Accounts receivable, net

3 Months Ended

May 05, 2018

Receivables [Abstract]

Accounts receivable, net

Credit transaction, net

During Fiscal 2018, Signet announced a strategic initiative to outsource its North America private label credit card programs and sell the existing in-house finance receivables. Below is a summary of the transactions the Company has entered into as a result of this strategic initiative:

Fiscal 2018

In October 2017, Signet, through its subsidiary Sterling, completed the sale of the prime-only credit quality portion of Sterling’s in-house finance receivable portfolio to Comenity. The following events summarize the credit transaction:

Receivables reclassification: In the second quarter of Fiscal 2018, certain in-house finance receivables that met the criteria for sale to Comenity were reclassified from "held for investment" to "held for sale." Accordingly, the receivables were recorded at the lower of cost (par) or fair value, resulting in the reversal of the related allowance for credit losses.

Proceeds received: In October 2017, the Company received $952.5 million in cash consideration reflecting the par value of the receivables sold. In addition, the Company recognized a beneficial interest asset representing the present value of the cash flows the Company expects to receive under the economic profit sharing agreement related to the receivables sold.

Asset-backed securitization facility termination: In October 2017, the Company terminated the asset-backed securitization facility in order to transfer the receivables free and clear. The asset-backed securitization facility had a principal balance outstanding of $600.0 million at the time of termination. The payoff was funded through the proceeds received from the par value of receivables sold.

Program agreement: Comenity provides 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 established 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 is 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 under an economic profit sharing agreement. The Program Agreement contains customary representations, warranties and covenants.

Additionally, Signet and Genesis Financial Solutions (“Genesis”) entered into a five-year servicing agreement in October 2017, under which Genesis will provide credit servicing functions for Signet’s existing non-prime accounts receivable, as well as future non-prime account originations.

Fiscal 2019

During March 2018, the Company, through its subsidiary Sterling, entered into a definitive agreement with CarVal to sell all eligible non-prime in-house accounts receivable. In May 2018, the Company exercised its option to appoint a minority party, Castlelake, to purchase 30% of the eligible receivables sold to CarVal under the Receivables Purchase Agreement. The accounts receivable will be sold at a price expressed as a percentage of the par value of the accounts receivable of 72% of par. The purchase price is expected to be settled with 95% received as cash upon closing and the remaining 5% deferred until the second anniversary of the closing date and subject to the non-prime in-house finance receivable portfolio achieving a pre-defined yield. The Company will adjust the asset to fair value in each period of the performance period. The agreement contains customary representations, warranties and covenants.

Receivables reclassification: In March 2018, the eligible non-prime in-house accounts receivables that met the criteria for sale were reclassified from "held for investment" to "held for sale" on the condensed consolidated balance sheets. Accordingly, the receivables were recorded at the lower of cost (par) or fair value as of the date of the reclassification. Subsequent adjustments to the asset fair value are required to occur until the transaction closes, which is expected during the second quarter of Fiscal 2019 subject to certain closing conditions. During the first quarter of Fiscal 2019, total valuation losses of $141.0 million were recorded within credit transaction, net in the condensed consolidated income statement.

Expenses: During Fiscal 2019, the Company incurred $2.1 million of transaction-related costs. These costs were recorded within credit transaction, net in the condensed consolidated income statement during Fiscal 2019.

In addition, for a five-year term, Signet will remain the issuer of non-prime credit with investment funds managed by CarVal and Castlelake purchasing forward receivables at a discount rate determined in accordance with the agreement. Servicing of the non-prime receivables, including operational interfaces and customer servicing, will continue to be provided by Genesis. The credit transaction is subject to certain closing conditions.

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.

In October 2017, the Company completed the sale of the prime portion of the Sterling Jewelers customer in-house finance receivables. The receivables sold, which were classified as "held for sale" as of the second quarter of Fiscal 2018, are no longer reported within the condensed consolidated balance sheets. See Note 4 for additional information regarding the sale of the prime portion of the customer in-house finance receivable portfolio.

