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Turnaround Letter
Out-of-Favor Stocks with Real Value

Signet Reports Improved 3Q Results

Turnaround Letter Buy-rated Signet Jewelers (SIG) reported third quarter Fiscal 2020 results that indicate the turnaround is making progress. Sales of $1.2 billion were about 4% ahead of consensus estimates and down 0.3% from a year ago (although they increased 0.2% excluding currency effects).This is encouraging as the company has been able to essentially stabilize its revenues despite numerous headwinds.

The adjusted net loss of ($.76)/share was much better than consensus expectations for a loss of ($1.09)/share. Also, the company posted a positive 2.1% same store sales growth, well-ahead of expectations for a 1.5% decline. More important, North America same store sales increased 2.9%. North America “brick and mortar” comps increased 1.6%, while eCommerce sales grew 13%. The positive comp surprise indicates that Signet’s merchandising and marketing strategies are having a positive impact, although more aggressive discounting to clear older inventory ahead of new holiday merchandise was an important booster to comp store sales.

International comps fell 5.2%, but we see this segment as a side-show to the critical turnaround in North America. We would not be surprised to see the International business (primarily in the United Kingdom) sold at some point in the next year or two.

Gross margins, net of a small inventory charge, were flat compared to a year ago, suggesting that the discounting didn’t have a major effect on the company’s profitability.

Overhead costs fell compared to a year ago. The company remains on-track to achieve the $200 million to $225 million in net cost savings over the 3-year turnaround period. The balance sheet, now bolstered by the recently completed financing that provides more liquidity, extends its debt maturities and fractionally lowers its interest expenses, showed higher cash balances yet lower debt compared to a year ago. Lower inventories and smaller operating losses contributed to the improved balance sheet.

The company raised its FY2020 same store sales guidance and the lower end of its operating profit guidance. So far, its holiday season is doing reasonably well but most of the period is still ahead.

We continue to rate shares of Signet Jewelers a Buy with a price target of 29.

Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks including SIG shares.