Good morning. My name is Tessa and I will be your conference operator today. At this time, I would like to welcome everyone to the Signet Jewelers fiscal 2019 fourth quarter earnings conference 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. Ms. Randi Abada, Senior Vice President of Investor Relations, you may begin your conference.

Thank you. Good morning and welcome to our fourth quarter earnings conference call. On the call today are Signet's CEO, Gina Drosos and CFO, Michele Santana. During today's presentation, we will 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. To begin, I would like to thank all of our team members for their passion in helping each and every one of our customers celebrate life and express love and for leading bravely as we accelerate Signet's transformation plan. In my remarks today, I will first discuss the progress of our transformation and our priorities for fiscal 2020. Then I will wrap up my comments with our financial guidance, cash flow and capital allocation. In fiscal 2019, we launched a three-year comprehensive transformation plan, Signet's Path to Brilliance to reposition the company to be the omnichannel jewelry category leader. The goal of our transformation plan is to drive sustained growth by delivering inspiring products and ideal online and in-store shopping experiences to our customers, funding for the improvements we need in systems capabilities, product and stores comes from driving out costs that customers don't see to invest in what they care about. This transformation will be a multi-year journey that we believe will position the company to drive long-term sustainable, profitable sales growth and create value for shareholders. Over the last few months, we have performed a detailed review of our fiscal 2019 performance and the foundational capabilities developed in year one of Path to Brilliance. Additionally, we have restructured parts of the organization and made leadership changes aimed to position us for success. It's clear that though we believe Path to Brilliance is the right strategy, we must move faster and more aggressively to achieve our goals. The learnings from this last year have been incorporated into our forward plans to improve both execution and financial performance. Year two of Path to Brilliance will build on the foundational capabilities developed during year one while accelerating growth…

Thanks Gina and good morning everyone. I will begin with some brief comments on our fourth quarter results and then move on to our fiscal 2020 guidance and our outlook for the first quarter. As we indicated in our holiday press release, fourth quarter results were impacted by lower traffic in key December holiday gifting weeks, some success in new merchandise that was offset by a faster than expected decline in legacy product collections and a highly competitive promotional environment. Same-store sales of down 2% for the fourth quarter was in line with our guidance. Slight deceleration in January reflected tougher prior year comparisons and the shift of a promotion into the holiday period at Zales. The fourth quarter GAAP operating loss of $84 million reflect a goodwill impairment, restructuring charges related to our Path to Brilliance transformation plan and a charge related to our previously disclosed regulatory matter. We recognized a $287 million non-cash impairment charge in the fourth quarter, of which $261 million is related to the R2Net acquisition with the remainder primarily associated with the Zales trade name. The R2Net impairment is a result of revised long-term financial projections for James Allen as well as an increase in the discount rate driven by a higher risk premium used to value this business. While the R2Net acquisition has enhanced Signet's digital innovation capabilities, the growth of this business has been lower than our initial expectations and has not yet reached profitability. A significant driver of the revised projections is sales tax implementation, which had a larger impact than we initially modeled in combination with a more competitive online marketplace. Our fourth quarter non-GAAP operating income of $241 million was in line with our expectations and declined $82 million or 290 basis points year-over-year. The decline over prior year…

Thanks Michele. As you may have seen from our announcement a few weeks ago, we are very excited that Joan Hilson will be joining us as our new Chief Financial Officer effective tomorrow. Joan has significant financial and operational experience working at a number of retailers, most recently as the CFO of David's Bridal. I am confident that she will bring valuable perspective to Signet and our transformation efforts. I would like to thank Michele for her many contributions to Signet and wish her well in her future pursuits. We also filed an 8-K this morning announcing the departure of our President and Chief Customer Officer, Seb Hobbs, on June 30, 2019. I would also like to thank Seb for his very many contributions to Signet. And now we are ready to begin the Q&A session.

[Operator Instructions]. Your first question comes from the line of Simeon Siegel from Nomura Instinet. Please go ahead.

