Signet Jewelers Limited (SIG) Earnings Call Transcript & Summary

Good afternoon, everybody. For those of you who don't know me for like the sixth time at this conference, I'm Alex Straton, I'm the co-leader for branded apparel, footwear and softlines retail alongside Kimberly Greenberger here at Morgan Stanley. We're super happy that you guys joined us here on the second day of the conference. Even more delighted to have Gina and Joan with us today from Signet. So before I kind of introduce them more formally, I'll start with a broad overview of what Signet is. So Signet is the world's largest diamond jewelry retailer, generating annual revenue of about $8 billion in its fiscal year 2022 across approximately 2,800 locations across the U.S., U.K. and Canada. Signet operates under multiple banners, which I didn't appreciate. It is so many. It's Kay Jewelers, Jared, Zales, Banter by Piercing Pagoda, Diamonds Direct, James Allen, Rocksbox, Peoples Jewelers, H. Samuel and Ernest Jones. I hope I covered all of them, there's quite a few. And to add to this portfolio earlier in the year, they did add a new banner, which was Blue Nile, which is an online engagement ring and fine jewelry retailer. So today, as I mentioned, we're joined by Gina Drosos, Signet's CEO; and Joan Hilson, Signet's CFO and Chief Strategy Officer. So thank you both for joining us today.

Thanks for having us.

So just to give you guys some background on Gina and Joan, starting with Gina. She joined Signet as CEO in 2017, bringing vast experience across the consumer goods, personal care and health care industries. Prior to joining Signet, she spent 25 years at Procter & Gamble, where she was the Group President of Global Beauty, and she also most recently served as President and CEO of Assurex, is that how I pronounce it?

Yes.

Assurex Health. Okay. Perfect. Then with Joan, she joined Signet as CFO in 2019 and has over 25 years of retail experience. She previously served as EVP and CFO at David's Bridal, American Eagle and Limited Brands. It's quite the retail track record you have there. So again, thank you guys for joining us. Welcome. I'm sure many of you have attended these sessions so far in the conference. It will be a question-and-answer style fireside chat, and we'll also leave some time to answer your questions at the end. Before I dive into that, I do need to give you a mouthful of disclosures. So I do have to remind everyone, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures, if you have any questions. So with that covered, let's start the fireside chat.

You reported in Q3 earlier this week, I hear you moved it so you could come to the conference. So thank you. Can you just give us the key takes from the quarter so we can understand what happened?

Sure. It was a good quarter, I think, a standout in retail, thanks to our great team. So really nice to see. We beat on the top line, both on our core and on our pure-play banner, which now includes James Allen and Blue Nile. And we beat significantly on the bottom line, the core was strong enough to more than offset losses on Blue Nile that we had anticipated and covered. What I think is important about the quarter is that it's really the compounding effect of 5 years of transformation that we've been under. We're seeing those strategies really begin to create a virtuous cycle, almost a flywheel effect of accelerating momentum for the company. Jewelry is a very attractive category. It's not as cyclical as apparel or other specialty or discretionary retail. People get married. They have anniversaries, they have birthdays. They buy for themselves year in and year out. And Signet has really established a very attractive position in the category with what we think are some competitive advantages that just can't be beat. The Jewelry category is still about 2/3 independent jewelers, so mom and pops primarily with 1 to 5 stores, the level of digital investment that we've put into our experience now with 700 virtual jewelry consultants online, chat online, try on search and browse is unmatched by the category as is our data, our ability to target new customers and as we said when we reported yesterday, we've gained 22.5 million new customers since our transformation began. And those customers are younger, more affluent, more diverse and more digitally savvy. So given the competitive landscape, they offer us great lifetime value potential and the ability to continue to grow market share and have value creation.

Great. That's a super helpful overview kind of more recently, what you guys have seen maybe zooming out and understanding this industry a little bit better. It's been quite volatile at least in retail on the apparel and footwear front. But jewelry is a little bit more unique in that you guys don't have that many publicly traded peers. So maybe talk to us about how the industry has been developing recently. And if you could also help us understand how Signet plays in this ecosystem?

