Wells Fargo Sees 20% Upside In Signet Jewelers

Although investors might have expected a challenging Q2, Signet Jewelers Ltd. (NYSE: SIG) reported worse-than-expected results for the quarter.

Wells Fargo’s Ike Boruchow maintains an Outperform rating on the company.

Negative Comp Trends

While reporting its Q2 results well below the guidance, management also lowered the FY EPS guidance from $8.25–$8.55 to $7.25–$7.55.

“What’s also troubling is that management was not able to speak to any real change in trends thus far in Q3, as the expectation for negative comps in 2H is now in their plan,” Boruchow mentioned.

Some Positives

Despite the fundamentally disappointing results, the analyst pointed out some encouraging developments, such as Signet Jewelers announcing that Leonard Green had agreed to invest $625 million in convertible preferred shares.

Related Link: Citi "Cautious" On Signet Following Timing Of $625 Million Fundraising

“While the business appears to be under cyclical pressure, we still see growth next year and view the risk/reward from here to be compelling from a value perspective,” the analyst stated.

Q2 Results

For Q2, the company announced a 2.3 percent decline in overall comps while EPS declined 11 percent to $1.14, meaningfully below the guidance.

Gross margins declined 130 bps while SG&A deleveraged 50 bps. Management noted there were still no signs of a rebound in the business, and further comp deceleration was expected in Q3.

Burochow continues to view “the product quality media noise at Kay as non-material, the real issue today is that the jewelry category appears to be going through a period of cyclical weakness.”

At time of writing, Signet was down 3.19 percent on the day at $80.78.

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