Good day, and welcome to the Signet Jewelers Third Quarter Fiscal 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask question. [Operator Instructions] Please note today's 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.

Thanks very much, Rocco, and good morning, everyone. Welcome to our third quarter earnings conference call. On the call are Signet's 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, quarterly reports on 10-Q, 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 non-GAAP measures as well as reconciliations of them to the most directly comparable GAAP measures, investors should review the news release we posted on our website at www.signetjewelers.com/investors. And with that, I will turn the call over to Gina.

Thank you, Vinny. And thanks to all of you, who are on the call with us today. Our performance in Q3 reflects the continuing progress of our Inspiring Brilliance transformation, and the innovation, agility and passion of our entire organization. I continue to be inspired by our team quarter-after-quarter, and I am proud to work at their side every day. As we look back at this past quarter and our year-to-date, I want to leave you with one core message. Our Inspiring Brilliance transformation is working, making Signet a much healthier and more agile company today than we were a few years ago. We believe our top and bottom line growth is sustainable and we're growing share while also investing in important new capabilities and customer experiences at a rate that is currently unrivaled in our category. We still have important work to do to complete this phase of Signet's transformation, but we have the strategic clarity, structural advantages, operating discipline and high-performing team to continue driving growth ahead of the jewelry sector. We saw this in Q3. Our team delivered the strongest, most profitable third quarter in Signet history, a quarter that has often been challenging because there's no broad scale gift-giving occasion. We've been taking steps to mitigate our dependence on big holiday cycles and move to a more always-on approach. This is evidenced in our investments in consistent marketing and customer engagement throughout the year, our year-round bridal cycle and our efforts to increasingly support early holiday shopping in October. This approach is paying off. We delivered a same-store sales increase of almost 19% to the third quarter last year, with notable growth acceleration in October. The overall jewelry category was strong this quarter, but we believe we're gaining market share. We're achieving this growth by leveraging…

Thanks, Gina. Hello, everyone. There are three important messages that I'd like to leave you with today. First, we delivered cost leverage on top line growth again this quarter as a result of our strengthened operating structure. Second, we achieved a trailing 12 months leverage ratio up 2.1 times. We returned value to shareholders through dividends and share repurchases and continued to invest in long-term growth. Third, we are raising fiscal 2022 guidance to reflect enhanced connected commerce capabilities and business momentum, which continues through Black Friday and Cyber Monday weekend. Also concluded in today's update is higher expected cost savings. In Q3, we achieved total sales of $1.5 billion, growth of approximately $237 million over last year. Compared to two years ago, sales are up $350 million with 423 fewer stores. While retail foot traffic remains down to pre-pandemic levels, our team effectively used enhanced connected commerce capabilities to drive increased conversion and higher average transaction value. So substantially, all merchandise categories and banners demonstrated growth, supported by a roughly 50% increase in advertising to strategically drive earlier shopping and reduce reliance on traditional fourth quarter profitability. We delivered approximately $576 million this quarter in gross margin or 37.4% of sales. This is a 380 basis point improvement to last year, and a 630 basis point improvement to two years ago. Leveraging of fixed costs contributed roughly 2/3 of the improvement in both years, driven by fleet optimization efforts. Additionally, the remainder of gross margin improvement relates to merchandise margin and was driven by fundamental changes in our operating model. These significant changes include enhanced discount controls and reduced promotions as well as strategic inventory initiatives that I'll discuss in a moment. Moving on, SG&A was approximately $471 million or 30.6% of sales. This rate is 70 basis points…

[Operator Instructions] Today's first question comes from Mauricio Serna with UBS. Please go ahead.

Great. Thanks and congratulations on the results. I wanted to ask first about the market share trends. You comment that you believe you're gaining market share. Maybe you could give us -- maybe a little bit more details on how is your growth compared to the industry that gives you that confidence that you're gaining market share? And also, if you could provide us maybe a little bit more details on Diamonds Direct, as the business, you talked about in your previous release about the EBITDA and sales expected for this fiscal year or calendar year. So I wanted to know a little bit more about how do the margins compare to your overall business on a gross margin and SG&A basis? Thank you.

