Signet Jewelers Limited

Good morning and welcome to the Signet Jewelers' 3rd Quarter Fiscal 2025 Earnings Call. At this time, all lines are in 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 Clayton Ward, Senior Director of Investor Relations and Capital Markets, J.K. Simancic, Chief Executive Officer, Joan Hilson, Chief Financial and Operations Officer, and Rob Ballou, Senior Vice President of Investor Relations. At this time, I would like to turn the conference over to Clayton.

Please go ahead.

Good morning. Welcome to Cigna Jewelers' third quarter fiscal 25 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.signatoolers.com. With that, I'll turn it over to JK.

Thank you, Clayton, and good morning, everyone. It's my pleasure to be with you all today, and I'd like to first thank all my Cignet colleagues for their incredibly warm welcome. There are many aspects that attracted me to Cignet that I'll share in a moment, but let me start by saying that the team is genuinely motivated by our purpose, committed to serving the needs of our customers, and invested in the future of Cignet. I've immersed myself in our business and culture, spending more time in our stores and offices, meeting with our team members and leadership. In my time at Signet, I've already seen firsthand how our team members recognize and celebrate the emotional connection we have with our customers when they are making a jewelry purchase. I've seen it in cities across our footprint, how passionate everyone here is about providing customers with the highest level of jewelry expertise, to offer guidance to create lasting memories at milestone and everyday moments in their lives. As a career-long merchant, I share this passion for serving customers. And I'd like to take this moment to recognize our Signet team for their dedication and hard work in the midst of our most important selling season. I'm also encouraged by our vendors and their commitment to strategic partnerships to create on-trend merchandise. After a month at Signet, I'm energized by our opportunity to accelerate growth. Our strong brands, deep consumer focus, and talented team provide a powerful foundation to strategically evolve and transform our business. In partnership with the management team, we are actively identifying new opportunities for the future. I recognize we have some challenges. Engagement incidents are somewhat less predictable on a short-term basis And as you know, lab-created diamonds have disrupted the industry, but also create opportunities in the fashion category, as well as increase the breadth of assortment within bridal. I'm excited by the opportunities in front of us, and I believe Cygnet's strengths will overcome its challenges to yield growth ahead of us. Over the next few months, myself and our team are first and foremost focused on continuing to execute a successful holiday season. We will look to evolve our strategy to fuel customer and shareholder value and look forward to sharing details on this work and our plans in the coming months. I'll now turn the call over to Joan.

