The deal made sense on paper, but now once-thriving Signet is beset with challenges

Through all of Signet’s recent troubles, management continues to point to its 2014 purchase of then-competitor Zale Corp. as a bright spot. On its November 2016 earnings call, it touted and raised expectations for synergies stemming from the deal.

“We still feel very good about the trend lines at Zales,” said CEO Mark Light on the earnings call following its holiday sales results. “We feel good about the controls we have in place and the opportunity to continue to capture market share and incremental profitability. We feel good and strong about the team we have at Zales and the store presentation. We are confident about the future for the Zales brand.”

Yet, given Signet’s recent holiday sales results and other issues, it’s worth reexamining this purchase.

Many in the jewelry market, as well as others, believe that the Zale acquisition was spurred by “activist investor” Corvex Management taking a stake in Signet, beginning in December 2013. One of Corvex’s stated goals was “accelerating [Signet’s] M&A.”

However, according to a decision in a lawsuit contesting the merger, Signet first approached Zale in October 2013, two months prior to Corvex’s first stock purchase. But the suit says Corvex may have goosed things along:

[Zale’s] Board concluded that Corvex’s announcement likely had prompted Signet’s desire to proceed more quickly with a potential transaction with Zale and was a favorable development for [Zale].

(Asked for comment on the role of Corvex and other investors, Signet spokesman David Bouffard says the “true drivers of the acquisition” can be found in this press release.)

By scooping up Zale, Signet scored three main divisions. One, Piercing Pagoda, has turned into Signet’s unexpected star; it was the only U.S. nameplate to increase comps, both at holiday and in the second quarter. Signet also scored Zale Canada, another solid pickup, as it landed the company in a third market.

But the bulk of the purchase consisted of Zales and Gordon’s stores. Gordon’s is a legacy brand that has shrunk to 47 stores, but Zales was a seemingly more attractive purchase; it was Signet’s strongest competitor in the malls.

Since then, it’s become clear that malls are suffering, with traffic dropping. With Zale, Signet gained significant mall market share. But it was just a larger slice of a shrinking pie.

Then there’s the question of cannibalization. Signet was already dominant in the malls. In some cases, it owned two or three stores in the same shopping center. Buying Zale made it even more dominant, and increased this overlap exponentially.

Signet is trying to differentiate Zales from its other brands through customer profiling. But there is still a lot of overlap. Now all its nameplates carry Ever Us. Jared also stocks the Vera Wang line, which originated at Zales. And Zales’ advertising—once among the best in the industry—is getting awfully Signet-like.

Further, removing a rival is not always a good thing. Opponents keep you on your toes and add fresh perspective. That is important in a static field like mall jewelry.

The Zale purchase nearly doubled Signet’s size. And in the two years since, Signet has seemingly found running 3,600 stores a lot more complicated than running nearly 2,000. Consider the recent stone-switching allegations. Yes, they are overblown. But the bigger your operation, the harder it is to control every single person within it. As one vendor put it: “Signet did not have these problems before it purchased Zale.”

What about from a stock perspective? At least Corvex made out okay, right? On Feb. 17, 2014, before the deal was announced, Signet’s stock traded at $74. Following the announcement, shares jumped dramatically, at one point hitting $144. But since then, its stock has dropped, and at press time, it was trading at $84. (Corvex sold half its stake in December.)

The Zale purchase is a done deal, and given Signet’s size and reach, everyone in the jewelry industry should root for its success. Many purchases, including that of Kay by Signet’s Sterling division, encounter issues at first. Signet remains a well-run, forward-thinking, ethical company that will find a way to make this work; it knows how to integrate new divisions, having done so quite often.

But management is in a tough spot. It’s not easy being any kind of retailer these days. Until last year, it appeared that Signet would stay immune from retail’s larger issues, and the Sterling division would be blessed with endlessly rising comps. But that’s not true, not anymore. Now Signet must fix problems in three different markets and at three different U.S. nameplates—and, at the same time, continue the integration of a 1,600-store chain. That’s a lot. It’s not surprising problems, like the technical glitches that hampered e-commerce over holiday, spring up.

The Zale acquisition made sense on paper. The thinking went: Signet knows how to run mall stores and is financially secure. Zale had fallen behind and had so-so finances. Let Signet take over Zale and all will work out.

But now we have a once-thriving company that’s beset with challenges. Granted, there are many reasons for those issues. But it probably shouldn’t be surprising that post-Zale, Signet is looking like a mixed bag. According to Harvard Business Review, “Study after study puts the failure rate of mergers and acquisitions somewhere between 70 percent and 90 percent.” All those deals probably looked great on paper too.

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