Signet Jewelers Limited (SIG) Earnings Call Transcript & Summary

Good morning, and welcome to the Signet Jewelers' Third Quarter Fiscal 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. Joining us on the call today are Clayton Ward, Senior Director of Investor Relations and Capital Markets; J.K. Symancyk, Chief Executive Officer; Joan Hilson, Chief Financial and Operations Officer; and Rob Ballew, Senior Vice President of Investor Relations. At this time, I would like to turn the conference over to Clayton. Please go ahead.

Good morning. Welcome to Signet Jewelers Third Quarter Fiscal '25 Earnings Conference Call. During today's discussion, 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 disclosures in our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Except as required by law, we undertake no obligation to revise or publicly up forward-looking statements in light of new information or future events. During the call, we will discuss certain non-GAAP financial measures or further discussion of these 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 ir.signetjewelers.com. With that, I'll turn it over to J.K.

Thank you, Clayton, and good morning, everyone. It's my pleasure to be with you all today, and I'd like to first thank all my Signet colleagues for their incredibly warm welcome. There are many aspects that attracted me to Signet that I'll share in a moment, but let me start by saying that the team is genuinely motivated by our purpose, committed to serving the needs of our customers and invested in the future of Signet. I've immersed myself in our business and culture, spending more time in our stores and offices, meeting with our team members and leadership. In my time at Signet, I've already seen firsthand how our team members recognize and celebrate the emotional connection we have with our customers when they are making a jewelry purchase. I've seen it in cities across our footprint how passionate everyone here is about providing customers with the highest level of jewelry expertise to offer guidance to create lasting memories at milestone and everyday moments in their lives. As a career-long merchant, I share this passion for serving customers. And I'd like to take this moment to recognize our Signet team for their dedication and hard work in the midst of our most important selling season. I'm also encouraged by our vendors and their commitment to strategic partnerships to create on-trend merchandise. After a month at Signet, I'm energized by our opportunity to accelerate growth. Our strong brands, deep consumer focus and talented team provide a powerful foundation to strategically evolve and transform our business. In partnership with the management team, we are actively identifying new opportunities for the future. I recognize we have some challenges. Engagement incidents are somewhat less predictable on a short-term basis and as you know, lab-created diamonds have disrupted the industry but also create opportunities in the fashion category as well as increase the breadth of assortment within bridal. I'm excited by the opportunities in front of us and I believe Signet's strengths will overcome its challenges to yield growth ahead of us. Over the next few months, myself and our team are first and foremost, focused on continuing to execute a successful holiday season. We will look to evolve our strategy to fuel customer and shareholder value and look forward to sharing details on this work and our plans in the coming months. I'll now turn the call over to Joan.

