Signet Jewelers Limited (SIG) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Signet Jewelers First Quarter Results Conference Call. During the call all participants will be in a listen-only mode. After the presentation we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] Please note that this call is being recorded today May 26, 2016 at 8:30 A.M. Eastern Time. I would now like to turn the meeting over to your host for today's call James Grant, VP of Investor Relations. Please go ahead, James.

Good morning and welcome to our first quarter fiscal 2017 earnings call. On our call today are Mark Light, CEO, and Michele Santana, CFO. The presentation deck we will be referencing is available under the investors section of our website, signetjewelers.com. During today's presentation we will in places discuss Signet's business outlook and make certain forward-looking statements. Any 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 risk factors, cautionary language and other disclosures in our annual report on Form 10-K. We also draw your attention to slide number 2 in today's presentation for additional information about forward-looking statements and non-GAAP measures. I will now turn the call over to Mark.

Thanks, James. And good morning, everyone. There are five key messages I would like you to take away from our presentation today. First, in what has been a choppy retail environment we were able to deliver record EPS at the high end of guidance. Our operating income, our net income and our earnings per share were all up over 20% year-over-year. This was due in large part to managing our expense structure in disciplined fashion and realizing synergies that position Signet well for the long term. This prudent expense management included good results in credit which Michele will speak about in more detail later. Second, we delivered solid sales for the quarter. Although our sales were slightly below our guidance they were still strong enough to deliver on our earnings expectations. Year-to-date we are gaining profitable market share. The third point I want you to take away is that we remain a growth story, a prudent, measured and profitable growth story. We remain on pace and are committed to growing our stores' square footage. Our disciplined, internal rate of return requirement on new stores of 20% remains firm. The growth this year will be led by Kay jewelers outside the enclosed mall. This is a departure from many other retailers that are having to reduce square footage these days. Fourth, we are reaffirming our annual earnings guidance. Our first quarter results and sales flow through keep us positioned to achieve our year end goals around EPS, adjusted EPS and synergies despite a lower sales outlook. And fifth, we are conducting a strategic evaluation of our credit portfolio, as we are always looking for ways to optimize our operating business model. Goldman Sachs, who has vast experience in this area, has been engaged as the company's advisor in this process. We will consider a full range of options as we evaluate our in-house and outsourced credit programs. These options include but are not limited to optimizing credit offerings, optimizing allocated debt and equity capitalization of the credit portfolio, including potential incremental securitization, bringing all credit function in-house over the long-term, in sourcing some credit functions and outsourcing others and outsourcing all credit functions. This evaluation is a top priority and as we move through this we will remain focused on executing our operational plans and driving profitable growth in our business. Moving on to slide 4 and the financial highlights, I will leave the specific numbers and details for Michele. But the main headlines and accomplishments from a financial perspective related to our first quarter are as follows. We delivered a good sales gain which included 2.5% comp increase. We delivered operating margin expansion and we leveraged both gross margin and SG&A, coupled with meaningful buyback which demonstrates our confidence in our business and the value we see in our shares. This led to record first quarter EPS with a double-digit percentage increase, and we have sound cash and liquidity levels and we continue to possess a strong balance sheet with clean inventory and a responsible amount of debt. Next, I'd like to discuss the main sales drivers of the first quarter. Like the fourth quarter results were led by our Ever Us which is our two-stone diamond ring collection. Ever Us is now testing line extensions in stores for the holiday season and some are already showing significant promise. Bracelets and earrings as well as necklace with on-trend looks and innovative fastening systems were also very successful in the first quarter. Branded bridal also grew in Q1. The bridal business is a stable grower and insulates us from some of the volatility that traditional retailers face, brand such as Vera Wang Love and Neil Lane led the way. Before I go into what is to come for the back half of our company, I want to take a few moments and make a few comments about our place in the jewelry industry. Our internal research shows definitively that consumers still find jewelry gift giving is one of the best ways to celebrate life and express love, and the numbers support this. As shown on the left side of slide 6, with three and five year compounded annual sales growth rates in the teens and 8% growth for 10 years when figuring in the recession, Signet has been gaining and continues to gain market share profitably. We consistently outperform the jewelry market and the total retail market and based on results to date we appear poised to deliver another year of industry out-performance. Given the fragmented jewelry industry we believe we have many years of profitable market share gains ahead of us. Our brands, our scale and our people give us a sustained competitive advantage. Signet is relatively Amazon proof as consumers have consistently shown a desire to touch jewelry and get educated by trusted and trained professionals before making a highly emotional purchase. We are in a consolidating industry. Jewelry in the US is growing in dollars and declining in the number of doors and we have three of the most preeminent brands in this space. We know that there are growth opportunities and we also know how and where to get them which makes us even more attractive for investment. So why invest in Signet? Firstly, we are the clear jewelry market leader with less than 8% of the total market share in the US and it's a highly fragmented and growing middle-market industry. We are a square footage grower and will be for years and we are consolidating in a growing industry. During calendar 2018 after synergies are done and the Zales business model is ready and operating consistently we intend to grow Zales outside the mall. We continue to deliver high quality financial results. Our financial flow-through is powerful with consistent comps and margin expansion accelerated by the Zale acquisition. We believe this will lead to long-term EPS growth. Coupled with a solid balance sheet including prudent inventory management and our financials compare pretty well with most of retail. We continue to have confidence that we will deliver on our annual earnings guidance. We have many competitive advantages that we're leveraging around our store teams, our marketing and our exciting merchandise programs. But allow me to discuss just a few of our exciting, compelling merchandise line extensions and tests that should help us deliver on the year by making the bulk of their contribution in the fourth quarter. As I mentioned earlier, we are successfully testing Ever Us line extensions, such as new diamond ring styles, necklaces, bracelets and earrings and in our experience beacon or industries trend that’s driving type strategies like this tend to perform even better in year two versus year one. We are also testing a line of Vera Wang fashion diamond jewelry and pearls and pearl jewelry to capitalize on her strong name and her design expertise. In all of our Jared stores we are resetting our Pandora presentation with beautiful new Pandora store in-stores. As a part of it we are selling a broader collection of Pandora products and fashion jewelry and we will support it with new TV advertising in creative in the fourth quarter. We're rolling out the Chosen diamond program to all Jared stores, which shows the customer each stage of a diamond's journey from a rough diamond to finished jewelry. This is in total alignment with the Jared customer segment who tend to value this type of product and information more so than some of our other store banners. We are also designing brand-new TV created to support the Chosen also for the fourth quarter. And lastly, we have new technology for our store teams in Kay and Jared for the fourth quarter that will enable our teams to interact with customers more intelligently based on their previous purchases and special life locations. We call it clienteling and we are very excited about its potential to drive sales and build relation with our customers and our team members. Okay. Now back to Signet's overall investment merits as we continue down slide 7. Our integration is progressing as planned and delivering the synergies along the way. We are living up to the expectations that we've articulated. Where Signet has pockets of underperformance, we have strategies. For example, at Jared merchandise, marketing and store operation plans will help us deliver a strong holiday season. And finally, we have a thoughtful and balanced capital allocation policy that accounts for strategic investments, meaningful stock repurchases, dividend increases and a preservation of capital. That concludes my prepared remarks. And now I'll turn it over to Michele.