Yes. So as I said, jewelry is an attractive category. COVID has caused some kind of once in several decades blips a little bit in terms of weddings and engagements. But generally, it's a very, very steady business. I mean we expect to see somewhere around 2.5 million weddings every year. We see more than that in engagements because not every engagement turns into a wedding, as you might guess, but very, very steady year in and year out. The big opportunity that we have seen is, like I said, lifetime value. So it's once you sell the engagement ring, then there are 2 wedding bands. The couple often gives gifts to people and their wedding party to each other, to moms, 43% of the gifts that they give are jewelry. So surrounding the wedding has become a big strategy for us. And they think of jewelry as an ownership experience in addition to just a buying experience. So unlike apparel, as an example, I mean, you really -- you own jewelry for a lifetime, and it appreciates in value, it doesn't decline. And so you want to take care of it. And so our ability to provide services like repair, like resizing, trade in. So an opportunity if you buy a $2,000 engagement ring because that's what you can afford when you get married, but you want to trade up to a $4,000 or higher engagement ring later, we provide that. So Rocksbox is an interesting new one for us. It's the country's largest jewelry rental business. It's not large yet, but we really see a big opportunity for event rental, for example, you have a beautiful engagement ring on your wedding day, you'd love to have also gorgeous earrings and a necklace that you might not be able to afford. But doesn't that -- then once you fall in and love within it, it's in all your wedding photos becomes a great first anniversary presence. So we've really -- we're finding different ways to surround the customers by providing a distinct and we think superior shopping and browsing experience, buying experience and then ownership experience for jewelry.

That's super helpful background. I think for me, just given I'm not as close to the industry, but I do know that I went to like 15 weddings this year. So to me, that screams this could be a category that maybe saw a huge reopening bump, some normalization this year. How has the category -- what's the trend been in the last couple of years?

Yes. So what we saw in COVID is that weddings didn't happen at the same level they had before. People want to celebrate with all of their friends and family and that just wasn't possible during COVID. So this year, 2022 is the year of the wedding. It's a 40-year peak in terms of weddings. That makes last year the peak in terms of engagements. And we've seen this year that engagements have been off low double digits versus that peak. We expect them to be down a bit again next year, but then after that to normalize back to historic levels.

And what is the normal growth rate in the industry?

About 2% year in and year out, it's a very steady industry. And that comes from the fact that a lot of what we sell, while beautifully crafted is commodity, right? I mean, diamonds and gold appreciate and value over time.

Okay. I think that covers the industry for the most part. Maybe turning to this transformation plan that you guys launched, I think relatively recently, or at least when you guys joined. Can you just provide an overview of what that plan is, what the impetus was for it? Just a broad strokes overview would be helpful.

For the transformation?

Yes, the transformation plan.

