Good morning, and welcome to the Signet Jewelers Fourth Quarter Fiscal 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Vinnie Sinisi, Senior Vice President, Investor Relations and Treasury. Please go ahead.

Terrific. Thanks very much, Andrew, and good morning, everyone. Welcome to our fourth quarter earnings conference call. On the call today 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 in our annual report on Form 10-K, quarterly reports on 10-Q and current reports on 8-Ks. 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, will discuss certain non-GAAP financial measures. For further discussion of those non-GAAP measures as well as reconciliations to the most directly comparable GAAP measures, investors should review the news release we posted on our website at www.signetjewelers.com/investors. With that, I'll turn the call over to Gina.

Thank you, Vinnie, and thanks to all of you who are on the call with us today. Before I get into the call, I want to take a moment to address the crisis in Ukraine. As a company whose purpose is inspiring love, we stand against this invasion and unprovoked war. As such, Signet has suspended all business interactions with Russian-owned entities since the beginning of the conflict. And through our Signet Love Inspires Foundation, we have donated $1 million to the Red Cross to help provide food, medical attention and supplies within Ukraine as well as shelter for the millions of refugees fleeing the country. Our foundation is also providing a 2:1 match for Red Cross donations made by our generous team members. We will continue to look for additional opportunities to support the people of Ukraine, and our thoughts and prayers are with them all. Now let me share Signet's results with you. We closed this year once again with strong performance. The Signet team delivered record sales and earnings growth, our sixth consecutive quarter of overall growth. I want to thank our team members for their unrelenting leadership and dedication. I am always inspired by their achievements. There is one key message that I'd like you to take away from this quarter and year. We are demonstrating that Signet has the strategies, strength and structural advantages to consistently outpace the market and gain share while also delivering sustainable double-digit operating margins. We can see this in 3 specific ways. First, we grew our U.S. market share to 9.3%, a 270 basis points gain over prior year. We grew share in every channel and every banner. This was true in well-established categories like bridal, where Signet is the clear U.S. retail leader with a roughly 30% share, and…

Thanks, Gina. Hello, everyone, and thank you for joining. Here are our key takeaways for today. We are demonstrating Signet as -- has the strategies, strength and structural advantages to consistently outpace the market and gain share while also delivering sustainable double-digit operating margins. Our strategic initiatives have improved our operating structure, and we are now positioned to consistently deliver an annual operating margin that is more than double that of 2 years ago. Simply stated, Signet is a transformed company poised to gain market share. Additionally, the combination of continuous market share gains and stronger margins means we will continue to generate excess cash, giving us flexibility to continue investing in the business, consider acquisitions that align with our existing strategy, and given our current valuation, focus on share buybacks. Our performance this quarter and this fiscal year reflect the importance of our improved operating structure and the cost discipline that is now a core part of our culture and will help fuel growth in the years ahead. While we anticipate a challenging macro environment for the industry in the coming year, we believe we will deliver top line growth that outpaces the industry. Now for the quarter, we delivered total sales of $2.8 billion, growth of nearly $625 million over last year. Growth continues to be broad-based across all banners and categories, reflective of our connected commerce efforts working across our platforms. Fourth quarter non-GAAP operating income of $411 million is up from $293.8 million last year. This represents a 14.6% operating margin, up 120 basis points to last year. Reflected in this improvement is 150 basis points of gross margin expansion, led by the continued leverage on fixed costs from our real estate optimization efforts. This was slightly offset by 30 basis points in SG&A from deliberate…

[Operator Instructions] The first question comes from Dana Telsey with Telsey Advisory Group.

Congratulations on the nice progress and the outlook. As we think about the macro environment, a couple of things. How are you taking into account the implications of inflation, both on the cost side and also the consumer side? And then on the macro side, do you receive any of your diamonds from Russia? And how are you handling that? And then just lastly, Gina, you talked about the ways you're serving the consumer and, frankly, the whole circular area, whether it's online, whether it's stores, whether it's what you have with Rocksbox. As you think about new customer acquisition, how is that moving along? And are you seeing channel diversification of the shoppers that you have?

