Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Signet Jewelers Ltd. (NYSE:SIG)

Q4 2012 Earnings Call

March 22, 2012 8:30 am ET

Executives

Michael Barnes – Chief Executive Officer

Ronald Ristau – Chief Financial Officer

Tim Jackson – Director, Investor Relations

Analysts

Ike Boruchow – JP Morgan

Bob Drbul – Barclays

Jennifer Davis – Lazard Capital Markets

Bill Armstrong – CL King & Associates

David Wu – Telsey Advisory Group

Rick Patel – Bank of America

Jeff Stein – Northcoast Research

Anthony Lebiedzinski – Sidoti & Co.

Rod Whitehead – Deutsche Bank

David Jeary – Investec

Andrew Hughes - UBS

Operator

Good day and welcome to fiscal 2012 Signet results conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Tim Jackson. Please go ahead, sir.

Tim Jackson

Thank you, Operator. Good morning and welcome to the conference call for Signet’s fiscal 2012 results. I am Tim Jackson, Investor Relations Director. With me are Mike Barnes, CEO and Ron Ristau, CFO. The presentation deck we will be talking to is available from webcast section of the Company’s website, www.signetjewelers.com.

I will now give the Safe Harbor statement. During today’s presentation, we will in places discuss Signet’s business outlook and 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 the annual report on Form 10-K that will be filed with the SEC on today, March 22, 2012. We also draw your attention to this slide.

I will now hand over to Mike.

Michael Barnes

Thanks Tim, and good morning to you all. I’ll begin with the highlights of our excellent fiscal 2012 results. Same store sales were up 9%. The U.S., which represents about 80.9% of our sales, delivered same store sales results of 11.1%, which was outstanding after an increase of 8.9% last year. In the U.K., we’re pleased with the return to positive same store sales for the year in a very challenging environment.

Income before income taxes was $502.1 million, an increase of 67.1%. After a tax grade of 35.4%, this gave diluted earnings per share of $3.73, up from $2.32 last year, an increase of 60.8%. I’d like to thank all the team members at Signet for their contribution to these great results.

As most of you know, the Board approved two forms of shareholder distribution during fiscal 2012. First, a $0.10 per share quarterly dividend was initiated and we’re very pleased to announce today that the Board has now approved an increase in the quarterly dividend to $0.12, representing a 20% increase. Second, the Board authorized a $300 million share repurchase program effective from January 16, 2012. By January 28, we had already executed $11.8 million under the program, which continues to remain in effect.

Now looking at the U.S. performance in a little bit more detail – U.S. total sales were $3.341 billion, up $289.9 million which was an increase of 10.6%. Kay increased same store sales by 11.8% in fiscal 2012, an acceleration from the 7% growth achieved in fiscal 2011. Jared had another outstanding year with comps up 12.1% for the year following an increase of 15.7% last year. Overall, U.S. same store sales increased by 11.1% in fiscal 2012 compared to 8.9% last year. Operating income was $478 million, and that was up $135.3 million or a 39.5% increase, and the operating margin increased by 330 basis points to 15.8%. This great performance was driven by all parts of the business working successfully together, but I’d like to highlight some of the major drivers for you.

First merchandising, where performance was driven by initiatives in all categories. For example, in bridal we rolled out Neil Lane Bridal and the Tolkowsky Diamond, and we began training our store associates using our enhanced bridal program in the second half of the year. In fashion, Charmed Memories continued to shine and was a non-comp for the first three quarters. Le Vian also performed very well. Our core collection showed great performance, in particular in the earring category. Overall, our differentiated ranges now account for about 26% of U.S. merchandise sales, which is up 400 basis points from last year. We’ve also been working strategically with our watch partners and we’ve been very pleased by the results achieved.

We were successful in maintaining gross merchandise margin rate in the U.S. despite the significant increases in commodity costs. This reflects our ability to carefully execute price increases and build a pricing architecture that continues to provide attractive opening price points and hits other key price points along a broad spectrum with appropriate merchandise.

Second, marketing – our marketing investment last year reached $188.4 million, up 16.7% and continues to be a driving force for the business. An important feature during the year was an increased focus on marketing support for the bridal category, including campaigns for the Leo Diamond and Neil Lane Bridal. We also started a multi-year investment in the digital environment with major upgrades to both the Kay and the Jared websites that were implemented for the holiday season. As a result, we saw a 45.7% increase in U.S. ecommerce sales in fiscal 2012.

A third major driver of our performance was our in-house customer financing. The ability to offer customer finance is a must in the jewelry category, and to be able to manage it in-house is an important competitive strength. By carrying out this function in-house, we can tailor our scorecards to the jewelry customer which has different characteristics from when they make other credit transactions. Our in-house customer finance program was used by our customers for 56.1% of all U.S. sales in fiscal 2012, up 190 basis points. This, aided by the reduction in net bad debt, was an important contributor to the increase in operating margin in fiscal 2012.

Now turning to the U.K., total sales were $715.1 million, up 21.9 million, an increase of 3.2%. At constant exchange rates, they were little changed. Same store sales were up 0.9% following a decline of 1.4% in fiscal 2011 with H. Samuel slightly outperforming Ernest Jones. The same store sale performance was comfortably ahead of non-food retailers in the U.K. as reported by the British Retail Consortium, a great performance in what remains a challenging retail environment for us. Operating income was $56.1 million, down $0.9 million which was 4.8% decrease at constant exchange rates. the operating margin decreased by 40 basis points to 7.8%.

Some of the key drivers were branded jewelry, fashion watches and bridal. The customer also showed a preference for promotional merchandise in this market. We increased marketing by 21.7% and we were smarter and much more precise in targeting our core customer. We continued to invest in ecommerce, for example by launching iPhone apps in the fourth quarter, and ecommerce sales increased by 15.5%.

