Q1 2021 Signet Jewelers Ltd Earnings Call
[music].
<unk> expense will be in listen only about.
Sure didn't need assistance. Please conference specialist are pressing the star K followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question even press Star then one under Touchtone phone.
To address your question. Please press Star then too.
Please note today's event is being recorded.
I'd now like Charlie converts over your host today Vinnie Sinisi. Please go ahead Sir.
Hey, great. Thanks, very much Keith good morning, everyone and welcome to our first quarter earnings conference call on the call today, our signature CEO, Joe So and CFO, Joe Intelsat during todays presentation will make certain forward looking statements.
These statements that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. We urge you to read the rest factors cautionary language and other disclosure in our annual report on form 10-K quarterly reports on form 10-Q.
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 will discuss certain non-GAAP financial measures for further discussion of the non-GAAP financial measures as well as reconciliation of those knockout financial matters to the most directly comparable GAAP measures.
Investors should review the news release, we posted on our website at Www Dot Signet jewelers Dot com slash investors and with that I'll turn the call over to John.
Thank you very good morning, everyone and thank you for joining us on our call today.
Are we going into our results I wanted to share a few thoughts on the events of the past few weeks.
Well these are truly unprecedented times from the global covert 19 pandemic to economic uncertainty nothing has matched the pain and hurt as of yet another brittle murder of an unarmed person enough color. This pattern of discrimination of violence must stop now racism has no.
Placed in our world and certainly not in the country dedicated to protect in life Liberty and the pursuit of happiness for all.
Oh ways and particularly in this context I'm extremely proud of what said that stands for we immediately to announce these hateful lags and made a substantial donation to the NAACP legal defense and educational fine.
I'm also hosting and opened Mike Townhall, what Signet team members next week.
Second that speaks out with the intention that a friend discussion on race, well give us new and meaningful actions, we can take to improve within our four walls.
We will continue this open dialogue throughout the year.
To leverage our actions and insights to also help lead change in our industry and communities.
Signet our mission is to celebrate life and express love and we're committed to making this true for all people.
[music] no news onto a discussion of our Q1 performance.
This quarter I'll open my remarks, with an assessment of Signups competitive positioning in the post cobot 19 World I'll provide thoughts on our key strategic priorities and our acceleration over the last two months to a more effective and efficient omni channel retailer.
I'll, then turn the call over to John for financial commentary on the first quarter and Cisco 2021.
So when it came into the fiscal year with strong momentum prior to the pandemic. We delivered strong results during the Valentine's day selling period and ended February was solid comps in the low single digits as disruption from Cobot 19 began.
Focusing first on the health and safety as our employees and customers and in full compliance with government mandates. We temporarily closed all stores in late March we took immediate actions to ensure the financial stability of our company and give it to a much stronger digital experience for.
Our customers.
I'd like to now frames cygnets actions in the context of the larger jewelry category.
The only retail market, it's highly fragmented within underpenetrated presence in digital.
Signet has roughly 6% market share in the U.S. and the number one share in all markets in which we operate.
Thousands of independent jewelry stores hold roughly 70% of U.S. market share.
One of Signets greatest strength is one we share with independent jewelers. The trust that comes from significant jewelry expertise and long term relationships.
And we do it at scale.
In fact across the country, our jewelry consultants help young couples celebrate engagement and then support their lifetime of jewelry gifts, including birthdays and anniversaries.
To help with meaningful statements of self expression and spontaneous on trend fashion purchases.
Well. This crisis has reinforced thing is that those relationships combined with our scale. The digital platform investments have allowed us to pivot quickly.
We've been able to transfer these relationships into virtual consultations and help our customers buy online [laughter] Signets shopping journey has never been more integrated across the breadth of our physical and virtual touch point [laughter], creating what we believe it's a long runway.
Opportunity ahead for signet to grow revenue and market share as the leading omnichannel retail jewelry company.
Here are some examples.
Since cobot 19, our store teams have personally reached out to more than 23 million customers.
Held over 100000 virtual appointments and have been successful in meeting customers needs, even a small stores were closed.
In Q1 site traffic increased 20% over last year, despite reducing our advertising spend.
Our virtual consultations are resulting in multi fold higher conversion rates, then direct ecommerce traffic alone.
