Ladies and gentlemen, thank you for standing by. Welcome to the Signet Jewelers Limited Q3 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, November 21, 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 third quarter earnings conference call. On our call today are Signet’s CEO Gina Drosos; and CFO, Michele Santana. The presentation deck that 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. Any statements that are not historical facts are 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. And we also draw your attention to Slide #2 in today’s presentation for additional information about forward-looking statements and non-GAAP measures. I will now turn the call over to Gina.

Thank you, James. Good morning, everyone, and thank you for joining today’s call. Today, Michele and I will discuss Signet’s third quarter results, provide an update on the progress we’re making on our strategic initiatives, share insight into our plans for the holiday selling season, and provide a detailed update on our credit transition. Then we will open the line for your questions. Beginning with the third quarter results we reported this morning, Signet had a challenging third quarter. We experienced a sequential decline in our comp sales, which was largely anticipated in what is our smallest quarter with an absence of gift-giving holidays. We also faced headwinds from weather-related incidents and disruptions in our systems and processes during our credit outsourcing transition. These events further pressured our results and impacted our comp sales by 60 basis points each. I’ll discuss credit in more detail in a few minutes. Lower sales on fixed costs and the inclusion of R2Net, which has a different business model and carries lower margins, resulted in a decline of 170 basis points in our gross margin. However, excluding R2Net, we delivered higher gross merchandise margins despite a heavily promotional environment. We saw improved effectiveness from our streamlined promotional strategies and sharper customer targeting. We also continue to focus on cost control. We’ve reduced expenses and improved our SG&A rate by 10 basis points, despite the 70 basis point unfavorable impact of R2Net transaction costs. In total, for the third quarter, we recorded a loss of $0.20 per share, including transaction costs of $0.25 and a $0.10 negative impact of the weather and credit-related events that I mentioned moments ago. As you can see, $0.35 of the loss was related to transactions, weather, and credit disruption. Importantly, I’m encouraged that we advanced our strategic initiatives during…

Thank you, Gina. For the third quarter, Signet’s total sales were $1.2 billion, down 2.5% year-over-year, or 2.8% on a constant currency basis. Comp sales decreased 5% compared to a decline of 2% in the prior year period. The acquisition of R2Net contributed 40 basis points of favourability to comp sales, well an estimated 120 basis points of negative impact was attributed to adverse weather and disruptions in our systems and processes associated with a credit outsourcing transition that occurred in mid-October. From a banner perspective, across the majority of banners, higher average transaction values were more than offset by a decline in the number of transactions. However, in Kay, we did see both the decline in ATV and the number of transactions due primarily to bridal and in part due to the impact of credit disruption. In looking at category performance, fashion jewelry and select categories in key price points performed well with some encouraging signs from the newness in our assortment. Bridal was challenged during the quarter, particularly in our Kay banner, as I just mentioned. And it was disproportionately impacted by the issues related to the credit transition that launched a week later than our three-week October bridal promotion. October was a strong performance period for a Zale banner who exited the quarter on positive comps. On a channel basis, eCommerce sales grew 56% over last year and represented 7% of total sales compared to 4.4% in the prior year, primarily driven by the recent acquisition of R2Net. Excluding the 47 days of sales related to R2Net, eCommerce growth was 10.5% and represented 5% of sales. We saw strong growth in our Kay and Jared digital sales, driven by the number of enhancements we have made to our sites combined with investments in digital marketing. As Gina…

[Operator Instructions] Your first question comes from Simeon Siegel of Nomura Instinet. Your line is open.

Thanks. Hi, good morning, guys.

Good morning.

Can you elaborate a little bit more Gina on the credit transition issues? I know you mentioned wait times, were more people rejected that they just walked out of the door before finding out. So any color there? And then you’re obviously making a lot of changes this quarter, you called out credit, the DC, Zale, eComm, et cetera. Just given the changes generally bringing about disruption, which we’re seeing, what do we need to think about for next year? Thanks.

