Good morning. My name is Leandra and I will be your conference operator today. At this time, I would like to welcome everyone to Signet Jewelers Fiscal Q2 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Randi Abada, SVP of Investor Relations, you may begin your conference.

Thank you. Good morning and welcome to our second quarter earnings conference call. On the call today are Signet’s CEO, Gina Drosos; and CFO, Michele Santana. During today’s presentation, we will in places 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 and quarterly reports on Form10-Q. Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events. During the call, we will discuss certain non-GAAP financial measures. For a discussion of the non-GAAP financial measures as well as reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures, investors should review the press release we posted on our website. I will now turn the call over to Gina.

Thank you, Randi. Good morning, everyone and thank you for joining today’s call. I'll begin with a brief overview of the second quarter and then move on to an update on our Path to Brilliance transformation plan and how it is beginning to impact our business. I'll wrap up my comments with a brief overview of the changes to our full year fiscal 2019 guidance. During the second quarter, we continued to execute on our Path to Brilliance transformation plan and saw early signs of operational improvement in our business. We are in the initial stages of a multi-year journey to invest in growth under our three strategic pillars of customer first, omni-channel and culture of agility and efficiency, which are enabled by driving out costs customers do not see or care about. I would like to thank all of our team members for their hard work and support of our customers. The entire Signet team is intensely focused on our plans to deliver the important holiday quarter as well as laying the foundation to be a share gaining omni-channel jewelry category leader with sustainable profitable growth. With the closing of the sale of our non-prime receivables this quarter, Signet has completed the strategic transaction to a fully outsourced credit structure. This allows us to focus squarely on our core retail jewelry business and enables significant cash returns to shareholders. Together, the prime and non-prime credit transactions generated nearly $1.4 billion in proceeds enabling the repurchase of 25% of shares outstanding. And now I will provide an overview of our second quarter results. Our results in the quarter reflect signs of stabilization in our sales performance with total company same-store sales up 1.7%. Although it is early in our transformation journey, we've started to see our results impacted by transformation…

Thank you, Gina and good morning everyone. I'll begin with a review of our second quarter results and then move on to our updated fiscal 2019 guidance and our outlook for the third quarter. For the second quarter total sales were $1.4 billion, up 1.5% year-over-year on a reported basis and up 1.1% on a constant currency basis. Same-store sales growth was 1.7% inclusive of one, a 40 basis point benefit from a planned shift in timing of promotions at Jared out of the first quarter into the second quarter. Two, an unfavorable impact of approximately 160 basis points due the transition issues related to the October 2017 credit outsourcing and three, as Gina mentioned in her remarks, as part of our initiatives to increase newness and refocus our product assortment, there were incremental clearance sales in the quarter which positively impacted same-store sales by 240 basis points. In addition, James Allen generated $54.4 million of revenues in the second quarter with a favorable impact of 80 basis points on same-store sales. Other items which did not impact same-store sales but impacted total revenue dollars included the following four items: First, the adoption of new revenue recognition accounting standards which contributed $24 million in sales; second, a calendar shift of weeks in the quarter which resulted in a Mother's Day event in Q1 that was held in Q2 of the prior year. Note that this shift has no impact on same-store sales and same-store sales calculations were adjusted to comparable weeks. The net effect of realigning the weeks following our 53rd week fiscal year including the Mother's Day shift was an unfavorable impact of approximately $50 million. Third, an unfavorable impact of store closures of $34 million partially offset by new store openings and fourth foreign exchange benefit of $5…

Thanks, Michele. Before we proceed with our Q&A session, I would like to finish my prepared remarks by discussing the announcement we made today regarding my colleague, Signet CFO, Michele Santana. Michelle will be leaving Signet after eight years with the company and I want to publicly thank her for the positive and lasting impact she's had on Signet and the partnership we have shared since my appointment as CEO. Michele played an instrumental role in many significant Signet milestones including the completion of our credit outsourcing transaction, the acquisitions of Zales, Ultra and R2Net and the launch of our Path to Brilliance transformation plan. With the completion of these major milestones reflected in our year-to-date result this morning, Michele felt that now is the right time to announce her intention to leave Signet and pursue new opportunities. We are committed to an orderly transition. Michele will remain CFO until her successor is appointed and then serve in an advisory capacity to ensure a smooth transition. We’ve commenced the search for a new CFO with the assistance of an executive recruitment firm and expect to name Michele's successor by the end of fiscal 2019. This is a critical hire to lead our financial operations as we progress through our Path to Brilliance transformation plan. Once again, I'd like to thank Michele for her many contributions and her ongoing commitment to Signet. This is a remarkable time for our company. We are well positioned as we continue to implement our Path to Brilliance transformation and we have a very strong team in place and are fully committed to delivering great results for our customers and our shareholders. And now with that, we are ready to start our Q&A.

