Hello, and welcome to the Signet Jewelers First Quarter Fiscal ‘21 Earnings Call. At this time, all participants will be in a listen-only mode [Operator Instructions]. Please note today's event is being recorded. And now I would like turn the conference over to your host today, Vinnie Sinisi. Please go ahead, sir.

Great, thanks very much, Keith. Good morning, everyone and welcome to our first quarter earnings conference call. On the call today are Signet's CEO, Gina Drosos; and CFO, Joan Hilson. During today's presentation, we will 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 disclosure in our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events. During the call, we'll discuss certain non-GAAP financial measures. For further discussion of the non-GAAP financial measures, as well as reconciliations of those non-GAAP financial measures to the most directly comparable GAAP measures, investors should review the news release we posted on our Web site at www.signetjewelers.com/investors. And with that, I'll turn the call over to Gina.

Thank you, Vinnie. Good morning, everyone and thank you for joining us on our call today. Before we get into our results, I wanted to share a few thoughts on the events of the past few weeks. While these are truly unprecedented times from the global COVID-19 pandemic to economic uncertainty, nothing has matched the pain and heartache of yet another brutal murder of an unarmed person of color. This pattern of discrimination and violence must stop now. Racism has no place in our world, and certainly not in a country dedicated to protecting life, liberty, and the pursuit of happiness for all. Always and particularly in this context, I am extremely proud of what Signet stands for. We immediately denounced these hateful acts and made a substantial donation to the NAACP Legal Defense and Educational Fund. I'm also hosting an open mic townhall with Signet team members next week called Signet Speaks Out with the intention that a frank discussion on race will give us new and meaningful actions we can take to improve within our four walls. We will continue this open dialog throughout the year and we’ll look to leverage our actions and insights to also help lead change in our industry and communities. At Signet, our mission is to celebrate life and express love, and we're committed to making this true for all people. Now I'll move on to a discussion of our Q1 performance. This quarter, I'll open my remarks with an assessment of Signet's competitive positioning in the post-COVID-19 world. I'll provide thoughts on our key strategic priorities and our acceleration over the last two months to a more effective and efficient omnichannel retailer. I'll then turn the call over to Joan for financial commentary on the first quarter and fiscal 2021. Signet came…

Thanks, Gina, and good morning, everyone. In my remarks, I'll discuss highlights of our first quarter financial results. I'll also review actions we've taken to conserve cash in response to COVID-19 and provide an update on our credit portfolio partner. To note for the first quarter, in light of the unprecedented times, we will provide additional details around our intra quarter performance. We do not intend to provide these details going forward, but thought it would be helpful for Q1. As Gina mentioned earlier, we saw accelerating e-commerce momentum throughout Q1 and into the Mother's Day selling season. Brick and mortar same-store sales declined 44.7% with temporary store closures beginning in late March. Adding some additional color, in February, things same-store sale were running positive low single-digits, and we grew our e-commerce sales by 11% compared to the prior year, reflecting strong Valentine's Day performance. We then pivoted in late March to an e-commerce only retailer. It was at this point that we increased our digital outreach to customers, as well as implemented our virtual appointment process. Gross margin of $204.2 million declined as a result of lower sales from the COVID-19 pandemic, which led to a de-leveraging on fixed costs. This decline was partially offset by cost reductions and lower occupancy costs. We note that we were able to hold gross merchandise margins consistent to last year. SG&A expense declined significantly, driven by lower labor costs resulting from employee furloughs, temporary pay reductions, lower advertising expenses and overhead reductions. This resulted in a non-GAAP operating loss of $142.5 million for the quarter. GAAP operating loss was $291.1 million and includes $136.3 million of pre-tax impairment of goodwill, intangibles and long-lived assets. As discussed in the earnings release, the Q1 financial statements are preliminary due to the long-lived non-cash asset…

Yes, thank you. As mentioned, we will now begin the question-and-answer session [Operator Instructions]. And the first question comes from Paul Lejuez with Citi.

