Q3 2020 Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Signet Jewelers third quarter fiscal 2020 earnings call.

This time, all participants are any listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any further assistance. Please press star zero.

I'd now like to hand, the conference over to your Speaker today, Randy about as senior Vice President of Investor Relations. Thank you. Please go ahead.

Thank you good morning, and welcome to our third quarter earnings conference call on the call today, our Signet CEO can address it as CFO Joe unhealthy 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 I urge you to read the risk factor 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 revive.

Hi, how quickly update forward looking statements in light of new information feature that.

During the call you will discuss certain non-GAAP financial measures for further discussion of the non-GAAP financial measures as well as reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures investors should review the news releases hosted on our website. These W.W. got Signet jewelers dotcom flat investors.

I'll now turn the call over to Jim.

Thank you Randy good morning, everyone and thank you for joining today's call I want to begin by thanking all of our team members for delivering solid third quarter and for providing an inspiring holiday experience for our customers.

Open my remarks, with an overview of our third quarter results and then provide thoughts on the holiday season and progress on our path to brilliance priority.

Wrap up with some brief comments on our guidance before turning the call over to John for additional details on our quarterly results and commentary on our financial outlook.

We believed that our third quarter performance demonstrates that the cumulative process progress on our path to brilliance transformation is positively impacting our results. The operational improvements we are seeing each quarter are contributing to higher net promoter scores improving traffic trends and better than expected financial read.

So.

Well, we remain mindful that we still have more work to do.

We are pleased with the progress of our path to really its transformation effort.

Here's some highlights of our third quarter results.

We delivered total same store sales growth of 2.1% with brick and mortar same store sales up in the all U.S. mall based banners and double digit growth in ecommerce sales.

North America same store sales grew 2.9%.

Reflecting growth at sales cake and piercing pagoda with case performance driven by a strategic decision to accelerate inventory reduction and make room for holiday newness.

James Allen returned to double digit growth through new merchandise assortment and site enhancements a long list beginning to lap the implementation of sales tax once again Cygnets U.S. traffic performance was ahead of shopper track total retail traffic.

I want to give a special mentioned to piercing pagoda, which had its sixth consecutive quarter up double digit same store sales growth pagoda has made strong progress in enhancing its product offering.

And recently launched a successful first ever advertising campaign, we are opening a 11, new kiosks in the second half and top performing malls to introduce more customers to this fast growing and highly productive concept.

In the third quarter merchandising efforts to expand our iconic flagship brands increase newness and strengthen our core products continue to take hold North America bridal and fashion. Each grew on a same store sales basis in the quarter strong performance and flagship brands Vera Wang Neil Lane Amblyopia.

Drove bridal sales with fashion growth led by gold.

Our exclusive love and be love collection and to Diamond fashion in Shanda Disney's showed continued strength in both bridal and fashion.

In the UK concerns over Brexit continue to negatively impact customer spending contributing to a 5.2% decline in same store sales.

Turning to profit our efforts to bring greater efficiency to our operations delivered operating profit growth year over year and ahead of our guidance.

This cost discipline funded important investments in advertising ecommerce capabilities and growth initiatives during the quarter and also allowed us to take actions to position inventory lower and make room for newness heading into holiday.

Adjusted free cash flow was up $243 million year to date, driven by operating profit growth and inventory efficiency.

Now I'll turn to an update on our holiday plans within our core strategic priorities of customer first omnichannel and culture of agility and efficiency.

Our holiday plans have been built around cumulative progress we have made toward our pastor brilliance priorities and operational roadmap that incorporates specific learnings, we gained last year and our view of the competitive environment.

Beginning with customer first.

We have significantly improved our merchandise offerings improve to the in store shopping experience and transformed marketing and media effectiveness with improved customer insights and data analytics capabilities, we're continuing our efforts to scale up services.

In product, we're positioned with bigger branded product launches a more inspiring broader selection of gifts and competitive price points for value oriented shoppers.

At K New brands include the exclusive Designit Adriana propel contemporary bridal jewelry collection inspired by the special occasion dress designed to this popular brand.

The center of me Diamond fashion collection.

And hallmark branded fashion collection.

We've expanded Neil Lane Premier bridal and colored gemstones.

We're also amplifying our gold offerings, and adding new designs, including color to our successful in house designed love and be loves collection. K also launched a sparkling saving selection of gifts a key price points.