Thanks, J.K., and good morning, everyone. I'd first like to thank our Signet team. Your agility and commitment continue to be an inspiration, and I appreciate the drive to results in the third quarter and the preparations for the holiday season. I have 3 takeaways today. First, we continue to drive sales momentum with our sixth consecutive quarter of sequential same-store sales improvement, as we navigate a choppy consumer and industry environment this year. Second, we are well prepared this holiday season with a go-to-market strategy, which we believe will drive positive same-store sales in the fourth quarter. Lastly, we're updating guidance to reflect the short-term impacts from both digital banners, James Allen and Blue Nile, leadership transition costs and the permanent accretive impact from the early completion of the preferred shares redemption. Looking closer at the third quarter, same-store sales finished down 0.7%, a nearly 3-point sequential improvement to the second quarter. In fact, when excluding the impact of our digital banners and hurricanes, we delivered same-store sales growth of 1 point. Fashion sales were positive, as we continue to see strong sell-through of new merchandise, partially offsetting the decline in engagement performance in our digital banners. Focusing more on newness, our strategy to drive higher penetration continues to resonate with customers, up nearly 8 points to last year in our core banners. The higher penetration of new merchandise is key to Signet's strategy around average transaction value or ATV and merchandise margin. For example, North America, Fashion ATV was up mid-single digits in the third quarter, driven by a more than 30% growth in lab-created diamond fashion sales. Importantly, new products carried more than a 5-point margin in premium to our core average, which is a greater premium than last year. Turning to Bridal. We finished the quarter with total North America engagement units down 2% due to performance in our digital banners. Excluding the digital banners, units were up nearly 4 points in the third quarter, a 7-point sequential improvement to last quarter. Turning to ATV. Overall North America Bridal ATV was down mid-single digits in the quarter due to competitive price pressure in loose stones. We continue to believe Engagement units will recover over the next few years. Services revenue was up nearly 2% in the quarter, as it continues to outpace merchandise sales. Extended service agreements, or ESAs, attachment rates grew 170 basis points to last year, driven by continued traction in post-repair ESA and Fashion merchandise. As a reminder, services carries a 20-point margin premium to merchandise. Turning to my second takeaway, we believe we'll deliver a positive holiday performance this year driven by our comprehensive go-to-market strategy. We have positioned merchandise and marketing to lean into both Fashion and Bridal, building on the momentum we've seen in the last few quarters. We've increased inventory penetration of newness to over 30% in core banners, up more than 10 points to drive holiday selling. The consumer continues to be value-oriented and the increase in new fashion merchandise allows us to provide customers a greater value at an attractive margin and ATV through product engineering. This work extends to Bridal as well. December typically has twice the number of engagements as any other month, and we believe December Engagement units will be positive. We delivered high single-digit same-store sales over the Black Friday to Cyber Monday weekend. However, keep in mind that this includes a moderate lift resulting from the closer proximity to Christmas and is reflected within our fourth quarter guidance expectations. As a reminder, our holiday sales are weighted to the 2 weeks before Christmas. Before I hand the call over to Rob, I'd like to discuss the changes in our expectations for the full year. As part of my expanded responsibilities, my initial assessment of challenges at our digital banners goes beyond the API integration issues we've previously shared. The delayed completion of replatforming work and aided search upgrades that began earlier in the year significantly impacted traffic and search placement upon the completion of that work in the back half of the quarter. While our fourth quarter expectations are lower for the digital banners than a few months ago due to these additional challenges, we've already seen some improvement in the fourth quarter compared to October's performance. And importantly, I am pleased to welcome our new Digital Banner President, Corinne Bentzen, who joined just a month ago. She has deep consumer and digital experience, including Tiffany's and most recently led Home Depot online. I believe our talented digital team will benefit from her leadership, setting the stage to drive improvement and return to our long-term growth path over the coming quarters. Alongside the update to our expectations of digital banners, we will incur leadership transition costs of approximately $7 million that were not initially contemplated in our full year guidance. We are also reflecting the accretive impact from the early completion of preferred share redemption. I'll now hand the call over to Rob to discuss the financial results in more detail.

Thanks, Joan, and good morning, everyone. Revenue for the quarter was $1.35 billion, down 3%. As Joan mentioned, same-store sales were down 0.7%. Same-store sales reflects the continued drag from our digital banners of approximately 120 basis points. Digital banners did improve sequentially by approximately 500 points that worsened in the second half of the quarter. We delivered adjusted gross margin of $486 million or 36% of sales this quarter, flat to last year. Merchandise margin was also flat in the third quarter, as we cycled a 250 basis point growth in the prior year. Turning to SG&A. Adjusted expense was down $8 million to $469 million for the quarter. SG&A deleveraged by 50 basis points to 35% of sales due primarily to somewhat higher marketing expense that we referenced last quarter to pull some marketing spend ahead of the election as well as approximately $2 million of leadership transition costs. Adjusted operating income was $16.2 million for the quarter or 1.2% of sales. Adjusted EPS for the quarter was $0.24 and in line with last year. Turning to inventory. We ended the quarter at $2.1 billion, up 2% to last year, as we bolstered the penetration of new product as we enter the holiday season. We have completed the redemption of all remaining preferred shares this quarter for approximately $270 million and $810 million in aggregate this year. Common share repurchases year-to-date totaled $118 million or 1.3 million shares at an average share price of approximately $91. These actions translate to an end-of-year share count reduction of more than 17% to fiscal '24 year-end to roughly 43.5 million diluted shares. We continue to see capital returns to shareholders as an important part of our capital allocation strategy moving forward. Turning to liquidity. We ended the quarter with $158 million of cash and equivalents and $253 million temporarily drawn on the revolver. The drawn on the revolver was the result of timing around the redemption of the preferred shares and holiday inventory purchases, and we have already repaid a significant portion so far in the fourth quarter. With that, I'll hand the call back to Joan to discuss our guidance for the fourth quarter and the fiscal year.

