Signet Jewelers Ltd (SIG) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Signet Jewelers Limited Q1 Fiscal Earnings and Credit Outsourcing Conference Call.

(Operator Instructions) Please note that this call is being recorded today, May 25, 2017, at 8:30 a.m.

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 first quarter earnings and credit outsourcing announcement conference call.

On our call today are Signet CEO Mark Light; and CFO, Michele Santana.

The presentation deck we will be referencing is available under the Investors section of our website, signetjewelers.com.

During today's presentation, we will, in places, make certain forward-looking statements and 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.

We also draw your attention to Slide #2 of today's presentation for additional information about forward-looking statements and non-GAAP measures.

I will now turn the call over to Mark Light.

Thank you, James.

Good morning, and thank you for joining today's call.

Today, we announced our first quarter 2018 earnings results and the strategic outsourcing of our credit business.

I'll then -- begin the call by discussing our first quarter results as well as our performance over the Mother's Day shopping period.

Then I'll provide an update on the progress we are making in our omnichannel strategy and growth initiatives.

I will then turn over to Michele to detail some of the quarter's financial highlights.

After we conclude the discussion of the first quarter, we'll discuss the structure of the credit transaction we announced just a short while ago.

Afterwards, we'll be happy to take your questions.

So let's get started.

Turning to the first quarter results which are on Slide #4, as anticipated, we had a very slow start to the year as continued headwinds in the overall retail environment were exacerbated by a slowdown in jewelry spending and company-specific challenges.

We generated net sales of $1.4 billion, a 10.1% decline on a constant currency basis and our same-store sales decreased by 11.5%, although 330 basis points of the decline was due to the later Mother's Day holiday.

Typically, Mother's Day is split between the first and second quarters, but in fiscal 2018, it fell entirely in the second quarter which caused an unfavorable impact to the first quarter but will benefit in Q2.

In Q1, against the difficult comparison the prior year, we saw declines across merchandise categories and collections with the exception of e-commerce and Piercing Pagoda, both of which had higher sales.

The number of transactions also remained under pressure across divisions, largely due to the ongoing declines in brick-and-mortar store traffic, deep jewelry promotional activity across the sector and increased competition for share of wallet.

While we're certainly not pleased with our first quarter results, we recognized that a portion of our performance softness is being driven by overall weakness in the retail environment as well as some one-off impacts like the delay in tax refunds which impacted our Valentine's Day sales.

However, we also know there is much within our control to address and improve our performance, and we are doing just that.

Importantly, though, it's still early and we have begun to realize some of the benefits of the actions that we have been taking since the end of last year in areas like e-commerce, digital marketing and organizational structure, all of which are driving the reaffirmation of our full year 2018 guidance today.

Along these lines, we have experienced sequential sales improvement across all divisions in the first quarter of fiscal 2018 when normalized for the later timing of Mother's Day.

In terms of product categories, diamond fashion jewelry, such as bracelets, earrings and necklaces, our Ever Us collection as well as higher price bridal categories outperformed the overall merchandise portfolio.

We have remain focused on merchandise innovation and, throughout the quarter, continued to test and invest in new line extensions, new collections and new fashion trends to successfully position Signet for the upcoming holiday season.

From a sale and channel perspective, Piercing Pagoda total sales increased year-over-year, driven primarily by higher sales of 14-karat gold chains, children's and religious jewelry.

You can see on Slide 5, we have also continued to make meaningful progress in our Customer-First OmniChannel initiatives.

We have made progress on our Customer-First OmniChannel initiatives and, in the first quarter, realized some of the benefits of the investment that we have made and work that we have done to date.

During the first quarter, our e-commerce platforms improved sequentially across all key e-commerce metrics.

For example, where we have been focused on addressing our online platform page load times, streamlining the online checkout process and improving the overall customer online experience, our sales in the first quarter were $81 million, up 1.1% compared to a year ago.

Before I continue, I want to take a moment to talk about Mother's Day, where we saw solid performance over the holiday selling period as a result of our efforts to drive improved performance.

We successfully leveraged our marketing modeling tools to respond to issues and opportunities using real-time data.

Specifically, we implemented more targeted, simpler holiday promotions that resonated well with our customers.

Additionally, our marketing was more focused with fewer and stronger messages that also make use of integrated digital elements.

Although our promotional activity was higher than last year, significant improvement across store brands and merchandise categories is what is driving our confidence in our full year guidance.

Before I turn things over to Michele, on Slide 7, I want to highlight our opportunities for fiscal 2018.

As the secular shift continues to go online, we are making ongoing enhancements to our e-commerce platform, adding relevant talent and resources, upgrading our mobile functionality, making advancements in search engine optimization, rolling out various content enhancements, launching a new Zales e-commerce platform, and enhancing our digital marketing efforts.

We also expect our omnichannel focus to drive increased in-stores orders through online appointment booking and the introduction of new functionality like local store inventory search.

Additionally, we believe that greater adoption of the new client system -- clienteling system by stores, will increase team member productivity.

As you may recall, clienteling enables our team members to improve their interaction with customers before, during and after their visits to our stores or our sites.

Further to the actions we're taking to streamline the organization, I want to let you know that 165 to 170 store closures slated for fiscal 2018 which are primarily mall, regional-based remain on track -- regional-based brands which remain on track as do the openings of new Kay off-mall locations.

And with that, I'll turn it over to Michele to walk you through the details of the quarter.

Thank you, Mark.

So we're going to start on Slide 8. For the first quarter, Signet's comps decreased 11.5% against an increase of 2.4% in the prior year first quarter and that compares to a 2-year comp hurdle rate of 6%.

Of our comp sales decline, about 330 basis points was attributed to a later timing of Mother's Day.

In general, average transaction value was higher while the number of transactions were lower for the reasons that Mark had just reviewed.

So I'll move on to the income statement.

On Slide 9, you can see our gross margin was $491.2 million or 35% of sales, down 300 basis points.

The lower rate was due principally to lower sales leading to deleverage on fixed cost, partially offset by higher gross merchandise margins in Sterling and Zale divisions.

First quarter merchandise margin was favorably impacted by mix benefits, targeted repricing, some commodity favorability and better discount controls.

As we have said before, we aimed to balance our competitiveness in the market with our promotional levels to protect margins in light of the heavy ongoing promotional activities seen across the sector.

