Signet Jewelers Is Racing Ahead; Here's Why

Author's Avatar
Dec 22, 2014

Shares of Signet Jewelers (SIG, Financial) surged 63% since the beginning of the year. This makes it obvious that this company is doing really well, which is clearly reflected in its share price. With declining oil prices and higher income, people seem to be shopping at the jeweler's store more often. However, these are not the only reasons for the great performance. The retailer's latest acquisition is to be credited for this.

Signet Jewelers acquired Zale Corp. (ZLC, Financial) last year, which boosted its growth. The buyout helped the company register a blockbuster quarter once again. The third-quarter numbers were ahead of the Street's estimates, sending its share price north.

Onto the numbers

Revenue jumped a whopping 53% to $1.18 billion, over last year's quarter. This was in-line with the analysts' estimate and was driven by the addition of Zale Corp. Also, same store sales grew 4.2% during the quarter, boosting the top line further. The comp sales were driven by growth of 7.5% and 6.5% in the Kay and the Jared division, respectively, and were higher than that of last year, which was at 3.1%.

The Zale division's same store sales declined 0.9% because of some integration related issues and tough competition in Canada. However, Signet is in the process of integrating the business properly in the coming months and expects synergies of $150 million to $175 million by January 2018. Also, it expanded the ecommerce segment of the company. The e-commerce division registered a growth of 96.5%, over the prior year, mainly due to Zale's online presence.

The gross margin of the company shrank to 33.4% from 35.2% last year. This decrease in margin was also because of the buyout of Zale Corp., which operates at a lower margin as compared to Signet's core operations. However, adjusted earnings of the company were ahead of the estimates. The bottom line stood at $0.21 per share, higher than the analysts' estimate of $0.18 per share. On a comparable basis, earnings were up 12% to $0.47 per share, as compared to the previous year's quarter.

On the other hand, peer Tiffany (TIF, Financial) did not do as well as Signet. Although both the top line and the bottom line grew, the numbers were below the Street's estimates. However, the retailer is confident about its future. Therefore, it increased its guidance for the year.

Positive cues

After closing the acquisition of Zale Corp. in May, the company entered into a rough diamond supply contract with DeBeers in order to boost its supply chain. This should help the retailer in the future, especially because the demand for diamonds is on the rise.

Furthermore, Signet Jewellers boosted the outlook for the year since it expects to benefit from Zale's buyout. Thus, it expects earnings to be in the range of $5.51 and $5.61 per share from a range of $5.38 to $5.54 per share, earlier. This surely delighted the investors, resulting in the increase in share price. In fact, the company also declared that it expects same store sales growth of 3% to 4% for the current quarter.

My takeaway

Signet Jewelers is doing really well and is worth looking at. Its great quarterly numbers, bright outlook and potential benefits of the acquisition should result in a bright future. Its efforts to grow its business are commendable. Thus, this jeweler deserves all the attention.