Summary
Signet's improved first quarter performance may not translate in to stronger performance this fall. Here are just a few of the reasons why.
Analysis
Signet announced that same store sales declined (2.5%) in its first quarter. According to the company strong sales in the UK were off set by a decline in the US market. Earlier, Signet had said its US store for store sales were trending about 4% down. Evidently, that trend continued as the company reported a 4.7% decline for the period in its US stores open at least one year.
In contrast, UK comparable store sales increased 5.7%. The company said the sales increase was due in part to higher traffic and sales productivity from about 133 stores it has renovated over the last 3 years. Just how much of the sales increase can actually be attributed to the format is uncertain. Operating more than 600 stores in the UK, Signet has been introducing one format after another since 1994. The current format is a variation on its US store design which was developed for low product density, mall stores. That’s in contrast to the most H Samuel and many Ernest Jones stores located on High Streets (Main Street in US terms), not malls, with relatively low value, high product density presentations. However, Group CEO, Terry Burman said Signet was outperforming the UK market for now.
Signet’s first quarter 2008 results was an improvement over its weaker 2007 4th quarter sales. Then, US like for like sales declined by about (8.6%), while UK sales declined by about (1.7%). But it’s problematic whether current trends will continue into the all important holiday selling season. Signet, like all US jewelers, is facing a deteriorating economy where escalating energy and food prices have significantly diminished the consumer’s discretionary spending. In addition, Signet raised prices after Valentine’s Day to recoup margin erosion because of higher gold prices. Since the beginning of January gold has increased cumulatively about 14%. Barman also commented the company was pleased with initial results of the price increase.
Keep in mind that Signet is now buying many of its products for what it sold them for at retail three years ago. That kind of commensurate retail price increase has caused ‘sticker shock’ as many products have more than doubled in price. For instance a pair of 14kt gold comfort fit wedding bands that sold for about $300 dollars in 2005 could now sell for $625 on a comparable basis. Sadly, the pricing problem is likely to worsen because of lower interest rates, escalating inflation, and the declining value of the dollar. This means, Signet could not only go into the holiday sales season with much higher prices, but continued margin pressure too.
Another factor, rough diamond prices for commercial quality Indian goods is beginning to increase. Up to now, small diamond sizes typically used popularly priced fashion rings and “Journey” style pendants have either remained flat or moderately declined in value. However, that may be changing. Reductions in production at a number of mines has brought supply more in line with demand causing rough prices to increase for the first time in several years.
Just how much of this increase will be passed on to polished goods is uncertain. But if the supply continues to decline, polished prices for commercial quality diamonds will begin to rise during the 3rd and 4th quarter. This will put additional pressure on Signet’s margins for the fall; in addition to their higher prices.
The fact is Signet's US stores may be overpriced this fall compared to the market. Zale's absolute prices will probably continue to be lower. Smaller independents will certainly lag behind Kay and Jared's price increases, as will many smaller chain stores. Short term, this disparity will likely give the advantage of price to the competition.
Some will say Signet buys better, so it will remain competitive regardless. But price advantages from scale are much different in the fine jewelry industry where products are more labor intensive and materials are by definition rare and in limited supply. Buying advantages, if any, are frequently measured in terms of 50 basis points not 500.
Long term, setting higher prices and limiting discounting should mean Kay and Jared stores should achieve higher average sales, better margins, and a stronger quality/value image too in the market place. But until the economy emerges, Signet's US stores may struggle to achieve top line sales.
