Signet Jewelers (SIG 2.15%) hasn't gotten much attention on Wall Street in recent years, but the stock has quietly been a top performer. Over the past five years, shares have risen nearly 300% driven by its Inspiring Brilliance transformation strategy, along with solid gains during the pandemic that the company has mostly maintained on the bottom line.
That track record didn't help Signet on Wednesday as shares fell 12.1% on its fourth-quarter earnings report. The world's biggest retailer of diamond jewelry continued to face headwinds from value-conscious consumers as same-store sales (comps) in the quarter fell 9.6%, and overall revenue, which benefited from an extra week, was down 6.3% to $2.5 billion, short of estimates at $2.55 billion.
Despite the sales decline, its new products performed well, and the company cut inventory levels by 10%, allowing it to achieve higher gross margins and lifting its adjusted operating margin from 15.2% to 16.4%.
For fiscal 2025, the company expects comps to land between a decline of 4.5% and a 0.5% gain. Its revenue forecast of $6.66 billion to $7.02 billion was below the consensus, as was its adjusted earnings per share guidance of $9.08 to $10.48, below estimates at $10.57.
Despite the weaker-than-expected guidance, here is why Signet still looks well-positioned for long-term growth:
Image source: Getty Images.
Engagements are making a comeback
Close to half of Signet's revenue comes from the bridal jewelry segment, and engagements have been down in the last couple of years due to a delay in new relationships from the pandemic.
Now, that trend is starting to reverse. In an interview with The Motley Fool, Chief Financial Officer Joan Hilson said, "We had predicted a trough toward the end of the third quarter, and we predicted that engagement would begin to rebound in the fourth quarter, and that is in fact what we are seeing."
Signet said the recovery in engagements would be weighted toward the back half of this year and would continue for the next three years. For fiscal 2025, which ends next January, the company expects engagement activity to increase 5% to 10% in the U.S. The engagement recovery should give the company a valuable high-margin tailwind over the next few years.
Capital returns are improving
For the fourth year in a row, Signet generated more than $600 million in free cash flow, adjusted for a one-time legal settlement, meaning the stock trades at less than 7 times free cash flow. Its financial position continues to improve as its ratio of debt to earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR) fell to a multiple of 2.3 at the end of the quarter, and the company reduced its leverage target from a 2.75 ratio to 2.5 in a sign of confidence in future cash flow.
As a result of its reliable cash flow and an improving balance sheet, Signet raised its quarterly dividend by 26% to $0.29 per share. Hilson said, "One of our commitments within our capital allocation priority is to consistently be a dividend growth company." The increase was the company's third consecutive hike after it suspended its dividend when the pandemic started.
Signet also raised its share buyback allocation by $200 million to $850 million, setting it up for continued buybacks as the stock looks undervalued trading at less than 7 times free cash flow. It reduced shares outstanding by roughly 5% last year.
Why you should expect more dividend hikes
Signet's business should return to growth by the back half of the year as the company benefits from a recovery in engagements and implements a new $350 million cost-savings program, which should continue to drive margins higher.
Meanwhile, there is more room for the company to return capital to shareholders as its price-to-earnings ratio is less than 9, and its cash position continues to improve. Signet has historically grown both organically and through acquisitions such as Diamonds Direct and Blue Nile, but if it doesn't spend on acquisitions, the company is left with a ton of cash to return to shareholders.
Its quarterly dividend is still below the $0.37 per share it paid before the pandemic started when the business was smaller, and it's likely to top that level in the coming years.
Recent quarterly results have been marred by revenue declines, but that should soon change with the help of the rebound in engagements. Combine that with its proven track record of margin improvements and its cheap valuation, and Signet looks like a good bet to deliver solid gains this year and reward shareholders with dividend increases and share buybacks over the longer term.
