SIGNET JEWELERS LTD (SIG) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis in this Item 7 are 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 consolidated financial statements and notes to the consolidated financial statements included in Item 8. This discussion contains forward-looking statements and information. The Company's actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in “Risk Factors” and “Forward-Looking Statements.”

This management's discussion and analysis provides comparisons of material changes in the consolidated financial statements for Fiscal 2022 and Fiscal 2021. For a comparison of Fiscal 2021 and Fiscal 2020, refer to Item 7 included in our Annual Report on Form 10-K for the year ended January 30, 2021 filed with the SEC on March 19, 2021.

OVERVIEW

Impacts of COVID-19

In December 2019, a novel coronavirus (“COVID-19”) was identified in Wuhan, China. During Fiscal 2021, the Company experienced significant disruption to its business, specifically in its retail store operations through temporary closures during the first half of Fiscal 2021. By the end of the third quarter of Fiscal 2021, the Company had re-opened substantially all of its stores. However, during the fourth quarter of Fiscal 2021, both the UK and certain Canadian provinces re-established mandated temporary closure of non-essential businesses. The UK stores began to reopen in April 2021 and Canadian stores began reopening in the second quarter of Fiscal 2022. To date, the Company’s operations have not been significantly impacted by the resurgence of COVID-19 or any variants that began emerging in the second quarter of Fiscal 2022. The Company continues to actively monitor and manage the situation related to its store and support center operations focusing on the health and safety of its employees, customers, suppliers and shareholders, and considering all guidelines from state and federal government and health organizations.

COVID-19 significantly altered the retail climate and the Company has been navigating that change by accelerating its application of the key strategic initiatives developed over the past few years including the Company’s focus on becoming an OmniChannel leader, focusing on the needs of its customers, removing non-customer facing costs, and optimizing its real estate footprint. The Company continues to maintain its cost diligence efforts as the Company executes on its Inspiring Brilliance strategy, as further described below and in the Purpose and Strategy section within Item 1 this Annual Report.

During the past two years, the Company also took numerous actions to maximize its financial flexibility, bolster its liquidity and strengthen its balance sheet, both strategically and as temporary measures as a result of COVID-19. Refer to the Liquidity and Capital

Resources section below for further information.

Outlook and strategy

Signet’s sales grew 28.6% during the fourth quarter of Fiscal 2022 compared to the same quarter of Fiscal 2021, as the Company’s organic growth this quarter was bolstered by the addition of Diamonds Direct USA Inc. (“Diamonds Direct”) to Signet’s portfolio on November 17, 2021. This growth also reflects sustainable enhancements to Signet’s connected commerce capabilities, digital marketing effectiveness, the strength of Signet’s banner differentiation and inventory management. The Company’s focus on its connected commerce shopping experience, both online and in-store, helped maintain strong conversion rates and improve average transaction values during the fourth quarter of Fiscal 2022. During 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. As described in the Purpose and Strategy section within Item 1 this Annual Report, through its Inspiring Brilliance strategy, the Company will focus on leveraging its core strengths that it developed over the past few years with the goal of creating a broader mid-market for jewelry and increasing Signet’s share of that larger market as the industry leader.

Although the Company has not experienced a significant impact to Fiscal 2022 results, Signet continues to expect some shift of consumer discretionary spending away from the jewelry category reflecting decelerating levels of consumer confidence and pent-up demand for experience-oriented categories in Fiscal 2023; however, the timing and magnitude of any shift is difficult to predict. Following a year of heightened growth, jewelry industry revenues are expected to flat to down slightly in the coming year. However, the Company believes that its banner value propositions, including the Diamonds Direct addition to Signet‘s portfolio, the strength of the Company’s product assortment and its investments in digital and flexible fulfillment methods are expected to continue fueling a strong response from customers across merchandise categories and banners in Fiscal 2023. Furthermore, the Company will continue its diligent and effective efforts to drive structural cost savings and mitigate supply chain disruption.

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The full extent of the COVID-19 pandemic impacts on the Company’s business in Fiscal 2023 or longer term, and whether the strong results in Fiscal 2022 will continue, remains unclear. Continued uncertainties exist that could impact the Company’s results of operations or cash flows, such as potential resurgence of COVID-19 in key trade areas, the ability to recruit and retain qualified team members, organized retail crime, extended duration of heightened unemployment in certain areas, pricing and inflationary environment changes impacting the Company (including, but not limited to, materials, labor, fulfillment and advertising costs) or the consumers’ ability to spend. In addition, although the Company believes economic stimulus measures have had a positive impact on current year results, it is uncertain how long this impact will continue.

Diamonds Direct acquisition

On November 17, 2021, the Company finalized its acquisition of Diamonds Direct for initial cash consideration of $501.2 million, net of cash acquired, and subject to customary post-closing adjustments per the Transaction Agreement (“Transaction Agreement”). Diamonds Direct is an off-mall, destination jeweler in the US operating in 22 retail locations with a highly productive, efficient operating model with demonstrated growth and profitability. Diamonds Direct was 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.

Market and operating conditions

The Company faces a highly competitive and dynamic retail landscape throughout the geographies where it does business, as well as a challenging macro-economic and political environment in the UK market. Refer to Item 1 for further information on the Company’s business, markets and strategy.

Exchange translation impact

Monthly average exchange rates are used to prepare the Company’s consolidated statements of operations. In Fiscal 2023, it is anticipated a five percent movement in the British pound to US dollar exchange rate would impact the Company’s income before income taxes by approximately $0.7 million, while a five percent movement in the Canadian dollar to US dollar exchange rate would impact the Company’s income before income taxes by approximately $1.0 million.

RESULTS OF OPERATIONS

Fiscal 2022 Overview

Similar to many other retailers, Signet follows the retail 4-4-5 reporting calendar. Both Fiscal 2022 and Fiscal 2021 were 52 week reporting periods.

Same store sales

Management considers same store sales useful as it is a major benchmark used by investors to judge performance within the retail industry. Same store sales growth is calculated by comparison of sales in stores that were open in both the current and the prior fiscal year. Sales from stores that have been open for less than 12 months are excluded from the comparison until their 12-month anniversary. Sales from stores that were acquired during the period and have not been included in the Company’s results for both the current and prior period presented are also excluded from same store sales. Sales after the 12-month anniversary are compared against the equivalent prior period sales within the comparable store sales comparison. Stores closed in the current financial period are included up to the date of closure and the comparative period is correspondingly adjusted. Stores that have been relocated or expanded, but remain within the same local geographic area, are included within the comparison with no adjustment to either the current or comparative period. Stores that have been refurbished are also included within the comparison except for the period when the refurbishment was taking place, when those stores are excluded from the comparison both for the current year and for the comparative period. Same store sales are also impacted by certain accounting adjustments to sales, primarily related to the deferral of revenue from the Company’s extended service plans.

