# SIGNET JEWELERS LTD (SIG) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from SIGNET JEWELERS LTD's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/832988/000083298823000032/sig-20230128.htm
Accession: 0000832988-23-000032
Filing date: 2023-03-16
Report date: 2023-01-28
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SIG/
All MD&A years: /company/SIG/mda/
Previous year: /company/SIG/mda/fy2022/ (FY 2022)
Next year: /company/SIG/mda/fy2024/ (FY 2024)

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 “Forward-Looking Statements” above as well as the “Risk Factors” section within Item 1A.

This management's discussion and analysis provides comparisons of material changes in the consolidated financial statements for Fiscal 2023 and Fiscal 2022. For a comparison of Fiscal 2022 and Fiscal 2021, refer to Item 7 included in our Annual Report on Form 10-K for the year ended January 29, 2022 filed with the SEC on March 17, 2022.

OVERVIEW

Diamonds Direct acquisition

On November 17, 2021, the Company acquired all of the outstanding shares of Diamonds Direct USA Inc. (“Diamonds Direct”) for cash consideration of $503.1 million, net of cash acquired. Diamonds Direct is an off-mall, destination jeweler in the US operating with a highly productive, efficient operating model with demonstrated growth and profitability. Diamonds Direct has been immediately accretive to Signet following the acquisition date. Diamonds Direct's strong value proposition, extensive bridal offering and customer-centric, high-touch shopping experience is a destination for younger, luxury-oriented bridal shoppers. Diamonds Direct strategically expands Signet’s market in accessible luxury and bridal, provides access to a new customer base and furthers Signet’s opportunity to build lifetime customer relationships. Signet plans to grow Diamonds Direct while driving operating margin expansion over time through operating synergies in purchasing, targeted marketing and connected commerce.

Blue Nile acquisition

On August 19, 2022, the Company acquired all of the outstanding shares of Blue Nile, Inc. (“Blue Nile”), subject to the terms of a stock purchase agreement entered into on August 5, 2022. The total cash consideration was $389.9 million, net of cash acquired, including purchase price adjustments for working capital. Blue Nile is a leading online retailer of engagement rings and fine jewelry. The addition of Blue Nile brings Signet a younger, more affluent, and diverse customer to Signet’s banner portfolio that will expand Signet’s accessible luxury tier. We believe the strategic acquisition of Blue Nile accelerates Signet's efforts to enhance its connected commerce capabilities and extend its digital leadership across the jewelry category – all to further achieve meaningful operating synergies for the consumers and create value for shareholders.

Overall performance

Signet’s sales declined by 5.2% during the fourth quarter of Fiscal 2023 compared to the same quarter of Fiscal 2022. Sales in the Company’s organic businesses were down year over year due to the continued impact of heightened inflationary pressure on consumers’ discretionary spending, extreme weather disruptions in the three shopping days leading up to Christmas in the US, as well as the impact of various union strikes in the UK and the weakening of the British Pound in the International segment. These declines in the organic businesses were offset partially by the addition of Blue Nile to Signet’s portfolio. The Company’s overall operating results continue to reflect sustainable enhancements to the differentiation of Signet’s banners, connected commerce capabilities, accelerated services, always on marketing strategy including increased penetration of digital marketing, and inventory management. During the fourth quarter of Fiscal 2023, the Company’s average merchandise transaction values (“ATV”) increased by 3.9% in the North America segment and 13.3% in the International segment, despite the decline in traffic and number of transactions. The increase relates to the higher penetration of the accessible luxury banners, shift in assortment architecture to higher price points and the reduced impact of Banter by Piercing Pagoda, which carries a lower ATV.

The Company has continued its focus on execution of the initiatives under its Inspiring Brilliance strategy, which is centered on the goal of achieving sustainable industry-leading growth with an annual double digit operating margin. As described in the Purpose and Strategy section within Item 1 of this Annual Report on Form 10-K, through its Inspiring Brilliance strategy, the Company is focused on leveraging its core strengths that it developed over the past five years with the goal of creating a broader mid-market and increasing Signet’s share of that larger market as the industry leader. See Outlook below for further information.

Refer to the “Results of Operations” section below for further information on performance during the fourth quarter and full year Fiscal 2023.

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Outlook

Following a year of heightened growth in Fiscal 2022, jewelry industry revenues softened in Fiscal 2023 and are expected to be down mid-single digits for Fiscal 2024, as the downward pressure on consumer discretionary spending is expected to continue. In addition, the Company expects headwinds to continue in engagements and weddings throughout Fiscal 2024, with expected recovery in engagements later in the year and continue to rebound in Fiscal 2025. It is anticipated that discretionary spending in jewelry will continue to be adversely impacted by rising prices on necessities such as gas and groceries, and could further impact sales of the Company’s product assortments at lower and mid-tier price points. However, the magnitude and timing of both inflationary factors and the shift in spending are difficult to predict, as is whether these pressures will ultimately impact other product categories, including softening demand for products at higher price points. The Company believes that its banner value propositions and differentiation, including the additions of Diamonds Direct and Blue Nile to Signet’s portfolio, the strength of the Company’s product assortment and its investments in digital and flexible fulfillment capabilities are expected to continue fueling a positive response from customers across most merchandise categories and banners into Fiscal 2024. Furthermore, the Company will continue its diligent and effective efforts to drive structural cost savings and leverage its flexible operating model.

The Company continues to monitor the impacts of certain macroeconomic factors on its business, such as inflation and the conflict in Ukraine. Uncertainties exist that could continue to impact the Company’s results of operations or cash flows in the future, such as further pricing and inflationary environment changes impacting the Company (including, but not limited to, materials, labor, fulfillment and advertising costs) or adverse shifts in consumer discretionary spending, supply chain disruptions to the Company’s business, the potential resurgence of COVID-19 in key trade areas, the Company’s ability to recruit and retain qualified team members, or organized retail crime. See “Forward-Looking Statements” above as well as the “Risk Factors” section within Item 1A.

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 global macro-economic environment as described above impacting the jewelry industry. 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 2024, 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 $0.5 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 $1.3 million.

