Signet Jewelers Limited (SIG) Earnings Call Transcript & Summary

Good morning, and welcome to Day 2 of our Goldman Sachs Global Investment Research Conference. My name is Brooke Roach. I cover the apparel and brand sector here at Goldman, and I'm very pleased to introduce our next session with Signet Jewelers. With me today are Gina Drosos, CEO; and Joan Hilson, CFO, Strategy and Services Officer. Welcome, Gina, welcome Joan.

Thank you.

Good morning, everyone.

Gina, would you like to tell us a little bit about the -- it's been about 6 months since you unveiled your new midterm goals, which target $9 billion to $10 billion in revenue and $14 to $16 in EPS. Can you expand on the key pillars of that plan and your confidence in achieving these targets, even as we face somewhat of a dynamic macro backdrop?

Sure. So we just reported our second quarter earnings about 1.5 weeks ago. We were able to deliver ahead of expectations on both top and bottom line, and we have reaffirmed our guidance for the rest of the year. EPS up slightly, thanks to share repurchases. So we felt good about the performance in the second quarter. And I think if we kind of go a little bit of bigger picture, Signet has been on a transformation for the last 5 years, really to invest in our digital and data capabilities, to optimize our store fleet, to refresh our brand positioning. And I think even in what was a somewhat rocky macro environment in the second quarter, our team was able to deliver in that context. So just 2 years into kind of our second phase of this transformation, we updated our midterm goals in April and took those a bit higher because we're seeing some really good traction on the capabilities that we've been putting in place during this transformation. And there were 4 key pillars that we talked about in our IR Day. The one that I think is the most obvious at this moment in time is that COVID created a temporary disruption in dating, and the average couple gets engaged 3.25 years after they start dating. And so we had predicted that we would see a lull in engagements caused several years ago by COVID now. So typically, pre-COVID, 2.8 million engagements per year in the U.S., last year, 2.5 million, this year, 2023 will trough at 2.1 million to 2.2 million, but then that begins to come back starting in our fourth quarter, and we believe creates a 3-year tailwind on our business, if we just maintained our market share, which is around 30%, that's $600 million in revenue that we see as part of those midterm goals. We don't believe we will just maintain our share, though. We are seeing good signs and reported in our second quarter that we believe we are growing market share. So that tailwind could actually be a little bit bigger for us. A second key one is accessible luxury. Signet has traditionally been a mid-market jeweler playing very squarely in the middle of the market. But the big share gain opportunity for our company is the 2/3 of category sales that are dispersed among 17,000 independent jewelers. It's a highly fragmented category. And typically, these independents play at a bit of a higher price point than us. So we have been tearing up both our existing banners like Jared, and we have acquired Diamonds Direct and Blue Nile, both of which give us a higher exposure to that accessible luxury segment. We talked about in our second quarter, for example, that just some assortment changes that we have made in the Jared business as those play through are worth $100 million in incremental revenue to us over time as we are raising our average transaction value virtually exclusively through our assortment, not through pricing but through the assortment and tiering that up. So in total, accessible luxury expansion is $1 billion of incremental revenue potential for us as we go forward. The other 2 that we talked about are services. We like to think of jewelry not just as a purchase experience, but as an ownership experience. When you think about your car, for example, you take it in for the 5,000 to 15,000 mile check up. You need to do the same with your tennis bracelet to make sure that the clasp is still tight or that the stones are tightened. And so we now, with a small acquisition that we made in the quarter, SJR, and with the integration of Blue Nile's jewelry network, we now have far and away the largest jeweler network in the U.S. market. And so our ability to lean into repairs to extended service agreements to rental of jewelry, all of those things is now really squarely in place. We think that's another $0.5 billion opportunity for us. And I would just remind everyone that services carries a margin that is about 20% higher than what we see in our merchandise margin. So that is a margin-accretive growth opportunity for us. And then the final one has really been the core of our transformation all along. It's getting our brand portfolio positioned in a way that we access more of the market despite our size as the #1 jeweler in the U.S. and the #1 diamond jeweler in the world, we still only have about a 10% market share here in our primary market in the U.S. And so getting our brand portfolio positioned in a way that really accesses more consumers and using our data capabilities to do that, I think, is a really important opportunity. We now have quite an expansive CDP or a customer data platform that we're using to personalize our marketing. So if I go back to the first example of bridal, we have 14 million people right now in the dating funnel that we can identify in our database. As I mentioned, 2.1 million couples will get engaged this year. So we have significantly more people that we see in the dating funnel, and we are now tracking 45 proprietary signals that tell us how couples are progressing through that 3.25 years between when they meet and when they get engaged. If someone is at an early stage, so meet the parents or go to a concert together or whatever, we're not going to serve them an engagement ring at. They're not ready to think about that yet, but they might be ready to think about celebrating a special occasion like a birthday or a couple anniversary kind of a thing. And so we're serving them different kinds of ads now at different points. We think that, that market share growth, the digital, the data investments we've made, the banner portfolio optimization is again worth another roughly $0.5 billion. And so these are the key 4 building blocks that we've outlined and that we're working very hard on the team to be able to deliver. And we saw in the second quarter a lot of those capabilities beginning to take hold.

