilities, and investing activities, due to new US space were $2.2 million and $1.1 million respectively.
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Positive free cash flow was $177.9 million in the 13 weeks to May 1, 2010 (13 weeks to May 2, 2009: $189.6 million); non-GAAP measure, see page 14. At May 1, 2010, Signet was in compliance with all debt covenants.
For fiscal 2011, positive free cash flow is now expected to be towards the top end of the anticipated $150 million to $200 million range, subject to general economic conditions.
In the 13 weeks to May 1, 2010, a sum of $0.8 million (13 weeks to May 2, 2009: nil) was received for the issuance of Common Shares pursuant to Signet’s equity compensation programs.
Movement in cash and indebtedness
Debt at May 1, 2010 was $276.3 million (May 2, 2009: $359.4 million), with cash and cash equivalents of $447.1 million (May 2, 2009: $69.2 million). Net cash at May 1, 2010 was $170.8 million (May 2, 2009: $290.2 million net debt); non-GAAP measure, see page 14. During the first quarter of fiscal 2011, there was a prepayment at par of $50.9 million of the private placement notes. In addition, a change was agreed with Signet’s revolving credit facility banking group that the facility be reduced to $300 million from $370 million. The facility was undrawn at May 1, 2010 (May 2, 2009: $40.0 million).
Fiscal 2011 Outlook
While some of the amendments to the Truth In Lending Act were implemented on February 22, 2010, their full impact on fiscal 2011 remains uncertain and continues to have an expected net direct adverse impact on operating income in the $15 million to $20 million range for the year.
Stores opened and closed in the quarter, together with planned changes for the balance of fiscal 2011 are set out below.
January 30, 2010
Opened
Closed
May 1, 2010
Openings, planned
Closures, forecast
January 29, 2011
OBLIGATIONS AND COMMITMENTS
The Company’s contractual cash obligations and commercial commitments at May 1, 2010 and the effects such obligations and commitments are expected to have on the Company’s liquidity and cash flows in future periods have not changed materially since January 30, 2010.
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SEASONALITY
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a multinational organization. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. There have been no material changes to the policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 30, 2010.
The Company is exposed to market risk from fluctuations in foreign currency exchange rates, interest rates and precious metal prices, which could affect its consolidated financial position, earnings and cash flows. The Company manages its exposure to market risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company uses derivative financial instruments as risk management tools and not for trading purposes.
As certain of the UK division’s purchases are denominated in US dollars and its net cash flows are in sterling, the Company’s policy is to enter into foreign currency forward exchange contracts and foreign currency swaps to manage the exposure to the US dollar. The Company also hedges a significant portion of forecasted merchandise purchases using commodity forward contracts. These contracts are entered into with large, reputable financial institutions, thereby minimizing the credit exposure from our counter-parties.
The interest rates earned on cash and cash equivalents will fluctuate in line with short-term interest rates.
The Company’s market risk profile as of May 1, 2010 has not materially changed since January 30, 2010. The market risk profile as of January 30, 2010 is disclosed in Signet’s fiscal 2010 Annual Report on Form 10-K.
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on this review, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of May 1, 2010.
Changes in Internal Control Over Financial Reporting
During the first quarter of fiscal 2011, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Information regarding legal proceedings is incorporated by reference from Note 10 of the Financial Statements set forth in Part I of this Form 10-Q.
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of Signet’s fiscal 2010 Annual Report on Form 10-K.
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The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
Number
Description of Exhibits
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
June 1, 2010
Walker Boyd
Group Finance Director
(Principal Financial Officer)
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