This Value Stock Just Plunged. Should You Buy the Dip?

Coming into its first-quarter earnings report, Signet Jewelers (NYSE: SIG) appeared to be executing its business plan effectively. The world's largest retailer of diamond jewelry had successfully made the case that it is reinventing its business, expanding margins, and leaning into its competitive advantages, such as the digital channel and customer loyalty. It had also elicited cheers from investors when it announced a plan in April to repurchase convertible preferred shares, lifting its earnings-per-share guidance for the year by about 10%. Shares were trading near a five-year high coming to the update.

However, that momentum disappeared once the earnings report came out. Signet stock fell 14.9% on Thursday after it reported results that beat estimates but also showed some signs of weakness that seemed to spook investors. Same-store sales, for example, fell 8.9% year over year in the first quarter due to macroeconomic challenges, a weak consumer, a sluggish start to the quarter, and a competitive environment with heavy discounting.

As a result, revenue fell 9.4% year over year to $1.51 billion, matching analyst estimates and the company's own guidance. However, profits fell sharply along with the decline in revenue as adjusted operating income slipped from $106.5 million to $57.8 million. The company reported adjusted earnings per share of $1.11, down from $1.78 in the quarter a year ago.

That lower result beat the analyst consensus at $0.85. Signet's guidance was also in line with expectations. What seemed to spook the market was a comment from CEO Virginia Drosos about the possibility of increased competitive discounting continuing in the second half of 2024.

A bride laying their hands over a ruffly wedding dress to show their ring.

The good news for Signet

Taking the company's broader competitive position and future prospects into account, the sell-off seems exaggerated. Signet's results improved throughout the quarter, and its guidance calls for that momentum to continue. The company sees same-store sales returning to positive growth in the second half of the year, driven by several factors, including a recovery in engagements and success in the fashion business thanks to lab-grown diamonds.

The fashion business, which encompasses everything that isn't bridal, saw sales from March to May improve 500 basis points from February and the fourth quarter. The growth of lab-grown diamonds has been a key driver of that strength. CFO Joan Hilson noted in an interview that the company had a 14% revenue increase in fashion products that included lab-created diamonds (LCD) as it took advantage of their lower price point. Hilson added, "LCD enables us to provide fashion at lower price points for our customer, but it in turn creates a higher price point within our assortment."

Meanwhile, the long-awaited comeback in the bridal business seems to be afoot. Growth in engagement units sold is expected to be modestly positive in the second quarter and materially positive in the year's second half.

Finally, the company is improving its balance with debt repayment, and the preferred share repurchase program should continue to pay off into next year. Interest rates should start to come down in the next year, which should encourage more consumer spending and offer some relief to its customers who use financing.

Is Signet a buy?

Putting aside the weak first-quarter results, Signet's prospects look essentially the same as before the earnings report, but the stock is now 15% cheaper. The company is poised to take advantage of the recovery in marriage engagements after a dip during the pandemic and the 10% bump in earnings guidance from April.

As a result, Signet stock now trades at a forward price-to-earnings (P/E) of 8.6. For a stock that is an industry leader, it's benefiting from aggressive share repurchases, a recovery in engagements, and an expected return to growth in the second half of the year.

Investors should look past the first-quarter weakness and take advantage of the latest sell-off in Signet stock.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.