Thanks, Rob. For the fourth quarter, we expect same-store sales in the range of flat to up 3%. This includes an approximate 1 point drag from our digital banners. We expect Engagement units to be up low to mid-single digits and Fashion sales to be up modestly. We expect adjusted operating income between $397 million to $427 million and a higher operating margin rate to last year. Gross margin rate is expected to expand in the quarter with SG&A rate up slightly. We believe our guidance provides for flexibility in a competitive environment. This results in an update to our full year guidance range with same-store sales down in the range of 2% to 3%. We expect adjusted operating income between $540 million and $570 million and adjusted EPS between $9.62 and $10.08. So in closing, before we go to questions, I'd like to remind you of the 3 takeaways I'm leaving you with today. One, we delivered the quarter within our expectations; two, we're on track for positive holiday sales. And finally, our updated guidance reflects short-term impacts from both digital banners and leadership transition costs and the permanent accretive impact from the early completion of preferred shares redemption. Operator, let's now go to questions.

[Operator Instructions] And your first question comes from the line of Ike Boruchow, Wells Fargo.

Good to talk to you, J.K. I guess 2 questions for me on the new guide. Just making sure I understand. So the new comp guide flat to 3, but there's 100 basis points of the digital. Did the core business, meaning ex-digital, did your expectation on that business also come down? It looks like it did, but it also kind of sounds like you're more calling out the digital banners is the driver of it. So just trying to understand core versus the digital component. And then just a follow-up question on the guide. It looks like you're still guiding some nice margin expansion despite the lower comp. And I guess I'm trying to understand where that margin expansion has come from. Is that gross margin? Is that some expense initiatives you're flexing. So just kind of curious the puts and takes.

Thanks for the question, Ike. So with respect to our core banner performance, we're pleased with the core banner performance in the third quarter. We were -- in collectively, we were up. I would say, from a guidance perspective, on the lower end, we're giving a little bit of a slight drop for the core -- for core banners within that guide for the fourth quarter. But overall, pleased with how the core banners are generally performing. The digital banners are really the impact that we're seeing in our business. As we noted in the third quarter, it was 120 basis points impact to the comp. We did have a little bit of a drop related to the hurricanes. But overall, as we look forward, we think some of that will mitigate, but we still expect that one point drop related to digital. Gross margin. Merchandise margin is really what's driving the gross margin expansion with some improvement related to the comp performance, Ike. But we're very pleased with our Fashion is performing. I shared that there was a meaningful expansion in merch margin rate related to the new product. And so that mix being driven up by our new product assortment is really what's driving the expansion in the fourth quarter related to gross margin.

Can you quantify what you expect gross margin to be for 4Q? And then just kind of comment on the promo environment, and then I'll pass it along.

Not specifically, but we do expect it to expand based on the higher penetration of Fashion newness. I would also add that in the third quarter, there was a slight impact related to promoting some of the clearance product to make way for newness, as we head into the fourth quarter. We believe that we are competitively positioned from a pricing perspective and have really assessed our fourth quarter and believe we've provided for flexibility within our current view of gross margin.

Your next question comes from the line of Lorraine Hutchinson with Bank of America.

This is Melanie on for Lorraine. I just wanted to ask about the digital integration issues, if you can just expand upon those a bit more. It seems like you identified a few more things going on in that side of the business. So if you can just explain why these are still going on, what else needs to be done?

With respect to the digital banners, we have been working through the API integration and believe that those opportunities or challenges are behind us. We saw that working nicely over the Black Friday weekend for us. So as we assess what was happening in the latter part of the quarter, with the replatforming work going in later than anticipated and aided search going in as well with closer proximity to the fourth quarter, it's really impacted the overall performance of the digital banners. Now we're working through. And as I mentioned on my prepared remarks that we're seeing some improvement relative to the later third quarter performance, we're seeing improvement in the month of November, but we still do expect a 1 point impact related to the digital banners in the fourth quarter.

