Signet Jewelers Limited

Hello, everyone, and welcome to the Signet Jewelers Q1 earnings call. My name is Emily, and I'll be coordinating your call today. After the prepared remarks, there will be the opportunity for questions, which you can ask by pressing start, followed by one on your telephone keypads when prompted. I'll now turn the call over to our host, Rob Ballou. Please go ahead.

Good morning. Welcome to Signet Jewelers first quarter earnings conference call. On the call today are Signet CEO, Jenna 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. Actual results may differ materially. We urge you to read the risk factors, cautionary language, and other disclosures in our annual report on Form 10-K, quarterly reports on Form 10-Q, and current report 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 financial measures, the most directly comparable GAAP measures, investors should review the news release we posted on our website at www.signatejewelers.com forward slash investors. With that, I'll turn the call over to Jenna.

Thank you, Rob. We're happy to have you joining your first Signet earnings call today and appreciate the extensive experience you bring. And thanks to all of you for joining us today. Before getting into our prepared remarks, I want to thank our SIGMET team. Our company continues to be recognized as a great place to work because of the outstanding people we work alongside. In a pressured quarter, we delivered on our commitments thanks to their agility and excellent customer service. I'm proud to lead this team. There are three key messages I'd like to reinforce in my remarks today. First, we achieved our revenue and bottom line commitments in Q1, despite macroeconomic headwinds that worsened late in the quarter. Additionally, as we predicted, there were fewer engagements in the quarter, resulting from COVID's disruption of dating three years ago. Given softening trends in late April, we leveraged high margin innovation in services and fashion, as well as strategic promotion to quickly respond to competitive pressures. These results reflect the agility we've built in our team and our flexible operating model. Second, we are adjusting our guidance for the year reflecting current market conditions, lowering revenue expectations based on increasing macro pressure on consumer spending. On the bottom line, our operating model continues to deliver at a double-digit annual rate. However, we are intentionally choosing to invest in the capabilities that we believe are creating sustainable competitive advantages and driving market share growth to expand the moat around our business. We have the advantage of having built a fortress balance sheet that fuels our ability to invest in a period of disruption, which we believe gives us significant competitive advantage. Third, we remain confident in our midterm goals that we outlined at our April investor day. In fact, our proprietary consumer insights give us increased confidence that engagements will begin to recover at the end of fiscal 24, and we're positioning ourselves to accelerate market share growth. Turning to the quarter, we delivered nearly $1.7 billion in sales and more than $106 million in non-GAAP operating income, both at the high end of our guidance. We achieved this despite 50% of our business being in bridal, which we expected to decline and in an environment that deteriorated late in the quarter, which we've seen continue in the second quarter. The swing factors in recent consumer confidence, lower tax refunds, economic concerns triggered by regional bank failures, and continued inflation led to a weakening trend in spending across the jewelry industry of an additional 10 points. that we estimate based on external reports. Bridal and macroeconomic conditions were two important drivers in the quarter, so I'll comment on both of them. We expected the low double-digit decline in engagements that we saw this quarter. Similar to the fourth quarter, we expected to see units decline, but we also expected growth in average transaction value, which did not materialize. This reflects the accelerated macro pressures on spending as well as a heightened promotional environment, those factors that we expect to continue. We believe we are growing market share in bridal in this environment. In fashion, we continue to see pressure at lower price points, as has been the case for the past year. However, later in the quarter, we began to see degradation at higher price points, between $1,000 and $5,000 in fashion. Price points remain strong at $5,000 and above. this price erosion continued into the second quarter. Nonetheless, our intentional focus on building out our fashion category over the last three years, which has grown 36% in that time to become a bigger portion of our mix, has positioned us to gain market share and is having the positive impact we've designed for in this current environment. I'll talk more about our guidance update shortly, but I want to first look at the value of the investments we've made to differentiate Cignet from competitors and position us to gain market share. In particular, our banner portfolio, our services business, and our digital and data capabilities, all of which were important strengths in Q1. Our broad portfolio of banners is working as it is designed to do. As we've repositioned it, Jared is a good example. Jared