Here's Why Signet (SIG) Stock Fell Despite Q4 Earnings Beat

Signet Jewelers Limited (NYSE:SIG) reported robust fourth-quarter fiscal 2018 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. Both the top and bottom lines increased year over year owing to solid performance of the Zale division.

Despite reporting better-than-expected earnings this Hamilton, Bermuda-based company’s shares are down nearly 11% following the announcement of its restructuring plans, which will continue for the next three years. Additionally, Signet provided soft fiscal 2018 guidance, which also dampened investors’ sentiment.

Notably, the company’s three years strategic initiatives comprises of cost effectiveness. A portion of this cost savings will be used to invest in growth initiatives, which include eCommerce development, OmniChannel capabilities and product innovations. Further, in an effort to drive store experience, the company plans to develop innovative store concepts. Currently, it is focusing on diversifying store base.

Signet is also expected to take initiatives to improve digital traffic. Further, the acquisition of R2Net, which owns popular online jewelry retailer, JamesAllen.com, and Segoma Imaging Technologies will combine Signet’s retail jewelry business with R2Net’s solid digital operations. The company expects digital sales, as a percentage of total revenues, to increase from 8% in fiscal 2018 to 15% in fiscal 2021.

Further, Signet anticipates the strategic efforts over the next three year to garner $200-$225 million of net cost savings. The costs savings initiatives will result in pre-tax charges $170-$190 million over the next three years. In fiscal 2019, the strategic plan is anticipated to generate $85 million-$100 million of cost savings, whereas initial estimates for pre-tax charges are expected to be in the range of $125-$135 million.

Signet, which announced second phase of credit outsourcing, declared that the company plans to sell its non-prime in-house credit card receivables. Earlier, the company had concluded the first phase of outsourcing of its credit portfolio to Alliance Data Systems as well as Genesis Financial Solutions. Also, it announced that Signet will sell $1 billion of prime-only credit quality accounts receivable to Alliance Data Systems Corporation (NYSE:ADS), as a part of its plan to outsource its in-house credit program.

Q4 Results in Details

Signet’s fourth-quarter adjusted earnings of $4.28 per share surpassed the Zacks Consensus Estimate by a couple of cents. Moreover, on a GAAP basis, the company reported earnings per share of $5.24 compared with $3.92 in the prior-year quarter.

The retailer of diamond jewelry and watches generated total sales of $ 2,293.1 million, which increased 1% year over year and also came above the Zacks Consensus Estimate of $2,287 million. Sales were primarily driven by an extra week of operations owing to shift in retail calendar and R2Net acquisition. However, same store sales were down 5.2% in the quarter. E-commerce sales came in at $253.8 million, up over 50% on a year-over-year basis.

While gross profit declined 2.7% to $919.8 million, gross margin contracted 160 basis points (bps) to 40.1%. Operating income came in at $323.5 million down from the $399.2 million, while operating margin declined 350 bps to 14.1%.

Signet Jewelers Limited Price, Consensus and EPS Surprise

Segment Discussion

Sales at the Sterling Jewelers Division dipped 1% to $1,382.7 million. Same store sales were down 8.6%, reflecting a decline of 12.8% in the number of transactions but an increase of 1.7% in average transaction value. Per Signet, nearly 500 bps of the same store sales declined due to credit outsourcing transition.

Sales at the Zale Division were up 5% to $582.5 million. Same store sales increased 4.3%, reflecting a rise in the number of transactions and average transaction value by 1.1% and 3.8%, respectively. At for Piercing Pagoda, same store sales jumped 4.6% and sales increased 8.8% to $91.1 million.

Sales at the UK Jewelry Division rose 2.8% to $233.9 million. Nevertheless, same store sales fell 9.2%, reflecting a decline of 2.6% in the number of transactions but an increase of 8.1% in average transaction value.

Other segment sales came in at $2.9 million.

Other Details

Signet ended the fiscal quarter with cash and cash equivalents of $225.1 million, net accounts receivable of $692.5 million and inventories of $2,280.5 million. Long-term debt and total shareholders’ equity were $688.2 million and $2,499.8 million, respectively.

For fiscal 2019, the company plans to close above 200 stores, besides opening 35-40 fresh stores. As of Feb 3, 2018, the company operated 3,556 stores.

Signet repurchased 8.1 million shares for $460 million in fiscal 2018. As of Feb 3, 2018, the company has remaining authorization of $650.6 million under its share repurchase program. Further, management announced quarterly dividend of 37 cents per share for first-quarter fiscal 2019, which reflects a 20% increase and marks the seventh consecutive year of dividend hike. This dividend will be payable on Jun 1, 2018 to shareholders of record on May 4.

Guidance

Management expects same-store sales in fiscal 2019 to decline in the range of low to mid single-digit. In fiscal 2018, same-store sales had declined 5.3%. Further, the company anticipates earnings per share between $3.75 and $74.25 in comparison with fiscal 2017 figure of $6.51. The consensus mark for fiscal 2019 is pegged at $6.08, which is likely to witness downward revisions in the coming days.

Sales for the year are anticipated to be in the range of $5.9-$6.1 billion. The company anticipates capital expenditures of $165 million to $185 million.

Signet currently carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Burlington Stores, Inc. (NYSE:BURL) delivered an average positive earnings surprise of 15% in the trailing four quarters. It has a long-term earnings growth rate of 18.6% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dollar General Corporation (NYSE:DG) pulled off an average positive earnings surprise of 3.7% in the trailing four quarters. The company has a long-term earnings growth rate of 11.6% and a Zacks Rank of 2.

Movado Group, Inc. (NYSE:MOV) has delivered positive earnings surprise in the preceding two quarters. The company carries a Zacks Rank #2.

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