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Shawn Woodhull

SIG AT A GLANCE

P/E ► -0.570   EV/EBITDA ► 1.48 VERY LOW ROA ► -12.1% AVG ROE ► -23.1% AVG Debt to Equity ► 0.835 LOW Current Ratio ► 3.27 HIGH Interest Coverage Ratio ► 11.0 HIGH

 

 

 

 

 

 

Signet Group plc (NYSE: SIG) is the world's largest specialty jewelry retailer with over $3.6 billion in sales in fiscal 2007.^[1] The company operates in the United Kingdom and the United States, where it owns jewelry chains such as Kay Jewelers and JB Robins Jewelers. In 2007, Signet's sales were split geographically 74% and 26% between the U.S. and the U.K., respectively^[2]. This gives the company a small source of revenue from abroad, but not enough to effectively protect it from downturns in the U.S. economy.

Despite being the world's largest specialty jeweler, Signet only earned a 10.9% gross margin, considerably lower than some of its competitors, including Tiffany's, which had a 55.5% gross margin in 2007^[3]. This is because of the relatively low price points Signet sets for its jewelry, placing it in the "affordable luxury" space. The company's goal is to provide value and pass along cost savings to shoppers, which appeals to the middle-income consumer. Signet's low gross margin is also partially because the company buys polished diamonds directly, rather than finishing rough diamonds in-house.

With only about 1/4 of its sales coming from the U.K. Signet's sales are slightly diversified, but not enough to protect it from economic downturns in the U.S. The poor condition of the U.S. economy in late 2007 took its toll on Signet's U.S. sales - in the first quarter of fiscal 2008, same store sales fell 4.7% for Signet's U.S. operations^[4], due to a decrease in consumers' disposable income and subsequent cutback on luxury consumption. However, while the U.S. economy struggles, Signet does make up some of these losses in its U.K. business; U.K. sales grew 5.1% on net as same store sales rose 5.3% in the first quarter^[5]. Additionally, Signet's U.K. sales have been augmented by the appreciation of the British pound relative to the American dollar.

Despite the short-term advantages of the dollar's weakness, since the end of 2006 Signet has been consolidating its operations in the U.K. Its store count has fallen from 581 at the end of 2006 to 559 as of the first quarter of FY08^[6]. The closings have largely been focused on the under-performing H. Samuel chain which has a 5 year CAGR of -1.4%^[7].

Business Overview

Signet Group is a U.K. based specialty jeweler operating multiple chains of jewelry retail stores in the United Kingdom and the United States. In the U.S. Signet operates Kay Jewelers and Jared The Galleria of Jewelry as well as other regional chains such as JB Robinson Jewelers, Marks & Morgan Jewelers and Belden Jewelers^[8]. In the U.K. Signet operates H. Samuel The Jeweller, Ernest Jones The Diamond & Watch Specialist, as well as a few other regional stores. Signet is an "affordable luxury" retailer as it targets middle-income consumers by providing jewelry at lower price points than jewelers like Tiffany. Although these lower prices open up Signet's stores to a wider range of customers, it keeps Signet's profit margins low and leaves the company exposed in times of economic distress when middle-income consumers cut back on unnecessary spending.

In fiscal 2007, 74% of Signet's sales came from its U.S. operations, with the remaining 26% coming from the United Kingdom^[10]. The U.K. business gives Signet a substantial source of revenue from abroad, but is not large enough to help the company continue to grow in times when the U.S. economy falters. This has become evident in early 2008 as sales have slumped in the U.S., and despite growing U.K. sales the overall business is struggling.

Kay Jewelers is Signet's largest single brand, responsible for 41% of sales in fiscal 2007^[11]. As of the end of the first quarter of FY08 the company operated 1,966 stores, up from 1,962 at the end of 2007^[12].

Possible Change in Primary Listing

As of June 2008, Signet is headquartered in England, but is listed on the London Stock Exchange as well as the New York Stock Exchange as an ADR. Despite being a British company, Signet reports its results in American dollars and is contemplating moving its headquarters to Bermuda and making the NYSE the primary listing for the company's stock.

Trends and Forces

U.S. Economic Downturn Hurting "Affordable Luxury" Jewelry Sales

Because 75% of Signet's sales come from their U.S. operations, the company is heavily dependent upon the health of the U.S. economy. Jewelry is a luxury that consumers will avoid in times when disposable income is low, such as in times of recessions or shorter economic downturns. This is especially true of "affordable luxury" retailers such as Signet which appeal to consumers with sensitive budgets by offering jewelry at lower price points than some of their competitors (Signet's most expensive chain, Jared, has an average unit price of $747 compared with prices above $3,000 for nearly half of the jewelry sold by Tiffany). Since late 2007, the domestic economy has been struggling, with many analysts and government officials suggesting that the U.S. will slip or has already slipped into a recession sometime in 2008. Signet's U.S. operations have been hit by these conditions, as U.S. same store sales fell 1.7% in 2007^[17] and 4.7% in the first quarter of 2008^[18]. Although Signet is better-equipped to deal with this downturn than some of its U.S.-only competitors, Signet's U.K. business is a minority of its business. In the first quarter of 2008 U.K. same store sales grew 5.3% (helped by the appreciation of the British pound) barely offsetting the problems in the U.S. as Signet posted a 1.0% increase in company-wide net sales during the quarter while same store sales on a companywide basis fell 2.5%^[19].

