Financial Analysis

FINANCIAL ANALYSIS FOR MANAGERS

FINANCIAL ANALYSIS OF SIGNET JEWELERS AND TIFFANY & CO.

Module: Financial analysis for managers

Prof. PETER THOMAS

REGENT'S UNIVERSITY, LONDON

Team:

ESHWARI THITE

KHUSHALI THAKAR

REENA THAKKAR

SAKSHI AGARWAL

MEETHI

ABOUT SIGNET JEWELERS

"Signet Jewelers Limited is the world’s largest retailer of diamond jewellery. Signet operates approximately 2,800 stores primarily under the name brands of Kay Jewelers, Zales, Jared, H.Samuel, Ernest Jones, Peoples, Piercing Pagoda, Rocksbox, and JamesAllen.com. The Company’s annual sales of $5.2 billion derive from the retailing of jewellery, watches, and associated services " (www signetjewelers com, 2021) Signet is recognised as the world's leading luxury jewellery parent organisation and has proved to perform exceptionally well in the past years.

ABOUT TIFFANY AND CO.

Tiffany and co is a world class company that engages in design, manufacture and sale of jewellery. The firm sells timepieces, leather goods, sterling silver goods, china, crystal, stationery, fragrances, and accessories. It operates through Americas, Asia-Pacific, Japan, Europe, and Other The company was founded by Charles L. Tiffany in 1837 and is headquartered in New York, NY (Forbes, n.d.)

LVMH acquired major stake of the company on January 2021 for $15.8 Billion.

FINANCIAL HIGHLIGHTS

SIGNET

Gross margin was $1.2 billion, or 41.0% of sales, 120 basis points higher to the prior year quarter and 70 basis points lower versus the fourth quarter of FY20 Leverage of fixed costs driven by fleet optimization represented the majority of the improvement to last year, followed by efficiency in distribution related costs Compared to FY20, 250 basis points of leverage on fixed costs nearly offset impacts from non-cash adjustments, as well as higher freight costs.

SGA was $745.8 million, or 26.5% of sales, 30 basis points higher versus the prior year quarter and 290 basis points lower versus the fourth quarter of FY20 Investments in both advertising and labor as part of Signet's holiday strategy drove the variance to last year. Compared to FY20, cost savings from new credit agreements and a more efficient labor model drove the majority of the improvement.

GAAP operating income was $402.4 million or 14.3% of sales, compared to $291.9 million, or 13.4% of sales in the prior year fourth quarter and $223.2 million, or 10.4% of sales in Q4 of FY20.(Bermuda,

2022)

TIFFANY

LVMH reported that all its business groups achieved double-digit organic revenue growth over the period Watches and jewelry grew 16% and saw a 26% increase in profit from recurring operations “ up to $1 billion for H1 2022.”

For the nine months ended 31 October 2020, Tiffany &Co. revenues decreased 25% to $2.31B. Net income decreased75% to $86.3M. Revenues reflect Americas segment decrease of 36% to $826 2M, Comp Store Sales (%) -America decrease from -4.3 to -34.7%, Value of Retail Sales, US decrease of 36% to $826.2M. Net income also reflects Merchandise Margins, Total -% decrease of 3% to 60 4%, Interest expense and financing costs increase of 7% to $31.6M. (Hortman, 2022)

SIGNET JEWELERS

STRENGTHS & WEAKNESSES:

Signet has a strong and reliable distribution network.

They have a successful track record of integrating complimentary firms through mergers.

They have active programs bringing consistency to their products and marketing.

They have built a strong culture between their dealers and distributors over the years

As observed, they require more investment in new technologies

There is not enough marketing - even though the product is a success in terms of sale, its positioning and selling proposition is not clearly defined

OPPORTUNITIES AND THREATS:

Signet's opportunities are largely aligned with its internal strategies and brand values that allow their companies to function with quality, set standards and company values.

Covid's adverse impact leading to market dilution paves way for a greater competitor's advantage

Technological advancements and research in the field of manufacturing and retailing practices could also help the company increase its performance

All companies have market threats that lead to uncertainty and disruption in their general flow of business

Global Economic slow down causing price fluctuations and inflation could act as a threat to the profit margins of the company and increased cost of sourcing and production

Signet deals with global currencies and any fluctuations in currency rates and FOREX could impact the company ' s operations, pricing and in turn its financial conditions

PROFITABILITY RATIOS

Profitability is the ratio to which a business yields profit It is the measure of an organisations profit relative to its expenses.