Well, Mauricio, thanks much for your questions. Starting with market share, as we've repeatedly said, and I think everyone knows the data in the jewelry industry is far from perfect. But what we do is we aggregate a number of annual projections from industry experts like Euromonitor, Mintel, Mastercard, IBIS, NRF. And what all of those are showing us is that we believe that expected jewelry category growth for this year is in the range of around 30%, so a very strong year the jewelry category. The high end of our guidance today implies more than 43% growth in total sales, and that reflects our belief that we will outpace the industry and gain market share. I think notably, part of the jewelry category that's growing the fastest is luxury that competes at the tier above where Signet plays today. And what that says to me is that the work we're doing differentiating our banners and trying to broaden the mid-market segment that we play in with accessible luxury, as I discussed in my remarks, including the Diamonds Direct acquisition, including all of the work we've done to build a higher merchant -- higher quality merchandise assortment and custom capabilities at Jared, and of course, the continuing work that JamesAllen does to really pioneer creating optimal online bridal buying experience. These things are important because they're giving us access to new customers that are coming into the mid-market. So these are all things that are part of our inspiring brilliant strategy, differentiating our banners, bringing connected commerce capabilities, serving customers whenever, wherever they want to shop, and that's one of the things that gives us confidence that the strategy is working. I'll start on Diamonds Direct and then turn it over to Joan for more detail. But the first thing…

And Mauricio to address the Diamonds Direct profitability and the purchase price or just the economics, as we said in our recent releases that we expect Diamonds Direct to be immediately accretive, we have included a view of Diamonds Direct performance within our guidance with our update today. As you know, we disclosed that, the trailing 12 month sales. So the purchase price represented a 1.1x multiple of sales and on the $490 million purchase price, and EBITDA trailing 12 months of 7.1x. So, we really feel very strong about the strength of the business, the management of the business, the economics of Diamonds Direct, and really feel that it's a natural fit within our structure, as Gina just mentioned.

Great, thanks. And just a quick follow up, one just, how is the holiday season trending so far? I know you mentioned that you feel like a lot of people have done some of the shopping earlier, but just trying to get a sense of how you're seeing like things in Black Friday and also regarding the things that you mentioned that you have like promotional flexibility? I mean, does that imply that you could become more promotional in the short term, if needed. I mean how does that also play out into your expectations looking into next year with some tougher compares?

Well, what we can address today is the guidance that we've given Mauricio, includes, as you noted, our flexibility for promotion should be needed in the fourth quarter. We did note, as you did, that we believe that the momentum in part that we've seen that continue through Black Friday and Cyber Monday weekend was in part due to the pull forward of earlier customer shopping. Gina noted that 25% of shoppers completed their holiday shopping prior to Thanksgiving this year, and that's up eight points from the prior year. So that's the basis for our belief that some of the momentum we're seeing today is a result of that pull forward. We've also have included in our guidance a view of Diamonds Direct, as I noted, but also the idea that there is still some concerns around the macro environment, the unknowns around government mandates, the impact of stimulus, the new COVID variants that are -- may impact shopping behavior and also the potential shift in consumer behavior towards more experience related. So all that in mind, our guidance reflects a strong view of holiday, we're very pleased with the 6% to 9% comp store sales growth for the quarter. I believe that given where that leaves us for the full year, it's also a very strong performance driven by the team to drive flexibility and our promotion, expand our operating margin. We'd note that the full year guidance implies a 10.9% operating margin, and that compares to 52% two years ago. So the teams have really put into place the operating model changes that I detailed in my remarks. And we really believe that, that's the strength that we can build upon go forward and continues to sustain the momentum in our operating margin performance.

I'd just add that within the factors we can control, we are staffed and stocked and ready to serve our customers.

Our next question today comes from Loren Hutchinson with Bank of America. Please go ahead.

There's a lot of puts and takes on the SG&A line with the cost cuts, the lower credit costs and now perhaps some higher labor and marketing costs. Signet has historically been in the 28% to 29% of sales range for many years. Is that a level that you think you can get back to in the coming years? And can you just walk us through any opportunities or pressures maybe around that number as we model for the next few years?

So, as I just mentioned Lorraine, and thank you for the question. Our FY '22 EBIT guidance implies an EBIT margin of 10.9% at the high end, and this compares with 5.2% two years ago. Looking forward, we've made structural changes to our operating model, which enabled us to sustain a healthier operating margin. And these include, top line performance, higher margin services, and many of the inventory management disciplines that affect our merchandise margin performance in the strong health and of our inventory is enabling that to really follow through to the bottom line as well. When we look at our costs, we are funding investments. With over the last four years, we've saved over $400 million, and have -- which has helped fund the investments that we've talked about, which connected commerce capabilities, flexible fulfillment. And we've also have enjoyed the results of, the diligence of our fleet optimization, which is really providing a significant leverage while we reinvest in advertising and some of the other costs that I mentioned with labor. So, the way we think about it is, we're going to continue to drive cost discipline for our organization. We'll use that to fund investments and continue to drive out costs that the customer doesn't care about.

And our next question today comes from Paul Lejuez with Citi. Please go ahead.

Joan, I'm curious if when you mentioned the EBIT margin sustainability, is that comment is specifically referring to F '22 as well that you are intending to say that EBIT margins are going to remain at least at that 10.9% million levels? And I guess, related to that, I'm kind of curious how you're thinking about F22? Just from a consumer pattern perspective, I know you guys have been assuming that consumer shopping patterns would change. I don't think that's happened to the degree that you have been planning for. So curious how that influences how you plan for F '22? And then just longer term, you guys still talk about the $9 billion long-term goal. Curious if you've got a time frame for when you might think you could achieve that. Thanks.