Sure. Thinks, Simeon. So let me start with credit. So we’re all disappointed that this didn’t go more smoothly and have all hands on deck working on it within our multifunctional team, our leadership team, and partnered with our customers. And the disruption that we’ve experienced can largely be characterized into two buckets: technology issues and process and change management. So I’ll give you some examples starting with technology. In the last week of Q3 and the first week of Q4, so and the first two weeks of Q4, so our first three weekends of the transaction, we experienced slowdowns or outages on servers, each due to different causes that had discrete negative impacts on sales. We have fixed each one of those. But in the mean time, we saw longer than usual new application process times and slow account lookups, which frustrated customers and did cause some customers to abandon the application process. It also led to sub-optimal experience for our store associates, which has caused our store associates to question how quickly they can process credit applications, so these process issues we believe will take longer to normalize, but we will continue to make this a top priority until all the issues are resolved. In terms of overall transitions, here’s what I would say. The execution issues around credit have been related to specific credit systems and processes, and the huge amount of change management that we were undertaking. I think we’ve learned a lot from this, and it is absolutely a key priority for us to capture those learnings, so that as we move forward on additional transformation that we bring to Signet, we will do that with an eye toward training, toward fully understanding all of the impacts throughout our organization, and how we work with our partners in an even better and more upfront way to anticipate any issues. So we’ll be undergoing a full post-transition review, and we are committed to building a culture of agility and efficiency and continual learning that will help us to transform this company very successfully as we move ahead.

Okay, thanks. And then either Gina or Michele, you did call out positive merch margins and despite the comp pressures, any color you can give there in terms of your expectations for maybe the competitive landscape and your ability to continue, or how you’d view the merch margin trajectory?

So we expect the competitive landscape to remain highly promotional during the holiday season. The great news is that we got out in front of learning about how to optimize our promotional offerings and how to target those promotions to customers more effectively. And so, we’ve been able to be competitive in this highly promotional environment, but still improve our gross merchandise margins.

Great. Thanks a lot. Best of luck for the holiday.

Thank you.

Thank you.

Your next question comes from Lorraine Hutchinson of Bank of America Merrill Lynch. Your line is open.

Hi, Lorraine. Lorraine?

Mr. Hutchinson.

Sorry, I was on mute. This is Stephen Albert on for Lorraine. I just had a quick couple of follow-ups on the credit disruption. So how confident are you that that the disruption that you’re experiencing quarter-to-date is done by the end of 4Q? And then I guess, just to clarify, so since this credit servicing functions on the non-prime book have already been outsourced to Genesis, is this a one-time disruption or would you expect maybe some similar disruption in processes when you outsource sub-prime book in the first-half of next year? Thanks.

So, as I said, we have all hands on deck on this credit transition, our partners, our leadership team, our team members are working through all the issues that we’ve identified to date. We’ve been having daily calls and we are systematically fixing issues every day as we go, and so we have rapidly responded to each issue as we have uncovered it. The fact is, we don’t know what we don’t know, and there are also process and behavior-related issues that may take longer to resolve. So for now, we know that our Q4 performance will be impacted, so we’re being prudent and revising our guidance for the full-year.

Yes. I guess, in terms of your second question, which I believe was, could we see maybe something similar when we close out phase two of the outsourcing on the residual book and underwriting the forward funding for those receivables? And what I would say is one, first, I would start with that, we’re very pleased that we are making great progress as it relates to phase two. We’re very much in advanced discussions with our potential funding partners and feel very confident in terms of being able to complete this in the first-half. A lot of the more complex heavy lifting is done as part of phase one. There will still be work that we need to do in phase two. And I think, going back to Gina’s earlier comments, definitely lessons learned in terms of change management, process changes will be utilized to ensure that we have a much smoother transition as we look to phase two.