As discussed in the Overview section above, because of COVID-19, the Company temporarily closed all of its stores in the first quarter of Fiscal 2021, as well as certain stores in the UK and Canada during the fourth quarter. Same store sales as presented in the results of operations below for Fiscal 2021 have not been adjusted to remove the impact of these temporary store closures.

eCommerce sales include all sales with customers that originate online, including direct to customer, ship to store, and buy online, pick-up in store ("BOPIS"). eCommerce sales are included in the calculation of same store sales for the period and the comparative figures from the anniversary of the launch of the relevant website. Brick and mortar same store sales are calculated by removing the eCommerce sales from the same store sales calculation described above. Comparisons at the divisional level are made in local

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currency and consolidated comparisons are made at constant exchange rates and exclude the effect of exchange rate movements by recalculating the prior period results as if they had been generated at the weighted average exchange rate for the current period. Same store sales exclude the 53rd week in the fiscal year in which it occurs.

Cost of sales and gross margin

Cost of sales is mostly composed of merchandise costs (net of discounts and allowances). Cost of sales also contains:

•Occupancy costs such as rent, common area maintenance, depreciation and real estate taxes.

•Store operating expenses such as utilities, displays and third-party merchant credit costs.

•Distribution and warehousing costs including freight, processing, inventory shrinkage and related payroll.

As the classification of cost of sales or selling, general and administrative expenses varies from retailer to retailer, Signet’s gross margin percentage may not be directly comparable to other retailers.

Factors that influence gross margin include pricing, promotional environment, changes in merchandise costs, changes in non-merchandise components of cost of sales (as described above), changes in sales mix, foreign exchange, gold and currency hedges and the economics of services such as repairs and extended service plans. The price of diamonds varies depending on their size, cut, color and clarity. Signet uses gold and currency hedges to reduce its exposure to market volatility in the cost of gold and the British pound to the US dollar exchange rate, but it is not able to do so for diamonds. For gold and currencies, the hedging period can extend up to 24 months, although the majority of hedge contracts will normally be for a maximum of 12 months.

Signet uses an average cost inventory methodology and, as jewelry inventory turns slowly, the impact of movements in the cost of diamonds and gold takes time to be fully reflected in the gross margin. Signet’s inventory turns faster in the fourth quarter than in the other three quarters, therefore, changes in the cost of merchandise is more impactful on the gross margin in that quarter. Furthermore, Signet’s hedging activities result in movements in the purchase cost of merchandise taking some time before being reflected in the gross margin. An increase in inventory turn would accelerate the rate at which commodity costs impact gross margin.

Selling, general and administrative expense (“SG&A”)

SG&A expense primarily includes store staff and store administrative costs as well as advertising and promotional costs. It also includes field support center expenses such as information technology, finance, eCommerce and other operating expenses (including credit losses) not specifically categorized elsewhere in the consolidated statements of operations.

The primary drivers of staffing costs are the number of full-time equivalent employees and the level of compensation, taxes and other benefits paid. Management varies, on a store by store basis, the hours worked based on the expected level of selling activity, subject to minimum staffing levels required to operate the store. Non-store staffing levels are less variable. A significant element of compensation is performance-based and is primarily dependent on sales and operating profit.

The level of advertising expenditures can vary. The largest element of advertising expenditures has historically been national television advertising; however, Signet has continued to invest more on digital and social marketing in recent years as part of its transformational initiatives, in order to evolve its marketing allocations based on consumer habits, business needs, and maximize return on investment (“ROI”) on its advertising investments.

Other operating income (loss)

Other operating income (loss) primarily consists of miscellaneous operating income and expense items such as interest income from customer in-house finance receivables, litigation settlements, foreign currency gains and losses, and gains and losses from de-designated or undesignated derivative contracts. See Note 12 in Item 8 for further detail on the Company’s other operating income.

COMPARISON OF FISCAL 2022 TO FISCAL 2021

•Total sales: up 49.7%.

•Same store sales: up 48.5%.

•Diluted earnings (loss) per share: $12.22 compared to $(0.94) in Fiscal 2021.

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Year to date sales

In Fiscal 2022, Signet’s sales were $7.8 billion, up $2.6 billion or 49.7%, compared to $5.2 billion in Fiscal 2021. Total same store sales increased by 48.5%, compared to a decrease of 10.8% in Fiscal 2021. This growth reflects continued strong business momentum driven by the strength of Signet’s connected commerce capabilities and holiday shopping, as well as the traction from strategic initiatives such as new product launches. Furthermore, the Company’s “always-on” marketing strategy, combined with consumer inspired promotional events as well as the strength of the Company’s product assortment drove a strong response from customers across merchandise categories and banners during the fourth quarter.

eCommerce sales were $1.5 billion and 19.3% of total sales compared to $1.2 billion and 22.7% of total sales in Fiscal 2021. The increase in eCommerce sales reflects the enhanced eCommerce capabilities, digital first focus and connected commerce strategies that are resonating with customers. The Company’s focus on its connected commerce shopping experience, both online and in-store, helped maintain improved conversion rates and average transaction values during Fiscal 2022.

The breakdown of Signet’s sales performance during Fiscal 2022 is set out in the table below:

(1)    Includes sales from Signet’s diamond sourcing initiative.

(2)    Includes sales from acquired businesses from the date of acquisition through the end of the period.

nm Not meaningful.

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Average merchandise transaction value (“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.

(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 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.

North America sales

The North America segment’s total sales were $7.3 billion compared to $4.8 billion in the prior year, up 50.1%. Same store sales increased 49.5% compared to a decrease of 9.5% in the prior year. North America’s ATV increased 14.3% and the number of transactions increased 29.2%. eCommerce sales increased 30.8% and brick and mortar sales increased 55.6% on a same store sales basis.

International sales

In Fiscal 2022, the International segment’s total sales were $492.4 million, up 38.4%, compared to $355.9 million in Fiscal 2021. Same store sales increased by 34.7% compared to a decrease of 25.0% in Fiscal 2021. ATV decreased 17.3% and the number of transactions increased 30.7%. eCommerce sales decreased 2.0% and brick and mortar sales increased 51.9% on a same store sales basis.

