Signet Jewelers Limited

Hello everyone and welcome to the Signet Jewellers Fiscal 2023 Third Quarter Earnings Call. My name is Emily and I'll be coordinating your call today. At the end of the presentation, you will have the opportunity to ask a question by pressing start followed by the number one on your telephone keypads. I'll now hand the call over to our host, Phineas Nisi, Senior Vice President of Investor Relations. Please go ahead.

Good morning and welcome to our Third 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 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 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'll discuss certain non-GAAP financial measures. For further 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 we posted on our website at www.signatjewelers.com slash investors. With that, I'll turn the call over to Jenna.

Thank you, Benny, and thanks to all of you for joining us today. I want to begin by thanking the entire Signet team for a standout quarter in a challenging retail environment. their passion for rising to every challenge and opportunity is inspiring i'm particularly pleased that our signet team was recognized this quarter by fortune as one of the top 20 best workplaces in retail this is a great reflection of the purpose pride and excellence our team members bring to our customers every day i'm proud to lead this exceptional team there's one core message that i want you to take away from today's call Signet is uniquely positioned to deliver consistent market share growth and value creation, given our number one and growing leadership position in jewelry, an industry that tends to grow steadily from year to year and is more resilient to economic cycles than other parts of retail. We've established our strong position in this attractive industry over the past five years by making significant strategic pivots that are now creating a virtuous flywheel effect with compounding advantages that are accelerating positive momentum and growth. First, we've created a differentiated portfolio of banners that appeals to a broad, diverse, and growing mix of customers. Second, we've established a connected commerce presence that is resetting customer expectations for the experience they want to have when shopping for, buying, and owning fine jewelry. Third, we've built a flexible operating model that gives us multiple levers to pull so we can deliver our commitments even when faced with challenging economic or market conditions. And fourth, we are executing a disciplined capital allocation strategy that is delivering meaningful value creation. It's focused first on expanding market share growing the top line and consistently delivering double digit annual operating margin. Since the beginning of our transformation in fiscal 2019, we've invested nearly $700 million in capital and over $900 million in acquisitions, far beyond any company in the industry. On the strength of these investments, we've accelerated growth and returned more than $1.3 billion to shareholders, through share repurchases and dividends. We saw the benefits of this flywheel effect again in the third quarter. We beat expectations and are now raising full year guidance inclusive of Blue Nile. Revenue was nearly $1.6 billion, up 2.9% versus a year ago, and up 33% compared to pre-pandemic levels. We generated non-GAAP operating income of $58 million, a strong result in a quarter that saw one-time COVID and supply chain-induced benefits last year, but consistently lost money prior. In fact, Q3 fiscal 20 suffered operating losses of nearly $30 million. And we delivered non-GAAP operating margin ahead of expectations for the quarter. This improvement was largely driven by the positive impact of services, the health of our inventory, and strategic assortment choices, including tiering up, value engineering, and balanced pricing. We achieved this despite Blue Nile losses, which we anticipated and more than covered, without impacting our core businesses or distracting us from disciplined execution. Now, even in a challenging environment, we're heading into holiday with multiple points of strength. First, we're well stocked with significant newness and great value at all price points. And most importantly, we're not overstocked like much of retail. In fact, our inventory was down 2% in the quarter, excluding acquisitions. and with clearance at the lowest levels in recent history, it's healthier than it's been since our transformation began roughly five years ago. We've tiered up our assortment, and nearly 30% of our assortment is new for holiday. Since Q3 fiscal 20, our inventory is down 17%, excluding acquisitions, with sell down and clearance penetration down 13 points. In addition to being well stocked, we're well staffed. A key driver of our staffing strength is retention. At Kay, for example, staff turnover is 17% lower than it was last year. This ensures we have more experienced consultants on the floor, an important factor because consultants with at least two years of experience in our stores sell two times more than consultants who've been with us for six months or less. And we're able to optimize labor costs by adjusting staffing plans dynamically in response to changing retail traffic. Using our proprietary store level data, we can flex to optimize coverage by hour when and where we need it without being under or overstaffed. As a result, our sales per labor hour are up more than 70% versus fiscal 20. We're still facing macroeconomic headwinds and consumers' behaviors can be somewhat volatile, but we're prepared for this. Our flexible operating model is designed to sustain our financial commitments even in the face of these challenges. We're ready for strong holiday execution. Now