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SIGNET JEWELERS LTD – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis in this Item 2 is intended to provide the reader with information that will assist in understanding the significant factors affecting the Company's consolidated operating results, financial condition, liquidity and capital resources. This discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, as well as the financial and other information included in Signet's Fiscal 2022 Annual Report on Form 10-K filed with theSEC onMarch 17, 2022 .
This management's discussion and analysis provides comparisons of material
changes in the condensed consolidated financial statements for the 13 and 39
weeks ended
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 are 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, results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. The use of the words "expects," "intends," "anticipates," "estimates," "predicts," "believes," "should," "potential," "may," "preliminary," "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 which could cause the actual results to not be realized, including, but not limited to: difficulty or delay in executing or integrating an acquisition, including Diamonds Direct and Blue Nile, or executing other major business or strategic initiatives, the negative impacts that the COVID-19 pandemic has had, and could have in the future, on our business, financial condition, profitability and cash flows; the effect of steps we take in response to the pandemic; the severity, duration and potential resurgence of the pandemic (including through variants), including whether it is necessary to temporarily reclose our stores, distribution centers and corporate facilities or for our suppliers and vendors to temporarily reclose their facilities; the pace of recovery when the pandemic subsides and the heightened impact COVID-19 has on many of the risks described herein, including without limitation risks relating to disruptions in our supply chain, our ability to attract and retain labor, decelerating levels of consumer confidence and consumer behaviors such as willingness to patronize shopping centers and shifts in spending away from the jewelry category toward more experiential purchases such as travel, the impacts of the expiration of government stimulus on overall consumer spending, our level of indebtedness and covenant compliance, availability of adequate capital, our ability to execute our business plans, our lease obligations and relationships with our landlords, and asset impairments; general economic or market conditions, including impacts of inflation, the cessation of government stimulus programs, or other pricing environment factors on our commodity costs (including diamonds) or other operating costs; a prolonged slowdown in the growth of the jewelry market or a recession in the overall economy; financial market risks; a decline in consumer discretionary spending or deterioration in consumer financial position, including due to the impacts of inflation and rising prices on necessities such as gas and groceries; our ability to optimize our transformation strategies; changes to regulations relating to customer credit; disruption in the availability of credit for customers and customer inability to meet credit payment obligations; our ability to achieve the benefits related to the outsourcing of the credit portfolio, including due to technology disruptions, future financial results and operating results and/or disruptions arising from changes to or termination of the relevant outsourcing agreements; deterioration in the performance of individual businesses or of our market value relative to its book value, resulting in impairments of long-lived assets or intangible assets or other adverse financial consequences; the volatility of our stock price; the impact of financial covenants, credit ratings or interest volatility on our ability to borrow; our ability to maintain adequate levels of liquidity for our cash needs, including debt obligations, payment of dividends, planned share repurchases (including execution of accelerated share repurchases and the payment of related to excise taxes) and capital expenditures as well as the ability of our customers, suppliers and lenders to access sources of liquidity to provide for their own cash needs; changes in our credit rating; potential regulatory changes; future legislative and regulatory requirements in the US and globally relating to climate change, including any new climate related disclosure or compliance requirements, such as those recently proposed by theSEC ; the risk of a potential US rail union strike; global economic conditions or other developments related to theUnited Kingdom's exit from theEuropean Union ; exchange rate fluctuations; the cost, availability of and demand for diamonds, gold and other precious metals, including any impact on the global market supply of diamonds due to the ongoingRussia -Ukraine conflict or related sanctions; stakeholder reactions to disclosure regarding the source and use of certain minerals; scrutiny or detention of goods produced in certain territories resulting from trade restrictions; seasonality of our business; the merchandising, pricing and inventory policies followed by us and our ability to manage inventory levels; our relationships with suppliers including the ability to continue to utilize extended payment terms and the ability to obtain merchandise that customers wish to purchase; the failure to adequately address the impact of existing tariffs and/or the imposition of additional duties, tariffs, taxes and other charges or other barriers to trade or impacts from trade relations; the level of competition and promotional activity in the jewelry sector; our ability to optimize our multi-year strategy to gain market share, expand and improve existing services, innovate and achieve sustainable, long-term growth; the maintenance and continued innovation of our OmniChannel retailing and ability to increase digital sales, as well as management of its digital marketing costs; changes in consumer attitudes regarding jewelry and failure to anticipate and keep pace with changing fashion trends; changes in the supply and consumer acceptance of and demand for gem quality lab created diamonds and adequate identification of the use of substitute products in our jewelry; ability to execute successful marketing programs and manage social media; the ability to optimize our real estate footprint; the performance of and ability to recruit, train, motivate and retain qualified team members - particularly in regions experiencing low unemployment rates; management of social, ethical and 31 -------------------------------------------------------------------------------- Table of Contents environmental risks; the reputation of Signet and its banners; inadequacy in and disruptions to internal controls and systems, including related to the migration to new information technology systems which impact financial reporting; security breaches and other disruptions to our information technology infrastructure and databases; an adverse development in legal or regulatory proceedings or tax matters, including any new claims or litigation brought by employees, suppliers, consumers or shareholders, regulatory initiatives or investigations, and ongoing compliance with regulations and any consent orders or other legal or regulatory decisions; failure to comply with labor regulations; collective bargaining activity; changes in corporate taxation rates, laws, rules or practices in the US and jurisdictions in which our subsidiaries are incorporated, including developments related to the tax treatment of companies engaged in Internet commerce or deductions associated with payments to foreign related parties that are subject to a low effective tax rate; risks related to international laws and Signet being aBermuda corporation; risks relating to the outcome of pending litigation; our ability to protect our intellectual property or physical assets; changes in assumptions used in making accounting estimates relating to items such as extended service plans and pensions; or the impact of weather-related incidents, natural disasters, organized crime or theft, strikes, protests, riots or terrorism, acts of war (including the ongoingRussia -Ukraine conflict), or another public health crisis or disease outbreak, epidemic or pandemic on our business. 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" and "Forward-Looking Statements" sections of Signet's Fiscal 2022 Annual Report on Form 10-K filed with theSEC onMarch 17, 2022 and quarterly reports on Form 10-Q and the "Safe Harbor Statements" in current reports on Form 8-K filed with theSEC . Signet undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.
