Signet Jewelers (NYSE:SIG) reported second-quarter financial results on Wednesday. The transcript from the company's second-quarter earnings call has been provided below.
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The full earnings call is available at https://events.q4inc.com/attendee/785183090
Summary
Signet Jewelers reported a solid quarter with positive same-store sales comps, marking the fifth out of the last six quarters, and achieved over 35% growth in adjusted EPS.
The company is accelerating brand initiatives, including merchandise refreshes, enhancements to the online and in-store experience, and a modern marketing approach to drive positive holiday comps.
Guidance was raised for the year, reflecting strong performance and the benefits from a new credit agreement with Bread Financial, expected to generate over $1 billion in incremental revenue and operating income over its term.
Operational highlights include successful website redesigns for Jared and Kay, with Zales to follow, and the launch of the Kay brand campaign 'Love All In'.
Management expressed confidence in continuing the momentum, supported by strategic investments and leadership changes, including new presidents for Zales and Blue Nile.
Full Transcript
OPERATOR
Signet Jewelers fiscal year 2027 quarter two earnings. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Rob Balleway, Senior Vice President, Investor Relations and Capital Markets. Please go ahead.
Rob Balleway, Senior Vice President, Investor Relations and Capital Markets
Good morning. Thank you for joining us for today's 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 discussion of the non-GAAP financial measures, as well as the reconciliation 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 J.K.
J.K. Symancyk, Chief Executive Officer
Thanks, Rob, and good morning, everyone. I'd like to start today by thanking our Signet team. Your commitment and execution of Grow Brand Love is inspiring. We're building something great, so thank you for being a part of it. There are three key takeaways I'd like to leave you with today. First, we delivered another solid quarter with positive comps—now five of the last six quarters—with positive comps each month of the quarter, and drove more than 35% adjusted EPS growth.
Second, we are accelerating our key brand initiatives including merchandise refreshes, enhancements to both the online and in-store customer experience, and a more modern, emotionally engaging marketing approach as we look to drive a positive comp over the holiday. Third, we have growing confidence in our ability to deliver this year and we're raising guidance. For the second time we had a solid quarter with comps up over 2%, reflecting high single-digit comp growth at price points over $2,000, including a strong Mother's Day.
Timepieces continued to deliver strong category comp growth, up almost double-digit to last year. We delivered low single-digit comp growth in bridal led by stronger sales performance. Fashion saw 1% comp decline, reflecting decreases in comps at Banter and lower price points in general, largely metal pieces, with nice sales growth at middle to high price points. Beyond top line, we continue to navigate tariffs. This quarter reflects diligent and ongoing work from our team led by Stacy Johnson Williams, who continue to minimize the impact of ongoing tariffs and pursue any and all available refund of direct tariffs previously paid.
They are also actively working with our valued vendor partners to pursue recovery of any applicable indirect IPA tariffs and continue to build on further supply chain opportunities. The speed and agility of our team in their efforts here is a direct reflection of our improved operating model. Looking forward to the second half, we have several initiatives working to differentiate Signet's brands. This week we're introducing an important evolution of Kay, one of the most recognized jewelry brands in the U.S. We're building on Kay's strong foundation with Love All In, a new campaign that brings a fresh expression of love to the Kay experience, from our imagery and language to how and where consumers engage with the brand. The goal of Love All In is to move Kay from an idealized expression of love to something much more real and authentic, while also expanding the occasions and relationships we can celebrate with them. As we mentioned on the last call, we have redesigned the websites for Jared, Kay, and Zales.
We have launched both Kay and Jared, and early results are promising. We expect Zales to launch later this month. I'd encourage you to visit the Jared and Kay sites now. You'll immediately notice better imagery and product presentation that includes more realistic on-model photography to help customers buy with confidence. A simpler navigation structure helps customers get to the right product faster, alongside curated experiences that work to connect inspiration directly to product.
In short, it's a more modern, intuitive, and inspiring shopping experience. This creates a foundation for digital growth by including deeper personalization, agentic discovery, and greater omnichannel connectivity. I'd like to take a moment to thank our digital and technology teams. You delivered ahead of schedule while serving customers without disruption, and you've positioned us well for an important Q4 ahead. Alongside those efforts, we continue to transform our marketing playbook while driving efficiency in spend.
For example, we reduced marketing spend this quarter while driving positive comps and increased social media impressions, including unpaid impressions, with the strongest increase in efficiency at our three largest brands. We also saw those three brands—Kay, Zales, and Jared—increase their customer consideration in the second quarter. Proof points like these give us confidence that stronger storytelling drives better brand engagement. We believe the combination of our marketing playbook and refreshed websites can continue expanding reach and engagement to drive conversion through digital experiences that reinforce brand distinction rather than relying solely on paid traffic. Importantly, ahead of holiday, we've invested in opportunities within our assortment and across price points. We know the consumer is always focused on value across income brackets, and we will leverage the full strength of our portfolio to drive differentiation and serve customers. This means both narrowing and deepening of top performers as well as fortifying trends and fast-following successes. We believe we are well positioned to deliver compelling value throughout the holiday season and have provided more flexibility within our strategic vendor base to react quickly to trends.