RESULTS OF OPERATIONS

Fiscal 2023 Overview

Similar to many other retailers, Signet follows the retail 4-4-5 reporting calendar. Both Fiscal 2023 and Fiscal 2022 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. Similarly, sales from acquired businesses made within the last 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.

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 12-month 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 currency and consolidated comparisons are made at constant exchange rates and exclude the effect of exchange rate movements

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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, 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 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. An increase in inventory turnover would accelerate the rate at which commodity costs impact gross margin.

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

SG&A 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 (such as credit costs) 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 (expense)

Other operating income (expense) 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 undesignated derivative contracts. See Note 12 in Item 8 for further detail on the Company’s other operating income (expense).

COMPARISON OF FISCAL 2023 TO FISCAL 2022

•Total sales: up 0.2%.

•Same store sales: down 6.1%.

•Diluted earnings per share: $6.64 compared to $12.22 in Fiscal 2022.

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[[GREPCENT_TABLE]]
[["","Fiscal 2023","","Fiscal 2022"],["(in millions)","$","","% of sales","","$","","% of sales"],["Sales","$","7,842.1","","","100.0","%","","$","7,826.0","","","100.0","%"],["Cost of sales","(4,790.0)","","","(61.1)","","","(4,702)","","","(60.1)"],["Gross margin","3,052.1","","","38.9","","","3,124.0","","","39.9"],["Selling, general and administrative expenses","(2,214.6)","","","(28.2)","","","(2,230.9)","","","(28.5)"],["Restructuring charges","\u2014","","","\u2014","","","3.3","","","\u2014"],["Asset impairments, net","(22.7)","","","(0.3)","","","(1.5)","","","\u2014"],["Other operating income (expense)","(209.9)","","","(2.7)","","","8.5","","","0.1"],["Operating income (loss)","604.9","","","7.7","","","903.4","","","11.5"],["Interest expense, net","(13.5)","","","(0.2)","","","(16.9)","","","(0.2)"],["Other non-operating expense, net","(140.2)","","","(1.8)","","","(2.1)","","","\u2014"],["Income (loss) before income taxes","451.2","","","5.8","","","884.4","","","11.3"],["Income taxes","(74.5)","","","(1.0)","","","(114.5)","","","(1.5)"],["Net income (loss)","$","376.7","","","4.8","%","","$","769.9","","","9.8","%"]]
[[/GREPCENT_TABLE]]

Year to date sales

Signet’s total sales increased 0.2% to $7.84 billion compared to $7.83 billion in the prior year while total sales at constant exchange rates increased 1.1%. Signet’s same store sales decreased 6.1%, compared to an increase of 48.5% in the prior year. While Signet’s total sales increased primarily due to the additions of Diamonds Direct and Blue Nile to Signet’s portfolio, Signet’s organic business declined year over year driven by the impact of the heightened inflationary pressure on consumers’ discretionary spending, shifts in consumer spending to experiences and travel, the impacts of lapping benefits from last year’s government stimulus in the North America segment and the weakening of the British Pound in the International segment.

eCommerce sales year to date were $1.6 billion, up $87.8 million or 5.8% compared to $1.5 billion in the prior year. eCommerce sales accounted for 20.4% of year to date sales, up from 19.3% of total sales in the prior year. Brick and mortar same store sales decreased 5.5% from the prior period.

The increase in eCommerce sales as of percentage of sales is primarily due to the recent addition of Blue Nile to Signet’s portfolio, as virtually all Blue Nile sales are digital. The Company’s focus on its connected commerce shopping experience, both online and in-store, helped maintain conversion rates and improve the ATV throughout Fiscal 2023.

The breakdown of the year to date sales performance is set out in the table below:

[[GREPCENT_TABLE]]
[["","Change from previous year"],["Year to date Fiscal 2023","Same store sales","","Non-same store sales, net (2)","","","","Total sales at constant exchange rate (3)","","Exchange translation impact","","Total sales as reported","","Total sales (in millions)"],["North America segment","(7.0)","%","","7.5","%","","","","0.5","%","","(0.2)","%","","0.3","%","","$","7,289.5"],["International segment","8.3","%","","(0.4)","%","","","","7.9","%","","(12.4)","%","","(4.5)","%","","$","470.1"],["Other segment (1)","nm","","nm","","","","nm","","nm","","nm","","$","82.5"],["Signet","(6.1)","%","","7.2","%","","","","1.1","%","","(0.9)","%","","0.2","%","","$","7,842.1"]]
[[/GREPCENT_TABLE]]

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

(2)    Includes sales from acquired businesses which were not included in the results for the full comparable periods presented. Blue Nile has been excluded from same store sales for the full year and Diamonds Direct began being included in same store sales for the fourth quarter of Fiscal 2023.

(3)    The Company also provides the period-over-period change in total sales excluding the impact of foreign currency fluctuations, which is a non-GAAP measure, to provide transparency to performance and enhance investors’ understanding of underlying business trends. The effect from foreign currency, calculated on a constant currency basis, is determined by applying current year average exchange rates to prior year sales in local currency.

nm Not meaningful.

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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.

[[GREPCENT_TABLE]]
[["","Average Merchandise Transaction Value (1)(2)","","Merchandise Transactions"],["","Average Value","","Change from previous year","","Change from previous year"],["Fiscal Year","Fiscal 2023","","Fiscal 2022","","Fiscal 2023","","Fiscal 2022","","Fiscal 2023","","Fiscal 2022"],["North America segment","$","507","","","$","448","","","11.2","%","","14.3","%","","(17.2)","%","","29.2","%"],["International segment (3)","\u00a3","171","","","\u00a3","129","","","8.9","%","","(17.3)","%","","(2.3)","%","","30.7","%"]]
[[/GREPCENT_TABLE]]

(1)    Net merchandise sales within the North America segment include all merchandise product sales, net of discounts and returns. In addition, excluded from net merchandise sales are sales tax in the US, repairs, extended service 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 $7.29 billion compared to $7.26 billion in the prior year, up 0.3%. Same store sales decreased 7.0% compared to an increase of 49.5% in the prior year. North America’s ATV increased 11.2% and the number of transactions decreased 17.2%. While North America’s total sales increased primarily as a result of the additions of Diamonds Direct and Blue Nile to Signet’s portfolio, same store sales in the organic banners declined due to a combination of factors noted above such as the impacts of heightened inflationary pressure on consumers’ discretionary spending and lapping of government stimulus.

eCommerce sales decreased 7.5% and brick and mortar sales decreased 6.8% on a same store sales basis. Overall, reported eCommerce sales increased 8.5% primarily due to the addition of Blue Nile as noted above.

