Market Overview

Signet Jewelers Reports Second Quarter Fiscal 2019 Financial Results

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Signet Jewelers Limited ("Signet") (NYSE:SIG), the world's largest
retailer of diamond jewelry, today announced its results for the 13
weeks ended August 4, 2018 ("second quarter Fiscal 2019").

Summary:

  • Same store sales ("SSS") up 1.7% versus prior year quarter1
  • GAAP diluted earnings per share ("EPS") of $(0.56), including a
    ($1.08) combined impact of a loss recognized upon completion of the
    sale of non-prime receivables, restructuring charges and associated
    tax benefits
  • Non-GAAP diluted EPS of $0.522
  • Completed non-prime credit outsourcing transaction, receiving $445.5
    million in proceeds
  • Repurchased $485 million in shares year to date, representing 14.6% of
    outstanding shares
  • Raising Fiscal 2019 guidance to same store sales of down 1.5% to flat,
    total sales of $6.2 billion-$6.3 billion
  • Raising Fiscal 2019 GAAP EPS guidance to $(7.47)-$(7.09) and non-GAAP
    EPS guidance to $4.05-$4.40
                 
Fiscal Q2'191 Fiscal Q2'183    

YTD Fiscal
20191

YTD Fiscal
20183

Revenue ($ in millions) $ 1,420.1 $ 1,399.6 $ 2,900.7 $ 2,803.0
Same store sales % change4 1.7 % 1.4 % 0.7 % (5.5 )%
GAAP
Operating income (loss) as % of sales (4.1 )% 9.7 % (21.8 )% 9.0 %
GAAP Diluted EPS $ (0.56 ) $ 1.33 $ (9.27 ) $ 2.36
Non-GAAP(2)
Operating income as % of sales 3.4 % 9.7 % 2.5 % 9.0 %
Non-GAAP Diluted EPS $ 0.52 $ 1.33 $ 0.60 $ 2.36
(1)   Fiscal Q2'19 and year to date Fiscal 2019 same store sales % change
calculated by aligning weeks in the quarter to same weeks in prior
year.
(2) See non-GAAP reconciliation page.
(3) Fiscal Q2'18 and year to date Fiscal 2018 numbers are as reported
with Q2'18 same store sales % change based on Fiscal 2018 calendar.
(4) Same store sales includes physical store sales and eCommerce sales,
which each incorporate the year over year growth of James Allen.
 

Virginia C. Drosos, Chief Executive Officer, commented, "While it is
still early in our journey, we are encouraged by our improving
year-to-date performance as we execute against our Path to Brilliance
transformation plan. During the second quarter, we continued to see
stabilization in same store sales, and we remain confident that we have
the right strategies in place to continue to drive operational
improvement over the long-term. To reflect our improved second quarter
performance, we are modestly raising our revenue and earnings guidance
for the year. For the fourth quarter, however, where a vast majority of
our annual operating profit is generated, we are remaining appropriately
cautious in our outlook as many of our Path to Brilliance initiatives
are being launched later in the year."

Drosos continued, "Another highlight of the second quarter was the
completion of our transition to a fully outsourced credit structure. Our
teams are now able to fully focus on optimizing performance within the
new credit structure which will be critical to driving a successful
holiday season. As a reminder, transaction proceeds from the full
outsourcing of credit over the past year were $1.4 billion, which
enabled the company to repurchase 25% of its outstanding shares."

    Change from previous year  

Second Quarter Fiscal 2019

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)

Kay (2.1)% (1.1)% (3.2)% na (3.2)% $ 546.0
Zales 7.1% (3.6)% 3.5% na 3.5% $ 278.5
Jared 1.2% (3.0)% (1.8)% na (1.8)% $ 271.2
Piercing Pagoda 11.5% (3.0)% 8.5% na 8.5% $ 67.6
James Allen(2) 25.3% $ 54.4
Peoples 0.2% (5.0)% (4.8)% 1.6% (3.2)% $ 47.7
Regional banners (3) (10.5)% (38.1)% (48.6)% 0.2% (48.4)% $ 21.3
North America segment 2.1% (0.2)% 1.9% —% 1.9% $ 1,286.7
H.Samuel (3.8)% (1.4)% (5.2)% 2.6% (2.6)% $ 60.6
Ernest Jones (1.1)% —% (1.1)% 2.8% 1.7% $ 70.9
International segment (2.4)% (0.6)% (3.0)% 2.7% (0.3)% $ 131.5
Other(4) $ 1.9
Signet 1.7% (0.6)% 1.1% 0.4% 1.5% $ 1,420.1
 
(1)   The 53rd 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) Same store sales presented for James Allen to provide comparative
performance measure.
(3) Regional banners represents results for regional stores presented in
the prior year as part of the former Sterling Jewelers and Zale
Jewelry segments (including Gordon's and Mappins).
(4) Includes sales from Signet's diamond sourcing initiative.
 