SG&A expense was $452.8 million and the rate was 32.3% of sales.

We continued our prudent SG&A expense management in the first quarter.

As we have discussed before, we are taking steps to streamline our organizational structure to deliver operational efficiencies with a greater omnichannel focus.

As a result, SG&A dollars decreased 2.1% in the first quarter versus the prior year, though I will point out, we did experience about 300 basis points of deleverage due to lower sales and fixed expenses.

This includes store payroll, long-term IT investments and legal fees.

Now this was partially offset by the favorable impact of lower variable compensation, lower corporate payroll and advertising timing.

Other operating income was $76.9 million.

This increase of $2.6 million was due to the Sterling division's higher interest income earned from higher outstanding receivable balances, but note that the rate increase was tempered by the higher mix that reduced rate plans.

Diluted earnings per share was $1.03, a decline of $0.84 compared to the same quarter last year.

This also includes approximately $0.17 unfavorable impact to EPS due to the later timing of Mother's Day holiday.

At the end of the first quarter, there was about $511 million remaining under Signet share repurchase authorization with no share repurchases occurring during the first quarter of fiscal 2018.

So moving on to inventory.

Net inventory ended the period at $2.4 billion, down 3.2% year-over-year which is roughly in line with our full year sales guidance.

We are managing Zale stores with less inventory per store to improve prominence and presentation of key collections.

This also includes the refinement of some of our bridal collections in favor of others with greater focus such as Vera Wang LOVE and Endless Brilliance.

We've also made changes to a few lines to provide less breadth and more depth in key categories, driving overall inventory productivity.

So turning our attention to our in-house credit metrics and statistics on Slide 11.

Our first quarter in-house credit sales in the Sterling division were $529 million, a decline of 12.6% over the prior year, and in-house credit participation was 60.7%, down 100 basis points.

The average monthly payment collection rate for the first quarter fiscal 2018 was 11.4% compared to 12.3% last year.

Our monthly collection rate is calculated as cash payment received divided by the beginning accounts receivable.

The decline in the collection rate is due principally to credit plan mix and an increase in the average transaction value of what is getting financed.

As a result, monthly payments are higher in dollars but lower as a percent of balances, thereby resulting in higher receivables outstanding to be collected.

With that said, our credit plan mix is driving a higher FICO score customer with the rollout of our 36-month bridal plan to select customers.

The collection rate decline contributed to an increase in our gross accounts receivable which increased by $40 million or 2.2% over the prior year, driven primarily by the collection rate decline.

Interest income from finance charges, which makes up virtually all other operating income on our income statement, was $74 million, which is $1 million lower than the prior year.

The change was due primarily to more interest income on the higher outstanding receivables space but tempered by plan mix.

Our net bad debt expense was $43 million, $9 million higher than last year and when taken together with the finance income, generated operating profit of $31 million.

This net combination was down $8 million from prior year.

In general, our bad debt expense was impacted by lower receivable growth, which was a symptom of the overall sales decline and late tax refunds in the first quarter.

So with that, let's turn our attention to our financial guidance on Slide 12.

Recall that fiscal 2018 is a 53-week year.

As Mark had indicated, we are reaffirming our fiscal 2018 full year guidance.

Our comparable store sales are expected to decrease in the low to mid-single digits.

The additional week will be accretive to fourth quarter total sales by approximately $75 million but will have no impact to our same-store sales calculation as it is excluded.

EPS is expected to be $7 to $7.40.

The additional week will have an immaterial EPS impact to fourth quarter due to the cadence of our planned Valentine's Day marketing and promotions.

Also note that our guidance excludes any impact of the credit transaction which Mark and I will discuss with you next.

That concludes my prepared remarks.

And with that, I'll turn the call back over to Mark.

Thank you, Michele.

We'll now discuss the strategic outsourcing of our credit portfolio.

Please turn to Slide 14.

Today, we are very excited to announce the first phase of the strategic outsourcing of our credit business, with the transaction structured to substantially meet all the strategic priorities we set at the beginning of this process.

As a reminder, those priorities include eliminating material credit risk from our balance sheet, substantially maintaining our net sales, enhancing our credit and customer experience in the most efficient way, minimizing any disruption to our business that would impact our customers, our team members and our store operations while optimizing our business model and deliver a transaction that creates value for our shareholders including EPS accretion.

On Slide 15, we have provided an overview of the first phase of our outsourcing structure, which is designed to allow us to maintain our full spectrum of credit offering and competitive advantage while substantially derisking our balance sheet.

The structure of the first phase, which Michele will cover in detail a bit later, includes the sale of roughly 55% of our existing accounts receivable as well as long-term partnerships that ensure our customers will have access to our credit offerings.

Let me take a moment to explain what we are accomplishing in this first phase.

We are pleased to announce that we are selling our prime quality receivables with a $1 billion gross book value to Alliance Data at par value.

Following the close of the transaction, Alliance Data will service these receivables also.

In addition to the sale I just described, to fully outsource the servicing of our entire receivables book, we have also put in place the 7-year agreements to which Alliance Data and Progressive Leasing will become funding providers and servicers for our new originations and our U.S. store brands.

Alliance Data will provide credit to our prime customers and Progressive will provide a lease purchase payment option to our customers that are at the low end of our current in-house credit structure as well as those who are currently not covered and at no risk to Signet.

For the portion of our accounts receivables that remained on our balance sheet until the completion of the second phase, we have entered into a preliminary agreement or a binding letter of intent with Genesis Financial Solutions, to which they will service our existing accounts receivable as well as new credit sales that are funded through our in-house program.

However, it is important to note that our in-house program will be meaningfully reduced in size as Alliance Data will own the prime customers and Progressive Lease payment option will take the bottom portion of the term secondary program.

Before I move on, let me also take a moment to provide you with some general guidelines as to how we intend to structure the second phase.

As part of the second phase, Signet intends to fully outsource its future secondary credit programs including the sale of the remainder receivables on its balance sheet as well as funding for new non-prime account generations.

And to this end, we anticipate engaging discussions with one or multiple capital providers.

Once the second phase is completed, we expect Signet's credit programs to be fully outsourced from a funding and servicing perspective and for all material credit risk to be fully removed from our balance sheet.

