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SIG - Signet Jewelers


ValueMaven
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Stock has fallen tremendously over the past two years...every sell-side analyst loved it over $120, now they all hate it below $40.  Multiple has contracted from 20x FY to less then 9x FY...lots of FCF, but some questionable accounting, which has negatively affected some of their legacy credit business.  New CEO/strong brands and bottom of the barrel expectations...I think this is an interesting situation at this point.  Also company is buying back a decent amount of stock (although they have done so at much higher levels as well)...Let's get the debate started! 

 

Sincerely,

ValueMaven

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Anyone have a link to a price quote on the prefs? Always struggle to find tickers and prices on prefs and now Google finance seems to have gone bye bye.

 

On October 5, 2016 , the Company issued 625,000 preferred shares to Green Equity Investors VI, L.P., Green Equity Investors Side VI, L.P., LGP Associates VI-A

LLC and LGP Associates VI-B LLC, all affiliates of Leonard Green & Partners, L.P., (together, the “Investors”) for an aggregate purchase price of $625.0 million , or $1,000 per share (the “Stated Value”) pursuant to the investment agreement dated August 24, 2016

 

Doesn't look like they're listed.

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There's 3 things holding them back from what I see:

 

[*]Credit book quality (Account Receivables)

[*]Long Term debt

[*]Revenue accounting

 

Looks like point 1 is being solved. Point 2 is being resolved with cash from point 1.

 

That leaves point 3. I need to do more digging but there's questions on revenue recognition timing so I'll need to see if I agree with the bear case.

 

I like jewelers as I think you have to visit a store and view the goods, I don't think the web will hit them too hard. I don't know if Signet has any great brands. I'd like them to be more like a Tiffany's for brand recognition and be more up market, the website points to cheap jewelry. But I'm not really a jewelry guy.

 

If they shore up the balance sheet and I'm happy with the accounting they might be a buy, but based on management guidance they'd have to get cheaper.

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Does anyone have a good industry primer for Signet or jewelry in general? This is pretty interesting and I would like to learn more about SIG and the industry over the weekend

 

I would second this!

 

I've been buying some jewelry in real life, as I can buy it for not much more than it's melt value of the precious metals. 

 

I am constantly shocked at the markup on jewelry and I would be interested to see how the established players operate.

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Guys - Read all of the 10K's...for the last 10 years.  It's a good place to start.  Again, this is a very complex situation, but I think expectations are SO, SO low right now...We've had activists in the name, short-sellers etc...former CEO Mark Light was an utter clown; but having rerated from 20x earnings to 8x earnings I took a long-stab after this latest earnings miss.  Deleveraging, buying back stock etc...It's risky, but could be interesting.

 

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Perhaps helpful:

https://www.mckinsey.com/industries/retail/our-insights/a-multifaceted-future-the-jewelry-industry-in-2020

www.hkexnews.hk/listedco/listconews/SEHK/2016/0104/a5963/EWPPGIHL-20150917-14.PDF

http://edahngolan.com/Docs/Edahn_Golan-2015_US_State_of_the_Jewelry_Market.pdf

 

Cannot fully guarantee the validity of the following story (or where I got it from) but it is about a jewelry store manager who is away and decides to mark down the price on some slow moving inventory. The manager phones the store and the employee misunderstands and marks them up. The marked-up items sold in no time.

Food for thought.

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Does anyone have a good industry primer for Signet or jewelry in general? This is pretty interesting and I would like to learn more about SIG and the industry over the weekend

 

Signet is not a jewelry company.

 

Yes I get that they are a jewelry retail company but understanding the current trends and jewelry industry would obviously help in understanding this company quite a bit. Of course you always start with the 10k of the company you are interested in but in complex cases like this it can be helpful to have a broader picture of the industry as well.

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Gimme a break man, what is the point of this?

 

Signet is not a jewelry company.

 

Think the short thesis generally says they are a sub prime lender as the sell a lot of credit to sell their jewellery

 

I was listening to the latest conference call....it is just over 70 minutes in length!

