Signet Jewelers Limited

Good day and welcome to the Signet Jewelers third quarter fiscal 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal 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 then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Vinny Sinisi, Senior Vice President, Investor Relations and Treasury. Please go ahead, sir.

Thanks very much, Rocco, and good morning, everybody. Welcome to our third quarter earnings conference call. On the call are Cignet CEO, Jenna Drossos, and Chief Financial and Strategy Officer, 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 risk factors, cautionary language, and other disclosures on your annual report on 10-K, quarterly reports on 10-Q, current reports on 8-Ks. 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 on those non-GAAP measures, as well as reconciliations of them to the most directly comparable GAAP measures, investors should review the news release we posted on our website at www.signatjewelers.com slash investors. With that, I'll turn the call over to Jenna.

Thank you, Vinny. And thanks to all of you who are on the call with us today. Our performance in Q3 reflects the continuing progress of our inspiring brilliance transformation and the innovation, agility, and passion of our entire organization. I continue to be inspired by our team quarter after quarter, and I am proud to work at their side every day. As we look back at this past quarter and our year to date, I want to leave you with one core message. Our inspiring brilliance transformation is working, making Signet a much healthier and more agile company today than we were a few years ago. We believe our top and bottom line growth is sustainable, and we're growing share while also investing in important new capabilities and customer experiences at a rate that is currently unrivaled in our category. We still have important work to do to complete this phase of Cygnet's transformation, but we have the strategic clarity, structural advantages, operating discipline, and high-performing team to continue driving growth ahead of the jewelry sector. We saw this in Q3. Our team delivered the strongest, most profitable third quarter in Cygnet history. a quarter that has often been challenging because there's no broad scale gift giving occasion. We've been taking steps to mitigate our dependence on big holiday cycles and move to a more always-on approach. This is evidenced in our investments in consistent marketing and customer engagement throughout the year, our year-round bridal cycle, and our efforts to increasingly support early holiday shopping in October. This approach is paying off. We delivered a same store sales increase of almost 19% to the third quarter last year with notable growth acceleration in October. The overall jewelry category was strong this quarter, but we believe we're gaining market share. We're achieving this growth by leveraging five structural advantages that we've built throughout our transformation. Number one, our distinctive portfolio of banners. Two, our connected commerce presence. Three, data analytics capability. Four, financial flexibility. And five, scale. We've built these strategic advantages through a series of investments and innovation that we continue to build upon. For example, we've made significant progress differentiating our banner value propositions with distinctive marketing campaigns and unique product assortments, delivering 14% sales growth in bridal and over 30% growth in fashion. We've invested in connected commerce capabilities that now exist in virtually every part of our business. This is reflected in capabilities such as seamless virtual and in-store consulting, asynchronous chat, product visualization, buy online, pick up in store, ship from store, curbside delivery, same day delivery, and more. We've streamlined our fleet, enabling us to serve customers across channels while also leveraging fixed costs as we drive the top line. We've eliminated consumer credit risk from our balance sheet, enabling us to focus entirely on jewelry retail leadership, while offering a broader array of payment options that continue to gain traction. By leveraging third-party expertise and focusing on what we do best, our financial services transformation is increasingly an enabler of customer acquisition and satisfaction. We've also eliminated costs the customer doesn't see or care about. Our expected cumulative four-year savings is now over $400 million through the end of fiscal 22. One example of how we're doing this is our data-driven labor model that enables us to dynamically plan staffing needs store by store, hour by hour, delivering a 75% improvement in productivity compared to this time two years ago. And we've improved inventory turns 50% by defining our product assortment more precisely by banner and by providing a much broader range of fulfillment options. We are becoming the consumer inspired, data driven jewelry leader and innovator that we aim to be. Given the very uncertain environment today, we're mindful of the challenges still ahead of us. That said, Joan and I would like to use our review of Q3 and our look ahead at Q4 to show how the advantages we've created are driving our performance and growth and positioning us for a strong holiday this year and beyond within all the factors we can control. Let's look first at how we're leaning into holiday earlier than ever. Our research indicates that roughly 25% of shoppers finished their holiday shopping before Black Friday this year, up from 17% a year ago. This trend is being driven by concerns about out of stocks, which we anticipated and planned for. We took action months ago to ensure that our holiday assortment would be stronger and available earlier than ever before. We pulled forward our pre-market qualification of new merchandise, strengthened our core assortments, leaned into trends identified in our research, and placed orders a month or more earlier than we typically do. We also prepared for continuing increases in digital sales and connected commerce this holiday. At this time last year, our jewelry consultants were providing new experiences like curbside pickup and virtual consultations to provide our customers a safe and convenient shopping experience. This year, we've improved the customer experience, allowing customers to select curbside service online during checkout and stay connected to the store throughout the process, from purchase to receipt to pickup. And we've expanded curbside delivery to more than 800 