Yes. I think our transformation has really been broad-based in the sense that it's been strategic, financial and cultural, and I'll touch on all of those. The strategic transformation was really to broaden our playing field. In 2016, Kay, which had grown as 1 mom-and-pop but another became big, Kay bought sales. But they were really 2 identical banners in a lot of ways, at least in the minds of consumers. They sold them the same price points for the same occasions, a lot of times even very similar merchandise and just not distinct. And so if Kay ran a promotion, Zales declined and vice versa. What we did is took a clean sheet of paper and mapped the category of consumers. So we looked at all the journeys that people buy for. We looked at price point as another vector, and then we looked at attitude or psychographics around how people buy. And with that, we created a very distinct portfolio now of 11 different banners, 8 of which are in the U.S. market, but they're appealing to different customers. So we've really been able to cast our net much wider. As a result, we've grown our market share from just around 6% to now about 10%. And that's just in the last several years. We think that we are on a trajectory to be able to continue to grow market share pretty substantially both because our data analytics is now a tremendous competitive advantage, so we can target and personalize our marketing better than we ever could before. And in a fragmented industry like ours, the scale of our marketing spend is a huge competitive advantage. But when we can bring it down to the individual level, then we're creating a flywheel effect there. So I think that's great. So I think banner value proposition is one really distinct factor. The other one I would talk about is we've created a very interesting connected commerce experience within the jewelry category. I think there was a paradigm some years ago that jewelry was a category that would not go online. And when we started our transformation, only about 5% of our sales were in e-commerce. Fast forward today, it's 20% of our sales. So quadruple as what it was before, but 20% is not the important part of this story. The important part is that 90%, 90% of our best customers shop with us both online and in-store before they make a purchase. So jewelry is a considered purchase. And so people do browse, they do compare prices, they do compare styles. They do try to connect with a jewelry consultant that they feel like they can relate to. And we can now provide that online or in store. We also have flexible fulfillment. So we've opened up our stores as vaults. So jewelry is bespoke, right? It's not like T-shirt that you would have in every location. We have individual SKUs and a piece that was sitting for several years gathering dust in Topeka, might be perfect for a person in Miami, but they could never see it. Now all of our jewelry consultants with a tablet that they're very accustomed to using can access inventory in every part of our company. And so that's great from a closure standpoint, really finding a piece that somebody wants. But it's always been great from an inventory standpoint. One of -- I thought our good numbers in the quarter was that inventory was down 2%. Now most of retailers has been happy with inventories only up 25 or something like that. But ours is down 2% and it's down 17% since Q3 pre-pandemic. And flexible fulfillment is one of the big reasons why. It's because we've been unlocking stranded inventory across our fleet. So our inventory is the healthiest that it's been since we can track it. Our clearance and sell-down is down 13 points versus pre-pandemic. So it's -- we're in a very, very healthy position in terms of that, but flexible fulfillment has been not only a great top line driver for customers, but also a great cash driver.

So it sounds like those are a couple of the transformations you guys have been able to successfully accomplish. Could you just tell us what inning would you say you're in, in terms of the bigger transformation plan? How much -- what's left to go?

I think we've gotten a very solid foundation in place that we can springboard from. But if I had to put a number on that, I'd say 25% or 30% of the way in. I mean there's a lot of value still to unlock. So our data capabilities, as I mentioned, are growing. But we just -- we've only been doing flexible fulfillment for 2 years now. So our ability to assort stores perfectly in the first place is still something that's growing. Our ability to make sure that every jewelry consultant has great TQ, we call it technical quotient to make sure they're really adept at that is still growing. Our loyalty program is another good example. Loyalty is a great opportunity for us to gather data and personalize our communication with customers. But we just have launched it. We launched it on Jared in the first quarter of this fiscal year. We launched it on Kay and Zales in the third quarter that we just reported. We already have 1 million customers in our loyalty program, and that's a great source of ongoing business. So I think we're just getting started, really.

Now one piece, I think, of the transformation plan that we didn't dive into as much as the off-mall strategy. Can you speak to the rationale behind that? And then perhaps what the financial implications are as you make that transition?

Sure, do you want to take that, Joan?

Sure. So we -- if you think about our portfolio, we've transitioned from like in the low 30% to almost 40% of our fleet to an off-mall strategy. Kay, our largest banner, is at 50%, 50% mall, 50% off-mall. And then we have Banter by Piercing Pagoda, which is primarily mall, but is a kiosk within mall. So what we've been able to do is lower our -- improve our penetration in the higher-grade malls and minimize our penetration in the declining malls by going off-mall. What we see is that the economics related to that are advantageous to us as well. It provides us more flexibility in operating each location because it's -- we have greater operating coverage, what are our hours and so forth. So we kind of call that shot in that situation. So it's good for us, and it's good to really mirror the traffic, the opening hours to the traffic in that location. So we see the economics are good, maybe at the top line, not as strong, working through that with the connected commerce capability that Gina mentioned because we look at each location overlay e-commerce and think about it from a block area perspective, put our store in what we believe is the most advantageous location for our customer, and really look at the market potential there. So those locations are very specifically picked and we believe that, that productivity will continue. And then the economics to the bottom line are positive for us as well. So really good strategy. It's really -- we've shifted our business in a positive way, gain flexibility and really feel that we've optimized our fleet since that. In Q3, our sales were up 33% to FY '20 or pre-pandemic. Our sales per square foot were up over 40% and on 450 lower stores. So really strong model for us, and the team has done a great job executing location selection.

