Signet Jewelers Limited

Good morning, everyone, and welcome to the Cignet Jewelers fourth quarter fiscal 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you may press star and then one. To remove yourselves from the question queue, you may press star and two. Please also note today's event is being recorded. Today's speakers are Cignet's CEO, Gina Grosso, and CFO, Joan Hilson. During today's presentation, Cignet will make certain forward-looking statements. Any statements that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. We urge you to read the risk factors, cautionary language, and other disclosures in Cignet's annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as filed with the Securities and Exchange Commission. Except as required by law, Cignet undertakes no obligation to revise or publicly update forward-looking statements in light of new information or future events. During the call, Cignet will discuss certain financial measures not presented in accordance with generally accepted accounting principles, otherwise known as non-GAAP measures. These non-GAAP measures include operating income, effective tax rate, and earnings per share. For future discussion of the non-GAAP financial measures, as well as reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures, investors should review the news release posted on Seamless website at www.seamlessjewelers.com backslash investors. At this time, I'll turn the conference call over to Ms. Trostos.

Thank you, Jamie. Good morning, everyone, and thank you for joining today's call. Before I discuss our fourth quarter and fiscal 2020 performance, I would like to address the COVID-19 outbreak. On behalf of the Signet Board of Directors, executive team, and all of our Signet team members, our hearts and prayers go out to all who have been impacted by the COVID-19 global pandemic. We greatly appreciate all who are caring for those in need, especially the many healthcare professionals on the front lines. I'm also thankful to our team members who are demonstrating remarkable compassion, commitment, and courage during this crisis. In this rapidly evolving environment, we have been making decisions in real time, prioritizing the health and safety of our team members and customers, and taking bold actions to ensure the long-term sustainability of our business. With that in the forefront of our minds, it's difficult to transition to a discussion of fourth quarter business results. However, we believe it's important to share how the business performed prior to seeing impact from the COVID-19 pandemic, the actions we have taken since and how we're positioning our company for when the nation begins to emerge from this crisis. The environment we're operating in today underscores the importance of Cignet's transformation into a more agile and efficient organization. As you've seen from our announcement earlier this week, we have moved quickly and aggressively to strengthen Cignet's financial flexibility. We are focused on substantially reducing discretionary spend in areas that our customers do not see or care about, as well as driving marketing efficiencies through enhanced digital presence and targeting using advanced data and analytics. Additionally, given the temporary closure of our stores, we are implementing reduced work hours, furloughs, and reduced compensation across store and support center teams. As part of this, our top leaders and I have taken a voluntary 50% base salary reduction and other leaders have taken significant reductions too. Half of this will be replaced with equity grants. The Board of Directors has reduced its retainer fees by 50% and agreed to be compensated entirely in the company's common shares. Many of us have also contributed a portion of our bonuses to an emergency relief fund established to help our colleagues in need. Our signet team is in this together and I have confidence we will emerge as an even stronger united team and company. Since we do not have visibility into the duration of this crisis and the related economic impact, in addition to expense reductions, We are temporarily suspending our cash dividend and have elected to pay the May quarterly dividend on the preference shares in kind rather than in cash. We also aggressively reduced planned capital expenditures. Within this lower spend, we are prioritizing digital investments and our flexible fulfillment initiative. Recall that over the past two years, we've successfully transitioned our banners to the hybrid e-commerce platform, enabling much faster speed, curated search, and product visualization using high-quality imaging. We also made important investments in our mobile experience and custom configurators to allow customers to personalize and even design their own jewelry. All of this improves the experience of our online purchaser. as well as the browser who starts their journey online and will eventually purchase in one of our brick and mortar stores. To achieve immediate e-commerce impact, we are focused on enhancing search and browse, easier checkout, and even more advanced custom design capabilities to create an optimized and frictionless shopping experience for customers. We are also continuing to implement our flexible fulfillment initiative, which unlocks store-level inventory, allows us to optimize across our network through a single view, improves our product assortment by store, and enhances the customer experience with buy online, pick up in store available this holiday. Very importantly, We believe we are effectively managing through the present disruption. At the same time, we are working to accelerate our transformation through acutely focused investments to build Cignet's future. We've made progress over the past two years on our path to brilliance transformation and are galvanized around three key strategies. Number one, customer first. Number two, omnichannel. and number three, building a culture of agility and efficiency. Our results in the fourth quarter demonstrate that these strategies are working. So while there is considerable disruption today, we believe we have built a strong foundation and the resiliency and capabilities to emerge as a stronger company with enhanced competitive advantage. Now turning to