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Jewelry Giants
Editorial
Feb 28, 2014 8:00 AM
By Avi Krawitz
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RAPAPORT... Signet Jewelers’ $1.4 billion acquisition of Zale Corporation announced last week signals the emergence of another retail giant in the diamond and jewelry market; not that the two companies were such small fish until now. Along with Tiffany & Co., Signet and Zale represent the top three specialty jewelers in the U.S. by revenue, while the latter two far exceed Tiffany & Co. by store count. The deal, pending regulatory approval, will consolidate Signet’s position as the largest jeweler in the U.S.
The combined company would have had a total revenue of $6.2 billion in 2013. Management estimates that it will hold about 15 percent of the U.S. specialty jewelry market and just over 6 percent of the overall U.S. jewelry retail market once the deal closes. The combined 3,653 stores will be made up of 2,958 in the U.S., 496 in the U.K., and 199 in Canada. Zale brings six brands to the portfolio that would complement, and in many cases compete with, Signet’s 17 brands.
Store closures and combinations are inevitable and one expects Signet to drive efficiencies at the enlarged company. Signet projected an estimated $100 million in savings from synergies by the end of the third full year of combined operation. Analysts at Sterne Agee suggested that estimate was conservative and that total synergies could reach up to $175 million. While sometimes the combined revenue of a merged company falls short of the preceding individual businesses – due to synergies – Sterne Agee projected that Signet’s revenue could grow 4 percent annually to $7.2 billion by 2017.
Globally, the deal now ranks Signet as the world’s second largest jeweler by revenue behind Chow Tai Fook, which generated about $7.4 billion in fiscal year 2013. Signet will outrank the Hong Kong-based company in its store count as Chow Tai Fook has approximately 2,000 points of sale. Furthermore, while Chow Tai Fook’s revenue is largely driven by gold products, which include jewelry, bars and coins, Signet is probably the largest diamond jeweler. By comparison, Tiffany & Co. generated revenue of $1.2 billion in fiscal 2013 from its global operations of about 280 stores.
It’s worth noting that Signet’s current market capitalization of $7.6 billion lags behind Tiffany & Co. at $11.75 billion and Chow Tai Fook’s valuation of around $17.3 billion. Still, while each company has vastly different business models, the deal elevates Signet to a new level in terms of market share.
However, for the diamond trade, the acquisition is about far more than Signet’s share in the jewelry sector. Rather, it enhances the company’s already significant buying power in the polished market that is paralleled by a select few. In fact, only Chow Tai Fook could possibly match or exceed Signet’s requirements in terms of the volume and range of diamonds needed to fill its showcases.
Many diamantaires welcomed the news of the acquisition. They reasoned that while Zale Corp. is a valuable diamond buyer in its own right, there was caution for a long time about its value as an ongoing business. Those apprehensions are dispelled under the Signet umbrella. However, insecurities linger for Zale’s suppliers as Signet consolidates costs in the newly merged company.
The $100 million synergy savings will be achieved via expense reduction and brand cross-selling, but predominantly through supply chain efficiencies. Ron Ristau, Signet’s chief financial officer, estimated that 50 percent of the savings will be due to improved sourcing and purchasing.
“Signet’s manufacturing knowledge, buying processes and proprietary systems, in partnership with Zale’s team, will accelerate and ensure gross margin improvement,” Ristau explained. “We also believe that proprietary inventory management processes will improve inventory utilization and turn[over].” Sterne Agee projected that better sourcing will account for as much as $95 million of its elevated savings estimate for the combined company.
Therefore, the acquisition may initially remove up to $95 million worth of purchases from the market, but it will also immediately strengthen Signet’s buying power. One larger buyer can dictate terms far more effectively than two smaller firms. The total equals a lot more than the sum of the parts when it comes to Signet’s buying power and its relationship with polished diamond suppliers and jewelry wholesalers – even after discounting the $50 to $95 million savings.
One also expects Signet to raise its activity in the rough diamond market and subsequently increase its in-house diamond manufacturing capacity. The company bought a factory in Botswana in November with the objective to “secure additional, reliable and consistent supplies of diamonds for our customers and achieve further efficiencies in the supply chain,” CEO Michael Barnes said at the time. He added that Signet’s suppliers of polished diamonds and diamond jewelry would continue to account for the majority of its diamond sourcing.
That may be so as it would be impossible for Signet to entirely rely on its own capacity for sourcing polished diamonds. However, the two recent acquisitions of Zale and the Botswana factory suggest that Signet will increase its rough sourcing and its diamond manufacturing activity. Doing so makes sense as it will help to improve margins and efficiencies.
By raising its stake in the rough market, Signet joins a powerful list of retailers sourcing rough directly from the mining companies and essentially competing with their own polished suppliers for goods.
Consider that Chow Tai Fook, Chow Sang Sang and Tiffany & Co. all have multiple De Beers sights and are also sourcing from ALROSA and other mining companies. It would hardly be a surprise if Signet applied for a sight in the upcoming De Beers new sight contract negotiations.
The emergence of retail diamantaires has further enabled rough price increases as they can arguably better afford high-priced supply. Retailers can gain higher margins from the rough than their manufacturing counterparts given their access to the consumer market and strong branding. Simultaneously, the retail powerhouses can use their position to garner discounted polished prices at favorable terms. How they buy could influence the market almost as much as how they sell.
As a result, Signet and Chow Tai Fook are now surely the two most powerful players in the diamond market. While many are encouraged by such consolidation in the diamond and diamond jewelry industry, dealers and manufacturers may consequently be squeezed into the shadows of these jewelry giants.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz and on LinkedIn.
This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.diamonds.net/weeklyreport/ or contact your local Rapaport office.
Copyright © 2014 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.
Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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Tags:
Avi Krawitz, Chow Tai Fook, De4 Beers, diamonds, Jewelry, Kay Jewelers, Rapaport, Signet, Tiffany
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