Hello everyone, and welcome to the Signet Jewelers' Q1 Earnings Call. My name is Emily and I'll be coordinating your call today. [Operator Instructions] I will now turn the call over to our host Rob Ballew. Please go ahead.

Good morning. Welcome to Signet Jewelers’ first quarter earnings conference call. On the call today are Signet’s CEO, Gina Drosos; and Chief Financial, Strategy and Services Officer, 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. Actual results may differ materially. We urge you to read the risk factors, cautionary language, and other disclosure in our annual report on Form 10-K, quarterly reports on Form 10-Q, and current report 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 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 news release we posted on our website at www.signetjewelers.com/investors. With that, I’ll turn the call over to Gina.

Thank you, Rob. We're happy to have you joining your first Signet earnings call today and appreciate the extensive experience you bring. And thanks to all of you for joining us today. Before getting into our prepared remarks, I want to thank our Signet team. Our company continues to be recognized as a great place to work because of the outstanding people we work alongside. In a pressured quarter, we delivered on our commitments, thanks to their agility and excellent customer service. I'm proud to lead this team. There are three key messages, I'd like to reinforce in my remarks today. First, we achieved our revenue and bottom line commitments in Q1, despite macroeconomic headwinds that worsened late in the quarter. Additionally, as we predicted, there were fewer engagements in the quarter resulting from COVID's disruption of [dating three] [ph] years ago. Given softening trends in late April, we've leveraged high margin innovation in services and fashion, as well as strategic promotions to quickly respond to competitive pressures. These results reflect the agility we built in our team and our flexible operating model. Second, we are adjusting our guidance for the year reflecting current market conditions, lowering revenue expectations based on increasing macro pressure on consumer spending. On the bottom line, our operating model continues to deliver at a double-digit annual rate. However, we are intentionally choosing to invest in the capabilities that we believe are creating sustainable competitive advantages and driving market share growth to expand the moat around our business. We have the advantage of having built a fortress balance sheet that fuels our ability to invest in a period of disruption, which we believe gives us significant competitive advantage. Third, we remain confident in our mid-term goals that we outlined at our April Investor Day. In fact,…

Thanks, Gina, and good morning, everyone. I want to reinforce today's message by focusing on one of the most important factors in our control, our flexible operating model. We are able to proactively respond to the current business environment and continue to strategically invest to drive market share gains precisely because of our model and our strong balance sheet. Turning to the quarter. We delivered nearly $1.7 billion in sales. This represents a sales decline of 9.3% and 13.9% on a same store sales basis. Traffic was down in the quarter in a mid-single-digit range on a relatively flat ATB and lower conversion. We leveraged strategic promotion towards the end of the quarter as we saw trends soften. In addition, we were able to drive growth in services of over 5%, notably outperforming merchandise performance in the quarter. This is a clear competitive advantage for us in the jewelry industry given our scale and skilled network of [Artisan Jewelers] [ph]. Our e-commerce penetration increased 500 basis points to nearly 23%, compared to a year ago, reflecting our strategic investments in digital. Turning now to gross margin, we delivered non-GAAP gross margin of $633 million or 38% of sales, a decline of a 160 basis points, compared to the prior year. Core merchandise margin expanded more than 100 basis points, compared to last year, including the positive contribution of services, discount controls, and strategic sourcing initiatives that generated product cost savings. That benefit was offset by deleveraging of fixed costs such as occupancy on lower sales, as well as the 50 basis point impact relating to product mix of the digital banner. Moving on to SG&A, our non-GAAP spend of $524 million or 31.4% was 240 basis points higher than last year and reflect deleveraging of fixed costs on lower sales…

Thank you. [Operator Instructions] Our first question today comes from the line of Ike Boruchow with Wells Fargo. Please go ahead, Ike. Your line is open.

Hey. Good morning. I guess, two questions. I think one for Joan, one for Gina. Joan, on the 150 store closures, any chance you could tell us – you said they're underperforming, but what's the revenue and EBIT associated with those stores? Are they actually losing money? Just kind of curious if there's any more color there? And then, Gina, understanding the lowering of the guide, you talked about accelerating some of the investments, which is why the margins are below your double-digit target, does that mean that when we get into next year, assuming, you know, engagement starts to inflect the way you think, that you should that you believe you'll return to a 10% operating margin? Just kind of curious how we can take those comments that you made? Thanks.

