Is Signet a diamond empire or finance company? – Washington Post

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No one would ever mistake Zales for Tiffany.

Zales started out in the Texas oil patch, in the 1920s, with one jewelry store and a tempting pitch: Go ahead, America, buy your bijoux on credit. “A penny down and a dollar a week” — that was the line.

Today its parent, Signet Jewelers, is taking that old idea to unusual heights. Some analysts say Signet is pushing the limits of credit and accounting so far that it’s starting to look less like a jewelry business and more like a finance company — a sort of Money Store for diamonds and baubles.

The approach has helped make Signet one of the world’s largest jewelry companies. But behind its sparkly empire lie consumer loans that bankers might consider subprime debt.

Just how Signet sizes up its customers and accounts for its loans has some investment analysts pressing for more information. Last year, the company generated nearly one-quarter of its $381.3 million in profit by financing, a calculation Signet says doesn’t give a full picture. Most retail chains, by contrast, farm out that part of the business.

“There is a risk here,” said Ufuk Boydak, managing director of German fund manager Loys AG, who calls the company well run even though his firm trimmed its Signet position in 2014 and keeps a close eye on its payments. “The credit business can get complicated. If things were to turn negatively, you have the recipe for a potential disaster.”

Signet, which is domiciled in Bermuda and headquartered in Akron, Ohio, says its approach is sound and crucial to its success. It points to years of managing loans without outsized losses, which it attributes to robust credit standards.

Despite a brisk holiday sales season at Signet, bolstered by sales of its Ever Us diamond, some stock-market investors are pulling back. After five years of heady gains, the company’s stock price has started to wobble, falling 37 percent, to $94.71, as of Thursday since reaching a record high of $150.94 in October. The S&P 500-stock index has declined 12 percent in that time, while the S&P Retail Select index is down 16 percent. Short bets against the stock are running at their highest level since February 2013.

The developments are the latest turn in the long-running story that is Signet. It started in the 1940s in Britain as Ratners Group, which stunned the country’s staid jewelry industry by offering cut-price deals.

The company has grown rapidly in recent years through a series of acquisitions, culminating with the $1.46 billion purchase of Zale Corp. in 2014. Along with Zales, its Kay Jewelers and Jared brands are fixtures in malls and towns across the United States.

Signet is building its business by expanding credit offerings to existing customers and identifying people it considers good credit risks who might be rejected by other lenders.

But of most concern to skeptical analysts is Signet’s reliance on an unusual accounting method to determine which customer accounts are past due and could go bad — an approach they fear could underestimate future losses in light of Signet’s expanded credit business.

Asked about its accounting and financing practices, Signet said it has disciplined credit standards and decades of experience to minimize losses.

“In the U.S. market, offering financing benefits our guests, and managing the process in-house is a strength of Signet’s Sterling Jewelers division,” the company said in a statement in response to questions.

Indeed, the company’s annual numbers seem to bear that out. In the past four years, the percentage of Signet’s accounts receivable classified as nonperforming has held steady, at 3.6 percent to 3.8 percent of the company’s gross loan portfolio. Those figures fall within the general band for delinquencies, near 4 percent, at private-label credit cards managed by banks.

Donn Vickrey, a forensic account at Pacific Square Research of San Diego, said that the company’s bad-debt expense is a potential hazard worth watching.

But the company rejects the notion that it is taking on greater credit risks. The software used for credit decisions, it says, is built on decades’ worth of proprietary records on consumer behavior and provides a more refined method of scoring applicants. When asked about it during a conference call last month, Signet’s chief financial officer described the credit program as a “competitive advantage for the company.”

Likewise, Signet points to a change in operations to explain how it is booking upfront more income from warranties sold at Kay and Jared. For example, on a $150 warranty on a $1,500 diamond ring, 57 percent can be booked as income immediately. Until last May, the company booked only 45 percent of that $150 over the first two years.

Whether these practices might lead to greater losses is the core question for investors. The standard contractual method for determining whether an account is nonperforming is simple: Did the customer pay the minimum amount due within 90 days? Signet instead uses the recency method — discouraged by the Federal Reserve for banking companies — which allows it to keep listing a loan as performing if a borrower has made a substantial portion of the minimum payment.

Recency is one of two approaches allowed under generally accepted accounting principles, as Signet points out, although it is rarely used.

For Marc Cohodes, a short-seller based in Penngrove, Calif., Signet’s credit strategy poses enough potential risks to rethink Signet’s 117 percent gain over the past five years. He’s shorting Signet.

“They don’t seem to have any wiggle room,” Cohodes said. “I view this company as a subprime financial lender dressed up as a retailer, which will one day lead to a substantial revaluation of the shares.”

— Bloomberg News

Is Signet a diamond empire or finance company? – Washington Post}