Signet Jewelers Faces Short-Term Headwinds Amid Mixed Earnings Report
If you’re a value investor, Signet Jewelers (NYSE: SIG) is likely on your radar. The company, recognized as the world’s largest retailer of diamond jewelry, owns well-known brands such as Kay, Zales, and Jared. Although operating in a stable sector, Signet’s significant size affords it competitive advantages. It has been investing in loyalty programs, digital marketing, e-commerce, and enhanced services—efforts more challenging for independent retailers to achieve.
Stock Reaction to Latest Earnings Report
Signet is consistently profitable, and with a price-to-earnings ratio below 10, it stands out in a market where the S&P 500 averages a P/E close to 30. Despite this, the company’s third-quarter earnings report displeased investors, resulting in a 12% drop in stock price on Thursday.
While comparable sales marked their sixth consecutive improvement as Signet recovered from pandemic-induced lulls, they still declined by 0.7%. This led to a 3.1% overall revenue decrease, totaling $1.35 billion, just short of the expected $1.37 billion.
Management acknowledged hurdles from digital integration involving the Blue Nile and James Allen brands, alongside potential costs from a leadership transition initiated when CEO Gina Drosos retired and was succeeded by J.K. Symancyk.
On the earnings front, adjusted earnings per share remained unchanged at $0.24, falling short of expectations at $0.33. Additionally, adjusted operating income dropped from $23.8 million to $16.2 million, although the earnings per share were aided by a reduced tax burden and fewer outstanding shares.
Revised Full-Year Guidance
Signet also modified its full-year revenue forecast, now projecting figures between $6.74 billion and $6.81 billion, an adjustment from the previous range of $6.66 billion to $7.02 billion. The company lowered its adjusted EPS prediction from a range of $9.90 to $11.52 to $9.62 to $10.08, bringing the midpoint nearly a dollar lower than estimates of $10.49.
Image source: Getty Images.
Short-Term Challenges Ahead
The reaction to the report was predictable, as missing estimates and reducing guidance typically trigger sell-offs. Nonetheless, many of the obstacles facing Signet appear temporary.
The primary issue remains the integration of the James Allen and Blue Nile brands. CFO Joan Hilson shared insights with The Motley Fool, noting integration difficulties had impacted web traffic and search functionality, yet she expressed confidence that these issues would stabilize within the next year.
Considering these challenges are likely to be fleeting, a 12% drop based solely on one earnings report may be excessive. Signet anticipates a resurgence in engagements, which dimmed during the pandemic due to shifting dating trends. Engagements are expected to rise back to typical levels within the next couple of years, boosting Signet’s revenues since bridal jewelry constitutes around half of its sales. Weak engagement trends during the recent quarter also contributed to the lackluster performance.
Meanwhile, the fashion segment—comprising the non-bridal portion of the business—shows strong growth, aided by the popularity of lab-created diamonds, resulting in higher average transaction values.
Assessing the Investment Opportunity
Despite the less-than-ideal performance, the foundation for growth remains intact, supported by an expected recovery in engagements, expansion in the fashion category, active share buybacks, rising operational efficiencies, and developments in the service sector.
Trading at a price-to-earnings ratio of under 10, the stock appears poised for potential outperformance in the coming years.
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Jeremy Bowman holds no positions in the companies mentioned. The Motley Fool also has no positions in the stocks discussed and adheres to a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