Fourth quarter sales

In the fourth quarter, Signet’s total sales were $2.8 billion, up $624.8 million or 28.6%, compared to an increase of 1.5% in the prior year fourth quarter. Same store sales were up 23.8% compared to an increase of 7.0% in the prior year fourth quarter. This growth reflects continued strong business momentum driven by the strength of Signet’s connected commerce capabilities and the level of early holiday shopping as well as the traction from strategic initiatives such as new product launches. Furthermore, the Company’s “always-on” marketing strategy, combined with consumer inspired promotional events as well as the strength of the Company’s product assortment drove a strong response from customers across merchandise categories and banners during the year.

eCommerce sales in the fourth quarter of Fiscal 2022 were $556.0 million or 19.8% of total sales, compared to $511.4 million or 23.4% of total sales in the prior year fourth quarter. The breakdown of the sales performance is set out in the table below.

(1)    Includes sales from Signet’s diamond sourcing initiative.

nm Not meaningful.

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(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.

North America sales

The North America segment’s total sales were $2.6 billion compared to $2.1 billion in the prior year, up 26.9%. Same store sales increased 22.2% compared to an increase of 10.4% in the prior year. The North America segment’s ATV increased 16.8%, and the number of transactions increased 3.6%. eCommerce sales increased 14.0%, while brick and mortar same store sales increased 24.9%. All US banners achieved strong sales, demonstrating that the Company’s banner value propositions, product newness, always-on marketing and connected commerce experiences are resonating with customers. Signet experienced higher conversion rates and an increase in transaction value, both online and in-store, which also helped to drive overall sales performance during the fourth quarter.

International sales

The International segment’s total sales increased 49.0% to $183.4 million compared to $123.1 million in the prior year and increased 49.5% at constant exchange rates. Same store sales increased 50.2% compared to a decrease of 28.3% in the prior year. In the International segment’s ATV increased 2.2% and the number of transactions increased 37.6%. eCommerce sales decreased 30.8% and brick and mortar sales increased 128.8% on a same store sales basis. The number of transactions increasing reflects the reopening of all UK stores in April 2021. In the prior year, all UK stores temporarily closed on March 24, 2020 and began reopening in the second quarter of Fiscal 2021.

Gross margin

In Fiscal 2022, gross margin was $3.1 billion or 39.9% of sales compared to $1.7 billion or 33.1% of sales in Fiscal 2021. In the fourth quarter, gross margin was $1.2 billion or 41.0% of sales compared to $869.5 million or 39.8% of sales in the prior year fourth quarter. The increases were primarily driven by a strong business momentum boosting sales as well as providing leverage on fixed costs, such as occupancy, further enhanced by merchandise and inventory strategies. Overall margins also benefited from merchandise margin rate expansion through reduced clearance and favorable merchandise and services mix.

SG&A

Selling, general and administrative expenses for Fiscal 2022 were $2.2 billion or 28.5% of sales compared to $1.6 billion or 30.4% of sales in Fiscal 2021. In the fourth quarter of Fiscal 2022, SG&A expense was $745.8 million or 26.5% of sales compared to $573.8 million or 26.2% of sales in the prior year fourth quarter. The increases were primarily due to advertising, payroll and investments in digital/IT, as well as increased variable costs such as store staffing costs and private label credit costs, which were higher as a result of the significant sales volume increase from the prior year as noted above. This was partially offset by the benefits of structural cost savings from the Company’s transformation activities, such as more efficient operating hours, contributing to the improvement in the current full year SG&A as a percentage of sales.

Restructuring charges

During the first quarter of Fiscal 2019, Signet launched a three-year comprehensive transformation plan, “Signet’s Path to Brilliance” (the “Plan”), to among other objectives, reposition the Company to be a share gaining, OmniChannel jewelry category leader. The Plan was substantially completed as of the end of Fiscal 2021. During Fiscal 2022, credits to restructuring expense of $3.3 million were recognized, related primarily to the adjustment of previously recognized Plan liabilities. In Fiscal 2021, restructuring charges of $46.2 million were recognized, $14.7 million of which were non-cash charges, primarily related to store closures, severance costs, and professional fees for legal and consulting services related to the Plan. See Note 6 of Item 8 for additional information regarding the Company’s restructuring activities.

Asset impairments, net

During Fiscal 2022, the Company recorded net non-cash, pre-tax asset impairments related to the impairment of long-lived assets of $1.5 million. During the fourth quarter of Fiscal 2022, the Company recorded non-cash, pre-tax asset net gain on impairment of $0.5 million, all of which related to long-lived assets.

During Fiscal 2021, the Company recorded non-cash, pre-tax asset impairments related to the impairment of goodwill, intangible assets and long-lived assets of $10.7 million, $83.3 million and $65.0 million respectively. During the fourth quarter of Fiscal 2021, the Company recorded non-cash, pre-tax asset impairment charges of $0.9 million, all of which related to long-lived assets.

See Note 17 and Note 19 of Item 8 for additional information on the asset impairments.

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Other operating income (loss)

In Fiscal 2022, other operating income was $8.5 million compared to other operating income of $2.4 million in Fiscal 2021. Fiscal 2022 primarily included interest income from the Company’s non-prime credit card portfolio and the receipt of UK government subsidies granted for restrictions imposed on non-essential businesses, partially offset by foreign exchange losses and charges related to previously disclosed litigation matters. Fiscal 2021 included a gain recognized as a result of the Company de-designating and liquidating derivative financial instruments primarily related to forecasted commodity purchases that were deemed no longer effective in light of the economic circumstances altered by COVID-19. That gain was offset by a charge, net of insurance recoveries, related to the settlement of previously disclosed shareholder litigation matters.

In the fourth quarter, other operating loss was $4.7 million compared to $1.9 million in the prior year fourth quarter. The fourth quarter of Fiscal 2022 was primarily driven by foreign exchange losses and charges related to previously disclosed shareholder litigation matters. Fourth quarter of Fiscal 2021 was primarily driven by miscellaneous asset write-offs offset by interest income from the in-house credit program.

See Note 12, Note 21 and Note 28 of Item 8 for additional information on these matters.

Operating income (loss)

In Fiscal 2022, operating income was $903.4 million or 11.5% of sales compared to an operating loss of $57.7 million or (1.1)% of sales in Fiscal 2021. This increase reflects a significant sales volume increase from the prior year as described above, as well as the favorable impact of structural cost savings. This favorability was partially offset by higher advertising, payroll and investments in digital/IT, as well as higher variable costs such as store staffing costs and private label credit costs on the higher volume.