In March 2018, the Company entered into an agreement to sell the remaining Sterling Jewelers and Zale 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. See Note 4 for additional information regarding the agreement. As of May 5, 2018, the accounts receivable held for sale were recorded at fair value. See Note 17 for additional information regarding the assumptions utilized in the calculation of fair value of the finance receivables held for sale.

(in millions)	May 5, 2018		February 3, 2018		April 29, 2017
Accounts receivable by portfolio segment, net:
Legacy Sterling Jewelers customer in-house finance receivables	$	—	$	649.4	$	1,683.8
Legacy Zale customer in-house finance receivables	$	—	33.5		32.8
North America customer in-house finance receivables	$	—	$	682.9	$	1,716.6
Other accounts receivable	6.8		9.6		9.7
Total accounts receivable, net	$	6.8	$	692.5	$	1,726.3
Accounts receivable, held for sale	$	484.6	$	—	$	—

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 February 3, 2018 and April 29, 2017. Effective October 20, 2017, the Zale customer in-house financing programs are being underwritten and serviced by a third party for newly originated balances after the effective date.

Other accounts receivable is comprised primarily of accounts receivable relating to the insurance loss replacement business in the International segment of $5.8 million (February 3, 2018 and April 29, 2017: $9.3 million and $8.9 million, respectively).

The allowance for credit losses associated with the portion of customer in-house finance receivables reclassified as “held for sale” was reversed during the first quarter of Fiscal 2019. The activity in the allowance for credit losses on Sterling Jewelers customer in-house finance receivables is shown below:

	13 weeks ended
(in millions)	May 5, 2018			April 29, 2017
Beginning balance	$	(113.5	)	$	(138.7	)
Charge-offs, net	56.3			54.4
Recoveries	4.2			9.1
Provision	(54.6		)	(51.7		)
Reversal of allowance on receivables previously held for sale	107.6			—
Ending balance	$	—		$	(126.9	)
Ending receivable balance evaluated for impairment	—			1,810.7
Sterling Jewelers customer in-house finance receivables, net	$	—		$	1,683.8

As a result of the sale of the prime-only credit portion of the customer in-house finance receivable portfolio and the outsourcing of the credit servicing on the remaining in-house finance receivable portfolio in October 2017 as disclosed in Note 4, the Company revised its methodology for measuring delinquency to be based on the contractual basis.

As of May 5, 2018, the customer in-house finance receivables were held for sale and recorded at fair value in the condensed consolidated balance sheet. As such, no valuation allowance for credit losses was required to be recorded. The credit quality indicator and age analysis of customer in-house finance receivables as of February 3, 2018 are shown below under the contractual basis:

	February 3, 2018
(in millions)	Gross		Valuation allowance
Performing (accrual status):
0 - 120 days past due	$	703.4	$	(54.0	)
121 or more days past due	59.5		(59.5		)
	$	762.9	$	(113.5	)
Valuation allowance as a % of ending receivable balance			14.9		%

Prior to the fourth quarter of Fiscal 2018, the Company’s calculation of the allowance for credit losses was based on a recency measure of delinquency. The credit quality indicator and age analysis of customer in-house finance receivables prior to the sale of the prime-only credit portion of the in-house receivable portfolio as of April 29, 2017 are shown below under the recency basis:

	April 29, 2017
(in millions)	Gross		Valuation allowance
Performing (accrual status):
Current, aged 0 – 30 days	$	1,445.9	$	(44.5	)
Past due, aged 31 – 60 days	251.9		(8.3		)
Past due, aged 61 – 90 days	40.9		(2.1		)
Non Performing:
Past due, aged more than 90 days	72.0		(72.0		)
	$	1,810.7	$	(126.9	)
Valuation allowance as a % of ending receivable balance			7.0		%