[Operator Instructions] Your first question comes from the line of Rick Patel with Needham & Company. Your line is open.

Thank you. Good morning everyone and congrats on the progress. I'm hoping you can talk about the opportunity to improve operating profit over the next couple of years. After the efficiency savings this year you're still going to have another $120 million left to go, and so given the year-over-year impact of credit won't be a major headwind in fiscal 2020 what would prevent operating profit from growing by $120 million over the next two years? I recognize that comps are the biggest driver here, but hope you can do some color on the offsetting investments you may need to make given so much of the heavy lifting is being done this year.

So why don’t I take that question, so as you imagine we're not providing a margin target in terms of longer term out, but do expect both our top and bottom line financial performance to have a gradual and incremental improvement over time as we continue to implement our Path to Brilliance initiative. And as we talked about our Path to Brilliance initiative, it does embed reinvestments that we'll be making back into the business to support and drive our future performance, so we'll continue to test and learn and see how our initiatives take hold, how the market responds to the initiatives to really drive that top line growth and also to enhance the operating margins as we move forward.

I'd just mention two other things related to our key strategies for Path to Brilliance. On the customer first strategy as we strengthen our brand equities and get our value placements right across our business, we think that gives us some room to continue to improve on operating margin front, and the second is cost savings. We're really working on that not only from a very well defined plan for this year, but also on building a cost conscious and entrepreneurial culture within the company so that we're consistently driving out all costs that customers don't see or care about to be able to reinvest in that top line growth.

Yes, maybe just one other follow up point Rick, just when we think about the fixed cost nature of our business, it does mean that there's significant operating leverage both up and down depending on what our revenue growth is, and I think that's something we're going to be able to better access longer term our same-store sales outlook after the key holiday season in that operating margin rate outlook as well.

Thank you. I also have a question on lab produced jewelry, so we've seen a growing number of products in your assortment with lab produced gemstones like sapphires and rubies, curious to know how customers have responded, your plans to scale that further, and also plans to potentially expand that into diamonds?

So I’ll take that one. Rick, as you probably know we don't carry lab grown diamonds in any of our banners today, but we have a very customer first mindset on this and we want to focus on delivering the products and experiences that customers want. So we are very closely monitoring and assessing the demand for this emerging category. What our research shows is that customers prefer natural diamonds for those really important purchases, bridal purchase, special birthday, graduations those kinds of things, but there could be some growing interest in the fashion jewelry space for synthetic diamonds. So we'll make sure that Signet is well positioned to participate in that space if the growth and the economics of it are attractive and if customers point us in that direction.

Thanks very much.

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

Hi, thank you. You made a lot of progress at the Kay Banner so far. What are your thoughts on what it will take to get sustainable positive comps like Kay? And it was also interesting advertising -- your decision around advertising, what was driving that and are there any banner specific details on how you'll spend that money and what medium as well, that would be great? Thank you.

Sure. Thanks Oliver. So I think across all of our banners the key things that we expect to positively impact our business especially as we move into that all important fourth quarter are these new banner positionings. We have I think done a very disciplined job on understanding our customers really making sure to differentiate our target audiences, broadening the appeal collectively of our banners by creating more differentiation between them. And as I mentioned in my prepared remarks we tested those positionings and have seen both higher purchase intent for all of our banners including Kay as well as more differentiation and opportunity to broaden our appeal to women and millennial consumers, so I think that’s an important piece. The other piece that I'd point to is our efforts in data science, in analytics that we've put behind creating more personalized marketing. I mentioned the always-on bridal campaign for Kay. The facts of the matter are only 2% of people in the country will get engaged in the next year and while broad scale marketing can be effective in helping people to understand our brand equity and the new and exciting merchandise that we carry targeting them on their journey at those right touch points is what really matters. And so as we have moved more of our effort to the right search terms, the right targeted social programs that kind of thing we're seeing an improvement in Kay and we back that up with putting more premium diamonds, larger carat sizes, more fancy stones, more solitaires because those are trending in the Kay and we saw a very positive response. So I’d say the big picture is back to what are those key things customers care about and the brand equity, the value equation, the right products we are single mindedly focused on making sure we get that right for our Kay customers and then differently for our Zales and our Jared got to customers.