Turning to my final takeaway today, we have growing confidence in our ability to deliver this year as we raise guidance for the second time. We are driving consistent results with momentum and focus, taking deliberate actions to strengthen our brands, deepen customer engagement, and create long-term shareholder value. Before I hand things over to Joan, I'd like to formally welcome our new Zales and Blue Nile Presidents. Jamie Siegelman, our new President for Zales and Banter, was most recently with Mattel, serving as Global Head of Dolls, which included leading the American Girl and Barbie lines.
Jamie brings 30 years of experience building and transforming long-standing, well-known brands. Pam Cloud, our new Blue Nile President, joins us with more than 30 years of luxury retail experience, including more than 25 years with Tiffany & Company. A merchant at her core, Pam understands the power of signature and proprietary collections as key to driving brand affinity. With Jamie and Pam rounding out our brand leadership team, we believe we now have the right leaders aligned to the right strategy and the momentum to bring Grow Brand Love to life at scale.
I'm excited for what this team will accomplish as we continue shaping the future of Signet. Summarizing my key takeaways today: first, we delivered another solid quarter with positive comps—now five of the last six quarters—with positive comps each month of the quarter, and drove more than 35% adjusted EPS growth. Second, we are accelerating our key brand initiatives including merchandise refreshes, enhancements to both the online and in-store customer experience, and a more modern, emotionally engaging marketing approach as we look to drive a positive comp over the holiday.
Last, we have growing confidence in our ability to deliver this year, and we're raising guidance for the second time. With that, I'd like to turn it over to Joan.
Joan Hilson, Chief Financial and Strategy Officer
Thanks, J.K., and good morning, everyone. We are pleased to announce that we have proactively signed an early renewal with our primary consumer credit partner, Bread Financial, after a competitive bidding process fueled by the strength of the portfolio. The new agreement extends the partnership an additional seven years through December of 2035. The renewal includes a new profit-sharing agreement that we estimate will generate over $1 billion to Signet in incremental non-comp revenue and operating income over its life.
This includes roughly $80 million of cash expected to be received in the third quarter in conjunction with the signing, which will be recognized ratably over the term. We estimate an operating benefit over the next 36 months between $200 and $250 million, and thereafter the amount should increase through the term of the agreement. We expect between $30 to $40 million of non-comp revenue and gross margin benefit this year, partially offset by higher incentive compensation.
Importantly, there is no loss sharing within the agreement. This is incremental to our current profitability and is still expected to provide significant benefit to Signet even across recessionary scenarios. In addition to the direct financial benefits, the agreement will also bring a number of customer enhancements over the next 12 to 18 months. These will focus on continued tech investments, robust analytics to enable data-driven marketing, as well as an improved customer experience and credit capabilities to support customer needs, including cross-shopping among Signet brands.
Additionally, we plan to offer credit from Bread Financial to Blue Nile customers for the first time ahead of this holiday season. With this announcement, I'd like to thank our financial services team, which is led by Lisa Walker, and also Vince Ciccolini, for their work, which brings tremendous value to shareholders and our customers. Turning to progress on Blue Nile, we are doubling down on what makes Blue Nile differentiated within the Signet portfolio.
Blue Nile has served as a diamond education resource since 1999 and we believe serves as one of the first touch points for consumers on their shopping journey. Building on this foundation, we'll be announcing a new luxury partnership in the coming weeks, reinforcing the rarity and enduring value of natural diamonds while continuing to provide customers with exceptional choice across diamonds and other gemstones. Additionally, we will be transitioning more of the Blue Nile showrooms to full-service stores with an increased availability of on-hand assortment, particularly in the new collections.
While not included in our comp sales, the brand delivered 10% sales growth this quarter. Now turning to the quarter, revenue was $1.5 billion with comp growth of 2.2%, reflective of AUR growth of 6% with growth across channels and amongst categories including bridal, timepieces and services. Adjusted gross margin was roughly $600 million for the quarter, with rate up 70 basis points. Merchandise margin increased 20 basis points, reflecting a core performance in line with expectations and an additional $13 million of refunds of tariffs previously paid above our expectation.
This offset a significant increase in gold costs and a higher effective tariff rate. SG&A expense decreased $12 million to last year, driving a 60 basis point rate improvement from operating model changes and continued spend discipline. Adjusted operating income increased 25% to $107 million, driving 140 basis points of rate expansion. Adjusted diluted EPS increased 36%, reflecting operating income growth, higher interest income and a lower diluted share count.
Now turning to the balance sheet, inventory ended the quarter at $2 billion, down 1% to last year. Even including the impact of gold costs, cash ended the quarter at roughly $525 million, up nearly $250 million to this time last year. Free cash flow year to date improved by more than $10 million to last year, driven by inventory and vendor payable management improving by one week, partially offset by incentive comp payout this year as well as higher cash taxes.
Turning to share repurchases and capital allocation, with the new credit deal, core performance and our outlook, we are stepping up the pace of share repurchases while remaining committed to a strong balance sheet. To this end, this morning we announced a nearly $400 million increase to our share repurchase authorization and a $125 million ASR that we intend to initiate this month. Net, we will have $575 million of authorization remaining and repurchased roughly $325 million year to date.
After the completion of the ASR, combined with dividends, we'll have returned 12% of our recent market cap in the first nine months of this year alone. With last year's free cash flow as a baseline and adding the benefits of the new credit deal, our shares trade at a pro forma yield of nearly 20%. Accordingly, we believe Signet shares remain undervalued and that share repurchases and attractive organic investments remain the best uses of capital to create value for our shareholders.
