Ladies and gentlemen, thank you for standing by. Welcome to the Signet Jewelers Limited Q4 fiscal 2017 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, March 9, 2017 at 8:30 AM 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 fourth quarter fiscal 2017 earnings call. On our call today are Signet Chairman of the Board, Todd Stitzer; CEO, Mark Light; and CFO, Michele Santana. 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 two in today’s presentation for additional information about forward-looking statements and non-GAAP measures. And now, I’ll turn the call over to Todd.

Good morning. My name is Todd Stitzer and I’m the Non-Executive Chairman of Signet. Over time, I've met and conferred on numerous occasions with many on this call. As you know, one of my responsibilities is to serve as a bridge and sounding board between our shareholders and management.

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience. Okay. We’re back in the conference now. Please go ahead.

Okay, folks. Turning it over to Chairman Todd Stitzer.

Okay. Well, start again. Good morning. My name is Todd Stitzer and I’m the Non-Executive Chairman of Signet. Over time, I've met and conferred on numerous occasions with many on this call. As you know, one of my responsibilities is to serve as a bridge and sounding board between our shareholders and management. I take this responsibility very seriously. So, this morning, on opening our discussion to provide significant context that addresses many of the questions we've heard from you during and following the media attention focused on the company last week relating to a long-standing arbitration case on pay and promotions. We chose today in this forum to discuss these matters with you because this is a complex matter that cannot be reduced to a simple soundbite or a clever phrase. The Signet board and management team have absolutely no tolerance for discrimination or harassment and we have had strict antidiscrimination and anti-harassment policies and practices in place for decades. The portrait of Signet painted in recent media reports is irreconcilable to me, with the company that I have served as a director and as chairman for more than five years. We have taken seriously the allegations of sexual harassment prepared in connection with the pending arbitration matter, many of which go back decades. The allegations of sexual harassment focused on our leadership were denied under oath. By numerous indicators, Signet outperforms national averages in the percentages of its store management staff who are female. In their 2016 Women in the Workplace Report, McKinsey and Company found that percentage representation of females in non-senior management of US corporations across all industries was 37%. The Bureau of Labor Statistics reports that 44% of all first-line retail sales supervisors are female. In the jewelry, luggage and leather goods subsector of the…

Thanks, Todd. And good morning, everyone. I would like to start by discussing some of the key points we would like you to take away from our fourth-quarter presentation. In a challenging retail environment, our team delivered some wins in certain fashion jewelry categories and selling channels. Our sales decreased, our EPS increased and our fourth-quarter financial overall were in line with the revised expectations. We also managed our SG&A and inventory well, which not only helped earnings, but also increased our free cash flow substantially year-over-year. We delivered more than our anticipated synergies through operating expense management, which helped us protect our profit, our profit margins and our cash position. The P&L benefits of our synergies, which are net operating profit contributions, were offset by the slow sales environment and our business investments. We have important initiatives in our business this year around line extensions, clienteling and more. But perhaps the most significant opportunity is adapting to the retail environment with an extensive omnichannel focus. We have realigned our executive organization structure to reflect customers’ multichannel interaction with us. We are greater technology investments to improve customers’ online experience. And our digital marketing and online presence will be more pronounced than ever. We delivered on our balanced approach to capital allocation. And for the year, we repurchased $1 billion of our stock and increased our dividend for the sixth year in a row. And lastly, as announced last year, we’ve initiated annual same-store sales and earnings per share guidance in lieu of quarterly in order to foster a more long-term view on Signet which is how we think about our business. Now, let’s move on to some of the drivers for the fourth quarter top line. From a category standpoint, diamond fashion jewelry, led by earrings and bracelets were…

