Shares of Signet Jewelers dropped 12.6 percent after the company reported a dismal sales decline for the second quarter and a 2.3 percent comp drop, but it does have a $625 million investment deal with Leonard Green & Partners that allows the jewelry retailer to fund the repurchase additional shares of common stock.
For the three months ended July 30, net income was up 31.7 percent to $81.9 million, or $1.06 a diluted share, from $62.2 million, or 78 cents, a year ago. On an adjusted basis, EPS was $1.14. Sales slipped 2.6 percent to $1.37 billion from $1.41 billion.
Wall Street was expecting EPS of $1.45 on revenues of $1.44 billion.
Signet operates under many nameplates, including Kay Jewelers, Jared the Galleria of Jewelry, Gordon’s Jewelers, Peoples, Piercing Pagoda, Zale and H. Samuel.
For the six months, net income rose 26.4 percent to $228.7 million on a 0.4 percent gain in sales to $2.95 billion. Comparable-store sales fell 2.3 percent in the quarter.
The company said it repurchased over 2.8 million shares in the second quarter for $250 million, along with insider buying. The new deal with Leonard Green gives the private equity firm $625 million in convertible preferred shares. The investment is by Green Equity Investors, an affiliate of the private equity firm. Signet plans to use the proceeds from the Leonard Green investment to fund the repurchase of $625 million in common stock either in the open market or through privately negotiated transactions. As part of the transaction, Jonathan Sokoloff will join the Signet board once the transaction closes, which expected in the third quarter of fiscal 2017.
Mark Light, Signet’s chief executive officer, said, “We are disappointed by our [second-quarter] results and market conditions have been challenging particularly in the energy-dependent regions. This has contributed to a downward revision in our annual guidance.” The company said 50 percent of the decline in sales was from the oil patch areas.
He said that the company achieved some “important wins” in the quarter, and the select diamond fashion jewelry, bracelets and earrings sold well. He said that for the fourth quarter, the company is planning new initiatives around merchandising, marketing, digital and the customer experience.
The ceo said of Leonard Green’s investment: “For more than 25 years, Leonard Green has successfully partnered with some of the best-known companies in the retail sector and worked to created significant shareholder value. We view Leonard Green’s significant investment in Signet as a strong vote of confidence in our business and its long-term growth prospects.”
Sokoloff said, “Signet is an outstanding company — an innovator in its industry with some of the world’s most recognizable store banners and jewelry brands.”
During the conference call to Wall Street analysts, Light said the company is analyzing opportunities to create shareholder value by optimizing or monetizing its credit portfolio. And while he said that “Signet has some of the best known and most trusted jewelry retail brand names in the world,” he didn’t talk about the negative social media postings in late May that raised questions of possible gem swapping fears during his prepared comments. At the time, the company said “incidents of misconduct, which are exceedingly rare, are dealt with swiftly and appropriately.”
In response to a question from an analyst, Light did note that the company will be testing the in the fourth quarter “new technology that relates to specific gem scopes that we are putting in place in some of our Kay stores that will not only have a view of the product under magnification but will also have a digital screen on top of the gem scope that will highlight the unique marks of everybody’s diamond.” He added that the new technology would create “even more transparency” for our customers. Light also told another analyst that the reputational issues that arose in May has been completely normalized, adding that “it’s impossible to really know for sure if it’s affected our sales or not.”
For the third quarter ending Oct. 29, the company guided comps to a negative 3 to 5 percent, with EPS at between 6 cents to 15 cent. For Fiscal 2017, comps were also project down at a negative 1 to 2.5 percent, with EPS in the range of $6.90 to $7.22.
Shares of Signet lost $12.06 for the day and closed at $83.44 in Big Board trading.