Signet: A Diamond in the Rough

04/02/2018 5:00 am EST

Focus: CONSUMER

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Consumer confidence and spending are up, along with retail sales. Consumers are spending more on discretionary items, and few goods are more discretionary than jewelry, asserts Mark Skousen, editor of High-Income Alert.

So, let’s take a closer look at Signet Jewelers (SIG). Signet is the largest specialty jewelry retailer in the United States, Canada and Britain. It operates more than 3,600 stores under the name brands Zales, Kay Jewelers, Jared, H. Samuel, Ernest Jones, Peoples and Piercing Pagoda. It also runs the website JamesAllen.com.

It is hard for non-professionals to tell 14-karat gold from 24-karat gold, or a sparkly rock or gemstone from the genuine item. That’s why millions of customers trust Signet. Annual sales top $6.2 billion.

However, slower mall traffic and an increase in online competitors have put a dent in Signet’s financials recently. Sales declined in 2017 for the first time since the recession of 2008-2009.

However, the company still generates strong cash flows and increased its dividend for the sixth year in a row. The stock currently yields 3.83%.


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One reason the dividend is so high is the stock dropped 20% last week after the company reported fourth-quarter results, even though the earnings per share of $4.28 topped analysts’ expectations of $4.25.

So why the stumble? Same store comparable sales were down and the company announced it will close 200 stores by the end of next year as part of an ongoing restructuring.

Yet, there are good reasons to believe the slowdown is temporary. Over the last five years, Signet experienced 15% compounded annual sales growth, well above the industry average.

Expense management has boosted the firm’s operating margin to over 9%. A new Zales e-commerce platform will launch this summer. Management is actively seeking lower financing rates for customers. And the company has been aggressively buying back shares.

Signet also is about to boost its digital marketing efforts. Indeed, President and Chief Digital Innovation Advisor Oded Edelman bought 90,000 shares of the stock seven weeks ago at $55.31-$55.71, for a $5 million investment.

He’s clearly optimistic about the company’s future. And the stock is dirt cheap at just five times earnings and 38% of sales. Signet is unloved and undervalued — and a terrific bargain at current levels.

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