Charting a Brighter Future: Signet’s Strategic Financial Moves
The largest specialty retailer of diamond jewelry in the world, with Leonard Green & Partners, L.P. A leading private equity investment firm announced the amendment to the terms of the Series A Convertible Preference Shares (“Preferred Shares”) to the net share settlement and a repurchase of 50% of the Preferred Shares. “LGP has been a supporter of Signet in our transformation journey from the time of the agreement in 2016 and execution of our ‘Path to Brilliance’ strategy. Since implementing this strategy, we’ve grown revenue double-digits while optimizing our fleet. We increased gross margins by over 400 basis points, drove a near 60% increase to our non-GAAP diluted earnings per share, and returned more than $1.5 billion to our shareholders, all while investing for future competitive advantage,” said Signet Chief Executive Officer Virginia C. Drosos.
“Our flexible operating model has consistently delivered well over 70% free cash flow conversion from non-GAAP operating income, enabling Signet to build a fortress balance sheet by materially reducing our leverage ratio and nearly tripling liquidity to have one of the strongest financial profiles among peers. We are very pleased that our partnership with LGP has led to a well-thought-out and smooth transition of its preferred investment at an attractive price for our shareholders,” said Joan M. Hilson, Chief Financial, Strategy & Services Officer at Signet.
Jonathan Seiffer, Senior Partner with LGP, said, “Today’s announced transaction represents half the investment that LGP made in Signet, a leading and innovative retailer that has some of the most recognized jewelry brands in the world. LGP has been pleased to partner with Signet as the Company successfully embarked on its ‘Path to Brilliance’ strategy, resulting in improving its balance sheet, return on invested capital, and e-commerce capabilities. LGP looks forward to continuing to partner with Signet to further execute on its strategic priorities and drive shareholder value.”
Preferred Share Repurchase Transaction
The Convertible Preferred Shares were due to mature in November 2024, convertible into approximately 8.2 million common shares of Signet. Signet will buy back about $414 million in cash of half of the Preferred Shares based on the volume-weighted average share price at the transaction signing date, April 1, 2024, including accrued dividends, and expected to be settled within ten business days.
In the event of a transaction, the said value of the Preferred Shares with a dividend of 5.0% will have $328 million remaining. The transaction is expected to immediately reduce Signet’s share count for diluted EPS by approximately 4.1 million shares, or about 7.6% of Signet’s diluted share count. The transaction will be funded by Signet through its $1.4 billion ending cash balance at Fiscal 2024. The deemed dividends are to aggregate an amount of approximately $83 million on a GAAP net income attributable to common shareholders basis, to be recorded in the first quarter of Fiscal 2025.
This is a deemed dividend representing the excess of the above one-time cash payment over the carrying value of the Preferred Shares at the date of the transaction. Net Share Settlement Amendment
The Company also amended the terms of the Preferred Shares held by LGP, with a view to signing to deliver cash for the stated value of the Preferred Shares. Any remaining value owed will be delivered in cash, shares or a combination of cash and shares at Signet’s election. This flexibility offered by this amendment in any remaining value will also allow for an orderly retirement of the remaining instrument hence smoothing the cadence of any further early redemption. This amendment in the net share settlement framework will have an immediate impact, estimated to lower Signet’s diluted share count by approximately 2.9 million shares, or about 5%, at the current price of the shares. Subject to the amendment taking place, LGP may begin future conversions per the net share settlement amendment beginning May 1, 2024. Fully retired, the Preferred Shares would represent approximately a 15% reduction to Signet’s diluted share count on an annualized basis.
Evercore acted as Signet’s financial advisor, with respect to the Preferred Share repurchase and amendment, up to the date hereof.
Fiscal 2025 Guidance Update
In connection with the Preferred Shares Repurchase Transaction and Amendment of the Preferred Shares Agreement: The Company is increasing its Fiscal 2025 non-GAAP Diluted EPS outlook to a range of $9.90 to $11.52 per diluted share from its previous outlook of $9.08 to $10.48 per diluted share.
This revised range reflects the diluted share impact from the repurchase and amendment with a weighted average diluted share count at approximately 46.3 million shares for Fiscal 2025 and excludes the deemed dividend from net income available to common shareholders of $83 million, each as discussed above.
Further, this range of non-GAAP Diluted EPS reflects the Company setting aside up to $1.1 billion for the purpose of a combination of retiring outstanding debt, retiring Preferred Shares, and repurchasing common shares during Fiscal 2025. Excludes potential non-recurring charges, including restructuring charges, asset impairments, or integration-related costs associated with the acquisition of Blue Nile, from diluted EPS on a non-GAAP basis. Accordingly, the Company is unable to provide its forecasted GAAP diluted EPS or the likely significance of the items without giving effect to such charges on an unaudited pro forma basis or provide audited pro forma, due to the potential impact of non-recurring charges on GAAP diluted EPS. Thus, the Company has not provided a reconciliation of forecasted non-GAAP diluted EPS to the corresponding forecasted GAAP diluted EPS.