Thanks, JK. Good morning, everyone. I'd first like to thank our Cigna team. Your agility and commitment continue to be an inspiration, and I appreciate the drive to results in the third quarter and the preparations for the holiday season. I have three takeaways today. First, we continue to drive sales momentum with our sixth consecutive quarter of sequential same-store sales improvement as we navigate a choppy consumer and industry environment this year. Second, we are well prepared this holiday season with a go-to-market strategy which we believe will drive positive same-store sales in the fourth quarter. lastly we're updating guidance to reflect the short-term impacts from both digital banners james allen and blue nile leadership transition costs and the permanent accretive impact from the early completion of the preferred shares redemption looking closer at the third quarter same store sales finished down 0.7 a nearly three-point sequential improvement to the second quarter in fact When excluding the impact of our digital banners and hurricanes, we delivered same-store sales growth of one point. Fashion sales were positive as we continued to see strong sell-through of new merchandise, partially offsetting the decline in engagement performance in our digital banners. Focusing more on newness, our strategy to drive higher penetration continues to resonate with customers. up nearly eight points to last year in our core banners the higher penetration of new merchandise is key to signet strategy around average transaction value or atv and merchandise margin for example north america fashion atv was up mid single digits in the third quarter driven by a more than 30 percent growth in lab created diamond fashion sales importantly New products carried a more than five-point margin in premium to our core average, which is a greater premium than last year. Turning to bridal, we finished the quarter with total North America engagement units down 2% due to performance in our digital banners. Excluding the digital banners, units were up nearly four points in the third quarter, a seven-point sequential improvement to last quarter. Turning to ATV, Overall, North America bridal ATV was down mid-single digits in the quarter due to competitive price pressure in loose stones. We continue to believe engagement units will recover over the next few years. Services revenue was up nearly 2% in the quarter as it continues to outpace merchandise sales. Extended service agreements, or ESAs, Attachment rates grew 170 basis points to last year, driven by continued traction in post-repair ESA and fashion merchandise. As a reminder, Services carries a 20-point margin premium to merchandise. Turning to my second takeaway, we believe we'll deliver a positive holiday performance this year, driven by our comprehensive go-to-market strategy. We have positioned merchandise in marketing to lean into both fashion and bridal, building on the momentum we've seen the last few quarters. We've increased inventory penetration of newness to over 30% in core banners, up more than 10 points to drive holiday selling. The consumer continues to be value-oriented, and the increase in new fashion merchandise allows us to provide customers a greater value at an attractive margin and ATV through product engineering. This work extends to bridal as well. December typically has twice the number of engagements as any other month, and we believe December engagement units will be positive. We delivered high single digit same store sales over the Black Friday to Cyber Monday weekend. However, keep in mind that this includes a moderate lift resulting from the closer proximity to Christmas. and is reflected within our fourth quarter guidance expectations. As a reminder, our holiday sales are weighted to the two weeks before Christmas. Before I hand the call over to Rob, I'd like to discuss the changes in our expectations for the full year. As part of my expanded responsibilities, my initial assessment of challenges at our digital banners goes beyond the API integration issues we've previously shared. The delayed completion of re-platforming work and aided search upgrades that began earlier in the year significantly impacted traffic and search placement upon the completion of that work in the back half of the quarter. While our fourth quarter expectations are lower for the digital banners than a few months ago due to these additional challenges, we've already seen some improvement in the fourth quarter compared to October's performance. And importantly, I am pleased to welcome our new digital banner president, Corrine Benson, who joined just a month ago. She has deep consumer and digital experience, including Tiffany's and most recently led Home Depot online. I believe our talented digital team will benefit from her leadership, setting the stage to drive improvement and return to our long-term growth path over the coming quarters. Alongside the update to our expectations of digital banners, we will incur leadership transition costs of approximately $7 million that were not initially contemplated in our full-year guidance. We are also reflecting the accretive impact from the early completion of preferred share redemption. I'll now hand the call over to Rob to discuss the financial results in more detail.

Thanks, Joan, and good morning, everyone. Revenue for the quarter was $1.35 billion, down 3%. As Joan mentioned, same-store sales were down 0.7%. Same-store sales reflects the continued drag from our digital banners of approximately 120 basis points. Digital banners did improve sequentially by approximately 500 basis points, but worsened in the second half of the quarter. We delivered adjusted gross margin of $486 million for 36% of sales this quarter, flat to last year. Merchandise margin was also flat in the third quarter as we cycled a 250 basis point growth in the prior year. Turning to SG&A, adjusted expense was down $8 million to $469 million for the quarter. SG&A deleveraged by 50 basis points to 35% of sales due primarily to somewhat higher marketing expense that we referenced last quarter to pull some marketing spend ahead of the election, as well as approximately $2 million of leadership transition costs. Adjusted operating income was $16.2 million for the quarter, or 1.2% of sales. Adjusted EPS for the quarter was 24 cents and in line with last year. Turning to inventory, we ended the quarter at $2.1 billion, up 2% to last year, as we bolstered the penetration of new product as we entered the holiday season. We have completed the redemption of all remaining preferred shares this quarter for approximately $270 million and $810 million in aggregate this year. Common share repurchases year-to-date total $118 million or 1.3 million shares at an average share price of approximately $91. These actions translate to an end-of-year share count reduction of more than 17% to fiscal 24 year-end to roughly 43.5 million diluted shares. We continue to see capital returns to shareholders as an important part of our capital allocation strategy moving forward. Turning to liquidity, we ended the quarter with $158 million of cash and equivalents, and $253 million temporarily drawn on the revolver. The draw on the revolver was the result of timing around the redemption of the preferred shares and holiday inventory purchases, and we have already repaid a significant portion so far in the fourth quarter. With that, I'll hand the call back to Joan to discuss our guidance for the fourth quarter and the fiscal year.

