Credit Transaction

6 Months Ended

Jul. 29, 2017

Receivables [Abstract]

Credit transaction, net

Credit transaction, net

On May 25, 2017, the Company, through its subsidiary Sterling Jewelers Inc. (“Sterling”), entered into a Sale and Purchase Agreement with Comenity Bank (“Comenity”) to sell the prime-only credit quality portion of Sterling’s existing in-house finance receivable portfolio and the assumption from Sterling of certain liabilities related to Sterling’s in-house finance receivable portfolio. The purchase price will be settled in cash for an amount equal to the gross value of the outstanding receivables (“par”) at the time of closing, which is currently estimated to be $1 billion. The transaction is subject to the defeasance of the balance outstanding under the asset-backed securitization facility as disclosed in Note 16. The Sale and Purchase Agreement contains customary representations, warranties and covenants.

In addition, the Company and Comenity entered into a Credit Card Program Agreement (“Program Agreement”) to provide credit to prime-only credit quality customers with an initial term of seven years and, unless terminated by either party, additional renewal terms of two years. Under the Program Agreement, Comenity will establish a program to issue Sterling credit cards to be serviced, marketed and promoted in accordance with the terms of the agreement. Subject to limited exceptions, Comenity will be the exclusive issuer of private label credit cards or an installment or other closed end loan product in the United States bearing specified Company trademarks, including “Kay”, “Jared” and specified regional brands, but excluding “Zale”, during the term of the agreement. The pre-existing arrangement with Comenity for the issuing of Zale credit cards will be unaffected by the execution of the Program Agreement. Upon expiration or termination by either party of the Program Agreement, Sterling retains the option to purchase, or arrange the purchase by a third party of, the program assets from Comenity on terms that are no more onerous to Sterling than those applicable to Comenity under the Purchase Agreement, or in the case of a purchase by a third party, on customary terms. Additionally, the Company received a signing bonus, which may be repayable under certain conditions if the Program Agreement is terminated, and a right to receive future payments related to the performance of the credit program after the sale is completed under an economic profit sharing agreement. The Program Agreement contains customary representations, warranties and covenants.

The Company’s in-house finance receivables have historically been “held for investment” and recorded at par value less an allowance for credit losses. During the second quarter of Fiscal 2018, the portion of the in-house finance receivables meeting the criteria for sale to Comenity were reclassified to “held for sale” in accordance with US GAAP. As a result, these receivables are recorded at the lower of cost (par) or fair value. See Note 15 for the fair value measurement of these held for sale receivables. Additionally, the reclassification of these receivables resulted in the reversal of the related allowance for credit losses of $20.7 million. This reversal was recorded in credit transaction, net in the condensed consolidated income statement for the 13 weeks ended July 29, 2017.

Upon closing, the Company expects to receive gross proceeds of approximately $1.0 billion which will be utilized to repay the $600 million balance outstanding on the asset backed securitization facility and to repay the short-term loan associated with the acquisition of R2Net, Inc. as disclosed in Note 21 and other borrowings under the revolving credit facility. The credit transaction is subject to regulatory approvals and other customary conditions, and is expected to close in October 2017.

Accounts receivable, net

Signet’s accounts receivable primarily consist of US customer in-house financing receivables. The accounts receivable portfolio consists of a population that is of similar characteristics and is evaluated collectively for impairment.

On May 25, 2017, the Company entered into an agreement to sell a portion of the Sterling Jewelers customer in-house finance receivables. As a result, these receivables have been classified as “held for sale” in the condensed consolidated balance sheet and recorded at the lower of cost (par) or fair value. As of July 29, 2017, the accounts receivable held for sale were recorded at cost (par) as the fair value approximated cost as disclosed in Note 15.

(in millions)	July 29, 2017		January 28, 2017		July 30, 2016
Accounts receivable held for investment by portfolio segment, net:
Sterling Jewelers customer in-house finance receivables	$	622.6	$	1,813.3	$	1,615.6
Zale customer in-house finance receivables	34.0		33.4		25.0
Other accounts receivable	7.9		11.3		10.0
Total accounts receivable, net	$	664.5	$	1,858.0	$	1,650.6
Accounts receivable, held for sale	$	1,055.6	$	—	$	—

Signet grants credit to customers based on a variety of credit quality indicators, including consumer financial information and prior payment experience. On an ongoing basis, management monitors the credit exposure based on past due status and collection experience, as it has found a meaningful correlation between the past due status of customers and the risk of loss.