Thank you, Mark, good morning everyone. So we'll start with our first quarter sales performance. Signet's comps increased 2.4% and that's on top of a 3.6% comp increase in the prior year first quarter with all three of our divisions delivering positive comp sales. Total sales increased 3.2% and on a constant exchange basis total sales increased 3.9% for the quarter. In looking at total sales and comp performance by operating segment let me share some additional color. In Sterling Jewelers total sales increased 3.8% to $980 million which included a comp increase of 2.3% on top of a prior year increase of 2.3%. Sales increases were driven principally by strong sales of select branded bridal jewelry, as well as fashion jewelry. The Zale jewelry operating segment's total sales increased by 2.3% to $381 million and 3.2% on a constant currency exchange basis. On a geography basis our Zale US sales increased 3.7% and comps increased 2.4% and that's on top of a 5.4% increase in the prior year. Our Canadian total sales declined 6.2% but increased 0.2% on a constant currency basis with comp sales decline of 0.6%. Canada sales continue to be impacted primarily by the Western region of Canada due to the struggling energy industry. Across stores sales were driven primarily by diamond fashion jewelry and branded bridal. Our Piercing Pagoda total sales increased 7.5% to $69 million with comp sales of 5.6% on top of 6.1% last year. Sales increases were driven primarily by gold chains and diamond jewelry. In the UK our total sales decreased 1.7% to $144 million, but increased 4% at constant currency rates. Comp sales grew 3.4% and that's on top of a 6.2% comp increase in the prior year. Diamond jewelry and prestige watches were the primary drivers of sales increases in the UK. So moving on from sales, we will look at Signet's consolidated Q1 performance and then we'll turn and we'll look at Signet's adjusted results. So turning to slide 9, the table provides the reconciliation of Signet's adjusted results to consolidated results. And we're continuing to present this reconciliation in fiscal year 2017 to reflect the impacts of purchase accounting, as well as severance and IT implementation expenses associated with our global systems that will drive future synergies. The difference between Signet and adjusted Signet are in the columns reflecting purchase accounting and integration costs. So starting in the lower left portion of the slide, on a GAAP basis EPS was $1.87 per share and that's up 26.4% over last year. In the next column over, purchase accounting adjustments were worth $0.04 of EPS dilution and this was driven primarily by deferred revenue adjustments related to acquisition accounting. The next column over reflects our integration cost and as I had just mentioned relate to severance that's associated with our organizational design changes and consulting costs related to information technology implementations. Integration costs were also responsible for $0.04 of EPS dilution. So on an adjusted Signet basis on the far right column, by adding back the $0.08 with adjustments adjusted EPS was $1.95, an increase of 20.4% over last year. So now looking below our sales line at Signet's adjusted P&L results. Our adjusted gross margin was $604.4 million or 38.2% of adjusted sales and that's up 40 basis points due primarily to the Zale division and a variety of synergies such as sourcing, discount controls and vendor turns, as well as some favorability in commodity cost and leverage on store occupancy. Sterling Jewelers gross margin increased by 20 basis points due primarily to commodity cost. The Zale division's adjusted gross margin rate increased 90 basis points, as synergies favorably affected many areas including our merchandise margins, distribution cost and store operating cost. Our UK gross margin decreased 30 basis points, driven principally by lower sales and merchandise margin deleverage as a result of currency exchange rates. Adjusted SG&A was $456.1 million or 28.8% of adjusted sales and that compares to $451 million or 29.3% of adjusted sales in the prior year. The 50 basis points of leverage was due primarily to lower store and corporate payroll expenses associated with our organizational realignment, as well as lower advertising expenses. This was offset in part by information technology expenses related to Signet's IT global implementation. Other operating income was $74.3 million or 4.7% of sales. This increase of $10.8 million was due principally to higher interest income earned from higher outstanding receivable balances. Adjusted operating income was $222.6 million and increased 14.7% over prior year first quarter. Our adjusted operating margin rate was 14.1% of sales. Now this 150 basis point expansion over prior year was driven primarily by the increase in sales, as well as gross margin expansion and SG&A leverage. Adjusted EPS was $1.95 which compares to $1.62 last year, an increase of 20.4% driven principally by our stronger business performance. So now let's move on to balance sheet and we'll take a look at our inventory. Our strong first quarter end inventory position reflects the success of our continued focus on inventory optimization. Net inventory ended the period at about $2.5 billion, an increase of just 1% compared to our sales growth of 3.2%. This relationship to sales was driven by solid inventory management across virtually all of our product categories, divisions and locations but most notably in branded bridal. We increased Zale inventory turn by reducing unproductive inventory, rightsizing store level inventory closer to Kay averages and improving clearance inventory management. As we move through Q2 our inventory levels and merchandise assortment for fiscal 2017 are very well positioned. So now we'll turn our attention to our in-house credit metrics and statistics. Our first quarter credit sales were $605.1 million, compared to $573.1 million in the prior-year quarter, reflecting an increase of 5.6% which compares to a increase of 9.2% in the prior year. The higher credit sales was driven primarily by growth in bridal and Ever Us, both with higher average transaction value. The average monthly payment collection rate for the first quarter of fiscal 2017 was 12.3% compared to 12.6% last year. Our monthly collection rate is calculated as cash payment receipt divided by beginning accounts receivable. The change in rate over prior year is due primarily to merchandise mix as bridal, especially higher priced branded bridal increases this creates a higher average initial balance. Now by design the minimum payment rate declines as the price point of the merchandise increases. Bridal has a higher average credit sale. Therefore, the repayment period is slightly longer and cash collected as a percentage of the receivable declined