The world's largest retailer of diamond jewelry Signet Jewelers Limited (SIG) in Hamilton, Bermuda, operates approximately 2,800 stores under the iconic brands: Kay Jewelers, Zales, Jared, H. Samuel, Ernest Jones, Peoples, Piercing Pagoda, and JamesAllen.com, along with a jewelry subscription service, Rocksbox. The company is focused on developing its channel-agnostic retailer capabilities and combining digital with in-store experiences to gain a competitive edge.

The stock has gained 99.5% in price over the past year and 29.5% over the past nine months based on its e-commerce sales growth and diversified strategies, which include integrating its physical stores with advanced virtual experiences through data-driven in-store consultations and services.

In addition, the company raised its guidance for the full fiscal year ending January 31. SIG now estimates sales of $7.41 billion - $7.49 billion, up from $7.04 billion - $7.19 billion initially. Same-store sales are expected to be 41% - 43% more than the prior year compared to the previous guidance of a 35% - 38% improvement. Last, its non-GAAP (adjusted) operating income is expected to be between $777 million - $814 million compared to previous guidance of between $680 million - $735 million.

 Here is what could shape SIG's performance in the near term:

Strategic Acquisition

In October, SIG agreed to acquire Diamonds Direct USA Inc. Diamonds Direct is an off-mall, destination jeweler in the United States with a highly productive, efficient operating strategy that has exhibited growth and profitability and will be immediately accretive to SIG following the transaction. SIG intends to increase its operational efficiencies by increasing its scale in buying, targeted marketing, connected commerce, and jewelry services.

Robust Financials

During its third fiscal quarter, ended Oct. 30, 2021, SIG's sales increased 18.3% year-over-year to $1.54 billion. Its non-GAAP operating income increased 124.8% year-over-year to $105.2 million. The company's non-GAAP EPS grew 1200% from the year-ago value to $1.43. In addition, its e-commerce rose 14.4% from the prior-year quarter to $273.1 million.

Strong Profitability

SIG's 9.9% trailing-12-months net income margin is 50.4% higher than the 6.6% industry average. Also, its ROC, Levered FCF margin and ROA are 68%, 142%, and 90.8% higher than the respective industry averages. Furthermore, its $1.25 billion cash from operations is 590.2% higher than the $181.03 million industry average.

Discounted Valuation

In terms of forward Non-GAAP P/E, the stock is currently trading at 6.9x, which is 49.3% lower than the 13.59x industry average. Also, its 0.65x forward EV/Sales is 50.7% lower than the 1.32x industry average. Furthermore, SIG's 0.56x forward Price/Sales is 48.2% lower than the 1.08x industry average.

Consensus Rating and Price Target Indicate Potential Upside

Of the five Wall Street analysts that rated SIG, two rated it Buy, and three rated it Hold. The 12-month median price target of $119 indicates a 48.9% potential upside. The price targets range from a low of $90.00 to a high of $150.00.

POWR Ratings Reflect Solid Prospects

SIG has an overall B grade, which equates to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SIG has a B grade for Quality and Value. SIG's solid earnings and revenue growth potential is consistent with the Quality grade. In addition, the company's lower-than-industry multiples are in sync with the Value grade.

Of  64 stocks in the A-rated Fashion & Luxury industry, SIG is ranked #15.

Beyond what I stated above, we have graded SIG for Sentiment, Stability, Growth, and Momentum. Get all SIG ratings here.

Bottom Line

SIG's brick-and-mortar and e-commerce business has witnessed solid growth over the past year. In addition, analysts expect its revenue and EPS to grow 26.9% and 20.3%, respectively, in the fourth quarter, ending January 31. So, given the company's financial strength and solid profit margins, we think the stock is poised to witness significant upside in the near term and could be a great bet now.

How Does Signet Jewelers Limited (SIG) Stack Up Against its Peers?

SIG has an overall POWR Rating of B, which equates to a Buy rating.  Check out these other stocks within the Fashion & Luxury industry with A (Strong Buy) ratings: Shoe Carnival Inc. (SCLV), J. Jill Inc. (JILL), and Oxford Industries Inc. (OXM).

SIG shares were trading at $83.27 per share on Thursday morning, up $3.34 (+4.18%). Year-to-date, SIG has declined -4.32%, versus a -7.10% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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