OVERVIEW
retailer of diamond jewelry. Signet is incorporated in
retail locations as of
geography, a description of which follows:
•The North America reportable segment operates nine banners, with the majority
operating through both online and brick and mortar retail operations. The
segment had 2,419 locations in the US and 93 locations in
•In the US, the segment operates under the following banners: Kay (
and Kay Outlet
Galleria Of Jewelry and
Direct; Rocksbox; and digitally native banners,
•In Canada, the segment primarily operates under the Peoples banner (
Jewellers
•The International reportable segment had 334 locations in the
Ireland
online retail presence for its principal banners,
reporting purposes, including the Company's diamond sourcing function and its
diamond polishing factory in
information regarding the Company's reportable segments, and see Item 1 of
Signet's Fiscal 2022 Annual Report on Form 10-K for further background and
description of the Company's business.
Diamonds Direct acquisition
OnNovember 17, 2021 , the Company acquired all of the outstanding shares ofDiamonds Direct USA Inc. ("Diamonds Direct") for cash consideration of$503.1 million , net of cash acquired. Diamonds Direct is an off-mall, destination jeweler in the US operating with a highly productive, efficient operating model with demonstrated growth and profitability. Diamonds Direct has been immediately accretive to Signet following the acquisition date. Diamonds Direct's strong value proposition, extensive bridal offering and customer-centric, high-touch shopping experience is a destination for younger, luxury-oriented bridal shoppers. Diamonds Direct strategically expands Signet's market in accessible luxury and bridal, provides access to a new customer base and furthers Signet's opportunity to build lifetime customer relationships. Signet plans to grow Diamonds Direct while driving operating margin expansion over time through operating synergies in purchasing, targeted marketing and connected commerce.
Blue Nile acquisition
OnAugust 19, 2022 , the Company acquired all of the outstanding shares ofBlue Nile, Inc. ("Blue Nile"), subject to the terms of a stock purchase agreement ("Agreement") entered into onAugust 5, 2022 . The total cash consideration is$395.9 million , net of cash acquired, including purchase price adjustments for working capital, and is subject to customary post-closing adjustments per the Agreement. Blue Nile is a leading online retailer of engagement rings and fine jewelry. The addition of Blue Nile is expected to further bring Signet a younger, more affluent, and highly diverse customer to Signet's banner portfolio that will expand Signet's accessible luxury tier. We believe the strategic acquisition of Blue Nile accelerates Signet's efforts to enhance its connected commerce capabilities and extend its digital leadership across the jewelry category - all to further achieve meaningful operating synergies for the consumers and create value for shareholders. 32
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Overall performance
Signet's total sales grew by 2.9% during the third quarter of Fiscal 2023
compared to the same period in Fiscal 2022, which was primarily driven by the
additions of Diamonds Direct and Blue Nile to Signet's portfolio. The decline in
sales within the Company's organic business includes the impact of heightened
inflationary pressure on consumers' discretionary spending, particularly for
assortments at lower price points, shifts in consumer spending to experiences
and travel, as well as the weakening of the British Pound in the International
segment. The Company's overall operating results continue to reflect sustainable
enhancements to the differentiation of Signet's banners, connected commerce
capabilities, accelerated services, always on marketing strategy including
increased penetration of digital marketing, and inventory management. During the
third quarter of Fiscal 2023, the Company's average merchandise transaction
values ("ATV") increased by 7.8% in the North America segment and 7.7% in the
International segment, despite the decline in traffic and number of
transactions. The increase relates to the higher penetration of accessible
luxury banners, shift in assortment architecture to higher price points and the
reduced impact of Banter by Piercing Pagoda, which carries a lower ATV. During
the remainder of Fiscal 2023, the Company will continue to execute the
initiatives under its Inspiring Brilliance strategy, which is focused on the
achievement of sustainable industry-leading growth with an annual double digit
operating margin. As described in the Purpose and Strategy section within Item 1
of Signet's Fiscal 2022 Annual Report on Form 10-K filed with the SEC on
March 17, 2022 , through its Inspiring Brilliance strategy, the Company is
focused on leveraging its core strengths that it developed over the past four
years with the goal of creating a broader mid-market and increasing Signet's
share of that larger market as the industry leader.
Refer to the "Results of Operations" section below for further information on
performance during the third quarter of Fiscal 2023.
Outlook
Following a year of heightened growth, jewelry industry revenues are expected to be down mid-to-high single digits for Fiscal 2023, as the pressure on consumer discretionary spending is expected to continue through the rest of the year. In addition, the Company anticipates that discretionary spending in jewelry will continue to be adversely impacted by rising prices on necessities such as gas and groceries, and could further impact sales of the Company's product assortments at lower and mid-tier price points. However, the magnitude and timing of both inflationary factors and the shift in spending are difficult to predict, as is whether these pressures will ultimately impact other product categories, including softening demand for products at higher price points. The Company also anticipates sales to be negatively impacted by the weakened British Pound during the remainder of Fiscal 2023. The Company believes that its banner value propositions and differentiation, including the addition of Diamonds Direct and Blue Nile to Signet's portfolio, the strength of the Company's product assortment and its investments in digital and flexible fulfillment capabilities are expected to continue fueling a positive response from customers across most merchandise categories and banners during the remainder of Fiscal 2023. Furthermore, the Company will continue its diligent and effective efforts to drive structural cost savings and leverage its flexible operating model. The Company continues to monitor the impacts of certain macroeconomic factors on its business, such as inflation and the conflict inUkraine . Uncertainties exist that could continue to impact the Company's results of operations or cash flows in the future, such as further pricing and inflationary environment changes impacting the Company (including, but not limited to, materials, labor, fulfillment and advertising costs) or adverse shifts in consumer discretionary spending, supply chain disruptions to the Company's business, including the risk of a potential US rail union strike, the potential resurgence of COVID-19 in key trade areas, the Company's ability to recruit and retain qualified team members, or organized retail crime. See "Forward-Looking Statements" above as well as the "Risk Factors" section herein and in Signet's Fiscal 2022 Annual Report on Form 10-K. 33
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RESULTS OF OPERATIONS
Comparison of Third Quarter Fiscal 2023 to Third Quarter Fiscal 2022
•Same store sales: Down 7.6%.
•Total sales:
•Operating income:
•Diluted earnings per share:
Comparison of Year to Date Fiscal 2023 Year to Prior Year
•Same store sales: Down 4.4%.