slightly. The combination of growth and credit sales and collection rate led to an increase of 11% in our net accounts receivable compared to an increase of 14.7% in net receivables in the prior year quarter. Our quarter ended net accounts receivable increased to $1.65 billion compared to $1.49 billion last year. Interest income from finance charges which makes up virtually all of the other operating line on our income statement was $72.8 million, compared to $64.4 million last year. The increase of $8.4 million was due primarily to more interest income on the higher outstanding receivables base. Our net bad debt was $33.6 million compared to $28.1 million last year. The increase of $5.5 million was driven by our higher receivable balances, but more specifically our bad debt provisioning establishes a 3% reserve at origination of the receivables based on historical experience. The higher our credit sales, meaning the more new volume in accounts receivable, the greater the amount contributes to our allowance for doubtful accounts. Now the net impact of bad debt in finance income generated operating profit of $39.2 million and that's compared to $36.3 million in the prior year. So looking at some of the key Sterling division allowance for doubtful accounts metrics, our total valuation allowance as a percent of gross receivables was 6.6% in the first quarter. This was up 10 basis points from prior year and down 40 basis points quarter-over-quarter. But what's most important is that as we expected we made more sequential improvement in Q1 of this year than we did in last year. So why is that? The impact of improved collection execution and credit marketing techniques that we began late last year are making more than just seasonal progress. We improved 40 basis points Q4 to Q1 versus 30 basis points over the same period prior year. Now the same trend was true for our non-performing portion of our receivables as a percent of the gross receivables. At 3.6% this was also up 10 basis points from prior year and down 40 basis points quarter over quarter. Again the sequential trend of non-performing loans was better at 40 basis points down versus 30 basis points down in the prior-year period. Building off the Q4 trends that we had discussed on our year end earnings call in March, we continue to see the same improvements in trends in Q1 and we anticipate that these trends broadly speaking will hold true for the remainder of the year. So moving on to our capital allocation, I want to reiterate our priorities for capital structure and our capital allocation strategy that we had first introduced 14 months ago. We have a strong balance sheet and we have also extended our ADS agreement for an additional year. The strength in our balance sheet and flexibility allows us to invest in or business, execute our strategic priorities and return excess cash to shareholders all while ensuring adequate liquidity. Our investment-grade ratings remain important to us because long-term we may return to the debt markets. Our adjusted leverage ratio target is to be at or below 3.5 times and we had ended fiscal 2016 at 3.7 times. As our EBITDA grows in fiscal 2017 we anticipate that we will have additional leverage capacity and we are actively evaluating use of this capacity under the tenet of our capital allocation policy. We plan to distribute 70% to 80% of our annual free cash flow in the form of stock repurchases and or dividends assuming no other strategic use of capital. In recent years we have been able to grow both dividends and share repurchases. Our share repurchase authorization is considerably higher now given the recently announced $750 million buyback authorization to go along with what was already left on the previous program. At the end of the quarter we had $761 million authorized after our $125 million of Q1 share repurchases. So now we will move on to our financial guidance. Signet's second quarter comparable-store sales are expected to increase 1% to 2% which factors in our quarter-to-date performance and also assumes that the environment remains somewhat muted. Second-quarter adjusted EPS is expected to be $1.49 to $1.54. For fiscal 2017 we anticipate comps of 2% to 3.5% and adjusted EPS of $8.25 to $8.55. The comp range has been reduced 100 basis points from our March guidance and we all see the trends out there and with a softer consumer environment we believe it is appropriate that we proactively reset our comp guidance. With that said, we continue to believe that the $8.25 to $8.55 EPS rate is achievable for the following reasons. First, and just as a reminder, March was the first time we had issued full year guidance and we were just out of the gate into our new fiscal year and appropriately so we had guided to an earnings range that gave us room to achieve earnings under various scenarios. Second, we are planning for the strong earnings flow through to come about through both gross margin expansion and SG&A leverage. We anticipate expanding our gross margin rate through higher sales and realization of synergies and the SG&A leverage will flow due to marketing and organizational design deficiencies, as well as additional expense letters within management's control. We proved this capability in Q1 where we were able to deliver at the high end of the EPS rate despite lower sales from the guidance and as a result we remain confident in our ability to deliver our EPS guidance. Now as to other aspects of our guidance, our annual effective tax rate is anticipated to be 27% to 28%. Under the recent U.S. Treasury and IRS proposed regulations tax rebate of related party debt and the tax deductibility of interest expense are limited to only certain related party transactions. Signet's related party financing arrangements, which stems primarily from the Zale acquisition are grandfathered under the proposal and there is no impact on our short to medium-term forecasted effective tax rate. Capital expenditure guidance for the full year is $315 million to $365 million, driven by a combination of new stores, store remodels, information technology and facilities expenditures. Net selling square footage is projected to grow 3% to 3.5% with most of Signet's new square footage growth is slated for real estate venues other than enclosed malls. We are also reaffirming the multi-year synergy guidance which we increased February 29. In fiscal 2017 we intend to deliver $158 million to $175 million cumulatively. That means the $60 million we realized last year, plus another $98 million to $150 million this fiscal year. Then by the end of fiscal 2018, we expect to deliver $225 million to $250 million of cumulative synergies. So in closing, we're pleased with our earnings performance and our relative financial results to date. And with that I will turn the call back over to Mark.

