Q2 2021 Signet Jewelers Ltd Earnings Call
Fired 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 name of financial measures as well as reconciliations of the non-gaap to the most directly comparable gaap measures investors to review the news release we posted on our website at ww.w. Signet Jewelers took us investors and without altering the call over to Jenna any good morning everyone and thank you for joining us on our second quarter call this morning recall that in q1 as stores, We pivoted to a digital first strategy and accelerated many elements of our pasta Brilliance transformation at the same time. We tightly managed cash and expenses to offset negative impacts of the covid-19 pandemic and preserve our ability to invest in and grow our business now in Q2. We are seeing our strategic efforts yield results.
Before I discuss our Q2 results, I want the first acknowledge and thank the Signet team. I am inspired Everyday by our teams agility to operate in this new retail environment. And that's our customers needs Guided by our purpose and core values safety and the well-being of our team members and customers remains a top priority. This is why we launched our love takes care safety program this quarter in partnership with leading Healthcare experts to ensure that we are doing everything possible to create safe places to shop and work our teams care and compassion fueled the launch of our signature team member Relief Fund for our colleagues most impacted by koven. We activated our voice and partnered with the NAACP legal defense fund to fight racism as well as supportive glad to call for equality and justice for all.
We are resilient and I want to wholeheartedly express my gratitude to our signature team along with our vendor partners and loyal customers. Our team is at the corner of my belief that we will together emerge from this crisis stronger. I'd like to now discuss our Q2 results as well as provide additional strategic perspective on how we are learning and using this Dynamic environment to accelerate our transformation in position ourselves for long-term competitive advantage.
Same-store sales for the second quarter. We're down 31.3% reflecting stores being closed for much of the quarter including our Mother's Day selling. Despite continued effects of the worldwide pandemic. We drove sequential sales Improvement month-over-month and same-store sales turned positive in mid-july as story openings reached scale. We achieve this while driving High double-digit e-commerce growth in Q2 and this momentum continued into Q3.
We leveraged our cost diligence and cash preservation to protect liquidity as well as fund increased investments in digital and e-commerce distribution office though the macro environment remains uncertain we have flexible new capabilities in place and are prepared to serve our customers this holiday season wherever and however they choose to shop.
Turning first to digital signature drove e-commerce sales of 72% in Q2 versus the prior-year quarter. This was led by e-commerce growth of 95% in our bricks-and-mortar banners while James Allen continued to experience some manufacturing disruptions, especially in May in q1. We established a dedicated fiber will selling team and in Q2, we scaled this team and also trained more than half or fifteen thousand of our store team Associates to use Virtual selling to change from in-store and from home in Q2. Our jewelry Consultants booked more than 300,000 individual appointments comprised of virtual video conference and curbside consultations. And these appointments are generating both higher conversion levels and higher average transaction value than historical e-commerce transactions.
We've achieved new levels of e-commerce sales penetration for perspective over the last four years. We've more than doubled our e-commerce penetration growing from roughly 5% off 12% last fiscal year during Q2 e-commerce penetration was 30% that we recognize covid-19 magnified e-commerce penetration dispatch reporter due to the temporary closure of many stores. We're seeing elevated levels continued even after our store openings reach scale in July with August e, penetration still heightened at roughly 20% This reinforces our beliefs that Signet store footprint combined with recognized jewelry expertise and new virtual selling capabilities is a strategic competitive advantage in the jewelry category where trust and counseled selling is important, especially. Yep.
Title given the trajectory of our e-commerce sales, we've expanded distribution throughput dedicated to online orders to five times a month of holiday last year to be ready to meet. This year's holiday demand.
