Yahoo Finance Signet Jewelers Limited (NYSE:SIG) Q1 2025 Earnings Call Transcript
Signet Jewelers Limited (NYSE:SIG) Q1 2025 Earnings Call Transcript June 13, 2024
Signet Jewelers Limited beats earnings expectations. Reported EPS is $1.11, expectations were $0.852.
Operator: Good morning, and welcome to Signet Jewelers First Quarter Fiscal 2025 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note, this event is being recorded. Joining us on the call today are Rob Ballew, Senior Vice President of Investor Relations; Gina Drosos, Chief Executive Officer; and Joan Hilson, Chief Financial, Strategy and Services Officer. At this time, I would like to turn this conference over to Mr. Rob Ballew, Senior Vice President of Investor Relations. Please go ahead, sir.
Rob Ballew: Good morning. Welcome to Signet Jewelers First 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 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 discussions of the non-GAAP financial measures, as well as reconciliation 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.
Additionally, a new investor presentation deck was also posted to our IR website this morning that we believe investors will find helpful. With that, I'll turn the call over to Gina.
Gina Drosos: Thanks, Rob, and good morning, everyone. I'd first like to thank our Signet team for delivering our expectations for the quarter. This continues to be a challenging environment with macro pressure on the consumer and heightened discount activity among many jewelry participants. Our team's tenacity and commitment to our customers is delivering our success and is an inspiration to me every day. I'd like to leave you with three key takeaways today. First, we delivered quarterly results within our guidance and are seeing momentum in the business driven by the accelerating engagement recovery, the success of our new fashion product offerings, and a continued strong performance in jewelry services. Second, we increased guidance for the year in April and are reaffirming that higher guide, which includes an inflection to positive same-store sales in the second-half of the year.
Third, our flexible operating model is working as designed, driving margin performance, strong free cash flow conversion and improving our balance sheet, all of which are delivering meaningful growth to adjusted diluted EPS. For perspective, our adjusted diluted EPS this quarter is nearly 14 times higher than pre-pandemic, and we've more than doubled our adjusted operating income. I'll now elaborate on each of these important takeaways. This quarter we delivered $1.5 billion in sales and $58 million in adjusted operating income in the top half of guidance. Recall that February was sluggish for retail. We saw trends begin to improve with late Valentine's Day shopping and further momentum through March and April, delivering a quarter with meaningful acceleration to Q4.
In bridal, we've seen the expected sequential improvement in engagements to last quarter, excluding our digital banners. From low-double-digit decline in the fourth quarter, we've seen engagements improve to mid-single-digit decline in Q1 with April and May reflecting low-single-digit decline. Our most bridal-focused banner, Diamonds Direct, has already inflected to positive units in April, with Kay and Jared having delivered several weeks of unit growth in recent months. Engagement units below $5,000 were flat to last year in April. We are seeing slower recovery at price points above $5,000, in part due to the digital banner challenges we discussed last quarter, which contributed to a small decrease in average transaction value or ATV. Engagements continued to improve in May and we anticipate further improvement as the second quarter progresses.
Our proprietary data continues to point to a multi-year recovery and we believe we remain on track to see engagements in the U.S. increase 5% to 10% for fiscal 2025. We are continuing to leverage our data on 17 million individuals in a dating relationship to do targeted marketing at the right time to win the bridal recovery. Sales of fashion merchandise are also gaining momentum. From March through May, fashion sales improved nearly 500 basis points, compared to February in the fourth quarter, driven by branding and new merchandise items. We continue to see strong sell-through of newness with new merchandise as a percent of sales, up more than 25% to this time last year in core banners. For example, revenue from the Shy Collection at Jared and our Unstoppable Love collection at Kay are both up materially, driven by strong performance of new items in those assortments.
Our new product strategy is also working to protect our ATV, as well as expand merchandise margins. We leverage our scale to innovate at attractive price points, delivering strong value for our customers. These include items such as lab-created diamond fashion pieces and precious metal jewelry, including gold, silver, and platinum. For example, the strength of our branded Neil Lane collection held a near-flat ATV to this quarter last year, while delivering a 20% increase in units. Further, our value-focused fashion banner, Banter by Piercing Pagoda, had flat same-store sales in the quarter on the continued strength of our gold assortment. We saw this same trend extend to peoples in Canada and H Samuel in the U.K. Another key driver of fashion is our loyalty program, which delivers a more personalized shopping experience and grows lifetime value.
