Signet Jewelers Limited

Good morning, everyone, and welcome to the Cignet Jewelers' fourth quarter fiscal 2021 earnings call. All participants will be in a listen-only mode. Should you need assistance, please say no to a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Vinny Sinisi, SVP of Investor Relations and Treasury. Sir, please go ahead.

Thanks very much, Jamie, and good morning, everyone. Welcome to our fourth quarter earnings conference call. On the call today are Cignet's CEO, Jenna Josos, and CFO, Joan Hilson. During today's presentation, we'll 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, other disclosures on our annual report on 10-K, quarterly reports on 10-Q, and current reports on Form 8-K. Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events. During the call, we'll discuss certain non-GAAP financial measures. For further discussion of the non-GAAP financial measures as well as reconciliations of non-GAAP to GAAP that's most directly comparable, investors should review the news release we posted on our website at www.signatjewelers.com slash investors. Also, please note that we plan to hold a virtual investor event on April 12th. Registration details will be announced soon. And with that, I'll turn the call over to Gina.

Thank you, Vinny, and thank you all for joining us today. Let me begin by sharing our results for the fourth quarter and then core elements of our strategic path going forward. I want to say, first and foremost, how incredibly proud I am of our Cignet team, and to thank them not only for their achievements this past year, but also for the amazing dedication and agility they've demonstrated throughout our three-year Path to Brilliance journey. We've put our culture of agility and efficiency to the test time and again, and Cignet people have demonstrated that we're continuing to transform this company and are well-positioned to deliver sustainable long-term growth. Q4 is a good illustration of the capabilities we're continuing to build. Same-store sales grew 7%, with over 70% growth in e-commerce sales. We delivered non-GAAP operating income of more than $293 million, up nearly 9% versus a year ago. While COVID created significant headwinds in the first half, we regained momentum. and delivered a strong second half with 9.9% same-store sales growth. Both our bridal and fashion businesses continued to be healthy, and our strong e-commerce performance complemented the reopening of our stores. Our ability to pivot successfully through the pandemic and to deliver the back half performance that our team delivered is rewarding, especially as I look back at what we've achieved in the past three years. In 2016 and 17, the company was losing share to smaller specialty jewelry stores, to non-specialty retailers, and to online and pure play digital retailers. The industry was changing fast, and customer expectations for quality, service, value, and personal engagement were constantly increasing. An especially big change was how quickly people were growing comfortable with e-commerce and digital technology in the jewelry category, a trend that accelerated dramatically this past year. As we launched Path to Brilliance, we committed to make clear strategic choices and cultural changes that would build a strong foundation, enabling us to pivot to growth. When I look back over the last three years, and compare it to where we are today, I see three very significant differences. First, our culture is stronger. We're more agile, more innovative, more efficient, and truly unified behind an inspiring purpose. Second, we're much more data-driven today than we were then, with deeper insight that enables us to create highly personalized customer experiences and move with greater speed and precision. And third, we have a broader and stronger set of core strengths that create sustainable and growable competitive advantages. Each of these differences is reflected in the results achieved over the first three years of our transformation. We eliminated $300 million in expenses benefiting gross margin and SG&A, above our initial goal of $200 to $225 million. We reduced our store footprint by more than 20%, decreasing our exposure to low-performing malls and achieving higher-than-expected sales transference in our new connected commerce model. Meanwhile, we grew our e-commerce sales to 23% penetration, above our initial goal of 15% and more than four times the e-commerce penetration that existed before we started Path to Brilliance. This transformation has been fueled by our strategic choices, customer first, omnichannel, and culture of agility and efficiency, and by the investments we made behind those priorities in technology, productivity, and culture. To best understand why we're now capable of delivering sustainable long-term growth and why the next phase of our strategy is right, it's important to look at what these investments have delivered over the past three years. I'll start with the significant and strategic investments we've made in technology. We placed a huge priority on data analytics with a deep commitment to become a more data-driven company. We developed and hired top talent. We started building the tech infrastructure required for a digitally enabled business. And we acquired James Allen, which strengthened our digital and e-commerce capabilities substantially. This emphasis on data analytics and digital technology has impacted nearly every aspect of our business. For example, we now have a much more granular understanding of customer behavior across banners and at every customer touchpoint, increasingly in real time. We reduced our inventory by nearly 11% over the past three years by implementing inventory disciplines, lifecycle management, and new technology tools, generating meaningful increases in cash flow and improving working capital efficiency. All this, while our merchants significantly strengthened our core assortment, and new product pipeline. We've moved our banner websites onto a unified platform, enabling a much more seamless customer experience that's improving conversion and increasing transaction values. This gives us the ability to innovate and to add new functionality much faster. And we've dramatically improved the effectiveness and efficiency of our marketing mix. This is a particularly important point, so I'll share just one brief example. Kay Jewelers, the largest advertiser among our banners, has cut its TV spend in half over the past three years while more than doubling digital marketing. This change in mix has been data-driven. We know, with a precision we didn't have three years ago, which media provide the best incremental return to make media spend more efficient. This capability combined with our scale is a meaningful competitive advantage. We've shifted significantly toward