Signet Jewelers (NYSE:SIG) is the largest diamond retailer in the United States and is the parent company of well-known brands like Kay Jewelers, Zales, Jared and the online diamond store Blue Nile.
Despite its brand dominance, Signet has been through a rough ride over the last year. Shares of the stock were falling consistently until a surprising turnaround recently when SIG delivered a return of 26.7%.
Why did Signet Jewelers stock go up so much, and is now the time to buy the diamond giant?
Why Did Signet Jewelers Stock Go Up So Much?
Signet Jewelers stock rose following better-than-expected results in Q4 after beating both on the top line and bottom line.
In Q4, Signet reported revenues of $2.4 billion and adjusted EPS of $6.62. Wall Street’s consensus estimates, meanwhile, called for revenues of $2.3 billion and earnings of $6.25 per share.
Investors also responded positively to Signet’s new turnaround strategy, which is meant to combat stagnation in the company’s overall performance. Under the new plan, Signet will close up to 150 low-performing stores, focus more deeply on differentiating its various brands to build customer loyalty and cut both staff and senior leadership to reduce costs.
A Deeper Dive Into Signet’s Performance
Although investors were pleased with the better-than-expected results of Q4, it’s important to recognize that there’s a reason Signet Jewelers needed to put a turnaround plan in place.
Revenue has been declining on a year-over-year basis for nine consecutive quarters. This negative growth is deeply concerning, as it has also pushed the company toward lower earnings.
These trends didn’t abate in Q4, as total sales were still down 5.8% compared to the prior year. Same-store sales declined by 1.1%, and adjusted operating income fell from $409.7 million to $355.5 million. For the full year, total sales fell 6.5 percent while same-store sales fell 3.4 percent.
It’s also worth noting that Signet’s profitability is far from massive. Over the last 12 months, the company has been able to deliver a net margin of just 0.9%, alongside a return on invested capital of just 2.7%. Though the new turnaround plans outlined alongside Q4’s earnings report could help to change this, the current level of profitability is far from appealing.
Is Signet Trading at a Fair Price?
SIG may be an attractive value at current prices if its turnaround plan proves successful and generates new growth.
At the moment, the stock is trading for just 6.5x earnings, 0.4x sales, 6.2 times operating cash flow and 1.4x book value. Needless to say, it’s also quite possible that Signet’s low valuation could make it a value trap if new growth fails to materialize and the company’s trend of falling revenues and earnings continues.
Analysts still appear to believe that the stock has room to keep advancing. The average price forecast for SIG in the coming 12 months is $76.60, and the range of estimates runs from $62 on the low end to $89 on the high end. With the stock currently trading just north of $60 per share, this leaves room for at least a modicum of upside under even the most bearish price forecast.
Signet’s Story Tied To Struggling Malls
Although its valuation and plans for a hopeful turnaround could both be appealing to investors, the fact is that Signet is still fairly risky. The recent history of declining revenues makes this evident enough.
In addition, recent increases in share price represent a spike in what has otherwise been a strong and persistent downward trend. In the past 12 months, SIG is still down over 30% due to investor concerns about the company’s future.
The company is also tied closely to the struggling institution of shopping malls. Though it does operate through eCommerce channels as well, specifically under its Blue Nile brand, Signet remains primarily a physical retailer.
Although eCommerce is certainly part of its growth aspirations, it may have some catching up to do in this department. With younger buyers especially moving to online channels for diamond purchases, Signet will struggle see the competitive advantage it built up with a massive network of physical stores translate as well to the digital world.
Is SIG Worth the Risk?
Although Signet Jewelers has been struggling recently, the combination of a viable turnaround plan, a very low valuation and firm brand recognition in the minds of consumers could make the stock a risk worth taking. If management can turn it around sufficiently to produce even a comparatively low level of positive growth, investors who buy today could see reasonably good returns.
They are also likely to benefit from Signet’s habit of returning cash to its shareholders. The stock currently has a trailing 12-month dividend yield of 1.9%, well above the current average of the S&P 500. It has also increased the dividend recently by 10%, a strong signal of management’s confidence in the payout’s safety.
Just as compelling in this department is the aggressive rate of share buybacks Signet has engaged in recently. The Board authorized the buyback of about 1.6 million shares last year. That’s been a persistent trend that has steadily brought the number of outstanding share of SIG down over many years, and that in turn is good for shareholders.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
