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Stock Analyst Update

Lowering Fair Value Estimate on Signet Jewelers

While we still think the company will be able to gain share from independents, we reflect lower near-term industry growth and a smaller scope for share gains in our forecasts.

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We are reducing our fair value estimate for  Signet (SIG) to $73 per share from $82 to reflect our assumption for lower growth and the impact of prime receivable portfolio outsourcing. After an 11% drop in first-quarter sales, we now expect full-year revenue to be down 6.4% (compared with our prior estimate of down 3.1%) with a corresponding drop in margin to 7.9% (9.7% previously). We still consider the shares to be undervalued at current levels, but we stress that investing comes with very high uncertainty. Our no-moat rating is unchanged.

The trend toward lower mall traffic and increasing online shopping for jewelry, seen in over the past year, continued in the first quarter. Signet’s own online channels outperformed the remainder of the business with 1% growth. Online still accounts for less than 6% of the company’s total sales; despite being slightly more profitable, online sales cannibalize retail channels, resulting in fixed-cost deleverage.

The industry consolidation trend is continuing as small players exit the market at a record pace. In the short term, this damps industry growth through an extremely promotional environment; in the midterm, this represents an opportunity for market share capture by stronger players. As channels shift to online, Signet is better positioned than small players, thanks to its resources to invest in developing those channels. However, it is worse-positioned than pure online players, which don’t have the retail fixed-cost overhang. As marketing channels get more fragmented, Signet is losing some cost advantage as mass consumers get more difficult to reach.

While we still think Signet will be able to gain share from independents, we reflect lower near-term industry growth and a smaller scope for share gains in our forecasts. We now assume 0.8% average growth over a five-year horizon and average margin slightly over 9%.

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Jelena Sokolova does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.