The other thing I'd add is that one of the things that we've committed to on an annual basis is delivering a double-digit operating margin. If you go back pre-pandemic, Signet was around a 5% margin kind of thing. And we are committed to annual double-digit now. The real estate transformation that Joan talked about is a big piece of that. It's 5 margin points of structural improvement because we got rid of our 21% of worst performing doors and now have been able to make that transition.

And it continues to evolve. It's an ongoing process for us, top now is the fleet.

Yes. I would say the other thing that is interesting associated with that is that we use pretty advanced data and analytics to plan our store labor, which is obviously another big element in our P&L. And our sales per labor hour are up 70% versus pre-pandemic. So we've also, with a rationalized fleet and the kind of retention that we're seeing in our sales force, we've been able to dramatically increase the productivity of our labor as well.

Compared to the pre-pandemic level, similar to how we talked about occupancy, that was worth 3 margin points for us, really honing in on that variable labor cost by location by hour. So -- and it's something that we continue to refine as our data analytics really burn in and we get better and more precise.

Now what inning are you in? Would you say in this off-mall transformation? Is there still more to go?

There's more to go for sure. And as we -- but it's dependent on the assessment of each mall, how the malls perform for us and where the customer is. So when you think about -- we have a strategy that is a hometown strategy. So not necessarily mall. There are more of those locations out there in the country that we -- and those are typically off-mall. So we are looking and really finding those locations that drive our top line and really where we feel that we can get the right economics with the right concentration of customers.

I think it's also not just a location strategy. It's a format strategy. So one of the very interesting things to us about the Blue Nile acquisition is the chance to learn about a showroom model. We don't carry any live inventory in a Blue Nile showroom. It's all just there for people to try on a CZ in a silver or ring. I mean it's not value product there. So you're not going in to buy something today. You're going in to see it, touch and feel it, experience it, and get the kind of consultation that you want, and then it all is ordered online and delivered either to the store or directly to the customer. That kind of a low inventory model is fascinating, right, for us to look at. Another example is custom. Signet employs more jewelers than anyone else in the country. And we have a very fast-growing custom jewelry business. That's a good margin business, as you might guess everything from, bring us your mom's jewelry box, and we'll redesign the pieces, so that they're more contemporary and something you might want to wear to want to design my engagement ring from scratch, whatever it is. We've put foundries now in about half of our Jared stores where we have like CAD/CAM sketch machines, I mean you can sit with a designer and literally do a design right there on site. So different formats are also playing into this whole real estate strategy.

So real estate is one pillar of the transformation plan, and I know e-commerce is another. And now Gina, you've touched on some of the things that you've done to transform this. Can you just give us a brief overview of the strategy there, what inning you're in and then also the financial implications of moving further online in this category?

Yes. So I mean I talked about how our e-commerce, as a percent of sales, has quadrupled since the beginning of the transformation and now up to 20%. We really set a goal of leading digital commerce within the jewelry category. We think it's a distinctive competitive advantage for us given the scale at which we can bring that to life. So we've worked a lot on everything dissecting the consumer experience. Our digital NPS is up strong double digits since before we started putting all this in place, and that's a great measure, but we keep adding to it. One of the things we just added is SMS. So when you're online shopping, you can choose to chat with someone or you can choose to text with them. And that 23% of our contacts in the third quarter, people chose to text. And when they text with a jewelry consultant, the conversion is more than 15x higher and the ATV is higher as well. So we're really -- we're bringing some of the best of store-to-virtual. And now we're also looking at bringing some of the best of virtual-to-store. So one of the things that's great in virtual is that you can track what people click on and how long they're on a page and what part of the page, they're reading that kind of thing. Well, we can't really do that in the store, right? We don't know how many times a particular piece is taken out of the case. But you can imagine if the piece is taken out 5x, it doesn't sell, there's something wrong. I mean the price isn't right or it's not the right style for the customer who's shopping in that area, et cetera. We've now launched e-tags on virtually all of our loose diamond inventory in our higher-priced -- some of our higher-priced bridal. So now we can track every time a piece is taken out of the case. We also have QR codes on that merchandise so that we can tell the customer a story about where that diamond came from or whatever, but when someone clicks on the QR code, then we now all of a sudden have the ability to retarget and remarket to them. So we're really trying to, I think, connect e-commerce and flexible fulfillment is one aspect that I talked about. But also bringing the best of each experience together, I think, is another aspect.