Dana, thanks so much for those questions and for being with us today. Starting with the customer, we are certainly aware of the pressure that customers are facing as it relates to the inflationary environment. It's front of mind for us and that's part of our research on an ongoing basis. To date, we have not seen significant changes. We delivered another strong Valentine's Day this season, and the trends have remained strong. But we have levers to pull if confidence turns significantly more negative and spending abates due to the macro environment. We are consistently working with our vendor partners to value engineer our products so that we can offer good, better, best products, products at a range of prices for our customers within our banners and of course, across the diversified banner portfolio that we've created. We also have targeted advertising, improved experiences in-store and online, compelling merchandise. All of this gives us confidence that as consumers turn to jewelry purchases, which they will, particularly given pent-up demand for weddings, even in a challenging time, we believe they'll turn to Signet. As it relates to Russia, and as I said at the beginning of the call, our purpose as a company is inspiring love. And so we moved very quickly to address this situation. We suspended all business interactions with Russian-owned entities since the start of this conflict. We've asked all of our vendor partners to do the same, and we made a $1 million donation to the Red Cross, which is really one of the best boots-on-the-ground organizations in Ukraine, helping all the people there. We also have a very well-respected responsible sourcing program. That's one of the things that customers play back to us in survey results. We've been an industry leader in responsible and ethical…

The next question comes from Tim Vierengel with Northcoast Research.

I think we all appreciate the extra data on your market share gains and expectations for the industry for fiscal '23. I was wondering if you can maybe break out how you think fashion will perform relative to bridal, assuming the industry hits that slightly down to flat comp versus the previous year. And I guess for modeling premises, do you expect the sales growth to be pretty consistent throughout the year?

Well, thanks for the question, Tim. And it's interesting, as we think about the growth in the jewelry industry, the heightened growth last year, and our view that we expect it to be down low signal to roughly flat given the inflationary pressures. We think that bridal will continue. We -- Gina mentioned that the increased number of weddings and people getting engaged. It's important for us to focus on bridal and continue to do so as it represents nearly half of our business. The other point on fashion is we've seen, over the last year, the continued growth in fashion. Gina talked about James Allen and the growth that we saw in line there with fashion. So we see it as a continued growth opportunity for our business and really a way for us to continue to bring value to our customer as well as address the self-gifting customer, if you will, throughout the year. So really feel that, that's an important aspect of our portfolio offering. And it really allows us as well to drive a good, better, best assortment architecture and that will also help us to mitigate some of the pressure that we're seeing related to the discretionary spend and inflation. With respect to how the year plays out by quarter, what we did give is the first quarter. And we didn't mention we had a strong Valentine's Day, and we're pleased with that performance and the continued strength of the business. That's reflected in our guidance for the quarter.

Okay. And you brought up inflation twice again. I was just wondering if you guys -- maybe, Gina, if you could clarify why inflationary pressure can be an advantage for you guys over the market? Does it -- is it simply it improves your relative value perception? Or is your buying power better, so your margins are less impacted? Can you just walk us through that a little bit more?

Yes, Tim, I think you just hit the nail on the head. We have, over time, developed 2 -- actually, really 3 competitive advantages in our supply chain that all allow us to be more inflation resistant than we believe other jewelry industry competitors are. One is our strategic vendor relationships. We get our orders in very early, which gives them flexibility to be in the market when prices are good and out of the market when they're not. And our scale is such that we can partner with them to make sure that we get the quality, quantity and pricing value equation that makes sense to our customers. Secondly, vertical integration. I mentioned in my script that we've increased this tenfold in the last year. This is a strategy that helps us not only serve ourselves in times of pricing pressure or pressure unavailability, but it also gives us insight into cost structure at every step of the value chain. And so it makes us better able to work with partners to get the value equation that we think we deserve. And then the third builds on what Joan was saying in her script about doing more with less. We reduced our inventory on our core business last year by $190 million while making product even more available to our customers. That's because our jewelry consultants now have access to every product across the Signet network at a touch on their iPads. And so we can serve customers virtually, we can serve them in store and find the best product for them. And that's important in a category like jewelry. A lot of our product is bespoke. Diamonds are unique. That's part of what makes them special. So it's not like white T-shirts in apparel that you need a certain number of size mediums. I mean, we really need to identify that right bespoke piece. And our network allows us to do that in a way that is with agility that's a significant competitive advantage. So those are really the reasons why I think that we have an advantage. And then I would also say from a category perspective. The jewelry category has tended to be more inflation proof than other areas of retail. And our research indicates that's because consumers see the inherent value in jewelry. Gold, other precious metals, diamonds, appreciate over time as opposed to other things that they could spend on that, that depreciate. So those would be the key reasons.

