FPA Capital Comments on Signet Jewelers

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May 02, 2014

Signet Jewelers (SIG, Financial) is another stock that has performed exceedingly well for the portfolio over the last several years. Our investment strategy initiated its position prior to the financial crisis and then added to the position as the stock declined into the mid - single digits. During the most recent quarter, SIG reached an all - time hig h at over $105 a share.

The most recent run up in SIG shares is due to investor excitement of the company's announced acquisition of its strongest U.S. competitor, Zale Corp. Signet owns and runs the Kay Jewelers and Jared jewelry retailers. If federal r egulators agree to the merger between Zale and Signet, SIG would be in a position to substantially improve Zale's operating profits. Besides buying diamonds at a better price than Zale currently pays for them, SIG can add its branded jewelry products to Za le's current offerings. SIG's branded products, such as Neil Lane, Jane Seymour, and Tolkowsky, provide materially higher profit margins than more commoditized diamond products. Zale does not have these brands and would likely benefit from carrying these b rands and others in their stores.

Nonetheless, with the huge run up in SIG's share price, we have reduced our position and now have less than a 2% position. We believe the merger will be approved by the regulators, and SIG's profits should be enhanced by the combination. However, if the merger is not allowed to proceed, SIG's stock would likely decline materially, in our opinion. Therefore, we made the decision to reduce the SIG position in the quarter and will likely pare the position further should the s tock continue to rise.

From FPA Capital's first quarter 2014 commentary.