Here is Why Signet (SIG) May Have a Rough Ride in 2018

Of late, Retail-Jewelry industry seems to have gained momentum. However, Signet Jewelers Limited SIG, which belongs to the same industry has witnessed a decline of 7.6% in the past three months, compared with the industry’s growth of 8.8%. Stocks such as Tiffany & Co. TIF and Movado Group, Inc. MOV have gained 14.5% and 15.2%, respectively in the same time frame. Let’s delve deeper and find out why Signet is lagging behind its peers.

Signet Vs Industry Scorecard

Parameters	Signet	Industry
Earnings Growth F1	-12.7%	13.5%
Sales Growth F1	-1.5%	16.5%
Long term Earnings Growth	8.0%	9.9%

Source: Zacks

Dismal Holiday Sales

Signet has kicked off 2018 with dismal holiday sales and soft outlook. The company’s dismal holiday sales results were primarily due to negative effect of the credit outsourcing transition and weakness at UK Jewelry division. Further, challenging retail landscape, aggressive promotional strategies and waning mall traffic were the other reasons behind lower-than-expected results.

Signet’s total sales for the nine-week period ended Dec 30, 2017, decreased 3.1% to $1,881.7 million from $1,940.9 million in the prior year, while same store sales fell 5.3%. This holiday season performance was more or less similar to that of 2016, where total sales decreased 5.1% and same store sales declined 4.6% in the nine-week period ended Dec 31, 2016.

The dismal results compelled management to adopt a more conservative view. Signet now expects fiscal 2018 earnings (excluding the impact of U.S. tax reform) in the range of $6.17-$6.22, compared with the prior guidance of $6.10-$6.50. Moreover, earnings (including the impact of U.S. tax reform) are estimated to be in range of $6.45-$6.50. Meanwhile, the company continues to expect same store sales to decline by mid-single digits.

Gross Margin Downtrend a Concern

Gross margin, an important financial metric that gives an indication about the company’s health has shown constant deceleration in the past few quarters. In third-quarter fiscal 2018, gross margin contracted 170 basis points (bps) to 27.8% following a decline of 120 bps and 300 bps to 32.7% and 35%, respectively, in the preceding two quarters. Decline in gross margin is primarily due to rise in promotional activities, which in turn lowered merchandize margin rate.

Signet currently carries a Zacks Rank #5 (Strong Sell). A better-ranked stock worth considering in the retail space include American Eagle Outfitters, Inc. AEO, whose shares have gained 35.5% in the past three months. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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