That's really great color. Thank you so much for the introduction on the midterm plan. Maybe we can step back for a moment and bridge that midterm plan to your second half outlook because your outlook does call for an inflection in momentum in 4Q, particularly around bridal and engagement. Can you dive deeper into your thoughts there? And what's assumed for the macro into the back half of the year and 4Q relative to what's assumed for your strategic initiatives?

Yes. I think that's a very important question. Maybe I'll talk about the top line and Joan, you can jump in on the margin side of the equation. We actually have not assumed in our fourth quarter guidance a significant inflection from engagement, we'll see a change in engagement, but we still expect engagements in our fourth quarter to be below last year, we're just at the beginning of that 3-year cycle. And so we will see some improvement, but not all the way to positive yet. The second thing in our guidance is that we haven't assumed an improvement in the macro environment. We've assumed that continues. We have not assumed a benefit from the lapping the weather of storm that we had last year. So we haven't built anything like that in. We are assuming that we'll see some benefit from cycling the U.K. shutdowns that we saw a year ago. So we've been, I think, conservative in how we have thought about that fourth quarter guidance particularly on the top line standpoint and then you can talk about the margins.

And on the low end, we've assumed some modest impact from student loans as well as a slight worsening -- potential worsening of trends. So we think that the range for the guidance for the back half of the year, we're comfortable with. And then when you think about the margin, what's happening is we have -- we're on track for a $225 million to $250 million cost savings for this year. It is heavily weighted in the back half and proportional in the fourth quarter. So a nice margin expansion from that is what we're expecting. Gross margin has been running -- core merchandise margins have been running up very nicely, sourcing initiatives, as well as inventory management and services, of which Gina spoke of carrying a 20-point higher premium -- or a premium to the merchandise margin, those will -- we expect to continue into the fourth quarter. So gross margin is implied to be up as well. Then when we think of these cost savings, SG&A in the second quarter, you may have noticed that it was up 420 basis points. We have some marketing timing. But we also -- we're still seeing impact of Blue Nile and the replatform we hadn't yet occurred. But as we move into the back half of the year, we successfully replatformed Blue Nile and James Allen, and in the fourth quarter, we will begin to see the benefit of that and the synergies that we can create with that replatforming. So that will also enhance the fourth quarter operating margin.

That's really great color. As you think about the opportunity in bridal as engagements begin to become less negative and potentially see a path to inflect positively. What programs do you have in place to capture that incremental market share? And if it does take longer than you currently expect for those bridal trends to normalize, what are the offsets in your business?