Thank you, Mark. And good morning, everyone. All right. I’m going to start with covering Signet’s fourth quarter sales. For the fourth quarter, Signet’s comps decreased 4.5%, against an increase of 4.9% in the prior year fourth quarter and compares to a two-year comp hurdle rate of 9.1%. Total Signet sales decreased 5.1%. And on a constant exchange basis, total sales decreased 3.3% for the quarter. Sales on an operating segment basis were as follows: In Sterling Jewelers, total sales declined 3.7% to $1.4 billion; comps decreased 4.9% compared to an increase of 5% last year and compares to a two-year compound rate of 8.7%. Average transaction value increased 7% and the number of transactions decreased 11.4%. ATV increases were driven primarily by higher value diamond jewelry coupled with declines in select lower average selling price points, such as our Charmed Memories. The Zales Jewelry operating segment’s total sales decreased 3.8% to $555 million. Comps were down 5.2% against the two-year comp increase of 8.2%. Average transaction value increased 2.4%, while the number of transactions declined 7.4%. Increases in higher price point diamond fashion jewelry and bracelets were more than offset by unit declines across all other merchandise categories. On a geography basis, our Zales US total sales decreased 3.5%, while comps decreased 4.9% against a two-year comp hurdle rate of 8.6%. In Canada, total sales declined 5.6% and comp sales were down 7.2% against a two-year comp rate of 5.8%. For the Zale Jewelry operating segment, declines were broad-based across merchandise categories and impacted by underperformance in the mall channel. Piercing Pagoda total sales increased 7.2% to $84 million, with comp sales up 5.7% and that’s on top of a 6.4% comp last year and a two-year comp rate of 9.1%. Average transaction value increased 12.7%, while the number…

Thank you, Michele. I’d like to close by saying, although the year did not go exactly how we would have liked, we still believe we have many years of profitable growth and market share gains ahead of us. Our brands, our scale and our people give significant competitive advantage. I would like to thank all the Signet team members for their hard work and dedication during the fourth quarter and throughout the entire fiscal year. And with that, we’ll now take your questions.

[Operator Instructions] Your first question comes from the line of Oliver Chen with Cowen & Co.

Hi. This is Sheila Reginis [ph] in for Oliver. Thank you for taking our question. Just in terms of your credit review, if possible, could you just elaborate more on what has given you more comfort around the option of outsourcing your credit business and viewing it as the preferred option versus keeping it in house?

Sure. So, as I mentioned on the call, and I described that we’re looking at that outsourcing alternative. We’ve identified that we would work with a primary and a secondary lender. So, that gives us our view in terms of potential path for outsourcing.

Okay. Just to clarify, it's more about the structure?

It’s the structure – that’s correct.

Okay, thank you.

Your next question comes from the line of Lorraine Hutchinson of Bank of America.

Thank you. Good morning. Mark, I was wondering if you had any numbers around the private jeweler closures that you could share with us. Seems like that's been a big factor in sales. And then also for Michele, if there's – is there an opportunity to reduce expenses at this point given the expectation for sales declines? Thanks.

Thank you, Lorraine. As it relates to jewelry store closures, according to the Jewelers Board of Trade, there was an increase of stores that were ceasing operations in the fourth quarter of 52% year-on-year. It was also stated by the Jewelers Board of Trade that it was the biggest decrease of store closures – or the biggest increase of store closures since the recession. I don’t have the number off the top of my head, but I believe it’s around 1,200 stores that closed year-over-year.

And to your second question in terms of the expenses, absolutely. That is what management does. We focus on our expenses and that’s factored into our guidance. You can look at our results for fiscal year 2017. Our total sales declined $156 million on an adjusted basis, but our EBIT was virtually flat. So, we do have the levers of expenses.

Thank you.

You’re welcome.

Your next question comes from the line of Simeon Siegel with Nomura/Instinet. Your line is open.

Thanks. Good morning guys. Michele, can you help contextualize – I know you spoke about it a bit, but can you just help contextualize your comfort in that gross margin leverage, just despite negative comps, and I think you guys are lapping some impressive cost synergies? And then just quick clarifications, just looking at the 165-plus closings, are you planning to close all the regionals this year and any help on the timing of the closures and openings?

Sure. In terms of – I’ll take your first question on the gross margin and our level of comfort. Well, I mentioned on the prepared remarks, the Zale gross margin rate increased, and that was driven primarily on the heels of 120 basis point increase in the gross merchandise margin rate. So, we have confidence in the initiatives that Mark outlined that are really focused on gross margin – repair, discounting, we’re getting the cost savings from our centers that are moving through our profit line based on our inventory turns. So, we feel very confident in terms of our initiatives around gross margin and the ability to leverage on that gross margin as we look out into next year. In terms of the regionals, we will still end the year with some regionals. We will accelerate, as Mark and I had alluded to on the call, this year, but there will still be a small residual that is left at the end of FY 2018.

And Mark?

If I could add, the majority of those stores will close by the end of the year because most of the leases terminate by the end of the year. And those regionals stores that will be staying open are very profitable regional stores and we don’t – we’re not accustomed to closing profitable stores. So, that’s why those stores will be open by the end of the year.