I'd like to provide perspective on where we're headed longer term and why Cignet is so well positioned to deliver consistent market share growth and value creation year over year. My confidence in our long-term growth is grounded in both the attractiveness of the jewelry industry itself and Insignia's strong leadership position within the industry. Jewelry is different from the rest of retail. For example, cyclical industries like apparel are more sensitive to economic volatility. carry inventory with a relatively low residual value, and sell products that consumers see as more discretionary. Conversely, customers place a higher value on jewelry. They see jewelry purchases as less discretionary because they're tied to special occasions and people in their lives, and jewelry retains its value or appreciates over time. In addition, jewelry doesn't go out of style from season to season. This makes jewelry more resilient and as a result more attractive than many other retail industries. It's an industry well-designed for sustainable long-term growth. And Cygnet has an advantageous position in this attractive industry. Jewelry rewards the flywheel effect I described, which is a point of difference for Cygnet. Inventory is a good example. Over the past five years, we have transformed the way we plan, manage, and optimize inventory. We operate today with a disciplined, tightly integrated approach. First, we leverage our vendor relationships and purchasing scale to ensure quality and availability while managing cash and protecting margins. Second, we consumer test our assortments. with the most advanced AI and data analytics capability in the industry. We believe our proprietary product concept testing capability is improving our new product success rate, enabling us to bring bigger ideas to market with greater confidence and speed. Third, we provide unrivaled inventory depth and transparency to both customers and our jewelry consultants. customers can work with our virtual and in-store consultants to find, see, and purchase individual pieces across our multibanner ecosystem. And finally, we provide a full range of flexible fulfillment options, including buy online pickup in-store, ship to store, curbside pickup, same-day delivery, and now more than 25,000 secure consumer access points. After launching the program just two years ago, customers are opting for a flexible fulfillment option in over 38% of online orders. These capabilities not only benefit our customers, but also minimize stranded inventory across our fleet. Taken together, this holistic approach to inventory design, management, and delivery is a significant competitive advantage. And it has driven significant inventory productivity gains with our core terms of 1.5 times now nearly twice what they were when we began our transformation. I'd like to turn now to progress we've made in the quarter on our four where to play focus areas. Let's start with winning in big businesses. A good illustration is how we are growing market share and winning in bridal. It's the most important segment in fine jewelry, not only because of its high relative value, but also because bridal is the point of market entry for jewelry lifetime value. It's the emotional and financial moment when long-term relationships are established between couples and with their jewelry consultant. 35% of new customers during Q3 made their first purchase at Signet through bridal. And over the past three years, roughly a third of bridal engagement customers have returned for subsequent non-engagement purchases, wedding bands, fashion jewelry, statement pieces, and gifts. This is a more than 40% higher repurchase rate versus non-bridal customers. An average transaction value of their second purchase has increased of 23% compared to three years ago. We've also continued to widen our customer funnel with Diamonds Direct and Blue Nile, two very strategic acquisitions that focus in bridal and have brought younger, more affluent, and more diverse customers to our business. The good news is that over time, bridal is not cyclical. Engagements, weddings, and anniversaries happen consistently year in and year out. COVID is presenting what is the first meaningful blip in engagement ring purchases in the past four decades. calendar year 2021 represented a 40-year peak in engagements, which is being somewhat offset in 2022 and 2023, both expected to be down low double digits. We anticipated this blip in consumer dynamics and positioned ourselves to increase our share of bridal and lean into fashion and gifting. As engagements return to more normalized levels, we will be especially well positioned given that maximizing lifetime value is an ongoing priority for us and a playbook that we are running across our entire business. Accelerating services is our second strategic focus area. As we said, we see services as a billion-dollar business over time, and we're continuing to make steady progress toward that goal. The success of our loyalty program, Vault Rewards, is a good example. We already have 1 million Vault Rewards members in just the first year of the program. Our program is especially powerful because we're the only jewelry retailer that can offer this type of holistic loyalty approach across multiple banners. And versus other specialty retail, we provide high value, given the very nature of what we sell, particularly for the engagement and bridal experience. Jared was the first to roll this out in the first half of fiscal 23 and now has more than 30% of sales coming from its loyalty members. Kay and Zales followed with rollouts during the third quarter and are already seeing more than 25% of sales coming from loyalty members. In addition, loyalty members are spending 