Signet Jewelers Limited

Thank you all for your patience. We're due to begin shortly as we wait for additional participants to join the line. Thank you. Thank you. Thank you. Good morning and welcome to the Signate Jewellers Fiscal 2023 second quarter earnings call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing star followed by one on your telephone keypad. After today's presentation, there will be an opportunity to ask questions by pressing star followed by one on your telephone keypad. Please note this event is being recorded. I'd like to turn the conference over to Vinny Sinisi, Senior Vice President, Investor Relations.

Good morning, and welcome to our second quarter earnings conference call. On the call today are Cignet's CEO, Gina 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 the risk factors, cautionary language, and other disclosure in our annual report on Form 10-K, quarterly reports on Form 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 will discuss certain non-GAAP financial measures. For further discussion of the non-GAAP financial measures, as well as reconciliations of the non-GAAP measures to the most directly comparable GAAP measures, investors should review the news release we posted on our website at www.cignajewelers.com slash investors. And with that, I'll turn the call over to Jenna.

Thank you, Vinny, and thanks to all of you for joining us today. I want to begin by thanking our Cignet team. Their passion for building lifetime relationships with our customers and fulfilling our purpose is central to everything we do. I continue to be inspired by their excellence and agility every day, no matter the conditions. It's an honor to work at their side. Here are the key takeaways from my remarks today. We believe that Cignet's growth strategy and the structural advantages we've created in our operating model enable us to do three things consistently. First, deliver an annual double-digit operating margin. Second, invest to achieve market share expansion. And third, create meaningful shareholder value. Q2 was yet another demonstration of these advantages. Our team delivered $1.8 billion in revenue and $193 million in non-GAAP operating income. Revenue was down 1.9% versus record-setting second quarter sales last year, and up 29% versus the second quarter of our fiscal year 20, which was the pre-pandemic base. Importantly, we delivered operating income within our original guidance range, and non-GAAP operating margin was strong at 11%, which is nearly three times higher than Cigna's operating rate in fiscal year 20. So despite a softer top-line environment, our structural transformation and the flexibility we now have in our operating model enabled us to leverage SG&A to deliver double-digit operating margin and maintain strategic investments and return capital to shareholders in Q2. Our strategy is working. We are winning in our biggest businesses with our diversified portfolio of banners expanding accessible luxury, accelerating services, and leading in digital. We're able to be strategically flexible, leaning further into the areas of our business with the most growth opportunities, driving both customer and shareholder value. Before I get into our results, let me first share some jewelry category context. What we're seeing in our proprietary data is that consumers shopping at lower price points, primarily buying discretionary fashion items or with lower incomes, are being impacted most directly by macroeconomic pressures. We believe lower jewelry price tiers are also seeing the most negative impact from deep discounting in apparel and other fashion and discretionary categories. So in general, jewelry price points below $500 are seeing steep decline, with price points below $1,000 also being negatively impacted. Conversely, higher price point items are showing more strength, and this is reflected in the fastest jewelry growth being luxury price tiers, followed by accessible luxury. What's particularly interesting is that our proprietary customer research for Kay, Jared, and Zales is showing relative strength in what we call considered purchases. That is, sentimental items over $1,000 like engagement rings, anniversary bands, and other sentimental gifts are outperforming their categories. Our strategies around consumer insights, banner differentiation, and tearing up into accessible luxury are allowing us to lean into these trends. So while Q2 was a mix of headwinds and tailwinds, we responded to these precisely as our company is now designed to do. We drove growth and bridle in our biggest banners, especially in the $4,000 to $5,000 price range, where revenue increased 11% versus last year. And all banners grew 15% in aggregate for purchases in the $10,000-plus price range. We grew services nearly 7%, which has a higher margin profile and drives traffic to our stores. We reduced core inventory, excluding diamonds direct, almost 2% versus last year, with more efficient data-driven assortment and flexible fulfillment. This is enabling us to quickly respond to changes in consumer trends, maximize newness, and limit clearance. With that context, let's take a closer look at how we're doing across our four growth strategies and why we believe we're building moats of