now represents an important mezzanine between fine jewelry and luxury jewelry. In each of the last nine quarters, Jared has increased average transaction value versus previous year by providing the higher quality metals, elegant cuts, and exclusive brands that Jared customers want. And we're piloting a preferred assortment in select stores that has driven a 600 basis point improvement in sales versus the balance of the fleet and a 1500 basis point improvement to average ticket sales. We expect to roll it out more broadly in the months ahead. The value and potential of our services business continues to be evident. Services grew more than 5% compared to this time last year, reflecting the notable progress across our services offering. a key driver with our extended service agreements or ESAs. The attachment rate for ESAs increased more than two points exiting the quarter with higher velocity. This is a particularly impressive result since our highest attachment is typically in bridal. Custom is another good example. We expected custom to decline in the quarter at a similar rate to merchandise sales. Yet this growing service bucked the trend increasing penetration and contributing to core margin expansion. We've been building our services offerings based on deep consumer research, and it's working. The improvements we've made in custom and repair drove a service margin increase of 340 basis points compared to the prior year. Our loyalty program is demonstrating meaningful growth as well. We recently introduced the option to enroll in our loyalty program when first creating an account on one of our banner sites, creating a frictionless point of entry for our customers. This enhancement has enabled a more than 50% increase in members in the quarter. This matters because our loyalty members are more frequent purchasers and have a 20% higher spend than non-loyalty members. These examples represent continued progress toward our midterm goal of $1.2 billion in service business revenue, as well as an important step change in the way services perform as a category. Historically, services revenue has trended alongside merchandise, often impacted by the same drivers. This quarter, services is a standout category and a clear reflection of our investments. We've changed the trajectory of this part of our business through ESA product differentiation, increased digital access and visibility, and increased training. The final strength I'd like to highlight is the value of our digital and data analytics capabilities. Our investments in digital continue to be a differentiator and a bright spot for us in the current environment, increasing penetration in the quarter. We believe that's both an indication of the macro environment where consumers are browsing and researching more before they buy, and also the investments we've made to create a great customer experience. Our Digital Net Promoter Score, or NPS, is now at an all-time high, having grown three points over the last quarter and nine points compared to this time last year. And 96% of promoters so they will shop with us again. As consumer expectations continue to increase, we are updating our digital experience, meeting customers how and where they want to shop with us at a scale that's hard to match. We implemented more than a dozen new priority feature launches this quarter, and we're on track for an additional 20 in the second quarter. These features include enhancements to online merchandise presentation, messaging, appointment booking, and services. With these and future improvements to come, we are sharply focused on customer delight and increased conversion. Beyond digital, our proprietary data and ability to mine it for insights is a significant source of competitive advantage. We see its value in bridal, for example. As we mentioned at our investor day, we have identified and tracked a proprietary list of 45 milestones that trace a couple's journey through four major relationship stages, meeting, exclusivity, committed, and engagement. What our data has shown is that once couples experience at least 27 of these milestones, it becomes highly likely that they will move to engagement. For example, couples traveling together is one of the top milestones later in a couple's journey to engagement. We see evidence of this milestone currently across our data sources, including online search activity. Searches for couples vacations on TikTok are currently twice what they were in Q4. Google searches for travel or vacation together are up more than 30%. In fact, multiple data sources that we track for other key proprietary indicators are also up significantly. The key point is that we're seeing the engagement milestones occurring as expected, which reinforces our confidence that engagements will begin to recover as we approach the end of the year. We are investing to win as this unfolds. Personalized marketing is another example of our data capabilities. Our marketing efficiency and effectiveness continue to improve as we personalize our approach. including a 9% increase to our return on ad spend in the first quarter, with advertising as a percent of sales flat compared to this time last year. Our customer data platform, which enables our personalized journeys, is still relatively new in implementation. That said, we've already built nearly 30 million customer profiles, and the platform is