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

Thanks. Good morning. I guess, wanted to understand a little on the Zale comments you made. Obviously, understanding you didn’t have any credit disruption. Just curious what you saw in the quarter, obviously you’re commenting about, I think, positive comps coming out of October. So wanted to hear your thoughts about the Zale performance opportunities. Could they even get better into the holiday quarter? And then back to Kay just your confidence now in progressive, I guess, ramping up to take that 7% of the underwriting that you guys won’t be doing this year. Just what’s your confidence that progressive will step up for that number? Thank you very much.

So starting with your question about Zale, we’re seeing strong performance in our Zale division, which as you said, has not been impacted by the credit transition. So we saw sequential run rate improvement at sales from September to October, driven primarily by bridal sales, as well as eCommerce. Fashion also ended the quarter with a strong trajectory. And we have seen strengths continue into November, where our run rates on Zale are very positive. We’re very excited about the Disney collection and the exclusive items we have on that. We’re doing great on solitaires. Piercing Pagoda is off to a terrific start on gold, which is a major trend for this holiday season. So in place – in a place where we were purely able to implement all of the strategic initiatives that we’ve talked about, which is getting eCommerce to a great place, getting our fashion assortment aligned, strengthening our bridal, we’re really seeing that payoff and work. So we’re very, very excited about the progress to date on Zale. In terms of leasing, just as a reminder of leasing, when people apply for credit, we decline about 45% of those customers. And so we are able then now in a way that we weren’t before to offer them a new financing alternative, which is leasing. It’s a new muscle, we didn’t ever do that before. And so our team is learning how to present multiple finance options, but we’re seeing a good pick up of that. We’re seeing in the 20% to 25% range of pick up on the leasing and it is improving quarter-on-quarter. So we are continuing to be able to leverage that as a new and strong financing option for our customers.

Yes, and I would just also add that, we’re gradually pulling back on that bottom 7% of the portfolio that we talked about for the holiday period. So think of it about 50% of that. So with that and combined with the comments that Gina said, I feel fairly confident that we can cover that population.

Great. Thanks and good luck for improved performance.

Thank you.

Your next question comes from Lindsay Drucker-Mann of Goldman Sachs. Your line is open.

Hi, everyone. This is Bill Schultz on for Lindsay.

Hi, Bill.

Just had a question for you guys. I wanted to sort of leapfrog off Simeon’s question on merchandise margins. I think, you called out, excluding R2Net the underlying merch margins were up in the quarter. What are the drivers of that? Was it a function of a mix shift away from bridal in the quarter? And sort of second question is, your inventories look pretty lean exiting the quarter. Do you anticipate a continued improvement in merch margins around holiday? Thanks.

Yes. So let me take your question on the merch margins in terms of what some of those drivers were during the quarter. I’d say, it’s a combination of items. Definitely, there was a favorable impact with mix. The other item I would add is, particularly we see on the Zale side synergies. If you recall, the synergies that we’re looking to achieve this year, a substantial portion of them resulted were related in terms of our gross merchandise margins, whether it’s sourcing-related, discounting controls, et cetera. So it’s a combination of those items that’s driving favorability in the merch margins. And then your second question was related to inventory levels, I think that’s…

Yes, correct.

Yes. I would say that’s an area that I’ve been very excited about, because I think, I continue to see opportunity to optimize the inventory levels. And when you start thinking about technology, particularly with the R2Net and technology that we can start to deliver into our stores, I think, it just enhances the opportunity we have to further optimize working capital, particularly related to inventory.

Thanks very much.

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

Thank you. Good morning, everyone. I also have a question on some of these lingering credit issues. So a credit participation fell 720 basis points last year. And it sounds like 400 basis point of this was related to disruptions and processes. So once some of these challenges are resolved, do you expect to recapture that 400 basis points all else equal, or do you think it will reset at a lower level? Basically, I’m a little unsure ADS has tightened their lending standards. And if they did, to what extent that would remain a headwind going forward?