The incremental cash from the new credit deal will only increase our ability to invest in both of those. To recap, we delivered another quarter with positive comps and margin expansion, leading to 36% adjusted EPS growth. We strengthened our balance sheet, signed a credit agreement adding meaningful value, and are significantly stepping up our return of capital to shareholders while ultimately increasing our adjusted EPS guidance by over 10%. Turning to guidance, we are raising our guidance for the year to reflect first half performance, a modest increase in expectations in the back half of the year, the improved economics from the credit renewal, refund of tariffs previously paid and additional share repurchases. For the full year, we now expect the same-store sales range to be flat to up 2.5%, increasing the low end guide 75 basis points. This reflects AUR and unit trends in the back half similar to those in the first. At the midpoint, we now expect adjusted operating income between $535 and $605 million, up nearly 10% or $50 million at the midpoint. This range includes the benefit from the new credit agreement and $30 million of refunds on tariffs previously paid, inclusive of the $15 million realized in Q2, primarily direct refunds.
Of note, the refund represents less than half of the net headwind from incremental tariffs in the current year. With respect to indirect refunds, we're assuming no material amount in the current year; however, timing on refunds of indirect tariffs paid is still fluid at this time. We expect indirect refunds to benefit fiscal 28 at a similar level or somewhat higher level than direct refunds this year. We are also actively working to accelerate holiday receipts in advance of any potential sanctions on countries that import Russian energy.
As a result of these changes, we now expect GMM expansion for the full year driven by the back half. Turning to SG&A, we expect to show leverage in SG&A for the entirety of the year across the range, with modest deleverage in the second half of the year. The deleverage in the back half reflects $17 to $25 million in higher incentive comp expense as a result of the increase in our guidance and the expected cash from the new credit agreement. In addition to the above, we are also increasing fiscal 27 adjusted EPS guide to include additional share repurchases as well.
In aggregate, our guidance range is increasing by over 10%. Finally, for the year we continue to expect $150 to $180 million in capital expenditures. For the third quarter, our smallest quarter of the year, we expect a same-store sales range of down 1% to up 2% with adjusted operating income between $31 and $48 million. This quarter we expect $7 to $9 million of benefit from refund of tariffs previously paid. We expect benefit in the quarter from the new credit deal beginning in September in the range of $12 to $16 million.
We expect 40% to 50% of the incremental incentive comp expense noted a moment ago to flow into the third quarter, causing modest SG&A deleverage. Before we turn to Q&A, I'd like to thank our team for their continued commitment and the execution of our Grow Brand Love strategy. Operator, now let's go to questions.
OPERATOR
We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one. Again, we ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Randal Konik with Jefferies.
Your line is now open. Please go ahead.
Randal Konik, Analyst at Jefferies
Yeah, thanks a lot, and thanks for taking my questions. I guess, first, J.K., when you think about your conviction and confidence for the back half of the year, what in your strategy or recent strategies you've taken on, and then execution improvement on the team and in different areas of that, are giving you that confidence and conviction to kind of, you know, do well and continue this momentum into the back half of 2026? Thanks.
J.K. Symancyk, Chief Executive Officer
Yeah, Randy, thanks for the question. I think, you know, you answered part of the question the way you asked it, honestly. You know, it starts with consistent performance within the business. You know, the fact that I felt like it's important that we've established credibility and accountability to do what we say we're going to do. And that's a track record this team has built. And that mantra of performing while we transform the business is an important part of what gives me that confidence.
I think the second, this is a busy quarter and it's evidence that we're doing a lot of things to really make the business better, both in the short term and the long term. And, you know, whether that's what we talked about with website redesign, some of the improvements in the core business, the credit deal, the underlying SKU and inventory reduction that we're seeing across the business, despite some of the external factors that might make those moves more challenging.
The improvements we're seeing across merchandise programming, the relaunch of Kay's brand platform, all of the, you know, the strength of holiday plans that we know are coming, that all gives me confidence and I think in particular coming against a backdrop that, you know, has really tested those strategies and the way that our team has navigated that change is the other thing that really helps me have much more faith in our ability to affect our will on the outcome.
And I think that, you know, that's probably the third leg of the stool. It's, we've got the right team in place and, you know, I don't think you accomplish all these things if you don't have the right talent deployed against the right strategy. And, you know, when I look at that and I think about some of the things we talked about that are clearly adding value to the business in this quarter, it really does position us to strike that balance between improving short-term results, but also gives us the fuel to invest in these things that we believe are going to create long-term value for both customers and ultimately shareholders.
Randal Konik, Analyst at Jefferies
Super helpful. And I guess for Joan, you know, one thing that we keep kind of telling people is to buy the math. And that means, you know, look at the cash flows that Signet generates and not just the overall cash flow, but the free cash flow. So maybe kind of give us a reminder on what you think is a base level of free cash flow from an ongoing standpoint to give us some perspective on how you think about the capex needs of the business. You gave us a little math there before.
And then maybe talk about, I guess a couple quarters ago you gave us a change in philosophy in terms of the financial capacity. I think you said, you know, you have like $2 billion financial flexibility, then down at $1.5 billion, meaning you're more aggressive with, you know, the balance sheet, but also cash. Just kind of give a perspective on that — how we should be thinking about that going forward and how, you know, you already kind of put together the ASR.
Sounds like you were aggressive. Just give us a bit more discussion on this topic. Thanks.
