Signet Stock Tumbles. Is It a Buying Opportunity or a Warning Sign?

If you're a value investor, there's a good chance Signet Jewelers (NYSE: SIG) has popped up on your radar.

The company is the world's largest retailer of diamond jewelry, and it owns banners like Kay, Zales, and Jared. It operates in a mature industry, but its size gives it scale advantages. It has also been focused on leveraging loyalty programs, digital marketing, e-commerce, and services, which are harder for independent retailers to do.

Signet is reliably profitable, and the stock trades at a price-to-earnings ratio of less than 10, which is clearly value range in a market where the S&P 500 trades at a P/E of around 30.

However, investors didn't like what they saw in Signet's latest report, as the stock was down 12% after the company reported third-quarter earnings on Thursday.

Comparable sales improved for the sixth quarter in a row as it emerged from a post-pandemic lull, but they were still down 0.7%. As a result, overall revenue was down 3.1% to $1.35 billion, which was just shy of the consensus at $1.37 billion.

Management noted headwinds from challenges from the digital integration of the Blue Nile and James Allen banners as well as leadership transition costs after CEO Gina Drosos retired during the quarter and was replaced by J.K. Symancyk.

On the bottom line, adjusted earnings per share was flat at $0.24, which also missed estimates at $0.33. Adjusted operating income in the quarter fell from $23.8 million to $16.2 million, though the company's earnings per share from a lower tax expense and fewer shares outstanding.

Reflecting the challenges at its digital banners, Signet also cut its full-year guidance. It now sees revenue of $6.74 billion to $6.81 billion, compared to a previous range of $6.66 billion to $7.02 billion. On the bottom line, it cut its adjusted EPS range from $9.90 to $11.52 to $9.62 to $10.08, lowering the midpoint of that range by roughly a dollar and below estimates at $10.49.

Image source: Getty Images.

The silver lining

It's not surprising that the stock fell on the news. After all, missing estimates and cutting guidance will tend to do that, but the headwinds facing Signet seem to be short-term.

The primary challenge facing the company is integrating the James Allen and Blue Nile digital banners.

In an interview with The Motley Fool, CFO Joan Hilson explained that as the company integrated the API from those banners, it negatively impacted traffic to the site and search functionality. However, she expected that to normalize within the next year, saying, "We're confident we'll be able to put that business back on track to our long-term expectations."

With those challenges expected to be short-term, a 12% decline in the stock on one earnings report seems excessive. Signet also continues to expect a ramp-up in engagements, which declined following the pandemic as dating patterns were altered by the global health crisis. However, engagements are expected to return to their historical levels in the next couple of years, which will benefit Signet as bridal jewelry makes up roughly half of its business. Engagement trends were weaker than expected in the quarter, which also contributed to subpar performance.

Meanwhile, the company continues to deliver solid performance in fashion, the non-bridal portion of the business, thanks in part to lab-created diamonds, which allow for a higher average transaction volume.

Is Signet a buy?

Despite the disappointing performance, the pieces for the growth of the business are still there, including a recovery in engagements, growth in fashion, share buybacks, increasing operating efficiencies, and growth in the service business.

At a price-to-earnings ratio of under 10 now, the stock looks more likely than not to outperform over the coming years.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.