Turning to Slide 16.

I want to highlight the benefits of this new outsourced structure to our customers, our Signet team members and our valued shareholders.

For our customers, our robust range of credit offerings will be preserved.

They will continue to receive a full spectrum of credit offerings and quality services they expect and we will ensure that the transition will be seamless.

Additionally, we had -- we have added a lease purchase payment option that will enable customers that may not be eligible for credit options to access Signet's merchandise which will have no financial risk to Signet.

For our team members, the majority of those that support our current credit operations will be transitioned to our experienced partners at Alliance Data and Genesis, and they will continue to service our customers with excellence as always.

They will ensure a smooth transition of our credit portfolio while, internally, we enhance our operational focus on driving the growth of our core retail business.

Our store operation teams remain aligned to key performance indicators into both credit and non-credit based sales.

And finally, for our investors, outsourcing our credit business will enable us to unlock the value from our credit portfolio, allowing us to, over time, optimize our capital structure and allocation strategy as the leading jewelry retailer with a simplified investment thesis.

On Slide 17, it's important to talk about the criteria for us with the outsourcing structure was to ensure the transition process has minimal disruption to our business.

We expect to close the sale of our prime quality credit portfolio and stand up the servicing agreement with Alliance Data in October of this calendar year.

And we have already begun detailed planning activities including systems integration planning, team member training and employee transition.

We also expect to transition the servicing of our retained accounts receivable to Genesis on the same time line.

Alliance Data and Genesis will assume the facilities related to the portion of the credit operations they will be servicing, which will enable us to move quickly and allow for a smooth transition.

And we are very pleased to be able to retain access to the deep experience embedded in our credit team, as they will continue to serve our customers as a part of our partners.

Additionally, we look forward to benefiting from the sophistication and the deep experience and knowledge of Alliance Data and Genesis.

Of course, we want to ensure any potential disruptions to operations is avoided during the upcoming holiday season.

So if needed, we may adjust the timing of closing to ensure the integration activities is completed prior to the launch.

I will now turn the call over to Michele to provide more details and review the financial impact of today's announcement.

Michele?

Thank you, Mark.

I'd like to start by reiterating Mark's comments that we believe the outsourcing structure we announced today provides compelling economic benefits to Signet and Signet's shareholders.

On Slide 18, we provide a breakdown of how our current credit sales will be supported in the first phase of our outsource structure.

As you can see on the slide, the outsource structure is designed to maintain the full spectrum of our credit offering for our customers, and as a result, we will protect our net sales while we derisk our balance sheet and drive EPS accretion.

On the left side of the slide, we've outlined the various credit tiers that we currently serve through our in-house programs.

The portion Alliance Data will be acquiring and servicing, which consists of prime credit quality customers, represented 65% of our credit sales in fiscal 2017.

The middle near and non-prime tier, which we will retain on our balance sheet during the first phase, made up 28% of our credit sales in fiscal 2017.

We will outsource the servicing of this tier to Genesis which is a leading player in this arena.

We will also move to the contractual aging methodology in conjunction with the transition to Genesis which is expected to occur in October of 2017.

The lower tier, which represented 7% of sales in fiscal 2017, includes customers who will no longer be covered through any of Signet's current credit programs as well as those customers that previously did not have a payment option to access Signet's merchandise.

So turning to Alliance Data primary program on Slide 19.

Alliance Data is a leading provider of branded private label credit programs and marketing services based in Columbus, Ohio.

They have been providing credit services to Zale brand's prime customers since 2013.

Under this agreement, Alliance Data will purchase our existing accounts receivables with prime credit quality.

They will also provide prime credit and services to all of our Signet's brands in the United States adding Kay, Jared and regional brands to its portfolio.

The portion of the portfolio that they will be acquiring is anticipated to total $1 billion in receivables at time of closing.

This anticipated amount takes into consideration the seasonality of our business in which the expected close occurs at the time of our lowest receivable balances.

As the primary program provider, Alliance Data will get first look to qualifying new credit applications after the closing of the transaction and provide all key functions to service the primary program, and that includes account issuing, servicing, funding and marketing and data services.

Signet will receive future payments based on the performance of the program including both existing and new accounts generated by Alliance Data under an economic sharing agreement.

Now as part of the transaction, Alliance Data will retain a portion of our current credit operations including certain facilities and approximately 250 employees located in Akron, Ohio.

The transition of these employees to Alliance Data will help to facilitate a seamless transition for both companies and customers.

We expect the transaction to close in October 2017 with full conversion to have occurred ahead of the holiday season.

So turning to the secondary program outlined on Slide 20.

As part of our phased approach, we intend to retain the non-prime accounts receivable on our balance sheet until the completion of the second phase.

We will also continue to provide credit to customers that do not qualify for Alliance Data's primary program.

It is important to note that our in-house credit offering, which will continue to be funded by Signet until the completion of the second phase, includes prime customers not approved by Alliance Data and non-prime customers that sit above the Progressive tier.

We have brought Genesis, a leading provider of consumer financing that specializes in near and non-prime credit, onboard with a 5-year agreement with the option to extend an additional 2 years to service our remaining secondary program accounts receivable and new originations.

And in conjunction with the transition to Genesis, which is expected to occur in October 2017, we will move from the recency method to the contractual aging methodology.

We do not expect any material impact to the financial statements as a result of the move to contractual aging.

The move to contractual aging will be incorporated into our reserve methodology and the definition of charge-off will change to be solely on a contractual aging basis.

We plan to provide an update at the time of this transition.

As part of our agreement, Genesis will run the operational interface and servicing functions and will retain a portion of our current credit operations in Akron, Ohio, including approximately 650 team members and certain facilities.

So we expect the transition to be smooth.

In line with the primary program, we expect to launch the servicing program with Genesis in October of 2017.

Looking ahead to the second phase of the outsourcing program, we are planning to fully outsource our secondary credit program including the sale of the remaining receivables on our balance sheet as well as funding the new non-prime account originations.

In conjunction with the outsourced credit programs, we are introducing a new payment option in partnership with Progressive Leasing for those customers that do not qualify for our outsourced credit programs or who do not wish to pursue a credit option.

This includes customers who no longer will be covered through any of Signet's current credit programs as well as those that previously did not have a payment option to access Signet's merchandise.