So you mentioned this kind of longer-term plan to get to those double-digit EBIT margin. It sounds like 2x what you've done historically. Sounds like the off-mall piece is a big lever and same with reducing store labor costs. I think you touched on both of those. What are the other levers? Or are those the 2 major ones? And then how should we think about the time line to getting to those dips in margins?

Yes. A big one is assortment. We are the most vertically integrated jewelry retailer, certainly in all the markets we play in. We are a site holder with De Beers. We're their largest retail site holder. So we're buying rough diamonds directly from the mine. We have a cutting and polishing facility ourselves in Botswana and about another dozen contract manufactured cutting and polishing facilities. And so we're taking vertical integration margin points, if you will, at every one of those touch points. We also work with our vendors to value engineer product. So taking cost out that customers don't see or care about to offer a better value to customers, but also be able to improve our margins. So I think our assortment is one way that we really have been improving our business ongoing. If there are any others, do you want to...

I would say just over time, we've taken out over $450 million of cost in areas where the customer really doesn't -- they don't see it. They don't care about it. And it's really been in navigating procurement costs, supply costs as well as really balancing our overhead at our central offices. We've reduced our footprint for our offices. So it's -- we've really looked under into every cost line item to get out those costs, and we continue to do it. It's a muscle that our team has built. And we continue to tone it and make it stronger and it's really a part of our DNA and our ongoing operating model to really just fund the investments that we need to make through these costs that are really truly something that the customer doesn't see.

You know what other one, you might talk about is services, actually, that's a high-margin business that we've been growing.

So services year-to-date is up 10% and the quarter was up 8%. We said on our earnings call that the margin attached to services is 20% higher than merchandise margin. So it's an accretive business for us. We continue to grow it. We're offering new components within services, one of its bundles is repair bundle, really offers the customer the opportunity to fully care for their piece of jewelry and enhance the ownership experience. And for us, what we find is overall, it's a higher AUR that really is driving up the ATV related to a repair service as well as we've been able to hone in on the margin cost related to services and really balance the labor there as well. So good top line, good margin expansion for us. And the customer really is experiencing a more fulsome ownership experience with jewelry.

The bundles have actually really been a great thing. I mean it's analogous in a way to cars, right? I mean you could go into your dealer and say, I want an oil change. and there might be a certain price for that or you can go in and say, "I need a 25,000 mile checkup, which includes an oil change, a brake pad change, alignment, whatever." That's what our repair bundles now do. So you don't just go in and say, "I want my ring sized." It also gets re-rhodium-plated, it gets polished and everything. So the customer is much happier because they have now their beautiful piece of jewelry been as sparkling in a way it didn't before. But it's also better for us because it's trading people up to a higher AUR.

So zooming back out, we kind of covered the strategy and now back to the near term. My question is kind of how are you guys thinking about holiday? What's embedded in your guidance? I know you guys just reported a couple of days ago, I think that was one thing we didn't cover at the beginning. So if we could circle back to that.

