Signet still Has Credit Book Problems

While Signet (NYSE:SIG) has been in the news lately over allegations of diamond swapping and a sexual harassment lawsuit there is a much deeper problem with the company's business model that still lurks below the surface. It appears Signet continues to rely on increasing credit sales to drive growth at its largest division, Sterling Jewelers. Also, the companies own metrics as well as other credit metrics appear to show a continuing deterioration of the company's credit book. In short, it looks like the company is increasingly extending credit to riskier borrowers in an attempt to keep sales growing.Back in fiscal 2011 only 53% of Signet's sales relied on financing provided by the company. Fast forward to today and as of the company's most recent fiscal year credit sales have ballooned to 62% at the companies Sterling Jewelers Division. The old Signet of 2011, prior to the purchase of Zales, is roughly analogous to the Sterling Jewelers division of Signet today.The problem for shareholders of Signet is that credit sales are growing faster than sales overall (this is obvious if credit participation rates are rising). The chart below shows the exact numbers for credit and sales growth ex-credit.The problem with credit sales increasing faster than overall sales growth is that it creates an unsustainable growth dynamic. There is no bigger illustration of this then the housing bubble and subsequent crash. Private debt growth in the form of mortgages and home equity lines of credit grew faster than overall economic growth. This had the effect of stimulating the economy in the short run as housing led consumption led to a growing economy. However, at some point debt growth must slow or stop. Eventually consumers need to pay back the money they borrowed. When debt growth rates slow, growth stops and the bubble collapses. The same thing that happened in the housing market will happen to Signet. Please don't misunderstand, the effect on the economy will not amount to anything. But for Signet shareholders a steep decline in sales and stock price is likely in store.Think about it this way. At any given time there are a finite number of people who want to buy jewelry. By offering easy credit Signet is pulling forward demand. They are increasing sales now at the expense of sales later. A customer may not have the money to buy an item now (just a someone with a home equity loan was spending more than their income) so Signet simply loans them the money. Over the next 36 months the customer is busy paying off the loan. As more customers buy more jewelry on credit Signet is taking future customers and transferring them to the present. Eventually Signet will reach the limit of the amount of jewelry buyers that exist and the process will run in reverse. Potential customers are now busy paying off previous loans, not buying new products.I have no idea what the total market is for potential Signet jewelry sales and when a collapse in sales could occur and I doubt anyone else does either. However, the housing crisis is a prime example of how private debt dynamics work and what the end result is when private debt growth outstrips sales growth (or economic growth in the case of the housing crisis).The other issue Signet has is one of declining credit quality in its loan portfolio. Over the past two years we can see a steady decline in just about every credit metric Signet reports.Its average monthly collection rates are falling and bad debt and charge offs are increasing. Signet's business is seasonal so some of the credit metrics vary quarter to quarter. The charts below show the receivables turnover and days sales outstanding for each quarter for FY2017 compared to FY2016. (Due to how the data was entered in Excel the chart is read right to left with period "4" corresponding to the 1st quarter of the year, period "3" the second quarter of the year and so on).We can see that both metrics have worsened for each period since Signet's last fiscal year.It would appear based on the credit metrics Signet discloses as well as our own analysis that Signet has been making riskier loans as time has gone on. If Signet continues to rely on extending credit to drive sales growth it's likely that their loan portfolio will continue to deteriorate. While income from the portfolio (interest and late fee income has offset losses) has been positive so far there is a very real risk that things will turn negative in the years ahead. It also raises the critical question of just how healthy is Signet's underlying business if it must continue to extend credit to ever riskier borrowers to sustain sales growth. We continue to believe investors should stay far away from Signet's stock.Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Signet still Has Credit Book Problems 1

recommended articles
Info Center
How About Meetu Jewelry Sales Net?
Title: Exploring the Meetu Jewelry Sales Network: A Gateway to Timeless Elegance Introduction: In the world of fashion and adornment, Meetu Jewelry has carved a niche for itself as a leading player in the jewelry industry. Renowned for its exquis...
How to Invest in Rising Jewelry Sales
Jewelry sales in the U.S. are up as Americans feel a little more confident in spending on some bling.The World Gold Council says gold jewelry sales in the U.S. were ...
Gold Jewelry Sales Recovering in China, but Platinum Left on the Shelf
LONDON (Reuters) - Gold jewelry sales in number one market China are finally picking up after years of decline, but consumers are still shying away from platinum.Chi...
Gold Jewelry Sales Recovering in China, but Platinum Left on the Shelf
LONDON (Reuters) - Gold jewelry sales in number one market China are finally picking up after years of decline, but consumers are still shying away from platinum.Chi...
Sotheby's 2012 Jewelry Sales Fetched $460.5 Million
Sotheby's marked its highest-ever total for a year of jewelry sales in 2012, achieving $460.5 million, with strong growth at all of its auction houses. Naturally, st...
Owners of Jody Coyote Bask in the Success of Jewelry Sales.
Byline: Sherri Buri McDonald The Register-Guard The sweet smell of opportunity led young entrepreneurs Chris Cunning and Peter Day to buy Jody Coyote, a Eugene-based...
Why China Is the World's Largest Gold Consumer
We typically see four key drivers for gold demand in any market: jewelry purchases, industrial use, central bank purchases and retail investment. China's market is n...
Is Jewelry a Shining Investment for Your Future
Every five years or so, I take stock of my life. At 50, I was concerned with fitness, health, and the trials and tribulations of dating again after the break-up long...
Meghan Markle Makes Gold Sales Sparkle
NEW YORK (Reuters) - The Meghan Markle effect has spread to yellow gold jewelry, helping boost United States sales in the first quarter of 2018 with further gains ex...
Birks Turns a Profit After Restructuring, Sees Shine in ...
Montreal-based jeweler Birks has emerged from restructuring to turn a profit in its latest fiscal year as the retailer refreshed its store network and saw increased ...
no data

Since 2019, Meet U Jewelry were founded in Guangzhou, China, Jewelry manufacturing base.

We are a jewelry enterprise integrating design, production and sale.


E-Mail: info@meetujewelry.com


Address: Floor 13, West Tower of Gome Smart City, No. 33 Juxin Street, Haizhu District, Guangzhou, China.

Copyright ©  2023 Meetu Jewelry - Guangzhou Quanqiuhui Network Technique Co., Ltd. |Sitemap
chat online
Leave your inquiry, we will provide you with quality products and services!