Shares of the world’s largest retailer of diamond jewelry, Signet Jewelers Ltd. (SIG, Financial), are up 77% since bottoming at the start of April. The company has experienced a bullish run in the last three months, which has led some analysts to suggest the stock may have run out of steam and it is probably the right time to sell.
According to leading sell-side analysts, the stock carries a consensus sell rating, with some recommending a strong sell. The most optimistic of analysts have a hold rating, pointing to the company’s reinvestment plan.
Signet is currently in the process of executing a three-year strategic initiative plan dubbed "Signet Path to Brilliance," which includes, among other processes, “augmenting its digital marketing efforts and planned capital investments to uplift its performance, as well as cost-effectiveness and investment in e-commerce development, omnichannel capabilities and product innovations.”
Nonetheless, given the company’s recent rally, which has seen it outperform the industry, there could be a period of stagnation from a valuation perspective. This suggests that selling to invest in alternative companies like Tiffany & Co. (TIF, Financial), which is up 40% since April, could be a more attractive option.
From a long-term perspective, however, Signet Jewelers appears well poised for success should its reinvestment plan pay off. The company is looking to strengthen its presence in the e-commerce market with double-digit sales growth over the next three years and wants this section of the business to account for at least 15% of its overall top line by fiscal 2021. In fiscal 2018, e-commerce accounted for 8% of the company's revenue.
The task of growing its online presence, however, could prove to be more difficult than anticipated due to an increase in competition. The e-commerce space is Amazon.com Inc.’s (AMZN, Financial) playground and, given its recent diversification projects, it would be unwise to rule out the potential threat it poses to traditional retailers looking to augment their sales by launching an e-commerce platform.
Furthermore, startups have also targeted online retail to ramp up their top lines and they, too, cannot be taken for granted, especially given their flexibility and ability to form strong customer relationships. According to Jim Vernon, CEO of RockHer Haute Jewels, “small retailers of luxury products lack the financial backing to run expensive marketing campaigns that industry giants boast. However, their ability to interact with customers via social media, email, and other support channels or even on a person-to-person level, provide them with the edge they need to remain competitive.”
Luxury jewelers have relatively few customers to target compared to other markets, whose main products are more basic and affordable. As such, the industry’s growth prospects are limited. During a recession, the luxury goods companies tend to post dismal performances. In contrast, when the economy is booming, these companies tend to grow as well.
This is demonstrated by Signet Jewelers' revenues, which registered an increase of just $600 million over a six-year period (2008 to 2014) before adding $2.3 billion in the following two years, reaching $6.5 billion.
That growth, however, seems to have stalled over the last couple of years with the top line falling to $6.3 billion in the most recent annual results. The seasonality in the company’s performance can further be highlighted by its massive decline in earnings per share in 2009, coinciding with the recession.
With online retail continuing to capture most of the market’s attention, ignoring it could be catastrophic. Signet Jewelers appears to have realized the potential benefits of having a strong online presence. Therefore, the company wants to make it one of its prime revenue drivers in the coming years. This could be a potent recipe for organic growth. While short-term bottlenecks are expected, the long-term outlook remains positive.
In summary, Signet Jewelers will face a few challenges in its bid to optimize organic growth by augmenting its traditional retail business through e-commerce. The likes of Amazon, eBay Inc. (EBAY, Financial) and Tiffany will be among the first obstacles in its way, while dynamic startups like RockHer will also present their own unique challenges. Signet has no other option, however, than to embrace the challenges because online retail will play a huge part in its growth story.
Disclosure: I have no positions in the stocks mentioned in the article.