Turning to real estate as we continue to optimize our footprint we moved quickly and have already closed 293 of the 380 plant closures. We announced for this fiscal year substantially all of which were traditional Mall locations with these closures. We have reduced our store count by 19% since the school 2017 year end. We continue to reduce exposure to lower traffic malls and shift toward off Mall locations, which typically offer lower occupancy costs with better performance. We continue to take a hyperlocal and data-driven approach which allows us to transfer sales from our closing stores. Well as from competitors store closings to our other physical locations or virtual Channel
Last quarter we mentioned testing multi Banner locations as a first priority. We tested James Island store in stores within Jared locations dead and positive sales results and strong traffic gains. We plan to expand this new format to over 80 locations or one third of our Jared Fleet prior to Holiday This is a terrific way to create a curated physical presence for James Allen while maximizing our existing off Mall space and Staffing in Jared.
Turning to merchandising during Q2. We worked with our vendors to strengthen our core assortments and invest in new and earlier product launches across home owners for Holiday to further support Ecommerce sales. We have also extended our online assortments as well as search and browse capabilities in anticipation of May holiday transactions occurring online this year in marketing we've implemented new capabilities in customer prospecting specifically focused on trade areas where tobacco stores and independent jewelry retailers are closing by further shifting our Focus to digital we believe we're able to more precisely and efficiently Target current and new customers and provide them with relevant and engaging content to amplify our marketing efforts. We've been successful in launching influencer and social programs. Yep.
Tend to the reach of our content.
As well as instituting robust consumer PR to continually be top-of-mind and maintain cultural relevance as a result our website traffic wage increasing.
Turning to cost savings and liquidity as we continue to optimize our store footprint. Our company's Workforce needs are also changing while Personnel discussion decisions are very difficult. We had a reduction-in-force this quarter that was driven both by are reduced store count and our pivot to increasing digital capability needs these decisions were made thoughtfully to better align the workforce to a more streamlined structure and digitally Focus culture. We remain on track to achieve off $100 of net structural cost savings as we discussed last quarter these savings efforts both bolstered our liquidity levels as well as contributed to positive cash flow this quarter, which we believe provides us the ability to both better manage uncertainty and also accelerate Strategic investment.
So all-in-all. I'm pleased with our continued progress in Q2 to manage cash and liquidity effectively gain traction and scale with our new digital capabilities and get stores open safely and quickly leading to improved same-store sales throughout the quarter and into Q3 while the month ahead are full of uncertainty. We are prepared to serve our customers effectively. However, and whenever they want to shop this holiday season and Beyond and now I'll turn the call over to John. Thanks Jeff. Hello everyone this morning, I'll provide details regarding our performance to help you better understand the trans. We five the quarter per month.
By month same-store sales were down 68.5% and may down 21.8% in June and down 1.3% in July wage included. Only brick-and-mortar momentum as stores reopen to scale but e-commerce remains strong with 72% sales growth over Q2 last year strength continued into August was preliminary same-store sales up 10.9% which includes 65.2% growth wage Ecommerce versus August of last year.
Due to covid-19 are designed and service centers workload closed until later in the quarter because of this Revenue recognition related to our extended service plan programs with the lower than last year and negatively impacted same Source sales by roughly four hundred fifty basis points. We expect some portion of this Revenue to be recognized later in the year. However, we cannot estimate the amount due to the uncertain impact covid-19 have a consumer behavior and our ability to keep stores open.
Are you?
To gross margin of approximately $220 billion or 25.2% of sales declined largely due to a delivery Lane on fixed costs resulting from lower sales rep. Well as the extended service plan Revenue discussed earlier, the rate declined was partially offset for structural cost-saving lower occupancy costs and inventory related costs money as she enables approximately 266 million down 145 million to last year. The Improvement to SG was primarily driven by lower labor and advertising expenses.
Non-gaap operating loss was 41.7 million and excludes pre-tax charges of $20 million related to impaired pyramid of long-lived assets as well as 28.7 million in restructuring charges related to the pastor Brilliance transformation plan.
Interest expense for the quarter was 9.4 million down roughly 7% year-over-year. Second quarter. Non-gaap EPS was a loss of a dollar thirteen compared to Prior years. Yes UPS of $0.51.