Thank you, Michele. To sum up we had a good quarter: record EPS, operating margin expansion, excellent inventory management, solid sales and profitable market share growth. I want to sincerely thank and congratulate all the Signet team members for all their hard work and accomplishments. And with that we will now take your questions.

[Operator Instructions] Your first question comes from the line of Rick Patel from Stephens. Your line is open.

Thank you and good morning everyone.

Good morning, Rick.

Can you help us think about the decline in traffic? I know it's not a new development, but is this something that is going on across the whole jewelry industry, and if so what does it say about customer shopping habits? Since bridal is doing well, I guess is there some level of fatigue out there to buy fashion jewelry or is competition just getting a little bit tougher for certain categories? Just some help on thinking about that.

Thanks, Rick. Decline in retail traffic, we're seeing a decline as everybody else is seeing a decline that we saw in the first quarter. We do have a third party company that tracks the traffic in the malls and it is showing that retail traffic as a whole was down for the first quarter. We have some traffic counters in our Jared stores, some in our Kay stores and we're seeing declines not as much as you are seeing with some of the third-party providers out there. But to your point, bridal is our stable type of business where it is a premeditated purchase and people are coming into our stores thinking about bridal and shopping beforehand. So we don't believe we're as affected by retail traffic in jewelry, as our retail competitors. But there is an effect, obviously, if there is less people in the malls. And more so like you said for gift giving. Now gift giving is also premeditated purchase but we're seeing less traffic in the malls right now, and overall retail traffic is down. But we still think the consumer is vibrant out there and we are seeing it in our own sales that you are seeing that we had a very respectable comp increase as it relates compared to the rest of the retail industry world.

Thank you, Mark. And just a question also on the department store space and the competition there. Macy's in particular recently talked about taking a more aggressive approach with fine jewelry and engagement. Have you seen an impact of this on your business and can you touch upon I guess what you see as the biggest differentiators between your business and what department stores would have competitively?

Sure. We are well aware of Macy's test, we were aware of it last year, we shopped the stores that we believe are being tested, we shopped them both from an inventory assortment and from a sales approach and a customer service perspective. And we believe we have tremendous competitive advantage against all of our competitors including Macy's and other department stores. When you just look at our assortment whether it be in gift-giving products and fine jewelry or more importantly in engagement and bridal category our assortment is far beyond anybody else out there. And in this category, as I stated, the customer engagement is critical and the experience that they have in the stores is critical. We believe that our team members out in our stores are better trained and better equipped to educate our customers on this critical emotional purchase and educate our customers on qualities of diamonds and understanding their needs. So our competitive advantage are we believe we have a better assortment, we believe we understand diamond fashion jewelry and diamond engagement much better and we believe we have much better trained and experienced salespeople to take care of that specific jewelry customer.

Your next question comes from the line of Oliver Chen from Cowen and Company. Your line is open.

Thanks, congrats on really awesome results in a really tough retail tape. So Michele I want to ask you the reaffirmance of guidance, the details are really helpful. On the gross margin and SG&A side what are the main drivers that are enabling you to - for that to offset some of the reality of the comp? . : And also are there drawbacks to outsourcing the credit portfolio just because of your very integrated selling process and if there's any learnings that you've had with Zale and ADS? It sounds like you are still encouraged by that relationship, that would be helpful? Thank you.

Thanks, Oliver. So let me start with your question in terms of the gross margin and SG&A and some of the primary drivers that we're very much focused on. So first, it does start back with the synergies and really pushing the synergies through gross margin both SG&A. I mentioned on the call on the gross margin what we're really starting to flow through and we continue to expect to have opportunities as we move into the year on the synergy front really relate to our discounting controls that we put in place. There's repairs, our vendor terms. We did actually move from in-sourcing our special events to outsourcing that. That has had a favorable impact on our gross margin. So there's a lot related to synergies that we see flowing through there and in addition there's still a little bit of favorability we're getting on the commodity cost front that's flowing through gross margin. On the SG&A side, on the synergy front we did a lot of work and we talked about this during the fourth quarter where we had accelerated some of the work around our organizational design efficiencies. And so we're starting to see those benefits. We will continue to see the benefits flowing through related to that in terms of payroll savings. We also have been really looking at optimizing our labor scheduling as it relates to our store payroll. So we continue to expect to see favorability flowing through that in the year leveraging our SG&A. And then more importantly as I was referencing, there's additional expense levers that management really does have control over. And although we will want to continue to preserve our more customer facing expenses, those expenses such as our advertising, line item, et cetera, for those that are less directly customer facing, whether it's our travels, our supplies, our support center, those are the ones that we are really able to tighten our belt and take a more disciplined approach to give up us the confidence that we will be able to hit our EPS guidance.

