Signet Jewelers Limited

Good morning and welcome to the CignaToolers fourth quarter fiscal 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Vinny Seneci, Senior Vice President, Investor Relations and Treasury. Please go ahead.

Hey, terrific. Thanks very much, Andrew. And good morning, everyone. Welcome to our fourth quarter earnings conference call. On the call today are Cignet's CEO, Jenna Drossos, and Chief Financial and Strategy Officer, Joan Hilsen. 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 disclosure in our annual report on Form 10-K, quarterlies on 10-Q, and 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 of those non-GAAP measures as well as reconciliations 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. Before I get into the call, I want to take a moment to address the crisis in Ukraine. As a company whose purpose is inspiring love, We stand against this invasion and unprovoked war. As such, Signet has suspended all business interactions with Russian-owned entities since the beginning of the conflict. And through our Signet Love Inspires Foundation, we have donated $1 million to the Red Cross to help provide food, medical attention, and supplies within Ukraine, as well as shelter for the millions of refugees fleeing the country. Our foundation is also providing a two-to-one match for Red Cross donations made by our generous team members. We will continue to look for additional opportunities to support the people of Ukraine, and our thoughts and prayers are with them all. Now let me share Cignet's results with you. We closed this year once again with strong performance. The Cignet team delivered record sales and earnings growth. our sixth consecutive quarter of overall growth. I want to thank our team members for their unrelenting leadership and dedication. I am always inspired by their achievements. There is one key message that I'd like you to take away from this quarter and year. We are demonstrating that Cignet has the strategies, strengths, and structural advantages to consistently outpace the market and gain share. while also delivering sustainable double-digit operating margins. We can see this in three specific ways. First, we grew our U.S. market share to 9.3%, a 270 basis points gain over prior year. We grew share in every channel and every banner. This was true in well-established categories like bridal, where Signet is the clear US retail leader with a roughly 30% share, and in Lab Created Diamonds, where we are widening the gap as the market leader in this new and fast-growing category. Second, we are continuing to increase margin as we grow. In fact, we have permanently reset our margins over the past four years by 200 basis points ahead of where we were before starting our Path to Brilliance journey. We'll use our time with you today to explain why we believe our double-digit operating margin is sustainable. And third, we are generating significant excess cash. Our leverage ratio is healthy at now less than two times EBITDA. We are investing in organic growth and acquisitions. And with our stock's current valuation, we are aggressively focused on share repurchases to take advantage of the disconnect that exists between our confidence in the value Signet will continue to generate and what the current share price reflects from the market. In fact, we repurchased more than $270 million in shares since mid-January and still have over $400 million in authorization remaining. Signet's results are being driven by the strengths we mentioned in our last call. our diversified banner portfolio, connected commerce presence, data analytics capability, and scale. These strengths and our financial health, our ability to sustain industry-leading investments in our business have become important, sustainable sources of competitive advantage. In a moment, I'll talk through the progress we made this quarter in each of our Where to Play focus areas. But first, I'd like to share perspective on both the tailwinds and macro headwinds that we see ahead in the coming year. Tailwinds we're confident Cignet can leverage and headwinds that we are well positioned to manage through. The most important tailwinds are those that we're creating with our strategies. They are not transitory. To the contrary, they are accelerating. We plan to invest up to $250 million in capital during fiscal 23 to drive our strategies, further enhancing our stores, digital platform, and data analytics advantages. This is our largest planned capital investment in the past five years, and it's guided by increasingly precise insights. The biggest external tailwind is also the happiest one. Weddings are back. Couples are getting married at record-setting rates. We expect more weddings this year than we've seen in nearly 40 years. Bridal is an important part of our business, of course, but it's much more than engagement rings. The average couple buys their wedding bands two months ahead of the wedding. And wedding days give us the opportunity to provide jewelry for the bride and groom, bridesmaids, mother of the bride, and guests attending the wedding. In addition, these celebrations drive future growth because dating couples who attend a wedding together are among the most likely to get engaged shortly afterwards. We continually look for new ways to innovate to make the entire bridal occasion more special. One example is the Roxbox Bridal Subscription, which we're testing now. Rental pieces make it easy and affordable for every member of a bridal party to shine at showers, engagement dinners, and at the magical I do moment. They also appeal to customers who want to participate in a circular