Okay. So I'll take that. The operating margin, the way we should think about that and the way we think about it structurally within our business is that beyond this year in a normalized environment, we will continue to drive and leverage the operating structural changes that I noted in my prepared remarks. So things like the merchandise margin expansion, the fleet optimization which has taken a lot of occupancy and labor costs, and it's enabled us to reinvest in advertising and capabilities that are going to drive growth and connected commerce capabilities that will drive growth as well and drive us to the jewelry category -- innovation leader in the Jewel category. So all that said, we're not giving guidance, but in a normalized environment, we believe that there's a sustainability to the operating margin that we're putting forward because of the structural changes within our business.

When we think about the fourth quarter and the consumer shift, what I've included in the fourth quarter and the view of fiscal '22 is the idea that we know that we've -- we need to prepare for flexibility of promotion that we have higher marketing costs. We indicated that they're significantly higher. In the third quarter, they were 40% higher. And at the end of the day, we -- there is uncertainty about the level of pull forward. So we've considered that in our top line performance. And then we'll -- we have included the idea of -- or the reality of increased transportation costs as well as the higher labor costs, we raised our wage rate along with higher incents of the holiday, which is very important for us to provide to our team member as well. So it's -- we've included all of the costs that we see ahead of us and the idea of promotional flexibility in fiscal '22. And we're prepared to Gina's earlier point, with staffing levels and inventory to serve our customer throughout the holiday selling period.

And Paul, just on your other question about our time line to our $9 billion goal, we have not given a time line on that. But I will say, our high guide today reflects revenue of almost $7.5 billion, which I'm really proud of our team for all the great effort that they have put in to deliver not only banner differentiation, which is driving strong performance across our different banners, but also the innovation that we see coming in flexible fulfillment and how we're able to serve our customers. Some of the non-comp things that we have in place this year, like our curbside service or our same-day delivery things which we just piloted last year are now fully across our fleet and that agility and ability to test and learn perfect things and then roll them out broadly at scale, I think, is a competitive advantage for us. So I'm proud of how we're learning to do that.

Our next question today comes from Tim Vierengel with Northcoast Research. Please go ahead.

I was wondering if you guys could go into a little bit more detail on these impressive average transaction kind of value improvements. Is it -- specifically, is it -- you guys are raising your price points or adding more inventory at the luxury high price per level at Jared and Kay, which is driving that 30-plus improvement? Or is it really a fundamental change in the demographic of the consumer and their spending habits? Or if it's a bit of both, maybe you could break it down which one as big a driver. Thank you.

Sure. I'll start on that, and you can jump in, Joan. I think the first thing I would say is that it is not about price increases. So what we really pride ourselves on is providing a great value to our customers, and we're able to do that across a broad variety of price points because of our scale and the data and analytics we use to optimize our assortments. What I do think it's related to is higher closure rates. So as we are better directing customers to the banner that is best able to serve them and as we're optimizing our assortment and our services and even our selling capabilities within those banners, we're seeing higher closure rates, which is great and then I'm pleased with all the work. Honestly, if you think about the entire funnel that our team has been doing to drive traffic both in-store and to our websites. So while retail traffic is still down versus two years ago, we saw a strong increase in brick-and-mortar traffic in the quarter. And I would consider that to be the effect of our omni approach to marketing, where we are really trying to serve customers whenever, wherever and however they want to shop. We've also improved a lot of aspects of our e-commerce and digital experience. Our virtual consultants, we have 700 of them now are able to have asynchronous chat with our customers. They have two-way texting capability. So our ability to start a conversation, pause a conversation if our customer wants to do more research or think about it and then come back to that same conversation to serve people in a seamless way is dramatically improved versus where it was a year ago. So all of these things are driving higher closure, which I think is the real story here.

The only add to that I'd have is the idea that our inventory is very healthy. Our clearance selling is the penetration of clearance sales is down to last year, and I mentioned that clearance and sell down inventory is down 14 points and that actual selling is down as a result. And so it's really improving the average transaction value as well. We've been able to put our inventory in a very healthy position.

And then in Jared, as I talked about in my script, I mean, we have had a very intentional strategy about tiering up our assortment to be more accessible luxury oriented, and the results there, I think, are very impressive over the last couple of years with more than a 30% increase in ATV as a result of all of the things I previously mentioned as well as a more valuable higher price point assortment.

Our next question today comes from Ike Boruchow with Wells Fargo. Please go ahead.

