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Signet (SIG) Down 19.6% Since Last Earnings Report: Can It Rebound?

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Keurig Dr Pepper (KDP) might move higher on growing optimism about its earnings prospects, which is reflected by its upgrade to a Zacks Rank 2 (Buy).

A month has gone by since the last earnings report for Signet (SIG). Shares have lost about 19.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Signet due for a breakout? 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 Q4 Earnings & Sales Beat Estimates, Decline Y/Y

Signet posted fourth-quarter fiscal 2019 results, wherein both top and bottom lines exceeded the Zacks Consensus Estimate. However, both the metrics declined year over year.

The company stated that decline in sales of legacy collections, aggressive promotional environment, waning traffic during important gifting weeks of December and weak consumer demand in the United Kingdom hurt the company’s performance.

Q4 Details

The company reported adjusted earnings of $3.96 per share in the quarter, which beat the Zacks Consensus Estimate of $3.77. However, the same declined 7.5% from the year-ago quarter’s figure of $4.28.

This jewelry retailer generated total revenues of $2,154.7 million that came ahead of the Zacks Consensus Estimate of $2,142 million but tumbled 6% year over year. On a constant-currency basis, revenues decreased 5.4%.

Per management, sales were negatively impacted by dismal same-store sales performance, unfavorable currency, impacts stemming from calendar shifts and store closures that offset benefits from the application of new revenue recognition accounting standards.

The company’s same-store sales declined 2% year over year. E-commerce sales came in at $260.6 million, up 5.4% on a year-over-year basis. We note that e-commerce accounted for 12.1% of total sales in the quarter.

Adjusted gross profit decreased 4.7% to $876.8 million, while gross margin expanded 60 basis points (bps) to 40.7%. Adjusted selling, general and administrative expenses (SG&A) were up 0.3% to $636.2 million in the quarter. Adjusted operating income came in at $241.3 million, down 25.4% from $323.5 million in the year-ago quarter, owing to reduced sales, increased promotions and clearance, headwinds related to outsourcing of credit, and charges from unproductive inventory. Adjusted operating margin contracted 290 bps to 11.2% in the reported quarter.

Segment Discussion

Sales at the North America segment decreased 5.5% on a reported basis (or 5.3% at constant currency basis) to $1,942.9 million. Same store sales fell 1.4% owing to shift in timing of promotional activities at Zales and Peoples along with negative impact from timing shift of service plan revenues. Average transaction value rose 2.2%, whereas the number of transactions decreased 4.0% during the reported quarter.

Further, same-store sales increased 2% and 17.1% in Zales and Piercing Pagoda, respectively, while the same declined 1.6%, 8.4% and 1.4% in Kay, Jared and James Allen segments, respectively.

Sales at the International segment declined 16.6% to $195 million on a reported basis and 12% on a constant-currency basis. Same-store sales at the segment declined 7.3%. Average transaction value fell 5.4%, while the number of transactions declined 2.3%. Dismal same-store sales performance mainly stemmed from lower sales of bridal and fashion jewelry, and fashion watches, which were partially offset by higher prestige watch sales.

Financial Details

Signet ended the quarter with cash and cash equivalents of $195.4 million, net accounts receivable of $19.5 million and inventories worth $2,386.9 million. Long-term debt and total shareholders’ equity were $649.6 million and $1,201.6 million, respectively.

The company has repurchased 8.8 million shares worth approximately $485 million in fiscal 2019. As of Feb 2, 2019, the company was left with share repurchase authorization of $165.6 million.   

Store Update

Signet opened 40 stores and shuttered 262 during fiscal 2019. The company plans to open approximately 20-25 stores and close more than 150 in fiscal 2020. As of Feb 2, the company operated 3,334 stores.

Guidance

Management provided guidance for the first quarter and fiscal 2020. For the first quarter, the company projects adjusted loss of 17-28 cents a share. The current Zacks Consensus Estimate for the quarter is pegged at a loss of 6 cents. The company expects sales $1.42-$1.44 billion, while same-store sales is anticipated to decline between 0.5% and 1.5%.

In fiscal 2020, the company intends to focus on enhancing product assortment and differentiation along with increasing investment in digital and social marketing. Apart from these, Signet will work toward improving customer’s shopping experience by upgrading its websites and mobile platforms. This, in turn, will help the company deliver double-digit e-commerce growth. On the flip side, the fiscal year is expected to face headwinds in legacy brands.

Signet anticipates earnings per share between $2.87 and $3.45 in fiscal 2020. Sales are projected to be $6-$6.1 billion, while same-store sales is likely to be flat to down 2.5% due to expected sluggishness in Jared and James Allen brands. Additionally, capital expenditure for the fiscal is expected to be $135-$155 million.

In March 2018, the company announced its three-year Path to Brilliance transformation plan. In this regard, Signet is on track with its cost-containment efforts that include procurement savings in merchandise and indirect spend, headcount reduction, consolidation of facilities, and reduction in corporate expenses.

Keeping along these lines, the company continues to anticipate net cost savings of $60-$70 million during fiscal 2020.  The company continues to anticipate cost savings of $200-$225 million from the transformation plan during the 2019-2021 period, out of which $85 million has already been realized in fiscal 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -31.94% due to these changes.

VGM Scores

At this time, Signet has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, 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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