Q1, ecommerce growth was 18.2% excluding the impact of the shutdown of James Allison, New York City distribution center due to covert 19.
Ecommerce growth accelerated through the quarter to 55% in April excluding James Alan and momentum has continued into the second quarter with a strong mother's day selling season, and the addition of some alternative sourcing for James Allison.
We believe that virtual selling will become a sustainable part of a uniquely desirable and integrated shopping journey provided by cigarette.
We will invest to continuously improve our digital experience, while bringing the best of our stores online and the best of our digital offering into stores.
We believe that are increasing sales momentum shows that well some of life's moments may physically be on hold our customers have never needed to celebrate does not much more than now and signal is meeting their needs whenever and wherever they want to shop.
Turning to real estate as of yesterday, we have approximately 1100 stores opened to the public store performance is better than expected with revenue able to cover four wall operating costs rather quickly.
We are continuing to accelerate the pace of store openings based on the safety of our employees and customers and government regulation.
We appreciate the incredible agility and urgency of our store teams to implement cleaning protocols to ready our stores for our customers and to make some continually safe places for people to shop and try on jewelry.
As you know over the last few years as part of our path to brilliant strategy, we reduced our store footprint by 13%.
Largely moving out of all de mall a regional banners.
Now in the current environment, we are accelerating our optimization efforts further reducing our exposure to declining C and b malls.
As a result of a full market assessment, one which included a greenfield analysis of customer trade area specific to jewelry. We are announcing that we will not reopened at least 150 stores in North America and 80 in Europe.
Furthermore, we are committed to closing at least an additional 150 stores. This fiscal year with these closures, bringing the cumulative <unk> footprint reduction to more than 20%.
With a focus on store profitability, we remain in active discussions with our landlord partners to negotiate rent payments and go forward occupancy cost.
We're also testing re imagined uses of our physical footprint, such as combined Jared and James Allen locations and outlet stores. The house multiple banners, we look forward to providing further updates on these and other location and format test over the course.
This year.
Turning to merchandising.
From an assortment perspective, we continue to rationalize S.K. years and focus on fewer bigger new product launches.
On trends product offerings, like Golden color and excellent values for our customers.
We ended Q1 with the inventory flat to last year's reduced levels.
We hosted notable virtual events on key brands like Levy and gifts for mother's day and have upcoming key launches ready for summer and holiday selling season.
Using our enhanced digital platform, we continue to optimize our targeted marketing techniques to maintain relationships with existing customers and capitalize on new customer acquisition opportunities with improved efficiency.
Turning to cost savings.
Over the first two years of passive really and we delivered $185 million in net cost savings, enabling us to find a digital investment mitigate headwinds and improve our cash and profitability.
This positions us to exceed our initial three year transformation goal of $200 million to $225 million and cost reductions.
Furthermore, since cobot 19, we have identified more than 100 million additional structural cost savings within this fiscal year, which we expect to continue into out years as well.
Turning to liquidity as discussed last quarter, we took rapid steps to preserve cash. We currently have 1.1 billion in cash and equivalents and had negative free cash flow of only 15 million in the quarter.
Well, we never could have anticipated the last few months and the obvious impact on revenue what stores close for almost half the quarter. The first two years of our path to really its transformation provided us with a strong foundation to rapidly build on.
Sage mentor off mine once said never waste a crisis and we've embraced that full line.
Your three a mixed coated 19 has been an opportunity to accelerate the momentum of key strategic initiatives.
We've made substantial progress on key elements of our customer first strategy by targeted marketing and a more relevant and curated merchandise assortment.
We've examined our omni channel journey with new digital tools in depth virtual consultation and store footprint optimization, and we've embraced rapid testing and learning with agility and double down on efficiency efforts with lasting cost structure improvement.
Our team is energized by the opportunity to serve our customers differently and we are relentlessly focused on emerging from this crisis as a stronger signet team and company.
And now I'll turn the call over to John.
Thanks, Jason I'm. Good morning, everyone in my remarks, I'll discuss highlights of our first quarter financing resolved.
I'll also review actions, we've taken to conserve cash in response to Cabot 19, and providing an update on our credit portfolio partner.
