Will Stretched Consumers Drive Signet Sales Lower

Implications: Both Signet's short term sales growth and long term repositioning strategy may be in jeopardy as UK economy contracts.  Here's why.

Analysis: Signet Group Plc recently surprised analysts announcing its UK jewelry division had out performed US brands Kay and Jared jewelers.  However, that trend may change.  According to the RetailBulletin, the US credit crisis is affecting middle class consumers in the UK.  In contrast to the US, United Kingdom monetary policy usually emphasizes savings.  However, low interest rates over the last several years accelerated growth in both credit card and mortgage debt.  Now, higher interest rates and reduced liquidity are reducing consumptions and increasing defaults too. 

According to Richard Blake from Transact member Meridian Money Advice, “Easy money borrowed to pay for extras and luxuries is a big contributor to the problem.”   If true, that fact could be bad news for Signet.  Signet attributed its better performance to a new US styled format that has been retrofitted to about 133 stores.  The question for investors: How will these stores perform if consumer’s liquidity declines to traditional levels?  

Signet’s new format is designed for mall based stores selling high value, low unit volume products.  That’s in contrast to H. Samuel usual merchandise mix offering large assortments of low priced jewelry in a high density arcade presentation.  Clearly, the new concepts are offering fewer low price point skus in gold and gift items in favor of more high priced diamond products.  For instance, Signet has introduced its high priced LEO brand into the UK market.   

To date, the decline in unit sales of low priced point items has been offset by incrementally higher priced diamond sales.  But, with consumer liquidity declining, high priced sales will likely decline too.  Unfortunately, the new US styled format isn’t practical for high density product presentations which means these new stores may appear over priced or under assorted to more price conscious consumers.  

If Signet can’t sustain its high priced sales in its US format stores, it will have to revise its UK real estate strategy too.  Management had signaled that it would not renew some store leases on High Streets where property shape and size restricted the use of the new format. If implemented, it means the company could lose market share to big box competitors for popularly priced jewelry that has traditionally been the back bone if the UK jewelry industry.

Meanwhile, the RetailBulletin also reported that UK retail sales fell (1.5%) on a like for like basis, compared to April 2007.  According to the article, Stephen Robertson, Director General, British Retail Consortium, said: "This is the first time in three years we've had two months in a row of year-on-year falls in like-for-like sales, further evidence that hard-pressed customers are really watching the pounds.”  

With both the US and UK facing higher prices for energy, food, and less credit too, Signet Plc investors could find FY 2008 earnings decline as comparable store sales in both the company’s US and UK divisions decrease in the critical Christmas quarter of 2008.