Strengthening the U.K. Segment by Downsizing H. Samuel

Since 2002 sales at one of Signet's major U.K. operations, H. Samuel, have fallen from about $550 million to $513 million^[20]. H. Samuel's average unit price in 2007 was only $88 compared with the $360 average price at Signet's other major U.K. operation, Ernest Jones^[21]. Signet has been downsizing the H. Samuel chain, from 418 locations in 2002 to 359 stores at the end of FY07^[22]. As the company shifts its U.K. operations away from the lower-priced H. Samuel chain and towards the higher-priced Ernest Jones stores it is possible that the company could lose market share to other lower-priced competitors.

Increasing Commodities Prices Hurt Signet's Already Small Margins

As an "affordable luxury" jewelry retailer who delivers value to middle-income consumers with mid-range prices, Signet's profit margins are slim. These margins can be seriously diminished by rising prices in commodities that are inputs in jewelry such as gold, silver and other precious metals. Recent trends in the global economy, spurred by rising oil prices and the falling dollar have led to increasing prices in these precious metals which may seriously hurt Signet's gross margin.

Exchange Rates Can Help or Hurt Signet

As 24% of its sales are derived from abroad, exchange rates can play a major role in Signet's performance. As the company doesn't engage in any significant hedging activity against exchange rate risk, the final amount of its sales and profits are greatly exposed to fluctuations in the value of the U.S. dollar. When the dollar falls against the British pound, Signet's U.K. sales become more valuable when translated back into dollars. For example, in the first quarter of 2008 Signet gained 1.0% on U.K. sales due to appreciation of the British pound against the American dollar^[23]. This is a major positive for Signet, as the dollar has been falling in value since late 2007 and a domestic recession would keep exchange rates in favor of companies with foreign sales.

Competition

The jewelry market is split between a range of companies of different sizes, because jewelry-shoppers are less price sensitive than other goods and thus price is not a major factor in a purchase decision, rather important points of differentiation are quality, service and image. Thus, smaller specialized jewelers are able to compete on a store-to-store basis against larger companies such as Signet. As such Signet's competition comes from a variety of sources, including other specialty jewelry retail chains, as well as department stores with jewelry operations and small jewelry shops. Signet's largest direct competitors include Tiffany (TIF) , Zale (ZLC), and Blue Nile (NILE). Tiffany (TIF) is a leading jewelry retailer based in the U.S. with $2.9 billion of sales in 2007; the company is based in the U.S. but over half of its stores are located outside the United States, with strong presences in Europe and Japan. Zales specializes in diamond jewelry and operates mostly mall-based stores as well as mall kiosks only in North America. Blue Nile (NILE) is the largest online-only retailer of certified diamonds and fine jewelry. In addition to these specialty retailers Signet also faces competition from upscale and exclusive retailers such as Bulgari and Cartier.

Speciality Jewelry Retailers:

• Tiffany
• Zale (ZLC)
• Blue Nile (NILE)

Department Stores:

• Saks (SKS)
• Nordstrom (JWN)
• Wal-Mart Stores (WMT)
• J.C. Penney (JCP)
• Macy's Inc. (M)
• Sears Holdings (SHLD)

Note: Market share figures assume $64.7 billion U.S. jewelry retail market.^[28]

References

1. ↑ Signet Group plc (SIG) Annual Report 2007
2. ↑ Signet Group plc (SIG) Annual Report 2007
3. ↑ Tiffany & Co. (TIF) 10-K 2007
4. ↑ Signet Group plc (SIG) First Quarter 2008 Results
5. ↑ Signet Group plc (SIG) First Quarter 2008 Results
6. ↑ Signet Group plc (SIG) First Quarter 2008 Results
7. ↑ Signet Group plc (SIG) Annual Report 2007
8. ↑ Signet Group plc (SIG) Annual Report 2007
9. ↑ Signet Group plc (SIG) Annual Report 2007
10. ↑ Signet Group plc (SIG) Annual Report 2007
11. ↑ Signet Group plc (SIG) Annual Report 2007
12. ↑ Signet Group plc (SIG) First Quarter 2008 Results
13. ↑ Signet Group plc (SIG) Annual Report 2007
14. ↑ Signet Group plc (SIG) Annual Report 2007
15. ↑ Signet Group plc (SIG) Annual Report 2007
16. ↑ Signet Group plc (SIG) Annual Report 2007
17. ↑ Signet Group plc (SIG) Annual Report 2007
18. ↑ Signet Group plc (SIG) First Quarter 2008 Results
19. ↑ Signet Group plc (SIG) First Quarter 2008 Results
20. ↑ Signet Group plc (SIG) Annual Report 2007
21. ↑ Signet Group plc (SIG) Annual Report 2007
22. ↑ Signet Group plc (SIG) Annual Report 2007
23. ↑ Signet Group plc (SIG) First Quarter 2008 Results
24. ↑ Tiffany & Co. (TIF) 10-K 2007
25. ↑ Signet Group plc (SIG) Annual Report 2007
26. ↑ Zale Corporation (ZLC) Annual Report 2007
27. ↑ Blue Nile (NILE) Annual Report 2007
28. ↑ Signet Group plc (SIG) Annual Report 2007, Market Structure, p. 12