Good morning and welcome to the Signet Jewelers Second Quarter Fiscal 2022 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Vinny Sinisi, Senior Vice President, Investor Relations and Treasury. Please go ahead, sir.

Great. Thanks very much, Jason, and good morning, everyone. Welcome to our Second Quarter Earnings Conference Call. On the call, today are Signet CEO, Gina Drosos, and Chief Financial and Strategy Officer, Joan Hilson. During today's presentation, we'll 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 risk factors, cautionary language, and other disclosure on our annual report on 10-K, quarterlies on 10-Q, and current reports on Form 8-K. 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 further discussion of those as well as reconciliations of them to GAAP measures, investors should review the news release we posted on our site at signetjewelers.com/investors. And with that, I will turn the call over to Gina.

Thank you, Vinny. And thanks to all of you on the call with us today. First, let me begin by sending our thoughts and prayers to our colleagues and partners who were in the wake of Ida. We hope you and your loved ones are all safe and sound. Now on the quarter. Our performance this quarter reflects continued momentum in our Inspiring Brilliance transformation to maximize jewelry category strength and capture market share over the last year. Specifically, we're advancing and better integrating our banner value propositions, product newness, always-on marketing, and connected commerce experiences. Our team continues to accelerate our transformation and delight new and loyal customers through their passion, dedication, and expanding capabilities and talents. Thank you to the Signet team. It's an honor to work alongside them. There are three key messages that I'd like to leave you with today. First, we outperformed expectations and are raising our fiscal '22 guidance. Data-driven insights and our bespoke research capabilities enabled our team to quickly identify and make the most of changing consumer trends. Second, our Inspiring Brilliance strategies are working in an integrated manner. Our continued refinement of our banner value propositions are serving distinct customers with differentiated product assortments and experiences. Our connected commerce strategy is increasingly enabling more consumers to shop with us whenever, however, and wherever they want. And third, we are continuing to strengthen our culture of innovation and agility, and our team members are embracing new capabilities with excellence. By investing in our people and attracting the best talent across industries, our people and culture are becoming an even stronger competitive advantage. Now, let me share some highlights from the second quarter. We delivered total sales of $1.8 billion this quarter. That's a same-store sales improvement of 97.4% compared to last year.…

Thank you, Gina and hello, everyone. The team delivered strong results this quarter, working to maximize the jewelry category strength with our new capabilities. As I talk through our performance, there are three key messages to highlight. First, we expanded operating margin by leveraging fixed costs, growing merchandise margin, and achieving higher labor productivity and additional cost savings. Second, we're raising guidance to reflect our Q2 beat and a stronger Q3 given current business momentum and the delay of the anticipated shift to experience-related spending, which we believe is primarily due to the Delta variant. We are maintaining a conservative view of the fourth quarter due to macro uncertainty related to COVID -19 variance and the impact of government support policies on consumer spend. And third, aligned with our capital priorities, we've expanded our authorized repurchases to $225 million to reflect our confidence in our longer-term growth opportunities and the strength of our balance sheet and cash flow. Now turning to the quarter, our total sales of $1.8 billion reflect growth of more than 100% over last year. We continue to overcome lower levels of retail industry foot traffic through higher conversion, higher average transaction values, and connected commerce capabilities. I'd also note that this quarter reflects the return of brick-and-mortar business for our UK banners. Moving on to gross margin, we delivered approximately $780 million this quarter, or 40% of sales. This is a 650 basis point improvement compared to the second quarter 2 years ago. Leveraging of fixed costs contributed more than 400 basis points of the improvement. The remaining factors were driven by sustained cost savings and merchandise margin expansion. A favorable merchandise mix complemented by increasing levels of service revenue, enhanced discount controls, and targeted promotions drove the expansion. This combination of drivers is an example…

Thank you. We will now begin the question-and-answer session. . Our first question comes from Ike Boruchow from Wells Fargo. Please go ahead.

Hi. Good morning. This is William for Ike. I just wanted to ask about gross margin. You said you had another -- the 600 basis points over pre-pandemic levels. Can you just talk a little bit about the sustainability into the back half of these levels? I mean, do you expect it to revert to more normal levels in the back half or how should we think about gross margin?

So I'll take that, Will. The gross margin in the second quarter was really driven by several things. One is, consistently, we're seeing that our assortment and the response to our assortment is very strong and it's broad-based. We've targeted our markdowns and our promotions very specifically rather than broad-based, so that's also helping the margin expansion. And thirdly, discount controls, enhanced controls, is expanding our merch margin. And then I would say that the occupancy cost and the leverage fixed -- leveraging of that fixed cost, but also the reduction of occupancy cost related to our store closures was also helping that gross margin expansion. And so as we said in my remarks regarding the third quarter, and essentially the back half, we're positioning ourselves for flexibility with targeted promotions as well. With the uncertainty, particularly in the fourth quarter of the competitive environment and the consumer shopping behavior.

Great, thank you. And just if I could squeeze in one more. Service business, can you just give us an idea of where that business is from a revenue perspective, I know you are targeting a billion over the long term, but can you just give us a sense of where that revenue is now?