competitive advantage that will lead to long-term profitable share growth. Winning in our biggest businesses is our first where to play strategy, and bridal is a big part of the story this quarter. We estimate that our bridal share is now approximately 30%. This is a real advantage driven by the high consumer awareness of our banners, our leadership marketing spend, and personalized, always-on media approach. Our connected commerce presence, which is unrivaled in the jewelry category, ensures that we're uniquely able to meet our customers' needs whenever, wherever, and however they want to engage. Relevance plus readiness is a powerful combination, and it is precisely the combination we've built with our portfolio of highly differentiated banners, our optimized footprint of brick-and-mortar stores, and our expanding digital capabilities and experiences. As predicted, 2022 has become the year of the wedding, with 2.5 million weddings expected this year. In addition, with in-person events growing, we've seen an increase in pre-wedding and other wedding-related events, which are great opportunities for gifting. In fact, our data suggests that jewelry represents 43% of the gifts shared at wedding-related celebrations, including gifts for the bridal party, mothers, and the couple themselves, making this a $1.9 billion opportunity in the U.S. Because Cignet delights so many couples with engagement ring purchases, we're now focused on making the most of all wedding opportunities. We've made changes to our assortment, services, and marketing, and are creating new digital content, online shopping guides, and targeted media campaigns, all to serve our customers throughout their special events and capture the entire value of the wedding. Our second where to play strategy is to expand the market we play in. And in this economic environment, we are both leaning into accessible luxury while also increasing our value equation for more economically challenged customers. To delight higher income customers, we've added higher price point items to our assortments across banners. We've expanded concierge-level services like Jared Foundry, which offers customers the ability to design custom pieces from scratch. We've increased availability of personalized appointment bookings, particularly at Jared's and Diamond's Direct. Diamond's Direct is proving to be the strong strategic acquisition we anticipated it would be, delivering $113 million in revenue this quarter, ahead of acquisition expectations. We believe we grew our share of accessible luxury in the quarter more than two points. We are also navigating the impact of inflation and economic pressure on value shoppers. To maximize the value of their spend, we are leveraging our scale, our vertical integration capabilities, and our strategic vendor relationships to value engineer pieces that make jewelry more affordable for all our customers. A great example is how we are leveraging lab-created diamonds for a bigger look for less in our fashion pieces. We've also designed innovative new items using diamonds that are more plentiful and have a lower cost basis. Finally, we've strengthened our financing offerings, including expanding our 0% down payment promotional financing. Accelerating services is our third where-to-play strategy and is delivering strong revenue growth, with first-half sales up nearly 12% versus a year ago and Q2 up 7%. This performance was driven largely by growth in warranty attachment and repairs. Extended service agreements revenue was driven by a mix of our newer, more customer-appealing bundles, price increases, and higher attachment rates. Repair growth reflects increasing NPS scores driven by faster turnaround time, team training, and new digital tracking visibility. Further, in the second quarter, we launched several new services based on our consumer research. These included appraisal services at Kay and a new insurance product at Jared Kay and Zales to protect cherished jewelry from theft and loss. We also launched Bridal by Roxbox, a new premium rental service for brides at all their wedding events, ranging from bridal showers to bachelorette parties to their wedding day. We believe this service will help us continue attracting younger and more diverse customers, as well as expand repeat purchases. The RocksBox subscriber base increased 15% in Q2, illustrating the power of Signet's scale for a newly acquired banner. We continue to be very bullish about the expansion of our Vault Rewards loyalty program, which is currently in Jared and Select Ks. It's on pace to be rolled out in e-commerce and to more than 1,800 Jared K and Zales stores by this holiday. This continues to be a meaningful source of future growth with transaction values among loyalty members at Jared, for example, nearly $600 higher and repeat rates up 700 basis points versus non-loyalty members. We continue to see services as a billion-dollar business and are steadily making progress toward that goal. Importantly, service margins remain consistent and accretive. Our fourth where to play strategy is leading in digital. Digital is our multiplier. It is the capability that creates the most advantage and is most difficult for competitors to match given the investments we've made. It's a