Good morning. My name is James and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Signet Jewelers Fiscal 2020 First Quarter Earnings Call. [Operator Instructions] Thank you. I'd now like to turn the call over to the SVP of Investor Relations, Randi Abada. Please go ahead.

Thank you, James. Good morning and welcome to our first quarter earnings conference call. On the call today are Signet's CEO, Gina Drosos; and CFO, Joan Hilson. 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 who provide outstanding customer service every day and who are doing important work delivering our Path to Brilliance transformation initiatives to our customers. In my remarks today, I'll start by discussing first quarter results and then move on to progress of our transformation. I'll wrap up with some brief comments on our financial guidance. Our first quarter results reflect progress against the year two Path to Brilliance priorities we announced on our last call. We continue to improve our operations, while navigating through a very competitive U.S. retail landscape with soft traffic trends and a difficult UK macro environment. While it is early in the year, we continue to grow e-commerce sales, are beginning to see some momentum on our fashion product performance and our commitment to cost discipline is positively impacting operating profit. Additionally, we've made solid progress on inventory management and generated strong free cash flow in the quarter. Here are some highlights of our first quarter performance. We delivered same-store sales growth at the lower end of our guidance range, with total company same store sales down 1.3%, e-commerce was up 12.6% in our North America banners, excluding James Allen and up 5.3% on a consolidated basis. James Allen experienced continuing pressure from the implementation of sales tax. In brick and mortar, we continue to see softness in transactions and high levels of competition in key promotional periods. We continue to execute on our new product strategy to build bigger, iconic and inspirational flagship brands, offer a highly competitive assortment for value-oriented shoppers, especially during holiday periods and deliver relevant on-trend products. In the first quarter, we continue to see benefits from…

Thanks, Gina. And good morning, everyone. I'm pleased to be here today on my first earnings call as Signet's CFO. And I'm excited to join the Signet leadership team. I look forward to meeting with many of you in the months to come. In my remarks, I'll cover the highlights of our first quarter financial results, then discuss our guidance and conclude by sharing my initial priorities. Beginning with our first quarter results. In the first quarter, same store sales declined 1.3%. North America showed strength in Piercing Pagoda and e-commerce, offset by softness in bricks and mortar in our larger banners. International results continue to reflect the challenging operating environment in the U.K. Revenue declined 3.3% reflecting lower same-store sales, the impact of net store closures and the impact of foreign exchange. Gross margin expanded 220 basis points in the quarter and was impacted by a number of structural items. First, the outsourcing of our non-prime receivable portfolio resulted in a benefit of 320 basis points as we lapped two months of bad debt expense in the prior year quarter. Second, there was an unfavorable impact of 65 basis points related to higher year-over-year sales of diamonds to third parties from our diamond polishing operations in Botswana. The sale of these diamonds that cannot be used in our own banners, with the objective of recovering our cost generates cash flow, but has an unfavorable mix impact on our gross margin rate. We expect higher year-over-year sales of diamonds from our Botswana facility in the remainder of fiscal 2020 and have incorporated the margin rate impact in our guidance. And finally, as expected, there was an unfavorable impact of 25 basis points related to the timing of revenue recognition on service plans. Importantly, we stabilized merchandise margin in our North…

[Operator Instructions] Your first question comes from the line of Rick Patel from Needham & Co. Go ahead please. Your line is open.

Question on your digital performance. So you're seeing lower comps for James Allen, but higher comps for e-commerce in the legacy banners. Can you just help us understand the disparity in your expectations for the rest of the year? And as we think about your product strategy at James Allen, would you consider selling branded merchandise there to reinvigorate sales?

So, we continue to expect growth in our overall e-commerce business for the year. As I talked in my remarks, our omni-channel strategy for the last over a year and a half has really focused on making improvements in the customer experience, both by reinventing our web platforms and by adding new functions and features, especially to the mobile experience, so things like our configurators which - we've seen the sales virtually double in those in just a year will continue to be emphasis for that program. James Allen continues to add more states collecting sales tax. In the first quarter, California came on board, and so we expect continuing headwinds on James Allen for the rest of this year, certainly, as we weather all those changes in sales tax. We do sell branded merchandise on James Allen. We have a number of designer bridal jewelry brands that we carry, and they do very well. We have a very discerning customer who comes to James Allen, nice transaction value, ticket value there. And so, we make sure that we're offering a broad range of not only high-quality diamonds, but also beautiful semi-mounts from different designers.