Thanks. Hi guys. Good morning. Gina, just recognizing the significance of Q4 in the business model, what is the Q4 EPS you are embedding in the full year guide, maybe help at all with the cadence of the first three quarters? And then just a question we get a nice amount, what percent of sales did the CarVal and Castlelake tranche represent this year? And maybe what do you think that will be this coming year? Thanks.

Hi Simeon, it's Michele. So maybe I will start and then if Gina has anything incremental to add, she can. In terms of, it sounds like you are looking for some color or numbers in terms of the fourth quarter EPS guidance and clearly we are not at a position that we are going to do that. We provided our full year guidance and we also provided the guidance for Q1 and including the EPS guidance, we did provide, as I mentioned on the call, operating income to also help facilitate the modeling. But maybe what I can do is provide some strategic color on how we are thinking about Q4 this year relative to last year. So as I mentioned in my remarks, we did a deep dive analysis on all of fiscal 2019 with particular emphasis on the holiday period. So we saw some slight improvements versus the previous year, but obviously did not deliver the results that we were expecting or that we wanted to in Q4. And we have a lot of learnings that will come through in this year. So for example, we think one of our competitive advantages is in being able to understand customers and how they shop, particularly around key holiday periods. And we have identified that there are different shopping behaviors that are occurring in those periods and we are targeting in a better way this year, both our products and our promotions in order to help to access those more value oriented shoppers. I think another thing that we are doing is really building our off-holiday business through, again, our proprietary jewelry category data analytics. I mentioned targeting customers at important gifting times of the year like birthdays and anniversaries. We call those more milestone gifting occasions as opposed to just holiday gifting occasions which are areas where we think that we have a right to uniquely win.

Gina, maybe just taking a -- yes, sorry.

Go ahead. No, go ahead, Simeon.

I was going to say, just maybe taking a step back and reflecting on the work that you have done, just thinking about the comp declines, do you have a view on where the customer, is the customer going somewhere else or simply not making a purchase?

You know, it's more and more a highly competitive environment. I mean we have seen that escalating over the last number of years with a fair amount of deep discounting, particularly during the December holiday period. But our data is indicating that the jewelry category remains a growing category that customers are continuing to look at jewelry as an important holiday purchase as well as a purchase for some of these other milestone occasions and one of the growing parts of the category is women buying jewelry for themselves. And so all of these are things that as we think about our product assortment and our revised marketing plans we will be going after as growth opportunities in fiscal 2020.

Okay. Thanks. And then Michele, were you going to follow up on that CarVal and Castlelake tranche, if at all possible.

Yes. I believe, Simeon, your question was, what percentage related to Zales? And so, we had said at the time, that transaction was really focused on our Kay and Jared banners. As I think, if you go back and you look at -- I am sorry, on what?

Sales, not Zales. Just how large of that business.

So it's sales, I thought you were saying Zales. Yes, I would just refer you back to the information we said at that time and we are not going to get into, you know, pursing out you know, the percentage of sales. But I think if you go back through previously comments that we made related to the transaction, you can get to an idea of what that percentage was.

Great. Thanks a lot, guys. Best of luck for the year.

Thank you.

Thank you.

Your next question comes from the line of Ike Boruchow from Wells Fargo. Please go ahead.

Hi. Good morning everyone. Thanks for taking the question. I guess, Michele, a question for you. I think in your prepared remarks, you talked about elevated inventory position to start the year. I guess can you help us understand, a little bit more color around that, maybe what type of merchandise are you referring to? Is it weighted to any one banner? And then how should we think about your inventory position at the start of the year in relation to gross margin in Q1 and then maybe gross margin progression through the year?

Yes. So I will start with some comments. You are correct. In my prepared comments, I had discussed the inventory levels that particularly related to Q1 and embedded with the guidance we gave, we do anticipate year-over-year to have higher inventory as we are working through some of the legacy product collections and selling through. We do anticipate to have some higher clearance level and that's all factored into the guidance that we gave as part of Q1 and embedded into the operating profit numbers we have provided as well. And then I also mentioned, though, as we progress throughout the year, we will be working through and selling down that inventory. So by the time that we do end our fiscal 2020, we expect that our inventory levels will be in a much better position. And that's been a key focus as we move throughout the year. One, in part of, just moving through inventory, but also focusing on the cash side of it.