In fiscal 2012, we’ve started rolling out a new Ernest Jones store design that creates a much more exclusive shopping environment with a greater focus on branded jewelry and watches. As part of this, we’ve been working with our prestige watch partners to create branded watch boutiques. We also tested a new design for H. Samuel in Westfield Stratford City. The store has a more contemporary feel with an improved presentation of bridal, diamonds, and branded fashion jewelry. We’re testing the use of digital media in-store at this location as well. We’ll continue to test this new design for further locations in fiscal 2013.

Fiscal 2012 was another year of very impressive results and clearly demonstrates Signet’s successful strategies, which are being extremely well executed. Our mission going forward is to further enhance our position as the market leader in both the U.S. and the U.K. specialty retail jewelry markets by offering a unique customer experience and driving customer loyalty. Therefore, our strategic imperatives are to develop and train our team members to consistently enhance the retail experience of our customers, grow and develop new and existing brands and categories to delight customers, drive competitive strengths and infrastructure to enable this growth, optimize the capital structure to manage risk and make investments to drive long-term shareholder value, and increase market share and maximize sustainable profit levels.

Our team members are very central to our success, so we seek to recruit and retain the best and to motivate and reward them accordingly. As a result, we continue to build on many years of training rather than having to keep relaying the foundations. This makes training much more productive. Examples of our training focus in fiscal 2013 would include focused support on merchandise initiatives; for example, additional training in how best to serve the bridal customer. Second, as we roll out customer-assisted selling systems into our stores, it’s very important to train our store team members on how best to use this technology when interacting with the customer; and third, supporting our initiative in the digital environment online. As important as growing ecommerce sales is the customer experience across an increasingly wide range of touch points. This requires well trained and knowledgeable people to support the greatly increased interactivity that is now expected by our customers. We’re able to deliver this by leveraging many of the existing skills, knowledge and systems that are already within the business and by recruiting and training new team members to build on this base as we further enhance our ecommerce platforms and drive our social media initiatives.

Let’s dig just a little deeper into the branded merchandise. In the bridal category, we continue to develop a variety of brands, including the Leo Diamond, Neil Lane Bridal, and the Tolkowsky Diamond. The Leo Diamond, which is our longest running exclusive brand and we continue to evolve the range, it’s marketing and the in-store presentation, both in the U.S. and in the U.K. As of October 2011 and based on successful trials, we had rolled out Neil Lane Bridal to all our U.S. stores. We continue to test new executions of this collection and we’re still at an early stage of this brand’s ongoing development. The Tolkowsky Diamond is still in rollout in both the U.S. and in the U.K. While already seeing success, as with Neil Lane Bridal, we continue to test new executions as well.

In fashion jewelry, we’re developing our portfolio of brands in the same way. For example, it’s very important to keep these ranges regularly refreshed and relevant to the consumer by introducing new designs. This is particularly so with a brand like Charmed Memories, which has a much higher frequency of purchase. In the U.K. where we have a substantial fashion watch business, we’re also having success with branded jewelry from partners such as Guess, DKNY and Gucci. In the watch category, we continue to work closely with the major brands and are pleased with the boutiques and shop-within-shops that we’ve trialed with a number of the prestige watch brands such as TAG Heuer, Omega and Breitling.

I’ll now look at some examples of how we’re driving competitive strengths and infrastructure to enable this growth. First with regard to strengthening our supply chain, we have built what we believe are sector-leading merchandising systems and supply chain capabilities, and more importantly the team members that use them to provide our customers with the right merchandise at the right time and in the right place. But our investments continue. In the fourth quarter, we added additional senior level management to the team. We’re now in the process of establishing permanent international capabilities in a limited number of very carefully selected locations that are planned to give us even greater expertise in our supply chain, enabling us to execute more efficiently and effectively. In fiscal 2013, we will incur 5 to $7 million of up-front costs as a strategic investment to establish this capability.

Two further major examples of where we’re investing to build our competitive strengths and infrastructure for future growth are in technology to enhance the customer experience; first, in-store where we began using a screen-based selling system in Jared more than five years ago. This technology uses a flexible but structured selling system for our sales associates, ensuring best practice is followed as well as the ability to offer our customers merchandise selections outside our typical store assortments. We began introducing this system to our Kay stores in fiscal 2012 and we will roll it out further this year. We’re also testing in-store digital technology in the U.K. market.

While all of our stores have access to the respective brand websites through their POS system, the deployment of these screen-based selling systems enables the customer and the store associates to access them much more readily. This is opening up exciting new opportunities for us even as we speak today.

The second major area is the digital online environment. In fiscal 2012, we made major upgrades to all of our websites and we’ll be making further significant improvements to them this year. We’re also increasing our social media and our mobile capabilities. We’ve been testing online video advertising on premium content sites utilizing our TV adverts and media buying leverage. We expect a further significant double-digit increase in ecommerce sales in fiscal 2013.

For fiscal 2013, capital investment of about 145 million to $165 million will be directed to projects that are intended to build upon our competitive strengths and drive sales growth. The level of store investment in fiscal 2013 is planned to be 95 to $105 million, up from $62 million last year. It is planned to increase the number of store openings in the U.S. to 45 compared to 25 in fiscal 2012 and to carry out a total of 110 major store refurbishments or relocations across both divisions, compared to 85 last year. Of these, about 90 will be in the U.S. market and 20 in the U.K. In addition, we intend to invest 40 to $45 million, up from about 28 million last year, in information systems, supporting sales enhancing technology both in-store and in the digital online environment and to enhance information technology operating infrastructure. About 40 million of this will be in the U.S. with the balance of about 5 million in the U.K.

