Signet Jewelers Ltd Q4 FY2024 Earnings Call

Good morning, and welcome to the Signet Jewelers Fourth Quarter Fiscal 2024 Earnings Call. Please note, this event is being recorded.

Good morning. Welcome to Signet Jewelers Fourth Quarter and Fiscal 2024 Earnings Conference Call. During today's discussion, we will make certain forward-looking statements. Any statements that are not historical facts are subject to a number of risks and uncertainties. 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, quarterly reports on Form 10-Q and current reports on Form 8-K. Except as required by law, we undertake no obligation to revise or publicly update forward-looking statements in light of new information or future events. During the call, we will discuss certain non-GAAP financial measures. For further discussions of the non-GAAP financial measures as well as reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures, investors should review the news release we posted on our website at ir.signetjewelers.com. With that, I'll turn the call over to Gina.

Thank you, Rob, and thanks to all of you for joining us today. Before we discuss both our fiscal '24 results and fiscal '25 expectations, I'd like to thank our Signet team. They delivered on our expectations in a year that experienced a deep COVID-induced engagement trough and an overstocked industry that drove an elevated promotional environment for the jewelry category. You continue to inspire me. Thank you for all your hard work and dedication this year. I'd like to leave you with 3 key takeaways today. First, we delivered on our financial commitments this quarter with EPS above the high-end of our guidance range. Second, excluding nonrecurring legacy legal settlements for the fourth year in a row, we generated over $600 million in free cash flow. This is nearly 15% of our market cap. Third, we expect same-store sales to improve throughout fiscal year '25 as the engagement recovery gains velocity. I'll elaborate on each of these takeaways beginning with this quarter's results. We delivered sales of $2.5 billion this quarter, down roughly 6% to last year. As anticipated, we saw a late shopper this holiday as value-conscious consumers were holding out to get the best deals and have one extra weekend to shop for gifts. We leveraged branding, innovation and value engineering within our newness to provide customers a competitive value proposition, along with size trade-up options in categories like lab-created products, our strategy resonated with our customers, as we saw new items sell through at an impressive 700 basis point increase to a year ago. Our strategy, which worked all year was also effective in the fourth quarter as we held North American average transaction value nearly flat, and expanded our non-GAAP gross margin by 170 basis points to this time last year. Conversely, industry data suggests independent jewelers accelerated their deep discounts in lab-created diamonds and stepped up their discounting for natural diamonds modestly. This resulted in heavy AUR declines among independents. Our life cycle product management continues to be a source of strength, driving inventory levels down 10% compared to the prior year. As we take markdowns from slower moving products earlier, this also allows us to bring in relevant new items faster, which have higher margins. Continuing the trend we saw for most of fiscal '24, jewelry retailers that catered to the low-priced Fashion category outperformed. Likewise, Banter, our value-oriented Fashion banner delivered the strongest same-store sales in the U.S. this quarter, nearly flat. We also saw strong performances at Peoples in Canada and value banner H. Samuel in the U.K., both of which delivered positive same-store sales over the holidays. Offsetting the stronger performance in our core, we had challenges at our digital banners from operational and integration issues resulting in lower fulfillment, which have continued into fiscal '25. This was caused by the integration of Blue Nile with production partners, resulting in lower conversion rates in the last 6 weeks of the quarter, reducing our overall North American same-store sales by 1 point. We are working to resolve these issues and expect to have fixes implemented later this year. We also underperformed in our Ernest Jones banner in the U.K., in part from macro challenges as well as a more negative halo impact from the November sale of our luxury watch stores. We estimate our U.S. jewelry merchandise market share for fiscal '24 was approximately 9%, down modestly from the prior year, driven by mix shift with lower engagements as well as the relative strength in lower-priced self-purchase items where we have less penetration. We believe that we expanded our market share in the Bridal category for fiscal '24 by approximately 50 basis points, which is where we over-indexed to the industry with nearly 30% market share. The second takeaway today is that our flexible operating model is working as designed and generating significant cash, fueled by continued cost savings, sourcing efforts and inventory discipline. We continue to drive working capital efficiencies in our business, which led to a 97% free cash conversion to non-GAAP operating income. We believe our ability to drive free cash flow will continue. This allows us to invest in the growth of our business, bringing critical newness and to return significant capital to shareholders. Last year, we returned nearly $200 million to shareholders, and we have returned nearly $1 billion to shareholders over the last 3 years. This morning, we announced a $200 million increase in our share repurchase