International sales

The International segment’s total sales decreased 4.5% to $470.1 million compared to $492.4 million in the prior year and increased 7.9% at constant exchange rates. Same store sales increased 8.3% compared to an increase of 34.7% in the prior year. The ATV increased 8.9% over prior year, and the number of transactions decreased 2.3%. The increase in same store sales reflects the reopening of all UK stores in April 2021 following the lifting of COVID restrictions.

eCommerce sales decreased 18.2% and brick and mortar sales increased 16.7% on a same store sales basis.

Fourth quarter sales

Signet’s total sales decreased 5.2% year over year to $2.7 billion in the fourth quarter, while total sales at constant exchange rates decreased 4.3%. Signet’s same store sales decreased 9.1%, compared to an increase of 23.8% in the prior year quarter. These declines were driven by the impact of heightened inflationary pressure on consumers’ discretionary spending, weather disruptions in the three shopping days leading up to Christmas in the US, as well as the impact of various union strikes in the UK and the weakening of the British Pound in the International segment. This decrease was partially offset by the addition of Blue Nile in Fiscal 2023, as noted above.

eCommerce sales in the fourth quarter of Fiscal 2023 were $650.0 million, up $94.0 million or 16.9% compared to $556.0 million in the prior year fourth quarter, primarily driven by the addition of Blue Nile to Signet’s portfolio. eCommerce sales accounted for 24.4% of fourth quarter sales, up from 19.8% of total sales in the prior year fourth quarter. Brick and mortar same store sales decreased 9.6% from the prior year fourth quarter.

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The breakdown of the fourth quarter sales performance by segment is set out in the table below:

[[GREPCENT_TABLE]]
[["","Change from previous year"],["Fourth Quarter of Fiscal 2023","Same store sales","","Non-same store sales, net (2)","","","","Total sales at constant exchange rate (3)","","Exchange translation impact","","Total sales as reported","","Total sales (in millions)"],["North America segment","(9.3)","%","","5.5","%","","","","(3.8)","%","","(0.2)","%","","(4.0)","%","","$","2,503.3"],["International segment","(6.8)","%","","(0.2)","%","","","","(7.0)","%","","(9.5)","%","","(16.5)","%","","$","153.2"],["Other segment (1)","nm","","nm","","","","nm","","nm","","nm","","$","9.7"],["Signet","(9.1)","%","","4.8","%","","","","(4.3)","%","","(0.9)","%","","(5.2)","%","","$","2,666.2"]]
[[/GREPCENT_TABLE]]

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

(2)    Includes sales from acquired businesses which were not included in the results for the full comparable periods presented. Blue Nile has been excluded from same store sales for the full quarter and Diamonds Direct began being included in same store sales in the fourth quarter of Fiscal 2023.

(3)    The Company also provides the period-over-period change in total sales excluding the impact of foreign currency fluctuations, which is a non-GAAP measure, to provide transparency to performance and enhance investors’ understanding of underlying business trends. The effect from foreign currency, calculated on a constant currency basis, is determined by applying current year average exchange rates to prior year sales in local currency.

nm Not meaningful.

[[GREPCENT_TABLE]]
[["","Average Merchandise Transaction Value (1)(2)","","Merchandise Transactions"],["","Average Value","","Change from previous year","","Change from previous year"],["Fourth Quarter","Fiscal 2023","","Fiscal 2022","","Fiscal 2023","","Fiscal 2022","","Fiscal 2023","","Fiscal 2022"],["North America segment","$","485","","","$","444","","","3.9","%","","16.8","%","","(12.6)","%","","3.6","%"],["International segment (3)","\u00a3","162","","","\u00a3","141","","","13.3","%","","2.2","%","","(18.7)","%","","37.6","%"]]
[[/GREPCENT_TABLE]]

(1)     Net merchandise sales within the North America segment include all merchandise product sales, net of discounts and returns. In addition, excluded from net merchandise sales are sales tax in the US, repairs, extended service 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 $2.5 billion compared to $2.6 billion in the prior year quarter, or a decrease of 4.0%. This decrease was primarily driven by the decline in same store sales due to the impact of heightened inflationary pressure on consumers’ discretionary spending, particularly on the Company’s product assortments at lower price points, as well as weather disruptions in the US on the three shopping days leading up to Christmas. This was partially offset by the addition of Blue Nile to Signet’s portfolio as well as an increased ATV of 3.9% compared to the prior year quarter.

Same store sales decreased 9.3% compared to an increase of 22.2% in the prior year quarter, which is reflective of the factors discussed above and resulted in the number of transactions decreasing by 12.6% year over year.

International sales

The International segment’s total sales decreased 16.5% to $153.2 million compared to $183.4 million in the prior year primarily as a result of the weakening of the British Pound which drove 9.5% of this decline. Total same store sales decreased 6.8% compared to an increase of 49.5% in the prior year, primarily driven by the impact of heightened inflationary pressure on consumers’ discretionary spending, as well as the impact of various union strikes in the UK during the fourth quarter. In the International segment, the ATV increased 13.3% year over year, while the number of transactions decreased 18.7%.

Gross margin

In Fiscal 2023, gross margin was $3.05 billion or 38.9% of sales compared to $3.12 billion or 39.9% of sales in Fiscal 2022. The decrease in gross margin rate for Fiscal 2023 compared to Fiscal 2022 primarily relates to the overall decrease in core sales volume and the mix of Diamonds Direct and Blue Nile’s bridal business, which generally carries lower margins, which was partially offset by a slight improvement in the merchandise margins in the Company’s organic banners.

