The diamond and jewelry industry is approaching crunch time, as jewelers need to buy inventory as they prepare for the holiday season. 

Until now, they’ve kept their inventory purchases to a minimum as the cost of financing those purchases increased with higher interest rates, demand has slowed, and as diamond prices have been on a decline – no one likes to buy in a downward trending market as you risk losing value on your inventory if prices fall further.

We saw that drop off in inventory in Signet Jewelers’ (US:SIG) second quarter earnings, as the company gave some interesting insights about its inventory management. 

Signet is the largest jewelry retailer in the U.S., and operates over 2,800 outlets under a number of brands, including Kay Jewelers, Zales, Jared, Banter by Piercing Pagoda, and Diamonds Direct. Globally, the company's brands include Blue Nile, JamesAllen.com, Rocksbox, and Peoples Jewellers.

The NYSE-traded company’s Signet’s total inventory was down 4.4% year on year, but excluding acquisitions that it made, such as that of Blue Nile, inventory was down 8% from last year and 20% below its pre-pandemic levels. 

The company has significantly improved its inventory turn – the rate at which it goes through its inventory – to 1.4 times, which it said was 40% better than pre-pandemic – or simply, as the company put it, to “very healthy levels.”

Right Assortment, Right Place, Right Time

Akron, Ohio-based Signet is using data analytics to ensure it has the right assortment at the right place at the right time. This is significant for the midstream, especially if it is an industry-wide trend. 

In Signet’s case, it’s a part of its drive toward efficiency, regardless of the state of the market. But it’s also indicative of retailers’ focus during periods of slower market conditions. We know there was some overexuberance to buy in the post-Covid boom, but now that the market has slowed, we can expect retailers to be much more cautious in their buying and focused on efficient inventory management.

By how much has the market slowed? Signet’s sales fell 8% year on year to $1.6 billion in the second quarter, which was better than expected, and the company expects the full year to be down by around that same margin.

SIG stock, at $78.62 a share, is trading at 0.62 times trailing 12-month sales and at a trailing price-to-earnings ratio of 8.82. 

Can we extrapolate from Signet to the rest of the market? In some ways. Signet holds about 10% market share in the U.S., but also claims to outperform the rest of the industry. That reinforces the cautionary approach we can expect from the rest of jewelry retail when it comes to their holiday inventory purchases. 

So don’t expect fireworks as jewelers prepare for that important fourth quarter.

Strong Value Showing

Signet’s share price shed 2.7% in August, not historically unusual for the stock. That’s in line with the decline in the share price of the Invesco S&P SmallCap Consumer Discretionary ETF (US:PSCD), which holds SIG stock at 2.5% of assets, at the sixth-largest position in the exchange-traded fund’s 82 holdings.

Fintel’s proprietary Value quant model scores SIG stock at 90.40, ranking it at 2,668 out of 25,810 assessed. Recall that the model ranks companies based on their relative valuation. Scores range from 0 to 100, with 100 being the most undervalued.

Not as strong a showing, but worth a mention nevertheless, is the Quality score on the shares, at 80.28. That puts it at 4,968 out of 35,268 assessed. The Quality Score is a proprietary scoring model that identifies high quality companies, based on cash generating efficiencies.

Analyst ratings, in data compiled by Fintel, show one ‘strong buy’, four ‘buys’, five ‘hold’ recommendations and one ‘sell’

Here Come the Brides

Quick final thought from Signet. The company is betting on a rebound in bridal come the fourth quarter, as that segment is still recovering from the effects of Covid. 

There was a slump in dating during the pandemic as singles were unable to meet. As people came out of lockdown, they started meeting up again, forging romantic relationships and only now two years later are those couples taking the next step with engagements.

Are other jewelry retailers seeing or expecting a bridal boom? Could be.

And, are jewelry retailers being more prudent with their inventory management because of the slow market or simply running their businesses better? Investors are expecting them to do so.

Avi Krawitz is an influencer, consultant and analyst in the diamond industry. He is the founder of Diamond Gems with Avi Krawitz, a boutique consultancy, providing research, analysis and editorial services relating to the diamond market, as well as opportunities for members of the diamond trade to promote their products and services through effective storytelling and engagement.

Robert Lakin contributed to this article.