Signet Jewelers

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Signet Jewelers is a global retailer of diamond jewelry, operating primarily in the US, UK, and Canada, with both physical stores and e-commerce channels.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Signet’s mission is to “Inspire Love” and its purpose is to “Celebrate Life. Express Love.” It aims to make jewelry accessible while maintaining quality standards.

Business Overview

Signet Jewelers operates as a retailer of diamond jewelry with a multi-banner strategy. Its stores and digital presence primarily serve the US, UK, and Canadian markets. The company has multiple store brands as well as an online presence.

Revenue Distribution:

  • North America Segment: This is the largest segment for Signet which includes all stores in the US and Canada, both brick-and-mortar stores and e-commerce activities. Its performance is crucial for Signet’s overall results as it generates a large majority of their sales. In Fiscal 2023, this region accounted for $6.951 billion in sales (around 85% of the total).
  • International Segment: This segment is primarily composed of UK operations. Although it does represent a much smaller portion of the business, the segment accounted for $1.312 billion in sales in Fiscal 2023.
  • Other This segment reflects results from the jewelry outlet business operations. It recorded total revenue of $0.320 billion in Fiscal 2023.

The jewelry industry is marked by several trends:

  • Luxury Goods Demand: The overall global demand for luxury goods, such as jewelry, tends to grow at a healthy rate annually. This growth is fueled primarily by the aspirational nature of jewelry purchases as well as the increasing spending power of high-income customers.
  • E-commerce Expansion: Customers are increasingly comfortable with buying luxury goods online, leading to investments in e-commerce capabilities for jewelry brands.
  • Personalization & Customization: There’s a growing demand from customers for personalized and customized jewelry, which can increase customer loyalty and allows retailers to demand price premiums.
  • Sustainability and Ethical Sourcing: Consumers are increasingly aware and concerned about issues related to conflict diamonds, and have become aware of the impact of mining on the environment. Thus, the demand for ethically sourced and sustainable jewelry is on the rise, forcing manufacturers and retailers to change their practices.

Competitive Landscape

The jewelry retail market is competitive and fragmented, featuring a mix of major chains, independents, and e-commerce platforms. The level of competition makes creating a strong moat for any competitor very hard. Some of Signet’s major competitors include:

  • Other jewelry retailers such as Tiffany & Co., and Blue Nile.
  • Department stores that carry high-quality and luxury jewelry options, such as Nordstrom.
  • E-commerce platforms like Amazon and Etsy.
  • Independent jewelry stores.
  • Global luxury groups that have jewelry divisions or sell directly to consumers in select markets, including LVMH.

What Makes Signet Different?

  • Multi-Banner Strategy: Signet has a multi-brand portfolio which caters to a wider customer base, increasing its potential market share.
  • Omnichannel Approach: Signet’s focus on its omnichannel operations allows it to capture sales from both brick-and-mortar stores and its online presence, which it has improved significantly in recent years.
  • Data Analytics and Customer Insight: Signet is leveraging data and analytics to gain valuable insights into consumer behavior and preferences.
  • Scale of Operations: As a global leader in jewelry, Signet benefits from its large-scale production, sourcing, and distribution capabilities.

Financials

Analyzing Signet’s financials provides a view into its health, profitability, and its challenges, particularly as they relate to earnings per share, returns on invested capital (ROIC), and free cash flow:

  • Revenue: The company posted revenues of $7.88 billion for Fiscal 2023. For the last two quarters, FY23 and FY24 Q1, both had a decrease in revenue due to economic downturn and a decrease in demand. For FY23 this was attributed to the loss of $87 million in sales from store closures and $184 million less in credit sales.
  • Gross Margin: Has generally ranged from around 40% (FY22-23) and the company is making efforts to increase it to around 42%. Gross margins were impacted negatively in fiscal 2023 due to price pressures and higher transportation costs.
  • Operating Margin: In FY23 the operating margin fell to 9.5%, primarily due to higher expenses, restructuring costs, and a decline in gross margins. The company is attempting to keep its operating margin level at around 10-12%.
  • Net Income: In fiscal 2023 net income fell from 788 million to 453 million. This is partly due to a decrease in sales but mainly due to an increase in costs and one-off charges as described above.
  • Cash Flow: In Fiscal 2023 net cash provided by operating activities was $1.2 billion. However, this is down from the $1.6B in 2022. In general cash flows are impacted by changes in sales, inventory, accounts receivable, and payables. It has a decent free cash flow that allows for buybacks, dividends, and debt repayment.
  • ROIC: Signet’s return on invested capital (ROIC), has declined to 11.7% (as of FY23) from a higher rate of around 18% (as of FY22). While the company does have a decent return, its profitability metrics are not as robust as some of its peers.