•Total sales:
•Operating income:
•Diluted earnings per share:
Third Quarter Year to Date
Fiscal 2023 Fiscal 2022 Fiscal 2023
Fiscal 2022 (in millions) $ % of sales $ % of sales $ % of sales $ % of sales Sales$ 1,582.7 100.0 %$ 1,537.8 100.0 %$ 5,175.9 100.0 %$ 5,014.7 100.0 % Cost of sales (1,030.1) (65.1) (962.2) (62.6) (3,234.9) (62.5) (3,043.1) (60.7) Gross margin 552.6 34.9 575.6 37.4 1,941.0 37.5 1,971.6 39.3 Selling, general and administrative expenses (501.7) (31.7) (470.5) (30.6) (1,512.1) (29.2) (1,485.1) (29.6) Other operating income (expense) (2.5) (0.2) 1.8 0.1 (193.5) (3.7) 14.5 0.3 Operating income 48.4 3.1 106.9 7.0 235.4 4.5 501.0 10.0 Interest expense, net (3.6) (0.2) (4.1) (0.3) (11.4) (0.2) (12.4) (0.2) Other non-operating expense, net (2.7) (0.2) (1.1) (0.1) (139.6) (2.7) (0.9) - Income before income taxes 42.1 2.7 101.7 6.6 84.4 1.6 487.7 9.7 Income taxes (4.6) (0.3) (9.1) (0.6) 15.0 0.3 (32.1) (0.6) Net income$ 37.5 2.4 %$ 92.6 6.0 %$ 99.4 1.9 %$ 455.6 9.1 % Dividends on redeemable convertible preferred shares (8.7) nm (8.7) nm (25.9) nm (25.9) nm Net income attributable to common shareholders$ 28.8 1.8 %$ 83.9 5.5 %$ 73.5 1.4 %$ 429.7 8.6 % nm Not meaningful. Third quarter sales Signet's total sales increased 2.9% year over year to$1.58 billion in the 13 weeks endedOctober 29, 2022 , while total sales at constant exchange rates increased 4.2%. The total sales increase was primarily driven by the additions of Diamonds Direct and Blue Nile to Signet's portfolio, offset by the decrease in same store sales of 7.6%, compared to an increase of 18.9% in the prior year quarter. This decline was driven by the impact of heightened inflationary pressure on consumers' discretionary spending, particularly on the Company's product assortments at lower price points, shifts in consumer spending to experiences and travel, and the weakening of the British Pound in the International segment. eCommerce sales in the third quarter of Fiscal 2023 were$331.1 million , up$58.0 million or 21.2%, compared to$273.1 million in the prior year third quarter, primarily driven by the addition of Blue Nile to Signet's portfolio. eCommerce sales accounted for 20.9% of third quarter sales, up from 17.8% of total sales in the prior year third quarter. Brick and mortar same store sales decreased 8.1% from the prior year third quarter. 34
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The breakdown of the third quarter sales performance by segment is set out in
the table below:
Change from previous year
Same Non-same Total sales Exchange Total Total
store store sales, at constant exchange translation sales sales
Third Quarter of Fiscal 2023 sales net (2) rate (3) impact as reported (in millions)
North America segment (7.6) % 12.7 % 5.1 % - % 5.1 % $ 1,464.8
International segment (6.7) % (0.5) % (7.2) % (14.0) % (21.2) % $ 95.3
Other segment (1) nm nm nm nm nm $ 22.6
Signet (7.6) % 11.8 % 4.2 % (1.3) % 2.9 % $ 1,582.7
(1) Includes sales from Signet's diamond sourcing initiative.
(2) Includes sales from acquired businesses which were not included in the
results for the full comparable periods presented.
(3) The Company also provides the period-over-period change in total sales
excluding the impact of foreign currency fluctuations, which is a non-GAAP
measure, to provide transparency to performance and enhance investors'
understanding of underlying business trends. The effect from foreign currency,
calculated on a constant currency basis, is determined by applying current year
average exchange rates to prior year sales in local currency.
nm Not meaningful.
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
Third Quarter Fiscal 2023 Fiscal 2022 Fiscal 2023 Fiscal 2022 Fiscal 2023 Fiscal 2022
North America segment $ 526 $ 488 7.8 % 15.2 % (16.0) % 3.5 %
International segment (3) £ 181 £ 168 7.7 % (4.0) % (14.7) % 12.8 %
(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, repairs, extended service
plans, 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 the International segment are denominated in British pounds.
TheNorth America segment's total sales were$1.46 billion compared to$1.39 billion in the prior year quarter, or an increase of 5.1%. This increase was primarily driven by the additions of Diamonds Direct and Blue Nile to Signet's portfolio, offset by the decline in same store sales due to the impact of heightened inflationary pressure on consumers' discretionary spending, particularly on the Company's product assortments at lower price points. This decline was partially offset by an increased ATV of 7.8% compared to the prior year quarter. Same store sales decreased 7.6% compared to an increase of 19.8% in the prior year quarter, which is reflective of the factors discussed above and resulted in the number of transactions decreasing by 16.0% year over year.
International sales
The International segment's total sales decreased 21.2% to$95.3 million compared to$120.9 million in the prior year, primarily as a result of the weakening of the British Pound which drove 14.0% of this decline. Total sales at constant exchange rates decreased 7.2% compared to an increase of 7.3% in the prior year, primarily driven by the impact of heightened inflationary pressure on consumers' discretionary spending, especially on necessities such as gas and groceries. In the International segment, the ATV increased 7.7% year over year, while the number of transactions decreased 14.7%.
Year to date sales
Signet's total sales increased 3.2% to$5.18 billion compared to$5.01 billion in the prior year, while total sales at constant exchange rates increased 4.1%. Signet's same store sales decreased 4.4%, compared to an increase of 66.3% in the prior year. While Signet's total sales increased primarily due to the additions of Diamonds Direct and Blue Nile to Signet's portfolio, Signet's organic business declined primarily driven by the impact of the heightened inflationary pressure on consumers' discretionary spending, shifts in consumer spending to experiences and travel, the impacts of lapping benefits from last year's government stimulus in theNorth America segment and the weakening of the British Pound in the International segment. eCommerce sales year to date were$949.4 million , down$6.2 million or 0.6%, compared to$955.6 million in the prior year. eCommerce sales accounted for 18.3% of year to date sales, down from 19.1% of total sales in the prior year. Brick and mortar same store sales decreased 3.3% from the prior period. 35
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The decrease in eCommerce sales as of percentage of sales reflected increased traffic in the stores year over year, particularly in theUK due to the lifting of government imposed COVID restrictions in the prior year. The Company's focus on its connected commerce shopping experience, both online and in-store, helped maintain conversion rates and improve the ATV throughout Fiscal 2023 year to date. The breakdown of the year-to-date sales performance is set out in the table below: Change from previous year Same Non-same Total sales Exchange Total Total store store sales, at constant exchange translation sales sales Year-to-date Fiscal 2023 sales net (2) rate (3) impact as reported (in millions) North America segment (5.7) % 8.6 % 2.9 % (0.1) % 2.8 %$ 4,786.2 International segment 17.5 % (0.5) % 17.0 % (14.4) % 2.6 %$ 316.9 Other segment (1) nm nm nm nm nm $ 72.8 Signet (4.4) % 8.5 % 4.1 % (0.9) % 3.2 %$ 5,175.9 (1) Includes sales from Signet's diamond sourcing initiative. (2) Includes sales from acquired businesses which were not included in the results for the full comparable periods presented. (3) The Company also provides the period-over-period change in total sales excluding the impact of foreign currency fluctuations, which is a non-GAAP measure, to provide transparency to performance and enhance investors' understanding of underlying business trends. The effect from foreign currency, calculated on a constant currency basis, is determined by applying current year average exchange rates to prior year sales in local currency.
nm Not meaningful.