In the fourth quarter, operating income was $402.4 million or 14.3% of sales compared to $291.9 million or 13.4% of sales in prior year fourth quarter. The operating income increase reflected a combination of factors including the increase in sales, both online and in-store during the fourth quarter of Fiscal 2022 when compared to fourth quarter of Fiscal 2021 and the favorable impact of structural cost savings. This favorability was partially offset by higher advertising, payroll and investments in digital/IT, as well as higher variable costs such as store staffing costs and private label credit costs on the higher volume.

(1)    Fiscal 2022 includes: 1) $5.4 million of cost of sales associated with the fair value step-up of inventory acquired in the Diamonds Direct acquisition; 2) $6.4 million of acquisition-related expenses related to Diamonds Direct and Rocksbox; 3) net asset impairment charges of $2.0 million; 4) $1.4 million gain associated with the sale of customer in-house finance receivables; and 5) $1.0 million credit to restructuring expense, primarily related to adjustments to previously recognized restructuring liabilities.

Fiscal 2021 includes: 1) $1.6 million related to inventory charges recorded in conjunction with the Company’s restructuring activities; 2) $36.0 million primarily related to severance, professional fees and store closure costs recorded in conjunction with the Company’s restructuring activities; and 3) asset impairment charges of $136.7 million.

See Note 4, Note 6, Note 13, Note 17 and Note 19 for additional information.

(2)    Fiscal 2022 includes net asset impairment gain of $0.5 million.

Fiscal 2021 includes 1) $9.7 million primarily related to severance and store closure costs recorded in conjunction with the Company’s restructuring activities; and 2) asset impairment charges of $22.3 million.

See Note 6 and Note 17 for additional information.

(3)    Fiscal 2021 includes $0.2 million benefit recognized due to a change in inventory reserves previously recognized as part of the Company’s restructuring activities.

See Note 6 for additional information.

(4)    Fiscal 2022 includes: 1) charges of $1.7 million related to the settlement of previously disclosed shareholder litigation matters; and 2) $2.3 million credit to restructuring expense primarily related to adjustments to previously recognized restructuring liabilities.

Fiscal 2021 includes: 1) charges of $7.5 million related to the settlement of previously disclosed shareholder litigation matters, net of expected insurance proceeds; and 2) $0.5 million related to charges recorded in conjunction with the Company’s restructuring activities.

nm    Not meaningful.

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(1)    Fiscal 2021 includes: 1) $1.3 million benefit recognized due to changes in severance and store closure liabilities recorded in conjunction with the Company’s restructuring activities; and 2) $0.2 million net gains on terminations or modifications of leases resulting from previously recorded impairments of the right of use assets in Fiscal 2021.

See Note 6, Note 19 and Note 17 for additional information.

(2)    Fiscal 2021 includes 1) $2.1 million primarily related to severance and store closure costs recorded in conjunction with the Company’s restructuring activities; and 2) asset impairment charges of $1.1 million.

See Note 6 and Note 17 for additional information.

(3)    Fiscal 2021 includes: 1) charges of $7.5 million related to the settlement of previously disclosed shareholder litigation matters, net of expected insurance proceeds; and 2) $0.5 million related to charges recorded in conjunction with the Company’s restructuring activities.

See Note 13, Note 28 and Note 6 for additional information.

nm    Not meaningful.

Interest expense, net

In Fiscal 2022, interest expense, net was $16.9 million compared to $32.0 million in Fiscal 2021. In the fourth quarter, interest expense, net was $4.5 million compared to $6.4 million in the prior year fourth quarter. The decrease in Fiscal 2022 is primarily due to lower average borrowings compared to prior year. The only debt outstanding during Fiscal 2022 was the Company’s 4.7% Senior Unsecured Notes (“Senior Notes”), whereas the prior year included borrowings on the ABL Credit Facility. See Note 24 of Item 8 for additional information on the Company’s debt.

Other non-operating income, net

In Fiscal 2022, other non-operating income, net was $2.1 million compared to a net $0.0 million in Fiscal 2021. Fiscal 2022 includes primarily amortization of unrecognized actuarial losses related to the UK pension plan. Fiscal 2021 included amortization of unrecognized net prior service costs, offset by loss on debt extinguishment.

See Note 24 of Item 8 for additional information on the Company’s refinancing activities and Note 23 of Item 8 for additional information on the Company’s retirement plans.

Income taxes

Income tax expense for Fiscal 2022 was $114.5 million compared to a benefit of $74.5 million in Fiscal 2021, with an effective tax rate of 12.9% for Fiscal 2022 compared to 83.1% in Fiscal 2021. In Fiscal 2022, the Company’s effective tax rate was lower than the US federal income tax rate primarily due to the reversal of the valuation allowance recorded against certain state deferred tax assets, as well as additional benefits realized from the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the benefits from global reinsurance arrangements. During Fiscal 2022, the Company evaluated evidence to consider the reversal of the valuation allowance on its state net deferred tax assets and determined that there was sufficient positive evidence to conclude that it is more likely than not its state deferred tax assets are realizable. In determining the likelihood of future realization of the state deferred tax assets, the Company considered both positive and negative evidence. As a result, the Company believed that the weight of the positive evidence, including the cumulative income position in the three most recent years and forecasts for a sustained level of future taxable income, was sufficient to overcome the weight of the negative evidence, and thus recorded a $49.8 million tax benefit to release the valuation allowance against the Company's state deferred tax assets during Fiscal 2022.

In Fiscal 2021, Signet’s effective tax rate was higher than the US federal income tax rate primarily due to the benefit from the CARES Act enacted on March 27, 2020, and the impact of Signet’s global reinsurance arrangement partially offset by the unfavorable impact of a valuation allowance recorded against certain state deferred tax assets and the impairment of goodwill which was nondeductible for tax purposes.

In the fourth quarter, income tax expense was $82.4 million, with an effective tax rate of 20.8%, compared to expense of $30.9 million, with an effective tax rate of 10.8% in the prior year fourth quarter. The fourth quarter Fiscal 2022 effective tax rate approximated the US federal income tax rate. The prior year fourth quarter tax expense and effective rate was favorably impacted by the benefit of the CARES Act, as well as by the mix of pre-tax earnings by jurisdiction.

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Refer to Note 11 of Item 8 for additional information.