economy. We also see macro headwinds in the months ahead and believe we are well positioned to mitigate them. We continue to anticipate a shift in spending towards entertainment and travel. More than 75% of American consumers say they are ready to travel. and a majority of those are already planning trips for June and July, despite the inflated costs of these trips versus pre-pandemic levels. This reinforces that consumers are willing to pay more for both experiences and goods that they want and value. The biggest issue on people's minds, of course, is the war in Ukraine, and to a lesser extent, the inflationary pressures that may create in both the near and longer term on top of what we were already experiencing. Inflation puts pressure on discretionary purchases. That said, whether people have been waiting two years to travel or two years to get married, they are making the purchases that matter to them, even at higher prices. At Cignet, we are prepared to make the most of this dynamic with excellent value, fresh assortments, industry-leading marketing and services, expert advice from our jewelry consultants in-store and online, and a connected commerce presence that provides superior and seamless customer experiences. Our financial fitness and our strong supply chain relationships enable us to deliver great value to customers despite inflationary pressures while still protecting and growing margin. As a result, we believe will be less impacted by inflation than jewelry industry competitors or the retail sector overall. To dig a little deeper, our supply chain is a significant source of competitive advantage. We're a site holder with De Beers, which enables us to buy rough diamonds directly. We have a proprietary online diamond marketplace through James Allen. This gives us real-time pricing on more than 450,000 cut and polished stones valued at more than $2 billion. We now have seven manufacturing facilities in India subcontracted to work exclusively for Signet, in addition to our own cut and polished manufacturing facility in Botswana. Altogether, we grew our production capacity by tenfold last year. This level of scaled vertical integration along with our strategic vendor partnerships gives us an enormous advantage in terms of both quality and volume of inventory. We are also an industry leader in responsible sourcing, which has become even more important to consumers today. We believe our sophisticated supply chain and AI-driven inventory management system is a clear competitive advantage in the highly fragmented jewelry industry, ensuring consumer access to the right inventory at the right time at the best price with an agility that's hard to match. We expect the overall jewelry industry to be down low single digits to roughly flat this year. While it's impossible to predict precisely how long it will take the industry to return to its historical average annual growth rate of 2%. What we can say with much greater confidence is that Cignet has the right strategies, strengths, and structural advantages to grow faster than the industry. We believe we are well positioned to keep gaining market share and delivering sustainable double-digit operating margins. With that confidence in mind, let's take a closer look at our progress across each of our where to play strategies. Winning in our biggest businesses remains the largest pillar of our inspiring brilliant strategy. Every one of our banners is growing at or ahead of their growth targets. This reflects the steady progress we've made differentiating our banners with more clearly defined customer targets. optimized assortments, and always-on marketing that is highly efficient and effective. I'll touch on just two of these improvements. First, we are focused on our in-store experience as part of our seamless connected commerce presence. During the pandemic, we pivoted to digital and invested in the digital experiences customers needed. Now that customers are coming back to stores, FY23 marks the biggest investment in our store experiences that we've made in five years, all driven by our distinctive banner value propositions and database greenfield analysis. Second, we're investing in always-on marketing more aggressively and strategically than ever, at a level that no other company in the jewelry industry can. In fiscal 22, we increased our advertising budget by more than $180 million, and we expect to continue investing again this year. This enables us to increase customer acquisition, engaging customers with relevant messages in the right channels at the right times, and as a result, reducing our reliance on traditional fourth quarter profitability. And here's where scale matters. We hold a 50% share of voice in targeted TV, even as we've shifted significantly to a more targeted digital marketing plan. The two approaches work in concert, enabling us to expand quantity at the top of our customer acquisition funnel and reach more customers more efficiently. At the same time, our data-driven consumer insights help us improve the quality of customers we're attracting. Customers who are responding to our marketing have higher purchase intent and are looking to spend more. We see this most vividly in North America, where we drove average transaction values up more than 15% and in-store conversion up nearly 20% versus two years ago. Further, Kay and Zales, Two of our banners that historically overlapped each other are now very distinct and delivering strong parallel growth. Not only did both outperform the industry, but they also delivered double digit improvements to their net promoter scores compared to two years ago. Expanding accessible