Signet: A Diamond in the Rough

Editor’s Note: I don’t have much use for jewelry. Other than my wedding ring, I have never worn any other form of jewelry in my life.

I am excluding the watch I wore before smartphones were invented. It was not meant to be ornamental. All I wanted to know was the time of day.

I realize that I am in a small minority as far as that goes. These days, it is common to see men wearing a wide variety ornamental jewelry.

That may soon change. With the price of gold back near $2,700 an ounce, some folks may decide that a tattoo of a gold watch is the better way to go!

Out of Fashion

Until a few weeks ago, the past year had been relatively uneventful for diamond jewelry retailer Signet Jewelers Limited (NYSE: SIG). It traded above $102 during the last week of November, less than a dollar from where it began 2024.

That changed for the worse in December, when rumors of weak holiday sales sent SIG below $81 by the end of the year. When those rumors were confirmed by the company on January 14, its share price fell to $57 before finding a bottom (circled area in chart below).

In that press release, the company acknowledged, “Merchandise margin expanded, but less than expected due to the lower fashion mix and a stronger customer response to promotional items. These dynamics are reflected in our updated guidance.”

It is that updated guidance that sent SIG tumbling down the charts. The company reduced its expectations for Q4 same store sales to drop by at least 2.0 percent instead of the flat to 3.0 percent increase originally predicted.

Import Tariff Threat

Clearly, Signet has a problem. The overall economy was strong during the second half of last year. During the fourth quarter, gross domestic product grew by an estimate of 3.1 percent while unemployment held steady near 4.1 percent.

Those two data points bode well for discretionary spending. Jewelry sales tend to fall during recessions when consumers have less money to spend.

If Signet can't grow sales while times are good, it is reasonable to wonder how it will fare when times get tougher. That’s a timely question now that the Trump administration is preparing to impose severe import tariffs across the board.

Although Signet derives approximately 90 percent of its sales in the United States, most of the materials in those products are imported from foreign sources. It's a safe bet that Signet would have to raise prices to offset the increased cost of any new tariffs levied on those goods.

Low Interest Rates > Punishing Consumers?

What I have described above is not mere speculation on my part. Five years ago, Trump wanted to impose a 10 percent import tariffs on a wide variety of goods including diamonds, pearls, gems, and silver jewelry.

Don’t be surprised if something similar happens again. Except this time, Trump should have sufficient Congressional support to make it happen.

That is the scenario that Wall Street fears. However, that is not the scenario that I expect to unfold.

Import tariffs are inflationary because consumers end up absorbing the higher cost of goods that get passed on to them. My guess is Trump will prioritize keeping interest rates low over punishing jewelry consumers.

Short Squeeze in the Making?

If I’m right about that, then Signet could be an attractive speculation given its huge drop. At a share price of $60, SIG is valued at less than 6 times forward earnings and 0.4 times sales compared to multiples of 24 and 3.1, respectively, for the S&P 500 Index.

Multiples that low imply that a business is in serious trouble. So does the fact that speculators have sold short roughly 22 percent of Signet’s float (shares trading in a public market).

Eventually, those speculators will need to buy back shares to replace the borrowed stock that they sold short. When that happens, a short squeeze could ensure that drives SIG considerably higher.

I don’t know when that might happen or what would trigger such an event. But I do know Signet’s management team is working hard to improve results in 2025, so don’t be surprised if it rebounds back above $80 during the second half of this year.