  Second quarter Fiscal 2019   Second quarter Fiscal 2018
GAAP Operating income/(loss) in millions $   % of sales $   % of sales
North America segment $ (4.2) (0.3)% $ 161.6 12.8%
International segment (6.1) (4.6)% 2.3 1.7%
Other (47.8) nm (28.3) nm
Total GAAP operating income / (loss) $ (58.1) (4.1)% $ 135.6 9.7%
 
Second quarter Fiscal 2019 Second quarter Fiscal 2018
Non-GAAP Operating income/(loss) in millions $ % of sales $ % of sales
North America segment $ 68.9 5.4% $ 161.6 12.8%
International segment (2.3) (1.7)% 2.3 1.7%
Other (18.0) nm (28.3) nm
Total Non-GAAP operating income $ 48.6 3.4% $ 135.6 9.7%
 

Second Quarter 2019 Financial Highlights

Signet's total sales were $1.42 billion, up 1.5%, in the 13 weeks ended
August 4, 2018 on a reported basis and up 1.1% on a constant currency
basis. Total same store sales performance was 1.7% versus the prior year
quarter, inclusive of a positive impact of 40 bps due to planned shifts
in timing of promotions at Jared and a negative impact of approximately
160 bps due to transition issues related to the October 2017 credit
outsourcing. Same store sales performance reflected the impact of
initiatives to increase newness and refocus the product assortment, as
well as incremental clearance sales to make room for new product.
Incremental clearance had a positive impact on same store sales of 240
bps.

The increase in total sales of $20.5 million in the quarter was
positively impacted by 1) same store sales performance; 2) the addition
of James Allen (acquired in September 2017); 3) the application of new
revenue recognition accounting standards; and 4) foreign exchange
translation benefit. These factors were partially offset by the negative
impact of a calendar shift due to the 53rd week in Fiscal 2018 and net
store closures.

eCommerce sales in the second quarter including James Allen were $150.3
million, up 82.8% on a reported basis. James Allen sales were $54.4
million in the quarter, up 25.3% compared to the prior year quarter, and
had a positive 80 bps impact on total company same store sales.
eCommerce sales increased across all segments and accounted for 10.6% of
second quarter sales, up from 5.9% of total sales in the prior year
second quarter.

By operating segment:

North America

  • Same store sales increased 2.1%, including the impact of initiatives
    across banners to increase newness and refocus the product assortment
    and James Allen sales growth which contributed 90 bps. Average
    transaction value ("ATV") increased 6.5% and the number of
    transactions declined (3.0)%. Incremental clearance sales positively
    impacted same store sales by approximately 270 bps, and a planned
    shift in timing of promotions at Jared contributed 40 bps. Same store
    sales were negatively impacted by approximately 175 bps, as a result
    of transition issues related to the October 2017 credit outsourcing.
  • Same store sales increased at Zales by 7.1%, and Piercing Pagoda by
    11.5%. Jared grew by 1.2%, including a positive impact of 195 bps due
    to a planned shift in the timing of promotions. Kay same store sales
    decreased (2.1)%.
  • Bridal and fashion sales increased in the quarter, benefiting from a
    greater percentage of newness in the core product assortment and
    higher clearance sales. This increase was partially offset by declines
    in the Other product category driven by a strategic reduction of owned
    brand beads, as well as declines in other branded beads. Bridal
    performance was driven by strength in solitaires and the Enchanted
    Disney Fine Jewelry® collection partially offset by declines in the
    Ever Us® collection. Fashion performance was primarily driven by gold,
    particularly chains and bracelets, and diamond jewelry items.

International

  • International same store sales decreased (2.4)%, with ATV increasing
    6.3% and the number of transactions decreasing (7.8%).
  • The same store sales decline was driven by lower sales in diamond
    jewelry and fashion watches, partially offset by higher sales in
    prestige watches.

Gross margin was $427.0 million, or 30.1% of sales, down 260 basis
points. Gross margin was negatively impacted by $63.2 million, or 440
bps, due to restructuring charges related to an inventory charge. The
charge relates to brands and collections that the Company is
discontinuing as part of its transformation plan to increase newness
across our categories. Excluding this charge, gross margin was $490.2
million or 34.5% of sales, up 180 basis points. Transformation cost
savings related to direct sourcing, distribution and store occupancy
offset sales deleverage and higher mix of clearance inventory sales.
Additional factors impacting gross margin rate include 1) a positive 350
bps impact related to no longer recognizing bad debt expense and late
charge income; 2) a negative 80 bps impact related to James Allen, which
carries a lower gross margin rate; 3) a negative 60 bps impact related
to the discontinuation of credit insurance; and 4) a negative 20 bps
impact related to adopting new revenue recognition accounting standards.

SGA was $444.8 million, or 31.3% of sales, compared to $409.0 million,
or 29.2% of sales in the prior year. SGA increased primarily due to 1) a
$6 million increase in advertising expense; 2) a $6 million increase in
store staff costs; and 3) a $9 million increase in incentive
compensation expense. In addition, credit outsourcing costs of $32.6
million were partially offset by savings of $10.4 million related to
in-house credit operations. Increases in SGA, including the impact of
foreign exchange, were partially offset by transformation cost savings.

