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Signet Stock Rose Due to Q2 Beat: Time to Exit?

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  • Signet stock closed about 27% higher. The company’s second-quarter results beat analysts’ forecast.
  • Investors should use the recovery in the stock to exit.

Signet Jewelers (SIG) shares closed 27% higher due to its better-than-expected second-quarter results for fiscal 2020 on Thursday. Including the second-quarter results, the company beat analysts’ estimates in the past seven quarters, which is impressive.

Despite beating analysts’ estimates for seven consecutive quarters, Signet stock has fallen about 56% on a YTD (year-to-date) basis as of Thursday. We think that the weakness in Signet stock is due to a good reason. Investors should use the recovery to exit the stock.

Signet’s financial performance hasn’t been consistent. The company’s top and bottom line have fallen in the past three quarters. We see weakness on multiple fronts, which will likely hurt Signet stock in the coming quarters.

For instance, the company’s comps continue to decline. The comps will likely stay low in the rest of 2019. The average transaction value has improved. However, the number of transactions continues to decline in North America and the International segment, which is a concern.

During the second quarter, the number of transactions fell 1.6% in North America. Meanwhile, the number of transactions fell 6.8% in international markets. The company blamed the planned shift in the timing of promotions and challenges in the United Kingdom for the disappointing performance.

We expect Signet’s comps to stay low, which reflects lower transactions. Meanwhile, the company’s holiday sales could be disappointing too. Currency volatility is expected to hurt Signet’s sales. The competitive promotional environment will likely impact the company’s sales despite promotional investments.

However, Signet has a cheap valuation, which is at a multiyear low. The stock trades at a forward PE ratio of 5.2x.

Signet’s second-quarter results

Signet Jewelers posted revenues of $1.36 billion, which beat analysts’ estimate of $1.34 billion. However, the sales fell 3.9% on a YoY basis. The comps fell 1.5% with a decrease across all of the product categories and regions. In North America, the comps fell 1.0%, while the comps fell 7.0% in international markets. Signet posted an adjusted EPS of $0.51, which beat analysts’ estimate of $0.24 but fell 1.9% YoY.

For the third quarter, management expects the comps to fall 1%–2%. Meanwhile, the company expects an adjusted loss per share of $1.02–$1.16.

Notably, Citigroup lowered its target price on Signet stock despite its second-quarter beat. Citigroup has a target price of $12, which is down from $17.

Besides Signet, analysts also lowered the target price on rival Tiffany (TIF) stock following management’s commentary on the second-quarter results last month. Tiffany’s sales are taking a hit from lower tourist spending. Meanwhile, negative currency rates and business disruption in Hong Kong remained a drag.

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