NON-GAAP MEASURES

The discussion and analysis of Signet’s results of operations, financial condition and liquidity contained in this Annual Report on Form 10-K are based upon the consolidated financial statements of Signet which are prepared in accordance with GAAP and should be read in conjunction with Signet’s consolidated financial statements and the related notes included in Item 8. A number of non-GAAP measures are used by management to analyze and manage the performance of the business, and the required disclosures for these non-GAAP measures are shown below.

Signet provides such non-GAAP information in reporting its financial results to give investors additional data to evaluate its operations. Management does not, nor does it suggest investors should, consider such non-GAAP measures in isolation from, or in substitution for, financial information prepared in accordance with GAAP.

1. Net cash (debt)

Net cash (debt) 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 and cash equivalents held by the Company.

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 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. Free cash flow is an indicator used by management frequently in evaluating its overall liquidity and determining appropriate capital allocation strategies. Free cash flow does not represent the residual cash flow available for discretionary purposes. In Fiscal 2022, net cash provided by operating activities included $81.3 million in proceeds received in connection with the sale of the Company’s non-prime credit card receivable portfolio. See Note 13 of Item 8 for additional information regarding the sale of the in-house credit card receivable portfolio.

3. Non-GAAP operating income (loss)

Non-GAAP operating income (loss) is a non-GAAP measure defined as operating income (loss) 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.

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(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 right of use assets in Fiscal 2021.

(2) Acquisition related costs include professional fees for direct transaction-related costs incurred for the acquisitions of Rocksbox and Diamonds Direct in Fiscal 2022, as well as includes the impact of the fair value step up for inventory from Diamonds Direct.

4. Leverage ratio

The leverage ratio is a non-GAAP measure calculated by dividing Signet’s adjusted debt by adjusted EBITDAR. Adjusted debt is a non-GAAP measure defined as debt recorded in the consolidated balance sheet, plus Series A redeemable convertible preferred shares, plus an adjustment for operating leases (5x annual rent expense). Adjusted EBITDAR, as revised by the Company in Fiscal 2021, is a non-GAAP measure, defined as earnings before interest and income taxes, depreciation and amortization, share-based compensation expense, non-operating income (expense) and certain non-GAAP accounting adjustments (“Adjusted EBITDA”) and further excludes minimum fixed rent expense for properties occupied under operating leases. Adjusted EBITDA and Adjusted EBITDAR are considered important indicators of operating performance as they exclude the effects of financing and investing activities by eliminating the effects of interest, depreciation and amortization costs and certain accounting adjustments. Management believes these financial measures are helpful to enhancing investors’ ability to analyze trends in Signet’s business and evaluate Signet’s performance.

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(1)    Total amount of depreciation and amortization reflected on the consolidated statement of cash flows for Fiscal 2022, Fiscal 2021 and Fiscal 2020 equals $163.5 million, $176 million and $178.0 million, respectively, which includes $1.1 million, $0.9 million and $0.9 million, respectively, related to the amortization of definite-lived intangibles, primarily favorable leases and trade names.

(2)    Fiscal 2022 includes: 1) $0.9 million of net asset impairments gain related to long-lived assets; 2) $3.3 million credit to restructuring expense, primarily related to adjustments to previously recognized restructuring liabilities in connection with the Company’s transformation plan; 3) $1.7 million related to the settlement of previously disclosed shareholder litigation matters; 4) $8.6 million of charges related to professional fees for direct transaction-related costs incurred for the acquisitions of Rocksbox and Diamonds Direct in Fiscal 2022, as well as includes the impact of the fair value step up for inventory from Diamonds Direct; and 5) $1.4 million gain associated with the sale of customer in-house finance receivables.

Fiscal 2021 includes: 1) $159.0 million in asset impairments related to goodwill, intangible assets, and long-lived assets; 2) $47.6 million related to charges in connection with the Company’s transformation plan; 3) $7.5 million related to charges related to settlement of shareholder litigation, net of insurance proceeds; and 4) $0.4 million related to cost of extinguishment of debt.

Fiscal 2020 includes: 1) $47.7 million related to an immaterial out of period goodwill impairment adjustment; 2) $79.1 million related to charges in connection with the Company’s transformation plan; 3) charges of $33.2 million related to the settlement of previously disclosed shareholder litigation matters, net of expected insurance proceeds; and 4) a $6.2 million gain on extinguishment of debt.

LIQUIDITY AND CAPITAL RESOURCES

Overview and capital strategy

The Company’s primary sources of liquidity are cash on hand, cash provided by operations and availability under its ABL Revolving Facility (defined below). As of January 29, 2022, the Company had $1.4 billion of cash and cash equivalents and $147.7 million of outstanding debt. 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 dividends or share repurchases.

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 below 3.0x. Refer to discussion of the adjusted leverage ratio in the Non-GAAP measures section above.

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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 its new and modernized eCommerce platform and optimizing a connected commerce shopping journey for its customers. The Company’s cash discipline has also led to more efficient working capital, through both the extension of payment days with the Company’s vendor base, as well through continued inventory reduction efforts. In addition, structural cost reductions since the Company’s transformation strategy began in Fiscal 2019 have generated annual structural costs savings of over $400 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.

In addition, during Fiscal 2022, the Company made two acquisitions in line with its “Inspiring Brilliance” strategy. On March 29, 2021, the Company acquired all of the outstanding shares of Rocksbox 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. On November 17, 2021, the Company acquired Diamonds Direct USA Inc. (“Diamonds Direct”) for initial cash consideration of $501.2 million, net of cash acquired, and subject to customary post-closing adjustments per the Transaction Agreement. The acquisition of Diamonds Direct accelerates the Company’s growth through expansion of the Company’s market in accessible luxury and bridal. See Note 4 of Item 8 for more 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 $1.5 billion ABL Facility, as further described in Note 24 of Item 8, 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 13 of Item 8, the Company entered into amended and restated receivable purchase agreements with CarVal and Castlelake 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. During the second quarter of Fiscal 2022, Signet received cash proceeds of $57.8 million for the sale of these customer in-house finance receivables to the Investors. Additionally, during the second quarter of Fiscal 2022, the Company received $23.5 million from the Investors for the payment obligation of the remaining 5% of the receivables previously purchased in June 2018.

