Ladies and gentlemen, thank you for standing by. Welcome to the Signet Jewelers Limited Q2 Fiscal 2018 Results Conference Call. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] Please note that this call is being recorded today, August 24, 2017 at 8:30 AM Eastern Time. I would now like to turn the meeting over to your host for today's call, James Grant, Vice President of Investor Relations. Please go ahead, James.

Good morning and welcome to our second quarter earnings conference call. On our call today are Signet's CEO Gina Drosos; and CFO, Michele Santana. The presentation deck we will be referencing is available under the Investors section of our website, signetjewelers.com. During today's presentation, we will in places make certain forward-looking statements and statements that are not historical facts or subject to a number of risks and uncertainties and 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. We also draw your attention to Slide number 2 in today’s presentation for additional information about forward-looking statements and non-GAAP measures. And I will now turn the call over to Gina.

Thank you, James. Good morning and thank you for joining today's call. It’s great to be here today on my first earnings call as CEO of Signet and announcing encouraging second quarter earnings and a transformative acquisition. Before I get into details about today’s announcements, I want to first acknowledge the tremendous career and contributions of my predecessor Mark Light. He retired last month. I’ve been in touch with Mark and spoke to him this week, his health is progressing well and he is very appreciative of all the support and your well wishes. Now I’d like to share some background, my initial observations, my immediate priorities, and why I am excited about Signet’s future. As many of you know, I have the privilege to serve as an independent director on Signet’s Board for five years including as a member of the Customer Experience subcommittee and the Respect in the Workplace Committee. I know it’s first hands that Signet is a great company with a strong foundation and many opportunities to accelerate its strategy and enhance its competitive advantage in a rapidly changing retail environment. As a director, I have worked closely with Signet’s leadership team. I have helped shape the recently refreshed Vision 2020 strategy, which I am pleased to see is beginning to deliver results. As you might also know, my career successes to this point are built on consumer-inspired strategies and innovation, changing category paradigms and developing an agile entrepreneurial and efficient approach to business operations often less as more and focus has been an important driver of my success with P&G and Assurex Health. Over the last months, since my appointment, I have been studying various aspects of our business to start identifying Signet’s highest return focus areas. I have also been getting to know, listening…

Thank you Gina. All right, so turning to Slide 7, for the second quarter, Signet’s total sales were $1.4 billion, up 1.9% year-over-year or 2.8% on a constant currency basis. Comp sales increased 1.4% compared to a decline of 2.3% in the prior year second quarter and compares to a two year comp hurdle rate of 1.9%. Other comp sales increased about 380 basis points of favorability was attributed to the performance and later timing of Mother’s Day which shifted to the second quarter. Key events that contributed to this encouraging comp performance were solid Mother’s Day results and a successful July bridal event. Overall, total comp sales increases were driven primarily by higher average transaction value across all store banners. We also experienced increases in the number of transactions in Kay, Zales and Peoples while the UK saw double-digit percentage decrease in transactions. By category, fashion jewelry led the sales performance closely followed by bridal while watches declined with the exception of our Prestige Watches in the UK that had strong sales performance. From a channel perspective, e-commerce led the growth with an 18.1% increase over prior year while those malls and off-mall stores delivered sales growth. Through the first half of the year, we have learned that agility in our approach to balancing sales and profits is particularly significant in today’s consumer environment. Signet is committed to strengthening its consumer relevance and market share while continue to balance incremental promotions to drive top-line, with expense reductions to offset margin rate declines. Our wins in the second quarter relating to our promotional messaging that consumers responded very strong to combine with wins related to our ongoing e-commerce initiatives support our full year guidance outlook. So now we will move to the income statement. On Slide 8, our gross margin…

Thanks, Michele. Before we take your questions, I’d like to reiterate a few points. First, I am honored to lead Signet at this exciting moment in our winning history, a time when we will leverage our strengths in new ways, develop new muscles and build our capabilities and culture at an accelerated and energizing pace. We have many great assets to enable our future success. We have a hard working, talented and passionate team. We have the discipline and operational expertise that sets the gold standard in the industry. We have recognizable and trusted brands that are part of consumers’ most meaningful life moments. But let me be crystal clear. We also have a number of challenges that we need to decisively address. We operate in a retail environment that is more dynamic and demanding than it has ever been, leading requires us to act faster, smarter and more efficiently. I will not lose sight of this. We will focus on clear strategic priorities that will help us gain momentum and lead growth once again. I will strive to build a stronger, more agile and more innovative Signet every day. By leveraging our strengths and keeping a laser-focus on what’s needed to deliver growth and profitability, I have great confidence that we will achieve sustained success and create strong value for our consumers, employees and shareholders. And with that, we will now take your questions.

