Shares of Signet Jewelers (NYSE: SIG), the world's largest diamond jewelry retailer, were soaring on Wednesday after the company delighted investors with a share buyback and raised its guidance to adjust for the diminished share count.
As a result of the buyback, the company is raising its adjusted earnings-per-share guidance from $9.08-$10.48 to $9.90-$11.52, and it will provide an additional boost to fiscal 2026 earnings as it benefits from a full year of a reduced share count.
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What's happening here
Signet made an agreement with private equity firm Leonard Green & Partners (LGP), which had taken a preferred equity stake in the company in 2016, to repurchase half of LGP's 8.2 million shares in the retailer. As a result, Signet is repurchasing 4.1 million for $414 million, based on the share price as of April 1. Following that transaction, LGP's stake will have a stated value of $328 million, on which it earns a 5% dividend.
That transaction will reduce Signet's diluted share count by 7.6%, and Signet will use cash from the $1.4 billion it has on its balance sheet. Signet will also record an $83 million reduction in net income to reflect the difference in what it sold the preferred shares for and what it's paying.
Additionally, Signet agreed to pay LGP $328 million for the stated value of its remaining preferred share balance, which will remove an additional 2.8 million shares, reducing its shares outstanding by roughly 7 million or 13%, which will give a 15% boost to earnings per share. The company will also save money by not having to shell out the roughly $34 million in annual preferred dividends it was paying.
Signet flexes its muscle
For Signet, the transaction is as much a move to reward shareholders and reduce its share count as it is a reflection of the gains the company has made under its Path to Brilliance strategy, which has grown revenue by double digits while closing underperforming stores, and expanded gross margin by more than 400 basis points. The company has also increased adjusted EPS by nearly 60% during that time.
In an interview with The Motley Fool, CFO Joan Hilson also noted that the repurchase would reduce the company's leverage ratio by 10%, putting it in a better position to make acquisitions and invest in the business.
Speaking in the same interview, CEO Gina Drosos underscored the transformation that led to this, saying: "We've transformed as a company. We've created an operating model that very consistently generates cash," and noted that the company generates nearly 15% of its company value annually, making Signet attractive to value stock investors.
Is Signet a buy?
Signet has quietly been a top performer on the market in recent years; the jewelry stock has more than tripled over the last five years, shortly after it introduced its Path to Brilliance strategy.
The stock fell on its recent earnings report as investors were unimpressed with its guidance, but Signet rewarded investors with a 26% dividend increase. Wednesday's share buyback announcement is the company's latest effort to return capital to shareholders, and the company is in an excellent position to do so with rock-solid fundamentals and a price-to-earnings ratio of about 10.
Signet also looks primed to grow over the coming years as it benefits from a recovery in engagements, which had declined to a pause in new relationships during the pandemic. The bridal business makes up about 40% of the company's revenue so the tailwind expected over the next three years could be substantial, and the company has other growth drivers, including high-margin services like repair, that can give profits a boost.
With a 15% reduction in shares outstanding and the recent 26% dividend hike, Signet looks more focused on rewarding shareholders than ever before, and the stock remains a good value for the expected growth ahead of it. Shares of the jewelry leader continue to look like a buy.
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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.
