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Signet Jewelers sags on word of costly "transformation plan" that will hurt fiscal 2019 results

"Signet Path to Brillance" involves store closings and relocations, cost cuts and the sale of credit card receivables
Kay Jewelers store exterior
Plan looks to "drive long-term sustainable, profitable sales growth and create value for shareholders"

Signet Jewelers Ltd (NYSE:SIG) shares are sagging badly on news that the giant jewelry retailer is embarking on a three-year "comprehensive transformation plan" and is anticipating results in the current fiscal year that will be well below the figures for fiscal 2018, it reported today.

Signet shares were down more than 17% in late-morning trading on Wednesday, at US$39.53 a share.

READ: Signet Jewelers Ltd shares slide after holiday sales dip

Signet CEO Virginia Drosos acknowledged that fiscal 2018 "was a challenging year for Signet."

"We gained sales momentum in our Zales banner in the fourth quarter as our strategic initiatives began to take hold, but we experienced challenges at our Kay and Jared banners, including execution issues related to the first phase of our credit outsourcing transaction," Drosos said.

In an effort to "drive long-term sustainable, profitable sales growth and create value for shareholders" going forward, Signet said it is implementing a transformation plan it is calling "Signet Path to Brilliance."

The plan includes store closings and relocations, reductions in what Signet called "non-customer facing costs" and the sale of its non-prime in-house credit card receivables.

Store closings galore ahead

Pending the outcome of an evaluation of its real estate holdings, Signet said it expects to close more than 200 stores by the end of fiscal 2019.

Because an estimated 75% of stores that Signet expects to close are within the same mall as another Signet banner, the company said it expects approximately 30% of revenue from closed stores to transfer to remaining Signet stores.

Signet said its cost reduction actions are expected to produce US$200mln to US$225mln in net cost savings over the next three fiscal years.

The company's preliminary estimates for pre-tax charges related to cost-reduction activities over the next three fiscal years are in the range of US$170mln to US$190mln, of which US$105mln to US$120mln are expected to be cash charges.

The transformation plan is expected to deliver net costs savings in fiscal 2019 of US$85mln to US$100mln, with further incremental cost reductions of US$115mln to US$125mln by the end of the three-year program. Signet said a majority of the fiscal 2019 savings are expected to be realized in the second half of the fiscal year.

The company's preliminary estimates for pre-tax charges in fiscal 2019 related to cost-reduction activities, are in a range of US$125mln to US$135mln, of which US$60mln to US$65mln are expected to be cash charges.

Sale of credit card receivables to produce loss

Signet said it has agreed to sell its non-prime credit receivables to investment funds managed by CarVal Investors, which Signet describes as "a leading global alternative investment fund manager."

The retailer said the sale is expected to result in US$401mln to $435mln of proceeds, inclusive of the servicing expense on these receivables. Signet said it intends to use the proceeds from the sale of its non-prime receivables to repurchase shares in fiscal 2019, subject to market conditions.

Signet expects to reclassify the non-prime credit receivables to assets held for sale in the first quarter of fiscal 2019 and plans to recognize a loss on the transaction related to the difference between the net book value and the fair value of the receivables at which they will be sold. Signet estimates that US$140mln of the loss will be recognized in the first quarter of fiscal 2019. The total loss in connection with the transaction is estimated to be US$165mln to US$170mln.

Online push on tap

Besides its cost-reduction efforts, Signet said it also "intends to invest in enhancing the customer experience across platforms and becoming the leading jewelry retailer across channels," with a particular eye on online sales. Among other things, Signet said it plans to enhance online appointment booking "and local store onine viewing capability."

"With these investments, Signet aims to grow its digital sales as a percentage of total revenues to at least 15% in fiscal year 2021 compared to 8% in fiscal year 2018," the company said.

CEO calls fiscal 2019 a 'transition year'

CEO Drosos said fiscal 2019 "will be an important transition year as we implement our transformation plan, and we expect to see improved operational and financial performance beginning in fiscal 2020." However, Signet's guidance for fiscal 2019 is for results that won't match those of the fiscal year that ended February 3, 2018.

Signet said it expects same-store sales will be down by the low- to mid-single digits on a percentage basis, with total sales in the range of US$5.9bn to US$6.1bn. It estimates GAAP diluted earnings per share in fiscal 2019 in a range of zero US cents to 60 US cents, and non-GAAP diluted earnings per share in a range of US$3.75 to US$4.25.

Those results would be below the figures Signet reported today for fiscal 2018, as it posted net income for the year of US$486.4mln, or US$7.44 a share, on revenue of US$6.25bn.

In the latest fourth quarter, Signet posted net income of US$343mln, or US$5.24 a share, which was up 19% from earnings of US287.8mln, or US$3.92 a share, in the fourth quarter of fiscal 2017, when there were fewer shares outstanding. Revenue rose a fraction, to US$2.29bn from US$2.27bn.

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