[Operator Instructions] And your first question comes from the line of Simeon Siegel with Nomura/Instinet. Your line is now open.

Thanks, good morning guys and welcome, Gina. Gina, you are being informed but new perspective to the leadership seat, any updates on your view on store counts and thoughts on the preferred store fleet size and maybe e-comp penetration, especially just given that you just bought an e-tailer. So, if you could dis-aggregate color between the main nameplate concepts and then the regionals, that would be great. Thanks.

Sure, thanks very much for your question and for the warm welcome. We’ve been aggressively managing our real estate portfolio. Year-to-date, we closed 98 stores and opened 53 for a net down of 45. This is focused on regionals and underperforming mall stores. We have a highly analytical point of view on this and are looking at ROIC every quarter on these stores. But we do view our retail footprint as a competitive advantage and believe that we can do a much better job connecting our in-store and our online experiences. And that’s important, because while jewelry customers begin their shopping journey online, nine out of ten jewelry shoppers want a store experience before they buy. So going forward, we will continue to take advantage of lease optionality to exit unprofitable stores, strategically open fewer new stores with strong potential sales and ROIC and much better connection between the online and bricks and mortar parts of our business. R2Net I think will play a strong role in helping us to build digital innovation capabilities to do this.

All right, great. Thanks, and then, Michele, if I can, I think you mentioned, you spoke about the interest expense. Anyway to think about the interest income for the back half and I know you had said it wouldn’t be material to the statements, but just to clarify as guidance and the balance sheet now reflect contractual accounting for the non-prime book. Thanks.

Yes, sure Simeon. So couple things that turns us, yes, I did mentioned interest expense savings, but also in my prepared remarks, I talked about the interest income at least associated I don’t know if you are talking about the finance charge income or if you are talking about some other type of interest income. But if you go back through the prepared remarks, that’s included all factored into the guidance. In terms of your question on a contractual basis, let me give some additional color there. We expect that when we do convert, when we close the transaction in October, that we will convert to contractual as we move to Genesis. However, for Q3 reporting, our delinquency will be done at the final time on recency basis and the reason for that, Simeon, is due to the cycle billing times and the conversion day that’s happening later in October. Beginning with our last seven billing cycles, which we have a total of 25 cycles in October, all accounts going forward will be aged and managed purely on a contractual basis. So you will see when we report Q4, that we will be moved to contractual. So, hopefully that helps.

Perfect, thanks a lot guys. Best of luck for the rest of the year.

Thanks, Simeon.

Your next question comes from the line of Oliver Chen with Cowen and Company. Your line is now open.

Hi, thank you. Your comments are really helpful. We are curious about your comments around the promotional environment and what’s happening with the industry at large and your thoughts on mom and pops and it sounds like you are very agile and thinking about this. But, will the comparison ease in the context on how the environment is evolving relative to your strategies? And then on the R2Net deal, could you just help us understand which features are you most excited about to help accelerate your own OmniChannel capabilities, I would be curious about that and generally speaking, how the timing would work and what we should think about and one of the topics you brought up a lot was speed. It could be in relation to that or supply chain, curious about that as well. Thank you.

Great, thanks, Oliver. Let me start and then Michele, you can jump in with more details. So first on the promotional activity. So we’ve discussed our strategy to appropriately balance sales and margin and you’ve heard in our Q2 discussion that we are willing in this environment to build profitable market share with higher levels of promotional spending offset by cost savings.

Yes. Oliver, if I could just add a couple points to that and then we will circle back to your R2Net question. As we said on the call, we are planning to be incrementally more promotional and with that we expect that we will slightly deleverage our gross margin rate and as you know that is a change from how we previously communicated our position before. But given the promotional environment and the competition we see in the marketplace and the fact that, we are going to go after market share, we absolutely believe that’s the right thing to do. But equally important, is ensuring that we remain agile and flexible and being able to go after cost reduction to support a lower gross margin rate and ultimately drive the bottom-line. And then on your question regarding R2Net, I am really very excited about the technology they bring and the way I think about it is, a pool of existing technology and a really robust R&D pipeline of future technology. So if I talk a little bit about the existing technology there are four critical pieces that I call out, one is diamond imaging cameras, so they’ve developed an in-house capability to create real diamond images in 360 degree HD with a 40 times super zoom on any device. So it looks great in a mobile app as well as online, it can look great in our stores, and they are continually updating and improving these cameras. So I think that’s something that we would look to reapply in the reasonably near term. The second is a 3D imaging technology and this is a rendering system which provides interactive videos of any diamond within the ring. So, when a shopper is online looking, they can look at the over hundred…