And Oliver, in reference to your credit question I'm going to be kind of giving you a holistic answer and answer your three questions about timing and drawbacks and learnings from Zales. And I want to start off with stating, and I just need to start off because we said in the announcement, that our credit metrics in our credit portfolio are strong. As we said our credit metrics are improving sequentially and within our expectations and all we fought for and involved in our earnings guidance both on a quarterly basis and on an annual basis. So our credit metrics are strong. To answer your questions, the reason why we're doing this credit project, your point is, yes, we have had some good experience with ADS. We've had a full quarter now under our belt where ADS has been managing our entire credit portfolio for Zales from January through now we're having some good experiences and we're learning more. And at Signet we're an evolving company. We're always looking for ways to better improve our business part of our business. That being said, we always feel there's ways of us getting smarter and understanding more about our business and we've also seen other major retailers out there. And I'm sure a lot of you know of them, that have carried internal receivables and have sold their receivables and have done work with receivables of recent and we've just understand there is an evolution going on and we want to make sure that we're on top of it. We're a business that is constantly looking for ways to improve ourselves. Actually one of our mission statements is that we're always looking to continuously improve. So we look at every facet of our business on a regular basis to make sure that we're continuously improving how we can enhance our business for our operations and for our shareholders. And credit is no different. We've done major credit analysis in the past. So as we mentioned, as I mentioned in our remarks, Oliver, possible outcomes could be outsourcing of all of our credit functions, possible outcomes could be some in-housing of our credit functions, some would be outsourced. Other things that we will be analyzing is the ways of optimizing our debt structures on our accounts receivables. Can we optimize our credit offerings? We're looking at variations of options to make sure that we're improving our ability to do sales, maximizing our profitability and enhancing our business model. And as far as timing goes Oliver, it's a top priority for us. We will be thoughtful though, and we will be diligent about the work but we are going to take time to be very thoughtful. And we are working real-time right now with Goldman Sachs on this who has a lot of experience in this world and has done a lot of this type of work with other retailers. So that's why we're comfortable sharing with you today. But we're not going to share a timeline with you because we want to do this thoughtfully and methodically, but we will keep you up to date when appropriate.

Okay. Just a quick follow-up, that's really helpful. You've given really helpful detail and more detail over time regarding your credit portfolio. Some investors are asking a lot about accounts receivable aging and the FICO score distribution and the reality of using the recency accounting methodology. Could you brief us on how you're feeling about those topics in terms of what you're seeing in your portfolio? It's an accounting method that you've used throughout many years. So I understand that it's very integrated in your processes?

Yes, thanks Oliver. So real quick on that. We talked at quite length on the last call that at the end of the day, regardless of recency or contractual, whatever method you are on, the financial results are going to yield the same answer. The provision will be the same, our bad debt expense will be the same. But to that point, the reason why we use our recency is one, we have done it since the beginning of time, and it really has worked well for us over the years with the type of lending that we do, jewelry lending that emotional connection and it does optimize our collections for us. And so with the use of the recency it does help us to engage with the borrower, start collecting quicker. It gives the customer some flexibility based on the disciplined criteria that we had outlined of our recency aging, what a customer has to remit to stay current. It leaves that customer in good standing if they are having maybe a challenging month where they can't remit a full payment. And that psychology and that flexibility of working with that customer puts that customer first, and that at the end of the day really drives maximization and optimization of our collection effort. Then as I said, importantly, the financial results will be the same. Now we'll continue and when you see the 10-Q that we plan to file within the next week or so in the footnote you'll see the same type of a breakdown of our aging. So we've continued to provide that, the 30 day, 60, et cetera and 90 days. In terms of FICO scores that will be an annual disclosure for us. But what I can tell you is the FICO scores are broadly in the same range as what we saw in Q4 which everybody would expect that you're not going to have major shift quarter-to-quarter on that.

Your next question comes from the line of Bill Armstrong from CL King & Associates. Your line is open.

Good morning, everyone. Question on…

Morning.

Good morning, Piercing Pagoda, so that's the division that arguably would be the most vulnerable to changes in mall traffic, given its locations within the hallway and the impulse nature of the purchase. That was actually the best performing division in terms of comp in the quarter. So I was wondering if you could maybe review for us what's going on in Pagoda and how is that division performs so strongly in such a weak environment?

Sure, thank you, Bill. Great observation. First of all, it always starts off with people, and we have a great leader who is running our Piercing Pagoda business named Jaime Singleton, and we have very motivated team members at Piercing Pagoda, and they feel great about the business and investments we are making in the business. Specifically what's helping our cause, if you look at the release, the average price is up dramatically in Piercing Pagoda. And what the team has done in Piercing is they have invested more in 14 karat gold, more in diamonds. So what they are doing - and we are training our people to be able to be comfortable selling at Piercing Pagoda 14 karat gold and diamonds and they are motivated and excited about the business. So we're getting benefit in Piercing Pagoda, even there's less traffic in the mall, we are getting the benefits similar to what's happening in our mall stores is that we are increasing our average sale dramatically. And a lot of that again is due to increased assortments in 14 karat gold and diamond jewelry and increased training on how to sell that product.