Starting in August, in-store Signet customers will have the option to lease jewelry, whereby Progressive will pay the full value of the merchandise to Signet once the customer agrees to leasing terms.

The program will launch online thereafter.

As a result, Progressive will assume any financial risk from the leasing of the merchandise.

Now while it's difficult to size the opportunity, we are very pleased to have the accessibility of our competitive credit offerings to our customers.

The initial term of the agreement is 7 years, similar to our agreement with Alliance Data.

With that, I will discuss the anticipated financial impact of the outsourced partner structure on Slide 22.

So Mark had mentioned that a priority for us was substantially maintaining our net sales, and this transaction is designed to be able to do so.

The structure we are putting in place provides coverage for our current credit offering.

Therefore, we expect no material impact from the outsourcing of our credit portfolio to net sales.

One aspect of our credit offering that's excluded from the new structure is that we will not provide credit insurance going forward from close of transaction, which is incorporated in the anticipated financial impact from the transaction.

This will further simplify the in-store selling process.

So walking down the P&L.

We've already noted that the first phase is not expected to have any material impact on net sales and we also expect SG&A to be net favorable.

We expect the outsourcing structure to reduce our SG&A expense by 2% to 3% on an annualized basis.

That takes into account the elimination of SG&A associated with our current in-house credit operations, economic sharing with Alliance Data and the cost of outsourcing the credit servicing with Genesis.

Additionally, in the first phase, the transaction will create savings from the elimination of 23% to 27% of our bad debt expense net of late fee income associated with the prime portion of the in-house credit program.

Due to the elimination of approximately 50% of our credit income, which we conventionally report under other operating income net line; and expenses associated with outsourcing of the credit, which are partially offset by elimination of credit operations and the economic sharing with Alliance Data, we expect to realize a minimal decline on our EBIT.

Further, there are significant benefits to our capital efficiency ratios from the removal of credit assets.

We estimate our return on capital employed ratio could reach above 40% in fiscal 2019.

Importantly, we expect the bottom line impact of the transaction will be accretive to earnings per share in the first full year of operations based on share repurchases at current share prices.

We expect to recognize onetime transaction cost of $35 million to $45 million, which is comprised of adviser and legal fees, IT conversion costs and employee transition expenses, which are expected to be largely realized in fiscal 2018.

In addition, we expect to incur a onetime noncash gain in the second quarter due to the accounting treatment that requires us to reclassify our existing receivables that Alliance Data will purchase from assets held for investments to assets held for sale.

On Slide 23, we have provided an updated view of our capital allocation which is essentially unchanged.

However, we have revised adjusted leverage ratio calculation.

We remain committed to maintaining an investment-grade profile with a strong balance sheet and financial flexibility to fund our business and growth strategy.

The proceeds from the transaction will provide us additional liquidity, of which $600 million will go toward repaying our existing securitization facility.

We plan on using the remainder of the proceeds to repurchase shares over time.

I will note, though, we have the flexibility to repurchase shares in advance of the close of the transaction depending on market conditions.

These will be incremental to capital returns under our commitment to distribute 70% to 80% of free cash flow in the form of dividends and/or share buybacks.

So this capital allocation tenet will now exclude the onetime proceeds from the transaction.

Finally, we are targeting to maintain our adjusted leverage ratio between 3x to 3.5x which is in the range of our previous target of below 3.5x.

On our website, we will post an illustrative reconciliation of our pro forma leverage calculation for fiscal year '17.

You will see this revised calculation excludes adjustments we previously included for our captive finance operations, move to a 5x rent compared to previously 8x rent and doesn't include an add-back for stock compensation.

We believe this updated calculation is more simplified and reflective of our foregoing business model.

With that, I'll turn things back over to Mark to wrap up before we take your questions.

Thanks, Michele.

Before we take your questions, let me close by saying that we are extremely pleased with the first phase of our outsourcing of our credit programs that we announced today.

While we initially sought to achieve the full outsourcing as part of a single structure, with this phased approach, we have been able to substantially derisk our balance sheet with the sale of 55% of our accounts receivable, not only maintain net sales but also outsource servicing for our full credit receivables to our partners.

And we've achieved all this in a way that delivers value to our shareholders in the form of EPS accretion.

Because we are executing from a position of strength, we are able to take the time to find the right partners for the second phase, partners that understand the importance of protecting our business, partners that understand the importance of understanding our customers' economics and delivering on our commitment to create value for our shareholders.

In summary, with the new credit structure in place, Signet will have an enhanced focus on our Strategic 2020 Vision which is focusing on delivering a Customer-First OmniChannel experience.

With that, we will now take your questions.

(Operator Instructions) And your first question comes from the line of Ike Boruchow with Wells Fargo.

It's actually Tom Nikic for Ike.

I kind of had a couple of questions around the credit transaction.

On the primary portion, can you give any -- I think you mentioned that there's a profit sharing agreement with ADS.

Is there any sort of details or quantification you can give us around that?

And I think you also said that ADS is taking about 250 of your employees and Genesis is taking some of them as well.

Are there some other employees that are still going to be part of your business?

And would you anticipate seeing those employees be part of a Phase 2 transaction?

Sure.

So let me start with the employees.

I'll reverse it in back order of your questions.

In terms of the employees, yes, 250 of our employees will be transitioned to Alliance Data Systems and then 650 of our employees will be transitioned to Genesis.

There is a remaining population of employees that will stay with Signet for our customer care operations.

So we think it is a great outcome and really will help to facilitate a smooth transition upon the close of the transaction.

In terms of the profit-sharing agreement, my remarks were that this would be net additive in terms of EBIT.

It will reduce our SG&A expense, but outside of that, I cannot quantify that for you.

Okay, got it.

I was also just hoping to understand the deal with Progressive a little bit more as well.

I think you said that they would capture 7% of your current credit business.

Is this also an opportunity to maybe facilitate sales to customers who would've otherwise been turned away and so maybe there is an incremental sales benefit?

And given that they're kind of a rent-to-own business, is that sort of a similar function, like the customer is basically going to be renting the jewelry from you and returning it if they can't make their payments anymore?

Any help there would be great.

Sure.

