Jewelry Turnaround: Is Signet Set to Sparkle?

10/24/2019 5:00 am EST

Focus: CONSUMER

George Putnam

Editor, The Turnaround Letter

Signet Jewelers (SIG) is the world’s largest diamond jewelry retailer, with 3,284 stores and kiosks; its major brands include Kay, Zales, and Jared, notes George Putnam, editor of The Turnaround Letter

For years, Signet was managed as a growth company.  Sales nearly doubled from 2011 to 2015, driven by healthy same store sales, new stores, and acquisitions including the $1.5 billion purchase of Zales in 2014. 

However, easy financing terms from its in-house credit operations fueled much of this growth while masking problems in the neglected core retail business.

The sparkle wore off when same store sales turned negative, credit losses mounted and the leadership faced accusations of widespread discrimination against its female employees. Efforts to outsource the credit operations only seemed to make matters worse.

Eager to resolve its problems, the company replaced its CEO in August 2017 with board member Virginia Drosos, a highly-regarded executive. 

Her three-year turnaround plan, unveiled in March 2018, concentrates on improving Signet’s merchandising and marketing, rationalizing the store base and expense structure, and completing the outsourcing of the credit operations.  Currently about halfway through the plan, the company has made impressive progress but investors remain skeptical. 

Signet’s turnaround plan includes all the right steps and appears likely to succeed.  After years of neglect, the company’s reinvigorated product line along with its clearing-out of dated inventory and better digital marketing should improve sales and margin performance. 

Its e-commerce initiatives have already doubled sales in the past two years to 11.5% of revenues.  Signet is pruning its exposure to weaker regional malls and plans to close 150 stores (about 4.5% of its store-base) this year.  It remains on-track to cut as much as $225 million (net) in costs.

The leadership team has been replaced and the board has been overhauled with new members, including a representative of respected private equity firm Leonard Green, all helping to ensure that the turnaround remains top-of-mind.

Signet shares trade at a modest 4.4x EBITDA. The recently-affirmed dividend offers an appealing 8.7% yield. However, investors shouldn’t count on this as being sacrosanct and any cut would likely pressure the shares.

While the upcoming holiday season, which typically produces close to 40% of annual revenues and 100% of operating profits, will be a major test, we think Signet’s turnaround will restore the luster of this tarnished company.

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