In the first quarter earnings report Seal jewellers (NYSE: SIG) seemed to be executing its business plan effectively. The world’s largest diamond jewelry retailer has successfully argued that it is reinventing its business, increasing margins and leveraging its competitive advantages such as the digital channel and customer loyalty. It also sparked cheers from investors when it announced a plan in April to buy back convertible preferred stock, boosting earnings per share for the year by about 10%. Shares traded near five-year highs during the update.
However, that momentum disappeared as soon as the earnings report came out. Signet shares fell 14.9% on Thursday after reporting results that beat expectations but also showed some signs of weakness that appeared to spook investors. For example, same-store sales fell 8.9% year over year in the first quarter due to macroeconomic challenges, consumer weakness, a slow start to the quarter and a competitive environment with heavy discounting.
As a result, revenue fell 9.4% year over year to $1.51 billion, in line with analyst estimates and the company’s own guidance. However, profits fell sharply along with the decline in revenue, as adjusted operating income fell from $106.5 million to $57.8 million. The company reported adjusted earnings per share of $1.11, compared to $1.78 in the year-ago quarter.
That lower result exceeded analyst consensus at $0.85. Signet’s guidance was also in line with expectations. What seemed to spook the market was a comment from CEO Virginia Drosos about the possibility of further discounts in the second half of 2024.
The good news for Signet
When we consider the company’s broader competitive position and future prospects, the sell-off seems overdone. Signet’s results improved during the quarter, and the guidance calls for that momentum to continue. The company sees same-store sales returning to positive growth in the second half of the year, driven by several factors, including a recovery in orders and success in the fashion sector thanks to lab-grown diamonds.
The fashion industry, which includes everything that isn’t bridal, saw sales increase 500 basis points from March to May compared to February and the fourth quarter. The growth of lab-grown diamonds has been a major driver of this force. CFO Joan Hilson noted in an interview that the company had a 14% increase in sales in fashion products, including laboratory-created diamonds (LCD), as it took advantage of their lower price. Hilson added: “LCD allows us to offer fashion at lower prices to our customers, but it in turn drives a higher price point across our range.”
Meanwhile, the long-awaited comeback in the bridal industry appears to be on the horizon. Growth in the number of engagement units sold is expected to be modestly positive in the second quarter and materially positive in the second half of the year.
Finally, the company is improving its balance sheet by paying down debt, and its preferred stock buyback program should continue to pay off next year. Interest rates should start to fall in the coming year, which should encourage more consumer spending and provide some relief to customers who use financing.
Is Signet a purchase?
Barring the weak first-quarter results, Signet’s outlook looks essentially the same as it did before the earnings report, but the stock is now 15% cheaper. The company is poised to benefit from the recovery in engagements after a dip during the pandemic and 10% earnings forecast from April.
As a result, Signet stock now trades at a price-to-earnings (P/E) ratio of 8.6. For an industry-leading stock, it is benefiting from aggressive share buybacks, a recovery in commitments and an expected return to growth in the second half of the year.
Investors should look beyond the first quarter weakness and take advantage of the latest sell-off in Signet stock.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
This value stock just dropped. Should you buy the dip? was originally published by The Motley Fool