Other operating income was $3.2 million compared to $71.9 million in the
prior year second quarter and includes a $3.2 million gain on the sale
of an asset. The decrease is primarily due to the sale of the prime
accounts receivable in the third quarter of Fiscal 2018, which resulted
in less interest income earned from a reduced receivable portfolio.

In the second quarter, Signet's GAAP operating income/(loss) was $(58.1)
million or (4.1)% of sales, compared to $135.6 million, or 9.7% of sales
in the prior year second quarter. The operating income margin decline
was driven by 1) $82.8 million in restructuring charges due to inventory
charges, severance, professional fees and impairment of IT assets
related to the Path to Brilliance transformation plan; 2) a $39 million
impact from the credit outsourcing transaction due to the loss of
finance charge income and credit outsourcing costs; 3) a $23.9 million
loss related to marking the non-prime receivables at fair value; 4) the
impact of the discontinuation of credit insurance; and 5) higher SGA
expense. These declines were partially offset by transformation cost
savings. Additionally, prior year results included a net benefit of
$10.1 million related to a net gain on the prime credit transaction and
certain one-time corporate and transaction costs.

Non-GAAP operating income was $48.6 million, or 3.4% of sales, compared
to $135.6 million, or 9.7% of sales in prior year second quarter.
Non-GAAP operating income excluded a $23.9 million loss on sale of
non-prime receivables and $82.8 million in restructuring charges related
to the Path to Brilliance transformation plan.

Income tax benefit was $44.0 million on a GAAP basis for an effective
tax rate of 65.7%, compared to income tax expense of $28.7 million or an
effective tax rate of 23.5% in the prior year second quarter. The
current year GAAP effective tax rate was driven primarily by
restructuring charges related to the transformation plan, a loss
recognized in the U.S. associated with the write-down of the non-prime
receivables held for sale, and pre-tax earnings mix by jurisdiction. On
a non-GAAP basis, income tax expense was $2.6 million for an effective
tax rate of 6.5%, driven by pre-tax earnings mix by jurisdiction.

GAAP EPS was $(0.56), including a $23.9 million loss on sale of
non-prime receivables and a $82.8 million charge related to the Path to
Brilliance transformation plan and associated tax benefits. Excluding
these charges, EPS was $0.52 on a non-GAAP basis.

GAAP and non-GAAP EPS in the quarter is based on net income (loss)
available to common shareholders as the preferred shares are
anti-dilutive and excluded from the ending share count due to the level
of second quarter net income.

Balance Sheet and Statement of Cash Flows

Net cash provided by operating activities was $452.6 million year to
date and free cash flow was $396.5 million, including $445.5 million in
proceeds from the sale of the non-prime receivables. Excluding these
proceeds, adjusted free cash flow was $(49.0) million. Cash and cash
equivalents were $134.1 million, compared to $119.1 million at the prior
year quarter-end.

Net accounts receivable, including accounts receivable held for sale,
were $11.1 million as of August 4, 2018, compared to $1.7 billion at the
prior year quarter-end. The decrease in receivables is primarily driven
by the sale of the prime and non-prime portfolios.

Net inventories were $2.4 billion, up 3.6% compared to $2.3 billion at
the prior year quarter-end and up 3.7% compared to $2.3 billion at year
end Fiscal 2018, inclusive of the $63.2 million inventory reserve. The
increase in inventory versus year-end Fiscal 2018 was primarily due to
investments in new merchandise related to bridal initiatives across
store banners which began to positively impact sales in the quarter.

Short-term debt was $111.4 million, a decrease of $828 million, compared
to $939.4 million in the prior year quarter end. Prior year short-term
debt included a $600 million ABS facility that was repaid in the third
quarter of Fiscal 2018 and $303 million in borrowings on the revolver.
Current year quarter short-term debt includes $71 million of revolver
borrowings. Long-term debt was $671.1 million, down $34.2 million,
compared to $705.3 million in the prior year quarter end.

In the second quarter, Signet deployed cash of $425 million to
repurchase outstanding common stock, or 7.3 million shares, at an
average cost of $58.26 per share. Fiscal year to date, Signet has
repurchased 8.8 million shares at an average cost per share of $55.06 or
$485 million. As of August 4, 2018, there was $165.6 million remaining
under Signet's share repurchase authorization.

Signet Path to Brilliance Expected Savings and Restructuring Costs

In March of 2018, the Company announced a three-year Signet Path to
Brilliance transformation plan to reposition the Company to be a share
gaining, OmniChannel jewelry category leader. The Company continues to
expect its transformation plan to deliver $200 million - $225 million of
net cost savings over the next three fiscal years. The Company's
estimates for pre-tax charges over the next three fiscal years is a
range of $170 million - $190 million, of which $80 million - $95 million
are expected to be cash charges.

In Fiscal 2019, the Company continues to expect net costs savings of $85
million - $100 million, with further incremental net cost savings of
$115 million - $125 million by the end of the three-year program. The
majority of the Fiscal 2019 savings are expected to be realized in the
second half of the fiscal year with approximately one third achieved
year to date. In Fiscal 2019, the Company's preliminary estimates for
pre-tax charges related to cost reduction activities and inventory
charges ranges from $125 million - $135 million, of which $40 million -
$45 million are expected to be cash charges.