our fourth quarter and fiscal 2020 results as well as color on our performance entering fiscal 2021. Our fourth quarter results were better than anticipated and we ended the year strong with our best overall holiday business performance in four years. Our team delivered fourth quarter same store sales growth of 2.3% and generated double digit growth in e-commerce. We delivered 0.6% same-store sales growth for the fiscal year and exceeded our cost savings target for the year, achieving an expense reduction of approximately $100 million. All of this drove strong non-GAAP operating income up 16% and free cash flow of $419 million for the fiscal year. The momentum we experienced during the holiday season continued, as we entered fiscal 2021. We had a strong Valentine's Day selling season with customers reacting favorably to our product newness, customer experience innovations, and our always-on approach to marketing. March performance to date reflects the increased impact of the COVID-19 pandemic, which led us to close all of our retail store locations earlier this week. In a time like this we all know that celebrating those you love is important. To effectively serve our customers our team is being agile and innovative. Given our size and scale there are things we are doing right now to drive relevance and deliver our company mission to help customers celebrate life and express love. Here are three themes we are actively focused on to put innovation into action and meet our customers where they are. First, providing our expertise. Our customers often want advice before making their final decision. Across all of our banners, our level of personal service, especially today, is one of our strongest differentiators. So we're leveraging the expertise of our digitally native banner, JamesAllen.com, to rapidly advance our online selling assistance tools across all of our banners. We've enhanced our live chat capability and trained hundreds of our customer care and in-store jewelry experts who are now working from home to provide their expertise virtually. Secondly, Bringing the best of our stores to our customers with Omnichannel. We are hosting virtual special events, including for Mother's Day, hosting video chats, and empowering our team members to be social ambassadors. We have also rapidly added to our online inventory from store stock to be ready to meet all customer needs. And third, giving customers an excellent value. We know that, given current and future economic uncertainty, our customers are even more value conscious. We believe our excellent vendor relationships, sourcing capability, and scale allow us to make sure we are providing high quality jewelry at a great value. All in all, the team is working to support our customers' desire to celebrate love, especially now, online. Our team members across the country are delivering our mission in new and innovative ways. In closing, our team delivered strong results in the fourth quarter and fiscal year 2020. As we navigate the current uncertainty, we are leveraging the strong foundation we have built over the past two years of our Pastor Brilliance transformation. Importantly, we have acted immediately to build additional financial flexibility during this disruption. We also believe that our transformation strategies are working, and we are acutely focused on the key priorities that will most enable our future growth. I will now turn the call over to Joan to further discuss our financial results and cost and cash management plans.

Thanks, Jenna, and good morning, everyone. In my remarks, I'll first cover the highlights of our fourth quarter and fiscal 2020 financial results, move on to the actions we are taking to conserve cash while our stores are closed due to COVID-19, and then conclude with a discussion of our credit facilities. The cumulative progress we have made is evident in our strong holiday quarter and full year fiscal 2020 financial results. Fourth quarter, same-store sales grew 2.3%, with double-digit growth in e-commerce as well as brick-and-mortar same-store sales growth. Non-GAAP operating profit grew 12% in the quarter, driven by higher growth margin as well as lower SG&A expense on a dollar-and-percentage-of-sales basis. Fourth quarter gross margin and SG&A each benefited from strong transformation cost savings. SG&A in the quarter also benefited from lower advertising spend that delivered higher impressions and lower staff costs inclusive of a smaller store base. These SG&A benefits were somewhat offset by higher incentive compensation year over year as a result of positive sales and profit performance. GAAP operating profit includes a charge of $33 million related to the company cash contribution portion of the settlement of a previously disclosed shareholder litigation, which will be described in our Form 10-K filing. The settlement is $240 million, with approximately $205 million expected to be paid with proceeds from insurance policies the company has in place. The settlement is subject to court approval. Interest expense declined 29% year-over-year in the quarter as a result of lower debt balances as well as the benefit of lower interest rates post our September 2019 refinancing. Fourth quarter non-GAAP EPS was $3.67 compared to prior year non-GAAP EPS of $3.96 as the benefit of higher operating profit and lower interest expense was more than offset by a higher tax rate. For the full year of fiscal 2020, same store sales grew 0.6% with double digit growth at James Allen and Pearson Pagoda. E-commerce grew 10% year over year and accounted for 12.2% of sales, up from 10.9% in the prior year and more than doubling as a percentage of sales over the last three years. Fiscal 2020 revenues declined 1.8% driven by a smaller store base. Fiscal 2020 non-GAAP operating profit grew 16% to 5.2% with gross margin expansion and SG&A leverage delivering non-GAAP operating margin improvement of 80 basis points. Operating profit performance was driven by transformation cost savings, lower stacked costs inclusive of closed stores, somewhat offset by slightly higher advertising, and higher levels of clearance. We delivered $100 million in net cost savings in fiscal 2020, with a portion of the gross savings reinvested in