This includes targeted marketing to drive follow-up purchases in fashion, it's working. In Q1, the penetration of active loyalty members purchasing fashion increased 20 points, compared to a year ago. We've also extended efforts to win new members to include engagement ring recipients, which has contributed to a more than 25% increase in total members since fiscal ‘24 year-end. Our targeted marketing provides members value in select merchandise based on their tastes and shopping preferences and is a key strategy in our merchandise margin expansion plan. Before moving on from fashion, I'd like to provide an update on lab created diamonds or LCDs. Over the past five years, LCD production has grown more efficient. This has allowed LCD costs in retails to come down, providing attractive options for many price-conscious customers that are looking for larger-carat options than they can afford in a natural diamond engagement ring.
Our merchandise strategy and trade-up selling has been effective at largely maintaining our ATV, while many engagement ring consumers looking to maintain a long-term value continue to be attracted to natural diamonds for their rarity and uniqueness. In fashion, however, we see meaningful runway for LCD expansion in a segment of the industry that is traditionally seen lower overall penetration of natural diamond assortment. It's a trade-up opportunity. For example, in Q1, we've increased LCD fashion offerings, driving a 14% increase in LCD fashion revenue, compared to a year ago. These LCD fashion pieces carry more than 2 times the ATV of non-LCD pieces at attractive margins for Signet. My next takeaway builds off my first. We remain on track to inflect positive same-store sales in the second-half of this year.
The building blocks of our Q1 performance will gain strength as the year plays out. We will further increase the penetration of merchandise newness in our inventory through more frequent deliveries and increased depth of new product offerings. We also believe our competitive advantages such as scale, consumer insights and technology provide Signet the opportunity to continue to drive fashion and bridal categories in a challenging macro environment. There are two leading indicators that we believe point to sales traction. First, our largest banner in each country we operate has delivered flat or positive comp sales in May. Second, our e-commerce sales, excluding our digital banners, also comped positive in May. Our optimized physical and digital footprints are a competitive advantage with jewelry shoppers.
It's the combination of both footprints that provide for connected commerce capabilities like ship from store and virtual jewelry consultants or JCs. More recently, we've introduced social selling capabilities for our JCs, which are showing a positive impact already. Our jewelry consultants are combining their social outreach with personalized storefronts, and we expect social selling will triple its revenue contribution in fiscal '25, or approximately 0.5 point of Signet comp growth this year. Last quarter, we spoke about the integration challenges at our digital banners. Planned interventions are underway and showing progress. For example, we're working to correct or establish inventory API connections with our just-in-time vendors to streamline our supply chain management and improve the speed of our fulfillment.
And we've launched a fast shipping program for select wedding bands that we can create in-house. As a reminder, our full-year guidance does not include any improvement in our digital banners. We'll continue to provide operational updates as the year progresses. Service revenue growth outpaced merchandise by more than 10 points in the first quarter, driven by a 550 basis point increase in attachment rate. Our newer service offerings, including post-repair extended service agreements are performing well. As merchandise sales improve, services will also benefit, especially from engagement rings, which have more than 80% in-store attachment. Turning to my final takeaway for this quarter, our flexible operating model and strong free cash flow conversion are driving meaningful impact to our adjusted diluted EPS.
Recall that we've generated more than $600 million in pro forma free cash flow in each of the last four years, driven by operating margin expansion of approximately 400 basis points to pre-pandemic. This provided the dry powder to reduce our debt outstanding by approximately 70% since fiscal ‘20 to-date. We increased our EPS guidance in April by 9% to 10%, reflecting the redemption of preferred shares. This will continue to be a positive impact into fiscal ‘26, as redemption of the preferreds will reduce our share count by 8.2 million shares from the end of fiscal 2024. We continue to expect strong free cash conversion. With our balance sheet now in great shape, we will focus excess liquidity on investing in the business, returning significant capital to shareholders, and leveraging opportunistic M&A in order to drive shareholder value.
