Signet Jewelers Limited

Hello, and welcome to the Signet Jewelers' fourth quarter fiscal 2023 earnings call. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star 1 on your telephone keypad. If you'd like to withdraw your question, you may press star 2. I'll now hand over to your host, Vince Ciccolini, Senior Vice President, Finance, and Chief Accounting Officer to begin. Please go ahead.

Good morning, and welcome to our fourth quarter earnings conference call. On the call today are CIGNA's CEO, Gina Drossos, and Chief Financial Strategy and Services Officer, Joan Hilson. 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 discretion of the non-GAAP financial measures, as well as the reconciliation 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.cignajewelers.com backslash investors. With that, I'll turn the call over to Jenna.

Thanks to all of you for joining us today. Let me begin by thanking our entire Signet team for delivering on our commitments. Their dedication to our customers and their agility in the face of unrelenting challenges and change continues to be our most enduring competitive advantage. Through fiscal 23, our company has been recognized as a Great Place to Work certified company for three years in a row. And for the fifth consecutive year, we've been honored as the only specialty retailer included in the Bloomberg Gender Equality Index. I'm grateful to lead such a strong and diverse team. There's one clear message I want to convey today. Our Cignet team delivered in fiscal year 23 and are poised to do it again in fiscal 24. There are three reasons for our confidence. First, Signet is uniquely positioned to grow market share because of our differentiated and broad banner portfolio, industry-leading connected commerce presence, and ability to invest in our competitive advantages consistently and sustainably. Second, we are confident in our ability to deliver an annual double-digit, non-GAAP EBIT margin based on our transformed operating model and the flexibility it creates. And third, our healthy balance sheet and strong cash generation enables us to invest in our business while also consistently returning meaningful cash to shareholders. At this time last year, we expected the U.S. jewelry and watch market to be down low to mid single digits. With particular pressure at lower price points, coupled with the difficult year over year comps. Added to that was the volatility created by the war in Ukraine, inflationary shocks, economic turmoil in the UK, and a major winter storm occurring in the peak selling period before Christmas. As a result, the category declined to the lowest end of our range. These were serious headwinds. During 3 of the highest revenue days of the year, Winter Storm Elliott caused almost 1 3rd of our stores to close or operate at reduced hours and consumers in roughly 3 quarters of our trade areas were under a travel advisory warning. For perspective, these days are 8 times more valuable than an average shopping day in January, for example, in a way that is unique to jewelry. A critical consumer segment for our category at holiday is the late inspiration seeker, who typically spends more than other consumer segments and buys gifts in person for their significant other in the last days before Christmas. Many of these shoppers delayed their purchases as long as possible this year, with the storm disrupting their normal behavior at a critical time. But our team pivoted quickly in the face of all these challenges, enabling us to deliver our commitments and provide strong returns to shareholders. This is a testament to our culture of agility and innovation, the flexibility we've created in our operating model, and to our financial liquidity. We've created both the culture and the capabilities to adjust as market conditions require. For fiscal 23, we estimate we again outpaced category growth and gained 40 basis points of market share, driving our share to 9.7%. We delivered $7.8 billion of revenue up slightly versus fiscal 22 and an annual EBIT margin of 10.8%, despite a negative 6.1% sales comp. We also executed well on our capital priorities, which are to, first, invest in growth through organic investments and M&A. Second, optimize our capital structure and maintain a leverage ratio less than 2.75 times EBITDAR. And third, return cash to shareholders through share repurchases and dividends in line with our commitment to be a dividend growth company. We allocated more than $1 billion of capital in fiscal 23 to achieve these priorities. Specifically, this included $210 million of CapEx, $426 million of share repurchases, $390 million for the cash acquisition of Blue Nile, and $37 million to shareholders in the form of common dividends, all while maintaining a two times leverage ratio that is well below our stated goal. Our strong liquidity position allowed for these investments and shareholder returns. Based on our confidence in our operating performance and cash flow, we are raising the dividend to 23 cents per share on a quarterly basis and are increasing our multi-year share repurchase program by $263 million for a total authorization of $775 million. For the fourth quarter, revenue came in at $2.7 billion, down 5.2% or a down 9.1% comp. Blue Nile contributed to our total growth and performed ahead of sales and profit expectations in its first full quarter as part of our portfolio. It was slightly accretive to the quarter. We continue to see strength at higher price points overall, and the strength of our fashion assortment continues, helping to partially offset the expected decline in bridal. Importantly, we saw some recovery post-holiday, and we had one of our strongest Januaries in Signet history. As we look ahead to fiscal 24, we believe the jewelry industry will continue to be pressured by a combination of macroeconomic and industry specific bridal dynamics. We forecast the jewelry industry to be down mid single digits this year. Given this, we expect to deliver top line results that are