Non-Prime Credit Outsourcing Update

On June 29, 2018, Signet completed the final phase of its strategic
outsourcing of credit through the sale of its existing non-prime
receivables and implementation of a forward flow purchase arrangement
for future non-prime receivables with funds managed by CarVal Investors
and Castlelake, L.P.

Signet received $445.5 million in cash proceeds from the sale of
existing non-prime receivables, excluding transaction costs, net of a 5
percent holdback. The holdback may be paid out at the end of two years
depending on the performance of such receivables in that period. The
Company used the proceeds, along with cash on hand, to repurchase $485
million in shares.

During the second quarter, Signet recognized a loss of $23.9 million,
including transaction costs, to adjust its remaining receivable
portfolio to fair value through the closing date of June 29th,
at which time receivable balances were transferred to the purchasers for
the aforementioned cash consideration.

Fiscal 2019 Financial Guidance

         
Fiscal 2019       Current Guidance     Prior Guidance
Same store sales (excludes impact of revenue recognition changes) down 1.5% to flat down low to mid-single digit %
Total sales $6.2 billion to $6.3 billion $5.9 billion to $6.1 billion
GAAP diluted EPS $(7.47) - $(7.09) $(7.90) - $(7.30)
Non-GAAP diluted EPS $4.05 - $4.40 $3.75 - $4.25
 
Weighted average common shares - basic 55 million 54 million to 55 million
Weighted average common shares - diluted 62 million 61 million to 62 million
Capital expenditures $165 million to $185 million $165 million to $185 million
Net selling square footage -4.0% to -5.0% -4.0% to -5.0%
 

The above current Fiscal 2019 GAAP guidance reflects the following
assumptions:

  • Impact of previously closed stores, which had annual sales of $150
    million in Fiscal 2018
  • Application of new revenue recognition accounting standard results in
    an increase to sales revenue of approximately $100 million for amounts
    previously reflected as an offset to operating expenses. No impact to
    operating income will result as this is a reclassification only. Prior
    year will not be adjusted for comparative purposes
  • Company plans to close more than 200 stores in Fiscal 2019 and open 35
    - 40 stores for a net selling square footage decline of approximately
    4.0% to 5.0%
  • Transformation program net savings goal of $85 million - $100 million,
    with the majority expected to be realized in the second half of the
    fiscal year. Approximately one-third of the savings goal was achieved
    year to date
  • Operating profit impact of negative $134 million - $141 million due to
    the outsourcing of prime and non-prime accounts receivable
  • One-time pre-tax charges of $125 million - $135 million related to the
    transformation plan
  • Pre-tax charge associated with the credit transaction of $167 million
  • Capital expenditures driven largely by Kay off-mall stores, store
    remodeling and IT initiatives
  • As a result of the impairment charges, the loss associated with the
    sale of the non-prime receivables, inclusive of the servicing fee and
    related transaction costs, and restructuring charges Signet will
    likely realize a tax benefit for purposes of calculating GAAP EPS.
    This tax benefit is expected to range from $95 million - $115 million
  • Interest expense of approximately $40 million
  • Share repurchases of $485 million completed in the first half of
    Fiscal 2019
  • For purposes of calculating both GAAP and non-GAAP EPS, the Company
    expects to apply a share count that excludes the preferred shares for
    the first, second and third quarters and the full year, and a share
    count including the preferred shares for the fourth quarter

Non-GAAP EPS guidance of $4.05 - $4.40 excludes one-time restructuring
charges associated with the transformation plan, the loss associated
with the sale of the non-prime receivables and the goodwill and
intangible impairment charge. Non-GAAP EPS is computed using a
normalized tax rate of 8% - 10%. The revaluation of deferred taxes
associated with the United States tax reform may result in discrete
adjustments within subsequent quarters which are excluded from the
calculation of non-GAAP EPS in Fiscal 2019.

Third Quarter Fiscal 2019 Financial Guidance:

 
Third Quarter Fiscal 2019
Same store sales (excludes impact of revenue recognition changes)       down 1.5% to flat
Total sales $1.15 billion to $1.17 billion
GAAP diluted EPS $(0.81) - $(0.70)
Non-GAAP diluted EPS $(1.23) - $(1.08)
 
Weighted average common shares - basic 51.5 million
 

The above third quarter Fiscal 2019 GAAP guidance reflects the following
assumptions:

  • Impact of previously closed stores, which had annual sales of $28
    million in the third quarter of Fiscal 2018
  • Application of new revenue recognition accounting standard results in
    an increase to sales revenue of approximately $22 million for amounts
    previously reflected as an offset to operating expenses. No impact to
    operating income will result as this is a reclassification only. Prior
    year will not be adjusted for comparative purposes
  • Calendar realignment will have a negative impact on total third
    quarter revenue dollars by approximately $10 million but has no impact
    on same store sales.
  • An unfavorable operating profit impact of approximately $40 million to
    $45 million as compared to the third quarter of Fiscal 2018 related to
    the credit outsourcing. This impact includes: 1) no finance or late
    charge income; 2) no bad debt expense; and 3) credit outsourcing
    expenses partially offset by the savings related to in-house credit
    operations
  • Restructuring charges of approximately $5 million related to Signet
    Path to Brilliance restructuring program
  • GAAP and non-GAAP EPS guidance is calculated by subtracting the
    preferred dividend from net income and applying basic share count