So it's an interesting dynamic going on with couples and how they think about getting engaged and getting married. And so we've gotten some questions around, are we sure that what we're seeing now is a COVID impact and not a cultural shift. And the answer to that question mathematically is, yes, we are absolutely sure of that. And the reason is that some consumers so quite higher-income professional urban consumers are seeing some falloff and have been, by the way, for the last 5 years in the number of couples getting engaged. But 2023 is the first year that quite that -- Hispanic quite customers are moving up and the curves have crossed. So we have more engagements this year from multicultural customers than we do from quite non-Hispanic customers. So these curve -- these lines, 1 going down and 1 going up or now crossing this year. And if you look over the next 5 years projection, we project a disproportionate number of engagements coming from Hispanic and black and Asian customers in the U.S. as well as LGBTQ+ customers in the U.S. We have been predicting this trend for a couple of years, and so we've been leaning into it. We know, for example, that Hispanic customers are very interested in brands. And so we've done a lot of work with our Vera Wang and with our Neil Lane with Monique Lhuillier, some of the exclusive brands that we carry to move those brands also into yellow gold and into simpler settings, which are highly desirable to the customers that we see really coming on. We have Spanish-language advertising across all of our businesses. We have all of our financial plans available for customers to see in Spanish language. We have Spanish speakers on the floor in all of our stores that we have designated as high Hispanic markets. So this is a trend that we've been expecting and have really been able to lean into. So I'd say that's one of the offerings. We also know that fashion jewelry and celebrating other occasions is very important. So for example, in the Hispanic community, multiple Mother's Day celebrations, we find that yellow gold is a great gift idea for those occasions. And so we've increased our assortment within those brands. So we've been using our data analytics to identify how to assort our stores based on the populations that are shopping in those stores, and we've carried that all the way through the customer experience, which I think will be very valuable. In terms of other general trends that we're seeing in wedding and engagement, we are seeing more customers, especially in the lower and middle income groups being interested in lab-created diamonds. We have a very good assortment of those, and we have some proprietary sourcing that has enabled us to keep our average transaction value on a lab-created sale actually higher even than a natural sale and that comes with a higher margin for us. So we have a good offering of that this holiday as well. Engagements, interestingly, while they happen all year long, they tend to skew to the November through January time period, lots of Christmas and New Year's engagements that kind of...

Just an add-on to that, Gina, it's the services.

Yes, exactly.

So as bridal trends begin to recover in the fourth quarter, warranty plans, the attachment to help enhance the jewelry ownership experience as well as the repair business that we have, we have SJR in the Seattle facility that is going to enable us to service more clients and customers as well.

One, as you might guess, the extended service agreement attachment rate is higher on higher priced purchases, which would include engagement rings. So the percentages are higher as well.

That was actually going to be my next question. services. So maybe we can dive a little bit deeper into the strategic opportunity that you see in services. You mentioned the opportunity for a little bit higher attachment rate in the fourth quarter. But can you contextualize the biggest opportunities that you see for services revenue across the different categories within your midterm plan and provide a little bit more detail on what the margin opportunity that is to Signet?

Joan, you want to take that one?

Sure. So the margin opportunity, as we mentioned, has a 20-point premium within the services category for us to be comparing that to merchandise sales. And so if you think about our business today, it's roughly 10% in the services category. And with our growth plan, our midterm goals takes us to about 12.5%. So we're growing a category mix that has a higher margin. So that's -- from an economic perspective, that's important for our overall model and enabling us to continue to invest. The key components of the services growth include the warranty and the attachment on that. Gina mentioned that bridal as an example, in higher price point products carry over an 80% attachment rate for warranty and it enables the customer to come back in and get their jewelery checked to make sure everything is tightened and it's safe for them. And so we see continuing to grow that attachment. In the first half of this year, we've grown over 200 basis points just alone with training and with the focus with the stores as well as digital investments related to the website whereas you check out the warranty is offered to you, as you check out on the POS, the warranty is offered. So we're giving the customer the opportunity to protect their joy of purchases. So that's a significant piece of our growth, probably half of it. The other half is what is the repair side of the business. We have over 2,500 skilled jewelers within our network. We can service the jewelry industry and really protect and continue to fortify the craftsmanship that goes into a piece of jewelry. So custom is a nice way for the customer to express and personalized jewelry. We will bring that to them, our customers through our services business, our repair facilities. And then we have now the opportunity with the acquisitions, both Blue Nile and SJR who do mail-in repairs, business-to-business repairs to service the overall industry as well as just bring in-house watch repair because we had to send out watches in the past. Now we have the skill set and the craftsman within and the certifications to bring watch repair in-house, which is immediately accretive to Signet. So overall, $500 million of growth, half of it coming from warranty plans, improved attachment on higher price points that's picking up as well on the tailwind of engagements and then the mail-in and B2B capacity as well as improving our services offering through repairs to our customer.

So one other thing I would mention, I mean, those are the biggest building blocks and we think very meaningful over time, repairs is an even more fragmented business than jewelry sales and so big opportunity for us to play a B2B role in that, which is still quite small for us, but we think growth over time. The other couple of areas in services that I think are very modern and very interesting are piercing and permanent jewelry. So for example, we are at New York Fashion Week, we've had a van for Banter by Piercing Pagoda. They're always doing piercings, doing permanent jewelry, where you sorter on a bracelet and then you don't have to take it off with a clasp. You just wear it together. This is something that friends do together, moms and daughters do together, generational kind of piercing is also a big deal in all communities, but particularly in the Hispanic community. So these are services as a way really for us to surround the consumer experience of jewelry. And when we do a great piercing, when someone has that kind of an experience with us, where we've had an emotional moment of getting permanent jewelry together, then we tend to be able to build a relationship that brings those customers back. So we see services as surrounding the experience in helping us create lifetime value.

