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Signet (SIG) Q3 Earnings Top, Path-to-Brilliance Plan on Track

·6 min read

Signet Jewelers Limited SIG reported stellar third-quarter fiscal 2021 results. Both the top and the bottom line not only beat the Zacks Consensus Estimate but also improved year over year. Notably, this was the company’s second straight quarter of sales and earnings beat. Quarterly results gained from the robust execution of the Path-to-Brilliance strategy, and solid digital and marketing efforts. The company witnessed pent-up demand as stores reopened. Signet’s e-commerce platform played a pivotal role during the quarter.

Over the past three months, shares of this Zacks Rank #2 (Buy) company have gained 52.8%, outperforming the industry’s rise of 12.4%.

Signet Swings Back to Profit

After witnessing a loss of $1.13 per share in the fiscal second quarter, this jewelry retailer posted a surprise profit. The company reported adjusted earnings of 11 cents per share against the Zacks Consensus Estimate of a loss of 77 cents. We note that the company recorded adjusted loss of 76 cents a share in the year-ago quarter.

This jewelry retailer generated total sales of $1,300.3 million that surpassed the Zacks Consensus Estimate of $1,116 million. The top line also increased 9.5% year over year and 9% on a constant-currency (cc) basis. Further, total same-store sales rose 15.1%. Gains from Signet's Path-to-Brilliance initiative coupled with pent-up demand from the preceding quarter, and marketing and promotional efforts to boost early holiday demand aided top-line performance.

Meanwhile, e-commerce sales skyrocketed 71.4% from the prior-year quarter’s level to $238.8 million. Brick-and-mortar same-store sales grew 6.8%, reflecting gains from continued shift of the company’s store base to off-mall locations.

A Sneak Peek Into Margins

We note that adjusted gross profit increased 18.3% to $436.5 million, while adjusted gross margin expanded 250 bps to 33.6% mainly owing to increased sales and lower store-occupancy expenses.

Selling, general & administrative expenses dropped 2.3% to $389.3 million, courtesy of reduced labor and operating costs, which were partly offset by higher advertising investments in relation to extended holiday selling period expenses. However, store labor costs are likely to increase in the fiscal fourth quarter as the company has implemented extended holiday shopping hours as well as more than 2,000 concierge stations.

Further, the company reported adjusted operating income of $46.8 million against an adjusted operating loss of $29.3 million in the year-ago quarter.

Segment Discussion

Sales in the North America segment increased 10.5% on a reported basis to $1,182.7 million. Further, same-store sales jumped 15.8% from the year-ago quarter’s levels. Average transaction value ("ATV") rose 0.5%, while the number of transactions climbed 14.3%

The segment’s e-commerce sales surged 72.7%, while brick-and-mortar same-store sales jumped 7.5%. Encouragingly, the North America unit has been expanding payment options to provide customers with a broad array of alternatives, including offerings across its digital platform. Signet is experiencing momentum in the new options such as Affirm and Progressive leasing, and it now accepts Apple Pay and Google Pay.

Sales in the International segment inched up 0.6% on a reported basis to $106.9 million. Same-store sales at the segment edged up 7.8% year over year. Further, ATV increased 17.7%, while number of transactions fell 7.6%. Meanwhile, e-commerce sales rose 58.4%, while brick-and-mortar same-store sales rose 0.5%.

Financial Details

Signet — which shares space with Tiffany TIF — ended the quarter with cash and cash equivalents of $1,332.6 million, accounts receivable, net of $58.3 million and net inventories of $2,174 million. Long-term debt was $1,036.2 million and total shareholders’ equity was $915.9 million at the end of the quarter.

For the 39-week period ended Oct 31, 2020, the company generated net cash of $606.7 million from operating activities. It had free cash flow of $565.6 million during the aforementioned period.

Path to Brilliance and Other Updates

Signet has been progressing well with its Path-to-Brilliance initiative of Customer First, OmniChannel, and developing a Culture of Agility and Efficiency. It has updated the jewelry assortment to resonate with customers’ preferences via refreshing core items, launching products, and advancing customization options.

With respect to Signet’s OmniChannel strategy, the company has been making investments in technology and talent. It is offering advice and consultation via Buy Online Pick up In Store, livestreamed events and one-on-one virtual appointments, including a jewelry consultant.

In the context of Signet's commitment to a Culture of Agility and Efficiency, it has been generating structural cost savings and working capital improvements. As earlier said, the company projects a minimum of $100 million of structural cost savings, bringing the three-year cumulative total to at least $285 million.

Further, the company has a diversified real estate portfolio. As of Oct 31, 2020, it had 2,893 stores. In the reported quarter, store count declined by 22. Out of the 380 store closures planned for fiscal 2021, the company has shuttered 316 by the end of the reported quarter. Majority of closings were in traditional mall locations.

Outlook

Management expects the pandemic to continue hurting traditional in-store shopping behavior as the company enters the fiscal fourth quarter. Fourth-quarter to date through Nov 30, preliminary same-store sales grew nearly 3% year over year. However, the metric for the Thanksgiving weekend through Monday declined low single digits owing to dismal retail store traffic trends, somewhat mitigated by increased conversion rates, migration to digital platform and elevated transaction value. Moreover, management believes same-store sales could be hurt in December by soft retail store traffic trends, social-distancing capacity constraints and store closures due to the pandemic. Nonetheless, it has taken additional measures to control high-traffic days, which include earlier and longer promotional periods, additional labor, concierge locations and advanced fulfillment capabilities to resonate with customer demand this holiday season.

Owing to the ongoing uncertainties, it did not issue any financial guidance. However, it believes pandemic challenges will have a more profound effect in December than it had in November.

More Key Picks in Retail

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L Brands LB, also a Zacks Rank #1 stock, has a long-term earnings-growth rate of 13%.

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