luxury and value is our second where to play priority. and we're making meaningful progress at both ends of the mid-market. In the value tier, we have now completely rebranded Banter by Piercing Pagoda. With seven consecutive years of positive same-store sales, Banter continues to attract our youngest customer base, and the rebrand is building momentum. The launch of Banter.com, for example, has driven site traffic up more than 80% compared to last year. And our expansion into inline locations is allowing us to enter high traffic shopping environments where kiosks aren't feasible and to provide private rooms for needle piercing services, one of the fastest growing and highest margin services we offer. We're also growing in the value tier by putting greater focus on our outlet formats, with distinctive and exclusive merchandise designed for treasure-seeking customers. Outlets grew nearly 55% compared to last year. At the other end, in the accessible luxury tier, we grew considerably this year across three of our banners, Jared, James Allen, and Diamonds Direct. Jared has been diligently refining their assortment for the past few years to lean into higher price points. We are now offering larger stones, fancier cuts, and higher quality metals while also moving away from lower-priced beads. This is working. In fact, for the year, Jared's average transaction value increased more than 60% compared to the previous year. James Allen remains critical to our accessible luxury expansion with its digitally native model. This year, James Allen made significant progress by expanding its fashion assortment. The strategy here is that when customers are thrilled with their James Allen engagement ring and wedding bands, it's naturally one of the first places they look for meaningful gift ideas and fashion accessories. This too is working. James Allen increased its fashion category sales more than 95% this year with an average transaction value that is more than eight times our North America average. Diamonds Direct is another great story. We only have 22 locations today and there is clear room for expansion. What Cignet brings to this opportunity is our trade area analytics capability. This will enable us to expand Diamonds Direct stores with data-driven precision ensuring we open new stores precisely where they will grow fastest and most profitably. And a bit down the road, we know we can leverage connected commerce to create a Diamonds Direct digital presence that will work seamlessly with our brick-and-mortar formats. Accelerating services is the third pillar of our strategy, and our goal is to grow it into a billion-dollar business. In FY22, we advanced toward this goal, delivering $620 million in revenue, up 65% versus prior year. I'll highlight three of our highest potential services, repair, extended service agreements, and rewards. What I love about these services is that they are all relationship builders. The better we do at each of them, the more lifetime relationships we build and the more lifetime value we capture. I'll start with repair. We offer repair services regardless of where a piece was purchased, not only because of the revenue it generates, but also because it is a powerful opportunity to build advocacy. When someone hands us a treasured piece of jewelry to repair and we beautifully refresh the quality, We create evangelists. It's a powerful and emotional moment of truth and also a driver of future growth. We are continually improving our repair capability. Our average turnaround time for repairs is now under a week compared to an industry average of two to three weeks. And we continue to see increasing customer satisfaction ratings in areas like feeling valued and time to assist. The second example I'd like to highlight is increased attachment of our extended service agreements, especially online. ESAs are the largest and among the highest margin of the services we provide. In the fourth quarter after our relaunch, online attachment increased nearly 400 basis points and lifted total attachment 300 basis points versus prior year. That translated into more than 35% revenue growth. in extended service agreements this quarter. Improvements like these are great for customers and are also important to our margin expansion goals. The last example I'll mention here is one I am personally very excited about, our new Vault Rewards loyalty program. We began piloting this program at Jared last year, and by the end of fiscal 23, we'll expand it into other banners. Loyalty programs are important because they deepen relationships and drive repeat purchases. At Signet, a customer's second purchase is the most important indicator of lifetime value. 40% of customers who make a second purchase within nine months of their initial purchase will make a third purchase in the next six months, building a relationship that only grows stronger over time. This matters. In fiscal 22, for example, the average transaction value of a returning customer was 14% higher than a new customer. Lifetime relationships at scale are a powerful source of advantage. Our fourth strategy is leading digital commerce, which we see as an accelerator of growth. This is a strategy that I think many people may define too narrowly, and as a result, underestimate the value Cigna is creating. It includes e-commerce, of course, and we've doubled our e-commerce sales over the past two years. In fact, e-commerce sales have grown more than threefold since we began our path to brilliance transformation. With over $1.5 billion in e-commerce sales, We are now the largest online specialty jewelry retailer in the US. And we are widening the