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Signet (SIG) Up 6.4% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Signet (SIG). Shares have added about 6.4% 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 catalysts.

Signet Q3 Loss Narrower Than Expected, Sales Beat

Signet reported third-quarter fiscal 2020 results, wherein adjusted loss was narrower than the Zacks Consensus Estimate. Moreover, the quarter marked the eighth straight quarter of sales beat. Notably, the company raised its top and bottom-line guidance for fiscal 2020.

Fiscal Q3 in Detail

The company reported adjusted loss of 76 cents per share, which was narrower than the Zacks Consensus Estimate of a loss of $1.07. Moreover, the figure was narrower than the year-ago quarter’s reported loss of $1.06.

The jewelry retailer generated total revenues of $1,187.7 million, which surpassed the Zacks Consensus Estimate of $1,138 million. However, the top line dipped 0.3% year over year. On a cc basis, revenues inched up 0.2%. Although robust same-store sales contributed to the top line to some extent, adverse foreign currency movements and store closures acted as deterrents.

The company’s same-store sales increased 2.1% year over year. E-commerce sales grew 11.4% from the prior-year quarter to $139.3 million. Markedly, e-commerce constituted 11.7% of total sales. Meanwhile, brick-and-mortar same-store sales inched up 0.9% from the year-ago quarter.

Adjusted gross profit fell 0.6% to $369.1 million, while adjusted gross margin remained flat with the prior-year figure of 31.1%. Cost savings related to the company’s transformation plan and increase in credit revenues offset lower merchandise margin.

Selling, general & administrative expenses were down 2.9% from the prior-year period to $398.4 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 advertising costs.

It reported adjusted operating loss of $29.3 million, narrower than a loss of $38.9 million reported in the year-ago quarter. The year-over-year improvement was driven by transformation cost savings.

Segment Discussion

Sales at the North America segment grew 0.6% on a reported basis (or 0.7% at cc) to $1,070.7 million. Same-store sales increased 2.9% from the year-ago period, owing to solid performance of Kay and Piercing Pagoda. Also, James Allen returned to growth track, recording double-digit sales improvement.

Further, same-store sales rose 2.8% in Zales, 3.8% in Kay, 12.4% in Piercing Pagoda and 15.8% in James Allen. Meanwhile, the metric declined 4.2% and 2.9% in Peoples and Jared, respectively.

Sales at the International segment declined 12.4% on a reported basis and 8.4% at cc to $106.4 million. Same-store sales at the segment dipped 5.2% from a year ago, with ATV and transaction declining 1.4% and 4.3%, respectively. 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 $188.6 million, accounts receivables of $20.8 million as well as inventories worth $2,519.4 million. Long-term debt and total shareholders’ equity were $788.8 million and $1,050.7 million, respectively.

On a year-to-date basis, free cash flow amounted to $18.2 million.

For fiscal 2020, the company plans to close 150 stores, with 86 store closures already completed on a year-to-date basis. Also, it intends to open 35 stores.

Signet currently operates 3,300 stores. Further, the company anticipates capital expenditure of $135-$150 million for the fiscal year.

Markedly, it entered a new senior asset-based credit facility worth $1.6 billion. The five-year facility will be used to refinance all of Signet’s outstanding amounts under current senior credit facilities. The new facility is likely to enhance the company’s financial flexibility and entail slightly reduced interest costs.

Outlook

Management is encouraged about Signet’s holiday season opportunities. The company made significant investments across stores and websites. Moreover, it remains optimistic about strength in merchandising and marketing strategies for the holiday season. However, adverse impacts of a shorter holiday season and ongoing challenges in the U.K. retail space remain concerns. Encouragingly, Signet is on track with its Path to Brilliance plan to improve sales and profitability in the long term.

Signet noted that tariffs will not have any impact on fiscal 2020 results, as it anticipates reduced exposure to China goods by the end of the fiscal year. Further, the company still anticipates inventory to be lower than that in fiscal 2019. Meanwhile, adjusted free cash flow is estimated to be higher than the prior year.

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 anticipates witnessing cost savings of $200-$225 million from the program by the end of fiscal 2021, including savings of $85 million in fiscal 2019.

Fiscal 2020 View

For fiscal 2020, the company expects a 1-1.7% year-over-year decline in same-store sales. Sales for the fiscal year are now projected to be $6.01-$6.05 billion compared with $6-$6.03 billion mentioned earlier.

Adjusted operating income is anticipated to be $270-$280 million. The company now anticipates adjusted earnings of $3.11-$3.29 per share, up from $2.91-$3.23 mentioned earlier.

Fiscal Q4 View

Signet also provided fourth-quarter fiscal 2020 guidance. It projects sales of $2.03-$2.07 billion. This view includes a negative impact of $55 million from store closures. Also, same-store sales are projected to decline 2-4% year over year. Moreover, the company envisions adjusted operating income of $222-$232 million. Finally, Signet anticipates adjusted earnings per share of $3.01-$3.16, indicating a decline from $3.96 reported in the year-ago period.

The guidance for the fourth quarter and fiscal 2020 includes adverse revenue impact of store closures and pre-tax charges related to the company’s transformation plan.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Signet has a subpar Growth Score of D, however its Momentum Score is doing a lot 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 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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 #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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