So -- and I'm glad you really picked up on that, but this truly does represent potentially an incremental revenue opportunity for Signet because not only for those customers that now, under our current structure, that lower tier of 7% will have that option for Progressive but customers who previously did not qualify for our current credit offerings have that ability.

So we do expect the program to generate incremental revenue for Signet.

It is difficult to size the opportunity but we're extremely pleased to add this additional option.

I guess just to go back and give you a little bit more flavor in terms of how the lease purchase works, I've mentioned it's a 7-year agreement.

Progressive Leasing will offer the lease purchase payment option to our customers that then don't qualify for our future credit program or potentially they just don't wish to pursue a credit option to begin with.

So that, as I mentioned, includes the customers that no longer would be covered through Signet's current credit programs.

What happens is Signet will receive the payments from Progressive, so Progressive actually makes the purchase from Signet.

We get the payment for full value of that merchandise and then Progressive will enter into the lease contract with the customer.

All right.

So basically, once Progressive buys the merchandise from you guys, it's sort of out of your hands?

Yes.

I mean subject -- there's always the return policies we stand behind but it's a relationship with Progressive and the customer.

Your next question comes from the line of Simeon Siegel with Nomura Instinet.

So I guess just first off, with the reiterated full year guide, can you just share anything, maybe quantify quarter day trends, speak to the confidence for the full year, then maybe any color on the February comp versus the ending comp run rate?

And then just, Michele, on the -- so the loans you've planned to still fund in Phase 1, can you give any color there whether FICO scores, bad debt charge-offs, any context to want to get what you guys are still going to be funding?

Any time line you want to share broadly for Phase 2?

And then that piece that you were just referring to, the 7% that Progressive is taking, I think it was 7% of credit sales last year.

What has that looked like over the past several years in terms of that 7%?

Okay, listen, I'll take the first question then I'll turn it over to Michele.

Simeon, as it relates to the business, as we said in the prepared comments, Simeon, we had a very, very tough start of the year.

It was not a great Valentine's Day, but the good news for us and why we're so -- feel strong about reaffirming our guidance is that if you normalize Mother's Day calendar, sequentially, after Valentine's Day into March, into April and leading into Mother's Day, we continue to get sequentially better and better, and we saw enhanced performances not only across our categories of products and across our brands of stores, but just as importantly, we saw enhance -- sequential enhancements to our online exposure and customer experience.

We continue to get better at increasing our traffic.

We continue to get better at increasing our convergence and we continue to get better at increasing our online sales.

And the one thing that we know more now than ever is that online experience for our customer is critical and it will affect the in-store experience.

So the better we get online, the better the in-store experience and in-store sales will be.

So that's why we continue to have confidence in our reaffirmation of our guidance because we have seen the sequential improvement of our businesses straight from end of Valentine's Day all the way through and into Mother's Day.

Yes, and Simeon, I will just add one comment before I move on to the next set of questions that you had.

If you go back and you think about at the time when we issued our annual guidance on March 9, we were well beyond Valentine's Day, which is the largest contributor in the first quarter.

In fact, we do what the first month, the largest month, again, of the quarter to be.

So we really had insight as to how our first quarter was shaping out and that was all factored into our guidance and as Mark mentioned, the continued sequential improvement that we've seen.

So we feel confident in reaffirming our guidance based on that.

In terms of your next question, which I believe went into the non-prime component of it, let me see if I can give you a little bit more color.

The expected gross value of the remaining portion of that portfolio is estimated approximately about $700 million to $800 million at the time of closing, October 2017.

So this includes the non-prime accounts receivable that are related to our Sterling U.S. brands and it also does include a smaller portion related to the Zale brand.

And then I'd also just direct you back into the slide presentation from a sales perspective, representing about 28% of our credit sales in fiscal year '17.

I believe your last question related to the Progressive Leasing, the 7% in that lower tier and maybe how these metrics looked historically, I don't have that information with me but I probably have no reason to believe that it would've looked significantly that different.

Okay.

And then maybe lastly, so you guys mentioned the challenging promotional environment a few times and we saw the sales, but you did point out the stronger merch margins, so -- which is obviously a nice thing to see.

So can you guys be, either Mark or Michele, speak to the way you're viewing sales versus margins looks like the resolver, the willingness to hold the short-term sales for long-term health?

So just any thoughts on how you're viewing those 2 pieces.

Yes, well Simeon it's always a balance, obviously, and in the first quarter, we were able to preserve our gross margin and we just didn't feel that during that time frame with the data we had that we were able to make -- we didn't have enough data to make the definitive decisions to go out and think that we can capture market share because there was some really deep discounting going on in some of our competitive set.

And so we felt for the first quarter that we didn't have the data that we needed to stay firm and increase our gross margin dollars on that front.

That being said, as I said in my prepared comments, with more data that we've got and -- from our data group and the information that we've learned about some of our marketing modeling that we were able for Mother's Day to be more promotional but more targeted, have less stories on our promotions.

So we felt it was time during Mother's Day there was -- we have opportunity to capture some market share while increasing our gross margin dollars and be a little bit more aggressive and more targeted.

Yes, I would just add Simeon to that, I mean it goes back at the time we issued our guidance where we talked about an amplified promotional environment, and we knew that and built into our guidance was a level of incremental promotional activity this year based on what we've seen.

So I'd say that's all been factored into the guidance as well.

Your next question comes from the line of Bill Armstrong with CL King and Associates.

A couple of questions.

Michele, on the SG&A savings of 2% to 3%, is that 2% to 3% based on the approximately $1.8 billion of adjusted SG&A kind of full year run rate that you had last year?

Is that how we should think about that?

That's correct, Bill.

Okay, great.

And then I'm not sure how much you can comment on this, but Phase 2, what sort of timing are we looking at on getting Phase 2 done?

I assume that's going to be sometime next year.

Or how should we think about that?

Yes; so in terms of timing, we plan on engaging in discussions very soon with capital providers to look to transfer our existing receivables as well as to originate and fund the future receivables.

So those discussions will start very soon.

We are committed to finalizing the full outsourcing of the credit portfolio in a timely manner, but at this time, Bill, we can't predict the timing or the ultimate composition of that.

Bill, we've been doing this for a year and you could question what happens to the full year, and you are involved in it, but our portfolios is a unique and complex portfolio as compared to other major retailers who sold their portfolios.

