In a note to clients Tuesday, analysts at Wells Fargo revealed three reasons the firm's "Top Recovery Pick" is Signet Jewelers (NYSE:SIG), the Bermuda-based, U.S.-listed jewelry retailer. Here's why:
The investment bank, which maintained a Buy rating and $95 price target on the stock, said the first reason for the choice is that the company's "overheated comps have cooled and normalized."
"A key overhang since 2022 has been the continued reversion of the jewelry category," explained the analysts. "That said, when we look at comps vs. 2019, we see that since peaking in 3Q22 (at a whopping +37%) trends have steadily decelerated over the last 24 months." They explained that with SIG's recent guidance cut in the last quarter, the implied comps compared to 2019 will moderate further this FY and "should end 2023 at roughly +HSD."
Secondly, Wells Fargo believes engagement trends are set to inflect for SIG. "A second pushback to the story has been the fall off in U.S. engagements," the analysts added.
"That said, trends are set to inflect 10%+ in '24 and '25, and given bridal is ~50% of SIG sales, this is a key catalyst to comp inflection next FY."
Finally, they noted that the upcoming convertible preferred share redemption adds an EPS accretion catalyst.
"A noteworthy catalyst that many investors may be unaware of is the redemption of outstanding convertible preferred shares," the analysts continued. They believe management may attempt to strike a deal prior to 2024.
"Big picture, redeeming the convertible shares should add between +14-18% in EPS accretion on our current FY25 estimates," the analysts concluded, adding that it should "provide clear visibility to EPS growth."