During the third quarter of Fiscal 2016, Signet implemented a program to provide in-house credit to customers in the Zale division’s US locations. The allowance for credit losses associated with Zale customer in-house finance receivables was immaterial as of July 29, 2017, January 28, 2017 and July 30, 2016.

Other accounts receivable is comprised primarily of accounts receivable relating to the insurance loss replacement business in the UK Jewelry division of $6.9 million (January 28, 2017 and July 30, 2016: $11.0 million and $7.6 million, respectively).

As a portion of the Sterling Jewelers customer in-house finance receivables have been reclassified as “held for sale” during the second quarter of Fiscal 2018, the allowance for credit losses associated with these receivables has been reversed as of July 29, 2017. The allowance for credit losses on Sterling Jewelers customer in-house finance receivables “held for investment” is shown below:

	26 weeks ended
(in millions)	July 29, 2017			July 30, 2016
Beginning balance	$	(138.7	)	$	(130.0	)
Charge-offs, net	103.9			89.5
Recoveries	17.8			18.3
Provision	(118.0		)	(107.2		)
	$	(135.0	)	$	(129.4	)
Reversal of allowance on receivables held for sale	20.7			—
Ending balance	$	(114.3	)	$	(129.4	)
Ending receivable balance evaluated for impairment	736.9			1,745.0
Sterling Jewelers customer in-house finance receivables, net	$	622.6		$	1,615.6

Net bad debt expense is defined as the provision expense less recoveries.

The credit quality indicator and age analysis of Sterling Jewelers customer in-house finance receivables “held for investment” and “held for sale” are shown below:

	July 29, 2017					January 28, 2017					July 30, 2016
(in millions)	Gross		Valuation allowance			Gross		Valuation allowance			Gross		Valuation allowance
Performing:
Current, aged 0 – 30 days	$	1,394.2	$	(42.8	)	$	1,538.2	$	(47.2	)	$	1,350.7	$	(41.3	)
Past due, aged 31 – 60 days	264.6		(8.6		)	282.0		(9.0		)	264.1		(8.6		)
Past due, aged 61 – 90 days	52.5		(2.4		)	51.6		(2.3		)	53.2		(2.5		)
Non Performing:
Past due, aged more than 90 days	81.2		(81.2		)	80.2		(80.2		)	77.0		(77.0		)
	$	1,792.5	$	(135.0	)	$	1,952.0	$	(138.7	)	$	1,745.0	$	(129.4	)
Less: Amounts attributable to accounts receivable held for sale	1,055.6		(20.7		)	—		—			—		—
Accounts receivable held for investment	$	736.9	$	(114.3	)	$	1,952.0	$	(138.7	)	$	1,745.0	$	(129.4	)

	July 29, 2017				January 28, 2017				July 30, 2016
(as a % of the ending receivable balance)	Gross		Valuation allowance		Gross		Valuation allowance		Gross		Valuation allowance
Performing
Current, aged 0 – 30 days	77.8	%	3.1	%	78.8	%	3.1	%	77.4	%	3.1	%
Past due, aged 31 – 60 days	14.8	%	3.3	%	14.5	%	3.2	%	15.1	%	3.3	%
Past due, aged 61 – 90 days	2.9	%	4.6	%	2.6	%	4.5	%	3.1	%	4.7	%
Non Performing
Past due, aged more than 90 days	4.5	%	100.0	%	4.1	%	100.0	%	4.4	%	100.0	%
	100.0	%	7.5	%	100.0	%	7.1	%	100.0	%	7.4	%

See Note 3 for additional information regarding the anticipated sale of a portion of the US customer in-house finance receivable portfolio, as well as the agreement to outsource the servicing function for the Company’s remaining in-house finance receivables.

Securitized credit card receivables

The Sterling Jewelers division securitizes its credit card receivables through its Sterling Jewelers Receivables Master Note Trust. See Note 16 for additional information regarding this asset-backed securitization facility.