Signet has outsourced the last batch of its credit operation, ending decades of supplying in-house credit to consumers.
The company today announced that it has sold its existing and future non-prime receivables to funds managed by CarVal Investors and Castlelake.
A company statement said that, by divesting itself of responsibility for consumer credit, the company can now fully focus on its retail jewelry business, reduce its balance sheet risk, lower working capital needs, and return capital to shareholders—a point echoed by CEO Gina Drosos on Twitter:
Today we recognize a major milestone in our strategic outsourcing of credit w/ the completion of Phase 2. This allows us to fully focus on our core jewelry business, while providing a full spectrum of finance & lease purchase options to our CUSTOMERS! #SignetPathtoBrilliance
— Gina Drosos (@GinaDrosos) July 2, 2018
For now, the company seems to be focusing on the shareholder aspect. While it will pocket $445.5 million from the sale of its non-prime book (minus a 5 percent holdback), it expects to use the sale to repurchase its shares.
Outsourcing its credit marks a dramatic turn for a company that traditionally called its in-house credit program a significant competitive advantage. That all changed two years ago, when analysts—some connected to short sellers—started noticing how much of Signet’s sales were done on credit (60 percent), and, in particular, how much of that credit was subprime (about 45 percent). “Is Signet a sparkly empire or a finance company?” asked Bloomberg. Analysts carped that by using a mostly obsolete, if legitimate, accounting method called recency, Signet was greatly underestimating the amount of bad debt on its books.
Last December, Signet disclosed that both the Consumer Financial Protection Bureau and the New York State Attorney General’s office were looking into its credit practice. Signet said its actions have all been “lawful.”
In May 2016, former CEO Mark Light enlisted Goldman Sachs to find solutions to its credit issues. One year later, he announced the company would start outsourcing its credit, starting with the $1 billion sale of prime credit account receivables to Alliance Data Systems. It also enlisted Genesis Financial Solutions to service those accounts. In addition, Progressive Leasing will now offer a new lease-purchase option to customers who do not qualify for credit.
Under the new deal, CarVal Investors will purchase 70 percent of the non-prime receivables going forward, and funds managed by Castlelake will purchase the other 30 percent.
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