Could you also touch on the outlook for gross margins? After the impact of credit outsourcing, it is completely in the base. How should we think about gross margin progression as we think about the various puts and takes? And big picture, where do you see the biggest opportunity to drive gross margin improvement for the underlying jewelry business?

So, the big picture response to that is that, as we drive through our inventory management program and effectively manage through our clearance, which is truly in the guidance that we've given for the year, we believe that as we continue to implement those programs that will be able to positively impact gross margin. In the long term, the cost initiatives that Gina mentioned in her prepared remarks on procurement is also very important to improving the merchandise margin. And as we look at the - as we look at the stabilization of merchandise margin, and turn to growing our services business, that will also help us to have a positive impact on our merchandise margin.

The only thing I would add on that is, as you know, we changed our merchandise strategy last year. The first pillar of that is building differentiated proprietary brands, Love + Be Loved is being a good example of that. And so, we see that as an opportunity also to build margin over time.

Your next question comes from the line of Simeon Siegel from Nomura Instinet. Go ahead please. Your line is open.

Can you - first off, any color you can give on the current comp trends just given the comments about the softening retail traffic? And then, Gina or Joan, just recognizing the significance that Q4 plays into your business model, can you help with what you are embedding for 4Q EPS within the full year guide? And then just lastly, Joan, just wanted to clarify did you say you expect the MDR to increase in the back half? Thank you.

Hi, Simeon. So, I'll start out and then I'll turn it over to Joan for, I think, your last two questions. On the first one, we have seen some softening trends in May that is embedded in our guidance. Consistent with many other retailers, we're seeing some softer traffic trends. We do continue to see a higher percentage of sales from our new merchandise. And as we work through some of our legacy collections and get a higher percentage of new into our stores, we think that we have - we are strengthening our closure opportunity certainly for the people who are coming in. Also have a number of training initiatives going on with our field team. They continue to be one of our biggest competitive advantages, so that as traffic trends go down, we're still creating a differentiated and truly best-in-class customer experience in the store.

Simeon, to address the credit impact. As I mentioned in Q2 quarter, Q2 was the last quarter we lap the completion of the outsourcing of non-prime portfolio. So, we have additional SG&A costs related to sales to our non-prime customers with no offset for elimination of bad debt expense, which we had in Q1. So, that's why it's higher in the second quarter. And then, I did mention in our comments that we have incorporated an expectation of an MDR change for the second half of the year into our guidance. And as a reminder, we have updated our credit guidance for full year fiscal 2020 to flat from flat-to-slightly down, given the performance that we saw in the first quarter.

And then anything in terms of the Q4 EPS that's embedded in the guidance?

Well, what I can tell you is that, when you look at our guidance in - the guidance range for the year, on the low side, the first half is down 2.4%, in the back half on the low end is down 2.7%. On the high end, front half of the year is down 1.9%, and in the back half of the year, the high-end could be down 1.2%.

[Operator Instructions] Your next question comes from the line of Ike Boruchow from Wells Fargo. Go ahead please, your line is open.

I guess to follow up on Simeon's question about May. Gina is there any way you could help us with where the softness is. Is it across the entire portfolio or is it more specific to one of the banners understanding that Jared has more headwinds than some of the others with the legacy bead business, Pandora business, just kind of curious if you could help us understand where that weakness is coming from.

Yes, what we're seeing is largely a decline in the retail mall traffic. We have a number of initiatives that we've put in place. As you saw from the first quarter numbers, the softness that we experienced was largely in James Allen and in Zales; James Allen, we expect to continue given the sales tax issues. Zales saw some softness on unbranded bridal, and so we've put some new programs in place to really shore that up from a product standpoint, and have a new advertising campaign as part of our always-on media model launching this summer. So, I think we've got some good initiatives coming, but like all retailers, we saw softening in the traffic trends in May. The only thing I would add to that is that, as a reminder, we mentioned that there was a promo-shift from Jared into the first quarter from the second quarter of last year.

And then just two quick ones for you Joan. On the SG&A, I believe you said there was some kind of timing shift that help you in Q1. I assume that's going to hurt Q2, was wondering if you could quantify that for us. And then I think you said, free cash flow should be up year-over-year ex the credit sales. So just to make sure my numbers are right does that mean free cash flow should be above, I think it was 120 million in free cash last year?

Yes that's accurate for the free cash flow for the year and then the SG&A was favorable by 5 million in the first quarter. We expect that to impact the balance of the year not fully in the second quarter.