Non-GAAP EPS loss guidance of ($1.23) - ($1.08) excludes one-time
restructuring charges associated with the transformation. Non-GAAP EPS
is computed using a normalized tax rate of 8% - 10%. The revaluation of
deferred taxes associated with the United States tax reform may result
in discrete adjustments within subsequent quarters which are excluded
from the calculation of non-GAAP EPS in Fiscal 2019.

Quarterly Dividend:

Signet's Board of Directors declared a quarterly cash dividend of $0.37
per share for the third quarter of Fiscal 2019, payable on November 30,
2018 to shareholders of record on November 2, 2018, with an ex-dividend
date of November 1, 2018.

Conference Call:

A conference call is scheduled today at 8:30 a.m. ET and a simultaneous
audio webcast is available at www.signetjewelers.com.
The call details are:

Toll Free Dial-in: 866-393-4306
International Dial-in: +1
734-385-2616
Access code: 2078588

A replay and transcript of the call will be posted on Signet's website
as soon as they are available and will be accessible for one year.

About Signet and Safe Harbor Statement:

Signet Jewelers Limited is the world's largest retailer of diamond
jewelry. Signet operates nearly 3,500 stores primarily under the name
brands of Kay Jewelers, Zales, Jared The Galleria Of Jewelry, H.Samuel,
Ernest Jones, Peoples, Piercing Pagoda, and JamesAllen.com. Further
information on Signet is available at www.signetjewelers.com.
See also www.kay.com,
www.zales.com,
www.jared.com,
www.hsamuel.co.uk,
www.ernestjones.co.uk,
www.peoplesjewellers.com,
www.pagoda.com,
and www.jamesallen.com.
This release 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 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 U.S.
tax reform, the benefits and outsourcing of the credit portfolio sale
including technology disruptions, future financial results and operating
results, the impact of weather-related incidents on Signet's business,
the benefits and integration of R2Net, general economic conditions,
potential regulatory changes or other developments following the United
Kingdom's announced intention to negotiate a formal exit from the
European Union, a decline in consumer spending, the merchandising,
pricing and inventory policies followed by Signet, the reputation of
Signet and its banners, 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, the development and maintenance
of Signet's omni-channel retailing, 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, an adverse decision in
legal or regulatory proceedings, 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 and our ability to successfully integrate Zale
Corporation's operations and to realize synergies from the transaction.

For a discussion of these and other risks and uncertainties which could
cause actual results to differ materially from those expressed in any
forward-looking statement, see the "Risk Factors" section of Signet's
Fiscal 2018 Annual Report on Form 10-K filed with the SEC on April 2,
2018 and quarterly reports on Form 10-Q filed with the SEC. Signet
undertakes no obligation to update or revise any forward-looking
statements to reflect subsequent events or circumstances, except as
required by law.

GAAP to Non-GAAP Reconciliations

The following information provides reconciliations of the most
comparable financial measures calculated and presented in accordance
with accounting principles generally accepted in the U.S. ("GAAP") to
presented non-GAAP financial measures. The company believes that
non-GAAP financial measures, when reviewed in conjunction with GAAP
financial measures, can provide more information to assist investors in
evaluating historical trends and current period performance. For these
reasons, internal management reporting also includes non-GAAP measures.
Items may be excluded from GAAP financial measures when the company
believes this provides greater clarity to management and investors.

These non-GAAP financial measures should be considered in addition to,
and not superior to or as a substitute for the GAAP financial measures
presented in this earnings release and the Company's financial
statements and other publicly filed reports. In addition, our non-GAAP
financial measures may not be the same as or comparable to similar
non-GAAP measures presented by other companies.

In discussing financial results, the Company refers to free cash flow
which is not in accordance with GAAP and is defined as the net cash
provided by operating activities less purchases of property, plant and
equipment. Management considers adjusted free cash flow, defined as free
cash flow excluding proceeds from the sale of the non-prime receivables,
as 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. Adjusted free cash flow is an indicator
used by management frequently in evaluating its overall liquidity and
determining appropriate capital allocation strategies. Free cash flow
and adjusted free cash flow do not represent the residual cash flow
available for discretionary expenditure.

