Signet Jewelers Earnings Call NUGGETS: Product Category Performance, Mid-Single-Digit Comps

On Thursday, Signet Jewelers Ltd. (NYSE:SIG) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Product Category Performance

David Wu – Telsey Advisory Group: First, the U.S. comp that appeared to have slowed, call it may be flat to low single-digit growth in the late May through July, if you compare to the 21% comp that you saw in the first three weeks of May and I was wondering, if you could perhaps talk about whether there any product categories that performed particularly weak or what you think drove the deceleration?

Michael W. Barnes – CEO: Thanks, David. We reported in the U.S. 8.2% comp sales for the full quarter. Obviously Mother’s Day was a very strong selling period for us as holidays tend to be. I would say, if anything, we had some great products in the full quarter that are doing very well, but some of them were in test, and as I mentioned a lot of those that were in test, we are now rolling out and we expect that to really benefit the back half of the year and especially the holiday period. I would also say, David that, consumers in general in this current economic environment, while our business continues to be very good and we’re very, very pleased with it and the results that we announced. The consumers tend to be moving more towards these holiday periods and spending more of their disposable income during those timeframes and this isn’t just new for this quarter, we’ve kind of seen this in the economic environment we’ve been in for a while now. The holiday spending very strong as it was during Valentine’s Day back in the first quarter and then things kind of tend to fall off a little bit. So, I would say that some of the spending has been grouped more around the holidays, but all in all, it was an excellent quarter for us. We’re very happy with the results that we have in sales and in profits.

David Wu – Telsey Advisory Group: How are engagement sales specifically in the quarter and how did that progress?

Michael W. Barnes – CEO: Our bridal business was strong both in Kay and at Jared. If you look at some of the great brands we’ve got out there, at Kay, we had strong sales from the Leo Diamond, from Neil Lane Bridal, Tolkowsky Diamond, all of those help drive the bridal business there. We had strong bridal in the Jared as well and we’re continuing to rollout more and more into Jared. In fact, one of the things that we’re doing is we’re leveraging Tolkowsky now, which has been a great brand for us and it’s still in early innings and that is moving into Jared as well. So, we expect to see some great results from that.

David Wu – Telsey Advisory Group: Then other income, obviously that increased nicely again in the quarter and you mentioned change in mix of the finance programs as the one driver there, and I was wondering if you could perhaps elaborate more on that and if you’ve adjusted any of your customer credit programs.

Ron Ristau – CFO: The answer to that is no. We have not adjusted any of our customer credit programs. They’ve remained relatively consistent. What’s happening is, as I indicated, consumers are opting on their own to change the mix of programs. Our regular credit terms require no debt payment and provide for slightly more extended number of months for payments. So, people are simply selecting that. There is nothing that we have changed or done. It’s a matter of customer preference and choice. So that’s what’s driving that.

David Wu – Telsey Advisory Group: Does that worry you at all in terms of…?

Ron Ristau – CFO: No, I mean the quality of our credit portfolio remains very well, as I indicated. The performance of the portfolio has been very strong. Again, I would point out, the total receivable is up 13.8%, but yet the bad debt as a percentage of sales is relatively consistent. So, that means that the overall portfolio is performing stronger and stronger, okay. So we’re not worried. We are on top of it. Our credit people are constantly reviewing and monitoring. But we have seen no change in any of that for the quarter or nor do we expect any for the go-forward six months. So, we’re not really worried about it at all.

David Wu – Telsey Advisory Group: That appeared to have obviously normalized more in the past couple of quarters; you haven’t really seen big improvements there. I know previously you’ve talked about the potential to get back down to sort of lower levels in the 2% range perhaps, and do you still think that’s an opportunity or do you think right now that the bad debt expense ratio is sort of normalizing to sort of…?

Ron Ristau – CFO: First of all, I don’t think we ever said it we will go down to 2% so I would caution. We said there was a range I think from 2.8% to 3.8% to what I believe was the historical range of some of that. But what we are seeing is that the – since the credit portfolio is growing that the percentage of sales we think it’s going to normalize. It might be as a percentage of sales at the same level maybe even a touch higher because that receivable balance is so big at this point. So even with good credit performance since you are working with a higher overall credit portfolio, when we look at the bad debt as a percentage of the receivable portfolio it continues to drive lower and lower, when we look at as a percentage of sales it’s not improving as rapidly. Does that make sense?

David Wu – Telsey Advisory Group: Just lastly can you maybe talk about your partnership with Rio Tinto and how you are – how that could potentially improve your gross merchandise margins over time?

Michael W. Barnes – CEO: Sure. Our partnership with Rio Tinto was very strong. We were very pleased to have been granted the select diamond tier status as a site holder of theirs and we believe it is a good step in the right direction for really improving our supply chain for the long-term. That’s something that we are going to build upon. It’s not material at the moment in terms of our overall business but it is a great step in the right direction and we continue to work with Rio Tinto as well as our other great vendor partners for more and more ability to improve our supply chain for our customers in the long run. In terms of how it’s going to affect gross margins, I don’t think that you will see any significant impact any time in the near future on that. We are now buying the rough diamonds and we are contracting out the marking and the cutting and polishing of those. Obviously, over a long period of time, we do feel like it could help us, but for anytime in the near future to medium future, I wouldn’t expect any significant impact; A, because it’s still a relatively small business; and B, because you would need to build up some level of scale to really see an impact and that’s away right now.