technology and innovation initiatives to drive growth. Gross savings were primarily driven by procurement, workforce optimization, and lower corporate costs. Our cost savings efforts have achieved $185 million in savings in the first two years of our Path to Brilliance transformation plan. We expect to continue to have a strong focus on cost savings in fiscal 2021. However, given uncertainties around COVID-19, We will not be providing a cost savings outlook for year three of the transformation at this time. Higher operating profit, together with improved working capital management, resulted in free cash flow of $419 million, up $300 million year over year on an adjusted basis, which excludes the non-prime credit proceeds in the prior year. Now I'll discuss the actions we are taking to navigate the current environment and the unknown duration of the impact of COVID-19. We are taking immediate actions to increase financial flexibility through operating expense and capital expenditure reductions. As Gina mentioned, the Board of Directors has elected to suspend our common dividend and pay the made quarterly dividend on the preference shares in kind. With respect to operating expenses, we substantially reduced our marketing spend while continuing targeted digital campaigns to support e-commerce operations as well as actively addressing all discretionary corporate spend. Our executives and board of directors have taken voluntary reductions in compensation. Half of the foregone base salary will be replaced with equity grants. We are also implementing actions across store and support center teams. We have reduced planned capital expenditures by more than 50% versus prior year and are prioritizing initiatives that continue to support our e-commerce channel. Additionally, inventory management remains a strategic priority for the company. We have developed strong inventory management disciplines over the last year, which we believe will enable us to manage our inventory in a more agile way across channels. These capabilities include store allocation tools that were piloted in the fourth quarter last year, leveraging artificial intelligence for just-in-time loose diamond replenishment, and lifecycle management. We've also embarked on a full review of our inventory-related store policies. Thanks to the strong relationships we have with our vendor partners, We have significantly reduced merchandise receipts while maintaining flexibility to ensure appropriate levels of newness to support holiday later this year. With respect to our real estate portfolio, we expect to further reduce our store footprint as we continue to optimize our fiscal presence to a smaller, higher growth potential store base that delivers a fully connected omni-channel journey. We are reducing our presence in declining malls while planning to selectively reposition certain stores to all small locations. However, due to the potential longer-term impact of COVID-19, we will be closely analyzing the health of every location in our fleet and evaluating where we believe the market potential has been impaired. Turning to liquidity. As previously announced, we refinanced our credit facility in September of 2019. Our debt now consists of an asset-based credit facility and senior unsecured notes, both of which are due in 2024. We have no scheduled principal payments under these facilities until they mature in 2024. In order to strengthen our financial flexibility, We accessed an additional $900 million on our asset-based facility on March 19th. As of the date of this drawdown, we had more than $1.2 billion in cash on hand and an additional $292 million available on this facility. The asset-based revolving credit facility is subject to a fixed charge coverage ratio. If availability under the facility falls below 10% of the borrowing base, or $100 million, whichever is higher. The most recently reported borrowing base under this facility is approximately $1.4 billion. Additionally, the senior unsecured notes due in 2024 are not subject to financial covenants. Now I would like to briefly discuss our non-prime credit offering. In June of 2018, we entered into a five-year agreement under which Carval Investors and Castle Lake LP would purchase 70% and 30% respectively of our non-prime receivables related to our private label credit offering. These non-prime sales currently represent approximately 7% of Cigna's annual sales in the prior year. As we disclosed in our December form December Form 10-Q, the net yield on these receivables has fallen below the minimum yield under the agreement, which gave the investors the right to terminate the agreement as of December 31st, 2019. As you will see in our 10-K filing, on March 23rd, 2020, Carval provided notice to the company that it was terminating the agreement effective the same day. In the notice of termination, Carvel stated that it is willing to provide a 30-day purchase facility at substantially the same terms as the terminated agreement, but for a fixed term of 30 days from March 23, 2020. Signed is in discussions with Carvel regarding such transition agreements. Catholic has informed Cignet that subject to their reservation of right to terminate, they do not currently intend to terminate their agreement. On March 25th, 2020, Catholic and Cignet entered into a non-binding memorandum of understanding regarding the party's shared interest in a potential definitive agreement whereby Castle Lake would purchase 100% of the funding obligations on the forward flow and add-on purchases on a go-forward basis. Importantly, our servicing arrangement with our partner, Genesis Financial, remains in place. We believe that Carval's termination will not have a material adverse impact on our Cigna's financial condition and will provide an update on our partner arrangements when these discussions are completed. Finally, I'd like to mention that we will not be providing fiscal or first quarter 2021 guidance due to the current uncertainty in the market. Be assured that our leadership team and team members at every level of our organization are resolutely focused on generating cash to maintain financial flexibility in this fluid environment. And now I'll turn the call over to the operator to begin the Q&A section.