Returning excess cash to shareholders

During Fiscal 2022 the Company remained committed to its goal to return excess cash to shareholders. The Company has declared the Fiscal 2022 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. On August 23, 2021, the Board authorized a reinstatement of repurchases under the 2017 Program, as well as an increase in the remaining amount of shares authorized for repurchase under the 2017 Program from $165.6 million to $225 million. In January 2022, the Board increased its authorized share repurchase program by $500 million, bringing the total authorization for the 2017 Program to $1.2 billion. On January 21, 2022, the Company entered into an accelerated share repurchase agreement (“ASR”) with HSBC to repurchase the Company’s common shares for an aggregate amount of $250 million. As of January 29, 2022, the Company had received 2.5 million shares based on a price of $80 per share, which is 80% of the total prepayment amount. On March 14, 2022, the Company received an additional 0.8 million shares, representing the remaining 20% of the total prepayment and final settlement of the ASR. Altogether, the Company invested $311.8 million during Fiscal 2022 for share repurchases. See Note 8 of Item 8 for more details.

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 (i.e. store count);

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•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 discussed further in Note 13 of Item 8, 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 flows

The following table provides a summary of Signet’s cash flow activity for Fiscal 2022, Fiscal 2021 and Fiscal 2020:

Operating activities

Net cash provided by operating activities was $1.3 billion compared to net cash provided by operating activities of $1.4 billion in the prior year comparable period. The Company’s cash flow from operating activities in Fiscal 2022 was primarily due to the Company’s strong revenue growth, ongoing cost control and working capital management initiatives. In Fiscal 2021, cash flows were negatively affected by the impact of COVID-19 on the Company’s operating results, however, these impacts were offset by temporary measures in place to manage liquidity as a result of the impacts of the pandemic and the Company’s ongoing working capital management initiatives.

•Net income was $769.9 million compared to a net loss of $15.2 million in the prior year period, an increase of $785.1 million.

•Net income included non-cash share-based compensation costs of $45.8 million compared to $14.5 million in the prior year period. The higher share-based compensation expense in the current year was driven by improved Company operating results. See Note 27 of Item 8 for more information.

•Deferred taxes were a source of $0.1 million compared to a source of $141.8 million in the prior year period offset by current income taxes of a use of $6.7 million compared to a use of $45.5 million in the prior year. The prior year amount was primarily the result of the net operating loss carryback filed in accordance with the provisions of the CARES Act, offset by an increase in the valuation allowance related to certain deferred tax assets in the US. During Fiscal 2021, the Company collected $183.4 million related to the loss carryback and other credits filed in Fiscal 2021 under the provisions of the CARES Act, whereas in Fiscal 2022, the Company paid cash for income taxes of $120.7 million. Refer to Note 11 of Item 8 for additional information.

•Non-cash asset impairment charges were $1.5 million compared to $159.0 million in the prior year period. See Note 17 of Item 8 for additional information regarding the impairments recognized in each period.

•Cash provided by accounts receivable totaled $12.4 million compared to a use of $50.1 million in the prior year comparable period. The prior year cash usage was driven by the portion of the non-prime in-house credit card portfolio that was retained by the Company beginning in the second quarter of Fiscal 2021. See Note 14 of Item 8 for additional information.

•During the second quarter of Fiscal 2022, 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 June 2018. This resulted in cash proceeds of $81.3 million. See Note 13 of Item 8 for further information.

•Cash provided by inventory was $198.3 million compared to $308.0 million in Fiscal 2021. The inventory reductions in both periods were driven by the Company’s continued inventory management initiatives.

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•Cash provided by accounts payable was $35.7 million compared to $577.8 million in Fiscal 2021. The prior year result was driven by the Company’s aggressive working capital management initiatives throughout Fiscal 2021, which included the extension of time to pay with numerous vendors. The Company has been successful in maintaining these terms throughout Fiscal 2022 with its strong vendor relationships.

•Cash provided by other assets and other receivables was $181.9 million in the prior year period and was driven primarily by the collection of insurance proceeds related to the shareholder litigation settlement described in Note 28 of Item 8. Offsetting these cash proceeds was the payment of the settlement amount during the prior year period, which resulted in cash used by accrued expenses and other liabilities of $185.8 million.

•Cash used by changes in operating leases was $64.1 million, compared to a source of $31.2 million in the prior year period, driven by the Company’s deferral of rent payments due beginning in April 2020, a substantial portion of which was repaid in Fiscal 2022. See Note 18 of Item 8 for more information.

•Cash provided by deferred revenue was $100.5 million compared to $73.1 million in the prior year period, primarily due to increased warranty plan sales associated with higher overall sales volume. See Note 3 of Item 8 for further information.

Investing Activities

Net cash used in investing activities was $642.7 million compared to $77.8 million in the prior period. Fiscal 2022 included $515.8 million for the acquisitions of Diamonds Direct and Rocksbox (see Note 4 of Item 8 for more information). Capital additions were $129.6 million and $83.0 million in Fiscal 2022 and Fiscal 2021, respectively. Capital additions in each period were primarily associated with new stores and remodels of existing stores, as well as capital investments in IT. The Company reduced capital expenditures in Fiscal 2021 due to uncertainty around COVID-19.

Stores opened and closed in Fiscal 2022:

(1) The net change in selling square footage for Fiscal 2022 for the North America and International segments was 0.5% and (0.7)%, respectively.

(2) Includes 12 store repositions in Fiscal 2022.

(3) Includes 22 Diamonds Direct locations acquired as described in Note 4 of Item 8.

Net Cash Used in Financing Activities

Net cash used in financing activities in Fiscal 2022 was $366.6 million, consisting primarily of $43.6 million for dividend payments on common and preferred shares and common share repurchases of $311.8 million. See Note 8 of Item 8 for more information.

Net cash used in financing activities in Fiscal 2021 was $498.6 million, comprised primarily of $27.2 million for dividend payments on common and preferred shares, $370.0 million for net debt repayments, and a decrease in bank overdrafts of $87.4 million. See further information on debt movements below.

Movement in Cash and Indebtedness

Cash and cash equivalents at January 29, 2022 were $1.4 billion compared to $1.2 billion as of January 30, 2021. Signet has significant amounts of cash and cash equivalents invested in various ‘AAA’ rated liquidity funds and at a number of 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.

During Fiscal 2020, the Company entered into (i) a revolving credit facility in an aggregate committed amount of $1.5 billion (“ABL Revolving Facility”) and (ii) a first-in last-out term loan facility in an aggregate principal amount of $100.0 million (the “FILO Term Loan Facility” and, together with the ABL Revolving Facility, the “ABL Facility”). Refer to Note 24 of Item 8 for further information.