In this Phase 2 function, as I stated in my words -- in my comments, we need to be focused on finding the right partner who's going to service our customers the way we expect them to be serviced and is going to partner with us.

And we believe those partners are out there but we weren't able to focus on singularly on that partnership.

We're trying to get a one, kind of, package out right now and now we're going to take the time.

We hope to get it done as soon as possible, but having Genesis as a servicer is a big leg up and having them work with our team members and really we are excited about the Genesis partnership because we believe they can even help us be better at lending dollars to those near-prime and non-prime customers.

So...

Yes.

So ultimately, I'd say we are executing this phased approach really from more of a strategic approach to outsourcing from a position and working off of the position of strength.

And because of this, we will and are able to take the necessary time to find the right partners and take care of our customers which is ultimately our #1 priority.

And it is important to remember, Bill, that we will be switching over to contractual aging when that deal's closed with Genesis that we're projecting to be in October.

Got it.

Is it possible that Phase 2 would be implemented this year or actually before October and sort of maybe leapfrog that or not really?

No.

We don't see that as a possibility to close out Phase 2 this year.

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

On the outsourcing program, I have some concerns about how the selling experience will evolve like in-store in terms of the training and development, and the (inaudible) that you have with the sales force really understanding your prior programs versus this one.

So could you speak to that and if that's a risk factor that is reasonable to think about?

Also, just broadly speaking, what do you think it will take for the comps to get less negative and then positive?

Are you -- there's factors outside your control which you mentioned in terms of competition.

As well -- I'm just trying to understand the prioritization of factors as we ideally journey back to positive comps.

Thank you, Oliver.

As far as the outsourcing, we actually are not concerned.

If you remember, what the critical component of this whole transaction was that we're able to maintain sales and continue to prove and underwrite -- our partners continue to improve and underwrite our programs and our credit offerings like they have in the past.

So we have all the confidence.

We worked with Alliance Data with our Zales stores, the secondary program which will be underwritten by Signet and with Genesis that it will basically not a lot is going to change on that front.

But we will take time and train our team members.

Our team is actually excited about it because what's going to happen because of Alliance Data and because of Genesis is they think they will ask our customers for less information.

There will be more seamless experience and there won't be selling credit, quite frankly, which makes the whole selling transition a lot more seamless, and they are very excited about the opportunities, and some of our competitors already do this, offering Progressive Leasing options to our customers which we believe there could be some incremental opportunities.

So as far as the primary credit offering, we believe that is going to be more seamless and easier for our team members to actually interact with our customers and asking for more -- less information and not trying to sell credit insurance and that Progressive is a very simple program that our team members are very excited about getting involved with.

And again, as I stated, some of our jewelry competitors are already offering that program.

It's something that we can have and we believe there could be incremental sales opportunities.

On the comp question, Oliver, I said in my comments, there's things that we can control, things that we can't control.

And what we can control is making sure that we have the products and the right channels for our customers.

And it all starts off with do customers still hold our products in favor.

And I will tell you that all the research that we have done, anything that we have researched on and from a data perspective is our consumers, whether it be millennials or whatever age group or demographic they're involved in, still find jewelry as a wonderful way of expressing emotional love.

And over the last 25 years of the jewelry industry, and I think over the last 25 years, the jewelry industry has grown on a compounded annual growth rate of 3.8%, almost 4%, which is very good and better than a lot of industries.

Now we've had some dips in those time frames, but as a whole, we've come out.

And specifically Signet, when we've seen dips in the last 25 years, Signet has come out as even a stronger company and able to have strong comps going forward.

So what we need to do as a retailer, with passion and intensity, is to make sure we have the right products for our customers in the fashion arena, in the bridal arena, and we are focused on that is to make sure that we have the omnichannel experience that's second to none.

When a client or a customer buys, goes online, goes into an outlet store, goes on a Facebook page, whatever that experience, it's got to be seamless and as smooth as possible, and we are very focused on that.

And just as an example, during Mother's Day, if you went to kay.com, in the past, the download of a page may have taken over 10 seconds, and now it's taking under 5 seconds, and in-store is taking under 3 seconds, and we're doing a lot of enhancements in our marketing of our digital marketing and a lot of enhancements to our in-store customer service and our online presence.

So it's all about making sure that we give our customers the superior Customer-First OmniChannel experience.

That will start increasing and improving our comps.

Okay, it does feel like you've intensified that perspective on the omnichannel story and you've had some good leadership there in the beginning as well.

Would -- do you -- how would you view your model as un-Amazon-able?

And what does it mean to you in terms of being very competitive versus Amazon?

Because we've also seen some pure-plays look at physical retail.

So I'm just curious about that and like was there -- is there an intensification of investment happening here given the trends you're seeing?

There's definite intensification, not only in investments in the omnichannel experience but in investments in the talent that we have in our business, investments in technology, investments in team members and partners that can help us make sure that we are the best.

Because we believe that in a lot of ways, the jewelry experience is different online, and still the vast majority of jewelry is bought in person, but the vast majority of customers go online first to educate themselves.

So we have to have -- and our plans and our expectations by Christmas time, is to have as good a jewelry online experience as anybody in the industry.

So yes, Oliver, it is critical that our online which ties into our omnichannel experience is as good as it gets in jewelry and we will be focused on using our resources to get us there as fast as possible.

Your next question comes from the line of Brian Tunick with Royal Bank of Canada.

I guess first question for Michele.

I think you commented that you expect no impact to revenues on the sale.

I'm just curious, people have been saying, where Zale, I guess, credit participation rates are trending now under Alliance Data Systems.

Can you maybe talk about the Zale credit penetration and how you think that won't happen in the Sterling division?

And then second question I guess, on the market share, closing of independents seems to be continuing at a very high pace.

What do you think is happening to that customer or market share as the independents close?

And does that give you more flexibility on rent negotiations as you come to these lease terms?

All right, Brian.

I'll start with your first question, and then Mark and I can take your second question.

So in terms of, I guess, credit penetration and you're trying to compare and contrast Zale and Sterling, due to a tender, I'd just put this on out for you, that due to the tender shift that we would expect to see from credit to noncredit tender, we do anticipate that there will be a single-digit increase in our credit penetration rate.

