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Signet Takes Hit Following Wells Fargo Report

Jan 8, 2020 4:41 AM   By Rapaport News
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RAPAPORT... Signet Jewelers is losing market share to competitors and faces risks from its credit operations, according to an analyst’s report that sent the retailer’s stock tumbling.

Ike Boruchow, senior analyst at Wells Fargo, raised concerns that consumers were moving away from the US’s largest diamond retailer due to high prices and a lack of product innovation. He also cited the possibility that the companies that bought Signet’s non-prime credit in 2018 would pull out because of lagging returns.

The bank downgraded Signet’s stock to “underweight” from “equal weight,” and slashed its price target. The jeweler’s shares slumped 13% on Thursday when the bank published its views, and have slid another 2.6% since then to close trading on Tuesday at $18.47 per share.

Signet has pledged to improve value for customers and stock more on-trend products as part of its three-year transformation program, Path to Brilliance, which CEO Gina Drosos introduced in 2018 following disappointing sales. Its stores now carry “a more inspiring, broader selection of gifts and competitive price points for value-oriented shoppers,” Drosos said in its third-quarter earnings calls in December.

But price resistance and product staleness both featured prominently in Wells Fargo’s criticism, with excessively high prices the primary reason consumers have been moving away from Signet, especially at its Kay Jewelers and Jared banners, Boruchow noted. Some 68% of customers planned to shop less at a Signet store in the next year compared with the past 12 months, according to a survey of 750 consumers the bank conducted, with 88% citing pricing as the cause.

A lack of new products was the second most common reason, followed by the absence of fashionable items, Boruchow continued. Independent jewelers and department stores were consumers’ preferred alternatives, he said.

This has likely forced Signet to offer more promotions, supporting sales revenue at the expense of margins, Boruchow explained. “A promotionally driven top line is not healthy or sustainable, and leaves us questioning how long this formula can last before the company needs to take more drastic action to remain competitive,” the analyst added.

Concerns about Signet’s 2018 sale of its non-prime credit receivables to CarVal and Castlelake for $445.5 million also contributed to the pessimism. In a filing with the US Securities and Exchange Commission last month, Signet said it expected the yields from those credit accounts to fall below the threshold the jeweler had originally agreed with the two investors, technically giving them the right to terminate the deal.

While CarVal and Castlelake have told Signet they do not intend to pull out, the situation still presents an “incremental tail risk” to Signet, Boruchow said.

In addition, new accounting rules that went into effect on January 1 could reduce profits from credit income, impacting both Signet and Alliance Data Systems Corporation, which bought the jeweler’s prime credit in 2017, Boruchow noted.

Signet declined to comment because of US Securities and Exchange Commission rules preventing it from making public declarations ahead of its holiday sales announcement, which is due on January 16. The company has forecast a decline in same-store sales of 2% to 4% for the fourth fiscal quarter, which includes the holidays.

Image: A Kay Jewelers store in Brooklyn, New York. (Shutterstock)
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Tags: Ike Boruchow, Jared, Jewelry, kay, Kay Jewelers, Rapaport News, retail, Signet, Signet Jewelers, US, wells fargo
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