authorization, bringing our total remaining availability to approximately $850 million. This is higher than the outstanding conversion market value of the LGP preferred shares. We believe share buybacks remain a very attractive use of capital for our shareholders. We also announced a 26% increase in our common dividend to $0.29 this quarter, our third consecutive year growing our dividend, which even after this increase represents less than 10% of our free cash flow in fiscal '24. Our strong free cash flow also strengthened our balance sheet. We ended fiscal '24 with $2.5 billion in total liquidity, which is $1 billion above our target of $1.5 billion. This gives us the dry powder to handle both our $148 million unsecured notes that mature in June as well as the convertible preferreds that mature in November, while staying well within our liquidity goals. As a reminder, the convertible preferreds also represent approximately 15% of diluted common shares, which provides potential EPS upside to our fiscal '25 guidance and our midterm goals. We are in active discussions with our Board and LGP on the best way to retire the preferred shares in fiscal '25, and we plan to give further updates as these discussions progress. The third takeaway is that we believe Signet will see sequential same-store sales improvement throughout fiscal '25. One component is the return of engagements in the U.S. We saw industry engagement unit sales consistent with our expectations in the fourth quarter. And after a deceleration in January and early February, we saw notable improvement in the back half of February and March. The milestones that we track show that the number of couples that have experienced more than 25 of the engagement milestones has increased 500 basis points since early 2023. We believe engagements in the U.S. should increase this year between 5% and 10%. This is a clear opportunity to attract new customers. Signet provides tenured knowledge, well-known brands, consistent newness and a full range of customization options. We believe the shape of this year's engagement growth will have a more material impact in the second half of the year, as customers continue to plan the majority of engagements around October through February. Our customer data platform now includes 17 million customers known to be in dating relationships, and we use this data to provide personalized marketing and education to attract engagement customers. After a customer's engagement ring sale, we look to build lifelong relationships as we'll be there for birthdays, anniversaries and milestone occasions as well as providing the services to keep their jewelry collection protected and looking its best. We will also continue to build brand equity, utilizing scale capabilities that will win new customers, including targeted personalized marketing. In fact, recently, we tested 28-day sprints of personalized marketing among Kay customers, and early results are driving a more than 10% revenue lift versus a control group. Over the last 6 years, we got smaller through fleet optimization to set ourselves up to get bigger. In fiscal '25, we will invest to grow strategically in markets where we see great returns, including a hometown market strategy for Kay, and to improve the shopping experience for our customers within our stores through renovations. We are opening up to 30 new stores and renovating an additional 300 stores in order to drive brand relevance in our highest productivity doors. We've seen strong returns from these early investments of between 15% to 25% IRR. Services, which outperformed merchandise by more than 1,000 basis points for the fourth quarter, remains a key area of growth in fiscal '25. We look to expand services further through B2B services with independents and insurance companies, where we offer exceptional value given our scale and breadth of service offerings. We will also drive post-repair Extended Service Agreement or ESA offerings to customers who did not buy an ESA initially or are seeking repairs on a piece not purchased at Signet. Following our nearly 350 basis points increase in fiscal '24, we continue to see the opportunity to further improve attachment rates in fiscal '25, both in-store and online. Now I'll briefly comment on results so far for fiscal '25. Similar to Christmas, Valentine's Day shoppers were late and highly value motivated. As a result, January and early February trends were quite soft, with comp sales down mid-teens. Since early February, trends have notably improved with same-store sales down mid- to high single digits. The core business continues to outperform with digital banners' operational issues dragging comps down. We believe consumers will remain focused on value this year as they make important trade-offs in their budgets and our ability to bring newness and innovation will be a differentiator. To summarize my comments today, I'd like to reiterate our three key takeaways. First, we delivered on our commitments again this quarter, including non-GAAP EPS above our high guide. Second, we generated over $600 million in pro forma free cash flow for the fourth year in a row. Our flywheel operating model is driving strong free cash conversion, which we're using to return capital to shareholders, improve our balance sheet and invest in our business to drive growth. And third, we believe we will see same-store sales improvement through fiscal '25 with same-store sales turning positive during the back half of the year in our core banners, driven by: engagement recovery; strengthened brand equities; product newness; and new customer acquisition, all while maintaining cost discipline.