Okay. Great, thanks. And you gave some industry data in your slide presentation, the industry lost a net 700 jewelers. Is that individual stores and are you seeing kind of regional chains going down or are these more kind of individual mom and pop type of stores do you think are exiting the market?

Bill, year-on-year there is an increase in the decline of jewelry store doors closing from 2014 to 2015. I believe it was about 100 basis points, but it was a big decline. And the vast majority of them are independent stores that are closing doors. And there is a lot of reasons for that whether it be lack of profitability, lack of a successor to turn the store over to. But the facts are the facts that the jewelry store doors are closing at a faster rate in 2015 than they did in 2014.

Let me just add to that, I mean that is one of the advantages whenever you are going through a somewhat softer environment given that we are so fragmented with a lot of these independent small mom and pops that does generally put pressure on those doors and you start to see an up-tick in those store closures. So we are probably one of the few retailers that actually benefit with gaining profitable market share gains in these type of environments.

And just to pile on to Michele's point, Bill, is a good reason as why we stated that we're expanding our stores more so outside the malls because a lot, the vast majority of jewelry sold in this industry in this country for certain is done outside the mall. And so we see opportunity to continue to grow Kay from those doors that we're closing primarily outside the mall and as we said after the end of 2017 an opportunity to start opening Zales stores outside the malls.

Your next question comes from the line of Simeon Siegel from Nomura Securities. Your line is open.

Thanks. Hey guys, good morning, nice consistency.

Thank you.

Thank you.

So just recognizing the synergy this year are going to be primarily expense savings related, can you talk to the ongoing opportunity to narrow the sales productivity gap, what should that do for the comp trajectory there? And then in light of what's looks like on ongoing shift to higher ticket items, you specifically called out a shift from Charmed Memories, can you just talk about that Jared Pandora rollout and any thoughts or expectations there? Thanks.

Yes, the Zale productivity, there's a lot of initiatives out there and we still feel very strong and have built good increase for Zales going forward. We continue to see benefits from our cross selling of brands. We continue to see tremendous benefits and we think there's going to be a huge benefit to Zales is having our repair business, our repair business being internal, not being done by third-party contractors which will help the top line not only in the repair business but ultimately you take care of our customer. You have a new customer for life and you take care of that customer. So we have a lot of areas of business that are going to increase the top line. But we are focusing right now on making sure that we get the model in place and we get the appropriate level of SG&A in line for that business model. So we do see good opportunities to continue to grow Zales going forward. And if you look at the comps for the Zale business itself in this past first quarter it was up over 3.5% which is better than most of retail. So we still feel really good about the opportunities for Zales on the sales line. As far as the average sales in Pandora, we did see some beads slowing down but not in our Pandora business. We have a big bead business, Pandora is just in our Jared stores and we're very happy and excited about our Pandora partnership. As we said we have these new store in stores, it will take us see year to roll them out but we will have all the new stores, our new stores, the Pandora stores in our Jared of stores by November 1. Right now we just completed about 50 doors and initial - it's early but initial sales results are very good to us. So we see great opportunities with Pandora in increasing our partnership with Pandora. And a big benefit of the Pandora partnership we have is not just selling more beads. But Pandora has been doing a great job of designing new jewelry products at lower price points that we really haven't done a great job with in the past and have not had a good inventory assortment of the Pandora jewelry product. And we're very excited about that opportunity for new business in our Jared stores this fourth quarter.

Your next question comes from the line of Jeff Stein from Northcoast Research. Your line is open.

Hey, good morning guys. Michele, a question for you with regard to ADS, I'm curious what the approval rates, what kind of approval rates you've seen on the ADS credit metrics relative to your in-house credit? And then I've got a couple of follow-ups.

Yes, so we're really excited with partnering with ADS and this is really the first full quarter that we've had them in play. Overall what we've seen with our Zale credit penetration rate for Q1 it's about 48%, now that's inclusive with primary with ADS, as well as our in-house second look that we're doing. But that 48% penetration rate compares to about 41% last year. And that really - that increase in rate is really driven by the primary lending that ADS is doing. And so what we're seeing and what we expected to see as part of the benefits with ADS, is it's driven by both a higher application and higher credit lines with ADS. And first, when you think about the change over to ADS there was a re-launch of the credit cards to customers, so one, you generally get that drives customers back into the stores. In addition, we did some field training relating to the ADS rollout. I'd also say that when we think about the credit value proposition related to ADS it really is more appealing than traditionally what we've had as it allows for lower minimum purchases that are required. And then also the application process, it is much more quicker and easier for that applicant. Previously it was a paper application where now we've utilized technology, hand the drivers license, punch in data and then they are off to the races with ADS. And then I would also lead to that when we think about the benefit of ADS in that relationship it is the reduced or the lower expenses associated with that which is flowing through our P&L.

Perfect. And a question on the bump that you may have received from extended service plans in first quarter both from a comp store standpoint and an earnings per share standpoint since I don't think you had anniversaried that change until Q2.

Yes, you are correct, Jeff. We will anniversary that in Q2. So we did see the impact in Q1 and on a consolidated basis it was about 70 bps to comps and about $0.07 or so to EPS.

Your next question comes from the line f Ike Boruchow from Wells Fargo. Your line is open.

Hey, everyone, good morning. Thanks for taking my question. I guess for Michele, I'm just curious do you have data on your credit customer about what percent of credit customers would be fine buying something without that option, but maybe just like the 12month interest-free or something like that versus the ones that would actually need the in-house financing arm to buy his or her item? And then just a follow-up to that I guess Mark, when you guys guided I think Valentine's Day was already over, I assume that's a big part of the quarter. So I'm just kind of curious can you comment on April? It was tough for most of retail, it seems like it was probably tough for you guys. I'm just curious about how the quarter maybe played out? Thanks a lot.

