Signet Jewelers (NYSE:SIG), operator of Kay Jewelers in the United States and H. Samuel in the United Kingdom, announces earnings on March 22 and they're expected to be an all-time high. Good things are happening in the jewelry business these days and as a result its stock is pushing towards $50, a level it's reached only once before in May 2007.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Stock Price

It's been a wild ride for Signet's stock since hitting the $50 mark in 2007. Almost immediately upon reaching said high, its stock began plummeting back to earth. By the market lows of early 2009, it had fallen to $7. Three years and 600% later, its stock closed on March 12 trading at $48.87, a scant $1.13 from the elusive $50 mark and its highest level since September 2008, when it went from being an American Depository Receipt to a full-fledged New York Stock Exchange stock. As part of its move from the London Stock Exchange, its shares did a reverse split on a one-for-twenty basis. At the time of the split, they traded around $23, so the net result has been a good one for shareholders. For related reading, see Understanding Stock Splits.


As I said in the opening paragraph, good things are happening in the jewelry business. Signet expects a minimum diluted earnings per share for fiscal 2012 of $3.67. That puts its net income at $320 million, higher than it's ever been on $3.76 billion in revenue, also a record. In 2012, management had four financial objectives: improve its gross margin, maintain selling, general and administrative expenses similar to fiscal 2011, capital expenditures between $110 million and $130 million and positive free cash flow between $150 million and $200 million. It achieved all four and as a result, it now expects free cash flow of at least $230 million. With this in mind, it will continue its 10 cents quarterly dividend and start repurchasing its shares in 2012. I hope it doesn't and instead implements some sort of special dividend payout at the end of the year. Warren Buffett recently said he would pay no more than 110% of Berkshire Hathaway's (NYSE:BRK.A) book value to repurchase his company's shares. Management is wise to follow his lead. Having said this, it doesn't mean I think Signet's shares are expensive; they're just not cheap.

U.S. Business

One look at Signet's overall business will leave you with two impressions: Its U.S. business is performing marvelously and its U.K. business isn't. Case in point is the nine weeks ended Dec. 31, 2011, which encompass the holiday selling season. Same-store sales in the U.S., which account for 80% of revenue, were up 9.2% compared to a much smaller 1.8% increase in the U.K. For the first 48 weeks of the year, same-store sales in the U.S. were up 11.6% compared to 0.8% in the U.K. Thankfully for shareholders, the bigger piece of the pie is performing as it should. Being a glass half-full type of person, I see this as an opportunity for Signet management.

In the first three quarters of the year through Oct. 29, 2011, its U.K. business produced an operating loss of $2.4 million on $451.4 million in revenue. In the same period in fiscal 2011, it made $1.7 million on $429.7 million. Even then we are talking about an operating margin of less than 1%. The U.S. division, on the other hand, made $287 million on $1.94 billion in revenue with an operating margin of 14.8%. Clearly, the U.K. economy isn't helping, but there's more at work here. The business mix in each country is entirely different. Average sales per store in the U.S. at its Kay stores is $1.7 million, and $4.6 million at its Jared stores. In contrast, its Ernest Jones stores in the U.K. generate $1.6 million while its H. Samuel brings in $1.1 million on average. The big difference isn't so much sales per store as it is the fact the U.S. stores generate 75% of their revenue from diamonds compared to just 28% in the U.K. I'm not a jewelry expert by any means, but I think it's safe to say diamonds are much more profitable than watches and other pieces of jewelry. Therefore, until management can figure out how to increase that percentage in the U.K., business won't improve there. Long-term, however, it is fixable.

Bottom Line

Signet expects $320 million in net income in fiscal 2012 and that's with 20% of its overall business generating a loss. Think how much it could make if the U.K. stores could figure out how to lift operating margins into the mid-single digits. Give it a couple of years and I think it will. In the meantime, the U.S. stores will have to do the moneymaking. Long-term, the geographic diversification will come in handy. Perhaps an Asian or Latin American acquisition makes sense once the U.K. stores are profitable. It will certainly have the cash to do so. Signet's stock in my opinion is reasonably priced. Get on board now as it continues to take market share from Zale (NYSE:ZLC), Tiffany (NYSE:TIF) and others. Its future is sparkles. For related reading, see A Beginner's Guide To Precious Metals.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!