Signet’s 30% drop in third-quarter results creates a buying opportunity – Signet Jewelers Limited (NYSE: SIG)


Signet Jewelers (SIG) reported disappointing results from T3 of 2018 today that sent stocks down around 30%. The quarter showed that the company is struggling with credit outsourcing and SSS outages that lead to a disappointing loss per share of $ 0.20. However, the dive can be too, very fast, since it leaves shares that are now quoted at 8.5x the midpoint of the administration's advance guidance for fiscal year 2018 of $ 6.10 – $ 6.50. After recovering briefly in the mid-1970s from its summer depression, the market's reaction to third-quarter earnings could offer an opportunity for long-term value investors to take another look.

  Graph YCharts GIS data

What happened in Q3?

Signet's total sales for the quarter were $ 1,157M, which fell $ 29M or 2.5% year-over-year (YoY) with comparable SSS decreasing 5%. This negative growth in sales was a continuation of the same quarter last year, in which net sales also decreased by 2.5% and SSS decreased by 2% year-on-year. As management mentioned in the teleconference, SSS was negatively affected due to weather-related incidents at an estimated 60 basis points (bps) and interruptions related to the transition from credit outsourcing to an estimated 60 bps.

On the cost side, gross margins for the quarter were $ 321M or 27.8% of sales, which fell 170 bp YoY with 30 bp of that attributable to R2Net, which has a higher gross margin rate low. Administrative and selling expenses were 2.7% less than $ 376 million or 32.5% of sales compared to $ 387 million or 32.6% of sales in the previous year. Excluding the one-time R2Net transaction costs of $ 8M, the SG & A rate improved 80 bps (only 10 bps including these costs).

Going down to the bottom line, Signet reported a loss per share of $ 0.20 compared to positive EPS of $ 0.20 in the prior year period. As stated by management, much of this loss can be attributed to one-time items, such as net credit transaction costs ($ 0.14) and R2Net acquisition costs ($ 0.11); before listening to the administration blame the bad weather and the interruptions of the credit outsourcing for an additional negative impact of $ 0.10.

Trying to make the right moves

Signet is trying to deal with a changing retail environment and social changes with respect to millennial life different cycles of their parent's generation. The company continues to move more online and e-commerce sales increased 56.4% mainly driven by the newly acquired R2Net, which owns and a strategic acquisition on which I previously wrote more in an article here. In the quarter after the acquisition of R2Net, Signet also began implementing R2Net's innovative diamond images and content technology at Jared stores, 24/7 customer service at Design-A-Ring and Ring Try-on App for Kay. The company is also moving more towards advertising through online platforms that will allow them to better target the ads to people who may have relationships.

The advance in the outsourcing of the credit portfolio was a great topic of discussion in the call for profits, given that the management of the interruptions declared in the transition had an impact on sales and profits. The interruptions of such an important transition should not be completely unexpected and the outsourcing of the loan portfolio will reduce business risk and free up capital for more productive purposes in the future. As indicated by the address in the call, the interruption of the credit is a priority number one and many of the problems have already been solved. The company expects fourth quarter performance to continue to be affected and, as a result, it lowered guidance.

Still recurring benefits for shareholders

Even given the disappointing loss of $ 0.20 per share for the quarter, Signet remains a profitable company. While the administration reduced the guidance for the 2018 fiscal year to $ 6.10 – $ 6.50 from the previous guide of $ 7.16 – $ 7.56, this is still a profitable venture. As can be seen in the table below, the third quarter has been historically weak for the company that represents only 3% of annual earnings per share in fiscal year 2015 and 2016. Investors should consider this last quarter unprofitable with regarding the broader calendar year. During the last 12 months, the company now earned $ 6.11 that would give it a 8.8x TTM P / E at current prices.

Morningstar data source

The company has also repurchased 12% of its YTD shares using operating profits and proceeds from the sale of the loan portfolio. The company also continues to return profits to shareholders through its quarterly dividend of $ 0.31 ($ 1.24 per year) that remains well covered with only a 20% payment given the year-round earnings advice.

Take Away

While the third quarter is definitely not ideal, the large fall in the share price allows another opportunity for value investors to take a look at the company. At the current price of $ 53.25, only shareholders are asked to pay around 8.5x P / U (at the midpoint of $ 6.30) to be co-owners of the business.

For readers interested in my previous article on Signet's profitability and valuation, you can see it through the link in this sentence.

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Disclaimer: While the information and data presented in my articles are obtained from company documents and / or sources that are considered reliable, they have not been independently verified The material is intended only as general information for your convenience, and should not be construed in any way as an investment advice. I advise readers to conduct their own independent research to build their own independent opinions and / or consult a qualified investment advisor before making any investment decision. I explicitly renounce any liability that may arise from the investment decisions I make based on my articles.

Disclosure: I am / we are long SIG.

I wrote this article myself, and expressed my own opinions. I am not receiving compensation for it (which is not from Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.

Additional Disclosure: I am a long GIS with an average cost base of $ 55.75

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