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Nick White  

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  • Should Signet Withdraw The Zale Corporation Offer? [View article]
    Good dialogue. However, with respect to Bank of Nova Scotia (BN), it is not a subject for disagreement, but a simple fact. Bank of Nova Scotia had agreed to a restructuring of Peoples subject to shareholder approval, which required 100% approval by the voting stock shareholders (there were two classes of stock, voting and non-voting). One of the family members that controlled a large block of voting stock was not satisfied with the deal and voted no. BN took immediate control, sold the home office, closed all the stores in Quebec, rationalized the portfolio in the rest of Canada, especially, Ontario, and wrote off millions in distressed inventory. Those are the facts.

    With respect to knocking off their number 1 competitor, Zale is no threat to Signet today. Indeed, given the company's low store volumes, lack of capital investment in operations and systems, and high debt, Zale has been the company's number 1 source of profitable market share growth since about 1994, when they took Kay national. If this deal goes through, then both companies will be looking for incremental growth form the other mall competitors, which will be cost margin and incremental marketing spend in most trade area.

    Kay's higher operating margins are a function of much higher average store sales than Zale. Given that both companies have high fixed costs, once the break-even point is reached, most of that difference in average store sales flows through to the bottom line. Just where Signet expects to steal the sales to drive Zale's average store sales higher remains to be seen. In fact, to increase Zale's average store sales to the level of Kay, could mean stealing 10%-20% or more of the remaining (non-Signet) market share in the trade area. If it could be done, it would be very expensive market-share to buy.

    Being a site holder is not a panacea for lower supply chain costs. Indeed, getting the rough product that can be cut into the shapes, qualities, and sizes that Kay and Zale needs is problematic at best. Signet's diamond business will keep the company focused on prices. But the Zale acquisition only complicates their entry into a business for which they will need a very steep learning curve to make into a net profit center. In contrast to your comment about selling off excess loose diamond inventory, let's be clear, (a) buying rough means more excess product and (b) if Kay can not profitably market these excess shapes, sizes, and qualities, why do you think it will that easy to "profitably" sell the goods back into the wholesale market?
    May 18, 2014. 11:04 PM | Likes Like |Link to Comment
  • Should Signet Withdraw The Zale Corporation Offer? [View article]
    Thanks for your comments. Emotionally persuasive, but the points do not fit the facts. Lets be clear, Peoples and Mappin's culture had been heavily influenced by Zale years before Zale bought the chain from the Bank of Nova Scotia. For example, Peoples and Mappin's operational credit programs were direct clones of Zale instant credit system. Also, the Bank of Nova Scotia had done the hard turn around work. In short, Zale bought a successful specialty retailer and immediately benefited from expense saving from consolidating operations. Still, the acquisition was not immediately successful, despite having clean balance sheet, rationalized store portfolio, etc. Clearly, this was not a turnaround acquisition and bears no resemblance to the circumstances faced in the proposed Signet-Zale deal.

    In contrast, Piercing Pagoda was a strategic disaster, suffering from market erosion of the businesses' primary product category and profit model, i.e., 60%-70% Gold Jewelry. In fact, the acquisition was plagued by over expansion both in the U.S. and Canada, followed by substantial asset write offs. A great example of an "unsuccessful" acquisition.
    May 18, 2014. 02:29 PM | Likes Like |Link to Comment
  • Investors In Mid-Market Jewelry Stocks Face Uncertain Returns [View article]

    With the exception of a few brands, i.e., Rolex, jewelry prices have always been elastic, such that high prices meant lower unit sales, but not linearly. Just how elastic has been a function of disposable income. Accordingly, assuming Tiffany's core customer's disposable income is disproportionately higher than say Zale's younger customer, higher gold prices will have less of an effect on Tiffany sales than say Zales, Kays, etc.

    Also, gold and precious metals make up a much smaller percentage of product value in diamond products for Tiffany than in the case of Zale. Indeed, Zale says that they have materially lowered price points which likely means gold as a percentage of total product cost has increased, since you can lower diamond quality, content, and value easier than reduce gold weight below a minimum value.

    Still, some luxury brand research has suggested affluent consumers are resistant to paying the premium for brand names, resorting to local and regional guild jewelers that sell product of equivalent quality and craftsmanship as Tiffany et al., but without the premium.

    Another point, since stock returns are in large part inflation driven with QE1...3, as are jewelry commodity and diamond/gem prices, it remains to be seen if affluent consumers will continue to pay an "inflation premium" for those products, opting instead for other luxury items that have been much less affected by material inflation, relatively speaking.

    Anyway, hope this aids your decision-making process.

    Oct 3, 2012. 05:57 PM | Likes Like |Link to Comment