Next question comes from the line of Paul Lejuez with Citigroup.

A couple of questions. Can you talk about what you're seeing on the cost side for both natural and lab? And how are retail prices change relative to what you're seeing on the cost side? And then second, when we get through this year, what's the profitability going to look like from those digital banners? Are they even making any money this year? And what's the plan to improve the probability of those businesses for next year?

Thanks, Paul. So first question related to cost. We see costs within -- particularly within lab-grown diamonds coming down faster than the retail is coming down. So the way that we've bridged that in our strategy, as you know, is we are providing design branded product within Bridal and with the introduction of more Fashion with ATV. We see that carrying 2x higher ATV than product without lab-grown diamonds in it. So we're managing the retails with the -- or the infusion of new product within our assortment, and we're very pleased with how that's performing. We're seeing our -- within our Bridal and Engagement, we see some decline in overall ATV as we mentioned on the call, but we're, again, balancing our assortment within our sweet spot of price points. So feeling very good about how Engagement recovery is continuing to happen, albeit slower and we are continuing to stay on our strategy of new product offering and continuing to bring branded product within Engagement. Now with respect to gold, we see little price resistance within our business on gold. The consumer understands value and how gold is priced in the market. So as we see prices our cost in gold rise, we are able to adjust our pricing and/or value engineer product to keep pricing within the consumer sweet spot. So I feel that we've been able to navigate that. Now with respect to your digital banner question, we don't really comment per se on operating margins. But what I will say to you, Paul, is that the top line growth of the digital banners, the infusion of finished jewelry within Blue Nile and James Allen is very important to the merchandise margin expansion for those banners. And when we -- and we are seeing that come in for this fourth quarter in some magnitude for the first time. So as we look forward, we clearly expect Blue Nile and James Allen to get back on track to our long-term growth plans and see assortment mix as well as expense management is part of the growing profitability of those banners.

And your next question comes from the line of Mauricio Serna with UBS.

Maybe could you talk about your quarter-to-date same-store sales, just given your commentary about Black Friday sales performance and then also, maybe could you give us a sense on the puts and takes that you're seeing into 2025 margins, rising pricing, commodity cost like gold, any incentive comp rebuild, just like getting a better sense of that? And then I have a quick follow-up on share count.

So as I mentioned, Mauricio, we had a high single-digit same-store sales performance over the Black Friday weekend through Cyber Monday. Just as a reminder, there's a modest impact there for proximity to Christmas. The overall performance of the quarter-to-date is reflected within our Q4 guidance. So it's considered within our guidance range. So -- and I also mentioned for -- within my prepared remarks that the 2 weeks prior to Christmas are very important to our business and our -- obviously, our highest selling period. So we have a good portion of the quarter to go. And so all of that's reflected within our guidance. Then with respect to '25, we'll be back to you on the fourth quarter earnings call with our view of fiscal '26, I think you're asking about. But we'll be back to you on that. Clearly, we are evaluating our operating plan, working with J.K. as he's come on board and with the management team. And we have a lot of work ahead of us to -- as J.K. mentioned, we're actively identifying opportunities for our future, and we'll be happy to share those at that time.

Got it. And just -- I guess, just to make sure I understood, does that mean that your quarter-to-date is within flat to up 3%? And then the follow-up I had on the share count. Just trying to understand like how you're getting to the -- I think like the 46.2 share count for the entire year, just like doing the numbers on what you already did and even like not assuming any more buybacks I'm getting to like a 45.5, which just trying to understand like anything there to consider on the calculations for the diluted share count for the full year?