[Operator Instructions] The next question comes from Lorraine Hutchinson with Bank of America.

After a really strong year for the category, I think one of the big questions is the margin sustainability. Joan, could you just try to bridge us from pre-pandemic margin to the guided levels and maybe focusing on the changes you've made in credit? How much of the merchandise margin gains are sustainable? Just to get us a little bit more comfortable with the sustainability of that level.

Yes. Thanks, Lorraine. As we reported on a non-GAAP basis, our operating margin was 11.6%. So when we look at that margin, the first thing I would point you to, Lorraine, is the optimization of our fleet. And as I mentioned in my remarks, it's 500 basis points of fixed cost leverage that we brought to this year in terms of just lowering the cost of -- the occupancy cost by cutting the number of stores in our fleet by over -- 20% over the last several years. And what that did for us is really provided the opportunity for us to reinvest and continue to drive top line because as you can see, we've been demonstrating top line growth while reducing our number of stores and investing in digital. The other point that I'd make is that I mentioned 300 basis points of -- related to the labor optimization model. And the way we do that is a structural change. It's planning day by day, hour by hour with our stores team. And it actually is a great opportunity for the team member in terms of getting coverage at peak times and during the important times of the selling day. And it provides us with the efficiency in the labor model, so improved labor productivity. So that's what's driving that 300 basis points is a structural change in how we do business. And then I would say with the gross margin expansion as well, the work that the team has done related to inventory has been nothing short of amazing. Working with the sourcing teams and merchants and, to Gina's point, streamlining the inventory, making the inventory available to all of our JCs through a touch of the iPad, it's helped us really sell through our inventory, turn it faster and provide newness, which provides growth. But also, I reported that our clearance was down 10 points. It's all related to the structural changes within our business. And so the team has built this muscle. It's part of our culture. And we take it very seriously to continue to drive operating margin expansion and sustain the margins that we've been able to demonstrate over the last couple of years.

The one build that I'd add is what I talked about in my script, one of our strategies, which is accelerating services. I mentioned that we have a $1 billion goal for services, that we reached $620 million last year. And it was up 65%. That's higher, obviously, than the 50% revenue that we were up overall in part because customers are returning to stores but also in part because we're figuring out how to get attachment of things like extended service agreements online. Services are high margin for us. And so as we really focus on growing that as part of our mix and leveraging the relationship building that we get. I also mentioned that the second and third purchases that customers make are often more valuable to us than the first one. So the benefit, not only of the service itself to our margin, but also that ongoing relationship with customers adding to our mix is another reason that we're confident that our margin expansion is sustainable.

The next question comes from Ike Boruchow with Wells Fargo.

This is Will on for Ike. Just a question around Russia, and you guys have somewhat touched on this, but given Russia is a major supplier of diamonds -- I think I read somewhere that it supplies like 30% of the world's mined diamond. Are you seeing upward pressure on costs related to the ban on imports in Russia? And then related to that, do you expect meaningful price increases for yourself and across others in the jewelry category?

So well, given the strong demand for jewelry over the past several years, we were already seeing some pressure on diamond prices with recent sites pricing on the rise. We've been working with our strategic vendors, though, as I mentioned, and leveraging our significant vertical integration and sourcing to mitigate these increases. So I feel very confident that consumers will continue to find strong value at Signet. And we believe that the pricing pressure will impact Signet less than other industry players and the retail segment as a whole. The other thing is that any price increases that will happen are within the balance of ones we've taken historically and have the data on. So I feel good about that. And when I think about the alternatives that consumers are seeing, things like travel, the double-digit increases on trips, things like that, that people are willing to pay for, are bigger price increases than I expect that we will see at Signet.

The next question comes from Paul Lejuez with Citi Research.

Curious as you think about the industry growth overall, how much are you assuming in terms of units versus price? And then I'm kind of curious about how you're thinking about your bridal business, specifically in terms of ticket and what the plans are there from an AUR perspective? And also just higher level, long term, where do you feel you have a bigger opportunity to take share? Is it bridal or fashion? One more so than the other?

Thanks for the questions, Paul. So when we think about our businesses for the coming year, our -- we haven't really talked about units versus AUR or AOB guidance. But what we can tell you is that good, better, best is part of our strategy, and we believe that we can bring value at each of those price buckets, if you will, and we can deliver that through the supply chain, vertical integration and the strong vendor relationships that we have in bringing product to market that our customers will love, but will also be able to afford at appropriate margins that are included within the guidance that we gave today. So that's how we're structuring our assortment architecture and bridal continues to be, as I mentioned earlier, a significant part of our business. We're excited about the number of lettings that we expect to happen this year and the potential engagement. So we'll continue to focus on that and then balance that with fashion as an important element of our portfolio strategy across all of our banners.

