2023-10-31 12:48:24 ET
Summary
- Signet Jewelers Limited is a cheap stock on a P/E valuation basis, but the shares have been range bound for a year and the company faces numerous headwinds.
- Analysts have mixed outlooks on Signet Jewelers, there is a fairly large short position in the equity, and insiders have been selling shares.
- Is the stock a "Value Trap" or "Undiscovered Gem"? An analysis follows below.
People are inclined to believe that you're a diamond only when you have a lot of diamonds. "? Tamerlan Kuzgov.
Today, we put Signet Jewelers Limited ( SIG ) i n the spotlight. This retailer looks very cheap on a P/E valuation basis. However, the stock has been rangebound for a year now, the consumer is facing considerable headwinds, the stock has a fairly large short position, and there has been some significant insider selling in the equity here in October. Is this a stocking stuffer or should investors move to another aisle for their shopping? An analysis follows below.
Company Overview:
Signet Jewelers Limited is headquartered in Hamilton, Bermuda. The company's primary business is operating jewelry stores in jewelry stores in malls, mall-based kiosks, and off-mall locations under well-known and established brand names like Kay Jewelers, Jared The Galleria Of Jewelry, and Zales. The company purchased online jewelry retailer Blue Nile for $360 million worth of cash in the summer of 2022. The stock currently trades just north of $70.00 a share and sports an approximate market capitalization of $3.1 billion. The company currently is in its FY2024 year.
Second Quarter Results:
The company posted second quarter numbers on August 31st. The company delivered non-GAAP earnings of $1.55 a share, a dime a share above expectations. Non-GAAP earnings per share were $2.68 a share in the same period a year ago. Non-GAAP operating income fell to $102.7 million from $191.2 million in 2Q2022. GAAP operating income had a similar decline, moving from $186.8 million in the prior quarter in 2023 to just $90.6 million in 2Q2024.
Sales fell just over eight percent on a year-over-year basis to $1.61 billion, which was $30 million above the subdued consensus. $1.5 billion of these sales came from North America. Concerningly, same-store sales were off 12% from the same period a year ago. Management provided the following guidance for FY2024.
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Analyst Commentary & Balance Sheet:
The analyst community is currently split on their outlook around Signet Jewelers. Since the second quarter results were posted, both Bank of America ($83 price target) and Telsey Advisory have reissued Hold ratings while Wells Fargo ($100 price target, up from $95 previously) and UBS ($93 price target, up from $90 previously) have reiterated Buy ratings with slight upward price target revisions.
Mastercard SpendingPulse was out with a forecast in mid-September projecting jewelry sales will fall slightly this holiday season. A recent survey by UBS also found that the percentage of consumers who plan to spend less this holiday season increased by 840 basis points from the same period a year ago, partly due to the resumption of student loan payments.
Just over 15% of the outstanding float in the shares are currently held short. Several insiders sold just under $3 million worth of shares collectively in October. This follows more than $10 million worth of insider sales in the third quarter. According to the company's second quarter 10-Q report, Signet Jewelers ended the first half of the year with approximately $690 million worth of cash and market securities on its balance sheet against no long-term debt but just over $830 million of operating lease liabilities.
The company used $253.3 million worth of cash in the first half of this year compared to $114.9 million in 1H2022, but this includes roughly $200 million for legal settlements. Signet Jewelers spent $43.3 million to repurchase its own stock in the second quarter of this year.
Verdict:
Signet Jewelers made $11.80 a share on $7.84 billion of revenues in FY2023. The analyst firm consensus has profits falling to $9.77 a share in FY2024 as sales shrink by eight percent. They see profits rebounding to $10.36 a share in FY2025 on flat revenue growth.
Signet Jewelers Limited stock seems more than cheap at six times trailing earnings with a small dividend yield of 1.3%. However, both sales and profits will fall this year. In addition, the consumer is under increasing headwinds which I highlighted in this recent article on Seeking Alpha. There is also a large short position in the stock and insiders have been dumping a significant number of shares on the market. It all adds up to a potential " value trap" that might be " dead money" at best and the business is more than vulnerable should the country enter a recession in 2024.
Better a diamond with a flaw than a pebble without ."? Devin Madson.
For further details see:
Signet Jewelers: Less Luster Than Meets The Eye