Thanks, Rob. For the fourth quarter, we expect same-store sales in the range of flat to up 3%. This includes an approximate one point drag from our digital banners. We expect engagement units to be up low to mid single digits and fashion sales to be up modestly. We expect adjusted operating income between 397 to $427 million on a higher operating margin rate to last year. Gross margin rate is expected to expand in the quarter with SG&A rate up slightly. We believe our guidance provides for flexibility in a competitive environment. This results in an update to our full year guidance range with same store sales down in the range of 2 to 3%. We expect adjusted operating income between 540 and $570 million and adjusted EPS between $9.62 and $10.08. So in closing, before we go to questions, I'd like to remind you of the three takeaways I'm leaving you with today. One, we delivered the quarter within our expectations. Two, we're on track for positive holiday sales. And finally, our updated guidance reflects short-term impacts from both digital banners and leadership transition costs and the permanent accretive impact from the early completion of preferred shares redemption. Operator, let's now go to questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press the star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press the star followed by the number two. One moment, please, for your first question. And your first question comes from the line of Ike Buruchow with Wells Fargo. Please go ahead.

Hey, good morning, everyone. Good to talk to you, JK. I guess two questions for me on the new guide, just making sure I understand. So the new comp guide, flat to three, there's 100 basis points of the digital. Did the core business, meaning ex-digital, did your expectation on that business also come down? It looks like it did, but it also kind of sounds like you're more calling it the digital banners as the driver of it. So just trying to understand core versus the digital component. And then just the follow-up question on the guide, It looks like you're still guiding some nice margin expansion despite the lower comp. And I guess I'm trying to understand where that margin expansion has come from. Is that gross margin? Is that some expense initiatives you're flexing? So I'm just kind of curious to put some takes.

Great. Thanks for the questions, Ike. So with respect to our core banner performance, we're pleased with the core banner performance in the third quarter. You know, we were, collectively, we were up. I would say from a guidance perspective, on the lower end, we're giving A little bit of a slight drop for core banners within that guide for the fourth quarter, but overall pleased with how the core banners are generally performing. The digital banners are really the impact that we're seeing in our business. We noted in the third quarter it was 120 basis points impact to the comp. We did have a little bit of a drop related to the hurricanes. But overall, as we look forward, we think some of that will mitigate, but we still expect that one point drop related to digital. Gross margin, merchandise margin is really what's driving the gross margin expansion with some, you know, improvement related to the comp performance psych. But we're very pleased with how our fashion is performing. I shared that there is a meaningful expansion in March margin rate related to the new product. And so that mix being driven up by our new product assortment is really what's driving the expansion in the fourth quarter related to gross margin.

Can you quantify what you expect gross margin to be for 4Q and then just kind of comment on the promo environment and then I'll pass it along?

Yeah, not specifically, but we do expect it to expand based on the higher penetration of fashion newness. I would also add that in the third quarter, there was a slight impact related to promoting some of the clearance product to make way for newness as we head into the fourth quarter. We believe that we are competitively positioned from a pricing perspective and have really, you know, assessed our fourth quarter and believe we've provided for flexibility within our current view of gross margin.

Thanks so much.

Your next question comes from the line of Lorraine Hutchinson with Bank of America. Please go ahead.

Hi. This is Melanie. I'm for Lorraine. Thanks for taking our question. I just wanted to ask about the digital integration issues. If you can just expand upon those a bit more. It seems like you identified a few more, you know, things going on in that side of the business. So, you know, if you can just explain why these are still going on, what else needs to be done. Thank you.

Thanks for the question. With respect to the digital banners, we have been working through the API integration and believe that those opportunities or challenges are behind us. We saw that working nicely over the Black Friday weekend for us. So as we assessed what was happening in the latter part of the quarter with the replatforming work going in later than anticipated and aided search going in as well with closer proximity to the fourth quarter, it's really impacted the overall performance of the digital banners. Now we're working through, and as I mentioned on my prepared remarks, that we're seeing some improvement relative to the later third quarter performance. We're seeing improvement in the month of November, but we still do expect a one-point impact related to the digital banners in the fourth quarter.

Thank you.

Your next question comes from the line of Polish Way with Citigroup. Please go ahead.