That's great. One of the questions that we're asking all companies at our conference today is that of the consumer backdrop. And specifically, do you see the consumer facing more headwinds or fewer headwinds next year compared to 2023? And how are you thinking about the potential impact from trade up or trade down across your demographic cohorts?

So as we mentioned, we're -- we don't have any improvement in our expectations of the consumer baked into our rest of year guidance. So we are assuming at the low end that things might get worse and at the high end that they stay the same. So there's nothing in this year's forecast about that. As we look into next year, we haven't given guidance to next year, but I think 2 important things that we've talked about, we'll continue to see. Number one is this return to engagements. So as I mentioned, 2.8 million in a typical year, it's been coming down at trough at 2.1 million to 2.2 million engagements. This year, we see that number going back up in 2024 to 2.4 million, 2.5 million engagements. And of course, we're leaning in, given this proprietary database and understanding that we have to capture a disproportionate share of those, given that bridal is about half our business, that's a very meaningful opportunity for us and one that we're really going after. And I think we will probably continue to see a return to self-purchase at lower price points. As people have gotten back into the office, they're refreshing their wardrobes and their looks. We've seen very strong sales at -- in fashion jewelry at $1,000 and less. We have a very strong offering and a lot of innovation in that. What customers need right now, I think, is a reason to buy. Over the summer, we've seen people spend. So consumer spending, obviously, has been good, but a lot on travel and entertainment and things like that, that, I think, is a good sign for us in the sense of those are key milestones that tell us that we're right about our predictions about engagement. But as we move into next year, we would expect to see more people buying at that low price point to express them -- their personalities and things like that. So those 2 trends, I think, will continue.

That's great. Another question that we're asking most companies at our conference today is the outlook for pricing. And you mentioned some interesting trends with self-purchase and with bridal, which have very different price points. But as you think about your like-for-like pricing, how are you thinking about that into 2024? Do you currently anticipate raising, lowering or maintaining your price next year?

So the first important point that I would make is that we believe that our scale allows us to offer customers a better value than their other alternatives for buying fine jewelry. So Joan mentioned that we have now put in place some company-wide sourcing programs that we're seeing actually positively impact our margins. We can also pass on free that value to our customers. And if you look back over the last several years, virtually all of our increase in average transaction value has come from tiering up our assortment, not from pricing. The other thing that I would mention is that the ingredients of the products that we sell are commodities. So we watch very carefully, obviously, the price of gold, the price of diamonds, we're able to time our purchases on that better than our competitors. We're 1 of only 4 retail site holders with De Beers in the world. We own our own cutting and polishing facility in Botswana. So we are vertically integrated, and we see diamond pricing all the way from mine to market. We're able, therefore, to time our purchases on that in a way that is very helpful to our business over time. So we -- and we have seen the price of diamonds, which is a bigger cost component in our jewelry than metals coming down, and we've been able to take advantage of that gold, of course, has stayed pretty much an all-time high. But I think that we would see continuing to tier up our assortment and offer our customers better value as we do that.

I think one example of that is the diamond cut gold. We're bringing innovation and value through our customer and making -- to our customer, making sure that we manage sort of a good, better, best price point architecture so that the diamond cut gold at the time when prices were increasing, we were able to offer a beautiful product within a price point range that the customer could feel good about. That is strategic relationships with our vendors and working with them on innovation that's meaningful for our customer base.

Just, I mean, on that front, we have another very interesting innovation coming for holiday. The technology is electroform gold. Basically, where you take gold, and you form it around another metal and then you take that metal out. So it creates a big -- think about like a big puffy kind of a link in the chain or an earring. It gives a very big look, but it's a lightweight and offers the customer a great value. These are the kinds of unique innovations that we're working 1.5 years to 2 years ahead with factories to be able to bring to our customer and are proprietary to us. So we see that innovation cycle is something that we can continue to bring. A good example on that for holiday is that we -- while independent jewelers didn't predict as well as we did the lull in engagements and as a result, have had very high inventories, and we've seen quite a high promotional environment. Our clearance is actually down quite significantly. That's been part of the improvement that we've seen in our gross merchandise margin, and we'll have more than 30% newness in our product assortment for holiday. We believe that's significantly more than our competition will be able to feel.