digital, which enables customized communication, but we're still able to command a leading TV presence in the jewelry industry at the same time, which builds awareness and brand equity. It's a very effective combination. These examples illustrate what I'm most encouraged about, and we're just getting started. We're continuing to invest in both technology and talent, and our business is becoming more customer-focused and data-driven quarter by quarter, holiday by holiday. The second area of focus was improving productivity, which is now an ongoing priority across our business. In fact, productivity is becoming a mindset that guides how we innovate and execute in everything we do. I'll give you a few quick examples. First, costs. We've cut more than $300 million in operating costs that customers don't care about over the past three years, and we've reinvested a meaningful portion of those savings into growth-focused areas that customers do care about. The technology examples I just shared are a good illustration. We were able to make these highly strategic investments because we improved our cost structure and created new flexibility to invest. Second, cash. Our diligent focus on cash conservation has enabled us to pay down more than $1.3 billion in debt, which included the full pay down of our revolver. As a result, we're ending the year in a position of strong liquidity. with $1.2 billion in cash. Third, stores. We made significant progress optimizing our store footprint. While we've closed more than a fifth of our locations over the past three years, we've also opened and repositioned stores in the right trade areas and in line with our portfolio banner strategy. As a result, we've dramatically reduced our exposure to lower traffic malls and increased our off-mall footprint. We've also been improving the customer experience, integrating digital and physical, not as an isolated channel play, but as part of a tightly integrated, data-driven, omnichannel approach. We're already seeing the early benefits of these moves. We achieved higher total revenue in the second half of fiscal 2021, up 4.4%, despite 395 permanent store closures. And we've delivered brick and mortar same-store sales growth in North America for two quarters in a row. I'd also like to highlight the improvements we've made in our culture. This company attracts passionate, skilled, experienced talent at every position. The challenge we faced three years ago was to unleash all the potential our people had within them, the culture had become too siloed, transactional, and risk-averse. We've worked hard to create conditions for a new culture to flourish, a culture characterized by freedom to try new things, to take risks, fail fast, and learn, to move with speed and agility, and to be empowered to cut costs relentlessly if they don't benefit customers. We've also invested in our people, with moves such as our commitment to a $15 minimum wage for all U.S. employees and our deployment of Love Takes Care Appreciation Bonus Awards for full and part-time employees, a gesture of our gratitude for their commitment in the face of unprecedented challenges. People are thriving in this more invigorating culture. We see it in our performance, but we also see it in employee comments. In a recent internal survey, for example, more than 90% of employees expressed understanding of our business strategy. And more than 80% said they are proud to work at Signet and believe Signet will emerge stronger from the pandemic. For three years in a row, Signet has been the only specialty jeweler recognized on Bloomberg's Gender Equality Index. And just this year, based on employee input, Signet was recognized as a certified great place to work company. Our priorities and investments in technology, productivity, and culture were foundational. Signet is a much stronger company today than it was three years ago, strategically, financially, and organizationally. And as a result, we're better positioned to lead our industry and deliver consistent long-term growth, which the next phase of our growth strategy, Inspiring Brilliance, is designed to achieve. So let's turn now to the road ahead. Our overarching objective is to lead innovation that helps grow the jewelry industry while also increasing our share of the market. In other words, to make the pie bigger and get a bigger slice of the pie. To do this, we're making clear choices about where to play and how to win. Let me start with our where to play strategies. First, we will win in our biggest businesses. We have the leading retail jewelry brands in their respective markets. K Jewelers in the US, H Samuel in the UK, and Peoples in Canada. Our bridal, gifting, and self-purchase businesses are strong and growing. We'll continue to win in these big core businesses with even sharper focus on data-driven marketing. proven levels of newness, and strengthened core assortment. And we'll continue the work we've done to align our banners with the customers they serve best. Second, we'll accelerate services, making it the glue that builds lifetime bonds with our customers. We will expand and improve existing services, such as care, repair, and extended service agreements, deepen relationships with new piercing and financial services, and build on our fast-growing marketplaces in ways that create even more opportunities to serve customers, such as access to new jewelry designers, rental services, and subscription offerings. Third, we'll expand accessible luxury and value. Our scaled position in the mid-tier jewelry market gives us the opportunity to stretch the traditional definition of the top of the mid-market with greater focus on accessible luxury and stretch the bottom with greater focus on value. These moves will help us gain share from independents, mass market retailers, and online retailers. And fourth, we're committed to lead digital commerce in jewelry. We'll serve our customers to ensure we're there whenever, wherever, and however they want to engage us. This means increasing the percentage of our business coming through e-commerce, increasing our share of jewelry e-commerce purchases, and increasing our presence in social commerce with bespoke experiences and influencers. We're confident in these strategic where to play choices. They leverage our scale, play to our strengths, and are difficult for competitors to match. Given the journey we've been on, we're also confident in the evolution of our three how to win capabilities, from foundational to inspirational, from customer first to consumer inspired, from omnichannel to connected commerce, and the continued enhancement of our culture to one of innovation and agility. Let's look first at consumer-inspired. When we began the Path to Brilliance journey, we focused on strengthening our relationships with existing customers. Now