And Paul, to your question about market share and where do we see that coming, we are a very consumer-driven company. So I would go back to 3 big trends that we expect in merchandise this year. Number one is weddings, number two is the emerging workplace and number 3 is lab-created diamonds. On weddings, I mentioned highest weddings in 40 years. People buy wedding bands about 2 months on average before the wedding. So even if they're already engaged, we have 2 opportunities -- 2 wedding band opportunities to serve them in addition to great earrings and necklaces and things like that. We are more and more expanding our care for our customers beyond just the couple getting married, but to mothers of the bride, bridesmaids, et cetera, through both merchandise sales as well as the new circular economy rental idea that we're testing. So I think that is definitely something we'll lean into. And we have an opportunity to grow share in the bridal market. On the workplace, as hybrid is becoming the norm, people are really looking to step out with confidence, both in person and on Zoom, right? On the Teams meeting. So think that we'll continue to be able to grow and self-purchase. It is an area that we've historically been underdeveloped in, and it has become a faster-growing part of our business more recently. So definitely opportunities for share gain there. And then lab-created diamonds. This is still under 10% of diamond purchases, but growing rapidly. And we've developed proprietary sourcing so that we believe we have the best offering for customers both in availability and quality as well as value. So we'll really lean into that. But maybe the most important umbrella point of all of those is the ones that we were making around lifetime value. Bridal tends to be a point of market entry for us as does piercing and our Banter brand. And then we really want to serve our customers for our lifetime. And the better we do that seamlessly across channels, the faster we grow.

The next question comes from Mauricio Serna with UBS.

Congratulations on the very good results. A couple of things. I wanted to ask about the capital allocation because you've done a lot of repurchases at the end of last fiscal year. So I want to understand how that plays out into the EPS guidance you provided this morning. And also maybe if we could just follow up a little bit on the operating margins? The guidance that you have provided seems like at least you will be able to maintain operating margins in line with last year. So just trying to understand what are like the puts and takes there in terms of cost, maybe like investment marketing and labor costs and all the major puts and takes in the operating margin guidance.

Thanks, Mauricio. As we mentioned, we completed our $250 million ASR after the fiscal year-end, and we have $413 million remaining under the current authorization. And what we have noted in our release is that our EPS guidance does not include further repurchases, but it does include the conclusion of the ASR program. And then with respect to the operating margin guidance, as you noted, for the full year, our guidance on the high side was 11.8% versus last year of 11.6%. We really are continuing to drive, Mauricio, the cost savings programs that we've built the muscle. It's part of our culture. And the teams know that we need to do that to expand margin as well as invest in the capabilities that we believe are important to our long-term future. We will continue to invest in advertising. As Gina detailed, we have -- through her prepared remarks, we have a very balanced approach to marketing. TV is a very important part of our approach, but also our digital investments are enabling us to have a broader awareness with our customers in a more targeted way through the data analytics and the customer data platform that Gina mentioned. So advertising is a part of our investment but carefully managed on a return-on-investment basis. And then I would just say we're continuing with our labor modeling that I detailed, we are continuing to -- through our fleet optimization but we've been able to continue to leverage the fixed cost through that program. So those are the big puts and takes, I think -- and I guess we have included inflationary pressure in our thinking, and we'll continue with the opportunities and vertical integration from our gross margin expansion as well. So it's a continuation of the structural operating model that we make -- are establishing and we'll leverage go forward.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, thank you again, everyone, for your engagement today. When we spoke with you this time last year, we reinforced that Signet has become a say-do company. Our team holds ourselves accountable for saying clearly what we will do, and then we do it. When we began our journey 4 years ago, we said we would accelerate growth, deliver cost savings to fund investments optimize our fleet, reduce debt and return capital to shareholders. We've done all those things by leveraging our strengths and accelerating our investments. As a result, we are consistently outpacing the market and gaining share while also delivering double-digit operating margins. We are no longer the company that many investors may remember from several years ago. We are demonstrating that Signet can reliably gain market share over time. We are a company you can count on to lead innovation, grow the market and generate the value you deserve. Thank you.

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