Signet for Sale? A Strategic Change is Needed
The largest shareholder in Signet Jewelers is calling for the board to explore strategic alternatives, including an immediate sale of the company, as the jeweler has lost significant value in the last three months.
“Investors appear convinced that the board and management team will erode the company’s cash, competitive position and franchise,” Select Equity Group wrote in a February 27 letter to the board. “As such, we believe that the board is obligated to explore all strategic alternatives for Signet including its sale.”
The group’s list of grievances echoed the sentiment which many in the jewelry trade have voiced for some time; that Signet has consistently underperformed the rest of the jewelry market, despite its dominant position and sizeable marketing budget.
The most recent reminder came in mid-January when Signet reported same-store sales fell 2% during the holiday season. Meanwhile, overall US jewelry sales grew 4% during the same November-December period, according to Mastercard. The Edge Retail Academy, a jewelry advisory firm, estimated sales among independent jewelers increased 8% in November and by 6% in December.
Management consequently lowered its guidance for the fourth quarter and full year, and forecast revenue of around $6.68 billion for the year ending February 1, 2025, down 7% from fiscal 2024. The earnings are scheduled for release on March 19.
Half the value
Signet shares slumped on the news and are now approximately 50% off their last peak of $104.13 recorded on November 25. The share traded at $49.73 on Thursday, February 27, but rose 5.2% to $52.32 on Friday following the publication of the shareholder’s letter.
It’s little wonder the folks at Select Equity are rattled. The value of their 9.7% stake declined by some $218 million in three months.
The letter points a finger at the board, and management under new CEO J.K. Symancyk as the ones responsible for the current predicament. However, Gina Drosos, who Symancyk replaced on November 4, should also be held accountable. It was her strategy that led to the missed holiday season, despite Select Equity’s support for the former CEO.
“We were supportive of the changes the prior CEO Gina Drosos made to refresh the brands and capitalize on Signet’s competitive strengths, but we have been disappointed with recent performance including operational missteps and management changes,” Select Equity wrote.
A longer-term analysis is required. In hindsight we can say that Drosos and her team misread the market and are most culpable of Signet’s failings.
Select Grievances
First, let’s see what Select Equity said:
The group began its argument pointing out that Signet’s same-store sales declined in each of the last 11 quarters, while operating profit decreased in each of the past three years and fell short of guidance in the most recent two.
It called out management for the “botched” transition onto a new technology platform of James Allen and Blue Nile – its flagship ecommerce businesses. This caused significant double-digit sales declines at both subsidiaries for six consecutive quarters, the investors noted.
The board has a poor record of capital allocation, wasting nearly half a billion dollars in purchasing unprofitable businesses, including Blue Nile, as well as deploying cash in purchasing shares well above their current level, Select Equity continued.
The letter also stressed that Drosos departed with little warning. And her absence, as the business continued to flounder during the holiday season, despite assurances she would continue as a consultant, further irked the investor group.
Finally, Select Equity highlighted the multi-million-dollar payouts to retain the existing management team for a surprisingly short period of time, of three to six months. It also agreed to pay “an outsized signing bonus and compensation package to hire a CEO with no jewelry or fashion experience and a mixed track record at the past two private equity-owned companies he ran,” it wrote.
Acquiring growth
It might be a little early to judge Symancyk’s tenure at Signet, given he came on board just four months ago. On paper, at least, he has an impressive enough resume, including a six-year stint as CEO of PetSmart Inc. and prior to that as CEO of Academy Sports + Outdoors.
Symancyk inherited Drosos’s strategy, with unfortunate timing, just before the holiday season exposed its shortcomings. While the faults in the strategy may be apparent to those in the trade, investors might not be aware of the market dynamics which Signet chased.
It’s understandable that Drosos endeared to investors, delivering admirable returns during her time as CEO.
“Under her leadership, in the last five years the company expanded its market share by nearly 50% and significantly grew its digital presence. During Gina's tenure as CEO, she and the team increased e-commerce sales fourfold and transformed the company's financial results, reducing gross debt outstanding by over 90%, nearly doubling liquidity, and over the last four years expanding adjusted operating margin more than 70% – all helping to drive Signet's total shareholder return near the top of its retail peer group for the past one, three, and five years,” Signet wrote at her departure.
However, the emphasis on market share, digital presence and e-commerce are misleading. They were all driven by acquisitions, such as that of Blue Nile, Diamonds Direct and Rocksbox.
Misreading trends
Signet has long struggled to generate organic growth as measured by same-store sales. It failed to deliver on its “Inspiring Brilliance” strategy, launched in 2022, which aimed to achieve $9 billion to $10 billion annual revenue within three to five years.
Drosos outlined the strategy during an investor day in April 2023, presenting four areas that would drive growth in the medium term:
A strong rebound in the bridal segment, which she said was still reeling from the Covid-19 disruption.
Rising demand for accessible luxury.
An opportunity for its services business to enhance the jewelry ownership experience, through its loyalty programs as well as repair, customization, and financing offerings.
Stimulating gains from its marketing, digital and data capabilities.