flat to down low single digits and believe we are well positioned to continue gaining market share. Despite the anticipated economic and industry headwinds, we also believe our strengthened operating model will continue to deliver annual double-digit operating margins, and we expect to maintain our approach to capital allocation, investing to widen our competitive advantages, and deliver strong returns to shareholders. I want to comment briefly on bridal, which has been temporarily impacted by COVID. The jewelry industry's bridal segment is composed of two distinct parts, weddings and engagements. After a decline during COVID, fiscal 23 was the year of the wedding, a 40-year high. Having anticipated this, Signet delivered strong growth in wedding bands and bridal jewelry. Meanwhile, engagements held flat during COVID at pre-pandemic levels but declined low double digits in fiscal 23 and will again decline low double digits in fiscal 24. We expect fiscal 24 to be the trough of engagement, with fiscal 25 seeing a return to growth and fiscal 26 returning to normalized levels. So why these shifts? It's temporary and COVID driven. We have rich proprietary data on couples' behavior. Engagements typically occur approximately three years after couples begin dating. COVID had a meaningful impact on dating, delaying the formation of new relationships because of the lack of in-person activities for the majority of 2020. So as we begin to lap that three-year period since COVID began, we expect engagements and engagement ring sales to start recovering toward the end of fiscal 24 and continue rebounding in fiscal 25 and 26. The important point is this, bridal jewelry is a great business to be in. Absent COVID, it has been, and we believe will be again, a very steady business with roughly 2.8 million engagements and 2.2 million weddings each year. It is the financial and emotional point of market entry to our category and the opportunity to build relationships and trust that drive lifetime value. With our leadership position in this important segment, Cignet is well positioned to take full advantage of the engagement recovery as it happens, both to grow sales and gain market share. In fiscal 24, we will continue to widen the mode of competitive advantages that we've built around our business in three interdependent ways. First, we're continuing to differentiate our banners with improved in-store experiences, including new store concept pilots and, where appropriate, higher price point assortments. As we cast our net wider, covering more customer demographics, we have higher potential to grow market share. Second, we are continuing to strengthen our capabilities to accelerate new customer acquisition, to increase repeat purchases, to drive higher transaction values, and to improve the increasing sophistication of our supply chain. Third, we're growing the value of our lifetime customer relationships by strengthening our service offerings through warranty programs, repair services, piercing services, and our new loyalty program. Let's take a closer look at each of these efforts. First, we're continuing to differentiate our banners. Given our breadth, we're able to serve accessible luxury customers, digitally native customers, and value conscious customers in a scaled way that no other company in our industry can. We have clarified our banner value propositions, significantly reduced overlap, and created the flexibility to lean into trends to best meet changing customers' needs and economic conditions. For example, over the past several years, we've successfully tiered up our product mix to drive penetration at higher price points and to move our customers up the value chain where appropriate within each banner. Bignett's average transaction value is up over 30% as a result with higher price points also resulting in higher service plan attachment. In addition, in anticipation of some cyclicality in the bridal segment, we've heightened focus on sentimental gifting and self-purchase occasions, resulting in fashion-driving nearly 36% growth since pre-pandemic. These two strategic actions helped us to partially offset the double-digit decline in engagements in FY23. The next way we're differentiating our banners is by optimizing our store footprint. We've aggressively closed underperforming doors, over 1,000 of them over the past six years, layering in technology to enhance the connected commerce experience and leveraging data to provide highly personalized service. In fact, our sales per square foot productivity has improved nearly 50% since the beginning of our transformation. In fiscal 24, we expect to invest more than $100 million in our fleet to showcase our banner's unique differentiators. This includes expansion of new stores with proven formats in key markets, continued repositioning or closing of low-performing stores, important sustainability investments like LED lighting, and modern HVAC, and cosmetic upgrades in key markets to bring more doors to brand standard and deliver seamless banner experiences across channels. Here are a few examples that I'm especially excited about. We will be piloting new accessible luxury Jared concepts as we continue to shift to higher price points along with additional selling features, offerings, and technology. We are accelerating Diamond's direct growth, leveraging Signet Scale to double our pace of store openings and give us more exposure to this highly efficient megastore model. And we are opening a number of new K modular concepts, which require lower inventory and build-out costs and delivered a very attractive return in our pilot. Importantly, fiscal 24 is also a year of marketing transformation. Marketing has been a competitive advantage for Cignet for some time given our scale and ability to build national brand recognition coupled with a local marketing spend. With our new CDP coming online in fiscal 24, our marketing will become increasingly personalized. This advanced database and localized approach is important