Thanks, Gina, and good morning, everyone. Revenue for the quarter was within our expectations at $2.5 billion, down 6% compared to the prior year. Same-store sales were down 9.6%, but improved to the third quarter. This reflects acceleration in Bridal and Fashion categories. While December was our best same-store sales performance of the quarter, January was somewhat below expectations, driven in part by integration issues in our digital banners. Our engagement performance improved several hundred basis points compared to the third quarter, and our overall incidence of engagements were in line with our expectations, excluding digital banners. This quarter included a 53rd week, which generated $103 million in sales and was largely the difference between total sales and same-store sales decline. Our North America ATV for the quarter declined 60 basis points to last year and transactions were down roughly 7%. The relatively flat performance in ATV is notable, compared to the more significant declines in AUR for independent jewelers due to their deep discounting. Our stable AUR during the quarter was driven by our assortment strategy, which provided our customers with several options to trade-up through innovation and value engineering. Services grew 5% to last year, driven by an attachment rate that increased by nearly 350 basis points, reflecting newly implemented offerings like post-repair ESAs as well as point-of-sale prompting for our jewelry consultants. We delivered gross margin of $1.1 billion this quarter or over 43% of sales, with non-GAAP gross margins up 170 basis points to the prior year. Merchandise margin also grew by 140 basis points on a non-GAAP basis, led by services and an increased mix in newness and LCD merchandise. Turning to SG&A. Our non-GAAP expense of $670 million reflects 26.8% of sales, 70 basis points higher than last year as we deleveraged somewhat against fixed costs. However, this reflects meaningful improvement to prior quarters with cost savings near the high-end of our expectations. Our non-GAAP operating income was $410 million for the quarter or 16.4% of sales, delivering $5 million more than the prior year on lower revenue. Non-GAAP EPS for the quarter was $6.73 per diluted share, up 22% from the prior year on higher operating income, higher net interest income and a lower effective tax rate. For the full year, we delivered $7.2 billion in sales, reflecting an 11.6% decline in same-store sales with gross margin of $2.8 billion or more than 39% of sales. This is up 30 basis points from fiscal '23 on a non-GAAP basis. Reflecting a merchandise margin increase of 110 basis points, partially offset by deleveraging of fixed costs on a lower sales base. Non-GAAP SG&A for the year of $2.2 billion or 30.4% of sales was up to last year, largely due to the fixed cost portion of labor. Non-GAAP operating income for the year was $643 million and resulted in a $10.37 non-GAAP diluted earnings per share with EPS above the high-end of our expectations. Our GAAP EPS of $15.01 was positively impacted by a $263 million nonrecurring benefit or $4.88 per share from the impact of new tax legislation in Bermuda, which resulted in the recognition of a deferred tax asset in Q4. Due to this new legislation, beginning in fiscal '26 or a year from now, our effective tax rate on income in Bermuda will increase to a minimum of 15%, which is expected to increase our overall effective tax rate nearly 4%. This $263 million benefit also provides an offsetting impact on cash taxes owed over the next 10 years or roughly $26 million a year. This means our cash tax rate will be well below our effective tax rate. Our ending inventory of $1.9 billion was down 10% to the prior year, a larger reduction than year-over-year sales and down more than $600 million compared to pre-pandemic, excluding acquisitions; and including memo inventory, it was down more than $1 billion in our core businesses. We continue to focus on life cycle management, taking markdowns earlier when merchandise performance does not meet our turn expectations, in order to capture more margin before SKUs reach clearance. We continue to see opportunity in optimizing our inventory, particularly as we lean into AI to drive assortments at the store level. These efficiencies translate directly to cash flow and higher margins. We ended the year with inventory turns of 1.4x, in line with the prior year. Turning to leverage. Gross debt to adjusted EBITDA was 2.3x with net debt to adjusted EBITDA of negative 0.7x as our cash of $1.4 billion exceeded approximately $800 million of outstanding debt. We continue to grow confidence in our ability to generate free cash flow each year, driven by our flexible operating model and continued efficiencies. As we look forward into the year and the maturities ahead of us, we are reducing our gross debt to adjusted EBITDA leverage target down by 0.25 turns to be at or below 2.5x. And we are introducing a debt-to-adjusted EBITDA target of at or below 1.25x, which would imply net debt to adjusted EBITDA below 0.5x at the end of fiscal '25. This year, our unsecured notes mature in June and our convertible preferred shares mature in November. Our fortress balance sheet and strong liquidity and cash conversion allow us to address these maturities in full, and further debt issuances would be done opportunistically. Turning to real estate. Last year, we closed 114 locations, mostly comprised of lower performing mall locations and U.K. stores. We ended the year