Your next question comes from the line of Paul Lejuez from Citigroup. Go ahead please, your line is open.

It's Tracy Kogan filling in for Paul. I have two questions, the first is a clarification, you guys mentioned I think 30% of your goods coming from China. And I just wanted to find out if that just on jewelry or does that include non-merchandise items like boxes and packaging. And then my second question was about the credit penetration, but within the credit penetration and whether you saw increased penetration of the leasing sales? Thanks.

So I'll take the first one the 30% referred to merchandise, there is additional but quite small impact on boxes packaging, things like that in the quarter and just like we are in merchandise we have a multinational supply chain. And so, we are looking at opportunities to work that with our vendors and reduce any impact to the company or to customers through pricing and now let Joan answer the second.

Well, we don't give guidance sort of the details around our leasing program itself our credit penetration. The plan participation rate was 50% versus 51.1% in the prior year first quarter. And just as a reminder, on the Q4 earnings call we guided to a slight decline in payment participation rate for the year.

Any color you can give on the leasing, whether customers are, maybe you can quantify but just whether anecdotally customers are gravitating toward that choice?

Yes, we feel that leasing based on what we're seeing with the leasing option is a positive for us with the non-prime customer those that would have normally participated with that offering are migrating nicely to the leasing program. So we see it as a positive and a good offering an important to our customer.

Your next question comes from the line of Dana Telsey from Telsey Advisory Group. Go ahead please, your line is open.

I noticed on the commentary - and welcome Joan, that now there is – around 150 store closures before it was more than 150. At the end of the day, where do you want to be for each concept in terms of stores and anything different in the UK from here in the U.S. and is there more rent negotiation opportunity for you? Thank you.

So we are anticipating closing at or around the 150 stores this year. As you know last year we over delivered the guidance that we had given on store closures. So I think we continue to take a very disciplined and analytical approach to store closures. Looking at trade areas, looking at sales transference really making sure we are creating a smaller but more optimized store base since we see that as a competitive advantage. What we have guided. Is that by the end of the transformation program the three years. We expect the store count to be lower than it was at the beginning. So I anticipate that this program of discipline will continue. At the same time, we work on growth concepts as well to be able to successfully make sure we're covering all of our banners and our customer base. Piercing Pagoda is an example of a banner that has consistently been growing very well. And so we have a discipline around looking at new concepts on the other hand. In terms of UK versus U.S., we have store closures going on in both markets and the process is similar. And in terms of rent negotiations absolutely, we continue to leverage our scale and partnership with larger landlords to work on optimizing our space, but also negotiating rent reductions.

Your next question is from the line of Omar Saad from Evercore ISI. Go ahead please, your line is open.

This is Westcott on for Omar. Can you give an update on the bridal category where your bridal penetration is, as a part of your sales now versus a couple years ago and what you think is going on in that category?

Sure, so what I said in my prepared remarks is that our bridal category was down in the first quarter. We saw strong growth from our iconic flagship brand across the board. Neil Lane, Vera Wang, Disney, Leo, all of those were up high single digits. And so the newness that we're bringing, the emphasis on those proprietary brands has been important and is showing good dividends for us. Non-branded bridal is where we saw a bit of softness in the quarter, especially in Zales and in Kay and then James Allen as you know is really 100% almost a bridal business. I mean it's really heavily skewed to bridal. In terms of penetration numbers, percentage of sales and things, that's not something that we have talked about.

Could you say directionally versus a couple years ago, whether the penetration of bridal is up versus fashion or…?

Well I think bridal is incredibly important to us and so we are working to grow both. In the first quarter, we saw some growth in the fashion part of the business, which was like – you know helpful and represents our strategy to build gifting especially at non-holiday periods and to attract female self purchasers into our business.

And just one other question and far as the employees being up to speed incentivized on how to use the credit and implement the credit effectively. Where do you think the employee education and incentive structure is to employ all of the credit options available to the customers?

So I think now we have gotten to a mix of financial offerings for our customers. That represents a competitive advantage with you know the prime lending, the subprime lending and also the leasing program that we have in place. After we experienced some operational issues surrounding the conversion to that a little over a year ago we put more than 80 technology fixes in place and significant training for our in-store personnel and that's something that we haven't stopped. We, in the first quarter had a four-hour training for all of our sales associates to work on how they present our different financial alternatives to our customers. So I see that as an ongoing opportunity for us to build that competitive advantage.

Since that there are no further questions. I’d like to thank everyone for joining us today. This concludes today's conference call. You may now disconnect.