As described above, 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
Year-to-date Fiscal 2023 Fiscal 2023 Fiscal 2022 Fiscal 2023 Fiscal 2022 Fiscal 2023 Fiscal 2022
North America segment $ 503 $ 446 12.8 % 11.7 % (18.1) % 49.6 %
International segment (3) £ 176 £ 167 5.4 % (2.4) % 9.8 % 25.9 %
(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 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 the International segment are denominated in British pounds.
TheNorth America segment's total sales were$4.79 billion compared to$4.66 billion in the prior year, up 2.8%. Same store sales decreased 5.7% compared to an increase of 69.9% in the prior year.North America's ATV increased 12.8%, while the number of transactions decreased 18.1%. WhileNorth America's total sales increased primarily as a result of the additions of Diamonds Direct and Blue Nile to Signet's portfolio, same store sales declined due to a combination of factors noted above such as the impacts of heightened inflationary pressure on consumers' discretionary spending.
eCommerce sales decreased 8.2%, while brick and mortar same store sales
decreased 5.1%.
International sales
The International segment's total sales increased 2.6% to$316.9 million compared to$309.0 million in the prior year and increased 17.0% at constant exchange rates. Same store sales increased 17.5% compared to an increase of 26.9% in the prior year. The ATV increased 5.4% over prior year, and the number of transactions increased 9.8%. The increases in sales and the number of transactions reflect the reopening of allUK stores inApril 2021 following the lifting of COVID restrictions, offset by the weakening of the British Pound. In the prior year, allUK stores temporarily closed onMarch 24, 2020 and began reopening in the second quarter of Fiscal 2022.
Gross margin
In the third quarter of Fiscal 2023, gross margin was$552.6 million , or 34.9%, of sales compared to$575.6 million , or 37.4%, of sales in the prior year comparable period. In the 39 weeks endedOctober 29, 2022 , gross margin was$1.9 billion or 37.5% of sales compared to$2.0 billion or 39.3% of sales in the prior year comparable period. The decrease in gross margin rate for both the 13 and 39 weeks endedOctober 29, 2022 , compared to the same periods in Fiscal 2022, reflects deleveraging of occupancy costs as a result of the lower same store sales noted above, and the mix of Diamonds Direct and Blue Nile's bridal business, which generally carries lower margins. Merchandise margins within the Company's organic business improved slightly to prior year in both the quarter and year to date, based on the improved health of our inventory, improved mix shift to higher priced merchandise and benefits of increase 36 -------------------------------------------------------------------------------- Table of Contents services revenue. In addition, the overall margin rate decline was partially offset by the continued benefits of cost savings in the Company's organic businesses.
Selling, general and administrative expenses ("SG&A")
In the third quarter of Fiscal 2023, SG&A was$501.7 million or 31.7% of sales compared to$470.5 million or 30.6% of sales in the prior year quarter. SG&A overall increased for the 13 weeks endedOctober 29, 2022 primarily due to the additions of Diamonds Direct and Blue Nile, offset by the impact of lower sales in the organic businesses. As a percentage of sales, the increase quarter over quarter was driven by investments in digital/IT, partially offset by lower payroll-related costs and the benefits of Signet's flexible operating model. In the 39 weeks endedOctober 29, 2022 , SG&A was$1.51 billion or 29.2% of sales compared to$1.49 billion or 29.6% of sales in the prior year comparable period. The additions of Diamonds Direct and Blue Nile, together with increased investments in digital/IT, were offset by lower payroll-related costs and the benefits of structural cost savings in Signet's organic businesses, including from the Company's restructured outsourced credit agreements finalized in the second quarter of Fiscal 2022. The improved SG&A as a percentage of sales year to date was primarily driven by the cost savings initiatives and the efficiency of Diamonds Direct's operating model.
Other operating income (expense)
For the 13 and 39 weeks endedOctober 29, 2022 , other operating expense, net was$2.5 million and$193.5 million , respectively, primarily driven by the pre-tax litigation charges of$190 million recorded in the first quarter. For the 13 and 39 weeks endedOctober 30, 2021 , other operating income, net was$1.8 million and$14.5 million , respectively, primarily driven by interest income on the Company's non-prime credit card portfolio andUK government subsidies granted for restrictions imposed on non-essential businesses.
Operating income
For the third quarter of Fiscal 2023, operating income was$48.4 million or 3.1% of sales, compared to$106.9 million or 7.0% of sales in the prior year third quarter. For the 39 weeks endedOctober 29, 2022 , operating income was$235.4 million or 4.5% of sales compared to$501.0 million or 10.0% of sales in the prior year comparable period. The decrease in operating income for the 13 weeks endedOctober 29, 2022 , compared to prior year quarter reflects deleveraging of occupancy costs as a result of the lower same store sales noted above, increased investments in digital/IT and the mix of Diamonds Direct and Blue Nile's bridal businesses, which generally carry lower relative margins. The decrease in operating income for the 39 weeks endedOctober 29, 2022 , compared to prior year period, was primarily driven by the pre-tax litigation charges of$190 million offset by the impact of the acquisitions and the benefits of Signet's flexible operating model discussed above. 37
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Signet's operating income (loss) by segment for the third quarter is as follows:
Fiscal 2023 Fiscal 2022
% of segment % of segment
(in millions) $ sales $ sales
North America segment (1) $ 65.4 4.5 % $ 123.8 8.9 %
International segment (6.5) (6.8) % 0.2 0.2 %
Other segment (0.3) nm (0.4) nm
Corporate and unallocated expenses (2) (10.2) nm (16.7) nm
Operating income $ 48.4 3.1 % $ 106.9 7.0 %
Signet's operating income (loss) by segment for the year to date period is as follows:
Fiscal 2023 Fiscal 2022
% of segment % of segment
(in millions) $ sales $ sales
North America segment (1) $ 300.3 6.3 % $ 573.1 12.3 %
International segment (14.9) (4.7) % (4.0) (1.3) %
Other segment 4.5 nm (1.4) nm
Corporate and unallocated expenses (2) (54.5) nm (66.7) nm
Operating income $ 235.4 4.5 % $ 501.0 10.0 %
(1) Operating income during the 13 and 39 weeks ended October 29, 2022 includes
$5.0 million and $15.2 million , respectively, of cost of sales associated with
the fair value step-up of inventory acquired in the Diamonds Direct and Blue
Nile acquisitions; and $4.7 million and $7.3 million , respectively of
acquisition and integration-related expenses in connection with the Blue Nile
acquisition. Operating income during the 39 weeks ended October 29, 2022
includes $190.0 million related to pre-tax litigation charges. See Note 4 and
Note 21 for additional information.