with roughly 2,700 locations across our banners down more than 500 stores from fiscal '20. Our end store count also reflects the sale in November of 15 prestige watch locations in the U.K., for an accretive multiple to continue our focus on our core higher-margin jewelry business, as well as 2 additional locations subsequent to that transaction, including 1 in February. Based on the strong performances we've seen up-tiering Jared, Diamonds Direct new stores, and the Kay new and remodeled stores, we plan to increase our investments in our fleet. In total, we expect approximately $160 million to $180 million in capital expenditures this year, including 20 to 30 new stores and renovating approximately 300 locations, including 200 in Kay stores, 50 Jared locations, and 6 Diamonds Direct stores to enhance the customer experience. We also expect to invest $40 million to $50 million in digital and technology in support of our consumers and team member experiences. Turning to guidance. Looking to the first quarter, we expect total sales in the range of $1.47 billion to $1.53 billion, with same-store sales down between 11% and 7%, including a 2-point negative impact from our digital banner issues mentioned earlier. As a result of modest fleet optimization and luxury watch store sales, returning to a 52-week fiscal year and as a generally popular investor request, we are reintroducing same-store sales guidance. Early Valentine's Day shopping was down mid-teens, consistent with January performance. Since Valentine's Day, same-store sales have improved notably up 2 to 3 points to the fourth quarter and a further point when excluding our digital banners. We forecast that the number of engagements in the U.S. will be down low- to mid-single digits in the first quarter of the year. We expect non-GAAP operating income between $40 million and $60 million. We are also introducing adjusted EBITDA guidance this year upon request from investors. In the first quarter, we expect adjusted EBITDA between $87 million to $107 million. We expect flat-to-modest improvement in gross margins in the first quarter, while deleveraging in SG&A on lower same-store sales. For the year, we expect fiscal '25 total sales in the range of $6.66 billion to $7.02 billion. We expect a range of down 4.5% to up 0.5% for same-store sales this year, including a 1.5% to 2% drag from our digital banners and an approximately negative 0.5% impact from the negative halo of our Ernest Jones banner in the U.K. We believe our core banners will continue to outperform with same-store sales approximately flat at the midpoint for the year, we expect to resolve the issues in our digital banners in the second half of the year, but it is not reflected as such in guidance. These issues are solely related to the James Allen and Blue Nile integration and are not tied to, nor are they impacting the e-commerce channels of our core banners, which are performing well. We believe consumers will continue to be impacted by the elevated inflation over the last 2 years in fiscal '25. Consumers continue to focus on value in the current environment, and our new items will be focused on price points that appeal to consumers across a variety of demographics. We also anticipate continued elevated promotions among independent jewelers this year. We expect engagement activity to be up 5% to 10% for the U.S. in fiscal '25. As such, we expect our same-store sales to improve as the year progresses. Our guidance range assumes a fairly similar 3-year same-store sales stack in Q1 and for the full year. We are also cycling-off a 53rd week that was over $100 million, $75 million in the U.K. from selling 17 prestige watch locations and closing up to 30 Ernest Jones locations and another $50 million from total closures in FY '24 and fiscal '25. Net of new store openings, we expect our overall net square footage to be flat or to decline slightly. The closures of the Ernest Jones locations in the U.K. is part of our efforts to rightsize that banner and shift sales to digital and other locations. We are also streamlining our overhead in the U.K. and expect to achieve margins in line with the rest of the company within 3 years. Fiscal '25 non-GAAP operating income is expected to be in the range of $590 million to $675 million, with adjusted EBITDA between $780 million to $865 million, with modest non-GAAP operating margin expansion. This reflects cost savings of $150 million to $180 million this year from a new 3-year initiative to drive $350 million in costs out of the system, leveraging AI, streamlining noncustomer-facing expenses in addition to increasing sourcing efficiency. We expect cost savings to be more impactful in the second half of the year as we see the benefit from sourcing savings and inventory turn. We expect modest deleverage in SG&A from the reset of incentive compensation and investments in e-commerce channels and customer and team member experiences, offset by gross margin expansion. Full year non-GAAP diluted EPS is expected to be in the range of $9.08 to $10.48. Importantly, our EPS estimates for the year assume the dilution of the preferred shares for the entire fiscal year. As I close my comments today, I want to thank our talented Signet team members for their passion for our millions of new and loyal customers and their dedication to ongoing consumer-inspired innovation resulting in an unrivaled experience in our industry. Our team is why we have excellent Net Promoter Scores, both online and in our stores.

