Analyst: Signet Jewelers Could Benefit From Low Expectations

Signet Jewelers Ltd. SIG missed on earnings expectations Tuesday and it guided down due to execution issues as it outsourced its credit portfolio.

The Analyst

Bank Of America Merrill Lynch's Lorraine Hutchinson retained its Buy rating on the stock and decreased its price target from $75 to $66.

The Thesis

Signet Jewelers has encountered significant issues associated with the Phase 1 outsourcing of its credit portfolio, which led to longer than typical application process times and the subsequent reduction in sales, Hutchinson said. Phase 1 closed just one week before the end of third quarter, but the credit transition issues have carried over into the beginning of the fourth. 

The analyst views fiscal 2019 as the trough earnings year and estimates $6.22/$6.00 for 2018/2019. The stock currently trades at 8.8 times the 2019 estimate, while the new price target assumes 11 times price-to-earnings. Any incremental progress on sales and fixing these issues will be a positive because of very low expectations for the team's execution, Hutchinson said. Key sales opportunities for the holiday include a greater presence within the $200-$700 fashion jewelry price range, the analyst said. 

The Price Action

The stock dropped around 30 percent Tuesday on disappointing earnings results. It is still trading above its May 31 low of $46.09 and was trading down 5.43 percent Friday at $50.13. 

Related Links:

Report: The Retailers Most Dependent On Holiday Sales

Wage Pressures And Holiday Comps In The Retail Sector