So, I'll start Ike with the stores. Up to a 150 stores that we believe are underperforming are a mix. In fact, of stores that are not cash flow positive and stores that are down-trending, and we believe with the current view of the year in terms of our guidance that they're not on the good trajectory, they're not meeting our labor productivity, or I'm sorry, our store productivity targets. So, it's a [mixture] [ph].

And on the margin, Ike, thanks for that question. So, our operating model is working exactly as we've designed it to, and we are operating at a double-digit rate. We've chosen this year because we see an opportunity to lean in to invest about a point and to continue to expand our digital and consumer personalized marketing capabilities. We think this really sets us up to drive an accelerated share growth, especially as engagements come back, but on an ongoing basis, we are well-positioned to deliver those double-digit operating margins. This is a temporary decision, intentional decision to invest.

Great. Thank you.

Our next question comes from Lorraine Hutchinson with Bank of America Merrill Lynch. Lorraine, please go ahead. Your line is open.

Thank you. Good morning. I wanted to follow-up on the new three-year agreement with Bread, how has the lending stand there changed, if at all? Are there any guardrails that give you confidence that they'll continue to lend to your customer base as they have been?

We, you know, within our agreements, we do have very clear guidelines on our lending practices, approval rates. Lorraine, what I'd say about what we're seeing within our own credit business is that approval rates are in fact down. However, it's because we see an increase in applications online. So, as you recall, we have the ability to – the customers have the ability to apply for credit, you know, online and those approval rates are lower, and I think, you know, you would see that across, you know, the industry. So, that's what we're seeing with approval rates. And our payment penetration rates are up overall and roughly 300 basis points, and I would also say that the amount financed is also up, Lorraine. So, we're seeing, you know, a good response within the financial services offering. Our partners of which Bread is, you know, on the prime portfolio, a partner for that. We're seeing, you know, health and we have a very watchful eye on, you know, as, you know, things move forward, we'll, you know, keep an eye on if there's any delinquency or change in and approval rates. I would say that we have, just as a reminder, we don't have credit risk on our balance sheet. And as you know, we removed that several years ago.

Thank you. And then can you provide us with some insight on how you're thinking about gross margin for the rest of the year? I imagine we’ll continue to have the fixed cost deleverage, but what do you think the merchandise margin trajectory will look like in this environment?

Well, what I'd offered there, Lorraine, is that the cost savings that both Gina and I commented on, which, you know, increased from a $100 million to $125 million to $250 million, half of those impact – roughly half impact gross margin, and largely in the back half of the year. And what did they relate to? Clearly, product cost savings, Gina talked about it, upping that from $20 million to $40 million. We're also seeing opportunity given the clearance and the health. The clearance position and health of our inventory first quarter, we saw core merchandise margin expansion of a 100 basis points. So, we're very pleased to see that. So, our continued health of our industry – of our inventory helps us manage margin and just use promotion as a strategic lever for us. So, back half, just to recap half of the cost savings as gross margin and SG&A positioned, and we're just leveraging the initiatives and the competitive advantages we've put in place to deliver that.

Thank you.

Our next question comes from Paul Lejuez with Citi. Paul, please go ahead. Your line is open.

Hey, thanks guys. Can you talk about the promotional landscape out there? Curious who's driving and you guys have pretty large market share. So, I would think that you would typically take more of a lead rather than follow. So, I just want to understand that dynamic a little bit in terms of what you're seeing. And then also on your expectations for the bridal business for the rest of the year, any way you can quantify that recovery and engagement, how that translates into your bridal business in terms of just what do you expect over the next couple of quarters in bridal 2Q and 3Q versus what you expect in 4Q? Thanks.

Thanks, Paul. So, let me comment, kind of on those in in reverse. So, on bridal, our predictive models, which incorporated trends from many years and 45 different factors that we are tracking on consumers are spot on in terms of the number of consumers who are getting engaged and the units of engagement rings that we sold in the quarter. What's changed a bit is the pressure on consumer spending from the macro environment. So, we saw some degradation in ATV in bridal late in the quarter. That's different from what we saw in Q4. So, that's a changing trend, and our revised guidance reflects an assumption that units will continue to track, you know, in-line with our predictions, but we'll continue to see some pressure on ATV. So, what's the pressure coming from? It's a combination of two things. One is a bit of consumer trade down, so people still getting engaged, but buying a ring slightly lower price. And we don't think that everyone in the bridal category predicted this downturn in engagements as accurately as we did and have some excess inventory in bridal. And so, we've seen slightly heightened rate of promotion in bridal that we wouldn't typically have seen. We're assuming both of those things continue for the rest of the year in the revised guidance.

