Signet Jewelers Limited

Good morning and welcome to the Signet Jewelers third quarter fiscal 2024 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star zero. After today's presentation, there will be an opportunity to ask questions. Should you have a question, please press star followed by the number one on your touchstone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, you can press star followed by the number two. Please note, this event is being recorded. Joining us on the call today are Rob Ballew, Senior Vice President of Investor Relations, Jenna Drossos, Chief Executive Officer, and Joan Hilson, Chief Financial Strategy and Services Officer. At this time, I would like to turn this conference over to Mr. Rob Ballew. Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning. Welcome to Cigna Jewelers' third quarter earnings conference call. During today's discussion, 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 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 financial measures to the most directly comparable GAAP measures, investors should review the news release we posted on our website at ir.signaturejewelers.com. With that, I'll turn the call over to Jenna.

Thank you, Rob, and thanks to all of you for joining us today. Our team delivered this quarter with non-GAAP operating income at the high end of our expectations. Recall the jewelry category is experiencing its second COVID as engagements are down 25% due to the disruption of dating three to three and a half years ago. Through this environment, our team has continued to be agile and innovative, resulting in Signet growing our bridal market share again this quarter. I'm confident we'll grow from this trough next year, just like we rebounded strongly from the closures of the pandemic. Our team knows our customers, creates unrivaled experiences to meet their needs and delivers on our commitments. And this time of year, their expertise really shines. I'm honored to work alongside them. I'd like to leave you with three key takeaways today. First, we delivered our financial commitments this quarter, and remain on track to deliver the year. Even as we delivered a profitable third quarter, we invested in marketing and merchandise strategies to deliver our fourth quarter commitment and to drive share gains. Jewelry continues to be an important gifting category, particularly among Gen Z, with Black Friday weekend results in line with our expectations. Second, the multi-year engagement recovery has begun. as we predicted, with engagement ring units beginning to rebound in recent weeks. While we still expect a gradual recovery over the next three years, of the 45 proprietary relationship milestones that we track, we have seen the expected progression to late-stage milestones over the past few months. This progression is highly correlated with engagement ring purchases, which we have also seen increase over the last several weeks. Importantly, engagement rings are the catalyst to lifetime value, which makes them a competitive advantage for establishing sustainable long-term growth. Third, our company is strategically positioned to leverage our scale and competitive advantages to help weather the highs and lows of our category and general macro pressures. For example, we are the largest advertiser in our industry, by far, with three times the annual spend of our nearest competitor. The scale and effectiveness of our marketing spend is reflected in the fact that our top three banners, Kay, Zales, and Jared, have top of mind awareness among jewelry consumers that is twice that of nearly any other US retailer. Our consumer insights also give us foresight, which, for example, helped us predict the engagement slowdown and reduce our inventory double digits, even while investing in newness for the holidays. Let's look at each of these points, beginning with the quarter. We delivered sales of roughly $1.4 billion this quarter and $24 million of non-GAAP operating income. Prior to the pandemic, the third quarter was consistently a lost quarter for Signet. It's the one quarter of the year without a major gift-giving occasion and is when we are investing in marketing and merchandise delivery for our largest gifting occasion, the winter holiday season. As a result of our transformation, we've delivered four years in a row of positive Q3 earnings, all while continuing to invest in both our holiday strategy and our long-term growth. Adding to the obstacles our team navigated this quarter, over-inventoried independent jewelers continue to drive heightened levels of promotion in our category. That said, our brand equities, services, targeted promotional cadence, and sourcing efforts allowed us to increase gross merchandise margin in the quarter up 250 basis points to last year. Further, inventory was down 14% from a year ago, allowing us to bring in more newness, creating a competitive advantage. This includes value engineered pieces that offer great looks and value at hot price points, along with broad assortments of on-trend gold jewelry, such as sculpted gold earrings and necklaces, and strong presence in lab-created items that also provide excellent value. Compared to last year, sell-through of new SKUs increased by 30% in the third quarter. The next point I want to underscore is that we are in the midst of the most popular time of year for engagement ring sales, October through February. As I highlighted above, we've crossed the trough and the engagement recovery has begun. For example, couples moving in together, a late stage milestone, was up nine points from early 2022. And Google searches for engagement rings are now 10% higher than last year, the first time they've exceeded the prior year in