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Signet (SIG) Q2 Loss Narrower Than Expected, Sales Down Y/Y

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Signet Jewelers Limited (SIG - Free Report) reported better-than-expected second-quarter fiscal 2021 results. This jewelry retailer posted narrower-than-expected loss. Further, the company’s net sales also surpassed the Zacks Consensus Estimate, following a miss in the preceding quarter. Notably, this was the company’s 11th straight quarter of bottom-line beat.

However, the top and the bottom line fell year over year in the reported quarter. Weak same store sales were a major deterrent. Margins were also dismal. Moreover, management did not provide any guidance for the fiscal year owing to persistent uncertainties.

Nevertheless, Signet’s e-commerce platform continued to perform well. While the company accelerated its omni-channel transformation, it has also continued to focus on cash preservation. As a result, the company has been able to further invest in its 'digital-first' initiatives. During the second quarter, it scaled toward enhanced virtual selling model, improved merchandise assortment and augmented digital marketing.

Although same store sales were down during the second quarter, thanks to store closures, the trend began to turn positive toward the latter end. The turnaround has been resulting out of store-reopening and high double-digit growth in e-commerce. Consequently, preliminary August same store sales reflect an increase of 10.9%, including e-commerce growth of 65.2%. However, management is uncertain whether the August sales trend will continue for the rest of third-quarter fiscal 2021.

Shares of Signet plunged nearly 4% during the trading session on Sep 3. In the past three months, Signet’s shares have gained 14.2% compared with the industry’s rise of 12.4%.

Q2 in Detail

The company reported adjusted loss of $1.13 per share, narrower than the Zacks Consensus Estimate of a loss of $2.06. However, the figure compared unfavorably against adjusted earnings of 51 cents a share reported in the year-ago quarter.

This jewelry retailer generated total sales of $888 million that surpassed Zacks Consensus Estimate of $835 million. However, the top line declined 34.9% year over year and 34.8% on a constant-currency (cc) basis.

Meanwhile, e-commerce sales skyrocketed 72.1% from the prior-year quarter’s level to $270.1 million. Brick-and-mortar same store sales plunged 46%. Total same store sales for the quarter plunged 31.3%.

Management pointed out that, due to COVID-19, the company’s design and service centers stayed shut until late second quarter.  As a result revenue recognition related to Signet's extended service plan programs was lower than last year, thereby negatively impacting same store sales by nearly 450 basis points (bps).

Nevertheless, management is impressed with the company’s strong digital show. Consistent with its digital first strategy, the company has continued to invest in its omni-channel platform. Markedly, its investment in virtual selling is aiding higher levels of conversion in digital and retail foot traffic. During the second quarter the company served more than 300,000 customers via virtual consultations, which led to higher than historical conversion rates. The company also increased e-commerce distribution throughput five-fold times.

We note that gross profit plunged 51% to $224.3 million, while gross margin contracted 830 bps to 25.3%. Decline in gross margin is due to fixed costs deleverage stemming from lower sales as well as lower revenue recognition relating to extended service plan programs. The downsides were partially offset through lower occupancy costs, structural cost savings and lower inventory related costs.

Selling, general & administrative expenses fell 35.3% to $265.9 million courtesy of reduced labor costs and lower advertising expenses.

Further, the company reported adjusted operating loss of $41.7 million against operating income of $53.1 million recorded in the year-ago quarter.

Signet Jewelers Limited Price, Consensus and EPS Surprise Signet Jewelers Limited Price, Consensus and EPS Surprise

Signet Jewelers Limited price-consensus-eps-surprise-chart | Signet Jewelers Limited Quote

Segment Discussion

Sales in the North America segment declined 33.7% on a reported basis to $823 million. Further, same-store sales fell 30.6% from the year-ago quarter’s levels. Average transaction value ("ATV") increased 2%, while the number of transactions declined 28.1%

The segment’s e-commerce sales surged 72.7%, while brick-and-mortar same-store sales tumbled 28.1%. Meanwhile, North America payment plan participation rate, with both credit and leasing sales, came in at 40.2% in fiscal second quarter, down from 51.4% in the year-ago quarter.

Sales in the International segment declined 46.4% on a reported basis to $61 million. Same-store sales at the segment dropped 38.8% year over year. Further, ATV increased 11.4%, while number of transactions fell 42.8%. Meanwhile, e-commerce sales rose 65.6%, while brick-and-mortar same-store sales fell 54.6%.

Financial Details

Signet — which shares space with Tiffany (TIF - Free Report) in the industry — ended the quarter with cash and cash equivalents of $1,204 million, accounts receivable of $31.5 million and inventories of $2,193.1 million. Long-term debt was $1,336.1 million and total shareholders’ equity was $916.4 million at the end of the quarter.

For the 26-week period ended on Aug 1, 2020, this Zacks Rank #3 (Hold) company generated net cash of $156.1 million from operating activities. It had free cash flow of $132.5 million.

Furthermore, the company’s dividend will remain suspended till it has better market clarity. However, management has elected to pay out the November preferred dividend in kind.

Path to Brilliance and other Updates

Despite uncertainties in the macro environment, Signet is placed well to meet consumer needs across both its digital and physical footprints. Markedly, the company is undertaking prudent measures to accelerate customer engagement via virtual selling. It has empowered more than 15,000 store associates to engage with customers via virtual selling.

Being in the third year of Path to Brilliance initiative, the company anticipates net savings of at least $285 million compared with its original target of $225 million. It has already accomplished $185-million net cost savings over the first two years of Path to Brilliance. Management has further identified additional structural cost savings of more than $100 million for fiscal 2021. The savings are likely to include workforce reductions, direct sourcing, indirect spend and occupancy costs.

As part of fiscal 2021 store optimization plans, the company closed 293 stores, out of its previously announced plans to shutter 380 stores. The company is on track with optimizing its store fleet by shifting to off mall locations, which is likely to help in occupancy cost reduction as well as boost performance. It currently has more than 90% of its total fleet open. Based on consultations with leading healthcare professions, the company launched the new Love Takes Care safety program.

Key Picks in Retail

Sprouts Farmers Market (SFM - Free Report) has a trailing four-quarter earnings surprise of 49.9%, on average and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (strong Buy) stocks here.

SpartanNash (SPTN - Free Report) , also a Zacks Rank #2 stock, has a trailing four-quarter earnings surprise of 21.5%, on average.

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