Signet Offers Solid Growth Potential

Of the three major jewelry businesses that reported earnings last week, Signet Jewelers (NYSE: SIG  ) wasn't quite the star, but it still performed respectably. The company, which is behind mall staple jewelry stores such as Kay and Jared, is growing top-line sales, and has its key brands posting impressive same-store sales growth. Compared to direct competitor Zale (NYSE: ZLC  ) and higher-market Tiffany, Signet continues to trade at a discount. Does this present an opportunity for investors or is there good reason the company's stock is on sale?

Earnings recap
Kay Jewelers led the charge in this past quarter as the company posted a 5.8% gain in same-store sales. Sales overall grew 7.7% to $716.2 million for 2013's third quarter. In the U.S., sales bumped up nearly 10%, but a slight decrease in the U.K. operations kept the numbers slightly lower. Signet's Ernest Jones had fewer stores with Rolex watches, which looks to be a culprit for the year-over-year decrease.

Following Kay's lead, Jared saw same-store sales growth of 3%, while e-commerce grew more than 16%.

Gross margin contracted slightly, from 32.9% to 31%. Management attributes this to the integration of Ultra, a chain of stores that Signet acquired in 2012 for $57 million.

On the bottom line, the company earned $33.6 million, or $0.42 per share. This comes in a penny below last year's earnings, or about 2.6% on a net income level. Without the Ultra acquisition, earnings would have ticked up $0.02 to $0.45 per share.

What it all means
Signet is doing a great job at growing through its organic channels as well as bolt-on acquisitions. Though the mega chains across the U.S. and abroad have a solid footprint, much of the jewelry store landscape remains fractured -- a smattering of independently owned stores mixed in with the corporations. Picking up the successful independent chains, such as Ultra, is a worthwhile market-share grab in the long term, as long as management paid the right price. For Ultra, investors will have to see some more data before determining the strength of the acquisition.

Signet also recently purchased a diamond-polishing facility in Botswana in an effort to improve its supply chain.

Valuation-wise, Signet is appealing at 14 times forward earnings. This comes in at a steep discount to Tiffany's 20 times earnings, and a good bit below Zale's 17.56 times. Investors will want to keep an eye on the bottom line more than the top here, as Signet could stand to improve margins and operating efficiencies (the diamond facility should help somewhat). If the impressive top-line and store-level gains can travel down to the bottom of the income statement, we may see the market award a richer multiple that is more in line with peers.

It's not just diamonds that are forever
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2752972, ~/Articles/ArticleHandler.aspx, 4/23/2014 8:45:18 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...