Signet’s earnings report signals growing synthetics problem and a change in the company’s messaging

The company is placing greater emphasis on moving lab-grown diamonds to the fashion segment, which proved to be a ‘good strategy’ for it over the holiday season

Bermuda: Signet Jewelers is shifting its lab-grown diamond offering toward the fashion jewellery category, mirroring the broader trend taking effect across the industry. Signet can least afford further infiltration of synthetics to the engagement ring segment, as it claims some 30% of the US bridal jewellery market. Bridal accounted for 43.7% of Signet’s revenue in the fiscal year that ended February 3, 2024, with the remainder split between fashion jewellery, watches, its services division, and other streams which includes diamond sourcing. 

Group revenue fell 9% to $7.17 billion for the year, reflecting the struggles for growth experienced across the trade in 2023. As the largest seller of jewellery in the US, with an estimated 10% overall market-share, Signet tends to serve as a bellwether of what’s happening in the broader industry.

Three main themes stood out in its annual earnings report and analyst call on March 20. The first relates to the idea that the engagement and bridal market is still due for a correction from the COVID downturn. Signet anticipates a boom in engagements in 2024. The theory is that people couldn’t date during the pandemic, so new relationships only started to form once the lockdowns ended. Given a two-to-three-year dating cycle, a spike in nuptials was expected. But that did not transpire as Signet’s bridal sales in North America fell 12% year on year to $902 million in the fourth quarter. Signet didn’t talk about the “engagement trough” as much this time as it has in previous earnings reports. It may be tempering expectations, though it does expect engagements to increase 5% to 10% in the coming year.

The company can capitalize on a wedding boom, given its market share. But it is being challenged by the heavy discounting environment in which it operates – the second major theme from the report.

“Industry data suggests independent jewellers accelerated their deep discounts in lab-created diamonds and stepped up their discounting for natural diamonds modestly,” CEO Gina Drosos told analysts.

Signet managed to withstand that promotional pressure, she added. The company’s average transaction value slid just 0.6% year on year to $497 during the fourth quarter, while the number of transactions fell 6.7%.

Jewellers are discounting lab-grown as wholesale prices fell sharply in 2023 and continue to decline this year. They’re still seeing high margins for synthetics but are reducing prices to reflect their costs. Ultimately, Signet will need to do the same. Given that scenario, the company becomes increasingly vulnerable the more that consumers ask for lab-grown diamond engagement rings.   

Which brings us to the third major theme that Signet is dealing with: finding the right balance of lab-grown in both its inventory and its messaging.

Of Signet’s total merchandise sales in fiscal 2024, 12% were of products containing synthetic diamonds, the company reported. Drosos noted that “lab-created” diamonds remains in the teen percentage of overall jewellery sales [in the US], with Signet’s reliance on the product slightly below the average given its strength in bridal.

The company – and independent jewellers – cannot afford for that number to grow. Signet’s earnings report signaled a recognition of that and a change in the company’s messaging on synthetics. It is placing a greater emphasis on the product’s place in the fashion segment, which proved to be a “good strategy” over the holiday season, Drosos added.

Signet appears to be refreshing its message on natural diamonds, stressing both the diamonds-do-good story and the value proposition of natural diamonds. “I think that consumers are becoming more aware that lab-created diamond prices are falling, and so while they might be great for fashion jewellery, there’s something very, very rare and individual about a natural diamond,” she said. “And so, we think that is a potential tailwind for natural diamonds in the year ahead.”

Having played its part in conditioning consumers to believe that lab-grown is an acceptable option for that meaningful love engagement ring gift, Signet needs to lead the market in the antidote story that will feature in this fiscal year – that natural diamonds provide the value consumers seek, leave jewellers less vulnerable to discounting, and will help them capitalize on the bridal boom that Signet believes is still coming.

Courtesy: avikrawitz.com