It’s tough being a jeweler these days. Raising prices to stay in sync with commodity prices and customer demand is a challenging balancing act that only some of the strongest names in the industry – such as Tiffany & Co. (NYSE:TIF), Signet Jewelers Ltd. (NYSE:SIG) and Blue Nile Inc (NASDAQ:NILE) – have pulled off with any degree of regularity.
In this article, I’ll focus on Signet Jewelers Ltd. (NYSE:SIG), which has handily outperformed both Tiffany & Co. (NYSE:TIF) and online retailer Blue Nile over the past five years.
What positive growth catalysts have driven Hamilton, Bermuda-based Signet’s meteoric rise, and does it now stand a chance at toppling Tiffany & Co. (NYSE:TIF) , the largest publicly-traded jeweler in the United States?
A Sparkling Fourth Quarter
For its fourth quarter of 2013, Signet Jewelers Ltd. (NYSE:SIG) posted a profit $2.12 per share, or $171.8 million, up 16.6% from the $1.79 per share, or $156.6 million, it earned in the prior year quarter. This topped the Thomson Reuters’ forecast by three cents. Meanwhile, revenue rose 11.8% to $1.51 billion, also ahead of the $1.49 billion consensus estimate.
Global same-store sales rose 3.5%, down from the 6.9% growth it reported a year ago, but still trumping most of its industry peers.
By comparison, Tiffany’s earnings rose 0.7% to $179.6 million, as revenue rose 4.1% to $1.24 billion. Global same-store sales came in flat – a warning sign that Signet is stealing some of Tiffany’s sparkle.
Battling Blue Nile
Meanwhile, Blue Nile, a Seattle-based online retailer of diamonds and jewelry, grew its top line 21.2% to $136.1 million last quarter, outgrowing both Signet and Tiffany & Co. (NYSE:TIF) . Blue Nile has shown that a purely online business model is a viable alternative for brick-and-mortar jewelers.
However, Blue Nile apparently suffers from the same weaknesses plaguing e-commerce retailers – weak margins and profit growth. Despite strong sales, Blue Nile only earned $0.39 per share, or $4.9 million, missing the analyst consensus of $0.47.
Blue Nile’s status as an online retailer is a blessing and a curse. Although it allows strong revenue growth without brick and mortar expenses, it is also recognized as a discount online retailer – a step below “affordable luxury”. This keeps its margins firmly pressured, as it has to sell its products at a discount to Tiffany & Co. (NYSE:TIF) and Signet Jewelers Ltd. (NYSE:SIG) to remain competitive.
In comparison to Blue Nile, Signet’s online sales rose 46.9% from $43.5 million to $63.9 million – comprising approximately 4% of the company’s total sales. Tiffany’s online sales currently make up 6% of its total revenue.
Targeting Tiffany
Signet’s stores are primarily located in the United States and the United Kingdom. Signet Jewelers Ltd. (NYSE:SIG) attributed its strong sales growth to a higher amount of purchases at its Kay and Jared stores in the United States.
During the quarter, same-store sales in the U.S. rose 4.9%, but its smaller U.K. business posted a decline of 1.9%, due to lower store traffic and more purchases of discounted, lower-margin products at its H. Samuel, Ernest Jones and Leslie Davis stores. Ernest Jones notably posted strong sales of Rolex watches at certain locations, leading analysts to suggest that increasing the availability of Rolex watches could have boosted its disappointing U.K. sales numbers.
In fiscal 2014, Signet intends to concentrate on its strengths by adding 65 to 75 new stores in the U.S. by the end of the year. Its $57 million acquisition of Ultra, the fifth largest jewelry chain in the United States, will also help Signet ramp up the pressure on domestic competitors.
Signet’s rapid growth in America is very bad news for Tiffany & Co. (NYSE:TIF) , which posted a 2% decline in U.S. same-store sales. The U.S. remains Tiffany’s worst performing market, and even its Fifth Avenue flagship store in Manhattan, a favorite stop for tourists, reported a 3% decline in sales – down from the 2% drop it reported in the first two months of the quarter.
However, Tiffany’s sales in Asia helped offset most of its U.S. losses. Tiffany’s same-store sales in Asia rose 6% as revenue advanced 13%, primarily boosted by higher demand in Greater China. Meanwhile, growth in Japan and Europe remained fairly weak.
With no exposure to Asia and the European Union, Signet Jewelers Ltd. (NYSE:SIG) has a major advantage over Tiffany. Recent market movements have shown the U.S. market to be the most resilient of the world markets, despite current concerns of payroll tax hikes and more fiscal cliffs. Many companies that are more concentrated on domestic markets have outperformed larger multinational ones.
Expenses and margins
All that talk of new stores points to higher expenses down the road for Signet. To gauge Signet’s financial health, we should calculate four metrics – revenue growth, inventories, cash and expenses.
Inventory growth is outpacing revenue growth – which explains the markdowns at its UK stores. Cash and equivalents have fallen substantially, primarily due to last year’s Ultra acquisition. Expenses have steadily edged upwards, and are forecast to come in at $180 million to $195 million for fiscal 2014, which will be used on new stores, renovations, and integrating the Ultra brand. Therefore, as expenses rise, we also need to check in on margins.
This is one area where Signet simply can’t match Tiffany. Tiffany’s profit margins are steadily rising towards its operating margin – a clear sign that the company is operating efficiently with minimal overhead costs.
Meanwhile, Signet’s brands lack the blue box brand recognition of Tiffany’s products, and are sold at lower prices, making markdowns and clearances risky.
During the fourth quarter, Signet’s gross margin increased 50 basis points to 42.1%. However, operating margin declined 30 basis points to 17.7%, due to the aforementioned operational inefficiencies in its U.K. operations.
The road ahead
Looking forward, Signet expects to earn $1.07 to $1.12 per share for the first quarter, barely meeting the consensus estimate of $1.12. However, same-store sales are expected to be robust, rising to 5%-7%.
In conclusion, let’s stack up the fundamentals of these three jewelers, and see which approach – Signet’s focus on the U.S. and the U.K., Tiffany’s sprawling worldwide presence, or Blue Nile’s purely online business – is better poised to thrive as a long-term investment.
| Forward P/E | Price to Sales (ttm) | Return to Equity (ttm) | Debt to Equity | Profit Margin | Qty. EPS Growth (Y-O-Y) | Qty. Revenue Growth (Y-O-Y) | |
| Signet | 13.95 | 1.33 | 16.04% | No debt | 9.01% | 33.70% | 0.80% |
| Tiffany | 17.39 | 2.29 | 16.78% | 36.74 | 10.97% | 0.70% | 4.10% |
| Blue Nile | 32.47 | 1.09 | 34.16% | 4.86 | 2.10% | 16.50% | 21.20% |
| Advantage | Blue Nile | Blue Nile | Blue Nile | Signet | Tiffany | Signet | Blue Nile |
Source: Yahoo Finance, 3/28/2013 (figures do not include Signet’s 4Q)
Although Blue Nile looks the most undervalued, its profit margins are too slim to remain competitive with Tiffany and Signet. Meanwhile, Signet’s clean balance sheet and robust profit growth make it a strong contender for Tiffany’s throne, despite its more fragmented brands and a lack of central brand recognition. Although it’s tough being a retailer these days, I think that Signet’s focused approach on the U.S. market will lead to stronger growth in the coming year – making it a favorable long-term investment.
The article Could This Jeweler Topple Tiffany? originally appeared on Fool.com is written by Leo Sun.
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