Grants Report Sends Signet Shares Tumbling

Signet Jewelers Ltd. SIG shares are down more than 5.9 percent on Thursday morning following a report by Grants that Signet and Snap-on Incorporated SNA are generating much of their growth from internal lending and deceptive accounting.

How has Snap-on been able to generate such impressive growth in recent years? Jefferies analyst Evan Lorenz says internal lending is playing a huge role.

“Over the past five years, finance receivables have grown at a compound annual 16.7% growth rate, almost double the annual growth rate in Snap-on Tools Group’s sales, Lorenz notes.

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Grants points out that Signet’s seemingly healthy balance sheet also may very well be smoke and mirrors due to creative accounting.

On the surface, Signet reported that nonperforming loans comprised only 3.6 percent of gross receivables on April 30. However, Grants gives an example of how that number could be very deceptive.

“Say that you owe $1,000 on June 30, but you pay $500 instead, and that you pay it on time. Because you have made a ‘qualifying payment’ by the due date, your account is considered current,” the report reveals.

Grants notes that, in the first three months of 2016, 3,274 cases of U.S. personal bankruptcies named Signet as a creditor compared to just 1,903 in Q1 of 2015.

Disclosure: the author holds no position in the stocks mentioned.