To note for the first quarter in light of the unprecedented time, we will provide additional details around our intra quarter performance.
We do not intend to provide these detailed going forward, but thought it would be helpful for Q1.
As Susan mentioned earlier, we saw accelerating E commerce momentum throughout Q1 and into the mother's day selling season.
Brick and mortar same store sales declined 44.7% with temporary store closures beginning in late March.
[noise], adding some additional color in February same store sales were running positive low single digits, and we grew our ecommerce sales by 11% compared to the prior year, reflecting strong Valentine's day performance.
Then pivoted and late March to an E commerce only retailer. It was at this point that we increased our digital outreach to customers.
As well as implemented our virtual appointment process.
Gross margin of 204.2 million declined as a result of lower sales from the Kobin 19, pandemic, which led to a de leveraging on fixed costs.
This decline was partially offset by cost reductions and lower occupancy costs.
We know that we were able to hold gross merchandise margins consistent to last year.
I see in a expense declined significantly driven by lower labor costs, resulting from employee furloughs temporary pay reduction lower advertising expenses and overhead reduction.
This resulted in a non-GAAP operating loss of $142.5 million for the quarter.
GAAP operating loss was 290 291.1 million and include 136.3 million a pretax impairment of goodwill intangibles and long lived assets.
As discussed in the earnings release, the Q1 financial statements are preliminary due to the long life noncash asset impairment review necessitated by the Kobin 19 pandemic.
Interest expense declined 23% year over year, reflecting our 2019 refinancing.
Our Q1 non-GAAP affect the effective tax rate of 50.4% represents projected benefits related to the application of certain relief provided under the cures Act.
We estimate will receive a cash benefit and the resulted in a well carry backs.
First quarter non-GAAP EPS was a loss of $1.59.
Compared to prior year non-GAAP bps of eight cents.
As a reminder of our cash preservation I'd like to quickly review the immediate actions, we took to increase our financial flexibility in the Cove it environment.
[laughter] physically we reduced marketing and discretionary corporate spending.
Our executive and board of directors took voluntary compensation reduction.
We expect to reduce capital expenditures by approximately 50% versus last year, and we'll prioritize initiatives that support our digital efforts.
Inventory management is also a key factor in our financial flexibility, we worked with our vendor partners to extended payment terms and establish go forward agreements with key strategic vendor.
We continue to Salford clearance merchandise cut plan receipts and are implementing initiatives in support of our flexible fulfillment effort.
All aimed at inventory efficiency.
The result of these efforts with free cash flow of negative 15 million in Q1 with cash and equivalents balance of 1.1 billion.
Finally, our common dividends remain suspended as does our financial guidance until we have greater market clarity.
The August preferred dividend will be paid in kind.
Now I'd like to briefly provide an update on our nonprime credit offerings.
With respect to the Nonprime forward flow receivables, representing approximately 7% segment annual sales last year telco like and Carvel have agreed to continue to purchase receivables or existing customer accounts that have or previously had a receivables balance.
Would you have 2021 unless terminated earlier by either party.
We have agreed to extend the payment due segment of the remaining 5% for the back book receivable purchased in 2018 until the agreements terminate.
The company is now retaining receivables.
Opened by new customers, which are expected to be less than 2.5 precise.
Of the company's fiscal 2021 Robin now.
The company's agreement with the credit service or Genesis remains in place.
Before I turn the call already today I'd like to reiterate that we feel confident in our financial positioning.
We intend to continue to preserve cash reducing structural costs and targeted investments and initiatives that will allow us to emerge from this crisis, what they plan to further optimize our virtual and physical footprint.
And now I'll turn the call over to the operator to begin the came in a fashion.
Yes. Thank you as mentioned we will now begin the question and answer session.
Yes. Good question you May Press Star then one on your Touchtone phone.
If you're using speakerphone, please pick up your hands up before pressing nikes.
Please press Star then.
Just time, we'll pause momentarily to assemble the roster.
[noise] and the first question comes with <unk> with Citi.
Hey, Thanks, guys I'm wondering if you could provide any further quantification on what you're seeing in the performance of the stores that have now reopened I did you said something about revenue covering operating cost doctors that that means that that those stores or.
Already four wall breakeven is that wanting the same.