Joan Hilson, Chief Financial and Strategy Officer
Well, thank you for the question, Randy, and I would say that the last part of the question, I think we were able to get the intent of the question. You were breaking up a bit, but to start off, the baseline cash. So what I would share with the call here is that we are continuing to drive inventory discipline. One is, you know, you saw that we were down 1% in overall inventory even with gold costs. JK mentioned, you know, inventory and SKU rationalization to really improve the health of our inventory, and so that's a lever we continue to pull.
Spend discipline is another lever that we continue to pull. And then the vendor payables — I noted in my prepared remarks that we have improved the days payable outstanding by one week, which is a meaningful change in our business. So applaud the teams for working with our vendors to really drive that improvement for us. And so we continue to drive free cash flow in a similar fashion while improving inventory and our vendor, you know, terms and agreements that we have.
So continued positivity there. As we look at our principles on capital allocation, we see a floor of liquidity at $1.5 billion. And we consider anything above that — and we couldn't target that at the end of the year — but we consider anything above that to be excess cash within our cash opportunities. Number one, organic investment. JK talked about them. We are investing in the website redesign that is going well, so we'll continue to identify opportunities such as that to continue our organic investments, including our fleet.
We talked about $150 to $180 million of capital investments — that's in our guidance — so that's, we think, an important use of capital. And beyond that, returning excess cash to shareholders is a very high priority for us. You know, we talked about on the call that if you just use the baseline of FY26, it's a pro forma 20% yield. And we believe that we have an attractive value within our stock and continue to prioritize the share buybacks. We also noted that we increased the authorization of our share buyback program and, on the completion of our ASR of $125 million, we'll have $575 million remaining.
So believe that we have a good capital allocation plan and priorities and look forward to continuing to drive that forward.
Randal Konik, Analyst at Jefferies
Thanks, guys.
Joan Hilson, Chief Financial and Strategy Officer
Thank you.
OPERATOR
Your next question comes from the line of Paul Lejue with Citi. Your line is now open. You may now go ahead.
Paul Lejue, Analyst at Citi
Hey, thanks, guys. Curious if you could talk — I think you said you changed something in the back half of your guidance slightly. Just curious if you could talk about what that was. Any comments about third quarter to date? And then on the credit agreement, I think you mentioned, Joan, the $200 to $250 million in profit over the next 36 months. Can you just go into a little bit more detail on how that flows? I think you said $1 billion overall over the life of the agreement.
Can you just talk about the difference between the next 36 months and then what happens beyond? Thanks.
Joan Hilson, Chief Financial and Strategy Officer
Sure. So if we first address the guidance question and the back half, we raised the midpoint of our same store sales guidance for the full year 37.5 basis points, and that's based on the year-to-date performance and slightly higher expectations for the second half. And we raised the low end by 75 basis points — so high end stayed the same; raised the low end 75 bps based on performance. We increased our adjusted EPS guide by 10% for the year, reflecting the year-to-date performance as well as the new credit agreement, the refund of tariffs previously paid, and then the additional share repurchases.
So basically, two-thirds of that raise came from the newer items that I just mentioned and one-third came from the core performance. We're pleased with the performance in margin on the core business. We were at expectations for the core performance in the first half of the year and see the back half as flat to slightly up. So continuing to manage the merchandise margin well — the team's done a good job, as JK noted in his remarks. And then we expect, you know, modest SG&A leverage for the year, including the increase in incentive comp — and that's a $17 to $25 million higher SG&A cost to us.
So feel that with the management of merchandise margin, the management of spend discipline, and really harvesting the benefits of our operating model shift, we've been able to really post up and raise our guidance for the year, and so we're very pleased with that. With respect to the third quarter to date, as you know, we do not comment on intra-quarter performance as part of our practice, but what we can say is that we're currently well within the guidance range provided for the third quarter.
And then with respect to the Bread deal, we are very much pleased with the partnership with the Bread Financial team. And what I was sharing is that the economic benefit over the term of the agreement is greater than $1 billion through 2035, and importantly, that includes consideration for any sort of recessionary activity. And that's important to note that there's no loss sharing within this agreement. So we feel confident in terms of the benefit that we've provided — over $1 billion over the term of the agreement.
It's a quarterly profit sharing, which, you know, is recorded as revenue and incremental operating income. And when you think about the $200 to $250 million that's over 36 months, what that reflects is just the profit sharing on the performance of the portfolio, as well as there are other elements of benefit to Signet economically within that range. So we believe that it's a strong agreement, and importantly, to note that the profit sharing ratios increase over time, so the better the performance of the portfolio, we, you know, continue to generate economic benefit to Signet and the shareholders.
OPERATOR
Your next question comes from the line of Jeff Lick with Stevens Inc. Your line is now open. Please go ahead.
Jeff Lick, Analyst at Stevens Inc.
Congrats on some great results and thanks very much for taking my question. Just to kind of build on what Paul's question was, maybe just thinking about it in a different way. If you just kind of straight-lined it and said, okay, 10 years, $1 billion, so it's $100 million a year — would the right way to be thinking about it be, you know, all else equal, assuming that none of us knew about this agreement, which we didn't until right now, that whatever you thought SIG was going to make, you're now basically just at $100 million of EBITDA on top of that?
Joan Hilson, Chief Financial and Strategy Officer
Yes. What I said in my prepared remarks, Jeff, it's incremental to Signet.
Jeff Lick, Analyst at Stevens Inc.