I’ll now hand it over to Ron to go through the financials in a little more detail.

Ronald Ristau

Thank you, Mike. As Mike stated, total sales for Signet increased 9.1% to $3.7492 billion compared to $3.4374 billion last year. Total company comparable store sales increased 9% versus an increase of 6.7% last year. In the U.S., total sales increased by 10.6% to $3.341 billion, primarily reflecting a comparable store sales increase of 11.1% versus an 8.9% increase last year. In the U.K., total sales increased by 3.2% to 715.1 million, reflecting a comparable store sales increase of 0.9% compared to a decline of 1.4% last year, and the favorable impact of currency fluctuations which more than balanced the 1% adverse impact of reduced space. In total, ecommerce sales were 92.3 million, up 24.7 million or 36.5% in the year.

Now looking at the reconciliation of income, income before taxes increased by 201.7 million to 502.1 million, up 67.1%. I’ll now explain the major factors driving this increase. Gross margin was 1.4376 billion, an improvement of 194.7 million. The gross margin rate was 38.3%, up 210 basis points. Key drivers of this improvement were as follows. The main driver was leverage on store occupancy expenses, both in the U.S. and the U.K. We experienced improvement in the U.S. net bad debt to total sales ratio, which came in at 3.4% of U.S., down from 4.2% last year. There was also improvement in inventory-related costs. These items offset a slight decline in gross merchandise margin which was down 10 basis points, with the U.S. being up 10 basis points and the U.K. down 60 basis points. Gross merchandise margin was little changed despite record increases in commodity costs.

Selling, general and administrative expense was 1.567 billion for fiscal 2012, up 76.3 million or 7.8% from last year. As a percentage of sales they were 28.2%, which is 30 basis points favorable. I will go into this in more detail on a following slide.

Our other operating income was 126.5 million, up 16.5 million on last year, reflecting the higher level of accounts receivable. This was a 30 basis point favorable impact on our operating margin. Fiscal 2012 operating income was 507.4 million, an improvement of 134.9 million or 36.2%. Our operating margin was 13.5%, up from 10.8% in the previous year or 270 basis points.

In fiscal 2012, our net interest expense was 5.3 million, a decrease of 66.8% of sales that was a fall of 200 basis points. 47.5 million reflected the absence of the non-recurring make-whole payment from 2011, and the balance reflected the resulting elimination of interest payments on private placement notes. Income before income taxes of 502.1 million, an increase of 201.7 million as a percentage of sales that was 13.4%, an improvement of 470 basis points. Our tax rate in fiscal 2012 was 35.4% resulting in net income of 324.4 million and diluted earnings per share of $3.73, up 60.8%. Please note that in fiscal 2011, our results did include a non-recurring make-whole payment due to the prepayment in full of our private placement notes of 47.5 pretax and 29.5 million post-tax, or $0.34 per share. This all occurred in the fourth quarter of fiscal 2011. Our growth in diluted earnings per share, excluding this item, was 40.2%.

Now looking at SG&A in more detail, as a percentage of sales in fiscal 2012 it improved to 28.2% as compared to 28.5% in the prior year as we effectively leveraged our SG&A. The major reasons contributing to the increase in the level of the expense of 76.3 million were as follows: we increased our net advertising investment by 30.1 million, we experienced 26.9 million of an increase as a result of store staff costs which flexed with the increased in sales, 6.5 million was attributable to higher 401K contributions, and 6.2 million attributable to currency fluctuations. The balance primarily reflected increased investment in IT and credit infrastructure. We believe our SG&A remains well controlled and effectively managed.

Now looking at the customer finance statistics, our credit participation rate showed an increase to 56.1% of U.S. sales in fiscal 2012, up from 54.2% last year. Our average outstanding balance at year-end was $1,068, up about 3.8% with the number of active accounts increasing 11.9% to just over 1.1 million. Our monthly collection rate accelerated by 10 basis points to 12.7%, therefore the average credit account maturity remains less than one year. As a percentage of U.S. sales, the net bad debt ratio improved by 80 basis points to 3.4% from 4.2 in fiscal 2011, and this improvement was driven by our consistent credit practices, the quality of our collection practice, as well as a more stable rate of unemployment in the United States. The closing level of receivables was just under 1.16 billion. Our credit portfolio is performing very strongly.

In fiscal 2012, net cash provided by operating activities was 325.2 million compared to 323.1 million last year. This was after an increase of 152.5 million in our receivable balance compared to a 78.7 million increase in fiscal 2011. The receivable increase reflected both the strong sales performance in the U.S. and the increased credit participation that I mentioned.

Our year-end inventory increased by 115.2 million. This was driven primarily by commodity price increases and some opportunistic commodity purchases that we made at year-end. Our underlying inventory turn improved significantly in fiscal 2012, reflecting our focus on efficiency.

Our capital spending totaled 97.8 million, up from 55.6 million in fiscal 2011 as we increased both our store and IT investment. We ended the year with cash at $486.8 million.

Now I’d like to provide you with an update on current trading. In the month of February, which covers the important Valentine’s Day trading period, our overall same store sales were up 7.6% in the U.S. with the U.K. down 3.1%. Overall, Signet’s same store sales were up 6.2%. Let me point out that for Kay, the balance was 8.4%, Jared was 8.1%, our regional brands were 1.2%. At H. Samuel, we were negative 2.3, Ernest Jones negative 4.1, and total U.K. down 3.1, with the total consolidated comp at 6.2.

