Time Goes, Buy: Signet Jewelers Ltd. (SIG), Blue Nile, Inc. (NILE), Zale Corporation (ZLC)

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The 2008 financial collapse and subsequent recession decimated Zale Corporation (NYSE:ZLC), one of the oldest and most respected names in jewelry in the USA and Canada.  Since 2010 the company, with new management in place, has shown remarkable progress.  While still a speculative situation, the company is likely to return to profits this year.

Zales has been a fine jewelry retailer since 1924.  It currently is operating 1117 stores in the USA under the names of Zales & Zales Outlet and Gordon’s Jewelers and in Canada under the names Peoples Jewellers and Mappins.  It has a well-regarded website.  In addition, it owns Pagoda with 652 locations.  Pagoda performs ear piercing and sells less expensive jewelry, principally of silver and gold.  Pagoda is not an integral part of its fine jewelry business.  It is important to note that the general definition of fine Jewelry includes watches.  This can cause distortions in making comparisons.

Signet Jewelers Ltd. (NYSE:SIG)In 2008, the financial market collapsed and a recession set in.  The jewelry business suffered a severe decline.   As the industry recovered, changes came.  Companies considered the economy the catalyst and the major problem.  Unlike other industries, jewelry faced almost 20% inflation in its raw materials of precious metals and diamonds.  New technologies, particularly the web, opened sales channels and changed marketing approaches to make use of the web and social media.  Big box stores, department stores, chains and pure E-tailers established their footprints in their own ways.

The jewelry business has for the most part recovered and is growing moderately at around 3% or somewhat above in nominal terms.  The return to profitability, in part, is a result of changes in earlier business models as well as significant additions to these models.  Without reflecting on these, it is not easy to perceive the chances for Zales to fully recover.

The major drivers in the industry’s recovery are:

1). The major drop in interest rates.  Interest is a significant industry expense.

2). The single most significant reason sales have increased is inflation.  Raw materials represent over 80% of cost. The price of precious metals and diamonds soared during this period.  Some studies suggest that on an inflation adjusted basis, the industry has still not fully recovered.

3). Slowly improving consumer spending and optimism.

4). Rapidly increasing use of the web.

5). Eliminating unproductive stores and cautious increases in new stores.

6). Good performance in watches.

The major inhibitors of growth are:

1). Decline in marriage rate.

2). Re-merchandising product lines to accommodate the increase in product cost.

3). Also decreasing SG&A to right size costs and improve profit.

There has been an increase in capital expenditures in the industry, but not in anticipation of rampant growth. Little has been spent on new stores.  Some investment has gone into remodeling existing stores.  A large portion has gone into systems for the web, inventory and other controls.

Today, Wal-Mart is the largest jewelry retailer and owns the bottom end of the market.  Amazon is the most significant jewelry E-tailer.  Independent jewelers are continuing to close.

The battle for market share in the higher side of the middle market is what Zales is engaged in.  Signet Jewelers Ltd. (NYSE:SIG) is Zales’ closest competitor because they own Kay Jewelers.  Signet has much more capital, stronger systems, and cheaper costs.  On the other hand, Zales appears to be more creative and aggressive with its merchandising. Blue Nile, Inc. (NASDAQ:NILE) has taken a total web approach.  They compete by holding diamonds in inventory and manufacturing on demand, eliminating markdowns.

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