So simply, if you go back to the slide that we've talked about fully covering our current spectrum of credit sales, Progressive at that 7% is not considered to be a credit sale.

So that's what I'm referring to in terms of a tender shift.

So although we'll be covering that full spectrum of our sales, part of it would no longer be considered credit.

I'd also reference that the Progressive Leasing will sit across all of our brands including Zale that currently doesn't sit there today.

So that also becomes incremental opportunity for us.

So Mark, do you want to take...

Yes.

As it relates to, Brian, your question about the independents closing, is a good point.

There has been a dramatic increase of closings of independent jewelers, the biggest increase since the recession.

And in the short term, that's a challenge for us because a lot of independent jewelers, a lot of their net worth is in their inventory.

So the way they're getting their money back out is having massive liquidation sales at or below cost to get their cash out of their business.

And we're obviously not going to go compete to those levels.

That being said, in the longer term, the independents closing is an opportunity for us because the independents don't have the capabilities, the scale, the expertise that we have, whether it be in the supply chain or it be in marketing, whether it be linear marketing or digital marketing, or the investments of the dollars that we're going to put into the omnichannel experience.

So we think there's greater opportunities in the near short term but not the very short term to gain market share because those independents are closing and the ones that are left really can't do a lot of things that our scale allows us to do.

As it relates to your point about rent negotiation, you can never make a statement across the board about rent negotiation.

It always depends on the center or the mall or what the participation in the mall is and what kind of area it is.

There are opportunities in some places to get rent relief for certain but some of the top malls and top centers in the countries, you just can't -- you're not going to get there, you're going to go for getting the best location and the best mall.

We are looking to optimize our footprint completely.

We think we have a very diversified portfolio.

Right now less than 6% of our sales is done outside the mall.

If you look at 5 years from now, over 50% of our sales will be done outside the mall and we think that it all just tied into the benefits of the omnichannel experience which will make our stores more efficient and more productive.

And your next question comes from the line of Paul Lejuez with Citi.

Just a big-picture question.

Mall traffic, I think has been a pressure point for you guys just for some time but you were able to buck the trend for many years.

I'm curious to know, just in your opinion, what changed over the past several quarters, call it, over the past 4 quarters that has caused the fall-off in comps?

And if you could maybe just give a little bit more color on mall versus off-mall performance and the differences that you're seeing in A, B and C locations?

Sure.

So let me start with the latter.

As it relates to mall versus off-mall performance, in the fourth quarter, it continued into the first quarter and sequentially continued to Mother's Day.

The off-mall stores have performed better than our mall stores and continue to do so.

As far as what's changed, I mean a big change is this whole omnichannel experience.

I mean traffic, Brian, has dropped even more substantially than it has mall traffic.

Specifically, it has dropped more substantially than it has over the last couple of years.

A lot of that, we believe, again is because people, instead of shopping in the mall, they're shopping online and going to online first so they have to make less trips to the malls.

We still believe that our products, as long as we have the products that our customers are looking for specifically, obviously, engagement ring is somewhat Amazon-proof because people still want to engage with a sales associate and still want to engage and be educated on diamonds and understand about the product they're buying but we have to do a much better job online and making sure that, that experience online is more critical.

So a big change, Paul, is that 2 or 3 years ago, the online experience wasn't as critical as it is today because that mall traffic that we were getting the benefit from in the past is now being taken up by the online traffic.

And we are doing everything in our power to make sure they have fabulous experiences online so that we can have the opportunity when we have lesser customers walking in our malls and our stores to close them at a higher ratio.

And maybe if I could just pile on, when you think about our footprint and our diversification between mall and off-mall, what we do know is that our Kay off-mall is our highest ROI, and that really has been where our focus has been in terms of our investment opportunity to grow that off-mall locations on the Kay side and further diversifying between the mall and off-mall locations.

Got you.

And I -- you had made a comment -- that in 5 years you expect 50%, 5-0 percent of your business to be off-mall.

Is that correct?

And I guess I'm just wondering what percentage of that is actually physical locations, off-mall versus e-com?

I'm referring to the actual physical locations, mall versus off-mall.

And your next question comes from the line of Lindsay Drucker Mann with Goldman Sachs.

I wanted to ask one on synergies as far as what you were able to achieve in the quarter and how you're thinking about it for the full year.

Sure, Lindsay.

So our synergies and part of our guidance that we had issued with $70 million was our expectation to achieve for this year which is built into the guidance that we have reaffirmed today.

We feel confident in terms of achieving those synergies and we're definitely where we need to be.

Okay, great.

And then as far as the extended service plan revenues and how we think about modeling that for the full year, that's been growing a bit ahead of sales historically.

Is that the right trend line to use going forward?

Or should we think about that growing more in line or even slower than sales?

I probably -- I don't know if I would do it slower than sales, I think in line, maybe slightly above would directionally be the right way to model.

And your next question comes from the line of Scott Krasik with Buckingham Research.

Just a question on the guidance and then a question on credit.

So I know you don't want to give quarterly guidance, but you did just miss consensus in 1Q by about $0.50 or $0.60 and $100 million on sales.

So as we look at 2Q, can you give us some ideas, consensus, reasonable where it is right now?

And I know you didn't want to give a quarter-to-date comp, but relative to the low to mid-single digits for the full year, do you expect that to be at the high end, above the high end, at the low end?

Any color there would be great.

Yes, sure.

So I'm probably not going to provide you much color.

As we've said, when we initiated our annual guidance, we are no longer providing quarterly guidance and really can't comment in terms of the consensus that's out there.

We're confident for the reasons that we cited on the call in terms of reaffirming our annual guidance and that was based on the fact where we stood at the time we issued that, knowing how the Q1 was shaping out.

And then the reaffirmation comes with the comments that Mark had said in terms of sequential improvement that we've seen in our comps combined with the initiatives and the actions we've taken to drive savings as well.

And then I guess from a credit standpoint, you're going to see an increase in the delinquencies when you switch to contractual.

As we look back in times when they're tough, I mean we're still in a full employment situation, I mean how should we think about sort of modeling the credit business on a go-forward basis when the environment's a little bit more challenging?

Yes.

So I guess 2 comments to that.

Keep in mind what we've said is this is the first phase and then there is a second phase where we would look to fully remove those receivables from our balance sheet.