I’d now like to cover two calendar shifts in fiscal 2013 which are important in financial planning. First, Mother’s Day, which this year is on May 13 and last year was on May 8. As a result, a key marketing event which normally falls for the Company in the first quarter in April will switch to May this year and will be reflected in our second quarter results. We estimate that this will reduce same store sales in the first quarter by $25 million or about 400 basis points in the U.S. and 300 basis points overall for Signet. The shift is EPS between Q1 and Q2 is estimated to be between $0.03 and $0.04. We are providing first quarter guidance due to the complexity of these changes. Due to the impact of the calendar shift, we expect first quarter same store sales in the low single digit range and earnings per share ranging from $0.88 to $0.93.

Second, this year is a 53-week year. This last occurred in fiscal 2007. As a result, an extra week of sales estimated at 48 million to 52 million will be added to the year. Although we are still finalizing our plans, we currently believe this additional week will result in an operating loss of 2 to $4 million, reflecting the timing of advertising expense and a shift into fiscal 2014 of a key promotional event relating to Valentine’s Day next year.

Now I’ll speak briefly about the financial objectives for the year. In setting the financial objectives for the year, consideration was given to the current operating environment with developments in the U.S. and U.K. economies continuing to be divergent. The U.S. economy is showing signs of strengthening, and in fiscal 2012 there was growth in the jewelry market. We plan to continue our leadership performance in the U.K. market, although we are operating in an economic environment that is not projected to show any short-term improvement, and I will point out that both economies could be adversely affected by developments in the euro zone.

Signet’s goal in fiscal 2013 is to deliver record results, building on our recent performance while making strategic investments necessary for future growth. Therefore in fiscal ’13, management’s financial objectives for the business are as follows. First, we intend to increase sales and gain profitable market share. We actually anticipate that the gross margin ratio, while expected to be broadly similar to fiscal 2012, will benefit from improved store productivity and increases in prices which are expected to primarily offset the impact of changes in the cost of commodities, in particular the cost of diamonds and gold. Note we will be investing in fiscal 2013 to drive the future supply chain capabilities Mike spoke of, and in this initiative we expect to incur start-up costs estimated to be between 5 and $7 million. We do expect to leverage our store occupancy expenses and maintain strong performance in our credit portfolio.

In selling, general and administrative expenses, we plan to increase advertising to drive sales and continue to build customer equity in our store concepts and merchandise brands while maintaining the selling, general and administrative expenses to sales ratio at a minimum. We will invest 145 to $165 million of capital in new stores, enhancing our infrastructure to drive future growth. Of this, 95 to 105 million will be spent opening 45 new stores and remodeling 110 stores, and 40 to 45 million in IT supporting sales and enhancing technology. We recommend using 36% as a tax rate for planning in fiscal 2013.

Thank you. I’ll now hand it back to Mike.

Michael Barnes

Thanks, Ron. We would now be pleased to take any questions that you have at this time.

Question and Answer Session

Operator

Thank you. If you would like to ask a question at this time, please press the star key followed by the digit one on your telephone. Please ensure that the mute function of your telephone is switched off to allow your signal to reach our equipment. If you find your question has already been answered, you may remove yourself from the queue by pressing star, two. Again, please press star, one to ask a question.

We will now take our first question from Ike Boruchow from JP Morgan. Please go ahead, sir.

Ike Boruchow – JP Morgan

Hi guys, good morning. I guess just a couple questions. First question on the current trading statement you gave us. Since you gave us the EPS range, Ron, can you help us—how should we think about gross margins and SG&A balancing out for Q1? And then also, could you guys help us understand just how important Valentine’s Day is, what percent of sales for the quarter Valentine’s Day represents, especially in the U.S.?

Ronald Ristau

Well, I would say that we’ve given the guidance ranges. You know, we’re not getting into extensive detail. We believe that, like we said, our gross margin ratio will be broadly similar to that of last year and that our SG&A will be similar. It fluctuates somewhat by quarter but those broad statements, I would think, still hold in the first quarter as well.

Michael Barnes

And as far as the importance of Valentine’s Day, obviously it’s one of the most important holidays that we have during the year, and it’s a very strong selling season for us so it’s a very important part of the quarter. I don’t think we break out the exact percentage of what it usually means to us. It probably is important to note, though, that it’s much more important in the U.S. than it is in the U.K. as a holiday.

Ike Boruchow – JP Morgan

Okay. And then I guess Mike, broadly speaking on the industry and commodity costs, can you help us think about the timing of when peak costs kind of flow through the P&L? Is that kind of happening right now in the first half, and kind of you guys’ strategies on how to help offset that with price increases and increasing the mix of higher margin products.

Michael Barnes

Well, I’ll let Ron talk about the flow of the costs and how that affects our average costing system. In terms of how we control it, we’re doing the same things that we’ve talked about in the past, and that is our plan is to broadly maintain our gross merchandise margins going forward. We feel that we can do that. As appropriate, we will increase prices to make that happen as well as we do see these costs flow through our system and increase in average costing. One of the great things is we’ve got an unbelievable product line-up. We’ve got great brands, great products, great designs, and because of that our customers are willing to accept the price increases as they have been over the years. It’s really been a competitive strength to us that we have such a strong line-up, we’re able to do that.

Ron, do you want to talk a little bit about how the costs flow through?

Ronald Ristau

Yeah. As you know, our costs flow through on average so that there is some time delay between commodity price increases and them being reflected in our margins. We will incur additional—we’re working on price increases in the first quarter. They will not have much impact in the first quarter, so I don’t really know what else to say about it other than for the year, we will price to more or less maintain our gross merchandise margins. There will be some fluctuations by quarter. Primarily, benefits usually come in the second and third quarter, and then by the fourth quarter they tend to be diminished somewhat as the costs begin to flow through, and you see this every year so that our margins tend to accelerate a little bit in the second and third and be a little bit lower in the fourth and first on gross merchandise margin.

