This Jeweler Hit It Big With Earnings, but Is It a Buy?

Austin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As consumer spending increases, many industries and companies see healthy growth ahead. Jewelry retailers typically suffer during down and flat markets, so when the tides turn these companies are among those that have the ability to expand. There have been numerous positive developments at jewelry companies that offer great opportunities to investors. 

Signet Jewelers (NYSE: SIG) posted outstanding financial results for its fiscal fourth quarter. Its retail jewelry chains had an 18% increase in earnings per share. Revenue rose an impressive 12% to $1.5 billion. Last year, the company opened 101 new stores and just announced that it's raising its dividend. What more can investors want out of a company?

Signet Jewelers owns and operates Kay Jewelers and Jared The Galleria of Jewelry stores. Most of its stores are in strip malls and other dense retail locations. It has 1,443 stores in the U.S. and more in the United Kingdom, Ireland and the Channel Islands.

The company is highly cyclical, and generates most of its revenue at the end of the fiscal year due to holiday shopping. Fourth quarter revenue was the highest it's been in the last six quarters.

Same-store sales rose by 3.5% globally. Results were lower than last year’s same-store growth rate of 6.9%. While the growth isn’t as high as last year, I still see this is as a positive mark of customer loyalty and brand awareness.

The company plans to open an additional 64 stores this year. Plus, it recently acquired Ultra Stores – a U.S. retail jewelry company, in a $57 million deal. Ultra Stores operates 102 jewelry retail locations in the U.S. 

Next year, revenue should climb to $4.4 billion, driving earnings per share to $4.80. The company has a strong current ratio of 3.5 and should be able to handle the capital expenditures necessary to build new stores and supply them with inventory. Investors have already sent the stock higher to $67.55 per share from $49 in just a few months. The one-year target is $70 per share, so there is still some room for Signet to grow.

A major competitor

One of Signet’s chief competitors, Zale (NYSE: ZLC), is considerably smaller, with a market cap of only $162 million. Its second quarter earnings per share were $1.09. This is a large jump from the first quarter results of $0.32 per share. It has shifted its focus from closing less profitable stores to same-store sales growth, which in the most recent quarter was 2.8%. While not representing a substantial change, it's the ninth straight quarter of same-store sales growth. Zale also restructured some of its debt to reduce interest expense.

The company doesn’t have the capital for aggressive expansion so it will have to continue its focus on same-store sales growth and improving the effectiveness of its sales staff. Also, the focus on online sales is important for Zale in the future.

The top jeweler 

It is hard to talk about jewelry retailers without mentioning Tiffany (NYSE: TIF). The company is being pressured by marketing expenses. It is one of the best jewelry brands around, but it still needs the power of strong advertising. The management is expecting earnings growth of 6% next year. Tiffany caters to high-end clients and likely will not affect the success of Signet, nor will it provide much competition to Zale.

The company is planning to open 15 new stores this year. It currently has 102 in North America, 55 in Asia Pacific, 55 in Japan, and 28 in Europe. The company's expansion strategy will help fuel the earnings growth it expects. 

It will also see lower costs this year as it expands its operating margins. This reduction in costs coupled with an expansion of stores to drive revenue is great news to investors. 

Due to poor marketing and difficult economy, Tiffany's saw a decline of 2% in U.S. same-store sales last quarter. The U.S. is the company's largest market, but it's also the market that's declining the most. Therefore there are definite challenges ahead. 

Final thoughts

Signet posted great gains, and investors have noticed. The stock is a hold at the very least and a buy at the very best. Most of the upside is already priced in to the stock, but there is the potential for a solid 5% gain in the next year.

Zale is a company worth looking at as it pursues cost-cutting and e-commerce sales. The company isn't in a place to expand aggressively, but it could find ways to increase its total profitability. Watch this company closely this year.

Tiffany's will have to overcome its declining same-store sales in the U.S. Lower costs will help net income, for sure. Expansion will drive top-line growth, but without same-store sales the growth won't be sustainable.


Austin Higgins has no position in any stocks mentioned. He is the Principal Consultant for Avant Venture Group and focuses on building businesses through innovation, growth and investment. Read his company's blog at BuildInvestGrow.com and follow him on Twitter @Austin_Higgins.

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