Great, thanks. And then, Mark, just to the point about the e-com channel growth, so when you think about that, are there differences you're seeing between bridal and the rest of the business?

Yes. As it relates to our business, the bridal penetration at e-commerce is lower than we sell in our brick-and-mortar stores. We do sell lower price point items more on e-commerce. But that being said, Simeon, we see opportunities of gaining momentum on the bridal business. I mentioned we’ll be testing a bridal configurator that we think will enhance the bridal experience on e-commerce, but yes, there is a difference, bridal penetrates much more in the stores than it does online as of to date.

Great. Thanks a lot, guys.

Thank you.

Your next question comes from the line of Brian Tunick with Royal Bank of Canada. Your line is open.

Thanks. Good morning, everyone. Two questions, I guess. Mark, from your perspective, you keep calling out the mall traffic declines and, obviously, sounds like February was down almost 10% for mall traffic. Is your customer telling you that they're not coming in and doing research anymore online, and it's more of an impulse item? Just curious why you think the jewelry purchase has changed so much and why you're calling out mall traffic. And then on Michele's point, I think you mentioned on the credit sale, there would be an update or an impact on the share count. Is it wrong to think that if you were to go through a credit sale, that you would look for an earnings-neutral deal and you would use the proceeds to buy back stock?

Let me just start with that and I’ll flip it over to Mark to talk about the online. I guess, two comments. One, it wouldn’t be wrong to think that way, but it’s premature for us to comment on that. At the time, we make the decision, we will update you in terms of any impact on what that means for our share count and share buybacks related to that.

Brian, as it relates to jewelry shoppers, we know – and we’ve surveyed this heavily – the vast majority of jewelry shoppers go online first to educate themselves about our business, to educate themselves about diamonds. It’s a product that a lot of consumers just don’t understand. So, we believe that shopping traffic is declining in the jewelry category as well because of going online first to educate themselves. We’re not – we can’t just escape that the mall traffic is down because we do have a lot – half of our business is gift-giving business and that is affected as well by more traffic. That being said, we’re going to make tremendous enhancements to our online and omnichannel experience that we think will benefit our store and our store brands, both online and in-store.

Great. Thanks and good luck.

Thank you.

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

Hey, good morning, everyone. This is Tom Nikic on for Ike. I wanted to just ask about general category trends. I know that your comps have been negative for a couple of quarters now and some of the department stores have talked about doing better in fine jewelry and making that a focus. Can you just talk about broader trends in the jewelry industry and maybe what the competitive set is looking like? Thanks.

Yes. As it relates to the competitive set, Tom, as we stated, it was a very promotional fourth quarter and, quite frankly, first part of this year. A lot of our department stores competitors did heavy, heavy discounting, specifically in the jewelry category, and we just elected not to participate and cut our margins to that level. As I stated earlier, there was a tremendous increase of independents and store closures, one of the largest increases of store closures since the recession. And a lot of those independent jewelers were having liquidation sales and discounting products very, very much. Again, we decided not to participate and preserve our margin. That being said, over the years, the jewelry industry, as we said, has been resilient and there have been dips in the industry and we have seen the recovery as Signet has done on a consistent basis. And we believe, with all the investments we’re putting in technology and innovation of new product and working on our marketing and digital marketing, that we still believe that long-term Signet has a great opportunity of capturing profitable jewelry market share.

All right. Thanks for taking my question. Good luck for this year.

Thank you.

Your next question comes from the line of Scott Krasik with Buckingham Research. Your line is open.

Yes. Hi, everyone. I'm just going to try and sneak three quick ones in first. So, Michele, first question, if you did have to keep the credit in house and transition to a contractual accounting, would that assume that you would have to have a material change in the penetration level of credit sales? Number two, it seems like you have about $0.30 in transitory costs or expenses in your guidance for FY 2018. Do those go away in FY 2019? And then number three, do we take the convertible or the preferred dividend out of net income? Or because it's assumed in the share count, is it not included in calculation for EPS? Thanks.