The higher the ratio , the better is the company performance. The ratios are used to compare company performances

GROSS MARGIN

The percentage of a company ' s revenue that it keeps after subtracting direct expenses such as labor and materials.

Gross margin = revenue - cost of goods sold/ revenue

Hence, the Signet gross profit margin is 39.93 and Tiffany is 14.37

NET PROFIT MARGIN

Net profit margin shows the the company ' s financial health since it is the measure of net profit generated by a company.

Net profit margin = net income/ revenue

The net profit margin of Signet is 9.84 and Tiffany is 9.2

RETURN ON TOTAL CAPITAL

Return on total capital is the ratio that shows how effectively a company turns its capital into profits. It is calculated by dividing the net operating profit tax (NOPAT) by invested capital.

ROTC

=

NOPAT/ Invested Capital

25.11 and 17.78 are the return on total capitals of Signet and Tiffany respectively.

LIQUIDITY RATIOS:

Liquidity Ratios help determine the ability to pay off a company's current debt with its existing current assets.

Current Ratio is the ability to pay off current liabilities with a company ' s total current assets.

Signet's Current Ratio is 1.78 signifies a good short term solvency of the company and the company is in good positions to pay off its current debts. Signet's inventories contribute to the high value of current assets

Tiffany and Co. projected a ratio of 0.83, the number is lesser than 1 indicating shortage of assets that could pay odd its short term liabilities. Signet/s ratio are more favourable while Tiffany's are unfavourable.

The Graph indicates the change of ratios over time. The downward trend can be a assumed as an impact of covid on the short term assets of the both the companies and can be tracked in the future to understand how the companies cope with global adversity

In the case of Tiffany and co. It is note worthy that the company ' s liquidity indicates its deal with LVMH in 2021.

FORMULA FOR LIQUIDITY RATIO: CURRENT RATIO= CA/CL

CA: CURRENT ASSETS INCLUDING CASH, CASH EQUIVALENTS, ACCOUNTS RECEIVABLES, INVENTORY AND OTHER CURRENT ASSETS

CL: CURRENT LIABILITIES INCLUDE ACCOUNTS PAYABLE, WAGES, TAXES PAYABLE, SHORT TERM LIABILITIES AND CURRENT PORTION OF LONG TERM LIABILITIES

REFER TABLE UNDER LIQUIDITY RATIOS IN APPENDICES

LIQUIDITY RATIOS:

Quick Ratio/ Acid Test Ratio is the ability to pay off current liabilities with a company ' s most liquid assets

Signet's Current Ratio is 0.78, it may seem as a ratio lower than that of healthy companies but may indicate that the company is using its funds to pay off its current debts that may have been carried on in the past Signet's trend suggests a stable change in quick ratio over the years.

Tiffany and Co. projected a ratio of 0.81 which reflects that the company holds higher accounts receivables and marketable securities which it eventually used to pay off its debts.

The Graph indicates the change of ratios over time Signet's current ratio highlights an interesting company history. In 2019, with the closure of shops globally and covid's peak the company lost a lot of its current assets in paying of rents with no significant inflow of funds. As stores opened and business picked, it is a good indication of an upward trend in the ratio.

The company can therefore be said to be bouncing back effectively.

Tiffany's trend was downward and would have affected the company ' s solvency if it hadn't done the deal with LVMH.

FORMULA FOR LIQUIDITY RATIO:

QUICK RATIO= QUICK ASSETS/CL

QUICK ASSETS INCLUDE CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES AND NET ACCOUNTS RECEIVABLE

CL: CURRENT LIABILITIES INCLUDE ACCOUNTS PAYABLE, WAGES, TAXES PAYABLE, SHORT TERM LIABILITIES AND CURRENT PORTION OF LONG TERM LIABILITIES

REFER TABLE UNDER LIQUIDITY RATIOS IN APPENDICES

LIQUIDITY RATIOS:

Cash Ratio/ Operational Cash Ratio is the immediate ability to pay off current liabilities with a company ' s cash flows. It is the reliable liquidity ratio with no room for manipulation

Signet's Current Ratio is 0.59, a ratio of more than 0.5 is considered to be an acceptable ratio indicating that signet has enough cash in hand to pay off its current liabilities.