stores. We're offering ship from store at 1,850 stores five times more than last year, and we're offering buy online, pick up in store at 2,100 locations. In addition, we've enhanced our distribution capabilities, particularly by building in a layer of surge capacity to fulfill customer e-commerce orders on our busiest days. This is a good demonstration of the ongoing transformation at scale we're striving for. Last year, we increased our e-commerce supply chain capability fivefold. This year, we're building on that foundation, increasing the capacity of our distribution centers again, nearly 25% more than last year, and adding a nationwide fleet of local distribution centers with our ship-from-store capability. We're working to extend these distribution advantages even further in the coming year. We're building an AI-driven digital simulation of our entire supply chain. This digital twin will enhance our planning with scenarios that identify potential issues before they occur, giving us insights that enable us to provide faster delivery while driving cost efficiency. We're also improving our employee experience to maximize our advantages in talent and staffing. We increased our hourly wage this year, significantly expanded benefits to respond to the changing needs of our team members, and have continued to invest in training, development, and career growth. In addition, we continue to leverage the power of our purpose, inspiring love, and our innovative, agile culture to strengthen our team's pride, motivation, and performance. These and other efforts are making a difference. We've seen a 60% decrease in new employee turnover during their first two months at a time when turnover continues to top the headlines across retail. This is important because tenure matters in the jewelry category where expertise and personal relationships lead to lifetime value. In fact, a jewelry consultant with at least one year of tenure achieves on average 60% more sales than a new team member. All of these readiness efforts are driven by the structural advantages I mentioned a moment ago and will help us deliver a strong holiday. I'd now like to highlight the meaningful progress we made this quarter within each of our four where to play strategies. Winning in our biggest businesses, expanding accessible luxury and value, accelerating services, and leading digital commerce. Winning in our big businesses is our foundational strategy. The story here is that the clearer our banner value propositions become, the faster we grow. We've gained real traction with this strategy over three consecutive quarters now. For example, K and Zales are appealing to increasingly differentiated consumer segments. While both appeal to bridal customers, almost 30% of New Zales customers are on a self-purchase journey, up 400 basis points compared to two years ago. And 64% of New K customers are on a milestone or gifting journey to celebrate special moments in the lives of those they love, which is 700 points higher than two years ago. We plan our assortments with these journeys as our compass. We're able to introduce newness with much better success rates because our customers are more precisely defined and because our assortments are more relevant to the journey our customers are on. The success of the Monique Lillier launch at Kay is a clear example. Monique is an acclaimed fashion designer known for her captivating bridal gowns. Her brand is all about celebrating life's most special moments. She's partnering with Kay because she considers Kay to be an authority in both the bridal experience and the celebration of milestone moments. We just launched this line at the end of September, and it has already delivered more than $2 million in merchandise sales, ahead of expectations. Our second strategy, expanding the accessible luxury and value tiers of the mid-market is also an important driver of growth because it's bringing new customers into our banners. Accessible luxury is appealing because it's a growing higher price point mezzanine segment that sits between luxury and the mid-market. We've built a portfolio that is attracting a diverse mix of highly valuable customers. Jared offers exclusive designer lines, concierge-level service, custom design studios, and a rich assortment of diamonds and fine jewelry for bridal, fashion, and gifting. James Allen is our digital bridal megastore, the company that continues to pioneer the way that customers shop for engagement rings online, setting new standards for custom design and selections, with over 300,000 natural and lab-created diamonds. In Diamonds Direct, our newest banner is our highly personalized bridal destination. They offer customers high-touch bridal experiences with a highly productive operating model unlike any other in the jewelry category. This portfolio is designed not only to give accessible luxury customers a wide range of options but also to compete even more effectively with independent jewelers who make up more than 65% of the specialty jewelry category. And it's beginning to work as the integrated mix we've envisioned. Jared's average transaction value this quarter was up 35% versus the third quarter two years ago through increased custom design and higher quality merchandise that includes larger stones and precious metals like platinum. James Allen had 50% more customer transactions this quarter than two years ago, again, demonstrating our ability to attract and close highly discriminating bridal customers online. And Diamonds Direct offers customers a differentiated accessible luxury experience, which is currently generating a median annualized revenue of approximately $18.5 million per store, over the last 12 months. We're confident we can learn from their model while also bringing Cignet's best practices and our scale to their approach. We see similar opportunity on the value end of the mid-tier. Banter by Piercing Pagoda is generating higher sales and resonating with customers we want to attract to our portfolio, young social media savvy and highly expressive Gen Z consumers and confident creative consumers of all ages. We're also growing banter.com, which has relatively low digital penetration with significant upside remaining. We're continuing to accelerate the expansion of the banter concept based on these early positive results. Accelerating services is our third growth strategy. Providing services is the glue that builds lifetime relationships across every banner while also supporting our margin goals. We remain confident