gap. Last year, when the overall retail average NPS in digital declined by 17 points versus prior year to less than 50, Cygnet's digital NPS improved by 8 points to nearly 70. That's an almost 20-point gap. And given industry fragmentation, we believe our advantage over jewelry retail is even higher. But importantly, leading digital commerce at Signet is much bigger than e-commerce alone. We are digitizing every interaction we have with our customers. Our store associates are so connected now that they never have to leave a customer's side. They can search our entire inventory for a perfect piece that may not be in their store, enroll a customer in an ESA, and complete the purchase all on their tablet. Here's why I believe this is such an advantage. Digitally connected customers represent more value and Signet is uniquely positioned to serve them. Now 65% of all our customers visit our digital sites during their journey much higher than pre-COVID. And fully 90% of our highest value customers, those who spend more than $500 with us, engage across our shopping channels, taking advantage of our connected commerce capabilities and services. The more customers who are comfortable and well-served across formats with no friction, the faster our banners grow. Beyond our customer-facing capabilities, we're also using digital innovation and data analytics to improve efficiency and to inform decision-making. Two quick examples. We know that targeted marketing and promotions are a better use of dollars. This year, we acquired 32% more new customers than we did in fiscal 21 as we continued to sharpen our targeting. and we regained 37% more customers who had not shopped with us in more than 2 years. This is why we are launching our new customer data platform this spring which we will leverage to attract more customers at lower acquisition costs. There is real scale potential here with a company-wide database of customer browsing and purchase histories harmonized across our banners. An additional point is that this data is by customer, not by household, which allows us to advertise to a customer about their upcoming anniversary without tipping off their spouse or partner. Secondly, we're leveraging digital capabilities to accelerate the continued optimization of our fleet. As we've talked, stores are an important part of our connected commerce presence. The key is to have them exactly where customers want them to be part of their shopping journey and where they will generate the greatest returns on investments. Over the past four years, we've trimmed over 20% of our fleet. Now we're drilling beyond trade areas to optimize our fleet at a hyper-local level with our new greenfield analysis. Fleet optimization is critically important. because it enables the permanent reset of our margin structure. We delivered nearly 500 basis points more in gross margin in fiscal 22 than we delivered four years ago by driving higher sales on lower occupancy costs. A simple way to think about our strategy of leading digital commerce is that we're building a consumer-inspired moat around our business The more we invest, and the stronger our capabilities become, and the more our customers come to value and expect our seamless connected commerce experience, the harder it becomes for competitors to catch up. This is strategic scale at its best. What I hope you can see is that we are outpacing the market in all four of our focus areas. And these strategic choices are widening the gap between us and the rest of the industry. We believe we can keep doing this and gaining market share year after year. Before I hand this over to Joan, I want to make one final point. Culture matters. The strength of Cigna's culture, talent, and employee engagement at every level of our organization is reflected in the company's strong business performance. One of the ways we assess the strength of our culture is the Great Place to Work survey. For the second year in a row, our employee survey scores qualified Cignet as a Great Place to Work certified company, with ratings improving in literally every category the survey tracks. Importantly, in a year when so many companies were suffering from labor shortages as a result of the great resignation, Cignet's turnover actually improved. One thing Team Cignet is highly motivated by is our purpose of inspiring love. This is part of every interaction we have with customers, and it's also part of our ethos as a good corporate citizen. Together, We want to make a long-term and meaningful positive impact on the world around us. This earns customer admiration and drives pride and belonging in our organization. One example, in addition to the humanitarian support for the people of Ukraine that I mentioned at the outset, is the support we provide to St. Jude's Children's Research Hospital. This year, in the midst of an ongoing pandemic and continued uncertainty, our customers and team members rallied, eager to express love and to help celebrate the lives of every child St. Jude cares for. And our fiscal 22 annual campaign came to an end with an increased fundraising donation of over 85% versus prior year, a total of $7.6 million. bringing our total to nearly $100 million in support over the past 25 years. Our ability to have an impact like this, powered by our purpose and driven by performance and strong customer relationships, builds a tremendous pride and belonging in our organization. It's one of the factors driving 90% of our team members to say they are proud of what they achieve every day at Cignet. On that note, I'll ask Joan to share her perspective, and then we'll be happy to take your questions. Joan?