Thank you. And Virginia, just one last question. When you think about the individual banners between Jarred and Zale, there is different aspects from the consumer selling experience versus product execution. Could you just dive a little bit deeper and that where you see those opportunities specific to the banners, because it feels like they are slightly different.

You are exactly right. They are slightly different, Zale, for example has a somewhat different customer than Kay and different from Jarred and I think we have a great opportunity to improve and differentiate our assortment. For example, in Zale, we want to look at higher price point fashion offerings than we’ve had traditionally in the past. For Jarred, we are looking at more branded merchandize and ways to really help Jarred elevate its point of view. We see the key competitor if you will for Jarred as regional independents and so how that we positioned Jarred to be able to reach to a higher income and discerning consumer and in Kay, the same, we’ve done very well with bridal brands and so we are looking at how we extend off of those brand names into more bridal offerings but also into fashion. So, understanding the consumer and who is shopping, at each of our banners is an important first step that we’ve been working on and from that we’ll be differentiating our assortment a bit more than we have in the past.

Thanks. Congrats on the deal. Best regards.

Thank you.

Your next question comes from the line of Ike Boruchow with Wells Fargo. Your line is now open.

Hi, good morning everyone. Congrats on the nice improvement you are seeing in the business. I guess, Michele, you mentioned gross margin will be down a little bit in 2H and – correct me if I heard this wrong, but you are planning to offset that with some cost initiatives that you’ve identified. Can you maybe talk of the specifics there? Are these initiatives brand new to the business meaning will those cost savings wrap around to the first half of next fiscal year?

Sure, Ike. So yes, the plan that we have is that given the environment as we talked about, and importantly some of the lessons that we learned from Mother’s Day on how we drove our promotional messaging which was much more streamlined, we will look to offset that through further cost savings on SG&A. So, some of these cost savings are continuing benefits of what we’ve done in the first half of the year. So if you look in the first half of the year, SG&A kind of excluding the CEO separation and the acquisition cost associated with R2Net are down about $20 million. Some of those benefits will continue to the back half of the year such as our corporate payroll, store payroll savings. We are also pushing in deeper into certain areas where we see further opportunities in select corporate expenses. In addition, we are also making smart reductions in advertising. Part of that is shifting advertising to higher ROI media. For instance, shifting away from some of the traditional media into the social media which is also very efficient in terms of dollars and it’s also supported by research we’ve done and which we know that people need fewer visits to stores. So our marketing is going to reflect that. For instance, years ago, the bridal journey required seven store visits on average, but today it’s down to about four as a result of digital. So we are kind of leading into that. So even though we are going to be diving deeper and reducing SG&A, we also at the same time are preserving or improving the customer experience through smarter allocation of our resources.

Got it and it’s very, very helpful. And then, just a follow-up on, on Phase two, maybe Michele, could you talk about your thoughts on potential timing as well as any other types of options or alternatives that you may be considering internally?

Yes, so let me give you a little bit more color on Phase Two. I guess, broadly some of the timing around that, very much what we previously said at the time we had announced our phased approach remains in play in terms of our objectives. We are actively engaged, as Gina had mentioned on the call in discussions with multiple interested parties, very committed to fully outsourcing the credit portfolio in a timely manner, but keep in mind we are also very focused on ensuring that we close the Phase One transaction in October before the holiday season. So we are kind of running a parallel path. What I would say and what we stated previously is that we expect Phase Two to be completed at some point in FY 2019, but we are going to continue to push forward on that path.

Got it. Thanks so much.

Thanks.

Your next question comes from the line of Paul Lejuez with Citi. Your line is now open.

Okay, thanks guys. Hey, have you thought about whether or not you are going to cross market, James Allen with your existing brands? That’s the first question and then just, I think is bigger picture, you’d focus more on OmniChannel, any early thoughts on the required CapEx investments as you think about next year and also if you could maybe touch on what we should be thinking about in terms of EBIT margin as you move more of your business online as online continues to outperform stores? Thanks.