I'm wondering if you could provide any further quantification on what you're seeing in the performance of the stores that have now reopened? I think you’d said something about revenue covering operating costs. Curious if that means that those stores are already four-wall breakeven, is that one and the same? And then also of the 150 stores that won't reopen as well as the additional 150 to be closed, can you talk about the sales and EBIT contribution from those two classes? Thanks.

I will take the first part of that question. So, our plan to reopen stores has been actually similar to how we close stores. We've been using a hyper local approach based on market dynamics and analysis of all the government mandates, et cetera. And we are, based on the results that we've seen early on opening stores as quickly and safely as we can. The performance of our reopened source has been exceeding our expectations. And yes, you’ve heard what I said in the script, right, the revenue is covering the operating expenses on a four-wall basis. So, we intend to carry forward the strides that we've made in digital capabilities doing more appointment booking and really leveraging that new integrated omnichannel experience as we reopen more stores. Our plan is to have at least 75% of the fleet open by the end of June.

And then Paul with respect to the second question. Our valuation of stores that we’ll not reopen, the 150 stores, really stems from the Greenfield analysis and the overall evaluation of our go-forward physical footprint. We're not disclosing at the time what the sales and operating contribution of those stores are, but we feel confident that the footprint that we see on a go-forward basis is the one that's best for us.

The one thing I would add to that, that we've historically done our analysis on closing stores really on an internally focused basis looking at the contribution and profitability of those stores. What we've done differently this time, that I actually think is a more breakthrough way to look at it, is that we have mapped the country in a Greenfield analysis, almost a clean sheet of paper to say if we were starting today, which markets justify one store, two stores, three stores, or more how and where would we put them, and we've used that customer first lens to really decide what our future store footprint should look like.

And just to go back on the commentary you made about the receivables, am I correct in understanding that the non-prime receivables will now come back on the balance sheet as we think about Signet in the future and F '21 and beyond, you guys will carry those receivables, no change to the prime piece of the equation?

There's no change to the prime. The non-prime CarVal and Castlelake will continue to purchase addons for the existing accounts. What will come onto with Signet’s purchasing is new accounts, new account purchases and what I indicated there that it was roughly 2.5% of sales is our expectation.

Thank you. And the next question comes from Dana Telsey with Telsey Advisory.

As you think about the gross margin and the SG&A, the gross margin, merchandise margin being consistent with last year, can you unpack the buckets of each and what you're seeing there? And as you think about costs coming back, do you need all the store staff that you had or do you operate with a leaner staff whether it's given more limited occupancy in stores, and also what you've been seeing in virtual appointments? Thank you.

So, with respect to gross merchandise margin, it was consistent for us over the quarter. We feel that in that quarter itself over the first quarter that we had a very nice balance of regular price selling. We had clearance selling, and we were able to leverage a lot of the value priced items for Valentine's Day that we saw serve us well over the holiday selling season in the fourth quarter. So, as we look forward and think about gross merchandise margin and our inventory, we will continue to consider strategic promotions working through our clearance inventory and balancing the bigger, fewer launch products that Gina mentioned in her prepared remarks. Then with respect to the structural cost savings, as we operate our stores today, we recognize that business is performing and behaving differently than it had pre-COVID. We have evaluated operating hours. We have evaluated store staffing. We have virtual selling that Gina mentioned in her script. So, these are the points of evaluation that are helping us to really take structural costs out of our SG&A, and that's just a few things related to labor that we are really evaluating and putting in place as we roll forward our stores and our store opening program.

Dana, the other thing I'd mention is Joan who just celebrated a little bit ago, her one-year anniversary with Signet has brought us a number of new capabilities, and one of those is a true zero based budgeting approach. And so, we continue to focus on costs that customers don't see or care about. But the kind of savings that we're now seeing an indirect spend are very meaningful, and so I'd say that's a big focus of the structural cost savings going forward.

And occupancy expenses of existing stores remaining, is there an opportunity there?

