Consumer

Sarah Halzack is a Bloomberg Gadfly columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

When it comes to digital know-how, Signet Jewelers Ltd. has the right idea: If you can't build it, buy it.

The corporate parent of the Kay and Zales jewelry megachains announced Thursday that it agreed to pay about $328 million to acquire R2Net, the company that owns JamesAllen.com, a millennial-friendly online diamond shop. News of the deal came as the company surprised investors with an increase in same-store sales, which sparked a rally in the shares. 

Looking Better
Signet surprised investors in the latest quarter with improved performance
Source: Bloomberg

To obtain this trinket, Signet is paying 1.6 times the roughly $200 million in revenue that is projected for JamesAllen.com in the current fiscal year. The company expects the purchase will be accretive to earnings by next year -- though given that the jewelry behemoth pulled down $6.4 billion in sales last year, the addition of JamesAllen.com is unlikely to make a meaningful difference on the income statement.

But what's important is what this deal shows about how management is thinking. In particular, it's getting serious about fixing Signet's inconsistent e-commerce performance. It helps, for example, that the president of JamesAllen.com, Oded Edelman, is poised to become the chief digital innovation adviser at Signet. "Acqui-hiring" someone who knows this area well is a sound idea.

Plus, JamesAllen.com has been aggressive about developing technology that could prove crucial to scoring online diamond sales. It has developed features such as interactive videos of each of its diamonds and 360-degree HD images of the jewels that customers can zoom in on to see the tiniest of details. That's a tool you might not care about when buying a T-shirt or laundry detergent, but could help get a shopper to say "I do" to an engagement ring or pricey keepsake. Good for Signet for realizing it's going to need this kind of innovation going forward.

While all investors stand to benefit from Signet's efforts to shore up its online division, those sitting on loss-making positions are likely even more grateful for steps in this direction that could lead to a further rebound for its stock. Among these? Private equity firm Leonard Green & Partners LP. 

Slippery Slope
Signet's investors including Leonard Green haven't had much to smile about lately
Source: Bloomberg

Exactly a year ago, the Los Angeles investor agreed to buy $625 million worth of preference shares from Signet, from which it's earning annual dividends worth 5 percent. But because of the stock's sharp decline since then, if those shares were converted per the agreed-upon terms, or roughly $94 apiece, Leonard Green's paper loss would be around 30 percent even after factoring in Thursday's bounce. The firm's best-case scenario if things don't improve is to wait for the company to redeem the preference shares at face value, which can't happen until November 2024 at the earliest and would be an outcome that'd clearly be frowned upon by the firm's investors.

Tarnished
Investors betting against Signet recently reached an all-time high, but recent moves to address its weak online performance may encourage them to pare their positions
Source: Markit, via Bloomberg

But Signet is improving, and he company's recent moves also may help change the perspective of some of its skeptics. Short interest has fallen from all-time highs. More aggressive steps from management could see it decline further yet.

--With assistance from Tara Lachapelle.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Sarah Halzack in Washington at shalzack@bloomberg.net
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net