At January 29, 2022 and January 30, 2021, Signet had $147.7 million and $147.6 million, respectively, of outstanding debt, consisting entirely of the Senior Notes.

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During Fiscal 2021, the Company borrowed $900 million and paid down $1.2 billion, on the ABL Revolving Facility. Borrowings were made to fund short-term cash needs and as a prudent measure in response to COVID-19 to increase the Company’s financial flexibility and bolster its cash position. In January 2021, the Company fully repaid the $100 million FILO Term Loan Facility.

The Company had stand-by letters of credit on the ABL Revolving Facility of $20.1 million as of January 29, 2022 that reduced remaining borrowing availability. Available borrowings under the ABL Revolving Facility were $1.2 billion as of January 29, 2022.

Net cash was $1.3 billion as of January 29, 2022 compared to net cash of $1.0 billion as of January 30, 2021. Refer to Non-GAAP Measures above.

As of January 29, 2022 and January 30, 2021, the Company was in compliance with all debt covenants.

Capital availability

Signet’s level of borrowings and cash balances fluctuates during the year reflecting the seasonality of its cash flow requirements and business performance. Management believes that cash balances and the committed borrowing facilities (including the ABL Facility described more fully in Note 24 of Item 8) currently available to the business are sufficient for both its present and near-term requirements. The following table provides a summary of these items as of January 29, 2022, January 30, 2021 and February 1, 2020:

(1) Includes cash and cash equivalents

If the excess availability under the ABL Revolving Facility falls below the threshold specified in the ABL Facility agreement, the Company will be required to maintain a fixed charge coverage ratio of not less than 1.00 to 1.00. As of January 29, 2022, the threshold related to the fixed coverage ratio was approximately $119 million. The ABL Facility places certain restrictions upon the Company’s ability to, among other things, incur additional indebtedness, pay dividends, grant liens and make certain loans, investments and divestitures. The ABL Facility contains customary events of default (including payment defaults, cross-defaults to certain of the Company’s other indebtedness, breach of representations and covenants and change of control). The occurrence of an event of default under the ABL Facility would permit the lenders to accelerate the indebtedness and terminate the ABL Facility.

Credit ratings

The following table provides Signet’s credit ratings as of January 29, 2022:

OFF-BALANCE SHEET ARRANGEMENTS

Merchandise held on consignment

Signet held $533.2 million of consignment inventory which is not recorded on the balance sheet at January 29, 2022, as compared to $387.4 million at January 30, 2021. The principal terms of the consignment agreements, which can generally be terminated by either party, are such that Signet can return any, or all of, the inventory to the relevant supplier without financial or commercial penalty.

Contingent property liabilities

At January 29, 2022, 11 property leases had been assigned by Signet to third-parties (and remained unexpired and occupied by assignees at that date) and six additional properties were sub-let at that date. Should the assignees or sub-tenants fail to fulfill any obligations in respect of those leases or any other leases which have at any other time been assigned or sub-let, Signet or one of its UK

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subsidiaries may be liable for those defaults. The number of such claims arising to date has been small, and the liability, which is charged to the consolidated statements of operations as it arises, has not been material.

IMPACT OF INFLATION

During the past three years, Signet does not believe that inflation has had a significant impact on consumer discretionary spending or Signet’s sales and results. Jewelry purchases are discretionary and are often perceived to be a luxury purchase. As such, if inflation negatively impacts consumer discretionary spending, it may also negatively impact Signet’s sales and results in the future.

The costs of commodities such as diamonds, gemstones and precious metals in merchandise Signet purchases from its suppliers generally increase over time, and Signet has historically been able to increase retail prices to offset such cost increases. Diamond and gold costs began to increase more than usual in January 2022 but did not have a meaningful impact on Signet’s merchandise costs in the fourth quarter of Fiscal 2022. Diamond and gold costs continued to rise into February and March at a rate that Signet believes was similar to consumer price indexes over the same time periods. Signet intends to leverage its supply chain and flexible fulfillment capabilities, as well as its product and assortment capabilities in order to minimize Fiscal 2023 retail prices increases that may otherwise be necessary to offset such cost increases. Refer to Item 1A, Risk Factors, for further information on the potential impacts and risk associated with inflation.

CRITICAL ACCOUNTING ESTIMATES

Critical accounting policies covering areas of greater complexity that are subject to the exercise of judgment due to the reliance on key estimates are listed below. A comprehensive listing of Signet’s significant accounting policies is set forth in Note 1 of the consolidated financial statements in Item 8.

Revenue recognition for extended service plans and lifetime warranty agreements (“ESP”)

The Company recognizes revenue related to ESP sales in proportion to when the expected costs will be incurred. The deferral periods for ESP sales are determined from patterns of claims costs, including estimates of future claims costs expected to be incurred. Management reviews the trends in historical claims to assess whether changes are required to the revenue and cost recognition rates utilized. A significant change in estimates related to the time period or pattern in which warranty-related costs are expected to be incurred could materially impact revenues. All direct costs associated with the sale of these plans are deferred and amortized in proportion to the revenue recognized and disclosed as either other current assets or other assets in the consolidated balance sheets. These direct costs primarily include sales commissions and credit card fees. Amortization of deferred ESP selling costs is included within selling, general and administrative expenses in the consolidated statements of operations.

The North America segment sells ESP, subject to certain conditions, to perform repair work over the life of the product. Customers generally pay for ESP at the store or online at the time of merchandise sale. Revenue from the sale of the lifetime ESP is recognized consistent with the estimated patterns of claim costs expected to be incurred by the Company in connection with performing under the ESP obligations. Lifetime ESP revenue is deferred and recognized over a maximum of 14 years after the sale of the warranty contract. Although claims experience varies between the Company’s national banners, thereby resulting in different recognition rates, approximately 55% to 60% of revenue is recognized within the first two years on a weighted average basis.

As noted above, the Company utilizes historical claims data to estimate the expected future patterns of claims cost and the related revenue recognition rates utilized. These claims patterns are subject to change based primarily on revisions to the Company’s ESP product offerings and changes in customer behavior over time. The Company periodically refreshes its analysis of the claims pattern on at least an annual basis, or more often if circumstances dictate such a review is required (such as occurred as a result of the disruption from COVID-19). A significant change in either the overall claims pattern or the life over which the Company is expected to fulfil its obligation under the warranty, could result in material change to revenues.