Ike Boruchow – JP Morgan

Great. Thanks guys.

Operator

We will now go to our next question from Bob Drbul of Barclays Bank. Please go ahead.

Bob Drbul – Barclays

Hi guys. Good morning, good day. Two questions that I have for you – first one is on ASPs. Can you talk a little about the ASP trends from Q4 and Q1 and sort of your expectations around it and heading into ’12? And the other concern or question that I would have for you is are you seeing price resistance to any of the price increases, and do you sort of have a plan for any further price increases around the diamonds and the gold as the higher costs do work into the P&L?

Michael Barnes

Well on the first question for ASPs, I guess in Kay we saw slightly declining ASPs. A lot of that is because we were mostly non-comp with our bead program, Charmed Memories, last year; and so obviously as beads are counted one at a time and carry a lower average price point, you’re going to see the ASPs slightly decline. In Jared, the ASP went slightly the other direction as we have totally finished comping the bead program in that concept store – Jared – and so we’re seeing just more of a normalized increase in ASP over time, and especially as prices are increased to offset the commodity prices out there.

I’m sorry, what was the second question you had?

Ronald Ristau

Customer resistance.

Michael Barnes

Oh, customer resistance. As I said earlier, we have been able to price to broadly maintain our gross merchandise margins historically. We continue to anticipate that we’ll be able to do that; and again, the great line-up of products and brands that we have allow us to do that because it still presents a great value for our customers.

Bob Drbul – Barclays

Great. Thank you very much.

Operator

We will now take our next question from Jennifer Davis of Lazard Capital Markets.

Jennifer Davis – Lazard Capital Markets

Hey guys. Congratulations on a great 2011 and on your continued solid execution. I remember at the beginning of 2011 there were doubts about your ability to increase sales and gross margins on top of strong 2010 results and increasing commodity costs, so definitely a job well done.

So I have a couple of questions. First, Mike, did you say how much bridal increased, and could you talk about margins on bridal versus the rest of the assortment? And then I was hoping you could elaborate a little more on the 5 to $7 million investment to drive future supply chain capabilities. I think you said you were establishing some permanent international capabilities. Just wondering if you could elaborate on that. Thanks.

Michael Barnes

Sure. On the—I’ll let Ron answer the question on the margins for bridal. Bridal, I don’t think we mentioned it in the call, but it continues to be about 50% of our jewelry merchandise sales and continues to be a very strong part of our business. As we did mention, we have focused very heavily on that and focused heavily on training our store staff to really drive that part of the business going forward. So we think there’s a great opportunity for us in that area. Margins on bridal—

Ronald Ristau

Yeah, bridal margins are similar to perhaps, depending upon the mix, just a touch lower than the Company average. Don’t forget, there are a lot of—there are loose solitaire stones in our bridal mix, and that is a lower margin business for us. So the total bridal mix is broadly similar, perhaps a little bit less.

Michael Barnes

And as far as the supply chain initiatives, Jennifer, we’re moving in a very exciting direction. As the leader in the specialty jewelry industry in both the United States and in the U.K., supply chain is very important to us. So we continue to look at new initiatives that will help us secure our supply chain for the future growth of our company and allow us to supply the right products, the right prices, the right qualities of both diamond-related and other products to our customers. So we’re very focused on that. We really haven’t outlined exactly what those initiatives are. They are international in nature. They’re not really material, as we stated, in terms of investment. We expect up-front investments of 5 to $7 million to really get started there, but there are some exciting initiatives that we have planned that we think are going to really give us competitive strengths for the long-term future of our company.

Jennifer Davis – Lazard Capital Markets

Okay, thanks. And then one quick clarification, if I may – on the Q&A, you guys both said that you were planning on maintaining, or broadly maintaining gross merchandise margins.

Ronald Ristau

No, I said gross margin.

Jennifer Davis – Lazard Capital Markets

Okay. All right.

Ronald Ristau

Yeah, we said gross margin. I’m sorry. We were trying to get away from one little piece of the margin; so broadly speaking, gross margin.

Jennifer Davis – Lazard Capital Markets

All right, thanks.

Operator

We will now take our next question from Bill Armstrong of CL King & Associates.

Bill Armstrong – CL King & Associates

Good morning Mike and Ron. What are you seeing in terms of new retail center development in the U.S.?

Michael Barnes

We’re not seeing a lot of new retail development still. What we did is we appropriately challenged our team to go out and open more stores this year than they did last year, and really hunt for those spots that they hadn’t found yet and try to make it happen. Most of those, or a great majority of those, are going to be off-mall locations. We are finding the occasional mall location, but certainly we’re much more penetrated with Kay in the malls. So if you look at the new store openings that we’ve outlined for this year, there is 45 new stores and we’re thinking about approximately 11 of those will be Jared, so that will be off-mall location; and the other 34 would be Kay, but a significant number of those would also be off-mall as we found a lot of success opening Kay off-mall as well as Jared. In some areas because of the demographics, Kay is actually a better fit; so we’re taking it as they come. We wish there was more development out there. We look forward to the day, hopefully, when there will be because we would love to open more new locations with the success that we’re having with our stores right now. That would be our best hopes and wishes, but we’re taking it as we can and we’re being as aggressive as we can with the environment that’s delivered to us.

Bill Armstrong – CL King & Associates

Okay, great. That’s helpful. Second question on your guidance, typically in the past your guidance has included same store sales and free cash flow, and I see that’s not included in your guidance currently. Would you care to share that with us, and if not, why the change?

