Signet Jewelers Limited

Good morning and welcome to the Signet Jewelers' 4th Quarter Fiscal 2024 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press the star 0 for the operator. Please note, this event is being recorded. Joining us on the call today are Rob Ballou, Senior Vice President of Investor Relations, Jenna Drossas, 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 Ballou, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning. Welcome to Cigna Jewelers' fourth quarter and fiscal 2024 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. Action 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. Acceptance is required by law. We undertake no obligation to revise or publicly update forward living statements in light of new information or future events. During the call, we discussed certain non-GAAP financial measures. For further discussions of the non-GAAP financial measures, As well as reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measures, investors should review the news release we posted on our website at ir.signatjewelers.com. With that, I'll turn the call over to Jenna.

Thank you, Rob, and thanks to all of you for joining us today. Before we discuss both our fiscal 24 results and fiscal 25 expectations, I'd like to thank our SIGMET team. They delivered on our expectations in a year that experienced a deep COVID-induced engagement trough and an overstocked industry that drove an elevated promotional environment for the jewelry category. You continue to inspire me. Thank you for all your hard work and dedication this year. I'd like to leave you with three key takeaways today. First, we delivered on our financial commitments this quarter with EPS above the high end of our guidance range. Second, excluding non-recurring legacy legal settlements for the fourth year in a row, we generated over $600 million in free cash flow. This is nearly 15% of our market cap. Third, we expect same store sales to improve throughout fiscal year 25 as the engagement recovery gains velocity. I'll elaborate on each of these takeaways beginning with this quarter's results. We delivered sales of $2.5 billion this quarter, down roughly 6% to last year. As anticipated, we saw a late shopper this holiday as value conscious consumers were holding out to get the best deals and had one extra weekend to shop for gifts. We leveraged branding, innovation, and value engineering within our newness to provide customers a competitive value proposition, along with size trade-up options in categories like lab-created products. Our strategy resonated with our customers as we saw new items sell through at an impressive 700 basis point increase to a year ago. Our strategy, which worked all year, was also effective in the fourth quarter as we held North American average transaction value nearly flat and expanded our non-GAAP gross margin by 170 basis points to this time last year. Conversely, industry data suggests independent jewelers accelerated their deep discounts in lab-created diamonds and stepped up their discounting for natural diamonds modestly. This resulted in heavy AUR declines among independents. Our lifecycle product management continues to be a source of strength, driving inventory levels down 10% compared to the prior year. As we take markdowns on slower moving products earlier, this also allows us to bring in relevant new items faster, which have higher margins. Continuing the trend we saw for most of fiscal 24, jewelry retailers that cater to the low-priced fashion category outperformed. Likewise, Banter, our value-oriented fashion banner, delivered the strongest same-store sales in the U.S. this quarter, nearly flat. We also saw strong performances at People's in Canada and Value Banner H. Samuel in the U.K., both of which delivered positive same-store sales over the holidays. Offsetting the stronger performance in our core, we had challenges at our digital banners from operational and integration issues resulting in lower fulfillment, which has continued into fiscal 25. This was caused by the integration of Blue Nile with production partners, resulting in lower conversion rates in the last six weeks of the quarter, reducing our overall North American same store sales by one point. We are working to resolve these issues and expect to have fixes implemented later this year. We also underperformed in our Ernest Jones banner in the UK, in part from macro challenges, as well as a more negative halo impact from the November sale of our luxury watch stores. We estimate our US jewelry merchandise market share for fiscal 24 was approximately 9%, down modestly from the prior year driven by mixed shift with lower engagements as well as the relative strength in lower price self purchase items where we have less penetration. We believe that we expanded our market share in the bridal category for fiscal 24 by approximately 50 basis points, which is where we over index to the industry with nearly 30% market share. The second takeaway today is that our flexible operating model is working as designed and generating significant cash fueled by continued cost savings, sourcing efforts, and inventory discipline. We continue to drive working capital efficiencies in our business, which led to a 97% free cash conversion to non-GAAP operating income. We believe our ability to drive free cash flow will continue. This allows us to invest in the growth of our business, bring in critical newness, and to return significant capital to shareholders. Last year, we returned nearly $200 million to shareholders, and we have returned nearly $1 billion to shareholders over the last three years. This morning, we announced a $200 million increase in