And Oliver, the other thing I would just add quickly to that is, keep in mind we'll be laughing the credit outsourcing in the prior year which impacted Kay more heavily than the other banners as well.

Okay and Michele best regards and great to work with you. On the operational issues related to credit improving, you did mention that you're monitoring that and you've made some nice improvements there. But what are you looking for in monitoring because the holiday selling season is very significant and that's an issue where you'll watch the impact with interaction between sales and customers? And another question we're receiving this morning is in relation to clearance sales. In terms of clearance sales how are you incorporating that in your guidance and how is it impacting earnings per share in terms of gross margin dollars? Thank you.

So why don’t I start on the credit piece and then Michele you can kind of pickup. I think, overall there are kind of two things I'd say on credit. One is that our goal is to offer a comprehensive program for our customers, so that wherever they are on their life journey they can be able to celebrate life and express love with their loved ones in the right way. And so you know that we offer a full suite of financial products for them to choose from whether that is using their own credit card, our Kay or Jared, Zales cards or whether that is using our leasing program which we've just added and so that I think is overall what we're really aiming to do. Now our application rates and things like that will continue to be influenced over time by mall traffic trends and where customers are generally in the economy, but I think we've got category leading suite that we can offer them. The second piece is how are we doing on fixing the operational issues that we saw when we did the transition last fall and those operational issues really sum up the two buckets one were technical issues and the other were training kind of changes we really more dramatically even than we had anticipated changed the process about how we offer credit to our customers. On the technical side we have made all of those changes and we've seen good results from that. We have tested those inside now and we feel like we are positioned well as we go into a busier time of year. And on the training and process changes we have really going from the bottom up on that getting feedback from our associates and then developing new programs and training plans that help us make that a very seamless process for them in-store and with our customers. So that's the part that we're really focused on here in the third quarter getting ready for holiday is making sure that we have everyone trained and feeling really comfortable with offer credit on our stores.

And then if I address your question in clearance, I guess a couple points on that front. As we mentioned on the call is part of our merchandise strategy. We continue to work to increase the newness and we're refocusing our product portfolio tied in conjunction with our banner repositionings that we're doing as well. And there's always a certain level of clearance that we have in our business, but we did make a decision to add incremental clearance in order to accelerate this strategy and ensure that we're freeing up store space for the newness. So we did clear certain products related styles, colors, brands as part of the second quarter and we also I mentioned in prepared remarks that we expect to have some higher incremental clearance sales in the third quarter. When you think about that impact in terms of margin, in the prepared remarks I mentioned that our non-GAAP gross margin rate was 34.5% up 180 basis points over last year and what we saw as our transformation cost savings related to a number of initiatives, really help to offset the sales to leverage as well as that higher mix of clearance sales, so it’s embedded in that non-GAAP margin rate. And then as we think about our guidance, clearly when we talk about a higher level in Q3 that's factored into our guidance as well as our full year. Generally, when we think about fourth quarter, typically clearance is a smaller percentage of the total product mix for us.

Thanks for that clarity and best regards.

Okay, thanks Oliver.

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

Good morning. Thanks for taking our question. This is [indiscernible] on for Brian. I guess two questions for us. The first one is a clarification or a follow up from Oliver’s question now. Help us understand the margin impact of the promotional incremental promotions you called out this quarter. I know you mentioned that 440 basis points impact from restructuring charges related to an inventory charge. Is that all related to the incremental promotions or how would merchandise margins would look like if you only included impact of promotions in the gross margin not the charges maybe but just promotions that you run that through all. I think you called out 240 basis points of comp this quarter.

Yes, so let me try to clarify, because I want to make sure it is understood on the two components. So in the prepared remarks and I talked about our GAAP gross margin rate and when we look on a GAAP basis our gross margin rate was down 260 basis points over last year and that was reflecting 440 basis points or an inventory charge that we took of $63 million that relates to products that we are discontinuing. So that is separate from when we talk about the higher level of their sales. So non-GAAP the 440 basis points is the inventory write-down. And then when we think about what you refer to as our non-GAAP gross margin which was up 180 basis points was excluding the inventory write-down but includes the higher level of clearance. That was up over 180 basis points. And as I said on the prepared remarks, we really did see an impact from a higher mix of clearance given the transformation cost savings that we saw. And then you are correct, we did call out that as part of same-store sales we saw a 240 basis points positive impact related to the higher level of clearance. So hopefully that helps to clarify what's rolling through the gross margin.