Operating income during the 13 and 39 weeks ended October 30, 2021 includes
$2.6 million of acquisition-related expenses in connection with the Diamonds
Direct acquisition; and $0.7 million and $2.0 million , respectively, of net
asset impairments. Operating income during the 39 weeks ended October 30, 2021
includes $1.1 million of transaction-related expenses in connection with the
Rocksbox acquisition; $1.4 million of gains associated with the sale of customer
in-house finance receivables; and credits of $1.0 million to restructuring
expense, primarily related to adjustments to previously recognized restructuring
liabilities.
(2) Operating income during the 13 and 39 weeks ended October 30, 2021 includes
credits of $1.7 million and $2.3 million , respectively, to restructuring
expense, primarily related to adjustments to previously recognized restructuring
liabilities.
Interest expense, net
For the 13 and 39 weeks ended
million
million
Other non-operating expense, net
In the third quarter of Fiscal 2023, other non-operating expense was$2.7 million compared to$1.1 million in the prior year comparable period. In the 39 weeks endedOctober 29, 2022 , other non-operating expense was$139.6 million compared to$0.9 million in the prior year comparable period. The other non-operating expenses in the 39 weeks endedOctober 29, 2022 primarily consisted of non-cash, pre-tax settlement charges of$132.8 million related to the partial buy-out of the Pension Scheme. Refer to Note 22 for additional information.
Income taxes
In the third quarter of Fiscal 2023, income tax expense was$4.6 million , an effective tax rate ("ETR") of 10.9%, compared to income tax expense of$9.1 million , an ETR of 8.9%, in the prior year comparable period. The ETR for the third quarter of Fiscal 2023 was lower than the US federal income tax rate, primarily due to the favorable impact of foreign rate differences and benefits from global reinsurance arrangements. The ETR for the third quarter of Fiscal 2022 was lower than the US federal income tax rate primarily due to additional benefits of the CARES Act of$12.4 million related to carry back of the net operating losses incurred in Fiscal 2021, which was finalized and recognized as a discrete item during the third quarter of Fiscal 2022. In the year to date period of Fiscal 2023, income tax benefit was$15.0 million , an ETR of (17.8)%, compared to an income tax expense of$32.1 million , an ETR of 6.6% in the prior year comparable period. The ETR for the 39 weeks endedOctober 29, 2022 was lower than the US federal income tax rate primarily due to the discrete tax benefits related to litigation charges of$47.7 million , the reclassification of the pension settlement loss out of AOCI of$25.2 million and the excess tax benefit for share-based compensation which vested during the year of$14.7 million . The year to date ETR in the prior year comparable period was lower than the US federal income tax rate primarily due to the favorable impact of the reversal of the valuation allowance recorded against certain state deferred tax assets. Refer to Note 10 for additional information. 38
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NON-GAAP MEASURES
Signet provides certain non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. 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 the Company's condensed consolidated 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.
1. Net cash
Net cash 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) October 29, 2022 January 29, 2022 October 30, 2021 Cash and cash equivalents $ 327.3 $ 1,418.3 $ 1,516.9 Less: Loans and overdrafts - - (0.3) Less: Long-term debt (147.3) (147.1) (147.0) Net cash $ 180.0 $ 1,271.2 $ 1,369.6
2. Free cash flow and adjusted 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 this metric to be 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, a non-GAAP
measure, excludes the proceeds from the sale of in-house finance receivables.
Free cash flow and adjusted free cash flow are indicators frequently used by
management in evaluating its overall liquidity needs and determining appropriate
capital allocation strategies. Free cash flow and adjusted free cash flow do not
represent the residual cash flow available for discretionary purposes.
13 weeks ended 39 weeks ended
October 29, October 30, October 29, October 30,
(in millions) 2022 2021 2022 2021
Net cash (used in) provided by operating activities
Purchase of property, plant and equipment
(36.1) (18.3) (94.3) (50.5) Free cash flow (76.7) 7.1$ (249.8) $ 433.4 Proceeds from sale of in-house finance receivables - - - (81.3) Adjusted free cash flow$ (76.7) $ 7.1 $ (249.8) $ 352.1
3. Earnings before interest, income taxes, depreciation and amortization
("EBITDA") and adjusted EBITDA
EBITDA is a non-GAAP measure defined as earnings before interest, income taxes,
depreciation and amortization. EBITDA is an important indicator of operating
performance as it excludes the effects of financing and investing activities by
eliminating the effects of interest, depreciation and amortization costs.
Adjusted EBITDA is a non-GAAP measure, defined as earnings before interest,
income taxes, depreciation and amortization, share-based compensation expense,
non-operating expense, net and certain non-GAAP accounting adjustments. Reviewed
in conjunction with net income and operating income (loss), management believes
that EBITDA and adjusted EBITDA help in enhancing investors' ability to evaluate
and analyze trends regarding Signet's business and performance based on its
current operations.
39
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13 weeks ended 39 weeks ended
October 29, October 30, October 29, October 30,
(in millions) 2022 2021 2022 2021
Net income $ 37.5 $ 92.6 $ 99.4 $ 455.6
Income tax expense (benefit) 4.6 9.1 (15.0) 32.1
Interest expense, net 3.6 4.1 11.4 12.4
Depreciation and amortization 43.7 39.2 123.5 122.9
Amortization of unfavorable contracts (0.5) (0.5) (1.4) (2.9)
EBITDA $ 88.9 $ 144.5 $ 217.9 $ 620.1
Other non-operating expense, net (3) 2.7 1.1 139.6 0.9
Share-based compensation 11.4 10.9 34.3 36.4
Other accounting adjustments
Credits related to transformation plan - (1.7) - (3.3)
Asset impairments, net (1) - - - (0.3)
Acquisition and integration-related costs (2) 9.5 - 20.3 1.1
Gain on sale of in-house finance receivables - - - (1.4)
Litigation charges (4) - - 190.0 -
Adjusted EBITDA $ 112.5 $ 154.8 $ 602.1 $ 653.5
(1) Includes right-of-use ("ROU") asset impairment gains, net recorded due to
various impacts of COVID-19 to the Company's business and related gains on
terminations or modifications of leases, resulting from previously recorded
impairments of the ROU assets in Fiscal 2021.
