Sparkle Still Seen In Signet Jewelers, As Needham Initiates At Buy

Signet Jewelers Ltd. SIG shares had a sparkle Wednesday, as Needham initiated coverage of the stock at Buy with a $69 price target. The firm is of the view that the worst is behind, given the decline in shares by about one-third over the past 12 months, and its estimates and the consensus being below the guidance.

Analyst Rick Patel expects adjusted earnings per share of $6.75 for 2017 and $7 for 2018 compared to the consensus estimates of $6.69 and $6.91, respectively. The analyst's 2017 forecast is well below the guidance of $7-$7.40.

Credit Turning Less of a Liability

Needham believes Signet's credit overhang is lessening, with the company appearing resolute to outsource its entire credit portfolio. The firm sees the Phase 1 credit outsourcing initiative to be accretive to earnings per share, as the portfolio sold for $1 billion par value to Alliance Data Systems Corporation ADS.

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Meanwhile, Needham is of the view the Phase 2 credit, which is non-prime, lower quality credit, would sell below par value. Although the financial impact of the outsourcing is too early to determine, the firm said it should decrease Signet's risk profile further.

Awaiting Inflection Point In Comps

Needham noted that comps have been declining for four consecutive quarters, with the decline worsening with each successive quarters. It's difficult to pinpoint when a turnaround would happen. Given the resilience of the jewelry industry and the industry's pricing power due to commodity inflation, the analyst expects sales to bounce back over the long run.

Needham sees declining mall traffic as a risk, with both engagement segment and fashion jewelry suffering. With e-commerce accounting for a mere 6 percent of sales, the firm said outperformance isn't likely unless stores perform well.

"Investments in omni-channel are critical for the company to be relevant and successful in the long term, in our view," the firm said.

At time of writing, Signet Jewelers was up 1.4 percent to $57.94.