Mid-Single-Digit Comps

Ike Boruchow – JPMorgan: Congrats. I guess Mike when we look at the U.S business, clearly the last two years have been fairly robust, and we’ve had some calendar shift noise in the first quarter to the year, but I guess when you kind of normalize for the shift, it looks like you comped around 4.5% in the U.S. in the first half of this year. How do you look at that and look at the back half of the year and kind of your business going forward, especially with all these new brands that are coming on? I mean is a mid-single-digit comp somewhat sustainable going forward or how do you think about that?

Michael W. Barnes – CEO: Go ahead, Ron.

Ron Ristau – CFO: To say, Ike, we’ve provided guidance forward into the third quarter which we told you would be, in our opinion, low-to-mid single-digit comps. We wouldn’t go beyond that for speculating, but we don’t give guidance for the full year and all that, but we have run out a quarter. The third quarter; however, will be somewhat suppressed by the impact of the watch event we spoke about which occurred in Jared last year. That generated about $16 million in sales in the quarter. That will not be repeated in the third quarter. So the overall third quarter comp will be down a little bit, and we do expect these new programs to get some traction into the fourth quarter.

Michael W. Barnes – CEO: We would expect to see the Jared business post the third quarter one-time watch event sequentially improve going into the fourth quarter.

Ike Boruchow – JPMorgan: But then from a higher level perspective, I mean from the category – in the mid-tier jewelry category and your market share, how much share you guys have been gaining each quarter for the last several quarters? I mean is there anything that’s changing there?

Michael W. Barnes – CEO: No, I mean our goals are all the same. Our long-term goal is to take market share over time as we have done pretty methodically over the last 10 years. So, you get a little bit here and a little bit there, but it’s a very long-term proposition by us, and it’s one that we’re going to stick to because we believe that we’ve got great competitive strengths that can really help us continue to do that with the great products we’ve got, the excellent team that we have in the field, our ability to advertise and to scale. So I believe that you’ll continue to see us working certainly towards that goal to continue gaining long-term market share out there. We believe that our business model is very solid right now. We think that we’re very well positioned to hit our goals for the year. We had a great first half and a great second quarter, and we look forward to continuing to drive, especially all these new initiatives as we move forward.

Ike Boruchow – JPMorgan: When you – with the new fiscal ’15, U.K. margin goal 10%; what’s kind of embedded in there? I mean I assume you guys need some positive comps there. I mean is there a material store rationalization plan that’s embedded in there as you guys – as you alluded to moving to some of the more productive locations in the U.K.?

Michael W. Barnes – CEO: Yeah, I talked about that a little bit; I’ll elaborate. Basically, we’re looking at our store base in the U.K. and certainly we are rationalizing it as we think is appropriate. A lot of that has to do with the shift in U.K. purchasing trend and that is away from a lot of the standalone kind of High Street locations and some of the smaller to mid size cities there and towards these big regional shopping malls, which drive tremendous traffic and our locations are doing fantastic where we have placed them there. We’ve also been able to revise and renew the store concept look that we have for both H. Samuel and Ernest Jones. If you ever have the chance to drop into Stratford, which is pretty convenient if you are in London the stores are just terrific there. We are incorporating a lot of digital both customer facing and otherwise into the stores. They are larger in size and they are just – they are driving great sales per square foot. So we think that stores, is a huge opportunity for us. We think that we will be able to continue to drive comps. We were happy with our comp store sales in that environment especially for the second quarter. We have great merchandise programs underway right now and just as in the U.S. some of these programs are just starting to really rollout. I mentioned the (Together) fashion product that we have in the U.K. that’s a really great merchandise program because it takes the gold and the silver both precious metals but of course gold is very expensive in today’s environment. It bonds them together and creates great fashion merchandise at more of an affordable price than the gold standalone jewelry would be and it looks fantastic. So we are very excited about the programs we have there. Then lastly we are making sure that we have the right infrastructure to fit the current environment and the level of sales that we have in the U.K., and where that’s going. So, all these things together, we believe that the team has a great opportunity to take us back to double-digit operating income over a three-year period there.

Ike Boruchow – JPMorgan: Then just one last quick question, Ron, the capital spending clearly came up a lot this year to about $160 million I guess at the midpoint. When we kind of think out the next year or two, is that level start to come down, is this an investment year, or does that – does it continue to build a little bit on top of that when we’re trying to think about your free cash flow?

Ron Ristau – CFO: Well, when you look at our capital spending, our capital spending is driven by new stores and we believe that the level of new store activity should be, if anything, maybe even higher. The level of remodeling is driven by our lease expirations and we attempt for our stores to maintain the look of a leader. So, therefore, we will not cutback or slowdown remodeling program anyway, so that level of investment will stay. And our continual investment in IT infrastructure is a multiyear approach. It’s not something we’re just doing one time. We intend to drive forward in all aspects of IT and social media and invest what is necessary to become number one in the market in that area. So, our capital spending will remain at these levels. If I were to look forward, I would say more so than not, okay.