Hey, a couple questions. Can you talk about what you're seeing on the cost side for both natural and lab? And how are retail prices changing relative to what you're seeing on the cost side? And then second, when we get through this year, what's the profitability going to look like from those digital Are they even making any money this year? And what's the plan to improve profitability of those businesses for next year? Thanks.

Thanks, Paul. So first question related to cost. We see costs within, particularly within lab-grown diamonds, coming down faster than the retail is coming down. So the way that we've bridged that in our strategy is As you know, we are providing design, you know, branded product within bridal and with the introduction of more fashion with ATV. We see that carrying two times higher ATV than product without lab-grown diamonds in it. So we're managing the retails with the infusion of new product within our assortment, and we're very pleased. with how that's performing. We're seeing our, you know, within our bridal and engagement, we see some decline in, you know, overall, you know, ATV, as we mentioned on the call. But we're, again, you know, balancing our assortments within our sweet spot of price points. So, feeling very good about how engagement recovery is, you know, continuing to happen, albeit slower. And we are continuing to stay on our strategy of new product offering and continuing to bring branded product within engagement. Now, with respect to gold, we see little price resistance within our business on gold. The consumer understands the value and how gold is priced in the market. So as we see prices or costs in gold rise, we are able to adjust our pricing and or value engineer product to keep pricing within the consumer sweet spot. So I feel that we've been able to navigate that. Now, with respect to your digital banner question, we don't really comment per se on operating margins. But what I will say to you, Paul, is that the top line growth of the digital banners, the infusion of finished jewelry within Blue Nile and James Allen is very important to the merchandise margin expansion for those banners. And we are seeing that come in for this fourth quarter in some magnitude for the first time. So as we look forward, we clearly expect Blue Nile and James Allen to get back on track to our long-term growth plans and see assortment mix as well as, you know, expense management as part of the growing profitability of those banners.

Thanks, Colette.

And your next question comes from the line of Marvisha Serna with UBS. Please go ahead.

Hi. Good morning. Thanks for taking my question. Maybe could you talk about your quarter-to-date same-store sales, just giving your commentary about Black Friday sales performance? And then also, maybe could you give us a sense on, you know, the puts and takes that you're seeing into 2025 margins, you know, rising pricing, commodity costs like gold, any incentive comp, you know, rebuild, just like getting a better sense of that. And then I have a quick follow-up on share count. Thank you.

Okay, so as I, you know, mentioned, Mauricio, we had a high single-digit same-store sales performance over the Black Friday weekend through Cyber Monday. Just as a reminder, there's a modest impact there for proximity to Christmas. The overall performance of the quarters to date is reflected within our Q4 guidance, so it's within, considered within our guidance range. Um, so, and, and I also mentioned, uh, for, within my prepared remarks that, you know, the two weeks prior to Christmas are very important to our business and our, our obviously our highest selling period. So we have a good portion of the quarter to go. And, um, so all of that's reflected within our guidance then with respect to 25, you know, we'll be back to you on the, uh, fourth quarter earnings call with our view of, um, Fiscal 26, I think you're asking about. But we'll be back to you on that. You know, clearly we are evaluating our operating plan, working with JK as he's come on board and with the management team. And we have a lot of work ahead of us to, as JK mentioned, we're actively identifying opportunities for our future. And we'll be happy to share those at that time.

Got it. And just, I guess, just to make sure, does that mean that your quarter to date is within flat to up 3%? And then the follow-up I had on the share count, just trying to understand, like, how are you getting to the, I think, like, the 46.2 share count for the entire year, just, like, doing the numbers on what you already did, and even, like, not assuming any more buybacks, I'm getting to, like, a 45.5, which just trying to understand, like, Anything there to consider on the calculations for the diluted share count for the full year?

Hey, Mauricio. Thank you for the question. This is Rob. Yeah, in terms of, you know, quarter days, as Joan said, we're not providing exactly the number, but, you know, there's the holiday shift a little bit closer to Christmas, and we feel very confident in our ability to deliver a positive comp for the quarter, which is provided in our quarterly guidance and certainly reflected in a strong Black Friday weekend. In terms of the diluted share count, as I think everyone knows, it's a fairly complicated calculation with the preferred shares this year due to the fact that we had some of the year calculated before we repurchased some of the preferred shares in April and then amended the settlement agreement. And so the share count was about $48 million in the first half of the year on a diluted basis, on an adjusted EPS basis. And obviously, you can get to roughly 44 million in the back half of the year to get to the 46.2 million shares. And as we put in our earnings release, we do expect to exit the year at 43.5 million shares, which should provide some additional EPS accretion going forward.

