Signet Relatively Well-Positioned

We are keeping our no-moat rating and fair value estimate of $73 intact after

Shares trade below our $ 73 fair value estimate; however, we note that investing comes with very high uncertainty. We continue to see Signet as the strongest brick & mortar mid-priced jewelry player poised to weather the current industry headwinds better than its smaller peers with firepower to invest for growth. However, we continue to believe that as the switch to online jewelry purchases gains steam and weak players exit the market, Signet will increasingly compete head to head with pure online and bigger diversified players against whom these advantages will not hold. It gets increasingly expensive to operate the business with investments needed in promotional activities, which the new management team seems to regard more favorably, omnichannel developments, and subprime receivable servicing. We believe that some of these increasing expenses can be offset by occupancy cost rationalization as well as healthy e-commerce margins.

We see the R2Net acquisition as reasonable from a strategic point of view although not material in terms of sales short term (adding just around 3% to 2018 fiscal year forecast sales). It will provide Signet with a fast-growing online platform and allow it to gain access to know-how that can be leveraged for development of Signet’s own brand online channels. The price at 1.6 times forward sales looks expensive for a retail business and is higher than median sales multiple for e-commerce acquisitions of 1.2 since 2016, according to Pitchbook data. However, it is well below 3-5 times sales paid for some consumer staple e-commerce names.

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