Buy Signet's Bonds, Not The Equity

Feb. 23, 2018 8:39 AM ETSignet Jewelers Limited (SIG)45 Comments
Holmes Osborne profile picture
Holmes Osborne
1.6K Followers

Summary

  • Signet has been closing stores and experienced a drop in sales.
  • We recommend to never buy a retailer when it's closing stores.
  • The bonds mature in six years and yield over 5%. The bonds are a better investment.

Signet's (NYSE:SIG) stock has been down with a fall in revenues over the last few years. Though the company is very profitable, we recommend not buying retailers when there is store closure. We did look at the bonds and found them to be investment worthy.

The stock trades for $51.24, there are 60.52 million shares, and the market cap is $3.1 billion. I'll use the $6.45 2018 earnings estimate, so the stock trades at a price to earnings ratio of 7.9. Pretty cheap. The forward dividend is $1.24, and the dividend yield is 2.4%. Not a bad dividend yield in today's low interest environment.

The earnings estimate from management is for FY 2018 range of $6.45 to $6.50 with the new tax laws. Without the new tax laws, the estimate is for $6.17 to $6.22. There are estimated by be an additional 2 to 3 million shares. I'm going to go by Yahoo Finance's profit margins. Profit margins are 7.14%, operating margins 10.56%, and return on equity 16.64%. Very profitable as most jewelers are.

For the holiday season, sales were $1.8817 billion, down 3.1%. I will list some of the stores and sales growth or loss over that time period. Kay's sales were down 10.8% and accounted for $723.1 million. R2Net sales were up 38.6% but only account for $50.6 million. Sterling Jewelers' revenues were down 8.5% and accounted for $1.146.6 billion. The three Zale divisions were up low single digits and account for $966.4 million. There are a few other small stores that you can find in the PDF linked above. The estimate for sales loss in FY 2018 is mid-single digits. A nice mid-single digit that comes to mind is the number five.

As of the latest 10-Q, the asset side of the balance sheet shows $113.4 million in cash and $720.4 million in receivables. I usually don't count inventories, but I will in this case since it is gold and diamonds. Inventories are $2.46 billion. The liability side shows $324.9 million in payables and $988.6 million in debt. Very strong balance sheet.

I found an interesting series of Signet bonds backed by a UK division. The CUSIP is 82671aaa1, the yield to maturity is 5.2%, and the maturity is 6/15/24. That's a pretty good yield for a six-year bond. The bonds are BBB- rated by S&P. I'd agree with that rating.

Here is why I won't buy the stock. Signet had 3,682 stores and kiosks at the end of October last year. Over the year, it opened 80 stores, closed 123, and ended October with 3,639. I never buy a retailer (even if profitable) if it's closing more stores than it is opening. The problem then becomes that same-store sales will be lucky to keep up with inflation. The next problem is that capital expenditures for remodels and upkeep will outpace inflation. Ever see a store with light in its sign that remains burned out for a long time? Sure you have.

I took a look at some of the value managers who have owned shares, according to Gurufocus. Joel Greenblatt, Tweedy Browne, Ruane Cunniff, all sold or reduced shares. David Einhorn and First Eagle have added shares. So, if you're bearish like I am, you're in good company. If you're bullish, you're in good company. All you bulls remember that when you are making your comments at the end of this article.

A very bullish article on Seeking Alpha discusses the merits and drawbacks to Signet. There are issues with receivables, sexual harassment, and a diamond swapping deal. Signet appointed Gina Drosos as its CEO last July.

S&P sees FY 2018 earnings per share down to $6.15 from the prior $7.45. S&P has a $57 price target. Sales fell from $3.7 billion in 2008 to $3.4 billion in 2009 to $3.39 billion in 2010. Jewelry does not sell when the economy collapses which is no surprise.

So, that's it. Bullish on the bonds and bearish on the stock. I don't buy retailers when they're closing stores. Period. That yield on the bonds is pretty decent, and Signet has a nice balance sheet. The bonds are what you should be looking at.

This article was written by

Holmes Osborne profile picture
1.6K Followers
Holmes Osborne is the principal of Osborne Global Investments. Holmes holds the Chartered Financial Analyst designation and a degree in finance from Syracuse University. He has been featured in the Wall Street Journal, Fortune Magazine, and Investors' Business Daily. Holmes has written financial columns for Seeking Alpha, the Motley Fool, theStreet.com, Gurufous, and several other publications.  Osborne Global focuses on fixed income, value investing, and international stocks.  Holmes is the father to two daughters, Adelaide and Emily.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Feel free to edit and to choose your own title.

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