SIG Q1 2018 Post-Earnings Update (5/26/17):

Checking in to provide a quick update and my thoughts following yesterdays Q1 2018 earnings release and the
coinciding news on the credit portfolio. Signet put on quite the spectacle yesterday and there is a whole lot going
on here. There is also a significant amount of confusion among investors and sell-side analysts. This was truly a
stunning earnings release that was full of PR spin and, in my opinion, potentially misleading statements regarding
the material financial impact on SIGs earnings.
Earnings Summary:

Q1 2018A Q1 2018E Q1 2017A Q4 2017A

EPS $1.03 $1.64 $1.95 $4.03
Revenue ($ millions) $1,403.4 $1,455.0 $1,578.9 $2,269.9
Company Wide Comps (11.5%) (8.6%) 2.4% (4.5%)
Sterling Comps: (12.8%) (10.0%) 2.3% (4.9%)
Kay Comps (13.5%) 4.7% (5.0%)
Jared Comps (10.3%) (1.7%) (3.2%)
Regional Brands Comps (21.4%) (3.6%) (16.4%)
Zales Comps (10.9%) 2.5% (3.9%)
UK Jewelry Comps (3.5%) 3.4% (3.8%)

As shown by the numbers above, SIG missed big time across the board on virtually every metric (EPS, Revenue,
and Comps/SSS). In addition, SIG somehow still reaffirmed FY 2018 guidance of $7.00-$7.40/share and comps
down low-to-mid single-digits (more on that later), despite missing EPS estimates by ~40%. In addition, SIGs
operating cash flow was down 50.3% year over year. Perhaps the more eye catching data point was Free Cash
Flow (FCF) for Q1 2018. Remember FCF is often cited as a central part of the bull thesis. FCF for Q1 2018 was
down 99.2% year over year...in dollar terms, FCF was $600 thousand versus $75.1 million during the same time
period last year. FCF was almost negative for the quarter! Its important to remember that SIG management
touted their full year FCF growth in the Companys Q4 2017 earnings release (despite quarterly FCF growth
being negative), yet there was no mention/disclosure of SIGs FCF in yesterdays earnings releasecoincidence?
I doubt it. No specific disclosure of Extended Service Plan (ESP) revenue and what % of sales ESPs accounted
for, but SIGs CFO, Michele Santana, did say on the call that going forward ESP revenue should be modeled as
growing slightly above sales. In the earnings release and presentation, SIG gives very few details with regard to
credit metrics. However, they do provide numbers for NPLs and average monthly payment collection rate. NPLs
increased 40 bps y/y from 3.6% to 4.0%, the largest year over year increase in NPLs since fiscal Q3 2016. The
average monthly collection rate declined once again to 11.4%, from 12.3% (-90 bps). Historically, the average
monthly collection rate has been highest during Q1.
Credit Transaction Summary:
The other significant news from Signet was what seemed to be a rushed announcement of the first phase of
strategic outsourcing of the credit portfolio. The Company plans to outsource the credit portfolio in 2 phases.
Phase I, which is expected to be implemented by October 2017, includes the sale of $1 billion of prime-only
credit quality receivables to Alliance Data Systems (ADS). This was probably the easiest part of the strategic
review and it doesnt make logical sense as to why Signet would sell these receivables before the non-prime