      26 weeks ended
(in millions) August 4, 2018   July 29, 2017
Net cash provided by operating activities $ 452.6 $ 409.8
Purchase of property, plant and equipment   (56.1 )   (105.7 )
Free cash flow $ 396.5   $ 304.1  
 
26 weeks ended
(in millions) August 4, 2018

July 29, 2017

Free cash flow $ 396.5

$

304.1

Proceeds from sale of non-prime receivables   (445.5 )  

 
Adjusted free cash flow $ (49.0 )

$

304.1

 
 
 
13 weeks ended 26 weeks ended
August 4, 2018   July 29, 2017 August 4, 2018 July 29, 2017
Gross margin $ 427.0 $ 457.9 $ 911.8 $ 949.1
Restructuring charges - cost of sales   63.2         63.2      
Non-GAAP gross margin $ 490.2   $ 457.9   $ 975.0   $ 949.1  
 

13 weeks ended

26 weeks ended

August 4, 2018 July 29, 2017 August 4, 2018 July 29, 2017
Total GAAP operating income/ (loss)

$

(58.1

)

$ 135.6

$

(632.3

)

$ 250.9
Charges related to transformation plan

82.8

89.3

Loss related to goodwill and intangible impairment

448.7

Loss related to sale of non-prime receivables  

23.9

       

167.0

     
Total non-GAAP operating income

$

48.6

  $ 135.6  

$

72.7

  $ 250.9  
 
13 weeks ended 26 weeks ended
August 4, 2018 July 29, 2017 August 4, 2018 July 29, 2017
North America segment GAAP operating income / (loss) $ (4.2 ) $ 161.6 $ (541.5 ) $ 296.4
Charges related to transformation plan 53.7 53.7
Loss related to goodwill and intangible impairment 448.7
Loss related to sale of non-prime receivables   19.4         160.4      
North America segment non-GAAP operating income $ 68.9   $ 161.6   $ 121.3   $ 296.4  
 
13 weeks ended 26 weeks ended
August 4, 2018 July 29, 2017 August 4, 2018 July 29, 2017
International segment GAAP operating income / (loss) $ (6.1 ) $ 2.3 $ (13.7 ) $ (0.2 )
Charges related to transformation plan   3.8         3.8      
International segment non-GAAP operating income $ (2.3 ) $ 2.3   $ (9.9 ) $ (0.2 )
 
13 weeks ended 26 weeks ended
August 4, 2018 July 29, 2017 August 4, 2018 July 29, 2017
Other segment GAAP operating income / (loss) $ (47.8 ) $ (28.3 ) $ (77.1 ) $ (45.3 )
Charges related to transformation plan 25.3 31.8
Loss related to sale of non-prime receivables   4.5         6.6      
Other segment non-GAAP operating income $ (18.0 ) $ (28.3 ) $ (38.7 ) $ (45.3 )
 
13 weeks ended

 

August 4, 2018 July 29, 2017

 

 

GAAP effective tax rate 65.7 % 23.5 %
Charges related to transformation plan (24.1 )%
Loss related to sale of non-prime receivables (23.2 )%
GAAP quarterly impact of annual tax benefit1   (11.9 )%    
Non-GAAP effective tax rate   6.5 %   23.5 %
 
13 weeks ended

 

August 4, 2018 July 29, 2017

 

 

GAAP Diluted EPS $ (0.56 ) $ 1.33

 

 

Charges related to transformation plan1 1.14
Loss related to sale of non-prime receivables1 0.10
GAAP quarterly impact of annual tax benefit1   (0.16 )    

$

0.52

 

$

1.33

 
 

Fiscal Q3'19
Guidance Low
End

Fiscal Q3'19
Guidance High
End

Q3 GAAP Diluted EPS $ (0.81 ) $ (0.70 )
Charges related to transformation plan1 0.08 0.08
GAAP quarterly impact of annual tax benefit1   (0.50 )   (0.46 )
Q3 Non-GAAP Diluted EPS $ (1.23 ) $ (1.08 )
 

Fiscal 2019
Guidance Low
End

Fiscal 2019
Guidance High
End

2019 GAAP Diluted EPS $ (7.47 ) $ (7.09 )
Charges related to transformation plan1 1.86 1.85
Loss related to goodwill and intangible impairment1 7.60 7.59
Loss related to sale of non-prime receivables1   2.06     2.05  
2019 Non-GAAP Diluted EPS $ 4.05   $ 4.40  
 

1Reconciliation of GAAP and non-GAAP charges and losses
includes related tax impact.

Additional Information Regarding Credit Outsourcing

From a financial perspective, Signet received nearly $1.4 billion due to
the combined sale of its prime and non-prime receivables portfolios.
While the outsourcing of our credit portfolio lowers our operating
profit, it also lowers share count and interest expense as proceeds from
the sale transactions have been used to pay down debt and repurchase
shares. Additionally, the transactions result in lower working capital
requirements going forward as Signet has no need for funding accounts
receivable for future sales to its prime customers and will only hold
non-prime receivables temporarily for two business days.

From an earnings perspective, after the prime and non-prime portfolio of
receivables were reclassified to held for sale and subsequently sold,
Signet no longer earns finance or late charge income on those accounts
and no longer incurs bad debt expense. Signet will continue to pay some
minimal fees directly to Genesis for new account originations, while all
other servicing costs are included in the discount on forward
receivables sold to investment funds managed by CarVal and Castlelake.
The discount on forward receivables will be partially offset by the
elimination of the costs related to our former in-house credit
operations.

