Coronavirus picks part 3: Signet Jewelers

Disclaimer: This not investment advice, just explanation of my investment decision. I own a stake in the discussed company.

After I sold Waste Management on April 8, 2020, I reallocated the money I had in that to positions in two companies that I thought had sold off much more than they should have.

Signet Jewelers was a company that was on my watch list in December. I was going to buy them, but do to bureaucracy related to working in the financial industry, I didn't get around to doing this before the stock price rapidly increased more than 50%, and I was no longer nearly as enticed as I had been at the previous price. Then when the coronavirus sell-off came, it sold off way more than market and present a buying opportunity well below the price I had been considering in December even though I don't think their business is particularly adversely affected by these conditions. In fact, I think their business may actually be helped by the lockdown in the long term.

Signet is primarily in the business of selling moderately high-end jewelry at brick and mortar locations. They are the parent company of all of the big jewelry chains that I've heard or seen advertise including most notably Kay, Jared, and Zales. They got a lot of bad press around both discrimination and sexual harassment from 2017-2019. But that seems like it's behind them now, and in particular, their current CEO is a woman, so I don't expect to see her implicated in "me too" the way her predecessor was. The business also seemed like it was in decline when she took over, and it seems to have been improving since then. There aren't a lot of data points to work with yet, but in general, I want to be investing in a company soon after I think they replaced a bad CEO with a better one. However, right around the time she took over, their profits tanked, and their share price plummeted. This is to be expected when the departing CEO is being removed in shame and disgrace.

There's also a secular trend of everyone expecting brick and mortar to die. I don't see that happening for Signet's business. They're primarily in the business of selling the most expensive gifts men buy for their wives, girlfriends, and would-be fiances, and about which most men feel they know nothing. Most men will greatly prefer to have somebody else to talk to about making these purchasing decisions. Furthermore, the men who do feel like they know something relevant mostly think they know jewels, not jewelry. They're going to want to be able to physically inspect the stones they are purchasing to try to find the ones they think are under-priced. (Or course, nothing should be under-priced in retail. These men should just end up buying the jewels that are the least over-priced. And even if they do somehow find a bargain, it's presumably one that Signet inherited in its acquisition of the merchandise to begin with so it's still good business for them.) I don't see their highest margin business moving out of brick and mortar into online shopping in the foreseeable future.

As such, I see online retail as more of an opportunity for Signet Jewelers than as a threat. The company you trust the most for your highest end shopping is also going to be the company you trust the most for your lower end shopping. If convenient, I would expect men to by default, start looking for the less expensive gifts of jewelry that they buy for less important occasions at the same store where they ended up deciding to buy their engagement rings. I think they get a sticky customer every time somebody buys an engagement ring at one of their stores. And this make online shopping very, very good for them. A man will drive all night to buy an engagement ring for his intended fiance, but he's not going to do that for his wife on third anniversary.

I won't discuss all the ways that I think Signet is helped by online jewelry, but the main thing is that I think the value of brand recognition has increased significantly in their business, and barriers to entry have gone up a lot. Fifteen years ago, I didn't necessarily know the names of the jewelry stores that were at either end of the mall where my family sometimes shopped, but I knew that there were jewelry stores there because I walked past them enough times, and it was easy for me to see the difference between a high end jewelry store and a low end one just by walking past. Today, the only place I know of where someone can buy high end jewelry offhand that isn't one of Signet's businesses is Jeweler's Row in NYC, and I live in Dallas, and I only know Jeweler's Row exists because I've looked up real estate prices on 5th Ave New York because I was in disbelief that real estate prices were significantly higher in Guangzhou, China than they are anywhere in the United States the first time I heard that fact.

In other words, Signet's branding has worked basically perfectly. I'm their target customer. (Apart from the fact that I'm contentedly single.) And I know two ways off hand to buy an engagement ring. I can go to a store Signet owns or I can go visit a block of 5th Avenue that I only know exists because I once tried to figure out where the most expensive real estate in the United States is. That's pretty good branding.

And branding keeps mattering more for their business.

And since branding matters a lot for their business to begin with, branding also helps with online sales. There is one insider at Signet who has been consistently buying. He's their head of online sales. Meanwhile like-on-like sales at their existing locations grew.

All of these things were reasons I was planning to buy them. I would almost certainly have eventually pulled the trigger on that investment if they continued trading at $18 a share. I more or less was just sitting out on the purchase because I was kicking myself for missing an opportunity. (What's the opposite of the sunk cost fallacy? That also exists in investing, at least for me. I don't get FOMO; I get non-buyer's remorse; but when I get it I always decide that I've already missed my window.)

But then they sold off way more than the market in the coronavirus sell-off. I think this probably happened because other people decided that they were a really good company to buy which is what drove up the price when it spiked, and they probably took leveraged positions. The companies with the most leveraged buyers sell of the most when volatility spikes and the market plummets. The price right before the volatility spike was realer than the price afterwards.

This is true unless, the lockdown is really bad for Signet. The one thing that would be really scary is if the lockdown materially increased the chance that Signet goes bankrupt in the near future. I don't see this happening. Signet seems really well-capitalized, and they have plenty of room to sure up capital if they need to do so, such as by cutting their dividend. So I'm not worried about that.

The next thing that could go very wrong for them with this time of heightened volatility is if the volatility provides a significant opportunity for disruption to their business. I don't see that happening either. People are delaying weddings and engagements over this pandemic, but they aren't fundamentally altering their life plans into perpetuity.

The next thing is if they permanently lose a lot of business over this. Again, I don't see that happening. The people who buy high end luxury goods have not been hurt financially by this lockdown. Everyone else has. People aren't cancelling their plans to enter relationships over the lockdown. They've just delayed them.

Finally, I don't even think Signet will experience much short term pain over this lockdown. February and December are the months when their business does particularly well. Q2 is always a bad quarter for them, and having an excuse to not have to incur many of the costs that they typically incur in Q2 should be good for them. Mother's Day is exactly the sort of occasion where they want more customers to be doing more online shopping for moderately high end jewelry. It would have been potentially bad for them if the lockdown had affected Valentine's Day or Christmas. June, July, and August start to be months where they should probably want their stores to reopen again. Anniversaries spike in February, but are otherwise concentrated in the summer. Birthdays peak in September. This lockdown is adversely affecting their revenue, but it is also reducing their costs during the worst part of the year for their business. It probably won't quite be a net win for them, but the way I see it, there are few businesses that could possibly be happier with the timing of these lockdowns.