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Bear of the Day: Signet Jewelers Limited (SIG)

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The mall is dead.

O.K., maybe not completely dead – there are obviously still plenty of retail malls of all shapes and sizes in operation – but the mall is certainly sick.  On life support, even.

Due mostly to changing consumer preferences and the rise of online retailing giants like Amazon (AMZN - Free Report) , mall traffic has been declining for years.  Mall real estate vacancies nationwide now top 10%, and this week, Moody’s Investor Service reported that the first Quarter of 2018 saw the highest level ever of default on retailer’s debt with nine firms failing to make scheduled interest payments – most notably, the long-struggling department store operator Sears Holdings (SHLD) and privately held Claire’s Stores, which filed for Chapter 11 bankruptcy earlier this year.

Retail Jewelry Takes a Beating

Signet Jewelers Limited (SIG - Free Report) has been hit hard buy the shift from brick-and-mortar retailing in the jewelry sector to more efficient (and in most cases, less expensive) online options.  

Operating well-known national brands like Kay, Zales and Jared as well as a number of smaller regional brands, Signet now finds itself on uncomfortable middle ground in the industry. Lacking the cachet of Super-Luxury brands like Tiffany (TIF - Free Report) or Cartier, or the online traffic of popular internet jeweler Blue Nile, Signet is in the midst of a three-year restructuring plan that aims to close 200 costly retail stores and attempts to replace the lost revenue with increased online sales.  

Unfortunately, it may be a case of too-little-too-late.

Despite the push to increase internet sales, Signet sold only $253M worth of goods online in fiscal 2018 (its most recent full year.) Although this is indeed a big increase from the previous year, it still significantly trails industry leader Blue Nile, which had revenues of $480M in 2015 (the last year it reported publicly before being acquired by private equity firm Bain Capital) and which presumably have grown even more since then.

Disappointing Guidance

Owing partly to a quirk in the reporting cycle (a 15-week 4th quarter), Signet actually posted a $0.02 cent earnings beat in the fourth quarter - $4.28/share vs. a Zacks consensus estimate of $4.26 – but the company’s guidance for the coming year was abysmal.  Prior to the announcement, the consensus estimate for next year was for earnings of $6.45/share.  Signet shocked the markets by guiding lower by 40% to a range of $3.75 to $4.25/share.

Analysts were quick to follow with an avalanche of downgrades, resulting in a new consensus estimate in the middle of that new range - $3.99/share.  
This earns Signet our worst rating, a Zacks Rank #5 (Strong Sell.)

Despite the fact that the stock price has been punished lately, trading around $38 – down from a 52-week high of $77.94, it’s still really not a value opportunity because of the significantly uncertain prospects for a successful restructuring.  

There are plenty of stocks out there that are leading growing sectors.  There’s no reason to get involved in one that’s shrinking.

Investors who want to have retail exposure in their portfolio would be wiser to consider Walgreen Boots Alliance (WBA - Free Report) and Dollar Tree (DLTR - Free Report) .  Both currently have a Zacks Rank #3 (Hold)- due mostly to relatively flat recent earnings estimates, but in the retail sector, both of these stores are sell the categories of merchandise that consumers are willing to travel to an actual store to get.


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