Your first question comes from Paul Lejuez from Citigroup.

Brandon Cheatham on for Paul. I wanted to dig in on what you're seeing on the engagement side to update your forecast. Now, you're looking for a 5% to 10% increase for the year versus what I think was a 10% increase previously. Just wondering, can you walk us through the progression as the year continues? And does that assume an acceleration in 4Q? Does 4Q end up higher than 10% to get there?

Brandon, thanks for your questions. So we're seeing engagements recover as we expected they would. We saw the trough happen in Q4, and we're expecting, as you'll recall, a gradual and incremental improvement in engagement trends over the next 3 years. So it takes a bit to recover. We've also continued to see progress on the 45 milestones that we track. We have statistically significant data that shows us that once a couple has experienced a certain number of the proprietary milestones that we've identified, and that number being 25, they're much more likely; statistically, significantly and likely, in fact, to get engaged, and that's up 500 basis points versus just a year ago. So we expect engagements to strengthen as fiscal year '25 progresses. We think it's 5% on the low side of our guide, 10% on the high side of our guide for the fiscal year, but that will naturally be back-weighted. And that has to do with both the gradual recovery as well as the seasonality of engagements. More couples tend to get engaged in the October to February time frame. So it will likely be more back-weighted.

Got it. And I was wondering, could you quantify the ticket and transactions that you saw, particularly in the first half of February, and where those metrics are now? And did you see pressure in any particular segment, Bridal or Fashion? And is there incremental pressure that you weren't expecting on the high end?

So I think if we go back to Q4 and we don't quantify all the tickets. But one of the things that we were proud of how our team executed in the fourth quarter was maintaining a stable average transaction value, despite significant discounting from independent jewelers, especially on lab-created, that was in Bridal and in Fashion. So that did put some pressure on average transaction value, but because we brought so much newness, which sold through so well and we value engineered that newness to provide an exceptional value, we were able to hold. Those trends of independent deep discounting have pretty much continued into the first quarter, I would say. And I think what we saw in the jewelry category in January and early February was pretty similar to the rest of retail. It was a low traffic time and a challenged consumer.

Your next question comes from the line of Lorraine Hutchinson from Bank of America.

I just wanted to follow-up on the engagement discussion. You did talk about unit sales consistent with expectations for engagement in the fourth quarter. Was there some softness in pricing versus your expectations? And then, how has that competitive landscape been included in the guidance for this coming year?

The reason we focus on units is that we're considering the number of couples getting engaged, which has been recovering consistently as we expected. Similar to my response to Brandon, we've experienced some pressure on average transaction value in both Bridal and Fashion, mainly due to deep discounting from independent jewelers. They didn't predict the engagement downturn as accurately as we did, leading to overstocking throughout the year. They are still working through that inventory in the fourth quarter, which has created pressure on sales. While we've seen their continued discounting in the first quarter, I expect inventories to improve somewhat, which could be beneficial. Additionally, consumers are becoming more aware that prices for lab-created diamonds are decreasing. While this is advantageous for Fashion jewelry, there is something very unique about a natural diamond, and we believe this could provide support for natural diamonds in the upcoming year.

Can you share your insights on the competitive landscape in the non-Bridal business and your expectations for this year?

Sure. So the part of the category overall that has been performing the best is low-priced Fashion jewelry. So Banter, our value banner competes in that space, H. Samuel and the U.K. competes in that space. But overall, we have reasonably low exposure to very low-priced Fashion jewelry. The place where we think we have an opportunity, in particular, is in gold, where we have some sourcing advantages and direct partnerships with factories to really value engineer jewelry, also bringing lab-created into Fashion proved to be a good strategy for us over the holidays. And our newness was well positioned to trade customers up into price points that we do uniquely carry over the holidays. We have a 700 basis point improvement in how our new items sold through over holiday by pursuing that strategy.

I would just add on to that, the idea of newness and the green shoots that we saw on holiday, particularly in Fashion and in our new Bridal offerings. Our intention and included within the guidance that we've given for FY '25 is a higher complement of newness, based on the run rate and testing that we saw in the holiday selling period, Lorraine.