Hey, Will, it's Jen, I'll take that one. So no, we don't report out our services revenues separately, what I can say is that services have been a meaningful part of Signet's business even pre-transformation. We have more than 1400 jewelers on staff who do everything from ring sizing to repairs to fully custom design work, and what we're doing now is really expanding those capabilities and building a better end-to-end customer experience. Same on our warranty programs, where we're expanding those offerings, testing and learning on simpler and better options for customers. And same on customization where we're really shining a light on that service with our Jared foundries. So a lot of these capabilities have been part of the Company, but a bit underutilized, and now we're really bringing them to life with consumer insights driving how we do that.

Great. Thank you. I'll pass it along. Thank you.

The next question comes from Paul Lejuez from Citibank. Please go ahead.

Everyone, this is Brian Chindamo (ph) for Paul. Good morning and thanks for taking our question. Just wanted to ask, in your prepared remarks, you mentioned trying to pull forward holiday sales in the third quarter and Telsey promoting their -- I guess can you reconcile that with some of the momenta that you're seeing going into the third quarter and then are you promoting in the third quarter over 2019 levels or I guess just why try and pull forward those holiday sales in this period?

From a macro standpoint, we have, for the last several years, been looking to reduce our reliance on fourth-quarter performance. And that's another consumer-driven insight. We now look at three different types of holiday shoppers; we know the early savvy shoppers who are more typically women, more typically looking for value, more typically a lower transaction value are shopping earlier and earlier for them this year. We believe that Christmas and holidays begin in September, and so we are ready with merchandise and with the right kinds of promotional cadence targeted to them, We know that engagements are something that most people start thinking about in the October time frame. And so we think a lot about where are we in our engagement business and bridal. We also know that there are very late shoppers. They think they're early if they're shopping on December 23rd because it's 2 days to go, but we know that we've got to have all the right capabilities in place to serve them especially on the 24th after e-com cut off. So we're really targeting all of our promotional cadence, the merchandise that we bring in, and these connected commerce services to meet differentiated consumer needs In this whole September through December time frame. So this idea of spreading our holiday sales into Q3 and starting it really is here to stay for us. We did it successfully last year and we'll continue to do it. This year, it's probably a bit more important given the macro uncertainties in Q4 and so we're looking to really drive top of the funnel marketing to be part of customers' consideration set in Q3 so that as we move toward the holiday, we've already been in contact with the 2.3 million people that we anticipate getting engaged this year and we are a big part of where they are considering purchasing.

The only thing I would add to that is that the always-on marketing strategy began with past brilliance in fiscal '20. And so we've been fine-tuning that and transitioning our business to support the promotions on holidays that Jenna spoke about. And in this year, particularly as we see the momentum and the delay of the anticipated shift that we expected later in the second quarter and with the momentum, we're seeing in the third quarter, we think it's very important for us to manage into that and maximize our share in the market with the strategies that we've put in place. Importantly the holiday receipts, so much of it being within on the water, as well as really in receipt already also helped us support that strategy importantly, so we're positioned to take advantage of the timing of what we're seeing in the market and bring to our customer the product newness that they would expect for gift-giving as well.

Got it. And if I can just follow up, there are some of the mitigation efforts that you cited in your release that the supply chain is an expected disrupt to the second half. Were you able to pull forward holiday inventory or do you just feel like you're in a good position heading into the back half?

This is where the value of our trusted vendor relationship really shines. We took deliberate actions with our partners to manage the potential sourcing disruptions this holiday and at this time, we don't anticipate any material impact. We provided holiday projections very early to allow our vendors time to safely plan for production, and also to have inventory proximity to help us meet demand. In fact, we have more than half of our holiday orders already enhanced.

That's great. Thank you very much and good luck.

Thank you.

. Our next question comes from Dana Telsey from Telsey Advisory Group. Please go ahead.

Hi, everyone. Gina, as you talked about inventory rationalization and SKU productivity, where are you on the inventory rationalization pipeline and where do you see it going by category? And then Joan, on the incremental cost savings, where is that coming from? And is there an opportunity for more on this path? Thank you.

Thanks, Jenna. So on inventory, we're really pleased with the progress that we've made, 40% increase to our inventory turn during our transformation so far. But we do have an integrated set of actions. We have good team members who focus on this. We have yet, I think, to see the full benefit of new technology that we've invested in that can help us continue to improve our inventory productivity. So it's a journey that we plan to continue to be on. It just gives us, I'd say 2 things. So much more flexibility and agility. And especially with the uncertain times ahead, we think that's very important. It's better for our vendors when we can be more precise and specific about what we need and when we need it so we're planning further out with them. And that's really because we're testing and learning, and we've done over 300 concept tests on new product ideas just in the last couple of years, and so now our volume forecasting has statistical significance on that. So we're getting much more precise on being able to predict the performance of new lines that we're bringing in, as well as the data analytics that we've put against our core inventory, which is really helping. So I would say the team is very focused on it and we're looking to continue improvements in that area.

And then Dana, with respect to the cost savings, we see that occurring in merchandise-related costs and process costs and -- which really impact our gross margin. And then we continue to drive down areas of indirect spending in places where the customer doesn't really see or care about, as well as continuing to drive our store labor productivity models. So we're very focused on continuing to drive these disciplines and the team has put forth an amazing effort to really drive these costs down so that we can continue to invest in our business and our growth strategy. So very much a team effort.

Thank you.

This concludes our question and answers session. I would like to turn the conference back over to Gina Drosos for any closing remarks.

Thank you again, everyone, for joining us today. Despite continuing macro uncertainties, we've armed our team with insights and capabilities that allow us to stay agile and we're heading toward holiday with confidence. Thanks again.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.