JPMorgan Downgrades Signet Jewelers On A Shift In Fundamentals

Signet Jewelers Ltd. SIG recently reported its worst SSS result since F2Q10, and reduced its 2017 EPS guidance. There’s a shift in the company’s “underlying near-term fundamentals,” JPMorgan’s Anne E. Samuel said in a report. She downgraded the rating on Signet from Overweight to Neutral, while lowering the price target from $136 to $90.

Management reduced its 2017 guidance by 12 percent to $7.25-$7.55 on a 450bps cut in the SSS estimate to -2.5 percent.

Looking Beyond This Year

Analyst Samuel expects Signet to be able to generate 10 percent EPS growth over the next three years, including ~$180 million in synergies. He expects the company to face “a combination of top line headwinds and resulting core expense deleverage.” Every 100bps of SSS equated to about $0.25 of EPS, representing 4 percent EPS growth.

Related Link: Johnson Rice Downgrades Signet Jewelers To Accumulate

Fundamental Headwinds

Top line headwinds witnessed by the energy region, which resulted in about half the SSS decline in Q2, are likely to continue through 1H18, with ~$140 million in remaining synergies offsetting deleverage on lower sales.

Although Signet’s stock appears cheap after having been under significant pressure due to credit book concerns and the lowered 2017 guidance, “we step aside for now given 2018 is likely a transition period assuming current macro headwinds persist,” the analyst commented.

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