Recent Problems and Concerns

  • Economic Slowdown: As discretionary spending diminishes, Signet is facing strong pressure from decreased sales. Higher inflation has also forced them to increase prices of some product, further decreasing demand.
  • Supply Chain Issues: Signet’s has continued to be impacted by supply-chain issues, both with raw materials and finished products. Labor costs and geopolitical issues such as the war in Ukraine have also contributed to an increase in input costs.
  • Credit Risk: A large percentage of Signet’s customers use credit to purchase jewelry. As interest rates rise and default rates rise, the company can be impacted. The default rate has increased slightly, but management assures that their models show adequate safety margins.
  • Customer Traffic and Conversion: Foot traffic and conversion rates are down across all stores, particularly in North America. Management has noted that the company has had a hard time attracting new customers, despite having a strong digital sales channel. It is focused on new marketing campaigns and increased investments to correct this.
  • Acquisition Challenges: Signet’s recent acquisition of Blue Nile and other operations has presented some accounting challenges. Management is actively working to resolve any uncertainties. The company also stated that some synergies have not materialized as quickly as expected.
  • Uncertainty with the Russian-Ukraine War: Supply chain bottlenecks and an increase in prices related to raw material are affecting their overall profitability as they are highly concentrated in Russia and Ukraine.

Management Outlook

  • New Growth Strategy: Management is putting an emphasis on driving sales growth by increasing its same store sales, introducing innovative new products, expanding geographically, and improving engagement with customers. A big component of the strategy is focused on digital capabilities, which will help engage new customers and retain old customers.
  • Focusing on Margin Improvements: Management is focused on improving its profit margins through a mix of cost control, supply-chain management, and operational efficiency. Their target is to get gross margins to 42%.
  • Commitment to Shareholders: Signet’s management has been focused on capital allocation and returning value to shareholders. The company is actively buying back shares and pays a quarterly dividend.
  • Diversification in products and demographics: Signet intends to continue diversifying its portfolio of products and also attract new customer segments with different cultural backgrounds and income brackets.
  • Future outlook: Management has acknowledged that current economic conditions are difficult. However, it has a long term outlook and is focused on positioning the company for future growth and has enough flexibility to maneuver through the economic uncertainty.

Moat Rating: 2/5

Signet has “some moat” which is a limited advantage. It does not have the level of competitive advantage that would enable it to consistently outperform its peers over the long term, nor does it have enough structural barriers to entry that it could command significantly higher returns than the industry average.

  • Brand Recognition: Signet has several well-known brands, such as Kay Jewelers, Zales, and Jared. These brands do carry some recognition with consumers, but they are not as distinct as to allow the company a great pricing power or customer loyalty. They are also not exclusive, and there are many retail jewelers that can fulfill the same needs as Signet.
  • Cost Advantages: Signet operates a huge and diversified supply chain and is one of the largest retail jewelry companies in the world. It is also investing in technology, which will bring some advantages in the long run. However, these are not unique or difficult to copy.
  • Switching Costs: This is very weak for Signet because customers can switch to different jewelers at any point and with no extra burden. Additionally, most jewelry items are not custom-made and can be purchased anywhere.
  • Network Effect: This is not applicable for Signet.
  • Intangible assets: This is the largest driver of the company’s moat. The brands they own are valuable, but as described above, they don’t have a differentiated product.

Understandability: 3/5

The business is fairly easy to understand, but it does have elements that require some knowledge. The retail aspect of the business is simple and straightforward. However, understanding its financials is a bit complicated. Analyzing factors such as goodwill, intangible assets, and long-term debt, and assessing its performance given macroeconomic conditions takes some understanding of financial metrics. Management also likes to use new formulas and measurements in its earnings calls, which sometimes adds to the complexity.

Balance Sheet Health: 3/5

Signet has a somewhat healthy balance sheet, but it is not the best.

  • Debt Levels: Debt-to-equity has fluctuated in the last couple of years, it seems that management is leveraging the company to finance both buybacks and operations. While it does have adequate cash on hand, management needs to be wary of the impact that high interest rates and a difficult economic environment can have. They have a long history of having very low debt, but this is shifting as their approach changes. It will be something to keep an eye on.
  • Cash: The cash on hand has generally been pretty good, currently sitting at around $1.5 billion. Cash flow is also very good, but has been volatile recently.
  • Inventory: The company has shown a strong commitment to reducing its inventory, which has been an area of improvement. However, their inventory still remains high and is impacting its working capital.
  • Intangible Assets: Signet has a decent amount of intangible assets, especially goodwill, that was inflated due to several acquisitions in the last few years. These assets are not particularly “bad”, but they should be closely scrutinized and tracked, given the amount of write downs the company has had in the past.
  • Provisions: Signet has a large amount of pension and retirement liabilities which are putting pressure on its balance sheet. Additionally, these are generally not easy to account for and therefore should be closely watched.

In conclusion

Signet Jewelers is a global jewelry retailer that is a decent business with well-known brands. However, there are a few fundamental challenges that need to be resolved to create sustainable value creation. It does have some competitive advantages that protect its profits over the long term, but as mentioned before, they aren’t as strong as some of its peers. Due to its history, volatility, and current issues, Signet is rated as a 3/5 for balance sheet health, with 3 being “relatively healthy”. Management must exercise caution with debt, improve revenue growth, optimize costs, and implement an effective marketing strategy to create long-term value. This would make it a moderately risky choice for investors.