Ronald Ristau

First of all, we’ve never included same store sales in our outlook, so I would just have to correct that statement. From a free cash flow perspective, we’ve made the decision not to focus on free cash flow. We think that, number one, it’s not a standard measurement for most U.S. companies, and we also believe that that was a focus during the recessionary time frames and that at this point in time it’s not as important. We didn’t give a number, but I’ll tell you we expect the number to be position to $200 million, so it will be over $200 million. This year, our free cash flow came in at around $228 million, so rather than give these broad ranges we were giving, we just would like to—it’s kind of an incidental measurement, not a primary driver, so that’s why we did not provide it. But the range will be over $200 million.

Bill Armstrong – CL King & Associates

Got it. Okay, thanks.

Operator

We will now take our next question from David Wu of the Telsey Advisory Group.

David Wu – Telsey Advisory Group

Hi, good morning everyone. First question – with respect to your new merchandising initiatives that you have planned for this year, are you planning at all to develop any new exclusive brands, or is the focus really on introducing new styles within your existing differentiated ranges?

Michael Barnes

That’s a great question. We definitely are focused on creating new designs and styles with our existing, very successful ranges. That’s always important to us, and we’ve got some great new products coming out in those ranges. In addition to that, though, we’ve got some exciting tests going on. I’m not going to characterize them exactly for competitive reasons, but we’ve got potential line extensions and we’ve got some new brand tests going on as well, so there’s a lot of exciting things happening. In fact, we’re testing a lot of things in the spring that could very well be rolled out or begin starting a roll-out in the back half of the year.

David Wu- Telsey Advisory Group

Excellent. On the price increases this year, could you quantify the magnitude at least directionally if they will be higher or lower versus last year?

Ronald Ristau

We don’t like to get into specifics on a level of price increase for competitive reasons. Suffice to say that we said that the price increases will be sufficient to cover the inflation in commodity costs that we are forced to deal with, but we’d like not to be more specific than that, David.

David Wu – Telsey Advisory Group

Okay, that’s fine. And then also, can you give us a little bit more color on credit sales over the quarter? How have approval rates been trending, and are you still seeing improvement in the average customer credit score in the fourth quarter?

Ron Ristau

Well, I would say that you can see the penetration went up to over 56% versus 54% for the year. The fourth quarter was strong. We are seeing that our approval rates remain, I would still say, relatively consistent. The approval rates in and of themselves have not been changing dramatically. We have seen that people who have been granted credit are behaving very responsibly and continuing to make more than the minimum payment, and all of this is reflected in the overall performance of the portfolio and the improvement in bad debts that we’ve seen. So the credit portfolio is performing very well. There has been no real change in the level of approvals or disapprovals, or no change in our scoring mechanisms, and it just seems to all be working well. It’s very supportive, of course, of the bridal business and important as we deliver some of the higher priced merchandise, such as the Neil Lane and Tolkowsky lines, which are slightly higher prices; and our consumers are using some additional credit to help finance those purchases. So everything is working very, very well and supporting the business to our satisfaction.

David Wu – Telsey Advisory Group

Perfect. Thank you very much.

Operator

We will now go to our next question from Rick Patel of Bank of America.

Rick Patel – Bank of America

Can you help us understand the February comp decline in the U.K.? I’m just wondering if the consumer sentiment there is getting worse, or if there was a change in perhaps your promotional cadence. What exactly is driving that change in trend there?

Michael Barnes

Hi Rick. That’s a great question too. You know, if you look at the February comps in the U.K. and you look at them compared to last year, what you saw was lower single digit declines both last year and this year, so there’s a little bit of a trend there. A couple things that I would say about that – one is to reiterate that while it is important, Valentine’s Day is not as important in the U.K. as it is to U.S., and it doesn’t carry the same weighting on that. The other thing that I would say is I wouldn’t necessarily expect to see that exact same trend in either the first quarter or the full year for the U.K. It seems to be a little bit of a trend for February, but that’s a very short time frame.

Ronald Ristau

And Rick, just to add to that, remember the comp last year in the U.K. was also a negative 2.6%. February just isn’t a very strong month over there.

Rick Patel – Bank of America

Okay, got it. And can you also maybe give us an estimate of how many store closures we should expect this year; and taking into account your 45 new stores, what should we expect the net change in square footage to be like?

Ronald Ristau

The square footage will be positive and I believe the closure number is approximately 25 stores. You know what, Rick? I just don’t have the number at my fingertips. I’d be happy to give you a call after the meeting, okay?

Rick Patel – Bank of America

Appreciate it. Thanks, and good luck on the new year.

Operator

We will now go to our next question from Jeff Stein of Northcoast Research.

Jeff Stein – Northcoast Research

Okay, good morning guys. A couple of questions here. First of all, Ron, can you discuss the other operating income line, which was up slightly in Q4 but it looks like the rate of growth year-over-year dropped relative to the first nine months. Anything there we should be focused on?

Ronald Ristau

No, I wouldn’t think you should be focused on anything in particular. We did make some small internal changes in some processing of cycles in February, which had a slight impact on that number; but I wouldn’t think you should read anything dramatic into it. The receivable portfolio was up, and operating income when we look forward into next year will continue to grow as the receivable portfolio goes.

Jeff Stein – Northcoast Research

Got it, got it. And the 5 to $7 million of supply chain investment, is that going to be run through gross profit or SG&A?

Ronald Ristau

It will run through gross profit because it’s the nature of manufacturing, so we’ll be including it in our gross profit line. It’s included in our guidance, Jeff, when we talk about being able to—you know, we’ll be able to accept that charge and still we believe be relatively similar in our gross margin ratios, so we’ve included that in our thinking. It’s not incremental to, so I don’t want you to think that it is, okay?