Zander Rosenbluth, Research Analyst

53 Forest Avenue, 1st Floor | Old Greenwich, CT 06870 | zr@lonestarvm.com |+1.203.489.9503
receivables. After repayment of the JP Morgan securitization facility ($600 million), that will leave Signet with
$400 million in cash to repurchase shares and/or repay debt. In addition to selling $1 billion of prime-only
receivables to ADS (which SIG estimates to be 55% of receivables), SIG will outsource credit operations for
prime-only credit quality customers to ADS. The ratings agencies were not pleased with Signets decision to
retain only non-prime receivables on their balance sheet.
As a result of the ADS transaction, SIG will be retaining the existing non-prime receivables on its balance sheet
and continue to originate new accounts until Phase II is completed. However, SIG also entered into an agreement
with Genesis Financial Solutions (Genesis) to outsource the credit servicing functions of the non-prime
receivables. Genesis is not only a credit servicing company, but is the largest second-look provider in the
country, focusing on retail financing programs for non-prime consumers. As part of this agreement, Signet will
convert receivables from recency to contractual accounting. Lastly, SIG will also form a partnership with
Progressive Leasing, a subsidiary of Aarons, Inc. (AAN), to provide a lease a Lease-Purchase Program to
customers not eligible for the primary (SIG/ADS) and secondary (Genesis) programs. So when Phase I is
completed, SIG will be left with the extremely delinquent, subprime receivables on their balance sheet
As part of Phase II of the outsourcing program, SIG intends to fully outsource its secondary credit programs,
including the sale of the remaining non-prime receivables on its balance sheet. What was surprising about this
was that SIG also announced it plans on engaging in discussions with capital providers to finalize the fully-
outsourced structure, which was puzzling because most investors believed the Signet had already been engaged
in discussions with regard to the subprime portfolio for the last year!
Confirmed, Undisclosed SEC Enforcement Activity:
On Thursday afternoon, news of a confirmed, undisclosed SEC enforcement proceeding into SIG was released by
John Gavin, CEO and Founder of Probes Reporter. Probes Reporter is an independent publisher of investment
research focused on public company interactions with the SEC. On April 4, 2017, Probes Reporter received a
response to a FOIA request from the SEC denying access to records over concern their release could reasonably
be expected to interfere with enforcement activities. In a response from the SEC to an appeal filed by Probes
Reporter dated May 4, 2017, Probes Reporter claimed the Existence of on-going SEC enforcement proceedings
confirmed on appeal; Access to records remains blocked.
In other words, this was confirmation of a previously undisclosed SEC Division of Enforcement investigation into
Signet. Note the SECs Division of Enforcement is completely separate from the SECs Division of Corporation
Finance. This does not come as a total surprise given the comment letters I previously discussed that were sent by
the SEC to Signet back in October 2016. It will be interesting to see if Signet determines this
investigation/enforcement proceeding material enough to disclose in the 10-Q.
My thoughts on earnings:
Wellif there was any doubt in anyones mind that Signet was subprime lender disguised as a jewelry company,
there shouldnt be anymore. By October 2017, absent a sale of the non-prime receivables that is highly unlikely,
Signet will definitively be a subprime lender that just so happens to sell jewelry! It makes no logical sense for
Signet to sell the prime receivables first and it seems the 3 major ratings agencies agreed with me. S&P, Moodys,
and Fitch all downgraded Signets credit rating post earnings yesterday. All 3 took their outlooks from stable to
negative, with Moodys going as far to say they are placing SIGs rating under review and considering
downgraded the Company to junk status! It is also notable that Genesis, who also is also a provider of non-prime
second-look credit programs did not purchase Signets non-prime receivables. I believe it is reasonable to
assume that Genesis, who has agreed to service SIGs non-prime receivables, was given a look into Signets credit
portfolio and didnt like what they saw one bit. This could suggest the credit profile of the non-prime receivables

Zander Rosenbluth, Research Analyst

53 Forest Avenue, 1st Floor | Old Greenwich, CT 06870 | zr@lonestarvm.com |+1.203.489.9503
was so poor that Genesis simply couldnt justify purchasing the receives (or Signet didnt like the deal they were
offered). Also, what in the world has Signet been doing for the past year? They already have a relationship with
ADS through Zales, which should have made the $1 billion prime receivables transaction fairly easy. The primary
reason for the strategic evaluation of the credit portfolio was to get the subprime receivables off the balance
sheet!!! Signets balance sheet is officially smoking, but the fire hasnt even started.
With regards to the actual earnings, the numbers speak for themselves. Signet missed on every possible metric
and all segments had negative comps. See what happens when you pull back on credit? The Sterling segments
operating margin decreased 530 bps year over year (14.9% vs. 20.2%). Zales margin deterioration continued as
well...which leads to the BIG question with Zaleshow do you not impair goodwill, especially since it's been 3
full years since the Zales acquisition and Signet stopped taking those silly "IT implementation" earnings
adjustments this quarter?? Earnings were abysmal, yet somehow the Company had the nerve to reaffirm their EPS
guidance range and they excluded the impact of the pending credit transactions!! Q1 2018 EPS accounted for
~14% of annual projected EPS based on the midpoint of managements EPS guidance. For some historical
context, Signets Q1 EPS as % of FY EPS is usually ~25%. So, unless management is banking on a massive and
rapid recovery in their business over the next 3 quarters, Id say Im a little skeptical of their guidance.
Im also a bit skeptical of many statements management made regarding the potential financial impact of the
credit transactions, as well as some of the other statements management made in yesterdays dual press releases
and on their earnings call. One particular statement that stood out to me: The conversion to contractual aging
methodology for the non-prime accounts receivable that will remain on Signets balance sheet is not expected to
have a material impact on Signets financial statements. It doesnt take a credit specialist to know that a portfolio
of severely delinquent non-prime receivables will have a significant material impact on SIGs financials
statement. However, I spoke to some experts anyways, who stated that it is virtually impossible for a company to
switch from recency to contractual accounting and the transition not have a material impact on the Companys
financial statements. Last night, I also communicated my concerns to the SEC Division of Enforcement claiming
that Signet not providing any sort of insight into Pro Forma delinquency numbers (on both a recency and
contractual basis) for the remaining 45% non-prime portfolio is dangerous for the average shareholder. Those Pro
Forma numbers/estimates are materials to understanding risks for Signets shareholders. Thats my opinion. In
light of the SEC having already questioned the Companys accounting practices in a comment letter and
yesterdays news of an ongoing investigation, readers are advised to draw their own conclusions.
So what now? Its up to investors to draw their own conclusions, but theres no doubt in my mind that Signet is
now a subprime lender (who just so happens to enjoy selling jewelry). With regards to the balance sheet (and the
seemingly messy and rushed transaction with ADS), where theres smoke theres usually fire.
Rememberall that glitters is not gold!