Yes. I will just add a little color on that as well. So we spoke previously about two areas in which we were investing in inventories, kind of coming into the holiday season. One was in bridal. We began that investment over the summer and we saw bridal growth across the business in fiscal 2019. We believe that we are getting to a much better mix of offerings on-trend and in our big flagship brands, Neil Lane., Vera Wang Love and Disney Enchanted. And then the second area that we made some investments are in more proprietary fashion designs. And those performed well over the holiday period. The example I gave in my prepared remarks is the Love + Be Loved collection, which we rolled out in a limited number of stores. It performed very well. And so that will become a focus of some of our marketing around Mother's Day. Just continuing to build those exclusive and proprietary lines that differentiate the offering that we have at Signet.

Got it. And then just to reconcile the Q1 and full year guide. Is there some help that you can give us on how this impacts the gross margin? Or how we should be thinking about gross margins?

The comment I would make is, we don't give guidance. The color that we provided, as we had called out, particularly in Q1, elevated levels of clearance, all of that is factored into our guidance. And that also, in part, why we did provide you the EBIT to help in your modeling.

Got it. Okay. Fair enough. Just on the second question, it looks like the credit losses or the impact on EBIT from credit in Q4 was a little bit worse than what you had planned. And the outlook for next year is again just a little bit worse than what you had said prior. Just help us understand the moving pieces there? Why exactly did that take place? Just kind of what's going on there? And what are the drivers of that?

Yes. So in terms of the costs related to the outsourcing of the credit, there is a number of variables that go into that consideration and factors that influence that. One of them being that I called out on the call, it really becomes a variable cost and is depending on the level of credit sales. So if our credit sales over performed compared to our expectation, you are going to have some incremental expense as well as it can also relate to promotional mix with [ABS] [ph] as well as just mix between our prime and our subprime. So all of those factors have been considered as we have given the guidance out into FY 2020. And I did mention that in FY 2020 that we do anticipate the payment participation rate to be a slight decline over fiscal 2019.

Got it. Thank you.

Thank you Ike.

Thanks Ike.

Your next question comes from the line of Lorraine Hutchinson from Bank of America Merrill Lynch. Please go ahead.

Hi. This is David Buckley, on for Lorraine this morning. Thanks for taking our question. Just move quick back to the gross margin, can you quantify the benefit that you expect to see in the first quarter from lapping bad debt expense? And then can you also comment on James Allen's performance in the fourth quarter and your outlook for 2020? Thanks.

Yes. I will start with the first one in terms of the gross margin and we did call out that we are getting the benefits that the prior year Q1 had included two months of bad debt expense. I don't have that with me, but if you go back and if you look at our Q1 filing, you will see a bad debt expense and you can probably come up with the impact and the positive impact that we have in Q1.

And then I will take your James Allen question. So we did see James Allen growth slowed substantially as we came through the year and began collecting sales tax in a number of markets. By the end of fiscal 2019, we were collecting sales tax in just under about 50% of sales as states that represent about half of James Allen sales. We expect that headwind to continue as we pick up some additional large states during fiscal 2020 and by the end of fiscal 2020, we will be collecting sales tax in states probably representing around two-thirds of James Allen sales. We do have though, say, a couple of things. We have some really important efforts going on, on James Allen right now. We are adding jewelry fashion products to our lines and that is a now growing part of the business that is a higher margin business for us. So we feel excited about the opportunities that we have there. We also have added some service plans on James Allen, so another opportunity for us to add value for our customers. And we are doing a lot of work on our algorithms in the technology and customization tools which really are the competitive advantage of James Allen to make sure that we have a best-in-class customer experience. So its' a combination of the headwinds we expect to continue to see on sales tax, somewhat offset by some of these growth initiatives that we are very rapidly putting in place.

Great. Thank you.

Your next question comes from the line of Paul Lejuez from Citi Research. Please go ahead.

