Signet Jewelers Ltd Earnings Call Insights: Operating Income Outlook and Gross Margin Analysis

Signet Jewelers Ltd (NYSE:SIG) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Operating Income Outlook

Jennifer Davis – Lazard Capital Markets: Couple of clarifications. First of all, Ron, how should we think about the other operating income going forward should we kind of think of it as 4.5% to 5% of sales in general or…?

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Ron Ristau – CFO: It’s not going to move that much, Jennifer. I think you should think about it in the range of last year. This quarter was a couple of tenths of basis points up, but I don’t think the range is going to move substantially.

Jennifer Davis – Lazard Capital Markets: Okay, but we should think about it in terms of a percent of sales rather than a fixed dollar amount?

Ron Ristau – CFO: It does fluctuate by quarter somewhat, but I would follow the actual results from last year (indiscernible).

Jennifer Davis – Lazard Capital Markets: Sorry, if I missed this. What was the or how come the Ultra acquisition is going to be about $0.03 – how come the impact will be about $0.03 greater than originally anticipated? Did you say that was because…?

Ron Ristau – CFO: It really relates to when we originally – we were originally expecting it to be about $0.03 in each quarter. What we have now come to realize or are anticipating in our second quarter guidance is that we are going to be completing the majority of the transition of the systems and inventory cut-overs in the second quarter as we’ve always indicated. We think there could be a little more of a disruptive effect on sales as that happens. Also I believe that we could have – we should have done a little bit better job in anticipating the Mother’s Day shift in Ultra, which was as strong for them as it was for us and our original budgets that we worked on with them didn’t really include that…

Michael W. Barnes – CEO: One thing I would add, Jennifer, this is Mike, is that it is an exciting opportunity for us because we have been waiting a long time now to get this transition completed and we are expecting to have it done in second quarter. Once we get the majority of these stores switched to Kay nameplate and are able to leverage the great equity that we have in Kay, it is going to be a big opportunity for us going forward. So, we are very excited. We have been waiting for this moment and we are glad it is almost upon us.

Ron Ristau – CFO: Last thing I would add to that, Jennifer, is that of the $0.09 there were – the $0.03 from first quarter and $0.06 in the second quarter we are anticipating, the majority of that, close to $0.08 of it is related to non-recurring costs again on duplicate overhead, severances and accruals for unnecessary office space that we will be incurring, particularly in the second quarter and these costs for sure will not be repeating in the second half of the year or in the next year. So that is a good strong help to us.

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Jennifer Davis – Lazard Capital Markets: Absolutely, we are really excited about the opportunity you have with Ultra as well or I should say Kay outlets now. One last question on – or actually two; on Mother’s Day, what was the impact of the shift? I think I kind of mismodeled that a little bit maybe.

Ron Ristau – CFO: Well, there is no effect – once again, there is no effect on comp. The comps were directly shifted, but the dollar sales move ranges between $32 million and $35 million is our best estimate…

Jennifer Davis – Lazard Capital Markets: Bridal, it sounds like it has increased as a percent of sales. Could you talk a little bit about that and how do margins on bridal compared to the rest of the assortment. Are they a little bit lower or are they about the same?

Michael W. Barnes – CEO: Well, I’ll start off and let Ron finish up with margins. On the sales, we had a very strong quarter for bridal and that’s very important because what we saw in this quarter, it was not just driven by the big holiday events of Valentines and lead into Mother’s Day. We had a great continuity business throughout the quarter and bridal was a really big part of that. We continued with our usual strong promotions. We also because we are so focused on bridal, we tested some new promotions that were related specifically to bridal in both the mall and in the Jared stores and we had really great results from that. So, we think there is a lot of opportunity for us to continue driving the bridal. Ron, do you want to talk about the margins, any other points on that?

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Ron Ristau – CFO: Our bridal margins are a touch lower than the overall Company, just a touch because of the fact that there is a lot of – there is loose stones involved in that and loose stones tend to be one of our lower margin businesses. It is not really that – it is not all that different.

Jennifer Davis – Lazard Capital Markets: Then, theoretically, your yields get greater, I guess, rents and fixed cost leverage on the sales?

Ron Ristau – CFO: Absolutely, I mean, driving bridal sales is a very important part of our business, representing more than 50% of our sales and it is something we continue to stay focused on because we believe it is a natural intersection of all of our competitive strengths, our great store experiences, the credit offerings that we have and the quality of our merchandise all combined for a great bridal experience and is something that we are best at. So it is a very good thing for us.

Gross Margin Analysis

Oliver Chen – Citigroup: What are your thoughts on how we should think about modeling the gross margin going forward in terms of the puts and takes and what can happen there over time. Also, if you could update us on the commodity cost environment and if you are seeing flexibility there with respect to what you are seeing and how you may be able to adjust your average unit retail?

Ron Ristau – CFO: Well, I will take the first question. I think that from an overall perspective we still try to work on maintaining our margins. We can’t be specific going into the third and fourth quarter of the year, but we think those margins will be good. When you think about commodities and what’s happening in commodities, the first thing I would like to point out is we are on an average cost FIFO basis, which takes commodity fluctuations into our P&L at different rates than some of our competitors. Currently, when we look at 55% of our cost of goods is diamonds and about 17% is gold. So right now, we can really continue to see some upward pressure on diamond prices for our quality goods. Although prices are really generally more stable on a relative basis in the near-term, long term, we really believe that this direction is up because global demand is flat. Demand is pretty strong still. The recent gold price declines, if they hold, should be somewhat helpful to us in the second half. However, we do some gold hedging, as I will point out, and we did have some unfavorable gold hedge positions that we found necessary to close with the reduction in gold prices. However, as always, there’s a lot of multiple factors, including pricing decisions, content, how we run our promotional programs, which reflect in our overall margin. So our outlook is good, but we really have to figure out how long this all lasts and who ultimately wins the battle on gold commodity pricing. But it will be helpful eventually to us if it holds.

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Oliver Chen – Citigroup: And regarding your comp guidance, should we anticipate that the same kind of run rate may continue between U.S. versus U.K. And on your low to mid-single-digit, is that traffic and conversion-led, if you could just give us parameter to what we should think about your forecast, that would be helpful…

Ron Ristau – CFO: Well, if you think about our – if you’re asking me the question — let me make sure I understand the question, how the comp forecast go forward will be reflected in transactions and pricing?

Oliver Chen – Citigroup: In terms of the comp lever…

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Ron Ristau – CFO: I think if you take a look at the U.S. division, you will say that there was a healthy mix of transaction growth and there was also some price increase, particularly at Kay on average, which went through. I would think that we would expect both transactions and price to drive in the United States as we go forward. In the U.K., we are seeing some traffic declines. We are seeing that particularly at our H. Samuel brand. We hope that we can arrest some of those as we move into the second half of the year, but we are fighting traffic declines in the U.K., so I would — if I had to bet right now I would say that there will be some degree of transactional decline in the U.K. go forward. That’s probably the best way I can answer that question, the U.S. is a great healthy mix, the U.K. is really driven by transactional decline more than anything else.

A Closer Look: Signet Jewelers Ltd Earnings Cheat Sheet>>