Signet Jewelers Limited (NYSE: SIG) plummeted 14.9% on June 13th, leaving it as the worst performing U.S. stock with a market capitalization of at least $700 million on the day.  Before the market opened, the world’s largest retailer of diamond jewelry reported weak -- but largely in line -- earnings and same store sales for the quarter ended May 4, 2024 (SIG’s first quarter of fiscal 2025).  More specifically, SIG’s 1Q FY 2025 adjusted EPS was $1.11, ahead of consensus estimates of $0.85; while its revenue in the quarter was $1.511 billion, a slight miss versus analysts’ forecasts of $1.516 billion.  Same-store sales in 1Q FY 2025 declined 8.9%, marginally worse than expectations of an 8.1% drop, but much improved from the 13.9% year-over-year decline reported in 1Q FY 2024.

What seemed to concern investors was the company’s moderately weaker than expected forecasts for 2Q FY 2025 (quarter ending in early August 2024) operating income and revenue.  Operating income and sales for that period are projected to be in the $50 to $75 million and $1.46-$1.52 billion ranges versus the consensus forecasts of $86 million and $1.51 billion, respectively.  Higher marketing and staffing costs will likely be the primary drivers of the lower operating income, while gross margins may be flat to up.

Investors ignored several positive aspects to SIG’s earnings report.  For example, the company noted that business accelerated over the last two months of 1Q FY 2025 after a sluggish February.  In addition, management reiterated its full-year FY 2025 (twelve months ending late January 2025) forecasts of $6.66-$7.02 billion in revenue and diluted EPS of $9.90-$11.52, saying that same store sales are poised to turn positive in the second half of FY 2025.

The diamond jewelry industry has faced multiple headwinds over the last few years, including inflation and high inventory levels caused by an “engagement gap.”  Many people spent far too much time alone during the COVID pandemic.  Another negative factor has been a significant shift in brides’ tastes toward environmentally- and budget-friendly lab grown diamonds and away from natural stones.  While inflation and the lab-grown issue seem likely to persist, engagements should rise over the next few years simply due to the ending of work-at-home guidelines a couple years ago.

The sharp decline in SIG’s share price today on just moderately “bad” news may have created an opportunity for risk-tolerant investors or for those who want to diversify from over-exposure in technology stocks.  SIG now trades at a forward P/E of only about 8.5x, a 60% discount to the S&P 500 Index.  In addition, SIG’s enterprise value-to-adjusted EBITDA ratio now stands at around 7.3x, or a 30%-40% discount to the typical stock.

We also note that while SIG operates a highly seasonal business, it also generates substantial free cash flow.  In its most recent fiscal years ended February 3, 2024 and January 28, 2023, the company generated free cash flow of about $420 million and $660 million, respectively.   

Stocks.News does not have positions in companies mentioned.