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Keep Buying Signet Jewelers

- By Jonathan Poland

There are two big jewelry retailers in the world: Tiffany & Co. (TIF) and Signet Jewelers Ltd. (SIG).

When looking for a diamond ring or some other fine jewelry item, you probably think about Zales, Kay, Jared or Tiffany. The first three are owned by Signet Jewelers. While Tiffany is valued at 20 times forward earnings, 23 times cash flow, 4 times book and 3 times sales, Signet is priced at just 8 times forward earnings, 2 times cash flow, on par with book and at 30% of sales. However, Signet generates more revenue and, up until last year, slightly more total income with far less capital expenditure spending rates. In other words, there's no reason the world's largest retailer of diamond jewelry should be trading at these levels.



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Of course, after hundreds of sexual harassment and discrimination claims against Kay and Jared, forcing Signet to close 200 stores, along with the allegations that Sterling Jewelers employees created fake store card accounts, maybe the past two years of distress is fully baked into the company's value. Investors will get a better understanding on April 3, when the company releases its fourth-quarter earnings. Here's the outlook so far.

The company reported declines in same-store sales over the holiday season, with a 7.3% drop internationally reflecting weakness in the global economy as well as Signet's products abroad. In the U.S., sales were down less than 1% as markdowns and slow traffic were the main drags. This resulted in Signet lowering its non-GAAP earnings guidance to $3.53 to $3.69 per share. It will also take a number of one-time charges from restructuring, goodwill impairment, regulatory resolution costs and a loss from the sale of nonprime receivables. All told, the hit will be over $11.50 per share. On the top line, sales are also expected to decline back to the $6.2 billion level.

The guidance going forward will be where investors can focus their attention. With a projected yield of 5.57% and a price close to the low end of its 52-week range, the stock still looks like a bargain. It's bigger and more accessible than its rival Tiffany, but trades at just a fraction of the value. Jewelry is a retail business that still inspires foot traffic. People enjoy wearing gold, platinum, diamonds and other precious stones and metals. More importantly, the world is getting wealthier, which means more people are buying jewelry. Once the stink is scrubbed off of Signet's brands, the company's value will rise again. That time is close at hand and the time to buy is now.

Disclosure: I am not long or short any stock mentioned in this article.

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This article first appeared on GuruFocus.