Yes. I'll talk a little bit about the consumer, and then maybe you can talk about the guide. What we've been seeing really since we lapped stimulus in March is some weakness in the lower-income customer. Jewelry tends to the price that people pay for certain items tracks according to the journey. So people spend more on bridal, the least on self-purchase generally, romantic gifting being in between and it tracks by income. So what we've seen kind of fall off given the inflationary pressures on lower-income customers is lower-priced self-purchase. And what Joan said on our call was that about half of the comp decline that we saw in the third quarter was related to one of our banners, Banter by Piercing Pagoda, which really is a value banner and focuses on that customer. Now Banter last year when stimulus was in the market was our fastest-growing banner, right? And so this is really, I think, the benefit of a portfolio strategy is that when we saw that begin to happen, we shifted much more of our assortment and our marketing to higher-priced product and higher income customers. That's why we saw ATV up 8% in the quarter, up 33% versus pre-pandemic, so strong in that sense. We're expecting for the holiday a couple of different things. One, higher income customers we think will still be in the market and buying, and we've got a great assortment for them. Secondly, we're seeing customers at every income level wanting value. They want to know they're getting a deal. So while last year, when supply chain was a concern and people were buying early because they were afraid that things were going to run out, we haven't seen that this year. We saw people really come into the market, Black Friday weekend. One of the interesting things on Cyber Monday, it was our biggest Cyber Monday ever on our core business and then Blue Nile on top of that. But we saw not only strong revenue, but -- we saw very strong visits. And we know there's usually about a 2- to 3-week lag between when people visit and start browsing and when they actually end up buying. So I think that was a good sign. And the search terms were consistent with what we saw happened during COVID, which is people were buying fewer but more expensive holiday gifts. So you're buying for people you love, not necessarily friendships or whatever. That has been very good for our business. So those are probably some of the headwinds and tailwinds that we see from a consumer standpoint.

Great.

And overall, we raised our guidance for the year, reflecting our confidence given the Q3 beat that we saw in both the top and bottom line, while we more than covered the losses of Blue Nile in the third quarter as well as we've maintained the operating rate -- operating margin guidance at 10.8% for the full year on the high end of our guidance, all while, again, slight operating losses in the fourth quarter with Blue Nile, but recognizing the fact that there's that sharp decline in the British pound and the Canadian dollar, and that affects our -- obviously, those businesses that we have in our portfolio. So reflected that in our guidance for our core as well as the lower price point trend that Gina mentioned. So overall, very pleased with our ability to bring that guidance and raise on the confidence of the performance we're seeing.

Now I know we only have a few minutes left, so I would like to open up to the audience if you guys have any questions. I know people have been shy recently. So if there's any questions? And if not, I can keep it going up here. So I'll keep going. One question I had for you was the strength you saw in managing inventory. Can you walk us through what enables you to do that? What's the kind of outlook or strategy there?

Want to take that?

Sure. So there are several factors, one of which we talked about in depth is flexible fulfillment, which really helps us have access to the inventory across our fleet. And we see our stores as our vault, including our distribution centers. So that enables us to really keep our inventory turning. We have a very strong strategic vendor relationships where we're able to bring product to market, test it with our own proprietary capability and really be able to invest quickly and ramp up on newness and new product. So that is also a big lever for us. I'd also add that just the overall discipline of our life cycle management has been something that has served us very well. We're able to turn our core inventory over 1.5x, which is a 50% improvement to where we've been pre-pandemic levels. The clearance inventory is down, Gina mentioned, 13% in FY '20. What that enables us to do is bring in newness, which is tested and turn faster. So it's that -- all of that together is what's really bringing our inventory capability and working capital efficiency that we're seeing in our business. And I would just also articulate that the cost, this is all done while we're tiering up our assortments. So in the quarter, our core inventory was down 2% at the end of the quarter. This was done while we've tiered up the assortments into higher price point categories. So we've been able to offset that with the nice life cycle management of our inventory.

So this has been -- go ahead, yes.

I would just say -- the only other thing I would add is that we've put in place a very strong concept testing program. So we premarket test our big lines now in a way that just wasn't possible in the past. We've now tested hundreds of product concepts. And so we can benchmark those versus real end-market experiences that we've had, which allows us to buy better in the first place. So that has also, I think, been a factor in our ability to manage the product life cycle as well.

Now with about 20 seconds left, any final key takeaway or item we hadn't discussed that you want to communicate to the audience?

Sure. I think the big takeaway is that Signet is well positioned for continued value creation and market share gains. We're in an attractive category and we have a scaled and competitive advantage position within that category. So I think we're -- we've been in the market buying our own stock because we think that there's a lot more value to be had.

Okay. Well, Gina and Joan, thank you for joining us. It's been super helpful. And thanks, everyone, for joining the session.

Thank you.

Thank you.