Michael Barnes

Yeah, it’s all built into the bulk.

Ronald Ristau

It’s all built into the guidance we’ve talked about.

Jeff Stein – Northcoast Research

Understand, okay. And your SG&A leverage point, any change there this year relative to last year?

Ronald Ristau

My favorite question always, as you know. The leverage point really depends on what we decide to spend in advertising and how it moves around. The leverage point on occupancy expense, which was a very successful point for us last year, remains very low single digit comp to start to leverage occupancy costs. Both of these things move around as we open up new stores and as we decide to change our advertising investment, so it’s hard to pick just one particular number. Generally if it comped at mid-single, we more than adequately leveraged many things.

Jeff Stein – Northcoast Research

Okay, very good. Thank you.

Operator

We will now go to our next question from Anthony Lebiedzinski of Sidoti & Company. Please go ahead.

Anthony Lebiedzinski – Sidoti & Co.

Good morning. Just a follow-up on the advertising question. Can you give us maybe some color on how much you expect to increase your advertising expenses by, and also give us a better understanding as to the breakdown between TV and radio and other media, whether that’s going to change significantly from the past?

Ronald Ristau

Well, what I would say is that we don’t like to go into too much detail of exactly what level of advertising increase we would realize. It depends upon the performance of the business, it depends upon advertising rates that we are experiencing, it depends upon competition this year from the presidential election and all of the money that will be spent. So I don’t really want to give you a specific number, nor would I tell you specifically how the mix is going to shift. I would tell you that TV advertising remains primarily our number one approach, but social media and direct-to-consumer marketing are also important in our mix, as is radio to a certain extent. So I would still say to you that TV will be predominant, but the other mix factors are moving as the market develops.

Mike, I don’t know if you had anything to add?

Michael Barnes

No, I was just going to say it’s something that we track very carefully. We take a very scientific approach to it. Yes, we are increasing our advertising this year, but as Ron said, we like to think of it as a cumulative number. In all of those different categories Ron called out are still very important to us, whether it be online, radio, or TV, which is still the major part of the advertising. The reason that we’re continuing to increase it is because it drives sales, it works for us.

Ronald Ristau

And again, I’d point out that while we’re increasing it, we’re also committing that at a minimum we’ll be able to maintain across the year our SG&A ratio. So we’re watching it – while we increase one, we’re making sure that the business performance justifies and that we’re getting the return on investment necessary to continue with spending. So we watch it and balance it very effectively.

Anthony Lebiedzinski – Sidoti & Co.

Mm-hmm, okay. And as far as current trading, the February comp in the U.S., how much is that driven by ASPs?

Ronald Ristau

Well, it’s driven by both ASPs and by volume. Remember what’s going on, as Mike alluded to, is the fact that we have the bead programs, which are high volume driven but low price, and then we have the diamond programs. I would say that they’re both driving. I would say that pricing continues to be slightly more important than volume on a net basis.

Anthony Lebiedzinski – Sidoti & Co.

Mm-hmm. And as far as the store remodels, do you have a breakdown between the Kay and Jared stores?

Ronald Ristau

I did not provide that level of detail on an overall basis. It will be close to 110 stores across the enterprise.

Michael Barnes

And that’s about 90 in the U.S., but we didn’t bring the breakdown between Kay and Jared on that.

Anthony Lebiedzinski – Sidoti & Co.

Okay, that’s fine. Thank you.

Operator

As a reminder at this time, if you would like to ask a question, please press star, one on your telephone keypad. We will now take our next question from Rod Whitehead of Deutsche Bank. Please go ahead.

Rod Whitehead – Deutsche Bank

Hi there. Three, if I may. One very quick one – I missed the figure you gave for ecomm growth in the U.S.

Ronald Ristau

Well, I didn’t. I gave an overall basis. I said it was 36.5%. It’s around 45% in the U.S., I’m sorry. On an overall basis, the growth rate was 36% and the total ecommerce sales were 92.3 million.

Rod Whitehead – Deutsche Bank

For the group?

Ronald Ristau

Yes, sir.

Ronald Whitehead – Deutsche Bank

Brilliant, thank you. And secondly on—you mentioned at one point, Mike, that you were working strategically with the watch brands. I wonder what that meant, and in particular one of the things you trialed last was the Michele watch brand, and how that has performed and whether that would be rolled out. And then finally, just on your buyback program, you said at the investor day that you ideally wanted a balance of 7 to 9% of sales, which is roughly $300 million; and you’re currently at 500 and your free cash flow is going to be at least 200 for the next couple of years. So if you only buy back 300 in the next two years, then your cash balance is actually going to go up from 500 to 600. So I was just wondering whether there is an intention for a further buyback program within the next two years?

Michael Barnes

Okay, well we’ll start with the watch question first. Now, we’re very excited with some of the partnerships that we have with a lot of the major brands out there. I just got back from the Basel Fair with both the U.K. and the U.S. teams a couple of weeks ago, and we had some great meetings. We’re continuing to get closer with our partners. We’ve got some exciting things going on, including building major boutiques for people like Omega and Breitling in the U.K., and TAG here in the U.S. So we think these are very important partnerships. We think that they’re going to be great business drivers for us in the future, and we continue to work with them in a very positive way.

We are testing and trialing some other brands – Michele, as you mentioned. We started with that in about 26 Jared doors. We’re actually going to increase the trial a little bit. We’ve seen some good pockets of success there, and it’s also done very well for us online so we know that we have the customer out there, but it is a new brand for us. So all in all, the brands are doing extremely well for us in the watch category, and it’s something that we would expect to see continue for the future. We look forward to continuing to build those partnerships.

