We came across a bullish thesis on Signet Jewelers Limited (SIG) on Substack by Elliot. In this article, we will summarize the bulls’ thesis on SIG. Signet Jewelers Limited (SIG)'s share was trading at $56.30 as of March 20th. SIG’s trailing and forward P/E were 11.21 and 6.09 respectively according to Yahoo Finance.
Signet Jewelers, the world’s largest diamond jewelry retailer, recently reported Q4 and full-year FY25 results, revealing a 6% YoY revenue decline to $2.35B. Despite the drop, revenue exceeded guidance, with same-store sales down just 1.1%, improving from the full-year 3.4% decline. Margins faced slight pressure due to fixed costs, but merchandise margin expanded. EPS remained stable at $6.62, aided by a lower share count. For FY25, revenue fell 6.5% to $6.7B, though Signet generated $438M in free cash flow, converting 88% of operating income into cash. Management sees signs of stabilization, guiding for FY26 revenue between $6.53B–$6.80B and EPS of $7.31–$9.10, though macro uncertainty remains. A notable concern was $200.7M in digital brand impairment charges, bringing the full-year total to $369.2M, reflecting underwhelming acquisition performance.
Strategically, Signet is intensifying its focus on bridal jewelry, which makes up half of its sales, while expanding into the larger fashion jewelry market. A 1% share gain in bridal equates to $100M in sales, while fashion jewelry offers a $500M opportunity. The company is restructuring around four brand clusters—Core Milestone (Kay, Peoples), Style & Trend (Zales, Banter), Inspired Luxury (Jared, Diamonds Direct), and Digital Pure Play (Blue Nile, James Allen)—to centralize operations and unlock efficiencies, targeting $50M–$60M in savings next year and $100M annualized. Real estate optimization continues, with 150 underperforming store closures and 200 relocations to off-mall locations, which have historically boosted sales.
Capital returns remain aggressive, with ~$1B in share repurchases reducing the share count by 20%, leaving $723M still authorized. The dividend was raised 10% to $0.32 per share, marking four consecutive increases. FY25 CapEx was $153M, below historical levels, reflecting a shift toward optimizing existing locations. Signet ended the year with $1.7B in liquidity and no near-term debt maturities, preserving financial flexibility.
The industry’s biggest shift is the rise of lab-grown diamonds (LGD), which saw 40% growth in Signet’s fashion segment. However, the company struggled to meet demand in the $200–$500 range, signaling inventory planning issues. LGD is reshaping pricing, but Signet is balancing this by keeping natural diamonds aspirational while using LGD to expand margins in fashion. High-income consumers remain resilient, while mass-market buyers are more cautious, requiring differentiated strategies. Signet also struggled with key gifting price points during the holiday season, reinforcing the need for improved inventory management.
A critical but underappreciated risk is the impact of LGD on Signet’s warranties and service revenue. The company’s Lifetime Jewelry Protection Plan (LJPP) has historically been a high-margin revenue stream, as customers purchasing expensive natural diamonds paid for extended protection. However, as ASPs decline with LGD adoption, warranty attachment rates may weaken, pressuring margins. Signs of this shift are emerging, with bridal ASPs growing just 2%, while fashion jewelry, where LGD penetration is highest, saw an 8% ASP increase primarily from volume. While management has not directly addressed LJPP margin pressures, mix-related gross margin concerns suggest this could become a headwind. If service revenue declines while fixed costs remain, Signet’s operating margins and free cash flow could be squeezed, making share buybacks and capital allocation more challenging.
Despite these risks, Signet’s valuation appears compelling. At a $2.5B market cap, the stock trades at just 3.8x EBITDA, yielding 17% in free cash flow with a pre-tax earnings multiple of 5.0x. This suggests the market is pricing in a permanent earnings decline, despite Signet’s strong balance sheet and cash flow generation. If EBITDA remains at $650M and achieves a modest multiple expansion to 5.8x–5.9x, the stock could see substantial appreciation. Even at 5x EBITDA, a 17% increase to $760M over three years would generate a 15% annualized return. Historically, retailers with stable cash flow and strong market positions have traded at higher valuations, and a shift in investor perception could drive a meaningful re-rating.
The simplest way to unlock shareholder value remains aggressive buybacks. With $430M in free cash flow, Signet could retire 6–7M shares annually, reducing the share count by 40% over three years. Even with flat earnings, this capital allocation strategy could drive EPS growth, significantly boosting intrinsic value. This does not depend on revenue growth, only disciplined execution and stable margins. However, the sustainability of free cash flow remains a key variable. If warranty revenue declines sharply due to changing consumer behavior, free cash flow could weaken, diminishing the impact of buybacks. Still, at its current valuation, even modest financial stability offers meaningful upside, making Signet a compelling investment with a clear path to strong returns.
Signet Jewelers Limited (SIG) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 28 hedge fund portfolios held SIG at the end of the fourth quarter which was 34 in the previous quarter. While we acknowledge the risk and potential of SIG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SIG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