Okay. So, you did. You snuck in three quick questions. Yeah, I guess your first question, in terms of – if you assume that we wouldn’t be successful in an outsourcing scenario and moving to a contractual, it really has no implication in terms of the credit penetration rate. So, I’m not sure if I fully understand what you’re trying to get at there, but there is nothing that I’m aware of that would have an indication on our credit penetration. Secondly, the $0.30, you’re correct, it’s about an implied of purchase accounting and integration cost in FY 2018 that’s factored into the guidance. When you think about FY 2019, some of those costs will go away. Keep in mind, with purchase accounting, that actually will drag on for a period of time. Primarily, it’s with the deferred revenue, but it will continue to be lessened as we move past FY 2018. And the third question, Scott, you had on the convertible, that’s factored both into – like our numerator and denominator on how do you calculate your earnings per share. So, I think you’re fine in terms of probably how you’re looking at it.

Okay. Thanks so much.

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

Good morning, everyone. Mark, I wondered if you could talk about the particulars of the fashion jewelry business, some of the lower AUR businesses where you were met with some promotional activity from competitors and lost some share. What's the outlook there for that business as we go forward? And I think it's great that you're trying not to promote much, but if the pricing pressure continues, I'm just wondering how far you'll let market share erosion go in light of pricing pressure. Thank you. Also, Michele, could you talk about inventory levels and if they are aligned by brand where they should be? Thank you.

Thank you, Janet. As it relates to fashion jewelry, when we analyzed our results from the Christmas selling season, we saw that there were certain price points in fashion, lower price points, call it $200 to $700, that we did not do as well as we expected to do. Our merchandising team is very focused on finding key fashion trends and testing key fashion trends in those price points and we’re focused right now on testing some different products and programs and brands in those price points. And we believe that we will have the opportunity to gain that market share back in those price points. What we did in the fourth quarter didn’t connect with the consumers. We’ll learn from that and we’ll take our learnings and make sure that we do much better in those price points for this year and going into the fourth quarter of this year also.

And, Janet, if I could just add on to what Mark said, just understand the comments in terms of our expectation to leverage gross margin next year, that also includes that we anticipate there will be promotional activity for Signet this year. So, it’s all netted into our guidance.

Thank you, Michele. One other thing, Janet, I want to make sure it’s clear, we’re also much more focused this year. There was a dynamic shift on what was happening in the jewelry industry and we’re focus much more on women customers specifically, and specifically fashion-oriented products that are attractive to women. So, it’s something that we are very focused on. We’ll be doing a lot of testing and research on those fashion products.

And then, Janet, I’ll take your second question related to inventory, which I believe is the inventory aligned by brand, we still have a continued opportunity with our Zale banners to optimize our inventory levels, and that will continue to be an ongoing initiative to drive a faster inventory turn rate.

Thank you.

Thank you.

Your next question comes from the line of Dana Telsey with Telsey Advisory Group. Your line is open.

Good morning. Can we talk a little bit about the store closures that you're doing? What do you see is the impact on sales and profit? And the investment in omnichannel, what should we – how much will it be of the Capex? A And what should we see coming through to the holiday season this year? Thank you.

So, your first question in terms of the impact of the store closures on sales and profit, the stores that we’re closing and accelerating, we actually believe, will have a benefit to our existing mall stores when we look at sales transfer, and it should only actually help to strengthen our top line and our profit for this year. And I missed your second part of that question.

The investment in omnichannel. Can you take us through what initiatives should we be looking at this year in order to wind up the holiday season a better holiday than 2016?

Yes, Janet. There are several initiatives. And I said in my prepared comments – let me just get my notes here in a second. We are investing, specifically in digital marketing, and we are investing in enhancing our architecture that we believe will enhance our content – our customer content review. We are investing in making sure – heavily in the Zales platform. We’re actually putting Zales because their platform is a platform that does not have a future. So, we are investing heavily in a new platform, which is a hybrid platform, for our Zales brand. There’s a lot more invested and we can talk about in more detail, Dana, after the call, but we are investing in digital marketing, we are investing in a huge new platform for Zales and we’re investing in the architecture to get it corrected for our Sterling brands.

And just quick question. More color on the Mother's Day shift. Is advertising moving or the different – May 8 last year, May 14 this year, anything we should take away on Mother's Day given the earnings impact of what's changing?

I think I said – you saw it in the release and I mentioned on the call. What I would say is that there is a shift, out of Q1, into Q2 of about 300 to 350 basis points as it relates to sales. And the EPS number I gave you would also factor in any movement on the advertising side as well.

Thank you.

Thank you, Dana.

We are out of time for further questions at this time. I will now turn the call back to Mr. Light.

Thank you all for taking part in this call. Our next scheduled call is to report the first quarter of fiscal 2018. It’s on May 25. Thanks again, everybody, and goodbye.