Then also the 150 stores that won't reopened as well as the additional 150 to be closed can you talk about the sales and EBIT contribution from those two classes.
Hi, Paul It's Jim I'll take the first part of that question.
So our plan to reopen stores has been actually similar to how we closed stores, we've been using a hyper local approach.
Based on market dynamics are an analysis of all the government mandates et cetera, and we are based on the results that we've seen early on opening stores as quickly and safely as we can the performance of our reopen stores has been exceeding our expectations and yes, I you heard what I said in the script.
Right. The revenue is covering the operating expenses on a four wall basis. So we intend to carry forward. This drives that we've made and digital capabilities doing more appointment booking and I really leveraging <unk> that new integrated omni channel experience as we reach.
Open more stores our plan is to have at least 75% of the fleet opened by the end of June.
And then Paul with respect to the second question, our valuation of stores that will not a re opened 150 stores really stems from the Greenfield analysis and the overall evaluation of our go forward physical footprint.
We're not disclosing at this time, what are you know sales and operating contribution of those stores are but we feel confident that the footprint that we see on a go forward basis is the one that is best for us.
The one thing I'd add to that that we've we've historically done our analysis on closing stores really on an internally focused basis looking at the contribution and profitability. If those stores. What we've done differently. This time that I actually think is there's a more breakthrough way to look at it is that we have maps the country.
In a greenfield analysis, almost a clean sheet of paper to say, if we were starting today, which markets justify one store two stores three stores, you know or more how and where would we put them and we view is that customer first lens to really decide what our future store footprint should look like.
Thanks, and just to go back on the good commentary you made about the receivables.
Correct understanding that the Nonprime receivables will now come back on the balance sheet as we think about signal in the future enough 21, and beyond you guys will carry those receivables no change to to the prime piece of the equation.
There's no change to the prime the Nonprime Carboline castle like well continue to purchase add ons for the existing accounts what will come on to but one thing that is is purchasing is new accounts new account purchases in what I indicated there that it was roughly.
2.5% of fails is our expectation.
Gotcha. Thanks, Good luck.
Thank you and the next question comes from Dan, It's healthy with Telsey Advisory.
As you think about the gross margin in the yes.
The gross margin merchandise margin being consistent with last year can you unpack the buckets of each <unk> you're seeing.
And I do think about costs coming back.
Do you need all the store staff that you had been.
Staff given more limited.
Occupancy in stores and also what you've been seeing and virtual appointments. Thank you.
Well, thanks, Dana so with respect to gross merchandize margin when it was consistent for us over the quarter, we feel that in that quarter itself over the first quarter that we had a very nice balance of regular price selling we had clearance selling and we were able to leverage.
A lot of the value priced items for Valentine's day that we thought serve us well over that and you know a holiday selling season in the fourth quarter. So you know as we look forward and think about gross merchandize margin at our inventory we will consider continue to consider.
Are you know strategic promotions working through our clearance inventory.
And balancing the bigger fewer launch products that you have mentioned in her prepared remarks.
Then with respect to that yeah structural cost savings as we operate our stores today, we recognize that Ah you know because the is performing and behaving differently that it had pre cobot we have.
Evaluated operating hours, we have evaluated store staffing we have virtual selling that general mentioned in her script. So these are the points of evaluation that are helping us to really take structural costs out of our S. C. N. A and that's just a you know a few things related to labor.
That we are really evaluating and putting in place as we roll forward our stores than our store opening program.
<unk>.
Dan rather thing I would yeah. The other thing I'd mention is Jones, who just celebrated a little bit ago. Her one year anniversary with signature has brought us a number of new capabilities on one of those is a true zero based budgeting approach and so we continue to focus on costs that customers.
Let's see or care about but the kind of savings that we're now seeing an indirect spend are very meaningful and and so I'd say, that's a big focus of the structural cost savings going forward.
Occupancy expenses of existing stores remaining is there opportunity there.
Oh, Yeah data, we have been working very strategically with our landlord partners on developers and we have been able to get worked through a number of situations that makes sense for both of us in terms of a reduction.
You know ransom specific locations and I will continue to work, but then collaboratively as we you know moved through this reopening.
Thank you.
Oh.
Thank you Hello next question comes from Lorraine Hutchinson with Bank of America.