we're growing our customer base with consumer-inspired insights and innovation. This is leading to stronger differentiation among our banners. In fact, with more bespoke product portfolios and personalized marketing, Kay and Zales are delivered their strongest fourth quarter combined same-store sales growth since the Zales acquisition. Jared's foundry concept is a good example. We looked at converging trends, the growing demand for personalization and customization, technologies like 3D printing that open up new design and production possibilities, and the desire of many customers to enjoy luxury experiences. that were previously unaffordable to many mid-market customers. Foundry concept emerged from our insights on these trends. We're leveraging our existing network of 1,400 skilled jewelry artisans and apprentices, leveraging our scale to access metals, diamonds, and stones, and leveraging CAD and 3D printing design technologies in our stores and virtually to create an immersive experience. Customers are bringing unique and creative visions and literally co-creating jewelry they've imagined hand-in-hand with our skilled artisans. We're expanding this concept to more than 50 Jared stores and online. It's a highly differentiated offering that capitalizes on our mix of personalized services and scale. Next is Connected Commerce. We've been introducing new technology tools such as conversational messaging, enhanced text search, virtual try-on, and virtual consulting for some time. In fact, we added hundreds of new search, browse, and checkout features in the second half of the fiscal year. But what's different now and going forward is how we're connecting them to create a seamless customer experience across technologies and touchpoints. The way we've integrated virtual try-on into a more holistic experience is a great illustration of connected commerce at work. Customers use visual search to find a fantastic ring from Zales or Kay or Jared on Instagram or Pinterest. They upload a photo and use virtual try-on to see how the ring looks on their unique skin tone and finger size. From there, they easily book an appointment in-store or with one of our more than 700 virtual consultants. And when they're ready, they can buy in-store, or buy online and pick up in-store, or ship directly to their home. Our connected commerce technology enhances the customer experience, celebrates customer diversity, unlocks our inventory nationally, and helps drive sales and higher spend, while also reducing returns. In fact, this connected approach I just described, using visual search, try-on, virtual appointments, and messaging, is gaining traction and increasing conversion, accounting for more than $125 million in revenue in the back half. We're testing these connected tools on a wide range of SKUs right now and expect to roll them out more broadly across banners this spring. The last how to win strength I want to touch on is culture of innovation and agility. We're creating a culture that's powered by our purpose, inspiring love, and that thrives on innovation and agility. Building on the lightning fast ways we've made decisions during COVID, we're looking to unlock faster paced iterative learning to empower agile work teams and to bring design thinking approaches to problem solving. We're working hard to turn innovation, diversity, speed, and transformational productivity into signature characteristics of our culture. We saw these characteristics grow during the past year and especially flourish in the fourth quarter. The 2020 holiday was a proof point. It was a data-driven holiday fueled by innovation and supported by precise execution on all fronts. For example, We reinvented how we plan labor in our stores, using real-time data analytics to model every store, hour by hour, every day of the holiday season. We were able to predict which stores had the greatest potential to drive sales by staying open later and which could be closed earlier to maximize the return on our store labor investment. We scheduled appointments before and after hours and used curbside selling and pickup to accommodate various customer needs, including health requirements. And our new concierge capability maximized the efficiency of store workflow, kept customer wait times down, and enabled faster buy online, pick up in store services. We equipped our jewelry consultants with client telling tools and technology that they can now use no matter where they are, at home, in a store, or elsewhere. creating zero distance between them and their best customers. We reduced customer care volume with an online order tracking tool that freed up our care teams to focus on customers who were ready to buy, which more than doubled phone and chat-assisted sales. And finally, on peak days, we used every bit of the five-fold increase in e-commerce distribution capability we built between April and October, resulting in over 98% of e-comm orders fulfilled on time as promised. This is to illustrate that in every part of the company, we were ready with capabilities and distribution that did not exist three years ago. It's how our team delivered a strong holiday and back half in the face of unprecedented challenges. What I hope you can see is the tight interdependence of these strengths. When we discover insights inspired by consumers, turn those insights into seamless experiences through connected commerce, and win with customers through a culture of innovation and agility, we develop competitive advantages that enable sustainable long-term growth. With these strategic choices, we are committing ourselves to be an innovation leader of the jewelry category, which is a vision that inspires the very best in us. I'll close on this point. Cignet exists to inspire love, and our jewelry products and services are designed to help people celebrate life and express their love. The power of love is not an abstraction. It's the heart of our business. It infuses our work with meaning and purpose. It's a standard of responsibility and an enormous motivator of performance. You see, every time we help someone express their love, we make the world a little better. Every time we stand up for love, we make ourselves and those we love a little stronger. And every time the love we inspire inspires love in others, we fulfill our purpose as a company. This is what inspiring brilliance means to us. We want to be and to lead the change that we want to see in our industry and in the world. Our path to brilliance journey has been an invigorating experience for all of us, and we are not letting up. Now is our moment to lean in and to keep accelerating the work we've begun. It's a threshold moment as we take Signet from stable to growing to great. I'll now hand over to Joan, and then we'll be happy to take your questions. Thank you, Jenna.