Your next question comes from the line of Ike Boruchow from Wells Fargo.

I have a couple of questions, possibly for Joan. First, regarding the gross margin, you mentioned it was slightly up in the first quarter despite a negative comparison, which is quite impressive. Could you explain the challenges and the various factors affecting gross margin in the first quarter and how you managed to maintain that?

Thank you for the question, Ike. In the first quarter, we have continued to achieve sourcing savings and efficiencies through collaboration with our vendors and sourcing team. A significant factor in improving margins is introducing new products. We expect that margin improvement will be more pronounced in the latter half of the year as part of our cost-saving initiatives, driven by new product offerings that will generate turnover. Sourcing presents a major opportunity for us. Additionally, our effective inventory management has been commendable, with our teams successfully aligning inventory levels with demand and market trends. We are not over-inventoried, especially in terms of clearance or sell-down, allowing us to maintain a leaner inventory before products reach that stage. So, inventory management is another crucial aspect. While we are navigating promotional discounting within the industry, we have strategically targeted pricing for specific areas of our product offering, rather than applying broad discounts or promotions. These strategies are helping us enhance our gross margin opportunities in the first quarter and for fiscal year 2025.

And then, Joan, you had mentioned you expect margin improvement to be more 2H weighted. Is that just operating margin? Are you saying that gross margins could also improve year-over-year as you move into the back half?

Gross margin. Yes, gross margin will improve. The sourcing savings as we roll or turn our inventory, last year it was 1.4x and sourcing newness comes in and the sell-through largely will occur more back half on the new items.

Got it. Regarding the gross margin, I believe your total revenue plan is expected to decline by 2 to 7. Can you provide a high-level expectation for your services? I assume you will exceed that figure, but is there a specific number you can share for the year that you are planning?

Not specifically on services, but what I would tell you is we continue to implement new tools and opportunities within the services business. We mentioned a couple on the call that are wraparound opportunities. So POS prompts for our jewelry consultants is rolled out to all of our banners as well as post-repair ESA, which is something that we've been ramping up and we see traction. Our stores team has done a great job in training and really understanding the benefit to our customer for those services as a one-stop for all of their jewelry needs. So we continue to evolve that. Our attachment rates as another note on that to consider, Ike, is attachment rates to Bridal are much higher than Fashion, they're almost double. And as with the return to engagements and as we see that scale up and progress throughout the year, we would expect the services business to respond similarly as well. So a lot of great opportunity in services for us.

It seems that service will perform better, but you're not going to specify the exact amount you're planning to do that?

No. We don't quantify the exact, but we expect it to continue to grow. And it did outperform our merchandise by 1,000 bps in the fourth quarter.

Great point.

Understood. Sorry, I have one last question. Regarding the tax rate comment, Joan, you mentioned an increase of about 3 or 4 points. Is that factored into the new 19 to 20 range you've set for this year? Or should we expect something like 23% to 24% in the following years?

Thank you for the clarification, Ike. The new tax legislation in Bermuda will impact fiscal year 2026, not fiscal year 2025. There was no impact in fiscal year 2025. We recorded the deferred tax benefit at the end of the year, which will influence the tax rate next year. This is also linked to a cash tax benefit that will be realized progressively over the next 10 years.

Got it. So '23, '24 as the go forward based on what you said earlier, right?

FY '26.

Your next question comes from the line of Mauricio Serna from UBS.

I would like to get an understanding of your views on the overall growth of the jewelry industry, particularly in relation to fashion and the non-engagement segment of bridal. How do you foresee industry growth for the year? Additionally, could you provide more details regarding the digital aspect of the business? Can you explain what issues you are encountering there? If I remember correctly, you anticipated some benefits in the fourth quarter from the integration of both banners. Finally, based on your comments regarding Valentine's and the trends since then, is there a way to understand the current quarter-to-date comparisons?

