2023-12-05 14:24:14 ET
Summary
- Signet Jewelers Limited just reported Q3 earnings and remains a cheap stock with potential for growth due to a short squeeze and strong holiday quarter outlook.
- Sales are down, but the company is seeing market share gains in the bridal market and strength in average transaction value.
- The company's balance sheet is in decent shape, with increased cash and reduced inventory, and the outlook for the holiday quarter is bullish.
Signet Jewelers Limited ( SIG ), despite having run the last few weeks, remains a very cheap stock on many valuation measure s. The stock trades at a below-market valuation given risk and uncertainty over the economy and luxury spending concerns going forward in this inflationary and high rate environment. In our opinion, the stock has more room to run from here as there is a short squeeze underway, and the outlook from the company in its just-reported Q3 earnings suggests a strong holiday quarter is ahead. We think you can ride this momentum higher.
It may feel a little like chasing here, and while we traditionally look for beaten-down names that are about to inflect, you can ride some momentum here. To define risk, you can consider calls, but shares look like they are on pace to head back into the $90s.
Signet Chief Executive Officer Virginia C. Drosos summed the progress up nicely in the press release :
We delivered earnings on the high end of our expectations driven by continued progress on our strategic goals. We believe our extensive consumer insights provide a competitive advantage that has contributed to continued bridal market share gains and consistency in average transaction value again this quarter...trends through Black Friday weekend, including sequential improvement in engagement trends, are performing in line with guidance expectations for the fourth quarter. As we enter the holiday season, jewelry remains a top of mind gifting category for consumers in a value conscious shopping environment.
The company is seeing market share gains in the very lucrative bridal market, and has seen strength in average transaction value. Now, the shares are valued where they are for a reason, because despite the impressive quarterly performance, and outlook, sales are still down, meaning there is a lack of growth. This is a reason shares struggled this year.
Sales were $1.4 billion, down $190.8 million or 12.1% from last year's Q3. These were in line with expectations, however. This top line figure comes as same store sales were down 11.8% versus a year ago. Do keep in mind the company has offloaded some sales of the UK luxury watch stores, at a profit, though this hits sales. North American and international sales were down. North America's total sales were $1.3 billion, down 11.9% from last year, but there was an increase of 1.1% in total average transaction value. Same store sales declined 12.3%. International total sales were $94.0 million, down 1.4%, but average transaction value was up 2.7%, while comps declined 4.6% from last year.
So sales are down, markedly, which brought down gross income, as well as net income. GAAP gross margin was $501.3 million, down from $552.6 million a year ago, but GAAP gross margin was 36.0% of sales, or 110 basis points higher than a year ago, which is a positive.
GAAP diluted EPS was $0.07, down from $0.60 a year ago. Making adjustments, diluted EPS was $0.24 per share, down from $0.74 from last year. Obviously with lower income, it stands to reason that shares would not be doing too well. But it was relatively known that performance would be like this. This is what attracted shorts, with short interest in the mid-teens. There is a bit of a short covering rally here, not because of results, but because of the forward view . This is why we see the rally as able to continue. The risk will be if shorts circle the wagon, but performance seems to be bottoming out.
The SIG balance sheet is in decent shape. Cash and cash equivalents, at quarter end, were $643.8 million, compared to $327.3 million a year ago. The company is also buying back shares. Signet bought back $35.1 million, or approximately 0.5 million shares, during the third quarter. Most importantly, the company significantly reduced inventory. Inventory ended the quarter at $2.1 billion, down $333.3 million down 14% year ago levels. The company is also paying a dividend, of $0.23 quarterly.
Moving ahead, the outlook for the holiday quarter is bullish. The company sees sales at $2.5 billion for the quarter, and $7.17 billion for the year, at the midpoints. Two-thirds of annual operating income will come out of Q4, as the company is projecting $417 million at the midpoint in Q4. For the fiscal year, EPS will be about $9.80, so we are trading at 9X FWD EPS. Still pretty cheap, but as we move forward, the market will want to see a return to sales strength (factoring in the sale of a number of shops) and EPS growth.
The long-term outlook will require execution, but gaining market share is welcomed. The consumer targeted by Signet is relatively insulated from a recession, though not immune. We are impressed with the inventory cleanup, and the holiday guide. The company also sees engagements rebounding over the next three years, which is a bullish view. We think that this short-covering rally in Signet Jewelers Limited shares can continue, and you can ride some momentum on this into the $90s for a trade.
For further details see:
Signet Jewelers Has More Room To Run