It's prawn free as Signet turns into a swan

It used to be the ugly duckling of retail, cursed by the remark that its products were 'crap'. Now, says Miranda McLachlan, it's a City golden boy

At Signet Group, the "R" word is rarely mentioned. It's been a long journey for the jewellery retailer since its former chief branded the company's own products as having a shelf-life shorter than a Marks & Spencer prawn sandwich.

Gerald Ratner gained notoriety in 1991 when he claimed that his stores were "selling a pair of earrings for under a pound, which is cheaper than a prawn sandwich from Marks & Spencer", adding unhelpfully:"But, I have to say that the sandwich will probably last longer than the earrings."

Thirteen years on, many retail analysts now appear to be backing Signet's ear-rings ahead of M&S's prawn sarnies, and are unabashedly upbeat about the group's prospects.

After it hit rock bottom in the early Nineties, a savvy new management team led by the gruff old warrior James McAdam has turned Signet around. It is now at the stage where it is knocking on the door of the FTSE 100, with a market value of about £1.8bn, ahead of next week's quarterly reshuffle of the index.

Merrill Lynch's retail analysts nominated Signet as "among the best long- term growth profiles in our universe", in a recent research report. Earlier this month, Signet revealed that second- quarter sales were up 6 per cent.

On Wednesday, the transatlantic jewellery group is expected to unveil a 10 per cent rise in first-half profits before tax to £52.7m, benefiting from robust diamond sales in the US. As one analyst noted, such merchandise is "hardly prawn sandwich territory".

Mr Ratner was forced to stand down as chairman in 1992 in the wake of his comments that the chain's products was "crap", paving the way for Mr McAdam, the Glaswegian former boss of textiles group Coats Viyella, to take over as executive chairman.

The colourful retailer's departure was also prompted by the fact that the company, known then as Ratners, was in financial trouble after a series of poorly executed acquisitions. Deutsche Bank analyst Rod Whitehead says the group "was grossly mismanaged in the late Eighties".

The company bought assets at very high prices and financed them with expensive debt instruments, says Mr Whitehead. "He also made no attempt to gain any synergies."

But it should not be overlooked that it was Mr Ratner's decision to move into the US in 1986 - a market which now outperforms the original UK franchise. Under Mr McAdam and chief executive Terry Bullman, the group has focused on selling mid-market jewellery, divesting underperforming brands and making operational improvements - such as developing its products, store formats and marketing strategy.

Perhaps most importantly, the group has concentrated on its employees in an industry where every item has to be sold individually. This has given it an edge, according to Mr Whitehead, who says Signet staff's knowledge is "second to none".

Bolstered by President George Bush's tax incentives unveiled last year, the strong American consumer market has helped to drive up Signet's US sales by 6.8 per cent in the second quarter. About 70 per cent of these sales are diamonds. Signet also continues to pick up market share in the US at the cost of rivals Zales and Whitehall. And its Jared superstores have proved a powerful source of growth, producing five times the sales of normal stores - and Signet could potentially increase these outlets from 90 to 250.

The company has also boxed clever in the past year, moving quickly to increase prices to avoid being stung by rising raw material costs. Unfortunately, much of the strength of its American trading performance has been offset by the weaker dollar.

Its UK stores, meanwhile, generated about 4.4 per cent growth in the second quarter. In the highly fragmented British market - where Signet operates 599 stores under the H Samuel, Ernest Jones and Leslie Davis brand names - the group has again managed to outperform many of its rivals which include major department stores.

Despite its strong performance, Signet's shares have remained volatile, significantly underperforming the overall retail sector this year (although the shares are typically weak at this time of year). The stock started 2004 at 103p, rose to just under 120p in April and is now back trading just below 103p.

Broker Credit Suisse First Boston believes that the stock, currently trading at a price-earnings ratio similar to its peers, continues to "merit a premium of around 10 per cent". It is currently trading at about 12 times 2005 forecasts.

Verdict Research chairman Richard Hyman says that the jewellery sector in the UK has been performing well in general. While spending on jewellery is highly discretionary, he continues, consumers have been moving in favour of "wants" rather than "needs" for some time.

Overall, retail in the UK has enjoyed a relatively good year, with demand driven by high employment and rising average earnings, while interest rate rises haven't yet had too much of an impact, adds Mr Hyman.

However, Verdict is predicting a slowdown over the remainder of the year as rate increases finally take their toll. A recovery is then anticipated in the second half of 2005.

Mr Whitehead at Deutsche Bank does not expect Signet to be overly optimistic about its outlook next week. "This is a company which is always very cautious in its statements, so its not going to announce everything is fantastic," he says. "A substantial proportion of its earnings are made in November and December so they never know what it's going to be like."

Of course, some more cautious market players, wary of a downturn in US and UK consumer spending, still opt for the M&S prawn sandwich over Signet earrings.

But these days it is M&S which is the turnaround story; that tale has already been told at Signet.

HE'S MADE IT THROUGH THE WILDERNESS AND ON TO THE WEB

By Abigail Townsend

"The wilderness years" pretty much sums it all up. After Gerald Ratner's careless references to prawn sandwiches and "crap" jewellery caused him to quit the family firm in 1992, the next 11 years were spent doing, well, not very much. He opened a gym, got to know his family and learnt to change his workaholic ways. But that was about it.

Until last November, that is. Then, on the third attempt, his internet business Gerald Online went live. (The first attempts failed because the dot-com bubble burst and then there was a spat with Signet over who owned the Ratner name; Signet does, much to the Mr Ratner's annoyance.)

Name or no name, however, Gerald Ratner has stuck to what he knows. Gerald Online sells a range of jewellery and watches, backed by the "bricks and mortar" jeweller Goldsmiths and supplied by Indian manufacturer SB&T International.

Nine months down the line and business is good, he says. "We're heading for break-even in our first year, but if we do well this Christmas, we could be into profit. We have got a strong philosophy - a very good product at a very competitive price."

Diamond jewels are selling particularly well, so much so that Mr Ratner is expanding. Two new divisions have been launched, one supplying TV shopping channels and the other marking a return, after an absence of more than a decade, to the high street through a concession with a "major" department store.

Mr Ratner refuses to name the store until the ink is dry on the contract. But he does say he will eventually roll out the "diamond counter" concessions across the chain.

So, is it good to be back? "It's a lot of work," he admits. "But I have to say that it's strange because I don't think anyone ever thought I was going to go back into the jewellery business. But you have to stay philosophical as you never know what's going to be around the corner. It's by no means as big as the old business - as yet."

He laughs, albeit with a tinge of regret, before conceding. "It never will be."