I will begin by addressing your questions, and then Joan can add her insights. Regarding our expectations for this year, we anticipate that the jewelry category will decline by mid-single digits. However, we believe we can gain market share in this environment, especially in the Bridal segment. Consumers are currently very value-conscious, a trend we observed during Q4 and Valentine's Day, with many shoppers focused on finding good deals. Our successful strategy in Q4 involved three key elements: first, utilizing our leading brand portfolio to attract customers across various price ranges; second, introducing new products and innovations, as consumers remain interested in unique items even in challenging economic times. We achieve this by providing appealing new offerings without resorting to heavy discounting. Lastly, we are well-positioned to succeed as engagement rates rise, thanks to our experienced store teams and reputable brands. Trust plays a significant role in engagement ring purchases, and we are leveraging proprietary data for our advantage. Our customer data platform currently includes 17 million individuals in dating relationships, of which we expect about 2.5 million to become engaged in the coming year. This means we have ample potential to engage with those pre-engagement customers ahead of time. That summarizes our outlook for the market and our belief in our ability to outperform the industry under these conditions. Your second question was about digital banners. And so, the first thing I want to start with is just emphasizing that the issues that we saw were not to do with our core e-commerce business. It was Blue Nile and James Allen as a result of the integration. Our core e-com business is performing well and the investments that we've put in place have led us to hit an all-time high in Net Promoter Score in digital. What we saw with James Allen and Blue Nile were some operational issues related to the replatforming of the business. Frankly, we thought we had it all wired and that the pipes were connected well, but they weren't. And we had, unfortunately, some problems integrating Blue Nile with its production partners, which caused us to see a dip in conversion with much longer fulfillment times. So, we've got the team very focused on getting this fixed. We believe that we are on a very good path to get these issues resolved. We expect the fixes in place later during the year, although our guidance does not reflect significant improvement in the digital banners. In fact, our fiscal year guidance assumes a 2-point comp drag in total coming from the digital banners.

Then Mauricio, regarding your question about comparable sales, as we noted, early Valentine's Day saw a decline in the mid-teens. After Valentine's Day, we are experiencing a decline in mid- to high single-digit comparable sales. For context, we expect our same-store sales for the first half of FY '25 to decline in the high-single to mid-single digits, followed by the second half seeing a slight decline to low single-digit growth. This provides a clearer picture of the year.

Very helpful. And very lastly, a follow-up on the cost savings initiative. Any way you could break it down like into the 3 big buckets that you mentioned on the sourcing, the AI and others like the noncustomer-facing expenses?

We expect to achieve between $150 million and $180 million in cost savings this year from the overall target of $350 million. About half of this will come from sourcing savings, which we believe will continue into the following years in a similar balance. The other half will derive from AI and noncustomer-facing expenses. Additionally, the sourcing savings are likely to be more weighted towards the second half of the year.

Your next question comes from the line of Jim Sanderson from Northcoast Research.

I wanted to talk a little bit more about the 300 renovations you're planning this year. That's, I think, about 10% of your store fleet. Can you outline the benefits you would expect this year or if this is a later year benefit? And any feedback on what you think the improvement in store sales volumes would be from those remodels?

Thank you, Jim. We’re really enthusiastic about this program. We’ve tested it in our Kay stores, which number around 200 and align with our Hometown strategy. The renovations have provided us with a mid-single-digit sales increase, and we refer to them as renovation lights, indicating they are capital efficient. These renovations include new carpet, LED lighting, and support our sustainability goals. We will also be enhancing services, which is a significant investment that will drive sales growth. Additionally, we’ll improve the lighting in display cases to enhance the shopping experience for our jewelry consultants and customers. Digital displays and basic loss prevention updates will also be included. This approach is capital light but effective in generating sales growth. We have a store in Texas that has undergone these renovations, and we are very pleased with the positive feedback from our team and customers. Regarding Jared stores, we are upgrading the assortment and have tested various layouts and designs within the Jared brand. We're investing in 50 stores, which has resulted in an overall sales increase exceeding 10%. The internal rate of return on this investment is between 18% to 22%. This initiative better aligns with the upgraded assortment, and we are also seeing strong sell-through on the new items. Overall, it represents a comprehensive enhancement for us as we increase inventory for the new Jared assortment.

Are the benefits primarily expected to occur next year? So this isn't really a fiscal 2025 story? Or is part of that included in your expectations?

It's a back half story. We have to invest upfront here, it will take us probably through to the end of the third quarter to address all the stores that we have targeted. So yes, definitely later in the year.

Okay. And you mentioned a comment about some fixed costs slightly higher on a year-over-year basis. I'm just wondering what is your outlook on labor inflation? And not only just inflation, but perhaps investment in labor as you grow going forward?