Our next question comes from Mauricio Serna with UBS. Mauricio, please go ahead. Your line is open.

Great. Good morning and thanks for taking our question. First, I guess, like to ask on the gross margin guidance, you know, are you expecting, you know, to maintain the core merchandise margins, expanding in the next couple of quarters? And then if I think about like industry dynamics, is there anything you can tell us about, like, how lab-grown diamonds are disrupting maybe the ATV or the discounting that you're seeing across the space? And just very lastly on the cost savings, you know, the increase that you are expecting, would you say, like that change is, like, mostly attributed to the, you know, the savings from the store closures that you're expecting now or what are the other main drivers behind that increase of $100 million to $150 million on the cost savings target? Thank you.

So, as I mentioned Mauricio on gross margins, we are very pleased with our inventory position and the health of our inventory, which really reflects it within our core businesses. So, yes, we would expect to see continued positivity in our positive result in our core merchandise margin. In May, just importantly, in May, we've also saw the continued decline in inventory year-over-year. So, very pleased with how the team is managing inventory to continue to position us well to take strategic promotion as needed and really paving the way for newness for us, which is a critical component of continuing to deliver that margin expansion. The other point I'd make on margin is services. Services, as we said at our Investor Day, carries a 20% premium to merchandise margin, and we're seeing services growth of 5% outpacing clearly merchandise, you know, merchandise growth and services itself when we are advancing repair, we're advancing our warranty programs as well, and the customer continues to respond to those, and we're holding, very importantly, holding our attachment rate in bridal and overall raising attachment rate 200 basis points in the first quarter as Gina mentioned.

And then Mauricio on lab-created diamonds, we do not see ATV and bridal being driven by LCDs. They're less than 15% of our overall sales. And, you know, just an important consumer trend and offering for us, we believe that the majority of our customers still prefer their rarity that comes from buying a one of a kind natural diamond. What tends to happen is that engagement shoppers begin their journey with a predetermined budget. And so for those who are open to lab-created diamonds, we've consistently seen them trade up to a larger stone, which we have a competitive advantage in our offering because we're vertically integrated. And so, we've been able to, I think, really manage that very effectively to have an equal or higher ATV typically with a better margin profile for the company.

And then with the respect to cost savings, Mauricio, the 150 million increase, a portion of that clearly relates to our, you know, the store closings. However, we continue to lean into our store, the dynamic store label model that we have and we apply that as well to our customer care centers, which enables us to continue to flex at, you know, at a nice rate to continue to drive our double-digit operating model that, you know, we believe is very much in-tact and working. I would also articulate that the sourcing opportunities itself are, you know, that provide cost transparency. We believe it can take costs out of the product without compromising quality and innovation, and you know, that is factored into here, as well as driving out administrative costs that the customer just doesn't see, and our team is very much this is a muscle and a rigor that we've built over the last two to three years. And we are in step and, you know, plan and see the path to delivering this incremental cost savings.

Got it. That's very helpful. And did you provide or can you talk about the signing bonus for the Bread Financial contract renewal?

We didn't mention that. We have an appropriate arrangement with Bread, we've extended it three years. It's a very strong partnership for us, and we believe strongly that this helps us really stabilize a view of, you know, cost of funds as we navigate into the future together.

Got it. Thank you very much and best of luck.

Our next question comes from Jim Sanderson with Northcoast Research. Jim, please go ahead. Your line is open.

Hey, thanks for the question. I wanted to dig in a little bit more to the same store sales expectation based on the revised guidance. Should we anticipate a continued negative double-digit teen comp pretty much through the holiday quarter? And can you give us a sense of how you're looking at that balance between transaction value and declines in actual transactions throughout the rest of the fiscal year?

So, I'll take that, Jim. So, in terms of the pace across the year, I mentioned that we would expect second and third quarter to continue the trends that we saw in first quarter, [fourth quarter] [ph], we see it slightly higher due to a few things. And we don't really give comp guidance as you know. So, when you look at it on a total revenue basis, there are a few things in there. One is the fact that we have a 53rd week. We're lapping the UK labor strikes. We also had a significant impact over holiday the last three days of holiday due to weather. Although, you know, bear in mind, we we're very well aware that, you know, that can happen again. And then I'd say, you know, lastly, the bridal recovery is, you know, factored into the fourth quarter as well. But to Gina’s point, we are, you know, very mindful and thoughtful about the ATV level that we're seeing in bridal today, and we have carried that through the balance of the year in our guidance. So, we would expect, you know, continued decline in transaction, the same impact on ATV that, you know, we saw in the first quarter related to bridal, and we're positioned for, you know, with good inventories and healthy inventories to take the appropriate promotional actions that we believe we would need to take throughout the year.