Turn on with your pastor billions cost savings that structural cost savings are on track to exceed a hundred million in fiscal Twenty-One now in our third year of past summer. And so we originally targeted Savings of $225 million over the three years. We now expect net Savings of at least 285 million dollars these things include Workforce reductions related to our new operating structure in stores and support centers direct sourcing indirect bank and occupancy costs the costs money also resulted in one time charges of 28.7 million largely consisting of cash payments for severance in the quarter.
Even though stores were closed for a good portion of the quarter inventory was down seventy five seventy Nine Million last year. The lower levels were driven by our use of inventory guy from permanent store closures to replenish active stores along with the sell-through of clearance and improved inventory efficiency in core products inventory Vanishing along with our continued cost diligence and working capital efficiencies generated net cash from operating activities of 156.1 million a quarter and Thursday. We ended Q2 with 1.2 billion in cash and equivalents. Our liquidity position provides us with the ability to accelerate our digital transformation and create a virtual experience for Shoppers as such. We now expect Capital expenditures to be approximately $85 million compared to $143 billion last year off.
Subsequent importer and we paid down a hundred million of our abl reflecting the impact of inventory level fluctuation on our borrowing face.
Turn into our financial services over the last few years. We have enhanced our suite of financing products to include Leasing and one-time-use split pay product. In addition to offer private label credit card programs. We are extending the availability of all of our financial service offerings and our extended service plans to our online Channel ahead of holiday turning to the non-prime portfolio. We mentioned last quarter that's significant purchasing new receivable accounts and the end of Q2 these receivables aggregated 17.2 million on our balance sheet. None of allowances the size and early performance of these new accounts have been within our expectations month.
ultimately our goal
It's provide our customers with a wide breadth of financing options to assist in the purchase of jewelry and ensure that we prudently manage our potential sales capture across our bow in closing. We are incredibly proud of our team members for their agility to Pivot and deliver with excellent service to our customers using a new digital tools. Our team came together to prioritize Investments effectively managing working capital and preserve our liquidity importantly. We are seeing our customers respond positively to our efforts and we look forward to serving them in the upcoming holiday season, and now I'll turn the call over to the operator to begin the Q&A session wage.
Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble the roster.
The first question today comes from Paul and June of City, please go ahead. Thanks. It's pretty filling in for Paul. I had two questions first. I was wondering if you could tell us what I'm seeing from your e-com customers. I think you mentioned the conversion was higher and the basket was higher, but I was wondering, you know where they buying different categories and and what does the customer look like in term of in terms of demographics if it's a new customer, and I guess prior to that if you could say whether you're getting more of a new customer or an existing customer there, and then secondly as you look toward holiday, I am just give us a sense of the newness you expecting a collection of this year versus last year. Thanks.
So I'll take I'll take the first question on e-commerce. You know, what's been very interesting so jewelry has traditionally not been a category that's very well developed in Commerce maximizing and kind of leveling out at about 15% of sales. We've been able to break through that in the quarter, of course in part stores were closed. But also using our new digital selling tools the other things that are changing our that jewelry was traditionally a lower average retail price purchase online, but we're seeing order than a normal e-com purchase and we're definitely seeing more new customers 40% of purchase.
Says this quarter came from new customers many of those online and our customers that are purchasing are typically younger and more multi-cultural than we've seen before. So we're working very hard to continue to improve our digital experience. We think our new marketing tools and prospecting especially life as some other jewelry retailers are struggling gives us a tremendous opportunity for new customer acquisition and potential for a longer-term share game.