Got it. Thank you so much, and good luck.

And your next question comes from the line of Jim Sanderson with North Coast Research.

Please go ahead.

Hey, thanks for the question. I wanted to go back to the commentary on the bridal category. I think you reported the average transaction value is down. Can you put that into perspective for us, whether that's getting worse or better and what the key drivers of that decline are?

Sure. I'll take that one, Jim. So engagement units that are recovering and although slower than we expected, they were down overall. Um, 2% in the third quarter, but it did represent a four point sequential improvement. If you look at the business, excluding the digital banners in the third quarter, our, uh, North America engagement units were up nearly 4% in Q3. So that is a seven point sequential improvement in, in our North America banners. So also a positive signal. You know, towards the, the engagement recovery. And so as we look forward, as I mentioned, we expect that bridal or engagement units in the fourth quarter will continue to be positive, albeit, you know, with the digital banners impact, we, you know, it will have some impact on that number. But we've reflected that, as we've mentioned earlier, in our guidance. So overall, engagement recovery underway. We believe that we'll continue to see that recovery, although it may be a bit extended from, you know, our earlier, you know, view on that.

Okay. All right. The actual transaction, right? I apologize.

Thank you.

So the average transaction value was down in the third quarter. It also had a significant impact related to the digital banners because there's such a high penetration of engagement within the digital banners. So go forward. We were pleased with the overall flat average transaction value, Jim, because our fashion assortment is providing us the ability to manage our way through what may be a bit of a choppy environment related to bridal ATV. So feel that it's stable and we're able to manage with the mix of our business.

All right. And just one last follow-up question. I think you reported numbers for Black Friday this year and Cyber Monday. Could you remind us what that trend was reported last year for comparison?

We didn't provide that last year, Jim, but just to remind us here, we reported a high single, we're sharing a high single-digit comp over that weekend, which is included in our guidance for positive comps in the fourth quarter.

Understood. Thank you.

Thank you. And we have a follow-up question coming from Mauricio Serna with UBS.

Please go ahead.

Yes, thank you. Just a quick follow-up. We wanted to understand the digital banners, like the impact on the total price, like why is that because of engagement? Is there more promotions? And just on the promotional environment, how are you thinking about that in Q3 versus the previous quarters, and how are you thinking about that with Q4? Thank you.

Okay, so the digital banners we said had a 120 basis point impact to comp in the third quarter. We saw with the timing of replatforming being completed later in the third quarter, as well as the AI, or I'm sorry, the search, aided search upgrades that we put into play, they negatively impacted performance. And we're seeing that come around somewhat in the fourth quarter, and we expect it to be a one point, uh, negative impact to comp on the fourth quarter from James Allen and blue Nile. They have a high penetration of bridal or engagement within their business. Therefore it's impacting our overall engagement performance, but our North America banners. are positive, as I mentioned, in engagements in the third quarter when you exclude the digital banner impact. With respect to pricing and promotion in the third quarter, I did mention that there was some clearance that we took pricing on to move through inventory to importantly make way for new product as we enter the fourth quarter, which has a much higher penetration than we did last year, I think, you know, nine to 10 points. So important for us to do that and believe that we've positioned that nicely heading into the quarter. Our guidance includes some, what we believe is a nice flexibility within a promotional posture for the fourth quarter, which will, you know, enable us to remain competitive within our guidance.

Thank you so much.

Thank you. And that is all the time we have for questions. I would like to turn it back to our CEO, JK Simancic, for closing remarks.

Thank you. In closing, I'd like to again thank our Cignet team for their dedication to our purpose and for welcoming me to the team. I believe the opportunities ahead of us to evolve Cignet will deliver further value to both shareholders

and customers i thank you for your time today we look forward to speaking to you again in march goodbye thank you presenters and ladies and gentlemen this concludes today's conference call thank you all for participating you may now disconnect