(2) Acquisition and integration-related costs include the impact of the fair value step-up for inventory from Diamonds Direct and Blue Nile; as well as direct transaction-related and integration costs, primarily professional fees and severance, incurred for the acquisition of Blue Nile in Fiscal 2023; Fiscal 2022 included direct transaction-related costs for the acquisition of Rocksbox.
(3) The 13 and 39 weeks ended
charges. Refer to Note 22 for further information.
(4) Refer to Note 21 for additional information.
4. Non-GAAP operating income
Non-GAAP operating income is a non-GAAP measure defined as operating income
excluding the impact of significant and unusual items which management believes
are not necessarily reflective of operational performance during a period.
Management finds the information useful when analyzing financial results in
order to appropriately evaluate the performance of the business without the
impact of significant and unusual items. 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.
13 weeks ended 39 weeks ended
October 29, October 30, October 29, October 30,
(in millions) 2022 2021 2022 2021
Operating income $ 48.4 $ 106.9 $ 235.4 $ 501.0
Gain on sale of in-house finance receivables - - - (1.4)
Credits related to transformation plan - (1.7) - (3.3)
Asset impairments, net (1) - - - (0.3)
Acquisition and integration-related costs (2) 9.5 - 20.3 1.1
Litigation charges (3) - - 190.0 -
Non-GAAP operating income $ 57.9
(1) Includes ROU asset impairment gains, net recorded due to various impacts of COVID-19 to the Company's business and related gains on terminations or modifications of leases, resulting from previously recorded impairments of the ROU assets in Fiscal 2021. (2) Acquisition and integration-related costs include the impact of the fair value step-up for inventory from Diamonds Direct and Blue Nile; as well as direct transaction-related and integration costs, primarily professional fees and severance, incurred for the acquisition of Blue Nile in Fiscal 2023; Fiscal 2022 included direct transaction-related costs for the acquisition of Rocksbox.
(3) Refer to Note 21 for additional information.
40
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LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company's primary sources of liquidity are cash on hand, cash provided by operations and availability under its senior unsecured asset-based revolving credit facility (the "ABL Revolving Facility"). As ofOctober 29, 2022 , the Company had$327.3 million of cash and cash equivalents,$147.7 million of outstanding debt related to the Senior Notes, and no outstanding borrowings on the ABL Revolving Facility. The available borrowing capacity on the ABL Revolving Facility was$1.3 billion as ofOctober 29, 2022 . The tenets of Signet's capital strategy are: 1) investing in its business to drive growth in line with the Company's overall business strategy; 2) ensuring adequate liquidity through a strong cash position and financial flexibility under its debt arrangements; and 3) returning excess cash to shareholders. Over time, Signet's strategy is to sustain an adjusted leverage ratio (a non-GAAP measure as defined in Item 7 of the Signet's Fiscal 2022 Annual Report on Form 10-K) below 2.75x.
Investing in growth
Since the Company's transformation strategies began in Fiscal 2019, the Company delivered substantially against its strategic priorities to establish the Company as the OmniChannel jewelry category leader and position its business for sustainable long-term growth. The investments and new capabilities built during the past three years laid the foundation for stronger than expected results during Fiscal 2022, including prioritizing digital investments in both technology and talent, enhancing the Company's new and modernized eCommerce platform and optimizing a connected commerce shopping journey for its customers. The Company's cash discipline has led to more efficient working capital, through both the extension of payment days with the Company's vendor base, as well as through improvement in productivity and overall health of the Company's inventory, utilizing a disciplined approach to drive continued reductions in sell down and clearance inventory. In addition, structural cost reductions since the Company's transformation strategy began in Fiscal 2019 have generated annual structural costs savings of over$450 million . As the Company continues to implement and execute on the next phase of its strategy, Inspiring Brilliance, it will continue to focus on working capital efficiency, optimizing its real estate footprint, and prioritizing transformational productivity to drive future cost savings opportunities, all of which are expected to be used to fuel strategic investments, grow the business, and enhance liquidity. In addition, the Company invested over$190 million for capital investments in Fiscal 2022, which included approximately$130 million for capital expenditures and approximately$60 million related to investments in digital and cloud IT. Additional capital investments of up to$215 million are planned for Fiscal 2023, which is lower than previously anticipated, reflecting the impact of external supply chain constraints. In addition, during Fiscal 2022, the Company made two acquisitions in line with its Inspiring Brilliance strategy. OnMarch 29, 2021 , the Company acquired all of the outstanding shares ofRocksbox Inc. ("Rocksbox"), a jewelry rental subscription business, for cash consideration of$14.6 million , net of cash acquired. The acquisition was driven by Signet's initiatives to accelerate growth in its services offerings. OnNovember 17, 2021 , the Company acquired Diamonds Direct for cash consideration of$503.1 million , net of cash acquired. The acquisition of Diamonds Direct accelerated the Company's growth in accessible luxury and bridal. During the third quarter of Fiscal 2023, the Company acquired all of the outstanding shares of Blue Nile, subject to the terms of a stock purchase agreement ("Agreement") entered into onAugust 5, 2022 . The total cash consideration is$395.9 million , net of cash acquired, including purchase price adjustments for working capital, and remains subject to customary post-closing adjustments per the Agreement. Blue Nile is a leading online retailer of engagement rings and fine jewelry. The strategic acquisition of Blue Nile accelerates Signet's efforts to enhance its connected commerce capabilities and broaden its digital leadership across the jewelry category - all to further achieve meaningful operating synergies for the consumers and create value for shareholders. See Note 4 for further details.
Liquidity and financial flexibility
During Fiscal 2022, the Company made significant progress in line with its
Inspiring Brilliance growth strategy through two key financial milestones.
First, the Company renegotiated its
described in Note 18, to extend the maturity until 2026 and allow overall
greater financial flexibility to grow the business and provide an additional
option to address the 2024 maturities for its 4.70% senior unsecured notes
("Senior Notes") and Preferred Shares, if necessary.