So with respect to newness Tracy we continue to see that we will have a consistent penetration of the newness to last year. But importantly what we've been able to do with our supply base is work with them to postpone. Some of our Mother's Day launches bring those in earlier in the season in the third quarter as well as work with them to ensure that we have our orders and it gets apply for the higher holiday filing season. So we also have new launches more new launches within that penetration. So Monday, we're feeling good about our ability to bring newness to the customer that's coming holiday. I'll just add on that. You know, one of the things that we've really focused on is part of our customer first strategy within pasta Brilliance is getting kind of proprietary customer data and our data indicates that 51% of jewelry customer.
Are planning to shop earlier this holiday season than they have in the past. So we'll be ready for that. Just want to follow up on your offer customers. Were you did you mean new to submit Concepts overall or just new two Ecom new to Cygnet overall?
Great. Thank you.
The next question comes from Lorraine Hutchinson of Bank of America, please go ahead. Thanks. Good morning. I was hoping that you could comment on seeing and bridle both as a quarter progressed. And then also if customers are seeming more willing to buy Bridal a particularly Engagement online versus prior periods.
So I'll start on that one and then Joan you can jump in we saw month-on-month Improvement across the quarter in all of our folios completing Bridal. I would say Bridal has been a particularly strong category For Us online, especially as we have been able to bring counseled selling at scale but it should have been stronger in store. Younger men are the most optimistic consumers right now and most interested in going back in stores. We're also seeing strong engagements happening. So our our Research indicates that over 50% of pre-engagement couples decided to quarantine together during nineteen and half of them say their relationship got stronger during covid-19 with only 7% saying that their that their relationship were suck.
and that's
We think a nice Tailwind in our bridal business. We're also seeing a higher you are in the bridal business in part because of our online consultation, but I would ask is that is we saw that continue as well into August and you know interestingly we're seeing um, you know our best performance and some of our bigger Brands which include Neal Lane levian and Vera Wang, and we also continue to be pleased with the performance of The Chosen line that Jared we've we've really upped our game over the last year in creating custom offerings for our customers. So now on Neil Lane and Vera Wang, for example, you can choose the diamond choose the setting really creative aspect of peace. And so that's also been part of the driver and are strong Bridal business.
Thanks. And then do you think about holiday? There will clearly still be some traffic constraints within your stores and and you spoke about your customer saying they charged earlier. So what are the changes you're making to ensure that you can handle the types of volumes usually see during those key holiday weeks and and you can try to spread those out.
I just think I mean there's a lot of uncertainty in the back half of the year, you know, whether there'll be a Resurgence of covid-19.
Holiday to be more pinpointed in that newness. And so that's ready. We've gotten our online business ready or websites are faster. They're easier to shop then they were a year ago. And as I mentioned in my prepared remarks, we've increased our e-commerce distribution capability so that we can ship five times more packages this year anticipating that there will be more online sales. And then also as I mentioned we've been able to stand up virtual selling with more than half of our Associates trained to be able to do that either from stores if our stores are open or from their homes, if our stores aren't open, so we're ready and we're doing a obviously a lot of work on new customer acquisition and prospecting to try to keep filling our funnel. The only thing I would add onto that Senate is just the flexible fulfillment work and the Cape Town.
I believe that we are.
You know, we're investing in ninety percent of our excuse will be available for buy online pick up in store for all of our us banners and our Akron DC will be able to ship e-commerce or wage increasing capacity as genocide as well as we have automated ship from store product to our customers and in the knowledge of our banners, but have provided a more a more improved manual approach in the Akron Banner. So that's a that's a a meaningful Improvement for us. And as we said to enable e-com purchasing we've expanded our credit options and our extended warranty plans online as well. So we've put forth a lot of thought and a lot of effort into understanding how the customer may want to shop this holiday to prepare for them to shop. However, they would like to
Thank you. Again. If you have a question, please press * then 1 the next question comes from Dana telsey Advisory Group. I had good morning everyone a nice to see the progress as you think about holiday season marketing spend shipping costs. We've heard of earlier deadlines. How long were you planning shipping costs advertising this year as compared to last year and also product introductions this year. How you how are they different this year than last year whether wage in terms of category or timing of introductions? Thank you. Hi Dana. Thank you. So a couple of things I would say on that one is Jeff earlier. So as I mentioned we're getting our new products available in September online and in stores in terms of newness. We're we're seeing a big Trend toward dead.
