Signet Jewelers Limited (NYSE:SIG), the world’s largest retailer of diamond jewelry, last week announced its results for the 13 weeks ended August 1, 2020 (“second quarter Fiscal 2021”).
“Sales improved sequentially throughout the second quarter as we reopened stores and remained agile and innovative in these unprecedented times. During the quarter, we also scaled our new virtual selling model, improved our merchandise assortment, and enhanced our targeted digital marketing to a strong consumer response,” said Virginia C. Drosos, Chief Executive Officer. “While same store sales were down 31.3% in the quarter given store closures, same store sales turned positive in late Q2 as we reached scale on store re-openings while driving high double-digit growth in eCommerce. Momentum has continued into Q3 with preliminary August same store sales of 10.9% and eCommerce growth of 65.2%.
In response to COVID-19 impacts, we quickly pivoted to accelerate our OmniChannel transformation while also focusing on cash preservation. This allowed us to further invest in ‘digital-first’ initiatives, including new virtual selling capabilities. In the second quarter, we served more than 300,000 customers through virtual consultations which achieved higher than historical conversion rates. We also increased our eCommerce distribution throughput five-fold and will continue to invest in digital capabilities to accelerate growth and position Signet to gain market share.
I am incredibly proud to be part of this company and want to thank each and every team member for their extraordinary contributions. We have been consistently guided by our purpose and core values, prioritizing the health and safety of our employees and customers and speaking out against racial injustice and inequality. We continue to keep all of those who are suffering from the COVID-19 pandemic in our thoughts and prayers and appreciate the resilience and compassion of all front-line workers.”
Second Quarter Fiscal 2021 Highlights
- Q2 same store sales (“SSS”) down 31.3% , reflecting eCommerce growth of 72.1% year over year. Brick and Mortar sales improved sequentially as store openings accelerated from approximately 20% open by end May, to 75% open by end June, and 90% open by mid-July. Preliminary August SSS are 10.9% with eCommerce growth of 65.2%.
- Net structural cost savings are on track to exceed $100 million in FY21. Now in the third year of Path to Brilliance, the Company expects net savings of at least $285 million versus its original target of $225 million.
- GAAP earnings per share (“EPS”) of $(1.73), reflects a pre-tax impairment charge of $0.39.
- Non-GAAP diluted EPS of $(1.13).
Business and Strategy Update
Consistent with the Company’s digital first strategy, Signet increased investment in Signet’s OmniChannel platform, driving growth and leveraging scale to position it for increased market share and an even stronger leadership position in the category. The Company has implemented a full-time virtual selling team, as well as empowered more than 15,000 store associates to engage with customers via virtual selling from their homes or in their respective stores. Signet’s investment in virtual selling is producing higher levels of conversion on digital and retail foot traffic. While the macro environment remains uncertain, the Company believes that it is prepared, through both its virtual and physical footprints, to serve customers wherever they want to shop and however this upcoming holiday season unfolds.
Signet’s physical footprint remains a key component of its competitive strategy. The Company currently has more than 90% of its total fleet open with safety prioritized through Signet’s new Love Takes Care initiative that includes safety protocols developed with leading healthcare professionals. The Company believes the safe shopping environment provided by the Company’s brick and mortar stores is contributing to sequential monthly sales improvements. Signet has closed 293 of the previously announced 380 stores in this fiscal year’s footprint optimization effort.
The Company is maintaining cost containment efforts and net structural cost savings are on track to exceed $100 million in FY21. Now in the third year of Path to Brilliance, the Company expects net savings of at least $285 million versus its original target of $225 million. A reduction in force this quarter contributed to these cost savings. These difficult decisions were made thoughtfully to better align the workforce to a more streamlined structure and digitally focused cultures.