Okay. Okay. Just to follow-up a question on the 150 store closure announcement. I think that will be complete sometime in fiscal 2025. Can you give us a sense, first of all, if what you would expect based on your history with closing stores, how much of the sales from the closed stores you would expect to recapture from omnichannel, and then wondering if you can provide any thoughts on what type of positive impact that will have on EBIT margin going forward?

We haven't dimensioned the overall impact of the store closings, but clearly as part of our $250 million cost savings program. What I would say is that they – what we see in transference is, we have stronger transference in our largest banners, the [cadence] [ph] sales banner. And, you know, as I said, we would expect most of these closures to occur in traditional mall locations. So, we've seen nice transference there. We have been able to capture if you look at our sales per square feet, over the last several years, we've seen significant increase in sales per square feet indicating that as we've, as you know, over the last 5 years, we've closed 5 years to 6 years, we've closed over a thousand stores, and we've had a significant increase in sales for selling square foot that we expect as well to pick up volume within our e-commerce channel.

Alright. And just one, like, quick last question. On Blue Nile, that will be fully included in the comp base by the fourth quarter.

Yes. And as you recall, we’ve acquired it in mid-August. We acquired Blue Nile. And, you know, that business is doing quite nicely for us in terms of the combination of the digital banners has really demonstrated strength. Synergies are pacing to expectation and really expect to – we'll have the re-platforming done for the start of the third quarter. So, really, as you would call, we said last quarter that we expect a one-point impact on our EBIT margins related to that acquisition in the first and second quarter, and that begins to abate in the third and fourth quarter of next year. So, very good news there.

Very good. Thank you.

Our next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead, Dana. Your line is open.

Good morning, everyone. As you think about the current environment and the volatility, the market share opportunities, given the large size that independents are of the jewelry industry, what do you see as the, any quantitative market share opportunities you have, especially with the new businesses that you've acquired that expand the customer base? Is there maybe even into next year, revenue opportunities that you can leverage with services that you're thinking about as we move forward? And then lastly, in the current environment, obviously, you know about the bridal business, what are you seeing in self-purchase and what are you seeing by brand there? And just one other quick thing. Any shift in the exit rate of the business versus during the quarter and did it vary by region? Thank you.

So, in terms of market share, Dana, we see this as a huge off opportunity. One of the things we've done in our transformation is created the flexibility by having, you know, lean inventory by paying down our debt, by creating a fortress balance sheet. We've created the flexibility to invest in the midst of disruption. That's what we did when we acquired Blue Nile at what we think was a very favorable price. We were able because of our cash position to do that. And we find ourselves in a similar position now where we see significant disruption in the industry, and so we're leaning in and playing offense. If you look at the first quarter, we believe that we grew share in bridal relative to independence. If you look at fashion, we have been building our fashion business to increase it as a percent of our total mix for the last three years in preparation for this moment that we anticipated that engagements would be down based on the COVID lack of dating three years ago. So, we've grown our fashion business 36% over the last several years in preparation for this moment. So, that's why we've made the choice to lean in and continue those investments so that especially as engagements return, which we think happens, you know, toward the end of this fiscal year in our fourth quarter, and ultimately, as macro pressures abate, we are ready to really put our foot on the accelerator and move ahead more quickly. So, we are seeing that as a big opportunity this year and I appreciate you asking that because I hope that's a key takeaway from this call is that we are leaning in to accelerate our competitive advantages. In terms of self-purchase, we are seeing self-purchase…

Those are all the questions we have for today, so I'll turn the call back to the management team for any concluding remarks.

Well, I want to thank all of you again for joining us today. What I hope you took away is that despite the pressured environment in which we're operating, our flexible operating model and strategic investments are working. We are confident in our capabilities, and so we're playing offense, leaning in to widen our competitive advantages to drive market share growth. Thank you.

Thank you everyone for joining us today. This concludes the Signet Jewelers Q1 earnings call, and you may now disconnect your lines.