Tiffany and Co projected a ratio of 0.01 which is extremely alarming This directly indicates trouble and was addressed publicly. The key learning being the implication of financial ratios of a company during an internal crisis

The graph indicates the change of ratios over time Signet's cash flow ratio is seen to have taken a slight curve in 2019, when comparing it with the acid test ratio, it can be drawn that the company used its marketable securities its inability to receive its current receivables a means of paying off its current debt and has been improving its liquidity position ever since. 2019 would have been the ideal time to invest in the company ' s shares. Signet's Liquidity ratio is exceptional. They could also now start investing their funds to gain higher returns or redirect them in marketing activities or expansion. Tiffany however was struggling to keep funds within the company.

FORMULA FOR LIQUIDITY RATIO: CASH RATIO= OPERATING CASH FLOW/CL

CL: CURRENT LIABILITIES INCLUDE ACCOUNTS PAYABLE, WAGES, TAXES PAYABLE, SHORT TERM LIABILITIES AND CURRENT PORTION OF LONG TERM LIABILITIES REFER TABLE UNDER LIQUIDITY RATIOS IN APPENDICES

EFFICIENCY RATIOS

A MEASURE OF HOW WELL A COMPANY UTILISES ITS RESOURCES TO MAKE PROFITS.

Accounts Receivable Turnover:

It is the measure of how efficiently a company is able to collect receivables from its clients.

The industry average for the receivables turnover in days is 9 days. Signet's receivables turnover ratio in days is 9.8 days which is close to the industry average and indicates efficient collection of its receivables The Chart represents the industry average and Signet's Accounts Receivable Turnover in days In Comparison, Tiffany takes about 54 days on an average to collect its receivables which is higher than the industry average and signifies its inefficiency.

Average Receivable Turnover = Net Credit Sales

Avg A/c Receivable

Ratio in Days = 365/ Avg. Receivable Turnover Ratio

Signet's Ratio: 37.23 & Tiffany: 6.75

An efficiency ratio can compute the turnover of receivables and liabilities, the amount and utilisation of equity and efficiency of stock and hardware (Kenton, 2021).

Inventory Turnover Ratio:

It is the ratio that helps understand how many times a company ' s stock/inventory is sold and replaced over a period

The industry average for the inventory turnover in days is 180 days. Signet's inventory turnover ratio in days is 212 days which is slightly higher than the industry average, this could be due to the exclusivity and nature of the brand where products are sold for higher values but lesser frequency This is an acceptable Ratio

Tiffany's turnover ratio is 544 days, signifying a major slow down in the businesses sales it is twice as compared to Signet's turnover and indicates a problem. LVMH reported a drastic improvement in the current year ' s sale

Inventory Turnover Ratio= COGS/ Average Inventory or in days: 365/ inventory turnover

Signet: 1.72 & Tiffany : 0.68

Asset Turnover Ratio:

It is the ratio that helps understand the efficiency of a company in using its existing assets to promote its sales

The industry average for the inventory turnover in days is 273 days. Signet's inventory turnover ratio in days is 429 days which is higher than the industry average, Signet's weakness lies in utilising its assets to promote its sales and is an indicator to use these assets better. In 2022, the company improved this ratio to 306 days

Tiffany's turnover ratio is 2027 days, this number supports previous ratios indicating an alarming problem in its sales Tiffany's financial position can be a key reason LVMH decided to restructure and revive the company.

Asset Turnover Ratio= Revenue/ Average Total Assets or in days: 365/ asset turnover

Signet: 0.85 & Tiffany : 0.18

GEARING RATIOS

INVESTOR RATIOS 1 3

INVESTOR RATIOS ARE CONCERNED WITH ESTABLISHING INDIVIDUAL PER SHARE STATISTICS OF PROFITS, DIVIDENDS, ASSETS AND CASH FLOWS FOR THE EQUITY SHAREHOLDERS, AND RELATING THESE TO THE MARKET PRICE OF EQUITY SHARES

Total Debt to Total Assets –

Total-debt-to-total-assets is a leverage ratio that defines the total amount of debt relative to assets owned by a company. The higher the ratio, the higher the degree of leverage (DoL) and, consequently, the higher the risk of investing in that company. (Adam Hayes,2022)

The Formula for Total-Debt-to-Total-Assets Is:

TD/TA = Short Term + LONG Term / Total aSSETS

Signet - 0.31 Tiffany - 0.27

According to the study, there is hardly any difference between the two companies. Yet Tiffany is not burdened by debt obligations if compared to Signet and will probably be able to obtain more financing at potentially lower rates

Long-Term Debt to Assets –

The long-term debt-to-total-assets ratio is a measurement representing the percentage of a corporation's assets financed with long-term debt, which shows loans or other debt obligations lasting more than one year This ratio provides a general measure of the long-term financial position of a company, including its ability to meet its financial obligations for outstanding loans (Will Kenton,2022)

