Signet Jewelers (SIG 2.15%) may not get a lot of attention on Wall Street, but the stock has quietly crushed the market in recent years. The world's largest diamond jewelry retailer -- including such brands as Kay, Zales, Jared, and Blue Nile -- is up 206% over the last three years versus a 23% gain for the S&P 500. So far this year, Signet has gained 32%, ahead of the S&P 500's return of 19%.
A multi-pronged strategy focused on closing underperforming stores, acquiring higher-end, digital-first brands, investing in higher-margin services like repair, and growing its loyalty program have all led to the stock's strong comeback. Let's see whether this jewelry stock can continue to shine.
On the rebound
The stock's ability to outperform was on display again in the third quarter as shares rose 5.9% on Tuesday, hitting a 52-week high on the results.
Signet is still facing challenges with a trough in engagements due to the pandemic's effect on dating. The company is also experiencing broader macroeconomic headwinds due to inflation and other pressures on consumer discretionary spending, including a shift from spending on goods to services like travel. Additionally, the benefit of stimulus money during the pandemic's height has lapsed.
Still, the company is gaining market share, hitting its guidance, and looking well-positioned for long-term growth. Same-store sales were off 11.8% in the quarter, driving revenue down 12.1% to $1.39 billion, but that matched estimates. Gross margin improved from 34.9% to 36%, helped by improving merchandise margin and increased contribution from higher-margin services.
Overall, adjusted earnings per share fell from $0.74 to $0.24 due to the decline in sales and higher selling, general, and administrative expenses, but that still topped estimates at $0.18. Historically, Q3 has been unprofitable since it's the only period without a major gift-giving holiday.
The company mostly held its full-year guidance steady, calling for adjusted earnings per share of $9.55 to $10.18. Based on that forecast, the stock is trading at a forward price-to-earnings ratio of 9, clearly in value territory.
Image source: Getty Images.
A return to growth
Management didn't give guidance for next year, but comments on the earnings call and in an interview with CFO Joan Hilson indicate that the company could soon see sales growth rebound.
Signet's bridal business makes up roughly 50% of its sales, and there are signs that engagement trends are starting to rebound after a delay following the pandemic. Engagements are down 25% from normal levels. However, CEO Gina Drosos noted on the earnings call that Google searches for engagement rings are up 10% from a year ago, and the company expects tailwinds from the engagements recovery to persist over the next few years.
Signet is also seeing growth in its loyalty program, which has reached nearly 4 million members, and its loyalty members spend 40% more on an average transaction than non-loyalty members.
Finally, the company is also entering the fourth quarter in a clean inventory position, having reduced its inventory by 14%. Hilson said that gave the company an edge over competitors that were stuck with excess inventory as it's allowed Signet to introduce more new merchandise and better control its margins.
Is Signet a buy?
Buying a stock trading at a price-to-earnings of 9 only makes sense if you expect profits to grow. The good news for investors on that front is that not only are engagement trends picking up, but the company remains on track to hit its guidance of $14 to $16 in adjusted earnings per share, $9 billion to $10 billion in revenue, and adjusted operating margin of 11% to 12% in the next three to five years.
Signet management has thus far executed on its initial turnaround strategy, which should give investors confidence that the company can hit those targets. Based on that earnings forecast, the stock trades at a price-to-earnings ratio of just 6, meaning the stock should continue to move higher if Signet can remain on track and benefit from the rebound of engagements.
In addition to the the organic growth, the company can also create value through share buybacks and more potential acquisitions. Given its strong performance and execution and low valuation, Signet looks like a good bet to continue to outperform the market.