Thanks, Good morning, I wanted to ask about the credit penetration rate was down on a year over year basis have you seen any reluctance on EDSS part to lend given about the volatile macro climate.
Well you know what I would say Lorraine to that is that when you think about the mix of business that we had in the first quarter was.
We moved to an E commerce only channel for the period of time the mix of credit on E. Com is lower and so we do not offer a leasing the online at this time, we are implementing that and expect to have it adds <unk> in roughly September of this year.
Sure. So that's really what is driving the credit penetration right.
Thank you and can you comment on your engagement or bridal trends as you started the year.
Sure. So we saw a we've actually seen a that customers are still very interested in getting married our research indicates that more than half of customers are coming out of their quarantine period, feeling better about their relationship.
Then they did before and we launched on not too long ago, a Jared virtual wedding program and I'll tell you within 72 hours, we had over 500 people signed up to do virtual wedding. So we have a in the numbers, but also in consumer sentiment. So.
Seen some strength and the bridal business.
Thank you.
Thank you and once again. Please press Star then one if you would like to ask your question.
And next question comes from Bicuar trial with Wells Fargo.
Hey, good morning, everyone.
Hope, you're all doing won't stay safe.
So I guess for Joan I, just want a couple of questions on on the credit maybe just to make sure I understand exactly what's going on so first in March I thought it would just horrible bobby's terminating and now it sounds like it's horrible and carefully I believe in March caused a Catholic said, they don't plan on permitting and so I guess im trying to understand.
What exactly is change between then and now.
And then two other quick follow through and a half percent sales.
Last year sales or this yourselves because obviously the sales base is gonna be dramatically different than the last one is maybe for Juno, which is I guess a higher level question on credit I know doesn't sound like a lot in dollars, but maybe the company went through you know period of time of having subprime receivables in the balance sheet and all could you try to get out of it so and there's a lot of all.
Okay, I guess, what's the thought process around doing that versus just kind of letting that revenue.
You know kind of just go away and focusing more on the prime customer. Thanks Circle.
Okay, I'll start and I with respect to carve out cost like that's accurate I car ball determinate and ER in late March calculate cannot terminated at that time as we progressed through conversations with both parties what the.
Agreement that we've established today is that both parties Carboline castle leg.
Purchase add ons to the existing accounts with both of those part is seeking that its way to purchase the new receivables and in keeping with that that was two and a half for sun as on a mix basis. That's an exact expectation that's what it was.
For fiscal 2020 from the perspective of how do we see this go forward and a little bit to respond to.
Your question agenda, and we are offering additional financing alternatives for our customers. We believe that there's a full suite of service is one of which is close then loans, which we are piloting currently online and there's also grasses leasing.
Product that we have online and I'm, sorry in stores and adding online in September. So we believe that this suite of offering is gives us a full suite and.
Helps us to continue to serve our customers with many financing options and really don't see that as indicative.
Yeah. So if I if I just don't want what John said to you know to answer the strategic question I think.
Four things number one we see this is a moment in the market for new customer acquisition and so controlling that part of the book, We think really gives us a strategic competitive advantage.
Number two we have new predictive models in place models that didn't exist when signet on the entire portfolio before and that is allowing us to better manage to whom we land and and make that more strategic number three as John mentioned, we have new tools. So we can direct our lower FICO.
Customers into tools like leasing, which grew strong double digits last year, and it's coming online as well as a firm which is the split pay option. So we really have the chance to to leverage those new tool to make our lending stronger and then the fourth one as.
Oh, we have a servicer now Genesis who's really helping to manage all the operations of this portfolio. So we're really only the underwriter now for that small part of the port folio not the full operator of the entire thing.
Thanks, Joe Joe that's helpful.
Thank you.
And as a what's the last question I would like trying the fortune management for any closing comments.
Great well I'm. Thank you everyone for joining us. This morning, I know, it's been a crazy few months for all of us.
But it's something that we are inspired by our employees creativity and our customers resilience were energized about the opportunities. We have ahead of us and we look forward to updating you throughout the year as we continue on our path to brilliance transformation journey, thanks very much.
Thank you.
Conference has now concluded. Thank your for attending today's presentation may now disconnect your lines.
[noise].