Sure, so just starting with your question on James Allen, our initial view is to run that as a largely independent division and keep JamesAllen.com as the very strong fast-growing e-commerce brands that it is now and then look to reapply technologies to Kay.com, Zale.com, Jarred.com and also in stores. We will also over time look at whether a showroom type concept would make sense on James Allen to create some in-store excitement around that brand as well. But I think we need to really get into more of an implementation phase before we get concrete ideas on that, but that’s at least the early thinking on that piece. Yes, and maybe, Paul, just in terms of your question, I believe one was on CapEx related to the acquisition elevated levels going forward, we have to say, I wouldn’t anticipate any material elevation in our capital expenditures. I think, how we’ll look at is, the result $4 for capital expenditures and we will allocate that based on priority and ROI. And then in terms of EBIT margin as we shifting OmniChannel, e-commerce for stores, our e-commerce margin is pretty healthy. Keep in mind, we don’t have the store, the related store expense. So although we do have shipping cost associated with the e-commerce, we are not having that store occupancy expense. So it really isn’t a drag on our margin for us.

Thanks. Anything – can you add anything on your store closings? What sort of recapture rate you see on the sales as you are closing stores?

Yes, so I’ll take that one. We typically see around 30% recapture rate that has a lot of upside in it. So it’s not a bad number now, but we think, especially with some of our new client telling system that we’ve rolled out to the field, we have an opportunity to increase that to up over 50% and so that’s a real focus area for us.

Thanks.

I think I have one more point on what Michele was saying about EBIT, James Allen has a significantly higher average transaction value than any of our other websites and that gives us a great learning math for how we can increase the purchase online for the rest of our websites and that in and of itself would be an improvement and EBIT for us.

Thanks. Good luck guys.

Thanks.

Thank you.

Your next question comes from the line of Brian Tunick with RBC. Your line is now open.

Thanks and good morning. Gina, I was curious, I guess, first maybe your view on the softness in the jewelry category overall, what are you seeing there, maybe, any differently, obviously, making a big acquisition on the millennial front today. But just curious what you think is going on in the last year and a half in the jewelry category and maybe what could help necessitate it and then maybe, Michele, on capital allocation, can you maybe update us on your views on where the balance sheet and leverage ratios will come in at the end of the year, given this accelerated buyback, the credit sale, today’s deal and maybe how you are prioritizing capital allocation, maybe as we go into next year? Thanks very much.

Sure. So, I think that the jewelry sector headwinds are really a combination of overall retail headwinds and the very rapid change in how consumers are choosing to shop. And then secondly, a more sector-specific issue around the lack of excitement and innovation. And those are two things where Signet is well positioned to strengthen our capabilities and to lead. I will say that after four years of declining growth, we have recently started to see a reacceleration of the jewelry industry, low single-digit growth year-on-year in the last year and we’ve done a lot of consumer research and we know that consumers of all ages including millenials tell us that jewelry is among the top three gifts that they like to receive and that diamond rings will continue to be how they choose to commemorate their engagements. So, I think there is significant resiliency in the jewelry industry across generations and as we can bring more exciting innovation, more visualization, more ability to be able to shop online for a purchase that traditionally people have thought you have to touch and feel and see in store when we can magnify that diamond forty times, turn it around 360 degrees and give people a great view of that online combined with 24/7 chat with diamond experts, I think will be able to lead a change in jewelry industry growth rates.

And Brian, in terms of your question on capital allocation priorities, a few thoughts there. The business has very strong cash flow generating capabilities and so we absolutely remain committed to one, preserving our financial strength and our flexibility to support growth and also maximize our shareholder return. This also though includes strategic investments like the acquisition that we just announced today of James Allen and balancing that through returning capital to our stockholders through dividend and/or share repurchases, so I’d say there is really no change in terms of those priorities that we have previously communicated. When you think about the end of the year leverage ratio, what I’d probably point you to is, we’ll probably be maybe low and three times basically be under that.

Great, thanks and good luck guys.

Thank you.

Thank you.

Your next question comes from the line of Rick Patel with Needham and Company. Your line is now open.

Good morning, Gina. Great to have you on the call and congrats on a strong 2Q. Just a couple of questions on the competitive environment. So first, are you still seeing a lot of liquidation in sales gone from the independents like you did earlier in the year or is that lessening? And then second, a major department store competitor is certainly accelerating its focus on jewelry with pretty good results so far. How should we think about this competitive threat and what levers Signet can pull to offset this pressure?

