Signet Jewelers Exec Insights: U.K. Challenges, Credit & Bad Debt

On Thursday, Signet Jewelers Ltd. (NYSE:SIG) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the executives shared.

U.K. Challenges

William Armstrong – C L King & Associates: So, it looks like the decline in the U.K. $0.06 is I think seems a little surprisingly large, maybe could you flush out a little bit more the pressures on the gross margin and what’s driving that?

Ron Ristau – CFO: Yes, as you know, the U.K. environment have been very challenging as we’ve indicated on our calls in the past, but what we’ve seen in the first quarter was that we did produce a positive comp in the U.K. because we have made the decision to protect market share and try to increase our market share there, but we are finding that it is increasingly promotional environment and that customers are sub-selecting being more promotionally orientated merchandise in the market. So we expect this trend to continue, whereby we believe we will continue to outpace the broader economic indices in the U.K. as measure by the Brent. However, we do think that the margins will be under some pressure and we believe that this is the right strategy as we prepare ourselves for holiday as Mike indicated in his comments. So there will be some slight losses that we will incur in the second quarter and that’s why we are calling it out.

Michael W. Barnes – CEO: I would just add to that, just to add on to what Ron said the U.K. tends to be a fourth quarter story for the most particularly, holiday and is so important. We feel like we are positioning ourselves exactly as we need to be as competitive as possible in that marketplace and that we do have the opportunity to gain further market share in the future. We continue to invest strongly into new merchandise programs. We have invested as you all know into stores and remodeling stores, et cetera. So, we’re very encouraged with the direction that we are going in that market and we feel good about the long-term future there.

William Armstrong – C L King & Associates: Is there a change in the competitive environment there, any new competitors coming in or is this really kind of a function of the difficult overall economic conditions in the U.K.?

Michael W. Barnes – CEO: You hit us on the second part there. It’s really a function of the overall macro environment there. We continue to make the same moves as we need to in the U.K. in terms of pricing just like we do in the U.S. But because of the competitive and the promotional environment, Ron said it best, the customer really is self-selecting the more promotional merchandise and that’s driving the mix, and it’s an impact on our gross merchandise margins to some degree. But again, I feel like that we are well positioned for the future and that we are moving in the right direction.

William Armstrong – C L King & Associates: One other question then on a different topic and that’s I was wondering, if you could maybe just explain a little bit more about this change in the number of credit-billing cycles, maybe help us understand how that works and how that would have affected, obviously the Q1 and then how that’s going to kind of reserve in Q4, the mechanics of it?

Ron Ristau – CFO: This is really a change in our internal operations relative to credit and what we wanted to do was to really unify our quarterly cut-offs and just some – the way we process internally, I mean, it drives some of the way that we recognize our bad debt expense and other operating income. So, what will happen is we have essentially cut the number of cycles in the – I’m sorry – added the numbers of cycles in the first quarter, cut the number of cycles in the fourth quarter, and it just will change the flow between the quarters this year. No net impact to the year. We took a hit of about $4.7 million in the first quarter of this year in the bad debt expense and we will recognize an offsetting favorable situation in our other operating income in the fourth quarter. So, in the year it means nothing, but it just helps us internally to have some efficiencies that we are always striving to gain in our own internal operations.

William Armstrong – C L King & Associates: So, then in future year, should we then see a similar seasonality – a seasonal pattern that we are now seeing this year?

Ron Ristau – CFO: This pattern will permanently adjust, and you should never have to realize any kind of a difference again.

Credit & Bad Debt

David Wu – Telsey Advisory Group: First your second quarter guidance does assume a bit of a comp deceleration to remain in the quarter just from the double-digit growth that you saw during May to-date. I was wondering, if you are just being conservative here or are you seeing something out there that is sort of making you more cautious?

Michael W. Barnes – CEO: I mean, if you look at the month-to-date the first three weeks as we pointed out, it was very strong double-digit comps obviously. We try to be as prudent as we can be when we give your guidance, and we felt like mid to high single-digits was an appropriate guidance to give. It’s very interesting, David, because this first two quarters just has so many moving parts between it. God knows I wish that Mother’s Day and other events would stop shifting around honestly; somebody didn’t plan this very well to the retail business when they thought about all these holidays thousand of years ago, but the point is there is just a lot of moving parts in the first couple of quarters. It kind of – we are through the shift now, and we feel pretty good about where we are yet. We pretty much guided and said that in the first half of the year also that we expected to see somewhere in the mid-single-digit comp range and that’s kind of where we’re still at and with the first quarter being lower single digit as we guided to and the second quarter being mid-to-high single-digits and we think it’s very strong performance especially in light of the performance that we’re lapping over last year and even maybe more important than the – even the comp number as the quality of this comp. You looked at setting record earnings in the first quarter and we still have a very strong year in front of us. We think that we’re well positioned to hit our financial objectives and other objectives for the full year as we move forward through the back half, so we’re very excited about where we’re at right now.

David Wu – Telsey Advisory Group: On credit sales you mentioned credit participation was up versus last year and I was wondering if approval rates are still relatively consistent from the prior quarters.

Ron Ristau – CFO: They are relatively consistent, David, but they are actually down about 100 basis points which I would consider relatively significant, but they are not up, they are down.

David Wu – Telsey Advisory Group: I understand bad debt expense increased about 20 bps even when you exclude the credit cycle impact and I know it’s relatively small impact, so I was wondering if you are seeing sort of any signs of softness at all in sort of the credit health of your customers.

Ron Ristau – CFO: I think it’s a very excellent question; we are very pleased with the performance of the credit portfolio. We are seeing no indication whatsoever of any problems, low rates or anything else of that nature. Everything continues to be tracking very, very strongly. What we have here is a slight impact of 20 bps. We’re dealing with the 13% increase in the receivables, so therefore the relative level of bad debt will go up and sales only increasing by 1%, so produces a slight distortion in the quarter in the rate, but now the underlying performance of the portfolio remains very strong and very well managed.

David Wu – Telsey Advisory Group: Just lastly, on price increases. I was wondering if you could just kind of share with us your strategy for the year, for your rates, prices at all in the quarter and if you think price increases could be an effective way to sort of deal with the tough comparisons that you have ahead?

Ron Ristau – CFO: We have increased prices in accordance with our normal strategies during the first quarter in both the U.S. and in the U.K. and it’s kind of a mixed bag. In the U.K. we’ve taken our normal price increases, but we’re seeing more promotional environment, so therefore it seems counter-productive to take further price increases to offset the margin issues that we’re having because that’s really not what – it won’t work in that market we don’t believe. What we need to be doing there is positioning ourselves for comp growth and greater market share participation in the U.K. right now. In the U.S. we did realized of course a 40 bps improvement in gross merchandise margin in the first quarter. So, it was helpful, pricing was helpful and we feel we’re well-positioned while continuing to maintain great values for our customers in the U.S. So we would not look to take further substantial price increases and that’s something I’m foreseeing happen, but I would say right now we’re on our normal pattern.