The company doubled down on its theory that the pandemic caused a disruption in the dating world as people couldn’t meet during the Covid lockdowns. The two-to-three-year cycle it takes for a couple to meet, date and get engaged was delayed, and would materialize in 2023 and 2024, leading to a boom in bridal, the narrative went. But it didn’t materialize and the company’s bridal business continued to decline with each passing quarter, including the last one.
It also misread the trend toward accessible luxury. While there was growth of affordable luxury at the time, analysts have since noted that the aspirational customer has been in decline. Luxury sales are being driven by the VIP consumer, a space in which Signet does not operate.
Regarding its other two predictions, the services business is too small to drive company-wide growth, accounting for 10% to 12% of total sales, while its marketing and data prowess still needs to be proven by sales growth. Plus, Signet apparently “botched” its digital advantage, according to its largest shareholder.
The synthetics embrace
Select Equity is therefore correct to highlight the consecutive same-store sales declines and growth and sliding operating profit. But it may or may not realize that those measures expose an additional flaw in Signet’s strategy – namely its strong embrace of lab-grown diamonds.
Signet’s sales of lab-grown diamonds have steadily increased since the company first started selling them in 2019. In fiscal 2024 (calendar 2023) the category was “in the teens percentage of jewelry sales overall,” Drosos reported at the time. Lab-grown sales grew around 40% year on year in the most recent fourth quarter, Symancyk said at the ICR Conference in mid-January.
The result is that Signet is consistently selling more lower value lab grown at the expense of higher-value natural diamonds. That will naturally impact same-store sales growth.
While it is true, the company has been able to up-sell its lab grown customers to purchase a higher priced, larger synthetic piece, that sale would still be a lower-priced transaction than it would have made to the same customer five years ago, of a natural diamond.
It’s also worth noting that Signet is selling fewer pieces in general. The number of transactions Signet recorded in North America in fiscal 2024 was its lowest level in at least six years, including during the 2020 pandemic year, according to my calculations. One might have thought the shift to synthetics would stimulate more transactions.
Selling more lab grown also affects operating profit. It’s no secret lab-grown diamonds that provide retailers with better margins; however, it is questionable whether they offer higher absolute profit, in dollar terms.
Signet alluded to this in its Fiscal 2023 annual report when it stated, “Over the past several years the portion of our inventory, revenue and operating margin related to lab-created diamonds has been increasing along with consumer demand and acceptance. If the value or consumer demand for lab-created diamonds declines it may have a negative impact on our inventory, revenue, and operating results.”
While consumer demand may have increased, the value of the product has significantly declined.
Amid all of this, Signet most notably lost out by marketing synthetics in the bridal segment. The company argued lab-grown diamonds “increased the breadth of assortment” within the bridal category. However, it did not consider the long-term cost of reducing its sales of natural diamonds.
As the market leader in bridal jewelry, it should be a stronger advocate of natural diamonds suitable for engagement rings.
Signet is now trying to reconnect bridal and the concept of commitment with natural diamonds by partnering with De Beers on its ‘Worth the Wait’ campaign. While it’s still too early to assess the ongoing program’s effectiveness, it will be a tough task to redirect consumers that are now aware of the more affordable alternative. Besides, Kay Jewelers, Zales, James Allen, Blue Nile continue to promote their lab-grown bridal collections.
Alternative strategies
That all leaves Symancyc in a bind, particularly after receiving such a stern letter from Signet’s most powerful shareholder.
Deflecting responsibility toward Drosos will get him only so far, if anywhere. His job now is to formulate an alternative strategy that will stimulate organic growth and sustainable earnings, and restore investor confidence.
It will require an entirely new narrative.
Symancyk must present an honest assessment of the company’s prospects in the bridal market and drop the Covid-delay theory that no one in the industry really believed. Signet must take ownership of marketing natural diamonds in bridal rather than following De Beers lead. And it will need to differentiate lab grown as a separate category, rather than an alternative to natural diamonds.
I suspect Symancyk will also have to close additional stores, further reduce Signet’s mall-footprint, and – once and for all – give a stronger differentiation between its brands, particularly Kay Jewelers and Zales.
Finally, Signet can re-engage with the affordable luxury consumer by adopting a more edgy and experiential tone. Jewelers gained when the pandemic squashed the experience economy. It’s now back, and consumers want to be excited and empowered in their diamond purchasing journey. They don’t relate to the sappy love stories of yesteryear.
Of course, what is true for Signet, is true for the industry at large. In many ways, Select Equity’s letter was a comment on the state of the broader diamond jewelry market. For Signet though, it will need to embrace change regardless of the strategic focus of its investors. A sale may well be on the cards; however, a strategic shift under the new CEO is the more pressing need.
To understand the pulse of todays jewelry customer and the jewelry market one needs expierence in the trade ... top to bottom. One needs relevant market research, global trade contacts and a whole lot of common sense. I'd say 10-15 years of expierence for any CEO. Can't find the right people ... try harder. Jewelry and pet food have what in common? For the price of a 2ct. diamond I can buy a truck load of pet food.