Summary
Despite meeting analyst's earnings expectations, Signet's own numbers show they are losing market share to the independent and small regional jewelers. Here's more.
Analysis
Signet Jewelry Ltd. reported earnings of $1.09 per share excluding goodwill impairment charges that matched analyst’s estimates according to Zacks Investment Research analysts Rob Plaza, CFA. Of particular interest was Signet’s hint that early first quarter 2010 sales had improved. Specifically, the company said that US sales for the first seven weeks, including Valentines Day, had deceased about 2.7% versus a decline of about 16% during the November-December 2008 period.
Earlier, Signet said that it had amended its borrowing agreements to ease financial covenants as sales have declined for two consecutive quarters. According to Walker Boyd, Finance Director, "The amended borrowing agreements give Signet greater long-term security in its financing". That combination of the two events propelled Signet’s stock price to $12.68 or about a 69% increase from March 13th to March 26th. Subsequently, the stocks price has retreated as the DOW has declined, closing at $11.65, a decline of about 8.1%.
Over the years, Signet Jewelers has been quick to point out how it has been stealing market share from its competition and this year wasn’t different. For instance, the company published US industry statistics showing that its average sales per store for its Kay brand had grown about 10% between 2002 and 2007, compared to about 8.3% for Gordon, 8.2% for Fred Meyer stores, 4.1% for Zale, and (13.8%) for Helzberg Jewelers. That’s pretty impressive as far as it goes.
However, buried in the numbers was another comparison that wasn’t so impressive! According to Signet’s numbers “Other Jewelers” significantly out performed both Signet’s US average store growth during the period. Specifically, “Other Jewelers” increased average store sales by a whopping 32.7%, while Kay and Jared increased by 23.9% combined (10% Kay, 27% Jared).
While Signet has outperformed many of its large chain competitors, it’s clear independent and small regional jewelry store chains have been the big winners. Stepping back for a moment, that isn’t surprising. Independents and small chains (less than 5 stores) are frequently more competitive than large chains, offer better service, and overall are much closer to the consumer. Other studies suggest that despite the high brand awareness of these big chains, shoppers may be choosing local stores and regional chains much more frequently than typically thought.
One interpretation of these numbers is that a lot of consumers aren’t finding what they looking for in big, monolithic jewelry chains, including Kay and Zale. While Signet has been very good at picking up market share from some of the lesser managed large chains over the last decade, they have fallen behind the majority of the industry competitors nonetheless. That should worry investors for several reasons. First, current trends favor smaller retailers that are closer to the consumer and can offer the real value that today’s discerning consumers demand. Second, malls are becoming less efficient and attract fewer shoppers. Lastly, Terry Burman is retiring and Signet has yet to name his replacement.
That leaves Signet in a leadership vacuum between now and January 29th, 2011 potentially followed by a long learning curve for the next Group CEO. It’s one thing to execute a lengthy succession plan in a business environment that is relatively stable, where competitive advantages are likely to continue into the near future, and when a successor has been identified. It’s quite another to announce the retirement of a CEO two year hence at a time when the industry is restructuring, and with no replacement insight.
Simply put, Signet’s short term US performance depends on the continued improvement in sector sales in combination with the company reducing cash costs by about $100 million over the next two quarters. Loner term, Signet has to put in place a permanent, low cost operating structure and dismantle much of its cookie cutter merchandising paradigm, if its historic growth is to continue. That’s a lot to ask of a CEO that has 640 days left in his tenure.
