Signet Jewelers (SIG 3.01%) doesn't get much attention on Wall Street, but the stock has performed well in a difficult environment, especially considering the cyclical nature of the jewelry industry. Over the last year, the stock has actually beaten the S&P 500, as the chart below shows, despite the headwinds in the sector and the general economy.
Could shares of the jewelry retailer continue to shine? Let's take a closer look.
Signet's financial fortitude was on display again in its fourth-quarter earnings report. Due to macroeconomic headwinds and difficult comparisons with strong results in the quarter a year ago, same-store sales were down 9.1%, but still up 16.4% from the fourth quarter in fiscal 2020, before the pandemic started.
Overall revenue was down 5.2% to $2.67 billion, which edged out consensus estimates of $2.65 billion, and the company gained 40 basis points of market share. Gross margin grew by 70 basis points to 41.7% as the retailer managed inventory well and saw better performance in higher-end categories.
As a result, adjusted operating margin rose from 14.6% to 15.2%, and the company reported adjusted earnings per share (EPS) of $5.52, up from $5.01 in the quarter a year ago and better than estimates at $5.43. EPS also benefited from share buybacks as the company repurchased $376 million of stock last year, reducing shares outstanding by 14%. The company also raised its quarterly dividend by 15% to $0.23, equal to a yield of 1.3%.
Moving ahead, the company intends to use a disciplined capital allocation strategy to balance investments between acquisitions, share repurchases, and dividends. The company also increased its share buyback program by $263 million to $775 million.
Image source: Getty Images.
What the future holds
For fiscal 2024, Signet expects sales to continue falling due to shifts in consumer spending and pressure in the macroeconomic environment. The company is calling for revenue of $7.67 billion to $7.84 billion, down 1.1% at the midpoint from $7.84 billion last year and below the consensus at $7.89 billion. Management said it expects industry-wide jewelry sales to decline by mid-single digits.
The company also expects earnings per share to slip from $11.80 in fiscal 2023 to $11.07-$11.59, but that's ahead of analyst estimates of $10.68.
However, Signet may see a return to revenue growth faster than some investors might expect. In an interview with The Motley Fool, CFO Joan Hilson explained that weak trends in engagement jewelry were partly to blame for the expected sales decline this year. That's because the pandemic delayed the start of new relationships -- and therefore engagements.
The company should benefit from that trend reversing in the coming years as the impact of Covid becomes more distant. Hilson expects the engagement segment to begin to recover in the fourth quarter of this year and return to normalized levels by 2025.
That should give the company a valuable tailwind as bridal jewelry, which also includes anniversary bands and other bridal-related products in addition to engagement and wedding bands, makes up roughly 50% of Signet's business.
NYSE: SIG
Key Data Points
Time to buy?
For value investors, Signet offers a lot of appeal, trading at a price-to-earnings ratio of less than 7 based on 2023 guidance. While the company competes in a slow-growing industry, it has a track record of gaining market share in a fragmented space dominated by independent retailers with the help of acquisitions like Blue Nile. It's also expanding profit margins by rationalizing its store base and investing in the digital channel.
Additionally, its focus on share buybacks will help lift earnings per share even if net income is flat.
While 2023 is likely to be a tough year for Signet and the rest of the jewelry industry, the tailwinds from the recovery of the engagement jewelry market, in addition to the factors above, should help drive the stock higher over the coming years.