multiplier because it makes browsing, shopping, and buying even easier and more fulfilling for our customers who are increasingly looking for an integrated multi-channel experience. and it leverages our data and scale in powerful and targeted ways to drive conversion. Being the digital leader of jewelry means much more than leading in e-commerce. We're leveraging our digital capability and technology to innovate in every part of our business, now with industry-leading speed. For example, we've added several new and easy ways for customers to book appointments, which is driving higher levels of customer engagement. In the second quarter, 65% more appointments were booked online versus a year ago. This is important because the conversion rate of a merchandise appointment is three times greater than for a walk-in customer, and the average transaction value is 30% higher. And we've also expanded virtual try-ons for more of our key products, which increases conversion rates between three- and six-fold. We saw a 22% increase in checkout start rates this quarter versus last year after launching our new mobile-first mini-bag shopping companion. This makes it easy for customers to see at-a-glance views of their orders, applied discounts, total cost, and progress toward earning loyalty incentives. In Q2, more than 20% of customers used one or more of our flexible fulfillment options, including ship to and from store, buy online pickup in store, or same-day delivery, all of which improved both customer convenience and inventory efficiency. These offerings also drive traffic to stores so that our expert jewelry consultants can further build relationships. We are increasingly linking our digital and physical experiences We now have 28,000 eTags tracking loose diamonds at the store level. This proprietary eTag ecosystem was developed at Cignet. eTags are innovative and valuable technology for many reasons. First, because our eTags enable storytelling with a visible QR code, customers can easily access information about each diamond. Second, by leveraging a motion sensor and sales data, eTags give us the ability to dynamically adjust pricing or offer incentives to close a sale within seconds. We can now optimize inventory levels and maximize sales and margin on a nearly real-time basis. Nearly every loose diamond at Jared will soon have an eTag, and we are continuing to expand the technology across other products and banners. With the digital innovation of our proprietary e-tag system, we're essentially adding Internet of Things technology to our connected commerce capabilities in a way that no other jewelry company is doing. We invested in digital from the beginning of our path to brilliance transformation, and we're not letting up. Our recent acquisition of Blue Nile is a good example. Blue Nile is the pioneer in online diamond marketplace shopping. bringing a new customer cohort to our portfolio, younger, more affluent, and highly diverse. It has the highest brand recognition of any digital pure play jewelry retailer and expands the top end of our accessible luxury offerings. Blue Nile has unique shopping technology featured in their 23 showrooms through which customers are educated by a trained jewelry consultant and are then able to complete their purchase online. We can learn from this low inventory showroom model. We see incredible synergy opportunities with Blue Nile and James Allen while strengthening and growing each of their unique banner value propositions We now expect the Blue Mail acquisition to be accretive through both revenue and cost synergies no later than Q4 of next year. The final point I want to make is that a significant factor in our performance from quarter to quarter is the strength of our financial position. We've reset our operating model with significantly reduced fixed costs, such as occupancy through our store fleet optimization, and leaned in to zero-based budgeting. Our operating model takes advantage of our scale. That's why we're confident in committing to annual double-digit operating margins with expansion over time. We've demonstrated that we have several levers we can pull to respond to changing market conditions. which is precisely what we did in Q2. We're using our financial strength and flexibility to invest in the business in ways that create moats of competitive advantage and that our customers see and are delighted by, whether that's through the value of our assortment, the breadth of virtual shopping journeys we enable, or through strategic acquisitions. We're focused on consistent long-term value creation and our stated capital allocation priorities. First, investing strategically in our core business and acquisitions to expand market share. Second, maintaining appropriate levels of leverage. And third, returning cash to shareholders through repurchases and dividends with a goal of being a dividend growth company. So I'll close where I began. Cignet's Q2 results are a strong reason to believe our core message. We have the strategic clarity, structural advantages, financial flexibility, and winning culture to deliver consistent, reliable, and sustainable growth and meaningful shareholder value. Cignet is strong and growing stronger. On that note, I'll hand it over to Joan.