We are very committed to investing in training, particularly for our store teams, and this is reflected in our guidance and investments for fiscal year 2025. We recognize its importance and believe it's crucial to also train our jewelry consultants in an effective environment so they can return and share that knowledge across all stores. This is a significant investment for us. Our guidance for fiscal year 2025 takes inflation into account. Through our cost savings program, we have worked diligently to mitigate inflation as we present our guidance for the year. We are focused on managing indirect procurement and non-customer-facing costs to protect our marketing initiatives and our employees, while eliminating costs that do not impact customers directly.

Okay. Okay. I have one last question, just talking more broadly about the shift to growth in the engagement category. Is there anything in your data set that helps us understand the opportunity for average transaction value to increase or if the engagement consumer is perhaps more value-oriented or frugal, hoping to invest in other parts of the wedding ceremony or engagement process. Just any feedback there based on what you're looking at?

Engagement customers view their purchase as a long-term commitment. It is often the most significant expenditure that couples make together, symbolizing their lifelong declaration of love. They typically consider their budget based on their income, and they tend to seek options that fit within that budget. Currently, many customers prefer to spend their budget on natural diamonds, believing they will hold their value better over time. Some customers are interested in lab-created diamonds because they can afford a larger carat size within the same budget. However, the majority of customers seek the guidance of our expert jewelry consultants to help them make their decision. Overall, the situation is more about fixed budgets rather than a strong emphasis on value, which contrasts with our Fashion category that tends to vary more with the economic landscape.

You mentioned lab-grown diamonds. Is your assortment, do you expect to expand that assortment in Bridal for lab grown for the back half of the year?

We've been very intent on following the customer and being customer-inspired with our inventory. What I could tell you is that lab-created still remains in the teens percentage of jewelry sales overall. For us, it tends to be a little bit lower than the category, especially given that we're skewing more to Bridal and a little bit less to low-priced Fashion. So we offer it, and it's been a good opportunity for some more value-oriented customers to get more for their limited budget. But I think, we'll continue to be very consumer-inspired on that front and make sure that we have a great offering of any kind of engagement ring or fashion product that customers are looking for across our banner portfolio.

Your next question comes from the line of Dana Telsey from Telsey Advisory Group.

As you think about the Services business, what impact on the merch margin is that having? How you're planning the Services business this year compared to last year? And anything of how you're planning in the first quarter in light of the first quarter guidance. And then when you think about the store openings that you're doing, I think, 20 to 30. Malls, out of malls, where are they going to be? And then you had closed some stores overseas. Is there a further store closing program that you anticipate there?

Thank you, Dana. Services represent a growth opportunity for us. We noted that it outperformed merchandise sales by 1,000 basis points and carries a 20-point higher margin compared to merchandise margins. Therefore, it serves as both a gross margin enhancer and a top line growth contributor. We anticipate it will continue to exceed merchandise sales in Q1 and throughout fiscal '25. The new programs, including the wraparound I mentioned earlier, post-repair ESA, and POS comps, are very engaging for our jewelry consultants, allowing them to ask customers if they would like to learn about the benefits of these warranty and repair packages. I think this will continue to drive growth. Regarding store openings, the 20 to 30 we are planning are primarily off-mall. Our analysis shows that off-mall locations have outperformed our mall stores, and outlet stores have also outperformed mall stores. We are keen on exploring off-mall opportunities further. In the U.K., we have sold some Ernest Jones locations and will be closing additional Ernest Jones stores, focusing more on jewelry, especially in the H. Samuel banner. The new store format in H. Samuel has had a very positive impact on the performance of our U.K. International segment. We will keep monitoring this and invest wisely in H. Samuel while continuing to close Ernest Jones locations.

Thank you. And ladies and gentlemen, this concludes the Q&A portion of today's call. I would like to turn it back to Gina Drosos, Chief Executive Officer, for closing comments.

In closing, I'd like to take a moment to thank Todd Stitzer for his service as Chair to Signet's Board of Directors. Todd will complete his 12-year term in June and will roll off our Board in accordance with Signet's Board tenure requirements. I know, I speak for the entire Board when I say we are so grateful for Todd's leadership and vision. We have transformed Signet into a data-driven, digitally-focused and consumer-inspired company. And Todd's trusted guidance, unwavering support and smart counsel have been an invaluable asset. Helen McCluskey will take over as Chair in the coming months. As part of the Board, Helen has already added great value to Signet, and we look forward to continuing to tap into her deep background in retail and understanding of the consumer. Thank you, everyone, for joining. We look forward to speaking to you all again in June.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.