In the fourth quarter, gross margin was $1.11 billion or 41.7% of sales compared to $1.15 billion or 41.0% of sales in the prior year fourth quarter. The increase in gross margin rate for the fourth quarter of Fiscal 2023 compared to the fourth quarter of Fiscal 2022 reflects the improved health of our inventory, improved mix shift to higher priced merchandise and the continued benefits of cost savings in the Company’s organic businesses. These improvements in the organic banners were partially offset by the mix of Diamonds Direct and Blue Nile’s bridal business, as well as deleveraging of fixed costs on the lower volume as described above.

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SG&A

SG&A for Fiscal 2023 was $2.21 billion or 28.2% of sales compared to $2.23 billion or 28.5% of sales in Fiscal 2022. The additions of Diamonds Direct and Blue Nile, together with increased investments in digital/IT, were offset by lower payroll-related costs and the benefits of structural cost savings in Signet’s organic businesses, including from the Company’s restructured outsourced credit agreements finalized in the second quarter of Fiscal 2022. The improved SG&A as a percentage of sales year to date was primarily driven by the cost savings initiatives and the efficiency of Diamonds Direct’s operating model.

In the fourth quarter of Fiscal 2023 SG&A was $702.5 million or 26.3% of sales compared to $745.8 million or 26.5% of sales in the prior year fourth quarter. SG&A overall decreased primarily due to the impact of lower sales in the organic businesses, lower payroll-related costs and overall cost savings initiatives, partially offset by the additions of Diamonds Direct and Blue Nile, as well as investments in digital and IT initiatives.

Asset impairments, net

During Fiscal 2023, the Company recorded non-cash, pre-tax asset impairments related to the impairment of long-lived assets of $22.7 million. During the fourth quarter of Fiscal 2023, the Company recorded non-cash, pre-tax asset impairments of $20.7 million, all of which related to long-lived assets and was driven by a partial impairment of the Company’s Akron, Ohio headquarters.

During Fiscal 2022, the Company recorded 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.

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

Other operating income (expense)

In Fiscal 2023, other operating expense was $209.9 million compared to other operating income of $8.5 million in Fiscal 2022. Fiscal 2023 was primarily driven by pre-tax litigation charges of $203.8 million. Fiscal 2022 was primarily driven by interest income on the Company’s non-prime credit card portfolio and UK government subsidies granted for restrictions imposed on non-essential businesses.

In the fourth quarter of Fiscal 2023, other operating expense was $18.4 million compared to other operating expense of $4.7 million compared to the fourth quarter of Fiscal 2022. The fourth quarter of Fiscal 2023 was primarily driven by charges related to a litigation matter of $15.9 million. The fourth quarter of Fiscal 2022 was primarily driven by foreign exchange losses and charges related to previously disclosed shareholder litigation matters.

See Notes 12 and 28 of Item 8 for additional information.

Operating income (loss)

In the year to date period of Fiscal 2023, operating income was $604.9 million or 7.7% of sales compared to $903.4 million or 11.5% of sales in Fiscal 2022. The decrease in operating income for the period, compared to prior year period, was primarily driven by the pre-tax litigation charges of $203.8 million and the overall decrease in core sales volume, partially offset by lower payroll-related costs, the impact of the acquisitions and the benefits of Signet’s flexible operating model discussed above.

In the fourth quarter, operating income was $369.5 million or 13.9% of sales compared to $402.4 million or 14.3% of sales in prior year fourth quarter. The decrease in operating income for the period, compared to prior year quarter reflects the overall decrease in core sales volume as well as charges related to litigation and impairment noted above, partially offset by lower payroll-related costs, the impact of the acquisitions and the benefits of Signet’s flexible operating model.

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Signet’s operating income (loss) by segment for the year to date period is as follows:

[[GREPCENT_TABLE]]
[["","Fiscal 2023","","Fiscal 2022"],["(in millions)","$","","% of sales","","$","","% of sales"],["North America segment (1)","$","673.2","","","9.2","%","","$","981.4","","","13.5","%"],["International segment (2)","(0.2)","","","\u2014","%","","14.4","","","2.9","%"],["Other segment","2.4","","","nm","","(0.2)","","","nm"],["Corporate and unallocated expenses (3)","(70.5)","","","nm","","(92.2)","","","nm"],["Operating income (loss)","$","604.9","","","7.7","%","","$","903.4","","","11.5","%"]]
[[/GREPCENT_TABLE]]

(1)        Fiscal 2023 includes: 1) $13.4 million of cost of sales associated with the fair value step-up of inventory acquired in the Diamonds Direct and Blue Nile acquisitions; 2) $14.7 million of acquisition and integration-related expenses in connection with the Blue Nile acquisition, primarily related to professional fees and severance costs; 3) $203.8 million related to pre-tax litigation charges; and 4) net asset impairment charges of $20.0 million.

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 of gains 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.

See Note 4, Note 6, Note 13, Note 17, and Note 28 of Item 8 for additional information.

(2)    Fiscal 2023 includes net asset impairment charges of $2.7 million.

Fiscal 2022 includes net asset impairment gains of $0.5 million.

See Note 17 of Item 8 for additional information.

(3)    Fiscal 2022 includes: 1) a charge 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.

See Note 6 and Note 28 of Item 8 for additional information.

nm    Not meaningful.

Signet’s operating income (loss) by segment for the fourth quarter is as follows:

[[GREPCENT_TABLE]]
[["","Fourth Quarter Fiscal 2023","","Fourth Quarter Fiscal 2022"],["(in millions)","$","","% of sales","","$","","% of sales"],["North America segment (1)","$","372.9","","","14.9","%","","408.3","","","15.7","%"],["International segment (2)","14.7","","","9.6","%","","18.4","","","10.0","%"],["Other segment","(2.1)","","","nm","","1.2","","","nm"],["Corporate and unallocated expenses","(16.0)","","","nm","","(25.5)","","","nm"],["Operating income (loss)","$","369.5","","","13.9","%","","$","402.4","","","14.3","%"]]
[[/GREPCENT_TABLE]]

(1)    Fiscal 2023 includes: 1) $1.8 million credit to cost of sales associated with the fair value adjustment of inventory acquired in the Blue Nile acquisition; 2) $7.4 million of acquisition and integration-related expenses in connection with the Blue Nile acquisition, primarily related to professional fees and severance costs; 3) $13.8 million related to pre-tax litigation charges; and 4) net asset impairment charges of $18.1 million.