configured to activate across channels like email, SMS texting, web, and social. I want to put this into perspective for you. We estimate those 30 million customer profiles represent roughly 40% of U.S. jewelry customers who make a purchase in a given year. And we've been adding over 1 million new profiles every month. The marriage of these two things, our proprietary consumer insights and our leading customer data platform is a powerful combination that doesn't exist at our scale anywhere else in the North America jewelry industry. Our unique consumer insights capability enables us to see and understand pre-engagement couples as they make progress through their relationships toward engagement. And our personalization capability enables us to interact with them at important steps, increasing the likelihood that they'll come to us when they're ready to get engaged. This also generates insights into all the milestone moments that come later in their lives and enables us to build lifetime relationships with them. This integrated approach to our insights and customer data is at the heart of our transformation and our long-term growth potential. We will continue to invest behind it as we get better and better every year. One final example of how we're leveraging data is the way we're driving out product costs without compromising quality and innovation. A recent example is a sourcing technology that we've activated, which we call the ROOC. This is a leading sourcing system that allows us to benchmark standardized component costs establish should cost pricing models, and create transparency and cost negotiations across our network, lowering costs and matching product demand and supply needs with the right vendors across all our banners. We're early in our implementation, but already in Q1, we estimate that we avoided mid-single-digit cost increases to lose stones. Based on our early success, We are now doubling our expectation of savings from $20 million to $40 million this year and believe we can ultimately save up to $200 million annually over time. This level of cost transparency gives us a clear competitive advantage, particularly with current macro headwinds. The point of these examples is to underscore that the investments we've made and continue to make to strengthen critical capabilities and create competitive advantages are working. Our financial strength allows us to keep investing to widen the mode around our business and position Cignet for ongoing market share gains. I'll touch briefly now on our guidance update. As a result of the deteriorating macro environment and impact on consumer spending patterns we saw late in Q1 and throughout May, We are revising guidance to reflect continuation of these trends for the balance of the year. We have updated our forecast to account for a lower range of top line outcomes and now expect revenue for the year to be between $7.1 billion to $7.3 billion. Based on sales data in May and June for the industry, we believe this guide positions us to grow market share as current trends are pointing to a larger decline across the industry. As I said earlier, our model provides double-digit operating margins, even in a tough macro environment. We are maintaining investments this year of nearly $75 million in OpEx to enhance our digital and IT capabilities, and up to $200 million in capital, which is a demonstration of our increasing confidence in the recovery of engagements and our ability to achieve our midterm goals. These investments will pressure margins by approximately one point, placing us temporarily below our double-digit target in a range of 8.9% to 9.2%. Importantly, these investments strategically position us to take advantage of the expected recovery and bridle that will begin later this year and capture share when the current macro headwinds recede. Our flexible operating model is in place and working, and our Fortress Balance Sheet gives us this opportunity. We're also taking action in three key areas. We're heightening our focus on innovation at the right price point, working to stimulate demand through relevant newness within our assortments, personalized customer journeys, and strategic promotions, all while balancing our inventory position. We believe our lean inventory and heightened turn gives us the opportunity to bring newness to market faster than our competition, and our scale allows us to create excellent value. Secondly, we are more than doubling our cost savings initiatives from $100 million this year to $225 to $250 million. And third, we're accelerating our ongoing fleet optimization. and plan to close up to 150 stores over the next 12 months that are not meeting our expectations for productivity. Joan will provide more perspective, but I'll close just by coming back to the core messages we're focusing on today. We delivered our revenue and bottom line commitments in Q1 despite significant pressure, reflecting our agility and flexible operating model. We're adjusting our guidance to reflect current macroeconomic conditions while continuing to invest intentionally in the capabilities that we believe are driving market share growth, and we remain confident in both the recovery of engagement and in our ability to achieve the midterm goals that we outlined at our April Investor Day. On that note, I'll pass it over to Joan. Thanks, Jenna, and good morning, everyone.