Yes. So why don’t I take that? In terms of – keep in mind that with ADS whatever applications they don’t approve that flows through over to Genesis, which currently Signet continues to perform the underwriting on that. So when you look in terms of Q3, the 720 basis points and if 300 bps was kind of the pre-trend prior to conversion, we definitely with the disruption we saw, we saw a follow-up in credit applications, as well as a fall off in the actual approval rate and that was really hindered by the downtime with the systems, call center times, frustration with the customers and store associates. What – as we think about going forward and what we continue to see in the first three weeks of November is that, the application volume is running similar to the pre-trend. And each week, we continue to see those approval rates getting better to the point that we’re largely in line. However, what we are seeing is a mix impact between in-store and eCommerce, more applications on the eCommerce side and that has a disproportionate impact in terms of approval rates. So I think, as we continue to work through the process change management that Gina talked about, we definitely should be able to get back to where we were, sense the 7% of the portfolio that we talked about that will gradually start to decline the underwriting in that group.

Got it. And so the third quarter impact was 60 basis points of the implied fourth quarter drag based on your guidance revision is 700 basis points. So is that because we’re talking about a full quarter of this being a headwind or are there other things coming into play that would create a bigger impact on 4Q?

Yes, what I would say, it’s a full quarters – full fourth quarter and it really is worst case scenario.

I got. If I could squeeze in one more. Any initial reads on interwoven, whether that’s able to capture the millennial customers that you’re going for? Any initial thoughts on success by banner would be great? Thank you.

Yes. We’re really excited about interwoven, it’s largely our first ever initiative targeted to millennial consumers. And it represents a good consumer insight, which is that millennial consumers don’t necessarily follow the same traditional relationship journey as their parents, often, they’re weaving their lives together in different ways long before marriage. So they might move in together, even have kids together before they’re buying an engagement ring. So for the first time what interwoven offers them is an opportunity to celebrate that journey together with a new item that represents how their lives have come together. And I love to sell line actually on it, but wherever we go, we go together. What’s also very exciting about this initiative is how we’ve surrounded it with millennial targeted marketing. So it’s our first-ever social media influencer campaign. I mentioned, we have about 100 influencers lined up, who will create over 100 million impressions. These are largely couple influencers, and we’ve done a very interesting ad campaign for interwoven that features a couple deciding to go on a trip together and doesn’t matter where they go, they’re going together and we’ll be replicating the idea of that with sweepstakes offering to send couples on a trip. And what’s featured in all of our marketing to date is the necklace, which is really the most important part of that item launch that we’ve rolled out and the sales on that are encouraging. So we’re excited overall about the opportunities to speak to a new target audience through new mediums in a different way and continue to learn and grow in that area of our business.

And our next question comes from Omar Saad of Evercore ISI. Your line is open.

Thank you. This is [indiscernible] on for Omar. I have a question about the overall environment just, I know earlier in the year there was a lot of independent liquidation, it seems like that has settled out, department stores were getting a little bit more aggressive. And I know you were looking to change your promotional cadence in the back-half of the year to step up and reach a different customer. Can you just talk about where you think the environment is today and how your strategy is looking forward to?

Sure, so I’ll start. Michele, you can fill in any other details. So first on the promotional environment, as I said, we expect the strong promotional environment, particularly in mall stores and department stores to continue. We’re expecting aggressive promotions not only for Black Friday, but also through the holiday season. We’re also very pleased about the offerings that we’ve put in place and believe they are well tested with our customers and transparent and really create, I think, a high value shopping experience along with our high-quality merchandise and the great service that we offer customers in store. So we are very open eyed about what we think the promotional environment will be, and believe we’ve constructed a good plan in that context.