40% more per repeat purchase than non-loyalty customers on average. and they are making second purchases 25% faster. In repair, we simplified our offerings with bundles that combine typical repair services. This improves both the customer and the employee experience by simplifying the offer and the operation. Earlier this year, bundles represented about 15% of our repair business. Today, 65% of paid repairs are part of a bundle. This is encouraging because bundles drive margin through AUR, which was up 18% versus a year ago. With this success, we have further opportunity for growth. Our research indicates that only 40% of people who shop in malls even know that our banners do repairs. We see upside potential and have doubled our marketing spend on services versus a year ago, which is helping drive growth and customer awareness. Our third where to play strategy is to expand accessible luxury and value. Accessible luxury continues to grow in importance. This top end of our market now represents approximately 30% of our business of nearly 10 percentage points versus the pre-pandemic period. The shift toward higher price products is being driven by a combination of factors. Our database ability to attract higher income customers, the appeal of our high-value assortment and ability to trade customers up the value chain, and our price architecture. We've also added Diamonds Direct and Blue Nile, both of which have a strong presence in accessible luxury, contributing to the increase. These factors are working. We're seeing spending at higher price points in all our categories, engagement, anniversary and wedding bands, and fashion. Overall, North America average transaction value increased 8% compared to last year and is up 27% versus pre-pandemic. We are equally committed to serve customers at the value end of the market. This is the cohort that is most impacted by economic pressures, and we want to ensure we are providing them with superior value as part of our portfolio strategy. To do this, we continue to innovate within our assortment to cut costs customers don't see or care about, and to provide a breadth of financing options for every budget. Leading in digital is our fourth strategy. We are now delivering a digital, data-driven, connected commerce experience that is unrivaled in jewelry. One of the biggest differences in Cignet today versus five years ago is the mix of customers we serve. We've added 22.5 million new customers since fiscal 19. As a result, our customer base is significantly stronger today than it was five years ago. It's younger, more multicultural, more affluent, more digitally savvy, and more demanding in terms of total customer experience. No other jewelry company is as well positioned as Signet to meet these expectations. In recognition of this shift, we are continuing to enhance our digital capabilities and offerings. We introduced two-way SMS just over a year ago, for example, and it now represents 14% of our digital support contacts here today. In Q3 alone, 23% of all contacts were through our SMS channel. This matters. After texting with a jewelry expert, conversion is more than 15 times higher than a typical e-commerce purchase. Interestingly, 60% of these purchases are made online and 40% are made in store. We also know that net promoter scores are typically 15 points higher when a customer shops with one of our virtual consultants. We've enabled social selling by equipping our jewelry consultants to curate personalized digital style guides and use them as a way to reach out to customers with clienteling support, driving both digital sales and store traffic. Customers can browse and buy directly from the style guides that connect directly via chat, SMS, or social platforms. We also know that virtual appointments booked online have more than doubled since last year, and sales attributed to virtual JCs have grown 150%. Customers who engage in a virtual appointment convert 12 times more than those who don't, and AOV is nearly three times more. We're also adding enhancements specifically focused on mobile conversion, because 87% of our website traffic is now coming from mobile devices. We see digital as much more than a standalone e-commerce capability. The power of digital is the ability it gives us to create a seamless, connected commerce capability that no one in jewelry can match. The final point I want to underscore is the strength of our financial position, which enables so much of the progress we're making. Disciplined cost management and our flexible operating model allow us to invest strategically in our core business and in acquisitions to expand market share, maintain appropriate levels of leverage, and return cash to shareholders through repurchases and dividends with a goal of becoming a dividend growth company. So to recap, jewelry is an attractive industry, and we're in an advantageous position within this industry. It's analogous to being the best house in a great neighborhood. And given our compounding advantages, we're growing share and investing in growth well ahead of the industry, which positions us for sustainable value creation. As important as our financial health is, it's only part of our story. As I said at the outset, the most important part of our success and of my confidence in our future is our culture of innovation and agility, powered by rigorous executional discipline. Our team continues to rise to every challenge and to go after every opportunity to serve our customers, grow our business, and lead our industry. We've built many advantages that set us apart in the jewelry industry and in retail, but none is as important as the caliber of our people and the culture in which they're thriving. On that note, I'll turn it over to Jen.