See Note 4, Note 17, and Note 28 of Item 8 for additional information.

(2)    Fiscal 2023 includes net asset impairment charges of $2.6 million.

See Note 17 of Item 8 for additional information.

nm    Not meaningful.

Interest expense, net

In Fiscal 2023, interest expense, net was $13.5 million compared to $16.9 million in Fiscal 2022. In the fourth quarter, interest expense, net was $2.1 million compared to $4.5 million in the prior year fourth quarter. The overall decreases in interest expense, net is related to higher interest income earned on invested cash due to higher interest rates.

Other non-operating expense, net

In Fiscal 2023, other non-operating expense was $140.2 million compared to $2.1 million in Fiscal 2022. In the fourth quarter of Fiscal 2023, other non-operating income was $0.6 million compared to other non-operating income of $1.2 million in the prior year fourth quarter. The other non-operating expenses in Fiscal 2023 primarily consisted of non-cash, pre-tax settlement charges of $133.7 million related to the partial buy-out of the Signet Group Pension Scheme. See Note 23 of Item 8 for additional information on the Company’s retirement plans.

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Income taxes

Income tax expense for Fiscal 2023 was $74.5 million, with an effective tax rate (“ETR”) of 16.5%, compared to an income tax expense of $114.5 million, with an effective tax rate of 12.9% in Fiscal 2022. The ETR for Fiscal 2023 was lower than the US federal income tax rate primarily due to the favorable impacts from the Company’s global reinsurance and financing arrangements, partially offset by the unfavorable impact of an uncertain tax position related to a prior year of $20.5 million recorded in Fiscal 2023. The ETR for Fiscal 2022 was lower than the US federal income tax rate primarily due to the favorable impact of the reversal of the valuation allowance recorded against certain state deferred tax assets. Refer to Note 11 of Item 8 for additional information.

In the fourth quarter of Fiscal 2023, income tax expense was $89.5 million, with an ETR of 24.4%, compared to expense of $82.4 million, with an ETR of 20.8% in the fourth quarter of Fiscal 2022. The ETR for the fourth quarter Fiscal 2023 was higher than the US federal income tax rate, primarily due to the unfavorable impact of an uncertain tax position related to a prior year of $20.5 million recorded in the fourth quarter of Fiscal 2023, partially offset by favorable impacts from the Company’s global reinsurance and financing arrangements. The ETR for the fourth quarter of Fiscal 2022 approximated the US federal income tax rate.

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 presents such non-GAAP measures in reporting its financial results to provide investors additional information to evaluate its operations and financial position. 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

Net cash is a non-GAAP measure defined as the total of cash and cash equivalents less loans, overdrafts and long-term debt. Management considers this metric to be helpful in understanding the total indebtedness of the Company after consideration of liquidity available from cash balances on-hand.

[[GREPCENT_TABLE]]
[["(in millions)","January 28, 2023","","January 29, 2022","","January 30, 2021"],["Cash and cash equivalents","$","1,166.8","","","$","1,418.3","","","$","1,172.5"],["Less: Long-term debt","(147.4)","","","(147.1)","","","(146.7)"],["Net cash","$","1,019.4","","","$","1,271.2","","","$","1,025.8"]]
[[/GREPCENT_TABLE]]

2. Free cash flow and adjusted free cash flow

Free cash flow is a non-GAAP measure defined as the net cash provided by operating activities less purchases of property, plant and equipment. Management considers this metric to be helpful in understanding how the business is generating cash from its operating and investing activities that can be used to meet the financing needs of the business. Adjusted free cash flow, a non-GAAP measure, excludes the proceeds from the sale of in-house finance receivables. Free cash flow and adjusted free cash flow are indicators frequently used by management in evaluating its overall liquidity needs and determining appropriate capital allocation strategies. Free cash flow and adjusted free cash flow do not represent the residual cash flow available for discretionary purposes. See Note 13 of Item 8 for additional information regarding the sale of the in-house credit card receivable portfolio.

[[GREPCENT_TABLE]]
[["(in millions)","Fiscal 2023","","Fiscal 2022","","Fiscal 2021"],["Net cash provided by operating activities","$","797.9","","","$","1,257.3","","","$","1,372.3"],["Purchase of property, plant and equipment","(138.9)","","","(129.6)","","","(83.0)"],["Free cash flow","659.0","","","1,127.7","","","1,289.3"],["Proceeds from sale of in-house finance receivables","\u2014","","","(81.3)","","","\u2014"],["Adjusted free cash flow","$","659.0","","","$","1,046.4","","","$","1,289.3"]]
[[/GREPCENT_TABLE]]

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3. Non-GAAP operating income

Non-GAAP operating income is a non-GAAP measure defined as operating income excluding the impact of significant and unusual items which management believes are not necessarily reflective of normal operating 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 these significant and unusual items. In particular, management believes the consideration of measures that exclude such items can assist in the comparison of operational performance in different periods which may or may not include such items.

[[GREPCENT_TABLE]]
[["(in millions)","Fiscal 2023","","Fiscal 2022","","Fiscal 2021"],["Operating income (loss)","$","604.9","","","$","903.4","","","$","(57.7)"],["Charges (credits) related to transformation plan","\u2014","","","(3.3)","","","47.6"],["Asset impairments, net (1)","15.9","","","(0.9)","","","159.0"],["Litigation charges (2)","203.8","","","1.7","","","7.5"],["Acquisition and integration-related costs (3)","25.8","","","8.6","","","\u2014"],["Gain on sale of in-house finance receivables","\u2014","","","(1.4)","","","\u2014"],["Non-GAAP operating income","$","850.4","","","$","908.1","","","$","156.4"]]
[[/GREPCENT_TABLE]]

(1) Fiscal 2023 includes impairment charges related to the Company’s headquarters. Fiscal 2022 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. Fiscal 2021 includes impairment charges related to the Company’s goodwill, intangible assets, and long-lived assets. Refer to Note 17 of Item 8 for additional information.

(2) Refer to Note 28 of Item 8 for additional information.