Hi. Thanks guys. Can you maybe break down the $60 million to $70 million of savings? Of if you can, maybe even talk about it on a gross basis? And then, what are those offsets of investments that y plan to make? What are the buckets there as well? Also curious on the James Allen business, what is the current carrying value of that asset? This write-down that you just took, does that basically write-down the James Allen asset to zero? Or is there still a carrying value on that asset? And then last, any changes for this upcoming year on the discount rate on the subprime receivables? Thanks.

So why don't I take the first question on cost savings. So we don't guide to gross cost savings. But you are absolutely right, we said that we will have net cost savings of $60 million to $70 million in fiscal 2020. That's on top of the $85 million of net savings that we delivered in fiscal year 2019 and on track for the $200 million to $225 million that we expected across the three years. Our real focus this year on cost savings is direct and indirect procurements, consolidation of facilities, payroll, savings and lowering our corporate costs. All of these are areas where we have identified opportunities that fit very well with our strategy of building a culture of agility and efficiency, simplifying decision making, so that we can move bolder and faster on our initiatives. And our cost savings has always been targeted to allow us to fund growth, right. I mean to get back to growth is a key cornerstone of Path to Brilliance. So the investments that we will be making are really in driving e-commerce, innovation and the mobile experience that customers have. So we move ahead on our first two strategies, customer first and building our seamless omnichannel experience for customers.

Paul, maybe I will pick up your two other questions. I think the second question you had related to James Allen and the non-cash impairment charge we had recorded in Q4 and was that a 100% of the goodwill and intangible balance we had or is there a residual piece? It is not 100% of the intangible value that we had recorded prior to the impairment charge. You will see, we will be filing the K at some point later today. So there is a residual piece. It was a substantial portion of it, I want to say, maybe 80% or so of the balance was written off based on the revised projections and the higher discount rate driven by the risk premium. Your third question, I believe, related then with the MDR rate related to our credit outsourcing. So again, just what I mentioned in the prepared remarks is that, we do expect credit outsourcing to be flat to modest year-over-year headwind to our operating profit for fiscal year 2020. That guidance embeds our view on the MDR rates, as well as you would imagine, there are several other variables, including the overall credit sales, the mix between prime, subprime as well as that promotional mix within our prime. And we have said previously, the MDR rate, it is subject to period adjustment and it could change. But everything has been factored into the guidance that we provided.

Michele, how often does that change?

It's a periodic adjustment. So as I said before, I mean it's not subject to monthly changes. And there's a number of factors that are involved, if that rate was going to change.

Thanks. Good luck.

Thank you.

Your next question comes from the line of Oliver Chen from Cowen. Please go ahead.

Hi. Thank you. We had a question about the product assortment ahead. Where do you see the most opportunities? And how will this interplay with traffic? And your thoughts on the best strategies to prioritize driving more consistent traffic? Would love your views there. Thank you.

Hi Oliver. Thanks for that question. So on product, we really have taken a good hard look at our product strategy and there are three key areas that we are prioritizing as we go into fiscal 2020. We laid some of the groundwork for this in fiscal 2019. But we will be able to move, I think, bolder and faster into it this coming fiscal year. Those three strategies are building iconic flagship brands. Good examples of ones that have been working for us are Vera Wang Love, Neil Lane and Disney Enchanted and also some of the proprietary brands that I talked about. We have developed a new customer testing methodology, so that we are screening more new ideas faster and that will allow us to bring more of these iconic flagship brands that we can holistically market through a digital, social and TV program as well as new fashion initiatives. And then if I just kind of shift into fashion a bit we also, as the two other points of our merchandising strategy, see how important it is for us to have good offerings, really competitive offerings for the value-oriented shopper, especially around key holiday periods and to have a higher mix of on-trend product. So we have excellent vendor relationships. We are looking across the world for great trends to be able to bring to our customers. And I think we haven't been leveraging that competitive advantage historically as much as much we will going forward.