In Zale's, New brands include Marilyn Monroe collection, and the art Deco inspired sales private collection and bridal in flagship brands, we launched Enchanted Disney New frozen to animal left us on collections and new gemstone bridal designs.

Vera Wang added new designs and launched new custom and men's fashion.

Zale's is also refreshing the exclusive past present and future collection and building on its successful dazzling deals value oriented gift offerings.

At Jared we've strengthened our competitive advantage and bridal assortment with higher quality loose stones more competitive prices and increased availability using our our two net virtual inventory.

Our efforts position Jared as a destination for custom created rings, well also refer refreshing branded bridal assortments, including the exclusive chosen collection.

In fashion, Jared has expanded gold and the shy fashion collection and also recently began rolling out the premium John Hardy collection.

Overall, we believe our product assortment is stronger this holiday season across our new and existing iconic flagship brands on trend merchandise and value oriented offerings.

Moving onto marketing.

We are continuing to implement strategic changes to our marketing model with modernized creative shifts in timing of spend and mix of media. These strategy changes are driving greater efficiency and effectiveness of advertising spend and contributing to improvement in brand health scores and in store and online.

On traffic trends across banners.

The timing of advertising spend has been rebalanced to a more always on model to support bridal throughout the year.

We also launched our holiday marketing in the third quarter this year to showcase new product and drive customer awareness earlier in the holiday season.

This holiday each of our banners has innovative integrated campaigns with improved scores versus last year and nearly all new ads in the top cortile in external database testing. These plans reflect our strategy to shift more spend to digital and mobile with significant increases.

Digital video.

We're in New York City. This week launching breakthrough event marketing with Nbcs tree lighting special at Rockefeller Center, leveraging our center of me Diamond jewelry.

And filming case sponsorship of the Empire State building signature holiday Light show, which airs later this month.

Both our iconic pop culture moments that resonate with our customers heartfelt sentiment at this time of year, creating attention grabbing multichannel activations that drive cultural brand relevance for K.

These events or just examples of the many activations, we've added to help drive impressions across earned social and digital increasing consumer engagement and providing additional opportunities to share our new creative.

Investments, we made in our customer data platform and data analytics combined with the capabilities of our new media agency are enabling us to deliver significantly more targeted digital content and higher total impressions at a lower cost.

Now I would like to discuss our plans to leverage our full service jeweler capabilities growing the services business isn't is an important part of our long term strategy as it creates more opportunities for us to interact with customers and create loyalty.

Also driving incremental revenue and margin mix.

As I mentioned on our last call, we believe piercing as an opportunity to increase traffic and build customer relationships early in their lifecycle of jewelry purchases.

Leveraging the expertise of our piercing pagoda team, we perform successful test set a group of Kay stores earlier, this year and launched piercing services in more than 400 Kay stores in the fourth quarter.

We have implemented email social and in store marketing to drive awareness of our new piercing offering.

Early customer feedback has been positive and we expect piercing to become more meaningful overtime as we further scale our efforts.

In repair we've seen steady improvements in our net promoter score. This fiscal year, we've added special events marketing support and website updates to drive customer awareness of our enhanced repair services offering.

For example, this weekend kase sales and shared our hosting get your sparkle on in store events with free cleanings to prepare customers jewelry for the holidays, along with a 10% off any care and repair purchase during this event driving and additional touch point with our customers.

Overall, we have built new services capabilities, which we expect to drive customer acquisition increased frequency and grow customer loyalty.

While the contribution from services will be small in fiscal 2020, we expected to be more meaningful revenue and margin contributor in the long term.

Turning to Omnichannel, we've made significant investments in omni channel for holiday across our stores and web sites in stores. We now have over 19000 ipads in place and upgraded bandwidth across our store base. This enables every jewelry consultant to service our customers with virtual inventory.

And inspiring custom design selling tools.

In E Commerce, we successfully transitioned the Kay and Jared web sites to the hybris platform during the third quarter.

This common best in class Technology Foundation enables greater speed and efficiency with all banners delivering delivering faster website load speeds.

We've also made important investments in mobile this year, including a recent launch of mobile first capability, allowing customers to design your own jewelry as well as investments in higher quality images and curated surge.

We believe these investments set us up to drive higher traffic to our sites and create a more compelling user friendly experience.

Moving onto a culture of agility and efficiency our cost optimization efforts continue to positively impact our results, we expect $70 million to $80 million and net cost savings in fiscal 2020.

