Citi 'Cautious' On Signet Following Timing Of $625 Million Fundraising

Citi’s Paul Lejuez expressed concern regarding the sales/merch margin equation turning negative for Signet Jewelers Ltd. (NYSE: SIG) during Q2, as well as the weakness at Zale Corporation over the last two quarters.

Lejuez downgraded the rating on the company from Buy to Neutral while lowering the price target from $125 to $83.

The analyst explained that the downgrade was based on a combination of weakening fundamentals and the Leonard Green transaction, the “substance and timing” warrants caution in the near to medium term.

Negative Comps

Lejuez pointed out that Q2:16 was the first quarter of negative comps for Signet Jewelers since 2009 and the first for Zale since its acquisition. Jared also saw a huge deceleration in comps of -8 percent.

Related Link: Tiffany Investors Cheer Q2 Earnings

This led to a 3 percent decline in merch margin dollars in Q2, as compared to the up 4 percent in Q1.

The LGP Deal

Regarding the Leonard Green transaction, Lejuez noted that Leonard Green had not agreed to buy Signet Jewelers’ stock worth $625 million, at an 18 percent premium.

“Rather, LGP agreed to “lend” $625MM to SIG in return for a 5 percent dividend yield, or $31.25MM/year with the option to convert its $625MM loan into shares if the stock appreciates significantly over the next two years,” according to the Citi report.

The analyst believes this transaction would not be bullish for Signet Jewelers.

The EPS estimates for F16 and F17 have been lowered to reflect lower sales and margins.

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