After Guidance Hike, Is Signet Jewelers a Buy?

Signet Jewelers (NYSE: SIG) is the world's largest retailer of diamond jewelry.

The company competes in a mature industry, but the stock offers a chance to get exposure to the jewelry segment from an industry leader trading at a value price.

Over the last five years, Signet has traded sideways as the company dealt with a post-pandemic hangover, high inflation, and a sluggish consumer spending environment. However, after bringing in a new CEO and organizing around its Grow Brand Love transformation strategy, the business is looking as healthy as it has in a long time, with comparable sales up in four out of the last five quarters and a solid guidance hike in its first-quarter report.

Let's take a look at the latest results.

Signet shines again

During a period with record-low consumer sentiment, Signet managed to deliver solid results with comparable sales up 1.8% in the first quarter, and revenue rose 0.8% to $1.55 billion, which matched expectations. The gap between those numbers is explained by the company's ongoing store rationalization program.

Signet managed to buck the overall headwinds in the consumer discretionary sector as CEO J.K. Symancyk said that because jewelry is an emotional and a considered purchase, it's not necessarily exposed to pressure from high gas prices or inflation like more incidental purchases might be.

Average unit retail was up 5%, and units sold fell 3%, showing the company is finding success at the higher end of the market, while it's experiencing pressure at the lower end due in part to higher gold prices.

Gross margin in the quarter actually fell 70 basis points to 35.8% due in part to inventory write-downs from its transition away from the James Allen banner, which is being folded into Blue Nile. The company also took advantage of elevated gold prices to melt down and trade in some of its gold inventory.

Adjusted operating margin expanded from 4.6% to 5.1% as the company benefited from increased leverage due to the gains in comparable sales and from $18 million in cost savings from the Grow Brand Love strategy.

On the bottom line, adjusted earnings per share jumped from $1.18 to $1.56, easily beating the consensus at $1.38. In addition to higher adjusted operating income, the company benefited from a lower tax rate and ongoing share repurchases as it reduced shares outstanding by more than 5% over the last year.

Signet also raised its full-year guidance. The company is now calling for comparable sales of -0.75% to 2.5%, up from a previous range of -1.25% to 2.5%, and now it expects adjusted earnings per share of $9.20-$11.00, up from a previous range of $8.80-$10.74.

Based on the updated forecast, Signet trades at a forward P/E of just 9.

Is Signet a buy?

Signet also announced an accelerated $50 million share repurchase program, which it intends to begin this month, and the company has $355 million remaining in its share repurchase authorization after that, or about 10% of its market cap.

With comps now positive, investors seem to be underestimating the upside potential of Signet as it can deliver solid EPS growth with the combination of rising comps, an improving margin, and a lower share count.

For value-minded investors, Signet looks like an attractive choice right now. If the company can continue delivering comparable sales growth, earnings per share should move higher as well, fueling gains in the stock.

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.