Our full year gross savings are primarily driven by indirect procurement workforce optimization and lower corporate costs.

Other efficiencies and direct procurement and distribution began to impact our results in the second half and are expected to have additional benefits in fiscal 2021.

A portion of the fiscal 2020 gross savings are reinvested in technology and innovation initiatives to drive growth.

Our three year pastor brilliance net cost savings goal remains $200 million to $225 million inclusive of the $85 million and net savings achieved in fiscal 2019. These cost savings have and we believe we'll continue to enable us to fund investments mitigate headwinds.

And improve our profitability over time.

Before I turn the call over to John I will briefly discuss our fourth quarter and fiscal 2020 financial guidance.

Our fourth quarter guidance for the same for same store sales decline of 2% to 4% is consistent with the fourth quarter outline outlook embedded in our previous annual sales guidance Black Friday weekend sales performance was in line with our expectations with particular strength on cyber Monday, both in store.

Sure and online.

Overall, our fourth quarter sales outlook balances, our optimism about the strength of our holiday merchandising marketing and omnichannel initiatives with a competitive us retail environment potential negative impacts from a shorter us holiday selling season, and they continue to difficult UK operating environment as.

A reminder, we have many key selling days still to come as December is the largest sales month in our fiscal year.

We are raising fiscal 2020 same store sales guidance.

And to the lower end of our non-GAAP operating profit guidance range to reflect year to date over delivery. We continue to expect fiscal 2020, adjusted free cash flow to be higher versus fiscal 2019, primarily driven by disciplined inventory management.

In closing we are encouraged by the progress to date on our path to brilliance transformation journey as we continue to execute with diligence, while operating in a dynamic and competitive retail environment.

And now I'll turn the call over to John .

Thanks, and good morning, everyone in my remarks, I'll first cover the highlights of our third quarter financial results briefly discuss the results of our recent refinancing and then conclude with guidance.

In the third quarter total same store sales grew 2.1% with brick and mortar same store sales up 0.9% and e-commerce sales up 11.4%.

In North America same store sales grew 2.9%.

With brick and mortar same store sales up 1.6% and ecommerce sales up 13%.

And share as same store sales performance benefited from additional clear to accelerate inventory reduction ahead of new merchandise for holiday.

North America E Commerce reflected improvement that James Alan as well as strong performance from our core banner.

North America E Commerce sales, excluding James Alan were up 10.6% in the third in the quarter inclusive of a planned technology platform change a kay and Jared.

International same store sales declined 5.2% and continue to reflect the challenging operating environment in the UK.

Revenue declined 0.3%, reflecting same store sales growth the impact of net store closures and the impact of foreign exchange.

non-GAAP gross margin flat to prior year with procurement related transformation cost savings and higher credit revenue share payments offsetting a lower merchandise margin.

The lower merchandise margin in the third quarter included the impact of Kay and Jared inventory reduction efforts.

Additionally, the positive brick and mortar same store sales performance resulted in leverage of our store occupancy costs.

As you know it was down $12 million or 0.9% of sales on a year over year basis.

This performance was driven by lower corporate and indirect spend as well as lower store staff costs, primarily due to store closures, partially offset by $12 million increase in advertising.

non-GAAP operating loss improved year over year, reflecting the benefits of cost savings and a lower net impact of credit somewhat offset by higher levels of clearance to accelerate inventory reduction and an increase on advertising.

Interest expense was $2 million lower year over year due to lower average borrowings lower average interest rate post the debt refinancing during the quarter and higher interest income on cash balances.

The non-GAAP EPS loss of 76 cents was an improvement versus prior year inclusive of a smaller operating loss and lower interest expense.

Overall third quarter non-GAAP EPS was ahead of our guidance due to better sales performance strong cost discipline and lower interest expense.

Turning to balance sheet and cash flow.

Inventory is down 5% versus the prior year in this third quarter as we continue to thoughtfully reduced legacy inventory and employ more disciplined purchasing strategy for new merchandise.

We generated $18 million and adjusted free cash flow year to date up 243 million year over year as a result of solid progress on working capital.

Before moving onto guidance I would like to briefly discuss our previously announced refinancing transit transaction, which was completed during the quarter.

We entered into new five year asset based credit facilities with availability of $1.6 billion, which replaced the previous revolving credit facility.