To view my live tweetstorm of SIG's earnings release and call on Thursday, see the link below:
https://twitter.com/zanderosenbluth/status/867707323313160193

Zander Rosenbluth, Research Analyst

53 Forest Avenue, 1st Floor | Old Greenwich, CT 06870 | zr@lonestarvm.com |+1.203.489.9503
P.S. I thought readers might enjoy reflecting on these interviews from a year ago. Posted some of my favorite
quotes as well. Guidance was all revised multiple times last year, and if this business is all about trust like
Signets CEO, Mark Light, repeatedly claimswhat has Mr. Light and the rest of the management team done
to regain investor trust in Signets guidance?

Mad Money Interview (April 7, 2016): https://www.youtube.com/watch?v=w-Nu2QR_uXg

Mark Light (ML): Zales is doing very wellwere thrilled whats going on with whats going on with the
acquisition and integration of Zales with our company
ML: We literally have tons and tons of data understanding how jewelry customers react to credit and how they
pay for their credit bills, which is different than how they pay for their cars. So, our credit portfolio is doing very
well and we think its a tremendous enhancement to our business
ML: We have a very good handle on how we run our credit business
ML: We know the mid-market better than anyone else and thats why were a growth company quite frankly
Jim Cramer: Your relationship with credit, is it similar to what, you know, credit card companies accept
the fact that there is some loss but they well. I mean, net net, you net out good on your credit?
ML response to Cramer: Oh absolutely, we net out good. It is a tremendous enabler and we understand these
customers, we understand the jewelry customers better. We have a lot of tremendous data to understand how they
pay for their jewelry, so yes its a very, very good program for us.

Mark Light CNBC interview (June 14, 2016): http://video.cnbc.com/gallery/?video=3000525885

Kelly Evans (KE): Is Jim [Grant] wrong?
Mark Light (ML): Yes, Jim is wrong on a lot of fronts.
ML: Everything we do, everything we studyWe understand the most important thing to our customers is trust
and integrity, so yes I think Jim is wrong
ML: But the most important thing is that we take care of our customers cause we are all about trust
KE: Is credit a lever that youre pulling maybe too hard in order to produce your sales and what happens
if those delinquencies start to rise?
ML: Absolutely not.
ML: We have very healthy customers. We understand these jewelry customers, theyre different than your
typical customer
ML: We believe [credit] is a competitive advantage because were different. These are jewelry customers, they
act differently.
ML: We still believe our credit book is a competitive advantage
Mark Light on 6/14/16: Right now our credit book is operating exactly how we expect it to be, it is right in line
with our most recent guidance we gave on our forecast for profitability, so as we speak right now, we are very
satisfied with the way our credit book is performing (Zander Rosenbluth on 5/25/17: guidance was $8.25-$8.55,
2-3.5% comps for FY 2017; finished FY 2017 with Adj. EPS of $7.45 and comps of -1.9%)

Zander Rosenbluth, Research Analyst

53 Forest Avenue, 1st Floor | Old Greenwich, CT 06870 | zr@lonestarvm.com |+1.203.489.9503