that our services strategy is a billion-dollar opportunity on Cignet's path to $9 billion in total revenue. Extended service agreements are a good example of the progress we're making with this strategy. One of the largest factors driving ESA growth is interaction with the salesperson. This happens naturally in-store, but we're focused on enabling this kind of interaction for purchases made online. We've empowered our virtual consultants to sell ESAs and have launched a series of educational videos that engage customers and discuss the benefits of our programs. In addition, we've simplified our ESA offerings, which, along with these other improvements, has helped us nearly triple our attachment rate online compared to this time two years ago and has lifted our overall attachment rate across channels by 60 basis points. Another example is our launch of a new loyalty program. Our vault reward is currently being piloted at a number of Jared stores. And after making refinements based on what we're learning, we expect to extend it across all our banners. This is a program that customers have expressed a desire for. It currently includes exclusive discounts, a rocks box trial membership, and unlimited jewelry cleaning. These programs are a great way to reward customer loyalty, stay connected, and provide additional data on how to better customize our assortment and services. Leading digital commerce is our fourth strategy. Digital is our accelerator, especially for our biggest businesses. The story in digital is data. This is becoming a real structural advantage for us. one of the biggest interventions we've made since we began our transformation. Our data analytics capabilities enable us to operate with increasing precision. For example, building on the insights of our initial real estate greenfield analysis, we're now taking a connected commerce approach to the next phase of this work. We didn't have capabilities like ship from store during our original analysis and no real way to capture each store's e-commerce halo. But now we do, and we're building on our trade area data with customer e-commerce trends, location data like GPS tracking, and macro level data, including traffic draw, tenant adjacencies, and customer demographics from more than 30,000 retail venues in the U.S. We're analyzing customer needs down to an even more precise level to determine where connected commerce opportunity exists. and how we can drive market share growth on a more localized basis. For example, we're now analyzing opportunities beyond just trade areas. We're micro-targeting customers using populations of 3,000 or fewer people. This focused level of data at scale is a significant advantage in the jewelry category and will serve us for years to come. We're also leveraging our analytics capability to optimize the way we introduce product assortments. A good example being our expansion of lab created diamonds. Our merchandise teams have used our data to build and tier our LCD assortment in a way that doesn't compete with natural stones. For example, customers who come into our stores this holiday with a certain piece in mind will, in some cases, be able to choose a lab created piece in a similar style that offers higher clarity or even higher carat weight. We're also offering an exclusive LCD cut through Zales called the Vera Wang True Line, and we're offering an LCD option of Kay's Leo Cut through the Leo Legacy Line. Our data-based approach is ensuring that LCD is additive. It is increasing selection, appealing to different customers, and driving incremental sales. In these and so many other ways, we're building and leveraging a culture of agility and innovation that is driving growth in every part of our business. What I hope you can sense is that the momentum we've been building is intentional and disciplined and reinforces our conviction that Cignet is a healthy and agile company. The strategic clarity and structural advantages we've created combined with the disciplined execution that our team is providing quarter after quarter, is building momentum and driving top-line growth, margin expansion, and liquidity that we believe is sustainable over the long term. We continue to work hard at our transformation efforts, and we know there are many uncertainties in today's environment, but we're energized by the impact we're having in our customers' lives And we're proud of what we're achieving and delivering together. We also take pride in what our company stands for. And I want to close on this point. Just as we're building momentum in our business, so are we building momentum in our leadership as a purpose-inspired company. And we're doing this from the inside out with our highly engaged team. A year ago, we announced on our Q3 earnings call that Cignet was, for the first time, named a certified Great Place to Work company. Today, we're pleased to announce that not only was Cignet recertified as a Great Place to Work this year, based on our strong Employee Trust Index survey results, but that all of our scores improved year over year. For us, our partnership with the Great Place to Work Institute gives us the ability to continuously advance our employee experience by listening to our team, taking action to improve, and benchmarking ourselves against other great companies. Significantly this year, 90% of our team shared that they feel a sense of pride in what we are accomplishing, and 82% believe wholeheartedly that Cignet is a great place to work. We can confidently assure you that our Cignet team is fully engaged and passionate about delivering for our customers this holiday. Additionally, this quarter, we paid close attention to the UN Conference on Climate Change that concluded just a few weeks ago. As a member of the UN Global Compact, we are fully committed to enhancing our business practices to meet evolving expectations from our investors, employees, and customers. We have established our own Cigna Climate Action and Sustainability Committee a cross-functional team tasked with preparing Cignet for the future with our own net zero strategy as we articulated in our corporate sustainability goals released earlier this year. These quarterly milestones advancing Cignet's commitment to corporate citizenship and sustainability matter because consumers are increasingly seeking out companies that share their values. On that note, I'll turn this over to Joan, who will provide deeper insight into what's driving our growth and where we're headed this fiscal year. Joan? Thanks, Jenna.