Okay, great, that's very helpful. And then, JK, one for you. Just curious — an update. Obviously you talked a lot over the last year about the challenges that you had in 4Q last year. You know, you've divided the 4Q into three different shopping season occasions, effectively, or segments, and the inability to have the $150 to $250 price points. Just an update there as you head into that important season on, you know, how confident are you on where things stand, you know, being improved over last year?
J.K. Symancyk, Chief Executive Officer
Yeah, I appreciate the question, Jeff. I'm feeling good as we go into Q4. And I think it's an equal part of addressing those things that we learned about the consumer, but I think we're better positioned as we go into this year not only to meet them where they are — and that's a combination of what we talked about in marketing, website redesign, which I think was a limiting factor for us as we look at some of these last couple of years and that earlier season in November especially.
But we are — with last year we were obviously chasing tariffs and dealing with a pretty volatile inventory environment, and, you know, not just tariffs, gold, all those sorts of things. I think our team did a great job of managing all of that to the tune of not creating a headwind, but it certainly makes merchandise assortment changes a little more challenging. And I think, you know, having a much more stable playing field in front of us and the agility that we picked up, we've been much more intentional going into the quarter around how we leverage all price points across all brands to really put ourselves in a better position to take advantage of the power of the portfolio. And I think that, plus getting some progress behind us in terms of brand distinction, really puts us in a position to show up with a much stronger footprint as we go into Q4 this year.
Jeff Lick, Analyst at Stevens Inc.
And then just a quick housekeeping one for Joan. Joan, I think in your prepared remarks, you made reference to the new tariff rate being higher than the old tariff rate. Did I hear that wrong, or did you just — you know, obviously there's a new tariff rate that will be in place that replaces the IPA tariffs. Is that, in your guys' case, effectively higher, or did I hear that wrong?
Joan Hilson, Chief Financial and Strategy Officer
It's not effectively higher. It's just the way that our inventory turns over time and the impact of the tariff on the turn as it flows through cost of goods. So it's really something that we've been able to manage. What I also did say is that the refund of tariffs previously paid did not fully offset the impact of tariffs in the year. So that's also something that the team was able to hurdle, Jeff, and work through with, you know, just working with the vendors, some price increases, as well as just overall managing the assortment mix to gain the benefits that we've been able to do within the merchandise margin.
Jeff Lick, Analyst at Stevens Inc.
But the tariff impact is really more just a timing issue for tariffs that you probably paid six to nine months ago that just show up in cost.
Joan Hilson, Chief Financial and Strategy Officer
Yeah, that is accurate. Thanks for the clarification.
Jeff Lick, Analyst at Stevens Inc.
Okay. Yeah, thanks very much. And best of luck in Q3 and Q4.
Joan Hilson, Chief Financial and Strategy Officer
Thank you. Thanks, Jeff.
OPERATOR
Your next question comes from the line of Rick Patel with Raymond James. Your line is now open. Please go ahead.
Rick Patel, Analyst at Raymond James
Thanks. Good morning and congrats on all the progress and strong execution. Can you talk about the trajectory of AUR? I think it was 6% in the quarter — it's a modest acceleration versus the prior quarter. What drove that? Was it pricing or sales mix? And how do we think about the durability of AUR growth for the back half? And how do we think about the impact of gold prices from here?
J.K. Symancyk, Chief Executive Officer
Yeah, thanks for the question, Rick. I mean, I think, you know, that the AUR is really influenced probably more by mix than anything across our business. Part of that, I mean, we talked about, you know, strength across the core brands. You know, one of our brands that, you know, isn't seeing that at the same rate is Banter that, you know, drives a healthy amount of unit performance, you know, for our business. And when that is not seeing the unit growth — and I mean, it is seeing some AUR expansion just because of what's going on with gold — that changes what mix looks like within our business.
So there's a little bit of AUR inflation as a function of mix, but it is also reflective of our ability to move higher in price point within our brands. We're intentional around the opportunity we see at higher price points, particularly in natural diamonds — both fashion and bridal — where we see some potential share gain opportunities and I think some assortment balance opportunities across our portfolio. So I do feel like for the near term AUR is going to be a little bit bigger part of the story.
But we also ultimately look for balance between the two and think modest unit growth and a little bit stronger AUR expansion is the right mix for our business for the longer term.
Rick Patel, Analyst at Raymond James
Your prices are below the peak in January but higher than where they were mid-summer. So does that impact — how does that impact the gross margin line as we think about the back half? And is there anything to call out for early fiscal 28 as those costs make their way through the system?
J.K. Symancyk, Chief Executive Officer
No. I mean, you know, this is not a new phenomenon, Rick. The question's a good one, but it's something we've been dealing with for a while. And so, you know, the answer is pretty similar. I think we've thought about, you know, from a design and mix standpoint, how do we, you know, engineer the right product at the right price points for customers and deliver the right value proposition? You know, there's no question anytime we've seen gold price increases pass through to the consumer at an industry level, not just Signet, we see some resistance on units and a little bit of pullback, particularly at lower value price points and gold weights.
But we're also sitting in a position where that is not our biggest input cost. Our biggest input cost is actually diamonds. And so we are fortunate in that, you know, we sit in a market where, on both sides — natural as well as lab-grown — there's opportunity there. The ability to balance that across, you know, the fulsomeness of our portfolio from a finished jewelry standpoint really does position us. So our guide reflects all of that — it has — and our team has really been navigating this environment now for, you know, you talk about those five of the last six quarters.