Mauricio, thank you for the question. This is Rob. Yes, in terms of quarter-to-date, as Joan said, we're not providing exactly the number, but there's the holiday shift a little bit closer to Christmas, and we feel very confident in our ability to deliver a positive comp for the quarter, which is provided in our quarterly guidance and certainly reflected in a strong Black Friday weekend. In terms of the diluted share count, I think anyone knows, it's a fairly complicated calculation with the preferred shares this year, but due to the impact that we had some of the year calculated before we repurchased the -- some of the preferred shares in April and then amended the settlement agreement and so the share count is -- was about 48 million in the first half of the year on a diluted basis -- on an adjusted EPS basis. And obviously, you can get to roughly 44 million in the back half of the year to get to the 46.2 million shares. And as we put in our earnings release, we do expect to exit the year at 43.5 million shares, which should provide some additional EPS accretion going forward.

And your next question comes from the line of Jim Sanderson with Northcoast Research.

I wanted to go back to the commentary on the Bridal category. I think you reported that average transaction value is down. Can you put that into perspective for us, whether that's getting worse or better? And what the key drivers of that decline are?

Sure. I'll take that one, Jim. so Engagement units are recovering and although slower than we expected, they were down overall 2% in the third quarter, but it did represent a 4-point sequential improvement. If you look at the business, excluding the digital banners in the third quarter, our North America engagement units were up nearly 4% in Q3. So that is a 7-point sequential improvement in our North America banners. So also a positive signal towards the Engagement recovery. And so as we look forward, as I mentioned, we expect that Bridal, our Engagement units in the fourth quarter will continue to be positive, albeit with the digital banners impact. We -- it will have some impact from that number, but we've reflected that as we mentioned earlier in our guidance. So overall Engagement recovery underway. We believe that we'll continue to see that recovery, although it may be a bit extended from our earlier view on that.

[indiscernible] transaction value. My apologies. I just wanted to make sure I understood it correctly.

So the average transaction value was down in the third quarter. It was also had a significant impact related to the digital banners because there's such a high penetration of engagement within the digital banner. So go forward, we were pleased with the overall flat average transaction value, Jim, because our Fashion assortment is providing us the ability to manage our way through what maybe a bit of a choppy environment related to Bridal ATV. So feel that it's stable and we're able to manage with the mix of our business.

Then just 1 last follow-up question. I think you reported numbers for Black Friday this year and Cyber Monday. Could you just what that trend was reported last year for comparison?

We didn't provide that last year, Jim. But just to remind us here, we reported a high single -- we're sharing a high single-digit comp over that weekend, which is included in our guidance for positive comps in the fourth quarter.

And we have a follow-up question coming from Mauricio Serna with UBS.

Just a quick follow-up. I wanted to understand the digital banners like the impact on the total price, like why is that because of Engagement? What -- is there more promotions? And just on the promotional environment, how are you thinking about that -- how is that in Q3 versus the previous quarters? And how are you thinking about that for Q4?

So the digital banners, we said, had a 120 basis point impact to comp in the third quarter. We saw with the timing of re-platforming being completed later in the third quarter as well as the AI -- or I'm sorry, the search -- aided search upgrades that we put into play, they negatively impacted performance. And we're seeing that come around somewhat in the fourth quarter, and we expect it to be a 1 point negative impact to comp on the fourth quarter from James Allen and Blue Nile. They have a high penetration of Bridal or Engagement within their business. Therefore, it's impacting our overall engagement performance but our North America banners are positive, as I mentioned in engagements in the third quarter when you exclude the digital banner impact. With respect to pricing and promotion in the third quarter, the -- I did mention that there was some clearance that we took pricing on to move through inventory to importantly, make way for new product, as we enter the fourth quarter, which has a much higher penetration than we did last year, I think 9 to 10 points so important for us to do that and believe that we've positioned that nicely heading into the quarter. Our guidance includes some, what we believe, is a nice flexibility within a promotional posture for the fourth quarter which will enable us to remain competitive within our guidance.

And that is all the time we have for questions. I would like to turn it back to our CEO, J.K. Symancyk for closing remarks.

Thank you. In closing, I'd like to again thank our Signet team for their dedication to our purpose and for welcoming me to the team. I believe the opportunities ahead of us to evolve Signet will deliver further value to both shareholders and customers. I thank you for your time today. We look forward to speaking to you again in March. Goodbye.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.