The last decade has seen many businesses shift a huge percentage of their activities to online platforms, while startups entirely based online have tried to emulate the success of Amazon.com (AMZN, Financial) and eBay (EBAY, Financial).
This paradigm shift has been boosted by the increasing use of social media platforms. Many people are spending more time chatting and sharing content through these platforms than they do in face-to-face conversations.
As such, businesses have been forced to adapt to the current changes with the culture of online shopping growing rapidly—and seemingly having no boundaries.
In today’s markets, even the most precious of luxury products like diamonds can be bought through online platforms. Every detail of the product is well stipulated, including karat size and conversion to various metrics as shown on Beyond4Cs.
The retail business has literally shifted to these platforms, which has affected brick-and-mortar retail stores, including those involved in the luxury products space. Signet Jewelers Ltd. (SIG, Financial) and Tiffany & Co (TIF, Financial) are good examples, and judging by their recent performances, it is fair to say they have not been spared either.
Both Signet Jewelers and Tiffany have experienced a slowdown in revenues since 2015, which subsequently has affected their stock prices. Signet’s revenues stagnated within the $6.5 billion range while Tiffany’s numbers have fallen from around $5 billion to the current level of approximately $4 billion.
Based on these numbers, Signet appears well priced compared to Tiffany given their current market capitalizations. With a market cap of $11.5 billion, Tiffany has a price-sales (P/S) ratio of 2.9 times, which is expensive compared to Signet’s P/S ratio of 0.8 times. The same picture is painted when looking at the bottom lines of the two companies.
Despite being the smaller company of the two, Signet generates more income, which is currently pegged at $486 million on a trailing 12-month basis, whereas Tiffany has a bottom line of $460 million. This, ironically, implies Tiffany has a better net profit margin (about 11%) compared to Signet’s net margin of about 7.7%.
When you look at the valuation metrics, however, Signet’s earnings are stronger with the stock valued at about 10.1 times to earnings compared to Tiffany’s price-earnings (P/E) ratio of about 25.1 times, as illustrated in the chart below.
With a P/E ratio of 10.1, Signet’s stock price could theoretically double before the end of the year and still appear cheaper than Tiffany. The company reports better top and bottom lines, yet it is the smaller of the two, which means there is room to run before it reaches peak valuation.
Looking ahead to fiscal year 2019, Tiffany’s revenues are expected to grow about 4.4% to $4.26 billion, while Signet’s top line is projected to grow just 0.2% from $6.3 billion to $6.34 billion, again remaining within touching distance of the $6.5 billion mark.
Signet’s earnings are also expected to grow at a slower rate compared to Tiffany. Its 2019 earnings figure is projected to increase by about 4.9% from this year’s numbers compared to a growth rate of 8.8% for Tiffany. The long-term growth projections are also in favor of Tiffany, whose earnings are expected to grow by 9.78% for the next five years compared to Signet’s 7% growth.
Conclusion
Overall, the retail market has been undergoing a transition over the past several years. People are now using online platforms a lot to search for products they wish to buy, which means if a company’s products cannot be accessed via the internet, then there is trouble.
This trend has seen some of the most popular traditional retailers like J.C. Penney (JCP, Financial), Macy’s (M, Financial) and Kohl’s (KSS, Financial) endure some challenging times as they struggle to adapt to the changing business environment.
Luxury products retailers have not been left behind, and are too beginning to adapt to this change by launching online marketplaces. In doing so, they are met with competition from startups looking to disrupt the space. Signet appears to have weathered the storm more diligently than Tiffany, and the current valuation metrics suggest it might be time to buy.
Disclosure: I have no positions in any stocks mentioned in this article.