Okay. And I know you have really dedicated a lot of effort thinking about Generation Z and millennials. A couple of trends we are seeing is, is the arise of the on-demand economy and Jewelry-as-a-Service as well as added transparency from search engines online. Could you just give us your thoughts about how you are thinking about those as they are part of the new customer and how Signet can remain agile in a time of change?

So bridal remains an incredibly important part of our business and while we see customers of all ages getting engaged, it really does skew to that younger Gen Z and millennial target audience. So it's one that we spend a lot of time with. One of the great foundational capabilities that we got in place in fiscal 2019 is really understanding the details of the customer journey. So being able to dissect that in a bridal context and how our customers are acquiring information, what they expect from selection, the kind of curation that they expect in store and online. Time is an incredibly important commodity to these customers. And so how do we make sure that we are fast and allowing them to get the information and the selection that they really want. So I think that's very much part of it. That's a lot that's behind our shift to a more digital and social media platform and leveraging our data to better target messaging to people when and where they need it. We also, given our size and scale, have developed some proprietary relationships with a number of the different social media channels and believe that we can leverage those to make sure, again, that we are creating community among these target audiences. And then the final thing that I will mention is, Signet continues to be a leader in corporate and social responsibility. We will be publishing our CSR report next week and I hope you all take a chance to read it because I am very, very proud of the stance that we have taken on responsible sourcing, on environmental sustainability, on diversity and inclusion in our organization and also on philanthropy. And we know that this generation of consumers is voting with their pocketbook for companies that really represent their values and I believe that Signet is uniquely that company within the jewelry industry.

Thanks for those comments. Best regards.

Thank you.

[Operator Instructions]. Your next question comes from the line of Dana Telsey from Telsey Advisory Group. Please go ahead.

Good morning everyone. As you think about the legacy products and the weakness there, how do you plan to up for fiscal 2020 new collections or introductions we should be watching for? And then on your real estate portfolio and the shift from mall to off-mall, impact of occupancy costs, what percentage of your real estate do you expect to be in off-mall going forward? Thank you.

Hi. So let me take both of those questions and then Michele chime in with any details. I think one of our biggest learnings over the last year-and-a-half since I have been here, has really been the pace of change and customers' appetite for new and different. So product life cycles that might have been four or five years in the past are shorter than that now. And so what we are really developing is better predictive capabilities so that we can more quickly understand where we are in that product life cycle and move through it and have other new offerings in place. I mentioned, for example, that one of the legacy, actually two important kind of legacy product collections that negatively impacted our business in fiscal 2019 and particularly holiday were beads and Ever Us. Those are examples of things we did not move through fast enough from a product life cycle standpoint and we have learned from that and we will be better prepared to do that in the future. I think from a real estate footprint standpoint, we have been aggressive in optimizing our real estate portfolio. And as I mentioned in my remarks, it's really to meet customers where they are and create that ideal omnichannel experience for them, but as we rationalize that store footprint, we are better able to target investments in creating a more digitally-enabled and more curated store experience. More and more, our customers are getting and understanding our selection online before they ever come into our store. About 70% of our customers now have already shopped one of our online sites before they walk in the door. So they understand already a bit about our selection. What we want to do is help them understand more about our expertise and our service to really help them find the right products once they get in store and we can do that through a combination of our outstanding store staff and expertise, but also more digitally-enabled footprint. We have seen better performance from our off-mall locations. And so we have been moving systematically out of lower performing malls and simplifying by moving out of regional banners. So I am feeling very good about the work that we have done moving out of over 260 stores in fiscal 2019 and we are guiding to moving out of another 150 in 2020. Some of those that will be replaced by great off-mall locations that we have identified based on our trade market data analytics.

Got it. Thank you. And just one quick follow-up. Given the impact of store closure on sales, how did that help or hurt operating income? And how do you look at it go forward? Thank you.

So Dana, it's Michele. When we think about the impact of store closures from total sales and how that flows to the bottomline, one of the items that we have talked about is our sales transference rate that we have been very focused that when you look at the stores that we are closing and the geographic ring that surrounds it where we have either another banner or a sister banner, we have been pretty successful in capturing a sales transference rate to mute impact to the bottom line.

Thank you.

There are no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.