(3) Acquisition and integration-related costs include the impact of the fair value step-up for inventory from Diamonds Direct and Blue Nile, as well as direct transaction-related and integration costs, primarily professional fees and severance, incurred related to the acquisition of Blue Nile in Fiscal 2023; Fiscal 2022 included direct transaction-related costs for the acquisition of Rocksbox and Diamonds Direct and 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 redeemable Series A convertible preference shares (“Preferred Shares”), plus an adjustment for operating leases (5x annual rent expense). Adjusted EBITDAR 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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[[GREPCENT_TABLE]]
[["(in millions)","Fiscal 2023","","Fiscal 2022","","Fiscal 2021"],["Adjusted debt:"],["Long-term debt","$","147.4","","","$","147.1","","","$","146.7"],["Redeemable Series A Convertible Preference Shares","653.8","","","652.1","","","642.3"],["Adjustments:"],["5x Rent expense","2,232.5","","","2,216.5","","","2,263.0"],["Adjusted debt","$","3,033.7","","","$","3,015.7","","","$","3,052.0"],["Adjusted EBITDAR:"],["Net income (loss)","$","376.7","","","$","769.9","","","$","(15.2)"],["Income taxes","74.5","","","114.5","","","(74.5)"],["Interest expense, net","13.5","","","16.9","","","32.0"],["Depreciation and amortization on property, plant and equipment (1)","162.2","","","162.4","","","175.1"],["Amortization of definite-lived intangibles (1)","2.3","","","1.1","","","0.9"],["Amortization of unfavorable contracts","(1.8)","","","(3.3)","","","(5.4)"],["Share-based compensation","42.0","","","45.8","","","14.5"],["Other non-operating expense, net (2)","140.2","","","2.1","","","\u2014"],["Other accounting adjustments (3)","245.5","","","4.7","","","214.5"],["Adjusted EBITDA","$","1,055.1","","","$","1,114.1","","","$","341.9"],["Rent expense","446.5","","","443.3","","","452.6"],["Adjusted EBITDAR","$","1,501.6","","","$","1,557.4","","","$","794.5"],["Adjusted leverage ratio","2.0x","","1.9x","","3.8x"]]
[[/GREPCENT_TABLE]]

(1)    Total amount of depreciation and amortization reflected on the consolidated statement of cash flows for Fiscal 2023, Fiscal 2022 and Fiscal 2021 equals $164.5 million, $163.5 million and $176 million, respectively, which includes $2.3 million, $1.1 million and $0.9 million, respectively, related to the amortization of definite-lived intangibles, primarily favorable leases and trade names.

(2)    Fiscal 2023 includes pension settlement charges of $133.7 million.

(3)    Fiscal 2023 includes: 1) $25.8 million of acquisition and integration-related costs including the impact of the fair value step-up for inventory from Diamonds Direct and Blue Nile, as well as direct transaction-related and integration costs, primarily professional fees and severance, incurred related to the acquisition of Blue Nile in Fiscal 2023; 2) $15.9 million of asset impairments; and 3) $203.8 million related to litigation charges.

Fiscal 2022 includes: 1) $0.9 million of net asset impairment gains 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.

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 senior unsecured asset-based revolving credit facility (the “ABL Revolving Facility”). As of January 28, 2023, the Company had $1.2 billion of cash and cash equivalents, $147.7 million of outstanding debt related to the 4.70% senior unsecured notes due in 2024 (the “Senior Notes”), and no outstanding borrowings on the ABL Revolving Facility. The available borrowing capacity on the ABL Revolving Facility was $1.4 billion as of January 28, 2023.

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 2.75x. Adjusted leverage ratio is a non-GAAP measure as defined 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 few years laid the foundation for the Company’s accelerated growth post-pandemic, including prioritizing digital investments in both technology and talent, enhancing the Company’s new and modernized eCommerce platform and optimizing a connected commerce shopping journey for its customers. The Company’s cash discipline has led to more efficient working capital, through both the extension of payment days with the Company’s vendor base, as well as through improvement in productivity and overall health of the Company’s inventory, utilizing a disciplined approach to drive continued reductions in sell down and clearance inventory. In addition, cost reductions and process improvements since the Company’s transformation strategy began have generated annual costs savings of approximately $500 million.

As the Company continues to execute on its Inspiring Brilliance strategy, 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 $210.5 million for capital investments in Fiscal 2023, which included $138.9 million for capital expenditures and $71.6 million related to investments in digital and cloud IT initiatives.

In addition, during the past two years, the Company made three acquisitions in line with its Inspiring Brilliance strategy. On March 29, 2021, the Company acquired all of the outstanding shares of 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 for cash consideration of $503.1 million, net of cash acquired. The acquisition of Diamonds Direct accelerated the Company’s growth in accessible luxury and bridal. See Note 4 of Item 8 for more details.

During the third quarter of Fiscal 2023, the Company acquired all of the outstanding shares of Blue Nile, subject to the terms of a stock purchase agreement entered into on August 5, 2022. The total cash consideration was $389.9 million, net of cash acquired, including purchase price adjustments for working capital. Blue Nile is a leading online retailer of engagement rings and fine jewelry. The strategic acquisition of Blue Nile accelerates Signet's efforts to enhance its connected commerce capabilities and broaden its digital leadership across the jewelry category – all to further achieve meaningful operating synergies for the consumers and create value for shareholders. See Note 4 of Item 8 for further details.

Liquidity and financial flexibility

During the past two years, the Company made significant progress in line with its Inspiring Brilliance growth strategy through three 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 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. In March 2022, the Company entered into amended and restated receivable purchase agreements with the Investors regarding the purchase of add-on receivables on such Investors’ existing accounts. Under the amended and restated agreements, The Bank of Missouri will be the issuer for the add-on receivables on these existing accounts and the Investors will purchase the receivables from The Bank of Missouri. In conjunction with the above agreements in March 2022, the Company entered into agreements with the Investors to transfer all existing cardholder accounts previously originated by Signet to The Bank of Missouri. Therefore, the Company no longer originates any credit receivables with customers.

Finally, the Company has substantially completed the buy-out of its UK Pension plan over the past two years, which eliminates the long term balance sheet risk of this benefit obligation, as well as will reduce ongoing pension funding obligations and preserve free cash flow. Refer to Note 23 of Item 8 for further information on the UK Pension plan buy-out.