More meaningful and sentimental jewelry, I think covid-19 has really caused customers to you know to focus on relationships in new and different ways of religious jewelry has been trending so we have new launches across all of our banners. I'm really excited about the journey collection that we have in Zales Journey kind of show casing, you know, that that life goes on and that we we are resilient through a period like this. We also have very strong launches of sentimental Concepts in both K and in Jared, so I think we are we are adapting to this environment. I mentioned that we are are worth visiting our custom offerings. We're seeing people more often want to customize their jewelry, whether it's you know engraving or choosing a dime.
And that bespoke rings.
Setting for their partner. So that's another Evolution that we've made and I don't have Joan you have anything to add to that? No, I was just got on the shipping cost. We are off of it. If we have it in our plans and are working through that we have receded as we mentioned bringing in, you know product a bit earlier and working with our vendors on that time just to smooth it out a bit Dana and then with respect to marketing. We have a we, you know have an effective marketing mix We believe that has a nice balance of Home digital social and and linear to you know, serve our customers and make sure we're we're speaking to them wherever they are and whatever time of day they need to so, I don't know Jennifer getting a marketing. Yeah, I mean just to say that over the last couple of years. We've really switched to more of an always-on strategy. So while Signet used to spend the money
Majority of our marketing and Q4 we've shifted to a much more balanced marketing message across the Year and much more digital. So we we can do more with less money via our customer data platform are Dynamic content optimization really getting the right messaging to the right customers at the right time.
Thank you. The next question comes from like Burchell of Wells Fargo, please go ahead. Hey, good morning. Everyone took questions. So on the I'm sorry if I missed this on the corner today the 10.9. Did you break that out stores reverse? See, I was just curious if it was any more color there and then just on margins, I guess, you know in August on those very strong sales. Is there any commentary on merchandise margins? Are they are they holding steady? Is there any is there anything going on from a promotional standpoint? I guess the last question of the three apologies. Um now that you've gotten these occupancy Savings in the cops are positive like like should we begin to assume that you're gross margins should be able to stabilize or maybe even begin to age group as we work through the back half of the Year. Thank you.
So so I guess I'll take the first question. We did we did say that e-commerce sales held strong in August. I was particularly pleased to see that so we got the scale on our story openings by mid-july. We got to just north of ninety percent of stores open and e-commerce sales held at over 65% in August. So to me, this is a reinforcement of our belief that it's the combination of Sigma store footprint are recognized jewelry expertise and these new digital capabilities, which is a competitive Advantage for us in the jewelry category given customers integrated shopping Journey, which is both in-store and online and given the importance of trust and counseling especially in bridal sales.
Okay.
Tomar Jan a you know, as we mentioned in the in the prepared remarks that we it declined largely due to be leveraging on fixed costs as well as off both of those costs associated with the stores and distribution. It was also down this quarter on a merch margin level as a result of our clearance efforts had a higher penetration this year than last year wage and we will you know continue to work through our clearance and promote as you know, we see appropriate, you know throughout each quarter and you know, it does time was you know, we cannot give guidance on on gross margin, but we remain, you know committed to inventory discipline and inventory management and working on efficiencies and our Quarry punishment as well.
Thank you.
Thank you, and that was the last question. I would like to turn the floor to Jen addresses for any closing comments. Great. Well, thanks everyone for joining us this morning. We are pleased with the progress. We made in Q2 and are well prepared to serve our customers this holiday season and Beyond again to our signature team members. We thank you for your extraordinary contributions and for your continued passion and commitment to our mission and core values and to everyone listening. We wish you and your families continued health and safety. Thank you.
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