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Turnaround Letter
Out-of-Favor Stocks with Real Value

December 4, 2020

This week two companies reported: Signet Jewelers (SIG) and Duluth Holdings (DLTH).


This week two companies reported: Signet Jewelers (SIG) and Duluth Holdings (DLTH).

There were no changes in ratings or price targets since our last weekly update.

Friday, December 4, 2020 Subscribers-Only Podcast
Covering recent news and analysis for our portfolio companies and other topics relevant to value investors.

Today’s podcast is about 11 minutes and covers:

  • Brief updates on:
    • Earnings from Signet Jewelers (SIG) and Duluth Holdings (DLTH)
    • Credit Suisse (CS) – impressive new chairman.
    • General Motors (GM) – new deal with Nikola – we have mixed views on this. South Korea remains an unprofitable mess.
    • Molson Coors (TAP) – accelerating their production capacity to accommodate rapid growth in seltzers and other new drinks.

  • Elsewhere in the market:
    • Markets in lull period, shifting from post-Covid recovery to something else, but we’re not yet sure what that “something else” is.

Please feel free to share your ideas and suggestions for the podcast with an email to either me at or to our friendly customer support team at Due to the time limit we may not be able to cover every topic each week, but we will work to cover as much as possible or respond by email.

Earnings reports by Cabot Turnaround Letter recommended companies:
Signet Jewelers (SIG) – Under its previous leadership, Signet suffered large losses in its in-house credit operations after using easy credit terms to boost sales, neglected to update its merchandising and marketing, had an ineffective ecommerce strategy, and had tolerated a toxic culture. New leadership is making impressive progress in reversing all of these problems, making the company much more relevant, profitable and valuable.

Fiscal third quarter results were highly encouraging. Revenues of $1.3 billion rose 9.5% from a year ago and were about 15% higher than consensus estimates. Adjusted per share earnings of $0.11 was much stronger than the consensus estimate of a $(0.77) loss.

Same store sales grew an exceptional 15.1%. While some of this was due to the favorable mathematics from closing weak stores, the fact that total sales grew smartly points to underlying strength in the company’s customer appeal. Ecommerce growth of 71% implies that customers bought from Signet even when they couldn’t or wouldn’t shop at its stores. Signet has introduced a strong assortment of new products – this has been a huge draw for new and repeat customers. Another driver of the growth was likely early shopping in advance of the holidays, and perhaps pent-up demand from a pandemic summer. Still, the growth was highly encouraging. Signet’s inventory looks lean and its relevance appears to be much higher, thus it is more likely to sell its goods without large mark-downs.

Adjusted operating profits of $46.8 million compared to a $(29.3) million loss a year ago. Signet’s merchandising margins were modestly weaker than a year ago as the company worked to clean up its inventory, including from its recently-shuttered locations. Also, early promotions were used to pull some demand forward ahead of the holidays. Costs have been cut with some savings being redirected to more customer-relevant uses. The company did not comment on its coverage of any credit losses incurred by its third-party lenders who help customers pay for jewelry.

Unlike most retailers, Signet has a balance sheet that is stronger this year than it was in the pre-pandemic year-ago period. Net debt of $344 million was considerably lower than the $1.2 billion a year ago. Sharp reductions in cash tied up in inventory, plus generous terms from suppliers, is helping build cash. Following the holiday period, we anticipate further debt reductions.

The turnaround will be tested in the holiday-driven fourth quarter – the outcome is unknowable and could either be strong or fairly weak. The amount of pull-forward of holiday demand into the third quarter is murky. Yet, based on what it can control, Signet is executing on its turnaround and we anticipate that Signet will have at least a reasonably strong fourth quarter.

Duluth Holdings (DLTH) – After struggling with a disjointed and overly aggressive retail store expansion strategy, the company removed its CEO (now led by the founder) and is rebuilding its infrastructure, improving its operational efficiency and slowing its store expansion program.

Third quarter results were positive even though the market drove the shares down 15%. Revenues of $136 million were 13% higher than a year ago, supported by a 40% increase in ecommerce sales. Retail store sales fell 16% as customers generally remain reluctant to shop in-person. The company does not report same store sales – we would clearly like to see this valuable piece of information. Despite the sales growth, investors had expected slightly higher sales volumes. Adjusted per share earnings of $0.03 were higher than the consensus estimate of a $(0.02) loss.

Our take on the share price decline was that investors had anticipated that results would “blow away” the consensus estimate. The company only reported decent results, and this, in Wall Street terms, was pretty disappointing. Also, investors seem to be having difficulty in modeling the company’s earning power given all of the shifting in advertising and other costs.

A major controversy with Duluth is whether its stores are needed to drive customer awareness and sales growth, whether in-store or on-line. The company said that its ecommerce sales in markets where it had no store presence grew 37% in the quarter (impressive) and 46% in markets where it did have a retail presence. These results show some encouragement that the company’s ecommerce strategy is on the right track. New product innovations appear to be producing more sales as well, despite the restrained marketing spending.

In-store sales are struggling, largely because of customer reluctance to shop in-person. The 16% decline in sales at its retail stores was an improvement from the prior quarter, but traffic remained down by 30%. This will probably be a millstone around Duluth’s results in the fourth quarter as well, particularly as the pandemic has worsened recently.

The company is currently planning only one new store for next year, as they want to learn more about the economics, all-inclusive, of new stores. We think this measured approach is a good long-term strategy but not one that will boost near-term sales, which, again, was probably a disappointment to short-term traders.

Adjusted EBITDA of $11.4 million was 57% higher than a year ago and nearly double the consensus estimate. Gross margins fell by about 2.2 percentage points due to extra promotions to boost interest in the Duluth brands. While the promotions reduced gross profits by about $3 million, they achieved their marketing goals, in our view.

The balance sheet remains in reasonable shape. Net debt is $79 million, but we believe much of this will be repaid with fourth quarter profits. We’d like to see Duluth pay off all of its debt.

While the stock price hit was disappointing, Duluth is executing on their turnaround and we remain committed to the stock.

There are no more scheduled earnings reports for the rest of the year from Cabot Turnaround Letter recommended names.