Second, as described in Note 11, the Company entered into amended and restated receivable purchase agreements with CarVal andCastlelake regarding the purchase of add-on receivables on such Investors' existing accounts, as well as the purchase of the Company-owned credit card receivables portfolio for accounts that had been originated through Fiscal 2021. These agreements provide Signet with improved terms for the next two years, as well as remove consumer credit risk from the balance sheet. InMarch 2022 , the Company entered into amended and restated receivable purchase agreements with the Investors regarding the purchase of add-on receivables on such Investors' existing accounts. Under the amended and restated agreements, TheBank of Missouri will be the issuer for the add-on receivables on these existing accounts and the Investors will purchase the receivables from TheBank of Missouri . In 41 -------------------------------------------------------------------------------- Table of Contents conjunction with the above agreements inMarch 2022 , the Company entered into agreements with the Investors to transfer all existing cardholder accounts previously originated by Signet to TheBank of Missouri . Therefore, the Company no longer originates any credit receivables with customers.
Returning excess cash to shareholders
The Company remains committed to its goal to return excess cash to shareholders. During Fiscal 2022 and Fiscal 2023 to date, the Company has declared all preferred share dividends payable in cash, and beginning in the second quarter of Fiscal 2022, elected to reinstate the dividend program on its common shares. The Company also increased its common dividends from$0.18 per share in Fiscal 2022 to$0.20 per share beginning in Fiscal 2023. In addition, during the third quarter of Fiscal 2022, the Board of Directors authorized a reinstatement of share repurchases under the 2017 Program, increased authorization under the 2017 Program by approximately$560 million during Fiscal 2022 and authorized an additional$500 million inJune 2022 . Since the reinstatement of share repurchases, the Company has repurchased approximately 8.3 million shares for$623.0 million under the 2017 Program, including$311.2 million to date in Fiscal 2023. See Note 7 for further information related to the share repurchases. The Company believes that cash on hand, cash flows from operations and available borrowings under the ABL Revolving Facility will be sufficient to meet its ongoing business requirements for at least the 12 months following the date of this report, including funding working capital needs, projected investments in the business (including capital expenditures), debt service, and returns to shareholders through either dividends or share repurchases.
Primary sources and uses of operating cash flows
Operating activities provide the primary source of cash for the Company and are influenced by a number of factors, the most significant of which are operating income and changes in working capital items, such as:
•changes in the level of inventory as a result of sales and other strategic
initiatives;
•changes and timing of accounts payable and accrued expenses, including variable
compensation; and
•changes in deferred revenue, reflective of the revenue from performance of
extended service plans.
Signet derives most of its operating cash flows through the sale of merchandise and extended service plans. As a retail business, Signet receives cash when it makes a sale to a customer or when the payment has been processed by Signet or the relevant bank if the payment is made by third-party credit or debit card. As further discussed in Note 11, the Company has outsourced its entire credit card portfolio, and it receives cash from its outsourced financing partners (net of applicable fees) generally within two days of the customer sale. Offsetting these receipts, the Company's largest operating expenses are the purchase of inventory, store occupancy costs (including rent), and payroll and payroll-related benefits.
Summary cash flow
The following table provides a summary of Signet's cash flow activity for Fiscal
2023 and Fiscal 2022:
39 weeks ended
October 29, October 30,
(in millions) 2022 2021
Net cash (used in) provided by operating activities $ (155.5) $ 483.9
Net cash used in investing activities (508.4) (63.0)
Net cash used in financing activities (407.5) (78.1)
(Decrease) increase in cash and cash equivalents $
(1,071.4)
Cash and cash equivalents at beginning of period$ 1,418.3 $ 1,172.5 (Decrease) increase in cash and cash equivalents (1,071.4) 342.8 Effect of exchange rate changes on cash and cash equivalents (19.6) 1.6 Cash and cash equivalents at end of period$ 327.3 $ 1,516.9 Operating activities Net cash used in operating activities was$155.5 million during the 39 weeks endedOctober 29, 2022 compared to net cash provided by operating activities of$483.9 million in the prior year comparable period. This overall decrease is primarily due to lower income 42
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and higher cash outflows for working capital compared to the prior period. The
significant movements in operating cash flows are further described below:
•Net income was$99.4 million compared to net income of$455.6 million in the prior year period, a decrease of$356.2 million . This decrease was primarily related to non-cash, pre-tax pension settlement charges of$132.8 million and pre-tax accrued litigation charges of$190.0 million during Fiscal 2023. See Note 20 for details. •Changes in current income taxes was a use of$206.1 million in the current period compared to a use of$67.3 million in the prior year. The year over year change was primarily the result of income tax payments of$127.2 million in the current year and lower overall pre-tax income. Refer to Note 10 for more information.
•During the prior period, the Company sold its existing customer in-house
finance receivables, as well as collected the payment obligation of the
remaining 5% of the receivables previously sold in
cash proceeds of
•Cash used by inventory was$305.6 million compared to cash used of$112.1 million in the prior year period driven by the replenishment of inventories to healthier in-stock levels. Overall inventory, excluding Diamonds Direct and Blue Nile, has decreased approximately$50 million compared to the same period in the prior year. •Cash used by accounts payable was$177.6 million compared to a source of$36.8 million in the prior year period. Accounts payable decreased in the current year as a result of merchandise replenishment during the first half of the year. In addition, the Company continued to utilize extended terms with its vendors and has maintained these extended terms throughout the current year.
Investing activities
Net cash used in investing activities for the 39 weeks endedOctober 29, 2022 was$508.4 million compared to a use of$63.0 million in the prior period. Cash used in Fiscal 2023 was primarily related to the acquisition of Blue Nile for$395.9 million , net of cash acquired, and capital expenditures of$94.3 million . Capital expenditures are associated with new stores, remodels of existing stores, and strategic capital investments in digital and IT. Signet has planned Fiscal 2023 capital investments of up to$215 million , of which approximately$135 million relates to capital expenditures for technology and banner differentiation, and approximately$80 million relates to digital and cloud innovation. In Fiscal 2022, net cash used in investing activities included$14.6 million for the acquisition of Rocksbox.
Stores opened and closed in the 39 weeks ended
Store count by segment January 29, 2022 Openings (2) Closures October 29,
2022
North America segment (1) 2,506 53 (47)
2,512
International segment (1) 348 1 (15) 334 Signet 2,854 54 (62) 2,846 (1) The net change in selling square footage for Fiscal 2023 year to date for theNorth America and International segments was 1.3% and (3.5%), respectively. (2) Includes 23 locations acquired from Blue Nile in Fiscal 2023.