In Fiscal 2018 there was a reduction in operating income of $21 million
in the fourth quarter solely reflecting the impact of the initial credit
outsourcing of prime receivables to ADS and servicing of non-prime
receivables to Genesis. Our Fiscal 2019 non-GAAP guidance embeds an
approximately $152 - $159 million incremental year-over-year reduction
in operating income reflecting a combination of (1) an additional 8
months of impacts of the prime outsourcing; (2) 2 months of servicing
costs on the non-prime portfolio receivables; and (3) 7 months of the
impacts from the future discount rate associated with new credit sales
that investment funds managed by CarVal Investors and Castlelake will
purchase. For Fiscal 2020, we expect a zero to $5 million positive
year-over-year impact on operating income. The 2020 estimate is based on
a contractual step up in revenue share profit percentage associated with
the prime outsourcing and an assumed discount rate for the CarVal and
Castlelake arrangement, and could change if the discount rate were to
reset higher or lower under certain review provisions in the agreement.

         
(in millions) Fiscal 2018 Fiscal 2019E Fiscal 2020E
Operating profit impact $18 $(134)-$(141) $(129)-$(141)
Operating profit impact year-over-year change $(21) $(152)-$(159) $0-$5
 
Proceeds from sale of prime and non-prime receivables $952 $445.5
      Note: Proceeds are shown pre-transaction costs. Estimated operating
profit impact is based on anticipated levels of credit sales and
accounts receivable.
           
(in millions) Fiscal Q1'19 Fiscal Q2'19 Fiscal Q3'19   Fiscal Q4'19
Operating profit impact year over year change $(69) $(39) $(40)-$(45) $(4)-$(6)
      Note: Q3 and Q4 estimated operating profit impact is based on
anticipated levels of credit sales and accounts receivable.

 

Condensed Consolidated Income Statements (Unaudited)

 
      13 weeks ended   26 weeks ended
(in millions, except per share amounts) August 4, 2018   July 29, 2017 August 4, 2018   July 29, 2017
Sales $ 1,420.1 $ 1,399.6 $ 2,900.7 $ 2,803.0
Cost of sales (929.9 ) (941.7 ) (1,925.7 ) (1,853.9 )
Restructuring charges - cost of sales (63.2 )   (63.2 )  
Gross margin 427.0 457.9 911.8 949.1
Selling, general and administrative expenses (444.8 ) (409.0 ) (927.6 ) (861.8 )
Credit transaction, net (23.9 ) 14.8 (167.0 ) 14.8
Restructuring charges (19.6 ) (26.1 )
Goodwill and intangible impairments (448.7 )
Other operating income, net 3.2   71.9   25.3   148.8  
Operating income (loss) (58.1 ) 135.6 (632.3 ) 250.9
Interest expense, net (9.4 ) (13.5 ) (18.3 ) (26.1 )
Other non-operating income 0.5     1.1    
Income (loss) before income taxes (67.0 ) 122.1 (649.5 ) 224.8
Income taxes 44.0   (28.7 ) 129.9   (52.9 )
Net income (loss) $ (23.0 ) $ 93.4 $ (519.6 ) $ 171.9
Dividends on redeemable convertible preferred shares (8.2 ) (8.2 ) (16.4 ) (16.4 )
Net income (loss) attributable to common shareholders $ (31.2 ) $ 85.2   $ (536.0 ) $ 155.5  
 
Earnings (loss) per common share:
Basic $ (0.56 ) $ 1.34 $ (9.27 ) $ 2.36
Diluted $ (0.56 ) $ 1.33 $ (9.27 ) $ 2.36
Weighted average common shares outstanding:
Basic 56.1 63.8 57.8 65.9
Diluted 56.1 70.5 57.8 66.0
 
Dividends declared per common share $ 0.37 $ 0.31 $ 0.74 $ 0.62
 

 

Condensed Consolidated Balance Sheets (Unaudited)

 
(in millions, except par value per share amount)   August 4, 2018   February 3, 2018   July 29, 2017
Assets
Current assets:
Cash and cash equivalents $ 134.1 $ 225.1 $ 119.1
Accounts receivable, held for sale 4.6 1,055.6
Accounts receivable, net 6.5 692.5 664.5
Other receivables 83.4 87.2 91.2
Other current assets 155.9 158.2 128.5
Income taxes 119.2 2.6 1.8
Inventories 2,363.8   2,280.5   2,282.1  
Total current assets 2,867.5 3,446.1 4,342.8
Non-current assets:

Property, plant and equipment, net of accumulated depreciation of
$1,249.2,
$1,197.6 and $1,131.4, respectively

820.1 877.9 836.6
Goodwill 509.0 821.7 519.9
Intangible assets, net 341.3 481.5 413.9
Other assets 169.6 171.2 165.1
Deferred tax assets 2.2 1.4
Retirement benefit asset 31.1   39.8   35.5  
Total assets $ 4,740.8   $ 5,839.6   $ 6,313.8  
Liabilities and Shareholders' equity
Current liabilities:
Loans and overdrafts $ 111.4 $ 44.0 $ 939.4
Accounts payable 236.7 237.0 148.2
Accrued expenses and other current liabilities 440.4 448.0 426.6
Deferred revenue 276.3 288.6 262.3
Income taxes   19.6   33.5  
Total current liabilities 1,064.8 1,037.2 1,810.0
Non-current liabilities:
Long-term debt 671.1 688.2 705.3
Other liabilities 236.1 239.6 247.1
Deferred revenue 663.3 668.9 658.8
Deferred tax liabilities 91.0   92.3   103.3  
Total liabilities 2,726.3   2,726.2   3,524.5  
Commitments and contingencies