To summarize, the three key takeaways for today are, first, we delivered on our commitments again this quarter. Second, we are on track to see an inflection to positive same store sales in the second half of this year. And third, our flexible operating model is driving EPS growth through higher margins and strong free cash flow. With that, I'll turn it over to Joan
Joan Hilson: Thanks, Gina, and good morning, everyone. Revenue for the quarter was $1.5 billion, just above the midpoint of our guidance. Same-store sales were down 8.9% to last year, including approximately two points of pressure from the digital banners as expected. This also reflects improvements in March and April from the slower start we saw in February. We were able to largely hold ATV even with continued heightened promotions in our industry as North America declined just 1.6% to last year. Loose Stone saw the largest decline in ATV, which disproportionately impacts Jared, Diamonds Direct and our digital banners. While finished products maintained ATV through branding and product innovation, traffic was down low-single-digits, services grew 1.3% reflecting an increased attachment rate and pricing on ESAs. We continue to develop training and technology improvements that our jewelry consultants use to educate customers on the lifetime value of our service offerings.
With an in-store bridal attachment rate over 80%, we will see tailwinds from the engagement recovery and we see significant opportunity to further build on the current fashion attachment rate of approximately 40%. We delivered gross margin of $572 million this quarter, or approximately 38% of sales in line with the prior year on lower revenue. Adjusted merchandise margin expanded by 100 basis points, led by growth in services and product newness, including expansion of lab-grown diamonds within fashion, but was offset by deleveraging of occupancy costs on lower sales. Turning to SG&A, our adjusted expense of $515 million was $9 million lower than last year, even with increased marketing spend from Mother's Day. Adjusted SG&A was 34% of sales, or 270 basis points higher than last year, as we deleveraged fixed costs on lower revenue.
Adjusted operating income was $58 million for the quarter, or 4% of sales and at the high-end of our guidance expectations. Adjusted EPS for the quarter was $1.11 per diluted share. With the redemption of half of the preferred shares and the net shares settlement agreement, we averaged 48 million fully diluted shares this quarter, a reduction of 10% from the end of fiscal ‘24. Turning to inventory, we ended the quarter at $2 billion, down 9% to last year in line with revenue, even while investing in additional new products. We're optimizing the pace at which we take markdowns and are strategically using clearance to reduce inventory levels of less productive and lower-margin products in order to bring in higher-margin, more relevant merchandise.
Turning to leverage, we ended the quarter with gross debt to adjusted EBITDA at 2.2 times turns, with net debt to adjusted EBITDA approximately flat, which reflects the preferred share redemption in April. We will retire our unsecured senior debt in the coming days, and we have the liquidity to address the remaining preferred shares this year. These efforts on our balance sheet have been noted by recent ratings upgrades by both S&P and Fitch. While we are on track to have zero debt in the coming months, we believe a modest amount of debt in our capital structure is the most efficient way to drive returns for our shareholders. Funded debt is also required to maintain a public credit rating, which is important to provide flexibility in the future.
As such, we will explore options in the market this year to lower our weighted average cost of capital, boost dry powder for opportunistic investments, and return excess cash to shareholders, all while remaining well below our leverage targets. Any amount borrowed will be modest and materially lower than where we ended the year in fiscal ‘24. On fleet optimization, we closed 23 stores this quarter, primarily in our Ernest Jones banner. We also materially reduced our overhead costs in the U.K. going forward. Both were part of our previously announced efforts to improve the performance and margins of our U.K. business. We remain on track to open 20 to 30 stores and renovate approximately 300 existing stores this year. Looking to guidance, we expect second quarter revenue in the range of $1.46 billion to $1.52 billion with same-store sales down in the range of 6% and 2%, a material improvement from the first quarter.
We believe that engagements will continue to improve in the second quarter with some AUR pressure in Loose Stone. We expect flat to higher gross margins with similar SG&A deleverage, compared to the first quarter. We expect adjusted operating income between $50 million and $75 million and adjusted EBITDA between $98 million to $123 million. We are reaffirming our full-year guidance today. However, there are two potential impacts we are watching. First, the potential early redemption of further outstanding preferred shares may lower our diluted share count and reduce our preferred dividends this year, both of which would boost our adjusted diluted EPS. Second, heightened competitive discounting may pressure margins into the back half more than we expected at the beginning of the year.
We are monitoring the potential impact of this discounting to our gross margins for the full-year, while we work to mitigate that impact in the second-half of fiscal ‘25 through assortment architecture and balanced promotional strategies. We continue to expect engagement incidents to be up 5% to 10% for the year, and we also continue to expect to spend $160 million to $180 million in capital expenditures. Before we move on to Q&A, I'd like to thank our Signet team in our stores, in our support centers, our repair shops, and in our distribution centers. Thank you for your commitment to excellence in the execution of our strategy and your devotion to our purpose of inspiring love. Your efforts are a steady source of inspiration for all of us.
Operator, let's now go to questions.
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