That's great. One of the things that's come up a couple of times now is the opportunity to tier up your customer into accessible luxury. That's one of the strategic pillars of our plan, and you have a target for $500 million of additional Jared sales. Can you help us understand the cadence and the pace of premiumization that you expect here? And how you think that, that will fall through to the bottom line?

Yes. So one element is expansion of our higher-end businesses. So Diamonds Direct is a company that we acquired a little over a year ago, they tend to operate at a higher price point than our average across our banner portfolio. We see a store expansion possibility for Diamonds Direct where we could potentially see kind of double-digit expansion of number of doors or Diamonds Direct over the next several years. Each of those doors tends to have an average level of sales of $15 million to $20 million, which is significantly higher than a typical store in our line. So it's interesting. One of the things that we have talked about is that we continue to optimize our store fleet out of malls and into an off-mall environment. And even though we've said that we'll close about 150 doors between now and next summer, so we've been on kind of a year cycle for that. We are seeing very little change in our square footage because at the same time, we're investing in expansion of Diamonds Direct and also of our Jared footprint. So one is just expansion of these higher-end lines. The second is getting these businesses more into higher-end fashion, so both Diamonds Direct, Blue Nile, and James Allen, frankly, all skewed significantly more to a bridal business than they do to a high-end fashion business. High-end fashion carries a higher margin and also allows us to sell that first anniversary gift, first birthday gift, very important in terms of creating lifetime value. So we see the assortment change as another opportunity to expand.

So let's move to you and discuss the margin opportunity at the business. You've laid out a midterm target of 11% to 12% on adjusted EBIT. What are the most important drivers of achieving that level of profitability versus your outlook for this year? And what improvements are fully in your control versus factors of the external environment?

So our view of margin expansion is really focused on continuing to drive cost savings and drive costs out and leveraging the data analytics capabilities that we put in place. Labor productivity continues to improve. It gave us 250 basis points of margin improvement to date, and we can continue to refine that. We will continue to work with the teams on. It just generally costs out that the customer doesn't see or care about. But the most significant opportunity for us is in sourcing and the strategies around sourcing and balancing our promotions within our business. And with the number of brands that we have, we have a great opportunity to speak to each one of those customers at pricing and be able to source to a price that enables us to control the margins that we have in our business. So being more vertically integrated, one, is an opportunity for us. Buying less, more often, it's kind of an old damage, but it's very real and really moving to more of a just-in-time strategy with our vendors is something that we're working diligently on over the -- and have been and continue to see opportunity in the future for that over the next 3 to 5 years. So sourcing, pricing and promotion as well as continued data analytics to drive cost out and leveraging AI, where it's applicable for us within our cost management. We have an asset protection team that leverages AI in terms of where losses are likely to occur, and we reinforce training and so forth in those locations. Our uninsured losses are below last year at this point in time. So with an industry-leading asset protection team, that's been very helpful to us as well as really mitigating shrinkage within our business. We have a very low level of strength related to inventory. So that, again, puts that within our control that within gross margin. And we continue to optimize our fleet. We've closed over 21% of our fleet over the last several years, and we continue to rationalize the fleet, Gina mentioned it. We're focused on mall locations, in primarily A malls and moving to off-mall where the economics are much better for our business and our customer response to those locations in terms of small-town strategy don't need to go drive to a big mall, but we are their local jeweler in that sense. So we've taken a national footprint to a local footprint with that strategy, that also helps with margin expansion. So we are -- we have a lot in play. The team is very much committed to delivering our margin expansion.

Gina, we have about a minute left. Any final closing comments or thoughts that you'd like to leave with the audience?

I think what's important to note about Signet is that we are the largest player in an unscaled category. We've been on a 5-year journey to make investments in our business that have not only taken our margin from roughly 6% to now 9% to 10% but have the ability to take us to meet our midterm goals, and all of the pillars that we've outlined in our midterm goals are in flight. I mean we're already seeing results from the activities that we put in place. So they're concrete, and we feel very committed to deliver those, and see them in our sites. And so we're looking for this return to engagement to be a multiyear tailwind for us and then to surround the customer with a great ownership experience and use our digital and data and analytics to really create competitive advantage and grow our market share.

Great. Well, thank you, Gina. Thank you, Joan, and thank you to all of you in the audience for joining us today.

Yes. Thank you.

Thank you.