Goodwill and intangibles

In a business combination, the Company estimates and records the fair value of all assets acquired and liabilities assumed, including identifiable intangible assets and liabilities. The fair value of these intangible assets and liabilities is estimated based on management’s assessment, including selection of appropriate valuation techniques, inputs and assumptions in the determination of fair value. Significant estimates in valuing intangible assets and liabilities acquired include, but are not limited to, future expected cash flows associated with the acquired asset or liability, expected life and discount rates. The excess purchase price over the estimated fair values of the assets acquired and liabilities assumed is recognized as goodwill. Goodwill is recorded by the Company’s reporting units based on the acquisitions made by each.

Goodwill and other indefinite-lived intangible assets, such as indefinite-lived trade names, are evaluated for impairment annually as of the beginning of the fourth reporting period. Additionally, if events or conditions were to indicate the carrying value of a reporting unit or an indefinite-lived intangible asset may be greater than its fair value, the Company would evaluate the asset for impairment at that time. Impairment testing compares the carrying amount of the reporting unit or other intangible assets with its fair value. When the carrying amount of the reporting unit or other intangible assets exceeds its fair value, an impairment charge is recorded.

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The impairment test for goodwill involves estimating the fair value of the reporting unit through either estimated discounted future cash flows or market-based methodologies. The impairment test for other indefinite-lived intangible assets involves estimating the fair value of the asset, which is typically performed using the relief from royalty method for indefinite-lived trade names.

The fair value methodologies used by the Company in testing goodwill and indefinite-lived intangible assets include assumptions related to sales trends, discount rates, royalty rates and other assumptions that are judgmental in nature. If future economic conditions are different than those projected by management in its most recent impairment tests for goodwill and indefinite-lived intangible assets, future impairment charges may be required. See Note 19 for further details.

Long-lived assets

Long-lived assets of the Company consist primarily of property and equipment, definite-lived intangible assets and operating lease right-of-use ("ROU") assets. Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Potentially impaired assets or asset groups are identified by reviewing the undiscounted cash flows of individual stores. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the store asset group, based on the Company’s internal business plans. If the undiscounted cash flow for the store asset group is less than its carrying amount, the long-lived assets are measured for potential impairment by estimating the fair value of the asset group, and recording an impairment loss for the amount that the carrying value exceeds the estimated fair value. The Company primarily utilizes the replacement cost method to estimate the fair value of its property and equipment, and the income capitalization method to estimate the fair value of its ROU assets, which incorporates historical store level sales, internal business plans, real estate market capitalization and rental rates, and discount rates.

The uncertainty of the COVID-19 impact to the Company’s business could continue to further negatively affect the operating performance and cash flows of the Company’s stores, including the magnitude and potential resurgence of COVID-19 (including variants), occupancy restrictions in the Company’s stores, the inability to achieve or maintain cost savings initiatives included in the business plans, changes in real estate strategy or macroeconomic factors which influence consumer behavior. In addition, key assumptions used to estimate fair value, such as sales trends, capitalization and market rental rates, and discount rates could impact the fair value estimates of the store-level assets in future periods.

Income taxes

Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are recognized by applying statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when it is more likely than not that all or a portion of the deferred tax assets will not be realized, based on management’s evaluation of all available evidence, both positive and negative, including reversals of deferred tax liabilities, projected future taxable income and results of recent operations. The Company has a valuation allowance of $27.9 million and $83.9 million, as of January 29, 2022 and January 30, 2021, respectively, due to uncertainties related to the Company’s ability to utilize certain of its deferred tax assets, primarily consisting of net operating losses, foreign tax credits and capital losses carried forward.

The annual effective tax rate is based on annual income, statutory tax rates and tax planning strategies available in the various jurisdictions in which the Company operates. The Company does not recognize tax benefits related to positions taken on certain tax matters unless the position is more likely than not to be sustained upon examination by tax authorities. At any point in time, various tax years are subject to or are in the process of being audited by various taxing authorities. The Company records a reserve for uncertain tax positions, including interest and penalties. To the extent that management’s estimates of settlements change, or the final tax outcome of these matters is different than the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made. See Note 11 in Item 8 for additional information regarding deferred tax assets and unrecognized tax benefits.

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Leases

Signet occupies certain properties and holds machinery and vehicles under operating leases. Signet determines if an arrangement is a lease at the agreement’s inception. Certain operating leases include predetermined rent increases, which are charged to store occupancy costs within cost of sales on a straight-line basis over the lease term, including any construction period or other rental holiday. Other variable amounts paid under operating leases, such as taxes and common area maintenance, are charged to selling, general and administrative expenses as incurred. Premiums paid to acquire short-term leasehold properties and inducements to enter into a lease are recognized on a straight-line basis over the lease term. In addition, certain leases provide for contingent rent based on a percentage of sales in excess of a predetermined level. Further, certain leases provide for variable rent increases based on indexes specified within the lease agreement. The variable increases based on an index are initially measured as part of the operating lease liability using the index at the commencement date. Contingent rent and subsequent changes to variable increases based on indexes will be recognized in the variable lease cost and included in the determination of total lease cost when it is probable that the expense has been incurred and the amount is reasonably estimable. Operating leases are included in operating lease ROU assets and current and non-current operating lease liabilities in the Company’s consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental secured borrowing rate based on the information available at the lease commencement date, including the underlying term and currency of the lease, in measuring the present value of lease payments. Lease terms, which include the period of the lease that cannot be canceled, may also include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The operating lease ROU asset may also include initial direct costs, prepaid and/or accrued lease payments and the unamortized balance of lease incentives received. ROU assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable in accordance with the Company’s long-lived asset impairment assessment policy.

Payments arising from operating lease activity, as well as variable and short-term lease payments not included within the operating lease liability, are included as operating activities on the Company’s consolidated statement of cash flows. Operating lease payments representing costs to ready an asset for its intended use (i.e. leasehold improvements) are represented within investing activities within the Company’s consolidated statements of cash flows.

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The Company and certain of its subsidiaries, which are listed on Exhibit 22.1 to this Annual Report on Form 10-K, have guaranteed obligations under the 4.70% senior unsecured notes due in 2024 (the “Senior Notes”).

The Senior Notes were issued by Signet UK Finance plc (the “Issuer”). The Senior Notes rank senior to the Preferred Shares (as defined in Note 7 of Item 8) 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 Guarantor 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:

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•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

•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.

(1)    Amounts included in asset and liability subtotals above.

(2)    Includes income from intercompany transactions with Non-Guarantors of $49.8 million for Fiscal 2022, and income of $231.2 million for Fiscal 2021. Intercompany transactions primarily include intercompany dividends and interest.