Yes and I mean, I would just add for sure, our overall goal is to grow share and do that profitably and meet the mid-market with strong bridal position and also strengthening our fashion assortment. And I think the comment that Gina had mentioned earlier show that we really have planted the roots in all of those areas. So when we think about the strategy and going forward, I just offer that perspective as well. Just one other thing speaking about independence, an area where independence have been particularly strong in the past is on solitaire diamond ring. Our loose stone volume at Jared is higher than it’s been. We’ve put more larger carat weights and high-quality diamonds into Kay and Zales. Solitaires are doing extremely well for us. So again, very open eyed on the competitive environment and finding opportunities to grow our business and achieve positive market share in those bridal, as well as fashion. I don’t want to miss the point I made earlier, our fashion assortment is very strong this year in the $200 to $700 price point, which is the key price point we missed last year, and in total in fashion, we have 50% more items in the right price point range than we did a year ago. So good analysis by the team and we’re feeling like we’re well-positioned for holiday.

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

Hey, thanks, guys. Hi, Can you tell us specifically what was the performance of bridal on a year-over-year basis, just the percent change in 3Q versus non-bridal? And also what’s the mix of bridal in 3Q versus 4Q? And then just second, as you focus more on eComm and digital, even excluding R2Net, if you think about the core business, how you’re thinking about the impact to EBIT margin as more business shifts to online? Thanks.

Yes. Let me start with bridal and then we can talk about the R2Net business model. I don’t actually read it, we have the bridal stats in terms of percentage this quarter versus last quarter, or Q4. But what we do know and as I mentioned on the call, we did decline in bridal. Now that was in large part we had a major bridal promotion in October and that overlapped, at the same time we saw the credit disruption as we are going through conversion. And when you think about our bridal sales, 75% of bridal sales are usually done using our form of credit. So that really disproportionately impacted what we saw in the bridal during the quarter.

Yes, that promotion actually was off to a very strong start before the credit transition issues hit.

And then in terms of your question on the R2Net model, so what….

[Multiple Speakers] R2Net, actually more of the core business?

I’m sorry, what?

More of the core business.

[Multiple Speakers]

…as we shift.

Yes. So the shift on – yes. So as we think about the shift online more sales being done online, to some extent, that benefits us in terms of our margin rate, because we don’t carry, even though we have shipping cost et cetera associated with the online orders, you don’t have the heavy burden of the full store cost associated with that. So that is actually a benefit to us.

Okay. Thanks, guys. Good luck.

Thank you.

Thank you.

Your next question comes from Kara Szafraniec of Northcoast Research. Your line is open.

Hey, good morning, everyone. Just two quick questions. First, understanding there was a weather impact in the third quarter due to hurricanes. Just wondering if you could touch on how some of those hurricane impacted regions have rebounded post-hurricane? And if you’re foreseeing any impact into the fourth quarter due to these weather events? Second, hoping maybe you could touch quickly on the performance of mall versus non-mall source in the quarter? Thanks.

Sure, so I’ll take weather and then Michele, you can talk about mall. So we have a very strong footprint actually in both Florida and Texas. We saw frankly more of an impact on our sterling business than we did on our Zales business from the weather-related issues, and we are seeing consistent improvement of those stores. They didn’t fully improve to pre-weather levels prior to the end of the quarter. So are we still seeing some impacts from that? Yes, albeit small. And so we haven’t really called that out as a big fourth quarter impact, but small. But the teams are working very hard to regain that. And we – we’re hoping that consistent with what we’ve seen in the past that as customers begin to get their insurance checks back in and be able to put their lives back together and are looking to celebrate and express love this holiday season that we’ll be able to see some positive impact in those markets from increased buying power on consumers.

Yes, and in terms of your question on the performance between mall and off-mall, if we look at our off-mall, excluding the outlet, they had performed substantially better than what we saw in terms of the mall, I’d say, in the tune of about 600 basis points better.

All right. Well, thank you so much, everyone. That’s all the time we have for questions today. We appreciate you all joining the call, and we look forward to updating you in January. Happy holidays.

Thank you. Ladies and gentlemen, that concludes today’s call. You may disconnect.