You know that has been true in all of those quarters on some level. So we're well positioned to be able to navigate that.
Rick Patel, Analyst at Raymond James
Great. Thanks very much.
J.K. Symancyk, Chief Executive Officer
Yeah, appreciate it. Thank you for the question.
OPERATOR
Your next question comes from the line of Ike Boruchow with Wells Fargo. Your line is now open. Please go ahead.
Ike Boruchow, Analyst at Wells Fargo
Hey, good morning everyone. Joan, thanks for all the help on the credit agreement and the benefits. Just at a super simplistic level, is the benefit expected to, over the next three years, effectively take EBIT up 50% outside of any organic benefits to the business, or would you expect some of those dollars to be reinvested — or a good portion of those dollars to be reinvested — into the business somehow? I'm just asking because it's a meaningful impact to your EBIT, and so I'm just kind of curious how we should think about the models building over the next three years because of it.
Joan Hilson, Chief Financial and Strategy Officer
So it's a great question. And as we navigate through to next year, we will, you know, evaluate what reinvestment is required along with, you know, continued spend discipline management and, you know, other actions that we would take to continue to drive margin expansion for the business. But we would expect to see a majority of, you know, a flow-through to an economic benefit. But remember, as I had mentioned, that the rate of sharing increases over time.
So it's not something that you should think about on a straight-line basis.
Ike Boruchow, Analyst at Wells Fargo
Right. I guess if you have multi-year line of sight in that capacity — it's almost similar to Randy's question — do you look at your stock and consider, obviously you're being aggressive on the buyback with your cash, but do you consider adding leverage to take advantage of that scenario, given it seems like there's a lot of profit growth that the market doesn't seem to be giving you credit for at this point?
Joan Hilson, Chief Financial and Strategy Officer
At this stage, we're not considering adding leverage for that. But what we are considering is, as we look at our capital allocation priorities, you know, we believe that the deal that is on the table enables us to truly evaluate and prioritize investment as well as return of cash to shareholders in a different light than we've been able to do in the past. And so we are also feeling very strongly about the core performance of our business. So, you know, with those two thoughts in mind, we believe that we have flexibility on where we can invest in our business to actually, you know, work the short term and invest in the long term to continue, you know, sustained improvement in our operating performance.
Ike Boruchow, Analyst at Wells Fargo
Got it. And sorry, the last one, Joan or JK, just on the gross margin line. So exit the refund, gross margins are still down. I think last time we heard from you, you expected them to be flat and then up in the fourth quarter. Can you just confirm if that's still the plan and — I'm sorry if you gave it earlier, Joan — but just the building blocks of the gross margins, what are the good guys and bad guys in the second quarter that still caused a like-for-like decline year over year?
Joan Hilson, Chief Financial and Strategy Officer
Yeah, so the second quarter actually came in, you know, at our expectations. And so from a core perspective, we expected the margins, you know, the merchandise margins to be down. And so, you know, what we cite there is just continued pressure from tariff and gold costs and really trying to drive through the inventory turn. And as we got into the back half of the year, with the price increases as well as the assortment opportunities that JK mentioned, we've been able to look at flat to slightly up in the back half of the year in terms of merchandise margin.
And just to add on to that, our promotion rate is consistent in our view of guidance. So it's really about understanding the core components of the product, really optimizing in that regard while delivering product that the customer still sees a value in. And so that's really how we've been managing margin going forward. So flat to slightly up in the back half.
Ike Boruchow, Analyst at Wells Fargo
Thank you.
Joan Hilson, Chief Financial and Strategy Officer
Thanks, Ike.
OPERATOR
Your next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is now open. Please go ahead.
Lorraine Hutchinson, Analyst at Bank of America
Thank you. Good morning. Can you talk a little bit about the performance of fashion ex Banter and then the role that lab-grown is playing in that fashion performance?
J.K. Symancyk, Chief Executive Officer
Yeah, sure. You know, we continue — I think one of the things that is important to note in our breakdown: fashion is pretty much everything that's not bridal. So, you know, on the whole, I would describe it as flattish, with ex Banter — with the same comments we outlined in the call — as driving, you know, more growth on the high end and the middle end. And then, you know, anything that is, you know, sort of in the lower end exposed has been, you know, where there's softness.
That really is all tied to metal. And as we've seen, you know, as we move forward, we have confidence in both plans of what we've got in the pipeline in terms of new receipts, new programs for the holidays, as well as how we're seeing the customer, you know, adjust to the new normals with gold, that we feel strong about that performance within fashion. I mentioned higher price points as an opportunity. We've seen strength there. Natural diamond we continue to see as an opportunity.
Lab-grown diamond fashion — still coming off of a low base, obviously, because so much of fashion has been without stone in our business — but is driving growth for us. And then even though we don't carve it out, timepieces is really a source of strength across the business that has kind of flirted around the double-digit growth line for a couple of years now. So feel good about fashion. I think, you know, as we go into the back half of the year, also more optimistic around some of the plans we have with men's, which has driven growth; color, which I think is an opportunity in our assortment today that we address moving forward. So looking to build on that momentum and really extend it across all price points.
Lorraine Hutchinson, Analyst at Bank of America
Thank you.
J.K. Symancyk, Chief Executive Officer
Yeah, thanks for the question.
OPERATOR
Your next question comes from the line of Mauricio Cerna with UBS. Your line is now open. Please go ahead.
