uploads///Part

Can Signet Jewelers’ Profitability Continue to Improve in 3Q16?

By

Updated

Signet’s margins improved in 2Q16

Recently Signet jewelers (SIG) has seen a drop in profitability due to the low gross margins associated with the Zale division, which Signet acquired in May 2014. Signet is investing in its Zale division in the form of advertising and IT (information technology) support in order to boost its sales and gross margin.

In the previous quarter, Signet Jewelers Limited (SIG) reported an increase in profitability. In 2Q16, Signet reported gross and operating margins of 34.8% and 7.2%, respectively, with an increase of 1.4 percentage points in gross margin and an increase of 33 basis points in operating margin compared to 2Q15.

Excluding Zale, Signet’s operating margin for 2Q16 was 14.4%. For 1H16, Signet reported a gross margin and an operating margin of 35.9% and 9.4%, respectively.

Lower commodity prices have been benefitting jewelry companies (XRT) as of November 18, 2015. In 2015, diamond prices dropped by 15%. Signet uses the average cost method for reporting inventory and raw material, which may not immediately release the impact of benefits from lower input costs.

Article continues below advertisement

Peer group comparison

Tiffany & Company (TIF) reported a gross margin of 59.5% in 1H16 compared to 59.1% in 1H15. The increase was a result of a decline in wholesale sales of diamonds and declines in input costs. Tiffany’s operating margin declined by 3.3% in 1H16 to 17.6% on account of higher marketing spending.

By comparison, Fossil Group (FOSL) reported a 3Q16 gross margin of 54.2%, which was down by 2.7%. The negative impact of the strong US dollar canceled out the positive impact of higher prices and lower input costs for Fossil.

ETF exposure

Signet is a component of the S&P 500 Index (SPY) and part of the SPDR S&P Retail ETF (XRT). It has a weight of ~1% in XRT. Signet, Tiffany, and Fossil Group have exposure in the iShares Russell 1000 Growth ETF (IWF) and the iShares Core S&P 500 ETF (IVV). Together these companies make up 0.12% of the total portfolio holdings in IWF and 0.19% of the total portfolio holdings in IVV.

Outlook

Of the total estimated synergies from the acquisition of Zale—between $150 million and $175 million—Signet expects to achieve 20%, or $30 million–$35 million, of synergies in fiscal 2016. This may likely improve the margins further. In the medium term, Signet estimates the operating margin at Zale to be approximately 12%.

Signet expects to achieve the following long-term operating margin targets:

  • Sterling division—19%
  • Zale division—15%
  • UK division—10%

Continue to the next part of this series for an instructive look at Signet’s shareholder returns in 2015.

Advertisement

More From Market Realist