Second Quarter 2021 Financial Highlights
Signet’s total sales were $888.0 million, down 34.9% year over year, in the 13 weeks ended August 1, 2020 on a reported basis and down 34.8% on a constant currency basis. Total same store sales declined 31.3% year over year. eCommerce sales were $270.1 million, up 72.1%. Brick and mortar same store sales declined 46.0%. For safety reasons, the Company’s design and service centers were closed until later in the quarter. Because of this, revenue recognition related to Signet’s extended service plan programs was lower than last year and negatively impacted same store sales by roughly 450 basis points.
By operating segment:
North America
- North America same store sales declined 30.6%. Average transaction value (“ATV”) increased 2.0% and the number of transactions declined 28.1%.
- eCommerce sales grew 72.7%. Brick and mortar same store sales declined 45.3%.
- North America payment plan participation rate, including both credit and leasing sales, for Q2 was 40.2% versus 51.4% in the prior year second quarter. The year over year decline continues to reflect a greater proportion of eCommerce sales in the quarter.
International
- International same store sales decreased 38.8%. ATV increased 11.4% and the number of transactions declined 42.8%.
- eCommerce sales grew 65.6%, with brick and mortar same store sales declining 54.6%.
GAAP gross margin was $224.3 million, or 25.3% of sales, down 830 bps versus the prior year quarter. The majority of gross margin rate decline is due to a deleveraging on fixed costs resulting from lower sales. The remainder of the decline resulted from Signet’s lower revenue recognition relating to extended service plan programs. The rate decline was partially offset through structural cost savings, lower occupancy costs and lower inventory related costs.
SGA was $265.9 million, or 29.9% of sales, was 30 bps favorable to last year’s SGA of $411.4 million. The improvement to SGA was primarily driven by lower labor costs and lower advertising expense.
GAAP operating loss was $(89.7) million or (10.1)% of sales. The loss compares to $(22.4) million, or (1.6)% of sales in the prior year second quarter.
Non-GAAP operating loss was $(41.7) million, or (4.7)% of sales, compared to Non-GAAP operating income of $53.1 million, or 3.9% of sales in prior year second quarter. Non-GAAP operating loss excluded $28.7 million in restructuring charges related to the Path to Brilliance transformation plan as well as $20.3 million related to the impairment of ROU assets and property, plant and equipment.
The current quarter GAAP income tax benefit was $17.2 million compared to income tax expense of $3.8 million in the prior year second quarter. On a non-GAAP basis the income tax benefit was $0.2 million.
GAAP EPS was $(1.73), including $0.55 in restructuring charges related to the Path to Brilliance transformation plan. Excluding restructuring and asset impairment charges (and related tax effects), EPS was $(1.13) on a non-GAAP basis.
GAAP and non-GAAP EPS in the quarter are 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 second quarter net loss.
Balance Sheet and Statement of Cash Flows Highlights
Signet continues to focus on cash in this economic climate, as the Company believes it is the first defense against uncertainty and protects its ability to fund growth initiatives. Continued cost diligence and working capital efficiency led to a reduction in inventory of $79 million to the prior year second quarter and cash flow from operating activities of $156.1 million.
Cash and cash equivalents were $1.20 billion, compared to $271.5 million at the prior year quarter end. Signet notes that long term debt of $1.34 billion, compared to $628.2 million at the prior year quarter end.
Quarterly Dividend:
Signet’s Board of Directors has elected to maintain the temporary suspension of the dividend program on the common shares and has elected to pay the November quarterly dividend on its preference shares in kind.
Outlook:
While Signet is encouraged by customers’ response to the Company’s digital first strategy and investments, looking to the second half of this fiscal year, the Company is not providing financial guidance. This is due to the continuing uncertainty surrounding multiple factors including the magnitude and potential resurgence of COVID-19 in key trade areas, extended duration of heightened unemployment, supply chain disruptions and macro or governmental influences on consumers’ ability to spend, particularly in discretionary categories like jewelry. Further, there can be no assurance that August sales trends will continue for the remainder of the third quarter and are not indicative of future performance.