Financing activities
Net cash used in financing activities for the 39 weeks endedOctober 29, 2022 was$407.5 million , consisting of the repurchase of$311.2 million of common shares, payments for withholding taxes related to the settlement of the Company's share-based compensation awards of$44.3 million , and preferred and common share dividends paid of$52.0 million . Net cash used in financing activities for the 39 weeks endedOctober 30, 2021 was$78.1 million , primarily due to the repurchase of$41.1 million of common shares and preferred and common share dividends paid of$25.9 million .
Movement in cash and indebtedness
Cash and cash equivalents atOctober 29, 2022 were$327.3 million compared to$1.5 billion as ofOctober 30, 2021 . Signet has cash and cash equivalents invested in various 'AAA' rated government money market funds and at a number of large, highly-rated financial institutions. The amount invested in each liquidity fund or at each financial institution takes into account the credit rating and size of the liquidity fund or financial institution and is invested for short-term durations. As further described in Note 18, onJuly 28, 2021 , the Company entered into an agreement to amend the ABL Revolving Facility. The amendment extends the maturity of the ABL Revolving Facility toJuly 28, 2026 and allows the Company to increase the size of the ABL Revolving Facility by up to$600 million . 43
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AtOctober 29, 2022 andOctober 30, 2021 , Signet had$147.7 million and$147.9 million , respectively, of outstanding debt, consisting primarily of the Senior Notes.
Available borrowing capacity under the ABL Revolving Facility was
as of
Net cash was$180.0 million as ofOctober 29, 2022 compared to net cash of$1.4 billion as ofOctober 30, 2021 . Refer to the non-GAAP measures discussed above for the definition of net cash and reconciliation to its most comparable financial measure presented in accordance with GAAP.
As of
in compliance with all debt covenants.
SEASONALITY
Signet's business is seasonal, with the fourth quarter historically accounting for approximately 35-40% of annual sales as well as accounting for a substantial portion of the annual operating profit. The "Holiday Season" consists of results for the months of November and December, with December being the highest volume month of the year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with US GAAP 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 financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to the valuation of inventories, deferred revenue, derivatives, employee benefits, income taxes, contingencies, asset impairments, leases, indefinite-lived intangible assets, depreciation and amortization of long-lived assets and accounting for business combinations. Management bases the estimates and judgments on historical experience and various other factors believed to be reasonable under the circumstances. Actual results may differ from these estimates. There have been no material changes to the critical accounting policies and estimates disclosed in Signet's Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 filed with theSEC onMarch 17, 2022 .
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company and certain of its subsidiaries, which are listed on Exhibit 22.1 to this Quarterly Report on Form 10-Q, have guaranteed obligations under the Senior Notes. The Senior Notes were issued bySignet UK Finance plc (the "Issuer"). The Senior Notes rank senior to the Preferred Shares (as defined in Note 6) and Common Shares. The Senior Notes are effectively subordinated to our existing and future secured indebtedness to the extent of the assets securing that indebtedness. The Senior Notes are fully and unconditionally guaranteed on a joint and several basis by the Company, as the parent entity (the "Parent") of the Issuer, and certain of its subsidiary guarantors (each, a "Guarantor" and collectively, the "Guarantors"). The Senior Notes are structurally subordinated to all existing and future debt and other liabilities, including trade payables, of our subsidiaries that do not guarantee the Senior Notes (the "Non-Guarantors"). The Non-Guarantors will have no obligation, contingent or otherwise, to pay amounts due under the Senior Notes or to make funds available to pay those amounts. Certain Non-Guarantors may be limited in their ability to remit funds to us by means of dividends, advances or loans due to required foreign government and/or currency exchange board approvals or limitations in credit agreements or other debt instruments of those subsidiaries. The Guarantors jointly and severally irrevocably and unconditionally guarantee on a senior unsecured basis the performance and full and punctual payment when due of all obligations of Issuer, as defined in the Indenture, in accordance with the Senior Notes and the related Indentures, as supplemented, whether for payment of principal of or interest on the Senior Notes when due and any and all costs and expenses incurred by the trustee or any holder of the Senior Notes in enforcing any rights under the guarantees (collectively, the "Guarantees"). The Guarantees and Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions. Although the Guarantees provide the holders of Senior Notes with a direct unsecured claim against the assets of the Guarantors, under US federal bankruptcy law and comparable provisions of US state fraudulent transfer laws, in certain circumstances a court could cancel a Guarantee and order the return of any payments made thereunder to the Guarantors or to a fund for the benefit of its creditors. A court might take these actions if it found, among other things, that when the Guarantors incurred the debt evidenced by their Guarantee (i) they received less than reasonably equivalent value or fair consideration for the incurrence of the debt and (ii) any one of the following conditions was satisfied: •the Guarantor entity was insolvent or rendered insolvent by reason of the incurrence; •the Guarantor entity was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or 44 -------------------------------------------------------------------------------- Table of Contents •the Guarantor entity intended to incur or believed (or reasonably should have believed) that it would incur, debts beyond its ability to pay as those debts matured. In applying the above factors, a court would likely find that a Guarantor did not receive fair consideration or reasonably equivalent value for its Guarantee, except to the extent that it benefited directly or indirectly from the issuance of the Senior Notes. The determination of whether a Guarantor was or was not rendered insolvent when it entered into its Guarantee will vary depending on the law of the jurisdiction being applied. Generally, an entity would be considered insolvent if the sum of its debts (including contingent or unliquidated debts) is greater than all of its assets at a fair valuation or if the present fair salable value of its assets is less than the amount that will be required to pay its probable liability on its existing debts, including contingent or unliquidated debts, as they mature.
If a court canceled a Guarantee, the holders of the Senior Notes would no longer
have a claim against that Guarantor or its assets.
Each Guarantee is limited, by its terms, to an amount not to exceed the maximum
amount that can be guaranteed by the applicable Guarantor without rendering the
Guarantee, as it relates to that Guarantor, voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally.
Each Guarantor is a consolidated subsidiary of Parent at the date of each
balance sheet presented. The following tables present summarized financial
information for Parent, Issuer, and the Guarantors on a combined basis after
elimination of (i) intercompany transactions and balances among Parent, Issuer,
and the Guarantors and (ii) equity in earnings from and investments in any
Non-Guarantor.
Summarized Balance Sheets
(in millions) October 29, 2022 January 29, 2022
Total current assets $ 2,963.1 $ 3,507.0
Total non-current assets 2,081.7 2,245.3
Total current liabilities 2,352.7 2,309.3
Total non-current liabilities 3,345.5 3,407.0
Redeemable preferred stock 653.4 652.1
Total due from Non-Guarantors (1) 518.9 311.4
Total due to Non-Guarantors (1) 1,819.8 1,666.9
(1) Amounts included in asset and liability subtotals above.
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