Signet (SIG) Up 16.3% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Signet (SIG). Shares have added about 16.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Signet due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Signet Q2 Earnings & Sales Top Estimates, Decline Y/Y

Signet Jewelers Limited posted second-quarter fiscal 2020 results, wherein the top line and the bottom line fell year over year, though both metrics beat the Zacks Consensus Estimate for the seventh straight time.
Signet revised its sales and adjusted earnings forecasts and also issued an outlook for the fiscal third quarter. The outlook for both periods includes the expected impact of tariffs, adverse revenue impact of store closures and pre-tax charges related to the company’s transformation plan.

Q2 Details

The company reported adjusted earnings of 51 cents per share in the quarter, which surpassed the Zacks Consensus Estimate of 26 cents. However, the bottom line slipped 1.9% year over year.

This jewelry retailer generated total revenues of $1,364.4 million that surpassed the Zacks Consensus Estimate of $1,337 million. However, the top line fell 3.9% year over year. On a constant-currency (cc) basis, revenues declined 3.4%. We believe that sales were adversely impacted by dismal same-store sales and unfavorable foreign currency.

The company’s same-store sales contracted 1.5% year over year. E-commerce sales were $156.9 million, up 4.4% on a year-over-year basis. E-commerce accounted for 11.5% of total sales. However, brick-and-mortar same-store sales fell 2.3%.

Adjusted gross profit declined 5.5% to $463.1 million while the adjusted gross margin contracted 60 basis points (bps) to 33.9%, owing to impact of increased diamond sales to third parties from Botswana operations and unfavorable timing shift of revenue recognized. This was partly offset by transformation cost savings.

Selling, general and administrative expenses (SG&A) were down 7.5% to $411.4 million in the quarter, courtesy of reduced store staff expenses, owing to the closure of a few stores, and transformation cost savings. However, these were partly offset by higher credit outsourcing costs.

Adjusted operating income was $53.1 million, up 9.3% from the year-ago quarter, driven by transformation cost savings. Adjusted operating margin expanded 50 bps to 3.9%.

Segment Discussion

Sales at the North America segment declined 3.6% on a reported basis (or 3.5% at cc) to $1,241 million. Same-store sales declined 1%, owing to negative impact of the timing shift of service plan revenues and Jared promotions.

Further, same-store sales declined 0.9% in Zales, 3.1% in Kay, 6.1% in Jared, 1.5% in James Allen and 4.6% in Peoples. Meanwhile, the metric grew 9.8% in Piercing Pagoda.

Sales at the International segment declined 13.3% on a reported basis and 4.4% at cc to $113.9 million. Same-store sales at the segment dipped 7%, with ATV remaining flat, and a transaction decline of 6.8%. Dismal same-store sales performance mainly stemmed from softness across all categories and a tough operating environment in the U.K.

Financial Details

Signet ended the quarter with cash and cash equivalents of $271.5 million, accounts receivable of $21.8 million, and inventories worth $2,272.1 million. Long-term debt and total shareholders’ equity were $628.2 million and $1,088.2 million, respectively.

On a year-to-date basis, free cash flow has amounted to $194.4 million.

For fiscal 2020, the company plans to close roughly 150 and open 30 stores. As of Aug 3, it operated 3,284 stores. Further, it anticipates capital expenditure of $135-$155 million in the fiscal year.

Moreover, Signet’s board declared a quarterly dividend payout of 37 cents, payable Nov 29, 2019, to shareholders of record as of Nov 1.

Guidance

Signet remains pleased with its better-than-expected performance, and remains on track with its transformation efforts. Markedly, the company’s solid cost-containment initiatives and tough inventory have helped it enhance adjusted free cash flow in the fiscal second quarter and on a year-to-date basis.

Management believes that Signet is well placed for the competitive holiday season, wherein it plans to implement its product strategy. The company plans to do this by launching more flagship brands, offering new and trendy merchandise, and providing a competitive assortment for value-focused customers. Further, it is on track with its Path to Brilliance plan to improve sales and profitability in the long term.

In March 2018, the company announced its three-year Path to Brilliance transformation plan. In this regard, Signet continues to anticipate cost savings of $70-$80 million for fiscal 2020. Additionally, it continues to project cost savings of $200-$225 million from this program by the end of fiscal 2021, including savings of $85 million achieved in fiscal 2019.

Fiscal 2020 View

In fiscal 2020, the company still expects same-store sales to decline 1.5-2.5%. Sales for the fiscal year are projected $6-$6.03 billion compared with $6-$6.06 billion mentioned earlier.

Adjusted operating income is anticipated to be $260-$280 million.

The company now anticipates adjusted earnings of $2.91-$3.23 per share. Earlier, its adjusted earnings guidance was at $2.88-$3.17.

Q3 Outlook

Signet also provided third-quarter fiscal 2020 guidance. Sales are projected to be $1.14-$1.16 billion. Also, same-store sales are projected to decline 1-2%. Moreover, the company envisions an adjusted operating loss of $42-$50 million.

Finally, Signet anticipates adjusted loss per share of $1.02-$1.16. The guidance includes rise in advertising costs of about $12 million on account of "Always On" media strategy.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -30.51% due to these changes.

VGM Scores

At this time, Signet has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Signet has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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