Signet Jewelers Ltd. (SIG, Financial) is the world's largest retailer of diamond jewelry. Standing under its umbrella are well-known brands such as Kay Jewelers, Jared and Zales. For British readers, names like H. Samuel and Ernest Jones may ring a bell.
Together Signet's brands attract lots of soon-to-weds. Why is that? Well, between catchy marketing campaigns, prolific mall presence and dazzling product selection, Signet really woos us. Plus, if you are an average Joe, Tiffany & Co. (TIF, Financial) is just out of your league.
Fortunately any Joe can buy stock. Let's have a look at this one.
Signet's share price has consistently moved upward since the middle of 2012, from $50 to $150 this past November. The upward trajectory can be attributed to five consecutive years of EPS growth and Signet's acquisition of Zales in 2014. For the past year, however, Signet's stock has been trending downward, despite total sales and diluted EPS growth of 14.2% and 24%. A portion of those increases are from the acquisition, but investors are more concerned about the economy. Signet will be affected if things go south; luxury retailers do not thrive in recessions. If you think we are going down this year, stop reading and visit the stock another time. Better yet, short and plan on buying something nice from Tiffany's.
To get excited about the stock, we assume the market will trade flat or hardly positive this year. With that in mind, here is why Signet is an attractive option.
One important catalyst for Signet is synergy. As a result of the Zales acquisition the company has experienced great revenue and EPS growth. Certainly a one-off but not yet exhausted. Going forward, the company projects roughly $225 million to $250 million in net synergies, of which $60 million was achieved last year. Signet expects $165 million in this fiscal year. The rest will be delivered in fiscal year 2018. Compared to total revenue of $6.55 billion in 2015, these increments seem small. However, in conjunction with other catalysts they are meaningful.
One of these is share repurchases. With a commitment to increase shareholder value, Signet approved a $750 million stock repurchase program this past year. This brings Signet's total buyback power to $886 million, which the company expects to deploy in two to three years' time. Already, Signet has committed to $125 million in repurchases in order to meet its first quarter EPS estimates. Thus, by April 30 we will probably see total shares outstanding around 78.8 million; as a point of reference, shares outstanding in 2012 totaled 87 million.
Another consistent catalyst is Signet's healthy same-store sales growth. Unlike Tiffany & Co. (TIF, Financial), Signet is largely unaffected by a strong dollar. Thus, it was able to record a 4.1% increase in same-store sales last year, among the fastest in U.S. retail. Guidance for this year projects up to a 4.5% increase.
With these measures, Signet expects fiscal year EPS to come in between $7.88 and $8.23. Adjusted for Zales acquisition costs βΓ like consulting fees, severance pay and deferred revenue βΓ EPS can fall between $8.25 and $8.55. Apply a reasonable P/E multiple of 17.5 βΓ 2013 number, pre-Zales announcement and low EPS growth βΓ to a moderate $8 of earnings, and we reach a favorable $140 a share. Including dividends, that would be north of a 16% gain on a cost basis of $120. Not bad for a tepid market.
Aside from the short-term catalysts, Signet has many long-term stimulants. The company is putting significant effort into new store openings and "old store" remodeling. This is evident in the planned $315 million to $365 million in capital expenditures, the largest in company history. As a point of reference, capital expenditure in each of the past three years never exceeded $230 million. At the same time, Signet plans on closing its unprofitable "regional brands," which account for roughly 4% of all stores.
As for Signet's financial health, the company is sound with a current ratio of 3.98, quick ratio of 1.72, and debt-equity ratio of 0.43 as of January 2016. In addition, interest coverage stands at 15.33. Beside these metrics, however, some investors have raised concerns about Signet's in-house credit facility, specifically in regard to its recency aging method for accounts receivable.
Signet's CFO has responded to these concerns in the latest quarterly report: "We see stable trends in our lending and credit metrics for which our average FICO portfolio score has been in a consistent range for numerous years. Our in-house credit finance is designed for rapid repayment and turns over on average in nine months. We continue to be confident in our credit portfolio performance and the competitive advantages associated with our in-house program." Furthermore, the aforementioned investors' concern that Signet is "a finance company that also sells jewelry" is facetious. In the past year's fourth quarter, the Sterling division reported a net impact (bad debt-interest income) of $3.9 million, just 1% of the segment's operating income. Clearly, investors' concerns should be taken with a grain of salt.
With the combination of synergy, healthy same store sales growth, meaningful capital expenditures and share repurchases, Signet is poised for many quarters of EPS growth. At 20.7 times earnings βΓ slightly above its five-year average of 19 βΓ and at parity with a five-year price-to-sales ratio of 1.5, Signet could be a glimmer in a dim year.