Good morning, Ike. So in terms of your question with the data that we have with our customers and I think the question was would they use another form if we didn't have a credit, we have a lot of information on our customers and we look at the data in a lot of ways. That's one that becomes a little bit difficult to track if we didn't have it would the customer still make that purchase. It really is challenging to be able to quantify that. But it is information that we're always looking at very closely to understand the benefit and the competitive advantage of the credit offering.

And Ike, how are you. In reference to your question about our guidance and Valentine's Day to your point you're right, we guided to have a 3% to 4% and we put that guidance out there on March 26. We had Valentine's Day under our belt. That being said, we had April ahead of us which leads up into obviously some critical shopping for Mother's Day and there was a slowdown in April. If you just look at what we have accomplished compared to what our guidance was at the time we gave the guidance there is no doubt that there is a slowdown in April that we experienced like all of retail. We've all been exposed to all the retail numbers out there for the first quarter. So our numbers slowed down but were better than most. That being said, going into May we're seeing a similar level to May, not better, not worse, we're seeing similar levels. So the guidance that we're giving you for Q2 is assuming that things don't get better and things don't get worse from an economic environment basis. But even though you didn't ask I want to say to you that we still feel very strongly about our earnings guidance for the year and we believe that we have a great opportunity in the second half, as I stated, we have a lot of initiatives - we have more initiatives this year than we even had last year, as I mentioned with the extension of Ever Us, as I mentioned with the Chosen diamond for Jared that tested wonderfully. We're very excited about the Pandora store-in-stores. We're very excited about the Vera Wang extension going into diamond jewelry and pearl jewelry. And we're very excited about this new technology that we're enabling our people in our stores to really be more sophisticated and more knowledgeable about their customers past experience and what they bought and what they can go buy in the future to help them communicate better with our customers. So, yes, we saw slowdown in April, but we're still outperforming most of retail and we still feel very bullish assuming the economy stays stable that we're going to have a very good second half and fourth quarter.

Your next question comes from the line of Dorothy Lakner from Topeka Capital Markets. Your line is open.

Thanks, good morning everyone. Just wanted to follow-up on some of those things, Mark, that you were just talking about. I wondered if you could provide a little bit more color on this new technology, the clienteling kind of technology and when the training is going to occur. So when we should start to see some benefits, obviously for holiday, but just wondered on the timing. And then also just the timing of the Vera Wang fashion introductions, the diamonds and pearls? And then just on Ever Us, obviously a big success story for you all. I'm wondering if you are seeing any changes in the customer base for that. I know you had seen a broader customer acceptance for that product than you had expected, sort of different types of clients than you expected. I wondered if that's changed any as we go into the rest of this year? Thanks.

Thank you, Dorothy. First a little bit more color on the technology I was referring to, so we have some great partnerships that we're working with some software technology companies like salesforce and Rosetta that's working with us on this project we're calling clienteling. And just to give you this spot, a good jewelry sales consultant has a book and they will talk, they will have it and they'll keep it manually now to understand all of their customers what they bought in the past, what are their key special occasions and their lifetime moments, whether it be birthdays or their loved ones or anniversaries or just graduation gifts and that type of things, and all that has been done manually in the past. We're going to be able now to have and give our associates real time information through their iPad and they can understand what their customers have bought in the past, what birthdays are coming up, how to communicate with them more intelligently. We will also be able to use this technology for CRM. So we think there is just vast opportunities of what we can get incremental benefits and sales from this new technology. To your point, we are training up our people at our Jared and our Kay stores and we will start in August. We will have a big training conference at our leadership conference in October and for Jared and Kay they will be fully ready for this aspect of this new technology for the fourth quarter. And we think there's a good opportunity to increase our sales and get incremental sales with just communicating more effectively with our customers. As far as Vera Wang and the extension of jewelry, we just think it's a great opportunity. Vera as I said is a tremendous designer and she's got such credibility in the bridal area and she has a great eye. So she's been designing some beautiful jewelry, pearl jewelry, pearls and diamond jewelry for our business. And so far it's testing well, and we don't want to say for certain because we are still in the testing zone, but if the tests continue to be successful we may see some major extensions of Vera Wang jewelry roll out potentially in our sales doors for the fourth quarter, but we'll keep you up to speed on that. As far as Ever Us goes, as you said, Dorothy, it's a tremendous success story for us and having an item and a trend that we have created. And we just - this has just continued to grow for us and the test that we're starting to see and necklaces, we see opportunities potentially in other parts of jewelry, different ring styles are really going well and we don't see a slowdown. As I said in my prepared remarks from our experience these type of trend changing or beacon type strategies from our experience actually gain momentum because as well as it did for us last year and into this year it's still a small, small portion of customers out there that have really have an understanding of what Ever Us is all about. So we believe there's still tremendous upside for the Ever Us collection going into the fourth quarter and into the future.

Your next question comes from the line of Janet Kloppenburg from JJK Research. Your line is open.

Hi, everybody. Congrats on a good quarter, nice showing.

Thanks, Janet.

Mark, I was just wondering if you could talk a little bit about your outlook for the fashion jewelry component. It feels like there's a lot of newness that you've created on the bridal site, both Ever Us and Vera, and I'm just wondering if you're finding it more competitive on the fashion side? And if you could also help me to understand what's going on in the Jared business a little bit more. I know you're transitioning maybe the promotional strategy there and the pricing strategy. But if you could elaborate a little bit that would help a lot? Thank you.

