Signet’s Turnaround Still Looks Underappreciated

Jewelry stocks don’t get a lot of attention on Wall Street, and it’s easy to see why. It’s a highly fragmented, slow-growth, mature industry, and only a handful of pure-play jewelry stocks are available on the market.

Signet Jewelers (NYSE: SIG), the parent of well-known brands like Kay, Zales, and Jared, is the world’s biggest diamond retailer and has quietly undergone an impressive turnaround in the last few years. Even after a recent pullback, the stock is up nearly 300% over the last three years, thanks to its Inspiring Brilliance strategy that’s cut costs by closing stores and streamlining expenses and focused on driving online sales, expanding profit margins along the way.

Like other consumer discretionary products, the company did benefit from some pandemic tailwinds as stimulus checks helped promote spending at some of its lower-end brands, but the structural improvements the company has made look built to last beyond the health crisis, and its first-quarter earnings report helps show why.

The latest results

Up against difficult comparisons in the quarter a year ago, Signet posted 2.5% comparable sales growth and 8.9% revenue growth to $1.84 billion, helped by its acquisition of Diamonds Direct last fall. That result beat estimates of $1.8 billion.

On the bottom line, its adjusted operating margin continued to improve from 10% in the year-ago quarter to 10.6%, and adjusted earnings per share (EPS) increased from $2.23 to $2.86, which beat estimates of $2.38.

What was even more impressive is that during one of the most challenging retail earnings seasons in memory, Signet actually raised its bottom-line guidance for the year, calling for adjusted EPS of $12.72-$13.47, which gives the stock a price-to-earnings ratio of less than five, based on this year’s expected earnings. That’s a great price for a healthy company in any industry.

Taking advantage of that rock-bottom valuation, Signet has been busy buying back its stock. It completed $318 million in share repurchases, or 4.3 million shares, in the first quarter, reducing shares outstanding by 8% to 48.8 million. It also expanded its share repurchase authorization by $500 million, a sign it aims to continue buying back stock at a rapid rate.

Signet’s balance sheet can support an aggressive buyback program as it has nearly $1 billion in cash and less than $200 million in long-term debt. The company also generated nearly $200 million in operating income in the first quarter.

Investors cheered the results as the stock jumped 9% Thursday, though it gave back all of those gains in the market sell-off on Friday.

Why is the stock so cheap?

Like other discretionary retailers, Signet got some benefits from the pandemic as consumer spending shifted from services to goods and consumers were flush from several rounds of stimulus. Signet’s emphasis on connected commerce helped it capitalize on the online shopping boom during the pandemic as well.

After a pullback in 2020, early in the pandemic, revenue jumped 50% to $7.82 billion, or up 31% from 2019 (fiscal 2020). The stock peaked at $112 last November and, like other retailers, has fallen sharply — nearly 50% — as the market seems to believe the improvements in the financial performance were strictly from the pandemic.

However, the company is squarely focused on delivering double-digit operating margins after closing 20% of its stores, improving purchase frequency with the help of its loyalty program, and shifting the business to more efficient e-commerce sales. It’s also grown historically through acquisitions such as Diamonds Direct last year and should continue to gain market share both through organic growth and acquisitions.

In other words, the company’s improvements are no pandemic accident. In three years, Signet increased its operating margin sixfold and the operating profit eightfold, and those gains look likely to stick over the long term even if a recession hits.

At just five times forward earnings and with an aggressive share buyback program, Signet looks like a can’t-miss value stock holding its own at a time when much of the retail sector is reeling.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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