Okay, yes this is very, very helpful thank you for that. And then the second question is on the category growth, clearly your results are showing a very nice improvement here and the industry data we get also looks more encouraging. So would you say at this point maybe the versus behind us in terms of jewelry store closures out there and the promotional environment, and I know last three-year is part of the reason for lackluster I would say industry sales was sort of a lack of broad based fashion trends to drive sales. But beyond the - beyond your own product introductions planned for the second half are you seeing any exciting trends emerging maybe into the holidays?

So, let me see if I can answer those questions kind of in the order you asked them. So number one, overall we see a healthy jewelry category. We continue to see growth in the low single digits and we continue to see customers of all ages desire jewelry as one of their top three to five items they like to receive for a gift, millennial consumers commemorate their engagements with diamond rings, all of that is contributing to this low single digits growth which has been pretty consistent over time. I think in terms of closures, yes a little bit about that, we see increasing closures of independent jewelers and that has been a trend that has gone off and on for the last several years that most recently we've seen a little bit of a pickup in that trend. In terms of promotions in the environment, we always expect a heavy promotional period in the fourth quarter and so I wouldn’t expect this year to be any different from that, usually you know department stores participating very actively in that. What we're really focused on is understanding our overall value equation which is the combination of rate irresistible product and so we're really focusing on newness and consumer driven innovation in the product area. We're focused on exceptional service. No one understands diamonds and jewelry better than our sales associates out in the stores and providing exceptional service and then doing that with the right value equation, the right pricing and promotion combination that delights them in those purchases. So that's kind of what we'd expect on the promotional environment. And then in terms of trends, definitely we're seeing some very interesting trends and this is an area where we see Signet as a leader is in that…

Thank you very much. Best of luck.

Thank you.

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

Thanks. Hey guys, good morning and congrats on a positive comp and improve results. Just a few quick clarifications if I can Michele. The products from the $63 million charge is that still on the books was it already sold or are you not planning to sell it and I guess what were the margin assumptions you used to determine that amount? Recognizing the different promo and clearance shifts, can you just explain or kind of talk to why transactions would be down but the ATV was up? And then the last one within that $32.5 million of credit outsourcing costs, I'm assuming that's not just a one month of the MDR, so can you just help us think through what that includes, that would be helpful? Thanks.

Yes, so I'll try to remember the question as we go through so remind me if I forget. So starting in terms of the inventory, basically what the inventory charge, the $63 million, we wrote the inventory down so there's a reserve that sits on the balance sheet for that inventory as we move through disposition of it. It basically relates to discontinued collections various products that we'll no longer be offering in our store and again it all in tied terms of our Path to Brilliance as we're bringing in a lot of newness. Ahead of the holiday season and for the holiday season we need to make room in the store. So I'm not going to get into specifics in terms of the margin assumptions related to that write down charge, but we always know that there is inventory that we are disposing off, there is always value in terms of the gold and the diamond associated with that. Your second question, remind me on your second question?

So this transaction…

Transaction, right, ATV and transactions, yes so keep in mind one of the things that has been impacting our transactions for a period of time that I think I believe we continue to call out and it’s a hurt to the transactions but it's also help to the ATV as the bead and so our churn [ph] memories, other bead programs within our banners we’ve continued to see that decline and as we've talked about, we have an exit strategy related to our owned bead brand, so that's the primary driver that you're seeing there. And then you had a question in terms of the credit outsourcing and the costs that we saw in the quarter, so that the combination of our credit outsourcing closed the transaction in June, so the fees associated with that. And I guess also considering the whole when you take the total amount is the bad debt expense removal of the bad debt expense removal of the finance charge income and the outsourcing associated with that I think that all came to a net $39 million.

So the 32.5 I just want to confirm that's not just one month of the MDR right that there's more in there?

Let me go back and revisit, there should be more than just one month because we closed at within June, so yes a little bit more than month.

Okay, great. Alright, thanks lot guys, best of luck for the rest of the year.

Thanks Simeon.