our share repurchase authorization. bringing our total remaining availability to approximately 850 million dollars. This is higher than the outstanding conversion market value of the LGP preferred shares. We believe share buybacks remain a very attractive use of capital for our shareholders. We also announced a 26% increase in our common dividend to 29 cents this quarter, our third consecutive year growing our dividend, which even after this increase represents less than 10% of our free cash flow in fiscal 24. Our strong free cash flow also strengthened our balance sheet. We ended fiscal 24 with $2.5 billion in total liquidity, which is $1 billion above our target of $1.5 billion. This gives us the dry powder to handle both our 148M dollar unsecured notes that mature in June as well as the convertible preferreds that mature in November while staying well within our liquidity goals. As a reminder, the convertible preferreds also represent approximately 15% of diluted common shares, which provides potential EPS upside to our fiscal 25 guidance and our midterm goals. We are in active discussions with our board and LGP on the best way to retire the preferred shares in fiscal 25, and we plan to give further updates as these discussions progress. The third takeaway is that we believe Signet will see sequential same-store sales improvement throughout fiscal 25. One component is the return of engagements in the U.S. We saw industry engagement unit sales consistent with our expectations in the fourth quarter, and after a deceleration in January and early February, we saw notable improvement in the back half of February and March. The milestones that we track show that the number of couples that have experienced more than 25 of the engagement milestones has increased 500 basis points since early 2023. We believe engagements in the US should increase this year between 5 and 10%. This is a clear opportunity to attract new customers. Cignet provides tenured knowledge, known brands, consistent newness, and a full range of customization options. We believe the shape of this year's engagement growth will have a more material impact in the second half of the year as customers continue to plan the majority of engagements around October through February. Our customer data platform now includes 17M customers known to be in dating relationships, and we use this data to provide personalized marketing and education to attract engagement customers. After a customer's engagement ring sale, we look to build lifelong relationships, as we'll be there for birthdays, anniversaries, and milestone occasions, as well as providing the services to keep their jewelry collection protected and looking its best. We will also continue to build brand equity, utilizing scale capabilities that will win new customers, including targeted, personalized marketing. In fact, recently, we tested 28 days sprints of personalized marketing among K customers and early results are driving a more than 10% revenue lift versus a control group. Over the last six years, we got smaller through fleet optimization to set ourselves up to get bigger. In fiscal 25, we will invest to grow strategically in markets where we see great returns, including a hometown market strategy for K, and to improve the shopping experience for our customers within our stores through renovations. We are opening up to 30 new stores and renovating an additional 300 stores in order to drive brand relevance in our highest productivity doors. We've seen strong returns from these early investments of between 15 to 25% IRR. Services which outperformed merchandise by more than 1000 basis points for the fourth quarter remains a key area of growth in fiscal 25. We look to expand services further through B2B services with independents and insurance companies where we offer exceptional value given our scale and breadth of service offerings. We will also drive post-repair extended service agreement or ESA offerings to customers who did not buy an ESA initially or are seeking repairs on a piece not purchased at Cignet. Following our nearly 350 basis points increase in fiscal 24, we continue to see the opportunity to further improve attachment rates in fiscal 25, both in-store and online. Now, I'll briefly comment on results so far for fiscal 25. Similar to Christmas, Valentine's Day shoppers were late and highly value-motivated. As a result, January and early February trend was quite soft with comp sales down mid-teens. Since early February, trends have notably improved with same store sales down mid to high single digits. The core business continues to outperform with digital banners operational issues dragging comps down. We believe consumers will remain focused on value this year as they make important trade-offs in their budgets, and our ability to bring newness and innovation will be a differentiator. To summarize my comments today, I'd like to reiterate our three key takeaways. First, we delivered on our commitments again this quarter, including non-GAAP EPS above our high guide. Second, we generated over 600 million dollars in pro forma free cash flow for the fourth year in a row. Our flywheel operating model is driving strong free cash conversions, which we're using to return capital to shareholders, improve our balance sheet, and invest in our business to drive growth. And third, we believe we will see same-store sales improvement through fiscal 25, with same-store sales turning positive during the back half of the year in our core banners, driven by engagement recovery, strengthened brand equities, product newness, and new customer acquisition, all while maintaining cross-discipline. I'll now turn the call over to Jen.