nearly two years. The percentage of couples moving to the engagement phase has improved by five points, a statistically significant movement over the last 18 months. Beyond the COVID-driven engagement recovery, we are also seeing more positive attitudes among younger unmarried consumers toward getting engaged and married. In our most recent survey, nearly 80% of non-married millennial and Gen Z adults say they want to eventually get engaged and married, which is a notable improvement to younger adults from a 2018 survey. That's encouraging. as are the multicultural changes we're seeing in engagements. Moving forward, the majority of engagements in the U.S. will be multicultural, led by growth in Hispanic Americans. This multicultural trend is steering our merchandise and marketing strategies as we lean into higher penetration of products like yellow gold and provide bilingual marketing and sales expertise that makes our multicultural customers feel respected and welcome. It's working. In the third quarter, Zales performance at high Hispanic doors is better by 130 basis points compared to the balance of Zales fleet driven by assortment, bilingual consultants and signage, as well as increased Hispanic targeted media. So our data is clear. Engagements are on their way back and we are positioning ourselves to win. We continue to expect a gradual return to pre-pandemic levels of engagements that will play out over the coming three years. A three-year tailwind that we can leverage for business and market share growth given our scale and our position as the engagement leader of the industry. The recovery of engagement rates is also our catalyst to lifetime value. We provide services that cement customer relationships, including nearly 80% attachment rate to extended service agreements on bridal pieces. We are also increasingly using our customer data platform, loyalty program, and personalized marketing capabilities to meet our customers' ongoing needs for jewelry to celebrate birthdays, anniversaries, and holidays for years to come. For example, we are now approaching 4 million loyalty members. And this quarter, their average transaction value, or ATV, was 40% higher than our non-loyalty members. It's a clear reflection of loyalty as a long-term growth driver and scaled competitive advantage. This brings me to my third and final point. Cignet is well positioned to grow reliably over time. thanks to the moat of competitive advantages and scale we've built that are unique in our category. Signet is able to withstand and even gain share through cyclical dynamics of the jewelry industry and general macro pressures, thanks to those advantages. A good example is how we are managing the price decline of larger loose diamonds this year. The elevated promotional activity of overstocked independents is a key contributor to driving down diamond prices to pre-pandemic levels in recent months. In contrast to independent jewelers, our product innovation and assortment, promotional priorities, and scaled buying power have delivered stable ATVs all year, including in recent months, both for natural and lab-created diamonds. Within the industry, the natural diamond oversupply situation, which has been pressuring retail prices, is beginning to abate. Independents have been buying less in recent months and their inventory levels have improved by more than 15 points since the first quarter. Midstream inventory appears to have peaked in June and major jewelry manufacturers have dramatically reduced their output. Large diamond miners have recently suspended mining activities and sales for two months or longer. Further, for the first time in more than a decade, De Beers is stimulating category demand with a branded natural diamond marketing campaign over the holiday season. Combined with the upcoming engagement multi-year tailwind, we believe the natural diamond market should normalize through next year. But what's most important for us as the world's largest retailer of diamond jewelry is that we are strategic with our partners to drive better pricing, better assortment, and better value for our customers by leveraging our inventory discipline and vertical integration. The other growth pillars of our midterm goals are also meaningfully progressing. Our services business, up 5% in the quarter and year to date, has contributed close to one point of our gross merchandise margin expansion. For example, we continue making great progress with ESA attachment up to last year again this quarter, improving by 310 basis points. In accessible luxury, we've opened five Diamonds Direct stores this year, including three since the quarter ended, bringing our total to 30 stores. These stores, once reaching full maturity, generate over $15 million a year in average revenue per store. Our foundry custom jewelry at Jarrod has grown, including 40% unit growth in Q3 compared to a year ago. This is complemented by our premium assortment doors, which outperformed the balance of the Jarrod fleet by nearly 900 basis points this quarter. Our digital and marketing capabilities continue to drive efficiencies led by our use of AI in North America and reflecting a ROAS improvement this quarter of 30% to last year in our core banners. We are activating Cignet's new CDP for this holiday season more fully than ever before as we target the 35 million people we know have purchased jewelry in the US in recent years and 14 million people we know are in various stages of dating relationships. To summarize my comments today, the competitive advantages that we've built are working. We are positioned to deliver our commitments this fiscal year and are on track to meet our midterm goals. With that, I'd like to hand it over to Joan.