I know we did not provide any timing but we will start those discussions soon.

In terms of your question on the contractual aging, I mentioned comments on the call that we will move to the contractual aging methods in conjunction with the transition to Genesis, and we would expect that to happen in October of 2017.

I also provided comments that we don't expect any material impact to financial statements as a result of the move to contractual aging.

And really from a customer perspective, it's likely that there's going to be a lower required monthly payment to really harmonize those terms with Alliance Data.

So the only -- so that would be a change, billing statements, they already receive on a contractual basis.

So really from a customer perspective, I would say no callout to that.

And then the other part of your question, can you go back?

Just trying to understand, things are still pretty good from a credit standpoint.

Just trying to model now the sensitivity going forward.

Yes.

So in terms of a modeling standpoint, let me try and just give you some of the color and a lot of it I'll guide you back to originally what my prepared remarks were.

So as we went through the slide material, I did go through on how to really model the impact of Phase 1 on EBIT on an annualized basis.

If you think about that we said the transactions expected to close in October of 2017, if you apply the normal seasonality, that should really help you think about the impact at least 2018.

And then of course, as we move forward, we will give you additional updates at the appropriate time.

And your next question comes from the line of Jeff Stein with Northcoast.

Michele, I've got a modeling question and I'm not sure I got it right.

Did you indicate that on an annualized basis, Phase 1 is EBIT positive or EBIT negative?

Again, annualized once Phase 1 is completed.

Right.

So let me go back and give you that information.

It is a slight decline to EBIT.

So if we go back through I guess the components of that, roughly 23% to 27% of our net bad debt expense and late charge income will be eliminated that's associated with the prime block, and that also includes -- will be eliminated associated with the prime.

When you go down to SG&A, our total SG&A reduction is estimated to be 2% to 3% annualized, and that's really 3 components that are in there.

First of all, we're going to have savings associated with the elimination of our in-house credit operation.

The second piece that's in there is we'll have the economic sharing with Alliance Data, so that's a positive.

And then we will have the cost of outsourcing the credit servicing function to Genesis.

So when you put those 3 things in a blender, it drives an overall reduction to SG&A.

And then you have the elimination of roughly, call it, 50% or so of our finance charge income.

So when you take those 3 things, that leads to a slight decline in the EBIT on an annualized basis.

Got it, okay.

That makes sense.

On the trends for Mother's Day, obviously, you guys did increase your promotional activity.

So I know you're not talking about forward-looking, but when you report second quarter, should we expect to see a change in the direction of merchandise margins?

I'm sorry, I totally missed your last question.

With the increased promotion of Mother's Day, do we expect to see a change in merchandise margin?

Yes.

So let me give you a little bit of color on that, Jeff.

I mentioned before that we had anticipated, as part of our annual guidance that we would be in a more promotional environment this year.

So that is factored into the guidance.

As we've mentioned before, we will continue to look to kind of balance that margins depending on how promotional the environment gets, so that would be the additional color I'd provide.

Okay.

With the 30% off promotion at Kay and 30% to 50% off at Zales, was that a planned or unplanned promotion?

Because your Mother's Day circulars did not include that 30% off.

As I said, Jeff, in my comments, we had some real-time data that we've gotten later than when the Mother's Day catalog was printed.

And so it was planned.

But it was planned after the print of those catalogs.

Got it.

Okay, that makes sense.

And one final question.

In your release, you did reference the fact that you had a mix of lower rate plans which affected your credit income.

Could you -- Michele, could you elaborate a little bit on that?

What plans are you referring to?

Yes, absolutely, Jeff.

So we had talked over the past year about we did the testing and then we did the full rollout of our 36-month bridal plan, which under that plan, it's based on, there's a dollar amount you have to purchase to qualify, and then it's at a reduced interest rate.

So that's having the effect and that's what I was referencing.

It's a lower rate which ultimately would have an impact on net finance charge line.

And your final question comes from the line of Rick Patel with Needham & Company.

Just a few ones on e-commerce, first, can you help us think about what's driving your e-commerce sales in terms of categories or branded lines and whether there have been changes to that over the past few quarters?

And second as you make investments in omnichannel, do you expect an acceleration in online sales?

Or will the uptick show up in stores as people still look to buy product in stores, perhaps after talking to an associate or seeing that product in person?

Thanks, Rick.

There's a lot going on in our online business, and I'll just talk to you about several of them and just going on.

One is that we're trying to enhance the customer experience.

I mentioned this earlier, our page load speed has improved dramatically.

If you go from Christmas of last year, it's improved to Valentine's Day and it sequentially has improved all the way through Mother's Day, where we had just a dramatic improvement, cut in half on page download speed.

Our checkout efficiency is better.

The way our customers have to apply promotions and rewards is more seamless for them.

Our personalized jewelry is better.

Our website personalization is better.

Our search engine optimization has been improved and our search engine marketing has been improved, and that's just on the customer experience side.

We're also thinking there's ways that we can get to grow our business, to your question, and we're dedicating more human resource to our online channel.

We're adding additional investments in there are e-commerce platforms and capabilities and we are reallocating materially more marketing dollars to digital.

So that being said, we are expecting both to improve, Rick.

We believe that because of the online experience, which is all omnichannel-critical, that our online sales should improve, which they have sequentially, and we believe that will enhance our in-store and business also going forward.

So yes, because -- we believe because of our instruments and our improvements to our online business, we'll improve our online business going further into the year and our in-store business.

And again, that is one of the reasons why we're reaffirming our guidance today.

And can you touch on the margin profile of your online segment versus your brick-and-mortar stores, perhaps some context on where it's at right now and what's the go-forward assumption as some of your investments ramp up?

Yes.

So our margin on our e-commerce business is actually a little bit higher than our brick-and-mortar.

So as we continue to ramp up investments, really don't anticipate a -- I'd say a material change in what that margin looks like.

The biggest difference that we see is the run expense associated with the brick-and-mortar.

And although you got the distribution cost flowing through the e-commerce channel, it's still driving higher marginal rollout from the brick-and-mortar.

And thank you all for taking part of this call.

Our next scheduled call is to report the second quarter of fiscal 2018 on August 24.

Thank you all again and goodbye.

Thank you, ladies and gentlemen.

This concludes today's call.

You may now disconnect.