Mauricio Cerna, Analyst at UBS
Great. Good morning. Thanks for taking our questions. I guess just maybe you alluded a little bit to the back half of the year, specifically for Q4. What's the implied comp in your guidance at the low versus the high end? And maybe you also talked a little bit about the promotions. Maybe could you elaborate a little bit more about what you saw in promotions this quarter on a year-over-year basis and what are your expectations for the holiday season?
Thank you.
J.K. Symancyk, Chief Executive Officer
Yeah, let me take promo first. I mean, I think Joan hit it importantly — we've maintained some really good discipline there and I've really been proud of the team's ability to manage that. You know, I think we found ourselves in a position this, you know, last year Q4, where, you know, given the start, we were a little more promotional going into it. I think we are much more confident of not only our base plan and the way we're attacking those kind of three parts of the season, how we're leveraging the strength of the portfolio.
I think we're more coordinated across our efforts going into the holiday this year. But we also have better contingency plans in place. And so I think you'll see that discipline hold. I do believe, just given the state of the consumer, that value is going to be a big story — value being sort of the right quality at the right price and really delivering on it. Not necessarily meaning that in terms of high end or low end, but really how do you set up the consumer to be motivated by value?
And I think we are much more mindful of that. It's reflected in our guide. So when we talk about being well positioned for that — and also going back to previous questions about margin — our expectation that we'll be able to hold and strengthen our margin performance as we go into it is something that is fully contemplated in that guidance. So, you know, that's what we're seeing. We're not seeing any sort of elevated or, you know, crazy promotional response from others in the industry right now.
And so I think we've got the right kind of measured approach to make sure we've got the right value proposition to win during the quarter and also still deliver on the improvements that we're talking about.
Joan Hilson, Chief Financial and Strategy Officer
Mauricio, to your question on the implied guide that the top-line range is implied at minus 2 to plus 3, and it's an increase of approximately 25 basis points on the low end and 60 basis points on the high end reflecting, you know, current performance. And then I would just articulate here that, at the midpoint, we see ample opportunity in the fourth quarter for benefit for us. And where our two- and three-year stacks are, if you do the math, it's, you know, down, you know, low single digit on a two-year and flattish on a three-year.
So believe that there's ample opportunity in that quarter for us to really bring home a nice performance.
Mauricio Cerna, Analyst at UBS
Very helpful. And then just one quick follow-up on the new credit agreement. I guess can you just give, like, a high level — what drives these benefits that you're going to get, you know, what changes versus the previous credit agreement? And just to confirm, that would still imply that you don't have — you're not going to carry the, you know, the credit on your balance sheet. Right. I would assume that kind of continues to be the case.
Joan Hilson, Chief Financial and Strategy Officer
Thank you, thank you for the question. Yeah, the credit portfolio will not be carried on our balance sheet; it is owned by the third-party credit provider. The change in the agreement is, at the highest level, it's a profit-sharing agreement, which we did not have in our previous agreement. We're very pleased to be able to bring that through a competitive bidding process, and it was really on the strength of the portfolio that we have today. And it is something that our partners see as beneficial to both of us.
And so the profit sharing is something that we feel we'll both benefit from. But also the key point in that, Mauricio, is that there is no loss sharing. So, for example, if there was net a loss in the portfolio, that would not impact — we would not share in a loss. And in fact there are other revenue-generating opportunities with the agreement, which are all factored into the view that we gave of over a billion dollars in benefit over the term of the agreement.
So we believe it's a very strong agreement for both parties and one that will really serve our customers well, because we'll be able to continue to bring financial services offerings to them that enable, you know, cross-shopping. And we're launching the Blue Nile credit card for the first time ahead of holiday. We're really pleased with being able to do that in such quick fashion. So overall it was a very favorable outcome, we believe, for both of us.
Mauricio Cerna, Analyst at UBS
Great, thank you so much.
OPERATOR
Your next question comes from the line of John Kipor with Goldman Sachs. Your line is now open. Please go ahead.
John Kipor, Analyst at Goldman Sachs
Thank you guys again. Good morning. Just a quick one on the credit agreement. I was just wondering — you mentioned that the economics improve, the sharing ratios increase over time. I'm just curious if there are, like, provisos or anything you have to accomplish for that to happen, or if it just naturally scales as part of the deal.
Joan Hilson, Chief Financial and Strategy Officer
That is part of the arrangement that we have in our agreement. There's no threshold.
John Kipor, Analyst at Goldman Sachs
Okay. And then a follow-up just on unit growth. You mentioned — you called out in the press release the higher ticket items did very well, high single-digit growth. But you've flagged in the past that the sub-250 or the sub-150 — the cheaper it gets, the harder it gets to sell. I'm just wondering what you saw at that end of the ladder. And my understanding is that the lower-priced items are actually quite high margin. So how does that factor into the margin expectations for the second half of the year?
J.K. Symancyk, Chief Executive Officer
Yeah, no, I appreciate the question. I mean the simple answer is it's all contemplated in the guide. We saw performance in Q2 consistent with what we expected. I'll remind you that a disproportionate amount of our unit performance happens within Banter and our core brands happens online. It is outsized relative to what its contribution to revenue is. And so I won't go through all of those numbers — people are probably tired of hearing me talk about price points and doing that math — but, you know, we have actually taken actions as it relates to new receipts and the holidays that we believe fortify those positions.