And term loan facility due in 2021 and funded a tender offer for a majority of outstanding senior notes due in 2024.

The refinancing improved our financial flexibility by extending signets debt maturity profile, increasing available liquidity and slightly lowering interest expense, while having a neutral impact on leverage.

We continue to expect our leverage ratio to be approximately four times by the completion of our transformation plan at year end fiscal 2021.

Turning to guidance.

For the fourth quarter, we expect same store sales of down 2% to down 4%.

non-GAAP operating income is expected to be $222 million to $232 million with a non-GAAP EPS range of $3.01 to $3.16.

Our fourth quarter sales outlook incorporates optimism in our plans for holiday balance with a competitive U.S retail environment as well as a challenging consumer environment in the UK.

Our operating profit guidance range includes some flexibility for a promotional holiday somewhat offset by cost savings.

Our fiscal 2020 same store sales guidance is now 1% to down 1.2%, 1.7% non-GAAP operating profit of $270 million to $280 million.

Our sales update reflects the outperformance in the third quarter and holds our prior fourth quarter sales guidance.

We are raising the low end of the non-GAAP operating profit guidance based on year to date performance, while holding the upper end of the range to provides flexibility in the always competitive holiday season.

This guidance reflects a modestly positive year over year net impact of our outsource credit model.

Our guidance also includes lift for tariff, which do not exist, we which we do not expect to be material to fiscal 2020 results.

At the end of fiscal 2020, we now expect our exposure to Chinese goods to be a low teens percentage of our merchandise spend.

Versus our previous guidance of mid teens.

Our non-GAAP EPS guidance reflect our updated operating profit range as well as lower interest expense expectations post our refinancing and a slightly lower tax rate.

We continue to expect inventory levels to be lower at year end versus 2019, and adjusted free cash flow is expected to be above fiscal 2019 level.

To close on my comments, we are intensely focused on delivering our operational and financial commitments for holiday.

I'm confident that were on the right path to continue reducing costs to fund our transformation growth priorities, while optimizing working capital to enable higher free cash flow.

And now I'll turn the call over to the operator to be again, the Q in a section.

Thank you as a reminder to ask the question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby probably compiled the Q and a roster.

Your first question comes from the line of Paul The Jews with Citigroup, Paul Your line is open.

Hey, Thanks, guys.

Just wanted to circle back on your Black Friday comment you said it was in line with expectations does that mean, specifically the good wind that down to the 4% that you were looking for the fourth quarter and then.

Second.

Do you mentioned that the Kay and Jared were driven by clearance can you quantify how much that did impact your third quarter comps.

And I wasn't quite sure I understood. The comments about how the clearance activity did not impact merchandise margin or wasn't included in your comments. Good merchandise margins were flat maybe you could just expand on that a little bit. Thanks.

So thanks Paul.

The comps for the quarter, we mentioned was about clearance for Kay and Jared and Kay and Jared did have higher clearance.

Sales clearance level of selling and.

It really drove their comp however, underneath that we are pleased with the performance of new product.

I would say also that b.

Vales and pagoda businesses were largely driven by.

Regular price promotional type comps and had normal penetration of clearance activity.

Gross merchandise margins on a non-GAAP basis were relatively flat.

And.

We as we look at the merchandise margin it was or because of the.

On.

Clearance selling itself.

With respect to Black Friday.

That is incorporated into our view of guidance, but we're not giving.

Guidance, specifically are giving actual results relative to the black Friday performance.

Okay.

One follow up.

Can you talk about sales recapture from from stores that are closing, maybe how much that couldn't help comps this quarter. Even this this year and what are your typical recapture rates as you look historically.

The transfer and freight is 30% as what we target for our store closures.

And is that what you're seeing currently.

We see that broadly in.

Some of the older stores the regional stores on it differs by banner, Paul, but we're finding our closing strategy to be affected but that is our target for our closures, where we've also engaged in.

Additional activity is that helped drive our clienteling and our customers to other locations, which we've incorporated that into this year.

Okay.

Selling art sales transference and store closing.

Okay. Thank you good luck.

And again, if you would like to ask a question. Please press Star then the number one.

On your telephone keypad.

There are no further questions at this time I will turn the call back over to the presenters for closing remarks.

Ladies and gentlemen, this concludes today's conference call on behalf of Signet Jewelers. We thank you for participation you may now disconnect.

Right.

[laughter].