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 actually Tom Nikic on for Ike. I had a quick question about the Jared banner, I know you said that there was a, I think it was 195 basis points benefit from a promo shift, but even excluding that there was a pretty substantial acceleration from Q1 to Q2 which you didn't really see at Kay. And so I was wondering if there's any reason why Kay would be more affected by the credit disruption than Jared would and if maybe some of those - more of those clearance promos that increased the comp, flowed through Jared rather than Kay, I'm just trying to get a sense on the difference between those two banners? Thanks.

Sure, so to directly answer your question on credit. Yes, as we've said since we did the outsourcing last fall, Kay is disproportionately affected by our credit transition issues. Higher percentage of our Jared shoppers are using their own credit cards, American Express, Visa, Master Card, Discover, and so that makes the impact on take greater. The bigger thing that was driving Jared’s business was response to changes that we made in our product merchandise and our value equation. So I mentioned that under our customer first strategy we have gone back and done very detailed shopping journey understanding with our customers and we understand that when they're coming into buy a bridal engagement ring particularly loose stone, they're doing a lot of online comparison. So they are on jamesallen.com, they are on bluenile.com looking at pricing as they are standing in the Jared store getting ready to make a purchase. And so, we have really tried to make sure that we are benchmarking across all different competitive sets to offer a superior product line and better service at what is a great value for customers. So we rebalanced some of our offering. We've brought in higher quality stones into our Jared stores because we found that that premium merchandise was more with our Jared shoppers are looking for and that newness and refocusing is beginning to show some there.

All right, thanks very much, best of luck in the back half.

Thank you.

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

Great, good morning. Thank you for taking the question. I wanted to follow up on some of the front line store staffing, store level staffing, you highlighted increased sales commissions as you know sales have been trending ahead as planned. I was curious if you're seeing any increased levels of turnover at the store level or other wage pressures as the market tightens to some degree, especially as you look to improve I think stability in the customer experience after implementing a lot of operational changes in the field organization over the past year. Thank you.

No, it’s really related more as Michele said in her remarks to the commissions. In fact we've had an ongoing program over the last number of months to reduce unnecessary tasks in our stores to really free up our consultants to spend more time with their customers and less time on pricing changes, merchandising changes, reporting, things like that and we're seeing some really positive benefits on that not only in employee engagement, but also in terms of efficiency we think in our store staffing which is something we can do going forward.

It’s Michele, I want to go back before we take the next question just try to clarify Simeon's question on the $32.6 million that are rolling through SG&A related to credit outsourcing. I just want to make sure that it is clear that if you go back to Q1 I mean we had about $24 million of credit outsourcing cost, when you exclude the offset in savings. So the increase that we're seeing over the quarter is the combination we talked last quarter promo plan mix and there's a cost associated with that, then combined with the month and a half or so that we saw finalizing the outsourcing of the non-prime receivables, so I just wanted to come back and clarify the increase from Q2 to Q1.

And your last question comes from the line of Paul Lejuez with Citi. Your line is open.

Hey, thanks guys. Can we just go back to the inventory charge for a second Michele? How much of that was related to product that was already sold in the second quarter versus product that will be sold in future quarters? A - Gina Drosos Yes, so in terms of the inventory charge that really is going to be the discontinued inventory items that we're pulling from the stores to make room for store space. So it is separate from how we look at the levels of clearance that we saw within the second quarter.

Right, but was that inventory that was sold and benefited sales in the second quarter or would that benefit sales in future quarters or is it destroyed?

Yes, so there's no impact in terms of the products that were already sold, so it's not related to Q2 products that we sold. It's inventory that we're discontinuing that we're going from the stores to make space for the new products and then we evaluate the disposition method because there is still as you would expect, there is still value in the inventory items where you can pop the stones to diamonds or the gold, et cetera, but it will be moved out of stores and disposed of in different methods.

Got you. And then just what was the merchandise margin rate this quarter and the second quarter including the clearance sales?

Yes, so we don't disclose our merchandise margin rate. We've provided the gross margin rates which when you exclude the inventory charge we said was up a 180 basis points and in the prepared remarks we provided the drivers of those, the most significant being 350 basis points since we're no longer recognizing bad debt expense, and then we also did make a comment that our transformational cost savings that falls into gross margin that helped to offset sales de-leverage as well as the higher mix of clearance sales.

That’s it. Thanks, good luck.

All right, thank you.

Thank you.

And there are no further questions at this time and this will conclude today’s conference call. You may now disconnect.