The Formula: LTD/TA = Long term debt / total assets

SIGNET - 0.17 Tiffany - 0.27

According to the analysis, Tiffany has a high long-term debt-to-assets ratio, which indicates the company is relatively at risk and may eventually be unable to pay its obligations Due of this, investors might be sceptical about purchasing shares of the company and lenders will be less inclined to lend it money Contrarily, Signet has a low long-term debt-to-assets ratio it can signify the relative strength of the business

Interest Coverage –

The interest coverage ratio is used to measure how well a firm can pay the interest due on outstanding debt. The interest coverage ratio is calculated by dividing a company ' s earnings before interest and taxes (EBIT) by its interest expense during a given period.

The formula used is:

Interest coverage ratio = EBIT / Interest expense

SIGNET - 53

Tiffany - 8.54

Here its comprehensible to identify that Signet has higher ratio which depicts lower risks for creditors to invest. Whereas Tiffany's ratio indicates higher risk to invest

CONCLUSION:

According to our study, Signet has a good valuation as compared to Tiffany & Co. Signet has better return on capital when compared to Tiffany & Co Though Signet has missed the opportunity of expanding by investing more as per its gearing ratio. And Tiffany has higher debts than equity so investor may not prefer to invest in it. The gearing ratio of signet is 0 12 and Tiffany's being 1 26 the ideal gearing ratio for a company is 1.2:1 tiffany has a higher ratio because of its debt quantum being high and the debt can be easily be paid by the equity it owns

When it comes to the current ratio signet has more of current assets than its current liabilities as compared to Tiffany the ratio of signet being 3.29 and tiffany is at 1.08. Both have the ability to sustain in the market with what they own and owe in the current period It is basically the ability to pay off its current liabilities

In case of profitability the gross profit ratio of signet is 39 93 and tiffany's is 14 37 this indicates the percentage of each dollar of revenue that the company would retain as gross profit signet therefore is in a better position. And net profit wise both are on similar lines.

The return on capital employed is a major factor to pay attention to when interpreting a company ' s position and performance in case of signet

Even with the adversity of Covid, Signet could maintain its financial position in the market. Due to its internal brand strategies and usage of technology, Signet has a positive outlook. To conclude, Signet has a good financial strength than Tiffany. Moreover, Tiffany was merged with LVMH this year which indicates the necessity of reviving this company in the market

Overall, both the liquidity and profitability of Signet are more sound and more attractive to a potential investor.

The above data provides adequate reasoning to invest in Signet. It is one of the leading and fastest growing companies.

KEY LEARNINGS: FINANCIAL ANALYSIS FOR MANAGERS

REFRENECES

www.signetjewelers.com. (2021). Signet Jewelers Limited - Investors - Financial Reports. [online] Available at: https://www.signetjewelers.com/investors/financialreports/default.aspx [Accessed 11 Dec. 2022].

Forbes. (n.d.). Tiffany & Co. | Company Overview & News. [online] Available at: https://www.forbes.com/companies/tiffany-co/?sh=355b19f22d04 [Accessed 12 Dec. 2022].

Kenton, W. (2021). Efficiency Ratio. [online] Investopedia. Available at: https://www.investopedia.com/terms/e/efficiencyratio.asp.

http://fernfortuniversity.com/term-papers/swot/nyse/3147-signet-jewelerslimited.php

Bermuda, H. (2022) 'Signet jewelers reports strong fiscal 2022 results and market share gains' Available at: https://www.signetjewelers.com/investors/financial-newsreleases/financial-news-release/2022/SIGNET-JEWELERS-REPORTS-STRONGFISCAL-2022-RESULTS-AND-MARKET-SHARE-GAINS/Accessed:15 November 2022).

Hortman, I. (2022) 'LVMH:Tiffany&Co's first half year was excellent' Available at: https://en.israelidiamond.co.il/news/financial-news/lvmh-tiffany-halfyear/#: :text=LVMH%20reported%20that%20all%20its,%241%20billion%20for%20H 1%202022.”(Accessed:15 November 2022).

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APPENDICES:

The Balance Sheet extract used for the calculation of the Liquidity and Efficiency Ratios is attached below:

THE BALANCE SHEET EXTRACT USED FOR THE CALCULATION OF THE GEARING RATIOS IS ATTACHED BELOW:

LONG TERM DEBT TO TOTAL ASSETS COMPARISON