Well, first on the liquidation sales, I would say we are seeing fewer from the independents that we had – than we had previously. But we are seeing stronger promotional spend from department stores, very price-oriented promotional spend. We take a view on this that we are leaders in this business for the long-term and so we are very analytical about our promotions willing to balance those to drive our top-line growth, but profitable share growth winning in bridal, getting stronger in fashion, those are the key things that are most important to us. It certainly is not all about price in our context. So we are working harder to combine our promotions with equity building, advertising and other marketing. So that we make sure we are building our brands over the long-term.

Can you give us some more color around the new initiatives for holiday? I am just curious about what’s going to be different from last year from a merchandizing perspective in terms of your existing brands and any other new brands you might look to scale that you may have tested over the last few months?

Yes, so, I don’t want to give away too much from a competitive standpoint, obviously, but we have a number of new fashion brands that we’ve been working on. Some of those are brands with – which really speak to the heart and soul of consumer passion and which they think are great and some of which are really trend-driven on – very on style at the moment, designer-oriented brands building on the stacking trends that we’ve seen recently in the market. So, I think, they are very strong. We are focused on price points in the gifts giving range of $200 to $700. So we’ll have a very strong offering there. And so what we are really aiming to do combining that with a disciplined and smart promotional and marketing spend is to drive traffic into our stores and be very much part of consumers’ holiday gift giving.

And if I could pile in and add one additional comment as well, when we go through our holiday period this year, we will have that our leased to own program with Progressive Leasing and when you think about that, currently about 45% of customers who applied for credit for today are denied. And so that does represent a great opportunity for those customers who can’t seek credit and mentioned on the call, we are able to successfully roll that out ahead of schedule and so now it’s really just a matter of our store associates kind of building their muscle related to that.

Thanks very much. All the best in the back half.

Thanks.

Great, thank you.

Your next question comes from the line of Scott Krasik with Buckingham Research. Your line is now open.

Hi everyone. Thanks and congrats, Gina. Just wondering, it seems like the underlying sales trends excluding the Mother’s Day shift in the first quarter were maybe down mid single-digits or so, second quarter that’s improved meaningfully. So I am just wondering, how you view sort of your underlying trends ex the shift, maybe how are sales in June and July and how you are thinking about that going forward?

So, I’d say a couple of things on that and then Michele, feel free to chime in. So, we had very strong average transaction value growth across our banners and across our key national banners led by Kay, certainly Piercing Pagoda, Zale as well, we also saw transaction increases in the quarter. So we are very pleased to see growth on both of those fronts. You are right, that ex the Mother’s Day, we would have been down slightly on a comp basis. But coming out of the momentum that we had behind our bridal promotion in July, we are feeling very good about our guidance for the back half of the year.

Yes, absolutely, I would say, very much encouraged by our Q2 results. We talked about strong performance going into the quarter and strong performance exiting the quarter with our July promotional event. And I did provide some color on the call on how to think about Q3 and Q4.

Right. And then, so just lastly an update on maybe the synergies where you are there? And I think you alluded to in Ike’s question that there you are finding some new savings. Can you just further expand on that?

Sure. We are looking for savings across our company. But just to answer specifically, synergies and related to the Zale acquisition which are the synergies that we talked about the most, Zale – I’ve having been on the Board for five years, I continue to be very excited about that acquisition. Very good strategic decision for us and we are very committed to achieving business success. What has gone well on that integration is our operational focus on synergies. So we are on track to deliver the numbers that we’ve communicated previously. What our bid opportunity is to drive further benefit from that acquisition is on the sales growth side. And we haven’t meaningfully improved our sales productivity and still our Kay average store sales are about 50% higher than a Zale’s which gives us a tremendous opportunity as we improve assortment, as we get our inventory right in the stores, as we update the look of those stores, as we bring technology like we’ve talked about a tremendous opportunity to drive sales productivity. And so, while we will reach our synergy targets, I think the integration still has tremendous upside and as we fully embrace the ideas and talents of our Zale division team, we will be able to bring those to life.

Okay. Thanks, good luck.

Thank you.

Thank you.

And that’s all the time we have for questions today. I will turn the call over to Miss. Drosos.

Okay. Thank you very much. Our next call will be the release of third quarter earnings on November 21. So that’s it. Thank you.