Returning excess cash to shareholders

The Company remains committed to its goal to return excess cash to shareholders. During Fiscal 2022 and Fiscal 2023, 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. The Company also increased its common dividends from $0.18 per share in Fiscal 2022, to $0.20 per share in Fiscal 2023, and beginning in Fiscal 2024 increased it again to $0.23 per share. In addition, during the third quarter of Fiscal 2022, the Board of Directors authorized a reinstatement of repurchases under the 2017 Program by

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approximately $560 million during Fiscal 2022 and authorized an additional $500 million in June 2022. Since the reinstatement of share repurchases, the Company has repurchased approximately 9.3 million shares for $687.9 million under the 2017 Program, including, $376.1 million in Fiscal 2023. Subsequent to year-end, the Board approved a further $263 million increase to the multi-year authorization under the 2017 Program bringing the total remaining authorization to approximately $775 million (net of approximately $25 million of share repurchases made in the first quarter of Fiscal 2024 through March 15, 2023). See Note 8 of Item 8 for more details.

The Company believes that cash on hand, cash flows from operations and available borrowings under the ABL Revolving Facility will be sufficient to meet its ongoing business requirements for at least the 12 months following the date of this report, including funding working capital needs, projected investments in the business (including capital expenditures), debt service, and returns to shareholders through either dividends or share repurchases.

Primary sources and uses of operating cash flows

Operating activities provide the primary source of cash for the Company and are influenced by a number of factors, the most significant of which are operating income and changes in working capital items, such as:

•changes in the level of inventory as a result of sales and other strategic initiatives;

•changes and timing of accounts payable and accrued expenses, including variable compensation; and

•changes in deferred revenue, reflective of the revenue from performance of extended service plans.

Signet derives most of its operating cash flows through the sale of merchandise and extended service plans. As a retail business, Signet receives cash when it makes a sale to a customer or when the payment has been processed by Signet or the relevant bank if the payment is made by third-party credit or debit card. As 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 2023, Fiscal 2022 and Fiscal 2021:

[[GREPCENT_TABLE]]
[["(in millions)","Fiscal 2023","","Fiscal 2022","","Fiscal 2021"],["Net cash provided by operating activities","$","797.9","","","$","1,257.3","","","$","1,372.3"],["Net cash used in investing activities","(545.4)","","","(642.7)","","","(77.8)"],["Net cash used in financing activities","(490.0)","","","(366.6)","","","(498.6)"],["(Decrease) increase in cash and cash equivalents","(237.5)","","","248.0","","","795.9"],["Cash and cash equivalents at beginning of period","1,418.3","","","1,172.5","","","374.5"],["(Decrease) increase in cash and cash equivalents","(237.5)","","","248.0","","","795.9"],["Effect of exchange rate changes on cash and cash equivalents","(14.0)","","","(2.2)","","","2.1"],["Cash and cash equivalents at end of period","$","1,166.8","","","$","1,418.3","","","$","1,172.5"]]
[[/GREPCENT_TABLE]]

Operating activities

Net cash provided by operating activities in Fiscal 2023 was $797.9 million compared to net cash provided by operating activities of $1.3 billion in the prior year comparable period. This overall decrease is primarily due to lower income and higher cash outflows for working capital compared to the prior period. The significant movements in operating cash flows are further described below:

•Net income was $376.7 million compared to $769.9 million in the prior year period, a decrease of $393.2 million. This decrease was primarily related to non-cash, pre-tax pension settlement charges of $133.7 million and pre-tax accrued litigation charges of $203.8 million during Fiscal 2023. See Note 12 of Item 8 for additional information.

•Change in current income taxes was a source of $98.5 million in the current period compared to a use of $6.7 million in the prior year. Deferred taxes was a use of $99.3 million in the current period compared to a source of $0.1 million in the prior year. Cash paid for income taxes was $74.6 million in Fiscal 2023 and $120.7 million in Fiscal 2022. Refer to Note 11 of Item 8 for additional information.

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•During the prior year, 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 used for inventory was $16.5 million compared to a source of $198.3 million in the prior year period driven by the replenishment of inventories to healthier normalized in-stock levels.

•Cash used by accounts payable was $101.6 million compared to a source of $35.7 million in the prior year period. Accounts payable decreased in the current year as a result of merchandise replenishment during the first half of the year. In addition, the Company continued to utilize extended terms with its vendors and has maintained these extended terms throughout the current year.

•Cash provided by changes in operating leases was $18.2 million, compared to a use of $64.1 million in the prior year, 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 $27.9 million compared to $100.5 million in the prior year, primarily due to increased warranty plan sales associated with higher overall sales volume in Fiscal 2022. See Note 3 of Item 8 for further information.

Investing activities

Net cash used in investing activities in Fiscal 2023 was $545.4 million compared to $642.7 million in the prior period. Cash used in Fiscal 2023 was primarily related to the acquisition of Blue Nile for $389.9 million, net of cash acquired, and capital expenditures of $138.9 million. Capital expenditures are associated with new stores, remodels of existing stores, and strategic capital investments in digital and IT initiatives. In Fiscal 2022, net cash used in investing activities included $515.8 million for the acquisitions of Diamonds Direct and Rocksbox and capital expenditures of $129.6 million. See Note 4 of Item 8 for more information on all acquisitions.

Stores opened and closed in Fiscal 2023:

[[GREPCENT_TABLE]]
[["Store count by segment","","January 29, 2022","","Opened and acquired (2) (3)","","Closed (2)","","January 28, 2023"],["North America segment (1)","","2,506","","","83","","","(114)","","","2,475"],["International segment (1)","","348","","","2","","","(17)","","","333"],["Signet","","2,854","","","85","","","(131)","","","2,808"]]
[[/GREPCENT_TABLE]]

(1) The net change in selling square footage for Fiscal 2023 for the North America and International segments was 0.9% and (3.7)%, respectively.

(2) Includes 23 store repositions in Fiscal 2023.

(3) Includes 23 locations acquired from Blue Nile in Fiscal 2023 as described in Note 4 of Item 8.

