In a stock market where technology stocks grab so much attention, a jewelry stock may easily go under the radar. But Signet Jewelers (SIG) has dazzled in more ways than one as you’re about to see.
From its humble Bermudian beginnings in 1950, Signet has grown to about 3,600 jewelry stores and holds the title of the world’s biggest diamond retailer. Around the world it’s better known by the retail store names it operates under, such as Kay, Zales, and Jared.
Collectively, these brands have produced impressive growth. In fiscal 2022, revenue topped $7.8 billion, a 49.7% growth rate over the prior year. So is Signet a buy?
What Is Signet Doing So Well?
The recovery of in-store sales, coupled with surging online sales over the past two years have ignited rapid growth. Much of this is attributable to Signet’s investments in online sales and technology. Stronger consumer spending acted as a tailwind also, though that will be less a factor going forward as inflation puts a dent in consumers’ wallets.
Operating income has skyrocketed even more than revenues. It increased from $165 million in 2020 to $894 million in 2022. That’s primarily due to the company keep its “other” expenses line item flat while revenues were rising. That’s the kind of growth Wall Street can get behind but there’s even more to like than the headline numbers.
From a valuation standpoint, Signet is trading at just 5.4x Enterprise Value/EBITDA and 6.5x Enterprise Value/EBIT. At just 4.0x free cash flow, Signet is arguably on sale and so we ran the numbers to test the thesis.
When we put the financial statements through a discounted cash flow forecast analysis, we arrived at a fair market value of $83.21 per share, representing 41.5% upside from the current trading price at the time of calculation.
And the good news doesn’t stop there. Share buybacks are in full force at Signet. The company’s share buyback yield is 22.0%. Clearly, management believes the company is undervalued too. But it’s not all smooth sailing.
Consumer Demand A Concern?
During the pandemic, consumer spending was focused more on services than goods but that inverted as the economy opened back up. Now that stimulus checks have evaporated, Signet growth should slow. Indeed, analysts are forecasting $8.0 billion in 2023 and $8.2 billion in 2024. Both numbers reflect significantly slower growth vs the pace reported in 2022 vs 2021.
Regardless of slower top line growth, Signet is committed to operating margins north of 10% now that one in five stores has been closed. It is also looking to boost purchase frequencies thanks to its loyalty program as well as directing customers online where e-commerce sales produce greater efficiencies.
A concern for investors is that growth is not all organic. Acquisitions have been a growth driver, so the high growth reported above is not a sustainable metric that should be expected. As Signet acquires companies like Diamond Direct, it causes step function increases in revenues but then a plateau occurs until the next acquisition, at least until organic growth levers kick into high gear.
Signet is a Jewel — But Is It a Buy?
There’s lots to like about Signet. It has boosted operating margins 6x, revenues by almost 50% and share buyback yield is north of 20%.
Trading at just 5x forward earnings and 4x free cash flow with a supportive share buyback program acting as a tailwind, the signs are positive that Signet will be a strong buy for some time.
From a valuation perspective, the upside to fair value is north of 40%, suggesting the margin of safety is large also. In short, if you want a jewel in your portfolio that could deliver long-term, Signet has the hallmarks of a stock worth holding over the long-term.