As far as the stock buyback, as we mentioned, it continues to be in force; and we had just gotten started January 16, so it’s still very new. We intend to continue on with it as appropriate, and we will address--the Board will address our balance sheet and our cash balances on a regular basis, and as it is appropriate we’ll look at doing other things. You know, we increased our dividend by 20% from $0.10 a quarter to $0.12 a quarter, so that’s another move. That’s what we intend to do – we intend to take very thoughtful measures from quarter to quarter and year to year to make sure that we’re delivering the best value we can for our shareholders. So it’s not like a one and done necessarily on the stock buyback or the dividend or whatever it may be. We’re always going to take it very seriously and analyze our situation and make those appropriate decisions.

Ronald Whitehead – Deutsche Bank

Thank you very much, Mike.

Operator

We will now go to our next question from David Jeary of Investec.

David Jeary – Investec

Yes, good afternoon gentlemen. A couple from me if I may, please. Coming back to the supply chain investments, Mike, I still don’t fully understand what you’re looking at. I know you used the words exciting initiatives, so I’m just wondering if you could help us to become a bit more excited by giving a bit more insight as to what exactly they were. And secondly, re your comments on marketing, I know you take a very holistic view of SG&A and returns. I was just really going to ask a question on that point specifically on U.K. marketing. I mean, the spend was up 22%, so sales and profits obviously not up by anywhere near those same metrics. I just wonder how you look at that in the context of what is obviously a difficult market and how you justify making that kind of investment relative to the returns, please.

Michael Barnes

Sure. Good morning or afternoon, David. As far as the supply chain initiatives, the reason I haven’t kind of lined that out a little bit more clearly, I want everyone to understand that we are appropriately investing in the future of our company and that includes making sure that we secure our supply chain better, we build better partnerships. There’s a lot of different things that we can have in the works, but until it’s the appropriate time I really can’t get into a lot of detail on that because—and quite frankly, I don’t want to tip our hand to the competition on everything that we’re working on. So we want you to know that we’re working diligently to do the right things and to secure the future of our business needs, and we will give you some more details on that as soon as we can.

In terms of marketing in the U.K., one of the things we said we were going to do—we’re very pleased with our business in the U.K. and especially when you look at the retail environment and the overall economic environment in the market, which I’m sure you know extremely well. We’ve done very well in that market compared to a lot of the other non-food retail companies out there. In fact, we have consistently beat the non-food retail on a regular basis, and we are going to continue to invest in our business. We believe that when it comes to taking market share and taking a leadership position and being the leader in the market, we need to appropriately invest. We’re going to remodeling stores in the U.K. Out of that 110 major remodels or relocations we talked about, about 20 of those are in the U.K., and that’s a big part of that when you look at the split between the U.S. and the U.K.

So the important thing to us is, yes, we did increase our marketing and we feel like that will help us drive long-term value and sales in the U.K. That’s why we’re doing it. This is not the time to shy away from investment. We believe in the marketplace. We think that we have a bright future there, and it’s tough times right now but hopefully it won’t always be that way, and we are preparing ourselves for the future and making sure that we make the correct investments to get us there.

David Jeary – Investec

Okay, thank you very much, Mike.

Operator

We will now take our next question from Andrew Hughes of UBS.

Andrew Hughes – UBS

Yes, hi guys. It’s Andrew Hughes from UBS. This is obviously the U.K. section of the call. I had a question about the U.S. business and the EBIT margin up at 15.8%. Looks to me like it’s an all-time high, certainly a 10-year high. Can you just give us some sort of thoughts about how you look at it now? I mean, clearly there may be some that get concerned about over-earning with an EBIT margin that high. The flip side of the coin is that the structure of the industry is completely different from the past. So do you think that you can continue to push on with that EBIT margin?

Ronald Ristau

I would say that, number one, of course we’re very pleased with that EBIT margin, and I believe you are correct – it is a record. It also—the business is performing very strongly in the U.S. and it continues to set new records. So just because we’ve established a record doesn’t mean we intend to stop there, nor do we think it’s a limitation. As we focus on improving the productivity of the store chain, which even though we’re opening up 45 new stores, the main driver is improving the productivity of sales within the Kay and Jared and regional brands that are already established. That is a very profitable way to grow sales because obviously we don’t have to make the capital investments or have the maturation of store issue that we deal with, so that we believe that the stores will continue to gain market share, continue to improve in productivity, and as they do that, they will continue to move higher in terms of the operating margins of the U.S. business.

So I think it is wonderful that it’s a record. We do not think it is a limitation. We believe that we can continue to push forward, and that’s what we are planning for in 2013.

Andrew Hughes – UBS

Okay, but the guidance you’ve given broadly is flat gross margin, flat cost ratios for this year, so the implication is that you might sort of pause for breath this year before continuing onwards and upwards in outer years. Is that a sort of fair assessment?

Ronald Ristau

Well, I think we always try to be reasonable with any statements we make relative to future guidance, because it’s always difficult to predict. But this year we probably wouldn’t have predicted getting to 15.8% if we had made a prediction, so I think that we always strive to get better while maintaining a conservative outlook so that we can not disappoint our investors.

Andrew Hughes – UBS

All right, good. Thank you very much.

Operator

As there are no further questions in the queue, that will conclude today’s question and answer session. I would now like to turn the call back to Mr. Tim Jackson for any additional or closing remarks.

Michael Barnes

Thank you, Operator, and thanks to everyone for taking part in this call. We really appreciate it. Our next scheduled call is on May 24 when we’ll review our first quarter results. Have a great day and thank you again.

Operator

That will conclude today’s conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Signet Jewelers' CEO Discusses F4Q12 Results - Earnings Call Transcript
This Transcript
All Transcripts