because we are seeing as much as a 40% increase in marketing efficiency when we can identify a customer in social media, present them with the right item based on what we know about their needs, and then send them directly to a nearby store to complete the transaction. Personalization is also an important theme for product in Cisco 24. Customers have a broad mindset when they think about custom jewelry. For some, it's simple, like engraving or tailored sizing. For others, it's configuring a piece from a set of options with a consultant in the store or virtually. For example, Kay and Zales will have more than 25 different configurators, giving our jewelry consultants and customers the ability to mix and match cut quality and finish. And a fast-growing segment wants to combine and modify pieces, or design a custom piece entirely from scratch, even from a hand-drawn sketch that we transform into a beautiful bespoke piece of jewelry. High-touch in-store events are a great way to co-create custom jewelry and can be uniquely shaped by each banner's differentiators. We generated nearly $100 million through our pilot events in fiscal 23 and we see meaningful upside as we expand them across the portfolio. We are under indexed in important areas of product personalization, leaving us plenty of room to grow with this trend. In fact, our proprietary research indicates that this is a $700 million growth opportunity across Cignet, making it an investment priority for us this year and beyond. The next way we're widening our moat is by continuing to invest in our operating model, including the scale and sophistication of our supply chain. We've been on a journey to both buy product less extensively, leveraging our scale, while also using data to improve our inventory turn and store assortments. For example, we've vertically integrated within our operations, enabling us to remove layers of cost in the system. avoiding the middleman, so to speak, and offering the best value to our customers despite inflationary and other pressures. For example, in fiscal 23, we introduced a new sourcing system, which we called the loop. This proprietary system gives us far more visibility into component and labor costs across our banners and the ability to break apart, analyze, and act on the components of product costs. In addition, machine learning and AI are driving increased efficiency in inventory costing and pricing, moving us from a sequential test and react approach to a best-in-class, data-driven analytical model for both price and promotion. We're investing in these capabilities because they are already unlocking significant margin benefits. One point I want to underscore is that virtually all of the capabilities that I've referenced here and many others are fueled by the investments we've made in digital technology and data analytics. Since forming our digital organization four years ago and ramping up our transformational investments over the past two years, we've more than doubled the return on our investment. We continue to make very meaningful progress across digital. Fiscal 23 was the best Cyber Monday in Cygnus history with traffic up 18% and an 11% increase in demand revenue versus last year. And we're seeing improvements across nearly all our digital touchpoints. More customers are adding ESAs to their orders of 12% versus year ago in Q4. Loyalty digital enrollment was up 2.9 times in Q4 compared to Q3. Two-way SMS now represents 20% of digital sales and support contacts, growing fast as a channel of choice, and 40% of customers who engage our virtual jewelry consultants ultimately purchase in-store. In total, digital as a percent of overall sales is almost four times pre-transformation levels. Our connected commerce presence is a driving force behind our growth, maximizing the enormous potential of our team, and we will continue to invest in this strength as a critical competitive advantage. The third way we're extending our advantages is by continuing to invest in our team and our culture. We know that our team members continue to be inspired by Cignet's purpose and are confident in our strategy, which drives our performance and has also helped improve retention by four points to 80% in the past year. Since the beginning of our transformation, we've seen a 15-point jump in the organization's belief in our growth strategy, and we've seen a nearly 30-point increase in our team's connection to our purpose of inspiring love. We're building on our strong engagement scores by investing in our team's growth as retail leaders through advanced learning and development. We call it Brilliant University. This growth-focused training improves our customer experiences, drives execution and agility, and enables performance and career growth for every team member who participates in the program. This past year, the average CIGNET team member visited Brilliant University 23 times, completed nearly 10 courses and virtual classes, and consumed 12 hours of training content. Usage of our training and development offerings increased 14% last year compared to the prior year, with 15% more overall course completions and a 76% increase in instructor-led training in fiscal 23 versus the year before. In total, more than 29,000 team members completed more than 650,000 hours of training and development in fiscal 23. Our team members are highly motivated to learn and excel, and we are continuing to add more offerings to develop leadership at all levels across the company. The key point is that we have achieved a cultural transformation at Cignet and created an environment that is dedicated to ongoing growth, galvanized by our authentic sense of purpose. By investing in our strategic choices and capabilities, we are creating a wider mode of competitive advantages year after year. And we're able to continue fueling this growth through revenue generation and ongoing cost discipline that will deliver more than $100 million in cost savings in fiscal 24. On that note, I'll hand it over to Jen.