On Diamonds Direct, I guess, could you maybe Joan, fill us in what's in the 4Q guide around revenue and EBIT contribution? That would be helpful. And then bigger picture for next year, is there an ability to take to add it generate some synergies or some incremental margin on that business as we think about what you guys can do with it? Or conversely, is there a thought that maybe you want to reinvest more aggressively and maybe take the margins down and then branching like. Just trying to understand how to think about the margins as they flow into next year?

Well, what we said, Ike, is that we expect Diamonds Direct to be immediately accretive. We have included it in our guidance. And you'll note that there was -- with the implied Q4 guide, there with some margin expansion as you kind of compare that to where we've been. So, that's really the -- what I can share with you around Diamonds Direct. We're not separating out Diamonds Direct. It's part of our North America business now and part of that family. And I would just encourage you to kind of look at the guidance or the information we've provided in our release around the purchase price and the trailing 12-month view of sales and so forth. And then into next year, we've not given that kind of guidance. But we really are excited about what the Diamonds Direct brings to the overall financial and economic view of our business and what it does for us in terms of bringing a new business into this expansion of the achievable luxury sort of mezzanine segment that Gina talked about in her prepared remarks. So really excited about what it can bring.

Got it. And then just a quick follow-up on the capital structure. You guys have a lot of cash. I know you just made the acquisition. Is there a thought to -- could you juggle a second tuck-in acquisition at this point? Or would you rather kind of let see how Diamonds Direct can flow in. Would you use that cash towards the buyback? Your stock is extremely cheap. And then just the last one on that is with the preferred converts that you guys have, is there any interest in paying those [Technical Difficulty]?

I think we got kind of cut off and missed the very last part of your question, but I'll talk to the idea of our capital priorities. Number one for us is definitely investing to grow our existing business, now including Diamonds Direct. Now including Rocksbox, we're excited about the acquisitions that we've made starting with JamesAllen a couple of years ago because it's really rounded out our portfolio in a nice way. We have an ongoing strategic process to evaluate other opportunities, and so we always stay open-minded to what might be another way to bring new capabilities, especially new opportunities to learn into our business. So we'll stay opportunistic and open-minded on that as a way to grow the business. And then our other capital priorities, of course, are making sure that we give back to shareholders. We reinstated our dividend. We did execute some share repurchase in the quarter and still have room in that authorization and then making sure that we're managing appropriately our liquidity. I think you were asking in the last part of your question maybe about Leonard Green. So with respect to the LGP preferred position, I'd just take you back to the ABL refinancing that enabled gave us flexibility that, that maturity, which is in October 2024. Our ABL extends beyond that and gives us the flexibility to manage through that through and it goes out to 2026. So LGP continues to be a very valued partner to us. And -- but we have the right ABL refinancing structure that enables us to manage through that.

We have time for one quick final question, and that comes from Dana Telsey at Telsey Advisory Group. Please go ahead.

Congratulations on the results. As you mentioned and the new inventory model, basically, whether it's focusing more on just-in-time inventory, reducing clearance inventory. Where are you on that path? And what does that imply for margins? And then just lastly, I believe that 2022, there's the numbers out there that there's going to be 2.6 million weddings, which should be a real benefit, obviously, for your bridal and engagement business. How do you see marketing and marketing investment going forward into 2022?

So I can start with the inventory. And Dana, we are feeling very good about the health and quality of our inventory. As you mentioned, we have a lot of new capabilities that have driven that, the flexible fulfillment, our SKU rationalization and our clearance inventory was down 14 points to a year ago. So enabling us all of that together to expand our merchandise margins. So with the expansion to both last year and two years ago, we said that 2/3 of that leverage our expansion came from our fleet optimization essentially, and then the other 1/3 is coming from our ability to lean out promotions and be all of the activities around inventory capabilities that get our product to the right place at the right time in our. So, we think that we're in a very good spot, more room to go, but we're in a very healthy position currently with our inventory position.

And then in terms of weddings, that is always good news for our business because the most likely people to get engaged or people who were just in someone else's wedding. So, we definitely try to make sure that we are using our targeted marketing efforts to reach those potential brides and grooms before they come into the engagement ring market. And we're ready. We're ready to serve them with our always-on bridal strategy, and we're ready with product this holiday season. So, we'll definitely be looking forward to that.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any final remarks.

Sure. Well, thank you again, everyone, for your engagement today. I'll just conclude by reinforcing that the results we're seeing demonstrate a healthier and more agile company at Signet and reaffirm that we have the right strategy, the right team and the financial strength to grow profitably and sustainably for the long term. We wish all of you the happiest of holidays this season, and we hope that you're able to celebrate safely and joyfully with your families and friends. Thank you.

And thank you, ma'am. This concludes today's conference call. We thank you all so much for attending today's presentation. You may now disconnect your lines, and have a wonderful day.