 

One thing that made me do a double take was that one of their executives said they sometimes LEASE their jewelry?  WTF?

Who is leasing jewelry?  I've never heard of such a thing...

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For whatever its worth, the cash conversion cycle and large amount of receivables is very common for the medium (industry, whatever you want to call it) that they operate in.

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"One thing that made me do a double take was that one of their executives said they sometimes LEASE their jewelry?  WTF?

Who is leasing jewelry?  I've never heard of such a thing..."

 

Definition of a pawn shop: a place where you get cash leaving a precious asset (often jewelry) as collateral because of lower tier credit status.

 

Definition of Progressive Lease (Aaron’s sub) that acts as the intermediary between Signet and the customer (“Progressive to purchase merchandise from Signet to lease to customer”): an intermediate that provides jewelry in exchange for a promise to pay.

 

Who has the appetite to curb discretionary spending these days.

Who cares: diamonds are forever.

So are unpaid loans.

 

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"One thing that made me do a double take was that one of their executives said they sometimes LEASE their jewelry?  WTF?

Who is leasing jewelry?  I've never heard of such a thing..."

 

Definition of a pawn shop: a place where you get cash leaving a precious asset (often jewelry) as collateral because of lower tier credit status.

 

Definition of Progressive Lease (Aaron’s sub) that acts as the intermediary between Signet and the customer (“Progressive to purchase merchandise from Signet to lease to customer”): an intermediate that provides jewelry in exchange for a promise to pay.

 

Who has the appetite to curb discretionary spending these days.

Who cares: diamonds are forever.

So are unpaid loans.

 

I completely agree with the analysis that most people simply don't have the discipline to cut spending and save money for big purchases, so they agree to credit terms with high interest rates. So do you view that as a positive or negative for a business like Signet? That model has worked pretty well for Aaron's, credit card and auto loan companies...

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bergman104,

 

Disclosure: have not looked enough at Signet to offer a valuable opinion up to this point, so take the following with a grain of salt.

 

-Credit is essential and buying on credit can make sense

-The evolution of subprime lending has been fascinating

-Never thought that this would extend to areas like jewelry

-Have spent time looking at retailers/sellers who rely on financing (internal and third parties) to drive revenue

-Have spent time on pawn shop chains and debt collectors

 

Conceptually, I think that this idea of applying and obtaining credit in the low tier market has gone too far and, over time, the forward consumption pulled from the future will eventually impact current results. I submit that discretionary items such as jewelry may be affected before other sectors such as cars or furniture.

 

Hope that helps and I encourage you to pursue this thread as the jewelry industry (all parts in the vertical chain) has very special attributes that can give rise to profitable opportunities.

 

Additional comment:

Since yesterday, after reviewing some online stuff related to jewelry, I keep viewing publicity (including here) about engagement rings!

When I was at that stage, the norm was to buy a ring whose value was a multiple of a month's salary.

Now it seems that the value of the ring is based on the amount that the subprime lender can offer. :)

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In the retail jewelry industry you have shops carrying high margin, branded, lower turn (1x per year) inventory and you have stores with commoditized, higher turn, lower margin stock.

 

Of course there's hybrids but you get the idea.

 

Bridal and engagement is the number one segment for most jewelers, with anniversaries as a strong runner up.

 

Most jewelers should have revolving doors on the front to handle all the sales reps coming in and out.

 

Many overseas manufacturers (Thailand, China & Italy to a limited extent) will readily give credit after you've bought some quantity.

 

Disclaimer: No "Works Cited" page. BC I've been busy.

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Jewelers goes towards branded names and I don’t know where SIG is positioned within this trend. They weren’t around when I was shopping for an engagement ring many moons ago and I don’t do it that often. There were specialty shops in each larger city that had a reputation for quality and decent prices  and where prices could be negotiated to some extend. I went the BlueNile way and was very pleased how it turned out. The Trend towards brands will hurt retailers like SIG unless they develop their own brands.

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