Series A redeemable convertible preferred shares of $.01 par value:
authorized
500 shares, 0.625 shares outstanding (February 3, 2018
and
July 29, 2017: 0.625 shares outstanding)

614.4 613.6 612.7
Shareholders' equity:

Common shares of $0.18 par value: authorized 500 shares,
51.9
shares outstanding (February 3, 2018: 60.5 outstanding; July
29,
2017: 60.3 outstanding)

15.7 15.7 15.7
Additional paid-in capital 287.6 290.2 282.2
Other reserves 0.4 0.4 0.4

Treasury shares at cost: 35.3 shares (February 3, 2018:
26.7
shares; July 29, 2017: 26.9 shares)

(2,418.0 ) (1,942.1 ) (1,949.7 )
Retained earnings 3,820.7 4,396.2 4,110.3
Accumulated other comprehensive loss (306.3 ) (260.6 ) (282.3 )
Total shareholders' equity 1,400.1   2,499.8   2,176.6  
Total liabilities, redeemable convertible preferred shares and
shareholders' equity
$ 4,740.8   $ 5,839.6   $ 6,313.8  
 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 
  26 weeks ended
(in millions) August 4, 2018   July 29, 2017
Cash flows from operating activities
Net (loss) income $ (519.6 ) $ 171.9
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 93.7 98.4
Amortization of unfavorable leases and contracts (4.1 ) (8.6 )
Pension benefit (0.6 )
Share-based compensation 8.2 6.7
Deferred taxation (0.3 ) 2.6
Credit transaction, net 160.4 (20.7 )
Goodwill and intangible impairments 448.7
Restructuring charges 77.4
Amortization of debt discount and issuance costs 1.0 1.1
Other non-cash movements (3.3 ) 0.6
Changes in operating assets and liabilities:
Decrease in accounts receivable held for investment 40.4 159.1
Decrease in accounts receivable held for sale 18.2
Proceeds from sale of in-house finance receivables 445.5
Decrease in other assets and other receivables 9.8 15.6
(Increase) decrease in inventories (170.9 ) 180.0
Increase (decrease) in accounts payable 3.6 (104.4 )
Decrease in accrued expenses and other liabilities (2.0 ) (6.4 )
Decrease in deferred revenue (17.0 ) (17.1 )
Decrease in income taxes payable (134.9 ) (67.4 )
Pension plan contributions (1.6 ) (1.6 )
Net cash provided by operating activities 452.6   409.8  
Investing activities
Purchase of property, plant and equipment (56.1 ) (105.7 )
Proceeds from sale of assets 5.5
Purchase of available-for-sale securities (0.6 ) (1.3 )
Proceeds from sale of available-for-sale securities 8.5   0.6  
Net cash used in investing activities (42.7 ) (106.4 )
Financing activities
Dividends paid on common shares (40.6 ) (39.0 )
Dividends paid on redeemable convertible preferred shares (15.6 ) (19.1 )
Repurchase of common shares (485.0 ) (460.0 )
Repayments of term loans (13.4 ) (9.0 )
Proceeds from securitization facility 1,242.9
Repayments of securitization facility (1,242.9 )
Proceeds from revolving credit facility 308.0 550.0
Repayments of revolving credit facility (237.0 ) (303.0 )
Repayments of bank overdrafts (8.1 ) (3.1 )
Other financing activities (2.1 ) (3.0 )
Net cash used in financing activities (493.8 ) (286.2 )
Cash and cash equivalents at beginning of period 225.1 98.7
(Decrease) increase in cash and cash equivalents (83.9 ) 17.2
Effect of exchange rate changes on cash and cash equivalents (7.1 ) 3.2  
Cash and cash equivalents at end of period $ 134.1   $ 119.1  
 

Real Estate Portfolio:

Signet has a diversified real estate portfolio. On August 4, 2018,
Signet had 3,493 stores totaling 4.9 million square feet of selling
space. In the second quarter, store count decreased by 35 and square
feet of selling space decreased 0.6%. Compared to year end Fiscal 2018,
store count decreased by 63 and square feet of selling space decreased
1.6%.

           
Store count by banner February 3, 2018 Openings Closures August 4, 2018
Kay 1,247 20 (22) 1,245
Zales 704 1 (16) 689
Peoples 129 1 (5) 125
Jared 274 (3) 271
Piercing Pagoda 598 (14) 584
Regional banners 100 (18) 82
North America segment 3,052 22 (78) 2,996
H.Samuel 301 (5) 296
Ernest Jones 203 1 (3) 201
International segment 504 1 (8) 497
Signet 3,556 23 (86) 3,493
 

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