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  • Volume II, Issue 6

LGR Newsletter

Volume II, Issue 6 (posted to website on December 1, 2016)

 

This Issue was sent to Newsletter subscribers on November 9, 2016

For this Issue, Newsletter subscribers were sent a one-page investment overview report on Signet Jewelers Ltd. (SIG) and a full stock pitch PowerPoint presentation on SIG. The stock pitch on SIG was finalized on Friday, November 4, 2016, and all price data was as of that date. Newsletter subscribers were also given the option of requesting to receive a second stock pitch PowerPoint presentation on Williams-Sonoma, Inc. (WSM). The stock pitch on WSM had been finalized on September 19, 2016.

Below is the one-page investment overview report on SIG (finalized on November 4, 2016):

This pitch relates to Signet Jewelers, ticker SIG. I have a 2-year price target of $116.00/share, which equates to an expected total return of 46%, including dividends, over its current share price of $81.39.

Signet is the world’s largest specialty jewelry retailer, with a $6.2 billion market cap and a $7.6 billion enterprise value. It has over 3,600 stores, generated $6.6 billion in sales over the last twelve months, and 95% of its products sell for $100 - $10,000. Signet’s price has fallen 45% from its 52-week high and I believe this decline is overdone and that the current stock price offers an attractive risk/reward opportunity.

There are three main reasons why I believe Signet is a good investment:

  • First, Signet has an excellent market position and should overcome industry growth concerns and continue gaining share going forward.
    • Signet holds the #1 market share position in the U.S., Canada and the UK and its 7.4% share of the total U.S. jewelry market has nearly doubled over the last 10 years and I expect this trend to continue.
    • Signet’s size is a significant competitive advantage, and it has the ability to spend more on advertising its products and opening new stores than any of its closest competitors. In addition, the fact that 50% of SIG’s sales are from weddings adds an extra layer of stability to its financial performance across any business cycle.
    • With a conservative projection that its U.S. sales will grow at a 2.2% CAGR over the next five years, while the market grows at 0.5%, Signet’s market share is projected to rise 70 bps to 8.1%.
  • Second, Signet’s operating margins can expand faster than current consensus forecasts.
    • Signet acquired Zale in 2014, causing its operating margin to contract 200 bps the next year because of Zale’s significantly lower margins. However, expected synergies of $225 - $250 million and operational efficiency improvements at Zale will drive a significant increase in Signet’s total operating margin.
    • I project Signet’s total operating margin will return to its pre-acquisition level of 13.9% in FY 2018, which is 45 bps higher than consensus estimates and contributes to my EBITDA estimates also being above consensus.
  • Third, optionality with the company’s in-house credit portfolio provides a win-win opportunity for investors.
    • Concern about Signet’s credit portfolio has grown over the last year.
    • Management is now considering monetizing the entire $1.6 billion credit portfolio despite the fact that its profit is at an all-time high. I project that if its credit portfolio was monetized, SIG would reap over $900 million in net proceeds. In the short term, monetizing the portfolio would likely boost SIG’s stock price, due to alleviated concerns and the aforementioned cash inflow, while in the long term offering in-house financing is a significant competitive advantage and contributor to both sales and profit growth.

In terms of valuation, my 2-year $116.00 price target was derived by applying a 8.5x multiple to my FY 2020 EBITDA estimate and it is supported by a DCF Analysis. The biggest risks to my valuation are a recession in either the U.S. or the UK, a failure to achieve expected synergies from the Zale acquisition, and a significant deterioration in Signet’s credit portfolio. However, with a Base Case price target of $116.00 and a Bear Case price target of $68.00, Signet currently has a 2.6 to 1 potential return to risk ratio, which I believe is very attractive.

Disclosure: This research report, along with the downloadable stock pitches, is not intended to be investment advice, and I am not a Registered Investment Advisor. I share this information for educational purposes, to document my own research, and to receive feedback (and learn) from my subscribers. I have no positions in any of the stocks mentioned in this report.  I wrote this report myself, and it expresses my own opinions. I did not receive compensation for it. I have no business relationship with any company whose stock is mentioned in this report.

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