We've tested a lot through Q2 and into Q3 that really informs that confidence. And those receipts, as we've talked about on these calls before, all happen to flow through in, really, September. And so it was consistent performance with what we had seen and consistent to what we had guided to. And I would say, you know, one important distinction — I know there was a lot in the script so I'll reiterate this just in case anybody missed it — while we've got confidence in the plans that we have in place to improve it, we also haven't dimensionalized big changes in performance by price point.
As we look at the guide for the back half of the year, that guide reflects the consistency we talked about. On your question around margin, yeah, I mean we see margin rate expansion modestly in the back half of the year. The guide contemplates that and we've been able to manage mix. I think the reality is the percents obviously change and look a little more attractive on some of the lower price point goods, but the contribution of the flow-through on the higher price point is still really good and accretive for our business.
And so, you know, where so much of our business happens is in that mid-tier, and we've seen really good stability there, and so no real call-outs other than what we've talked about before. We continue to see an opportunity for some rate expansion in the back half of the year. As Joan put it, we saw improvement to the trend and saw that margin fall exactly where we thought it would for Q2 once you strip out tariff refunds. So feel good about where we're positioned going into this back half.
John Kipor, Analyst at Goldman Sachs
Nice. Good setup for the back half. Looking forward to it.
J.K. Symancyk, Chief Executive Officer
Yeah. Thank you, John. Appreciate the questions.
OPERATOR
Your next question comes from the line of James Sanderson with North Coast Research. Your line is now open. Please go ahead.
James Sanderson, Analyst at North Coast Research
Hey, congratulations for a great quarter. Just wanted to go back to outlook for the rest of the year. You mentioned e-commerce platform improvements at Jared and at Kay. Wondering if you can take those learnings and help us understand how that might be a benefit to Zales going forward, and if those benefits are part of your guidance already.
J.K. Symancyk, Chief Executive Officer
Sure, Jim, and I'll clarify one thing you said just, you know, to make sure everybody's on the same page. It's not a platform change — it's a user experience redesign. The only reason I think that's important is, obviously, you know, the more you mess with the back end, the more you introduce potential challenges. That's not what we've done with our websites. The back end is functional. The company has invested a lot over the last several years to make the back end sound.
So when you think about that inner working, we're good. Where we had fallen short really was in our — what does the customer see and how do we connect with a customer in a way that they shop most today. And so we've redesigned that front-end experience for our three largest brands — Kay, Zales, Jared. We have launched live already Jared and Kay, and, you know, what we said in the call is early results are promising. I think we didn't give specific numbers because I think it takes more than two or three weeks for us to start reporting on something like that, but we've come out of the gate strong.
We're seeing better engagement from customers. We're seeing average order value increases. We're seeing engagement with our product display pages higher. And all of those things bode well as you move into a critical time period for that to be a bigger part of our business. Importantly, too, we did all this with no negative impact. Our team did a tremendous job of managing all of this on the back end, running in parallel and flipping a switch in a time period where it, frankly, was seamless.
And so I really appreciate the work that went into it. We will launch Zales later this month. That gives us plenty of time to do two things, really: one, to rebuild natural search algorithms and all the things that happen when you start to change content; but two, it also gives us an opportunity to learn where customers are engaging the most and how to best leverage those improvements in a way that we can play offense. And, you know, when it's all said and done — I mean, it may sound soft — but better imagery, realistic on-model presentation, that really does help a customer imagine style and trend differently and how it might fit them.
Much simpler navigation, sort of a shoppable editorial, and the ability to navigate the site and shop in a more modern, intuitive and, frankly, more inspiring content. Part of that redesign is not just the wireframes of the page, but it's updated content, all-new photography, imagery, introduction of live video, better engagement. That really does help whether you're in the discovery phase for something that you know you want or you're shopping for, you know, you're just looking for a thing and you're trying to be inspired.
And so really like what we're seeing from customers so far and think that it obviously is going to help us as we go through the back half of the year.
James Sanderson, Analyst at North Coast Research
All right. Thank you for that. I had one quick follow-up question on the credit agreement. Given the magnitude of the agreement, how does this improve the flow-through profitability you expect out of the business over the next several years?
Joan Hilson, Chief Financial and Strategy Officer
We would expect that — what I mentioned, Jim, earlier is that we view it as incremental to Signet, and that it gives us the opportunity to consider some reinvestment and really bring a better experience to customers with the hope of, you know, continuing to grow the credit portfolio with our partner and, again, include a greater profit sharing for the company. So we see it as a plus, an incremental benefit, and it also provides flexibility for investment.
James Sanderson, Analyst at North Coast Research
So would you expect that to slightly improve that outlook or that target going forward? Is that the right way to look at it?
Joan Hilson, Chief Financial and Strategy Officer
We would expect, yes, our outlook for our operating margin to improve.
James Sanderson, Analyst at North Coast Research
All right. Thank you very much.
Joan Hilson, Chief Financial and Strategy Officer
I'll pass it on. Thanks, Jim.
OPERATOR
There are no further questions at this time. I will now turn the call back to J.K. Symancyk, Chief Executive Officer, for closing remarks.
J.K. Symancyk, Chief Executive Officer
Thank you, and thanks everyone for joining our call today. And thanks once again to our team. We look forward to discussing further detail on our holiday plans and our Grow Brand Love progress in December. Until then, goodbye for now. Thanks.
OPERATOR
This concludes today's call. Thank you for attending. You may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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