Dana, we have been working very strategically with our landlord partners and developers, and we have been able to work through a number of situations that make sense for both of us in terms of reduction of rents in specific locations, and we’ll continue to work with them collaboratively as we move through this reopening.

Thank you. And the next question comes from Lorraine Hutchinson with Bank of America.

I wanted to ask about the credit penetration rate was down on a year-over-year basis. Have you seen any reluctance on ADS’ part to lend given about the volatile macro climate?

What I would say, Lorraine, to that is that when you think about the mix of business that we had in the first quarter was we moved to an e-commerce-only channel for a good period of time. The mix of credit on e-comm is lower. And so, we do not offer leasing online at this time. We are implementing that and expect to have it as in roughly September of this year, so that's really what is driving the credit penetration rate.

And can you comment on your engagement of bridal trends as you started the year?

So, we've actually seen that customers are still very interested in getting married. Our research indicates that more than half of our customers are coming out of their quarantine period, feeling better about their relationships than they did before. And we launched not too long ago a Jared virtual wedding program. And I'll tell you within 72 hours, we had over 500 people signed up to do virtual wedding. So, we have in the numbers but also in consumer sentiment seen some strength in the bridal business.

[Operator Instructions] And the next question comes from Ike Boruchow with Wells Fargo.

So I guess, Joan, I just had a couple of questions on the credit, maybe just to make sure I understand exactly what's going on. So first, in March, I thought it was just CarVal that was terminating and now it sounds like it's CarVal and Castlelake. I believe in March, Castlelake, so they don't plan on terminating. So I guess I'm trying to understand what exactly is changed between then and now? And then two other quick follow-ups, the 2.5% of sales. Is that last year sales or this year’s sales? Because obviously the sales base is going to be dramatically different. And then the last one is maybe for Gina, which is I guess a higher level question on credit. I know it doesn't sound like a lot dollars, but I mean the company went through a period of time and having subprime receivables on the balance sheet and opted to try to get out of it, so lot of volatility. I guess what's the thought process around doing that versus just kind of letting that revenue kind of just go away and focusing more on the prime customer? Thanks.

With respect to CarVal, Castlelake, that’s accurate. CarVal did terminate in late-March. Castlelake had not terminated at that time. As we progress through conversations with both parties what the agreement that we've established today is that both parties, CarVal and Castlelake, will purchase add ons to the existing accounts with both of those parties. Signet is going to purchase the new receivables and keeping with that, that was 2.5% on a mix basis that’s an expectation, that's what it was for fiscal 2020. From the perspective of how do we see this go forward and a little bit to respond to your question of Gina, is we are offering additional financing alternatives for customers. We believe that there's a full suite of services, one of which is closed in loans, which we are piloting currently online. And there's also progressive leasing products that we have online and -- I'm sorry, in-stores and adding online in September. So we believe that this suite of offering is, gives us the full suite and helps us to continue to serve our customers with many financing options and really don't see that as a negative.

So if I just build on what Joan said to answer the strategic question, I think of four things. Number one, we see this as a moment in the market for new customer acquisitions, and so controlling that part of the book we think really gives us a strategic competitive advantage. Number two, we have new predictive models in place, models that didn't exist when Signet owned the entire portfolio before and that is allowing us to better manage to whom we lend and make that more strategic. Number three, as Joan mentioned, we have new tools. So we can direct our lower FICO customers into tools like leasing, which grew strong double digits last year, and is coming online as well as a firm, which has a split pay option. So we really have the chance to leverage those new tools to make our lending stronger. And then the fourth one is we have a servicer now, Genesis, who's really helping to manage all the operations of this portfolio. So we're really only the underwriter now for that small part of the portfolio, not the full operator of the entire thing.

Thank you. And that was the last question. I would like to turn the floor to management for any closing comments.

Great. Well, thank you everyone for joining us this morning. I know it's been a crazy few months for all of us. But at Signet, we're inspired by our employees' creativity and our customers’ resilience. We're energized about the opportunities we have ahead of us. And we look forward to updating you throughout the year as we continue on our path to brilliance transformation journey. Thanks very much.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.