Financing activities

Net cash used in financing activities in Fiscal 2023 was $490.0 million, consisting of the repurchase of $376.1 million of common shares, payments for withholding taxes related to the settlement of the Company’s share-based compensation awards of $44.4 million, and preferred and common share dividends paid of $69.5 million. See Note 8 of Item 8 for more information.

Net cash used in financing activities in Fiscal 2022 was $366.6 million, comprised primarily of $43.6 million for dividend payments on common and preferred shares and common share repurchases of $311.8 million.

Movement in Cash and Indebtedness

Cash and cash equivalents at January 28, 2023 were $1.2 billion compared to $1.4 billion as of January 29, 2022. Signet has cash and cash equivalents invested in various ‘AAA’ rated government money market funds and at a number of large, highly-rated financial institutions. The amount invested in each liquidity fund or at each financial institution takes into account the credit rating and size of the liquidity fund or financial institution and is invested for short-term durations.

As further described in Note 24 of Item 8, on July 28, 2021, the Company entered into an agreement to amend the ABL Revolving Facility. The amendment extends the maturity of the ABL Revolving Facility to July 28, 2026 and allows the Company to increase the size of the ABL Revolving Facility by up to $600 million.

At January 28, 2023 and January 29, 2022, Signet had $147.7 million of outstanding debt, consisting entirely of the Senior Notes.

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The Company had stand-by letters of credit on the ABL Revolving Facility of $18.1 million as of January 28, 2023 that reduced remaining borrowing availability. Available borrowings under the ABL Revolving Facility were $1.4 billion as of January 28, 2023.

Net cash was $1.0 billion as of January 28, 2023 compared to net cash of $1.3 billion as of January 29, 2022. Refer to the Non-GAAP Measures section above for the definition of net cash and reconciliation to its most comparable financial measure presented in accordance with GAAP.

As of January 28, 2023 and January 29, 2022, 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 28, 2023, January 29, 2022 and January 30, 2021:

[[GREPCENT_TABLE]]
[["(in millions)","January 28, 2023","","January 29, 2022","","January 30, 2021"],["Working capital (1)","$","1,259.0","","","$","1,659.7","","","$","1,583.3"],["Capitalization:"],["Long-term debt","147.4","","","147.1","","","146.7"],["Redeemable Series A Convertible Preference Shares","653.8","","","652.1","","","642.3"],["Shareholders\u2019 equity","1,578.6","","","1,564.0","","","1,190.3"],["Total capitalization","2,379.8","","","2,363.2","","","1,979.3"],["Additional amounts available under credit agreements","$","1,406.6","","","$","1,245.9","","","$","1,320.8"]]
[[/GREPCENT_TABLE]]

(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 28, 2023, the threshold related to the fixed coverage ratio was approximately $126 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 28, 2023:

[[GREPCENT_TABLE]]
[["Rating Agency","Corporate","Senior Notes"],["Standard & Poor\u2019s","BB-","BB-"],["Moody\u2019s","Ba3","B2"],["Fitch","BB","BB"]]
[[/GREPCENT_TABLE]]

OFF-BALANCE SHEET ARRANGEMENTS

Merchandise held on consignment

Signet held $623.0 million of consignment inventory which is not recorded on the balance sheet at January 28, 2023, as compared to $533.2 million at January 29, 2022. 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.

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.

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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. 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 reportable 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 13 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 60% to 65% of revenue is recognized within the first two years on a weighted average basis. Management estimates that a 1% change in the recognition rates between years for ESP sales, based on the level of ESP plans sold in Fiscal 2023 and assuming no change in the life over which the Company is expected to fulfil its obligations under the warranty, would impact revenue recognized on current year ESA plan sales by approximately $5 million.

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 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, with the exception of newly acquired reporting units which are completed no later than twelve months after the date of acquisition. 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 reporting unit or 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.

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 or operating performance, such as declines in sales or increases in discount rates, 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 of Item 8 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

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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 current macroeconomic environment on to the Company’s business could continue to further negatively affect the operating performance and cash flows of the previously impaired stores or additional stores, including the impacts of inflation, continued changes in consumer behavior and shifts in discretionary spending, the inability to achieve or maintain cost savings initiatives included in the business plans, changes in real estate strategy or other 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 $19.0 million and $27.9 million, as of January 28, 2023 and January 29, 2022, 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 of Item 8 for additional information regarding deferred tax assets and unrecognized tax benefits.

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 cost of sales 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. Certain leases provide for contingent rent based on a percentage of sales in excess of a predetermined level. 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.

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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. Leases with an initial term of twelve months or less are not recorded on the balance sheet, and we recognize short-term lease expense for these leases on a straight-line basis over the lease term. 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. ASC 842, “Leases”, allows a lessee, as an accounting policy election by class of underlying asset, to choose not to separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component. We have elected this practical expedient as presented in ASC 842, and do not separate non-lease components for all underlying asset classes. 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. Expenditures made 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 Senior Notes.

The Senior Notes were issued by Signet UK Finance plc (the “Issuer”). The Senior Notes rank senior to the Preferred Shares 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:

•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

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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.

[[GREPCENT_TABLE]]
[["","","Summarized Balance Sheets"],["(in millions)","","January 28, 2023","","January 29, 2022"],["Total current assets","","$","3,225.3","","","$","3,507.0"],["Total non-current assets","","2,056.3","","","2,245.3"],["Total current liabilities","","2,555.5","","","2,309.3"],["Total non-current liabilities","","3,192.3","","","3,407.0"],["Redeemable preferred shares","","653.8","","","652.1"],["Total due from Non-Guarantors (1)","","425.1","","","311.4"],["Total due to Non-Guarantors (1)","","1,798.3","","","1,666.9"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Summarized Statements of Operations"],["(in millions)","","Fiscal 2023","","Fiscal 2022"],["Sales","","$","6,705.7","","","$","7,188.9"],["Gross margin","","2,786.0","","","3,014.9"],["Income before income taxes (2)","","546.0","","","939.7"],["Net income (2)","","490.1","","","827.9"]]
[[/GREPCENT_TABLE]]

(2)    Includes income from intercompany transactions with Non-Guarantors of $128.3 million for Fiscal 2023, and income of $49.8 million for Fiscal 2022. Intercompany transactions primarily include intercompany dividends and interest.