Sure, thank you, Janet. The fashion outlook, the fashion business is a business that we have to stay on top of and it's not you got to continually investigate and innovate with new opportunities and new styles like we did with Ever Us. And we have a lot of exciting things in the pipeline. I touched on several of them. One is Pandora is all about fashion. Pandora jewelry is all about fashion. When you think about Vera Wang designs and what we're going to do is all about fashion. So we have a lot in the works and that we're testing in the pipeline. I was just sharing some for competitive reasons that we're always looking to be innovative and look for new ways of continuing to test new things in fashion. It gives me an opportunity to say something broader. For us to continually gain market share in the jewelry industry over the last 5, 10 and 20 years and for us to continue going forward we as a company have got to constantly be innovative. We've got to consistently have new ideas in our pipeline not only as it relates to fashion which is critical, but all facets of our business. So we are continually, that's why we open the design center and that's why our design centers are continually looking for new ways and looking at fashion trends to continually test and look for new ways, of innovative ways to sell fashion and gift-giving products to our customers. So we believed we have a good, healthy pipeline in fashion. As far as the Jared business goes, Janet, we have said that we believe, firmly we believe that even though Jared's comps were down in the first quarter and their total sales were up and we believe we are gaining profitable market share in the jewelry industry, we believe that firmly because Jared is growing in a healthy, profitable way. That being said, we have made some enhancements and refinements to the Jared model. We've have talked about how we have changed some of the selling tactics that we have used. We have talked about how we are changing some of the assortment that we are having. We are getting more involved in some fashion areas. We are getting more involved with some lower price point fashion products. We are getting more involved with designers like Vera Wang. We've also talked about how we are continually looking for ways to enhance our selling coverage and how we sell to the Jared customer and that Jared customer we've learned that our segmentation analysis is they are looking for a little bit more promotions, they are looking for some sales every once in a while. So we are testing that also, and we're also testing radio advertising in certain markets because continuity of radio is a strong thing and we are selling products in Jared and engagement rings with Jared's 12 months a year, not just in the 12 weeks that we advertise on TV. So we are actually very bullish on our Jared business. We believe that we've a lot of good things going on in Jared and they are in a transition stage where we are changing their inventory up a little bit, we're continuing to change the selling tactics that we have and we're still working on testing some new bounce-back programs and coupons and promotions. So, again, we feel very bullish about how Jared is going to perform in the fourth quarter, as long with the economy is consistent and operating consistently.

And your next question comes from the line of Lindsay Drucker Mann from Goldman Sachs. Your line is open.

Thanks, good morning everyone.

Good morning.

Good morning.

I wanted to clarify Mark, just quickly a comment you made before about the end to first quarter and beginning of second quarter. The start to the second quarter, are you saying that the momentum you are seeing to start the quarter is consistent with your 2Q guidance or are you embedding some degree of acceleration in the way it feels like you are embedding some degree of acceleration in the back half of the year? That's my first clarification. And secondly, as you think about the strategic review of the credit book you talked about basically every kind of scenario that could be determined from this outcome. I was curious Mark, as you think about what the priorities are for the outcome is it shareholder returns, is it unlocking value? And as you think about now, I know that this is your initial strategic review with an outside party, but you've been conducting some review internally and you do have this partnership with ADS now a good quarter under your belt. Is there a scenario you believe where you could have a third party run the credit portfolio and not have to change your current lending practices or is it two very different? Thanks very much.

Okay. First answer your first question, Lindsay, what I was saying is that April, the decline after we announced and the decline it was declining as the rest of retail was and May was at a similar levels to April. So that was built into our first-quarter – second quarter guidance of being up 1% to 2%. And so what we're saying is that our April decline it's not decelerating, it is not accelerating, it's similar to what's happened in April is what is happening in May. That was that is that clear for you Lindsay?

So you are in order to get to an up 1% to 2% business would have to accelerate from here?

We believe that we feel comfortable in our guidance of 1% to 2% that we can deliver that sales guidance for the second quarter.

Yes, I think with what we've seen as Mark said with May being very similar to what we had observed in April and we've incorporated that into the guidance that it's a very balanced view in terms of balancing both the upside, downside risk to achieve a 1% to 2% comp. So we feel good with that comp guidance.

And your question about our priority as it relates to the credit review, and Lindsay you are not going to like this answer, but shareholder value and operating profit are both hand-in-hand. So it's about both, and when we look at this we are going to look at it holistically. What options do we have, what alternatives do we have that can help enhance, potentially enhance the profitability and or the shareholder value, we believe they go hand-in-hand. So are there opportunities for third parties, can there be, that's what the analysis is all about. We are looking to see what the opportunity is out there. And we have to take a deeper dive and we need time to make those determinations. But to be confident in understanding what we're going to do is make the right decision for our business model to make the right decision that is right for our shareholders and what is right for the company as a whole and our customers. And we have to take all those elements into our decision making process. And we'll keep you up to speed, Lindsay. We just wanted to announce to everybody because we did hire Goldman Sachs who has a lot of experience. And to do this thorough analysis we will be talking to different type of constituents to get this analysis done. And we wanted to make you and everybody else aware that we are doing that now, but we will keep you up to speed once we have more information and talk more intelligently with more data.

Thank you. And ladies and gentlemen, we are out of time for our formal Q&A session. I would now like to turn the call back over to Mr. Light.

Thank you. I'm trying to find my date here. Okay, thank you for taking part in this call. I wanted to let you all know that our next scheduled call is at August 25 when we review our second-quarter earnings. Thanks again to all of you and good-bye.

Thank you. Ladies and gentlemen, that concludes today's call. You may now disconnect.