Signet Jewelers: A Deeply Undervalued Cash Machine or a Melting Ice Cube?

Signet Jewelers, the world's largest retailer of diamond jewelry, recently reported its financial results for the fourth quarter and the full fiscal year 2025. Q4 revenue fell 6% YoY to $2.35B, but still exceeded the company’s updated guidance. The difference between total sales and same-store sales (down 1.1%) partly reflects cycling last year’s extra 53rd week. Adjusted gross margin was 42.6% , a 70 bps YoY decline due to higher fixed costs and certain year-end adjustments, though underlying merchandise margin expanded modestly. Adjusted SG&A dropped $32M to $638M, and EPS came in at $6.62, essentially flat compared to last year, thanks in part to a lower share count. For the full year, revenue was $6.7B, down 6.5%, with same-store sales slipping 3.4%. While the numbers weren’t great, the company still managed to generate $438M in free cash flow, converting a solid 88% of adjusted operating income into cash.

Digging into same-store sales, Q4’s 1.1% decline was actually an improvement from the 3.4% drop for the full year, suggesting things stabilized a bit toward the end. Management seemed to confirm this, noting that quarter-to-date comps were positive and guiding for FY26 same-store sales to be anywhere from down 2.5% to up 1.5%. Revenue for next year is projected between $6.53B and $6.80B, and the EPS guidance of $7.31–$9.10 is a pretty wide range, reflecting uncertainty in the consumer environment. One big red flag in the report was $200.7M in impairment charges tied to the company’s digital brands in Q4 alone, bringing the full-year total to $369.2M. This signals that prior acquisitions aren’t delivering as expected, a clear sign that some of these deals weren’t as valuable as originally believed.

On the strategic front, Signet is doubling down on bridal jewelry, which makes up about half of merchandise sales, while also pushing deeper into fashion jewelry, a much larger market opportunity. The company noted that gaining just 1% share in bridal is worth $100M in sales, but a 1% share gain in fashion jewelry would bring in $500M, highlighting where the real growth potential lies. They’re also reorganizing around four key brand clusters—Core Milestone (Kay, Peoples), Style & Trend (Zales, Banter), Inspired Luxury (Jared, Diamonds Direct), and Digital Pure Play (Blue Nile, James Allen). The idea is to centralize merchandising, media buying, IT, and repair services, which should unlock cost efficiencies. Management expects this restructuring to deliver $50M–$60M in savings next year, with an annualized benefit of $100M. As part of its real estate strategy, Signet will close about 150 underperforming stores over the next two years, mainly in malls with shorter leases, and relocate around 200 stores to off-mall locations where traffic is better. Historically, these types of store moves have driven low- to mid-single-digit sales lifts, so this isn’t just about cutting costs but about improving productivity.

In terms of capital allocation, Signet repurchased ~$1B worth of shares, reducing its diluted share count by ~20%. This includes both common share repurchases and the redemption of convertible preferred shares. They have $723 million remaining under its buyback authorization as of the end of FY25. Management stated they will be opportunistic with repurchases, particularly at the current valuation levels, suggesting they view shares as undervalued at recent prices. The quarterly dividend was increased 10% to $0.32 per share for FY26, marking the fourth consecutive annual increase. CapEx for FY25 was $153 million, below historical levels, reflecting a slower pace of store renovations and fewer new store openings due to the ongoing strategic repositioning. FY25 capex guide was for $145M-$160M as they expect 10-15 store openings, mostly off-mall locations, 15 store repositioning (primarily moving from declining malls to higher-traffic areas) and 200 store remodels. Signet ended FY25 with $1.7 billion in total liquidity, including $604 million in cash and no near term debt maturities. Overall, Signet is prioritizing shareholder returns while maintaining financial flexibility and reinvesting in strategic growth areas, which is exactly what shareholder should want to see.

Lab-Grown Diamonds: The Elephant in the Room

The jewelry industry is currently being shaped by key trends such as the increasing popularity of lab-grown diamonds and shifts in consumer spending behavior. The market for lab-grown diamonds has experienced substantial growth in recent years, driven by increasing consumer acceptance and a perception of better value and ethical sourcing . Signet has recognized this trend, and the company reported a strong 40% growth in the lab-grown diamond fashion segment. However, Signet also noted that it did not have sufficient inventory in the $200 to $500 price point range to meet the demand. That’s a clear sign they need better inventory planning to capitalize on this trend. The rise of lab-grown diamonds is shifting the entire industry, especially in pricing, and it’s unclear how much this will cannibalize traditional diamond sales long term.

Signet sees the engagement market recovering from last year’s weakness and expects the overall engagement market in a range of down low single digit to up low single digit, and they plan to gain share through improved assortments, brand storytelling, and personalized experiences. They are taking a balanced approach to preserve the allure of natural diamonds (especially in bridal) while tapping significant potential for lab-grown in fashion. The strategy makes sense: keep natural diamonds aspirational while using lab-grown to increase AUR and margins in fashion jewelry. They see lab-grown diamonds as a key way to increase fashion jewelry sales, especially at lower price points. Signet notes that lab-grown in fashion commands a significant AUR premium and healthy margins, likely because LGD allows for larger, more eye-catching stones at prices still below natural equivalents. They’re trying to keep natural diamonds as the centerpiece of engagement rings, positioning lab-grown more as a fashion/self-purchase item. They want to ensure natural remains aspirational while letting lab-grown capture demand in everyday jewelry. The consumer landscape is also bifurcated right now with higher-income shoppers are still spending, while the mass-market buyer is being more cautious. The luxury and bridal jewelry segments have shown more resilience as that higher-income consumers continue to spend in these areas. In contrast, mass-market jewelry buyers appear to be more cautious with their spending . This bifurcation necessitates a tailored approach from Signet, potentially requiring differentiated product offerings and marketing strategies to cater to the specific needs and preferences of these distinct customer groups. Furthermore, Signet observed underperformance in key gifting price points in the two weeks leading up to Christmas, resulting in softer fashion performance. This highlights the importance of effective merchandising and inventory management, particularly in the crucial holiday shopping season, to ensure that the right products are available at the right price points to meet gifting demand.

Signet’s management is cautiously optimistic about a potential rebound in the engagement market, which would be a big win for them considering their 30% market share in bridal jewelry. More engagements obviously mean more demand for engagement rings and wedding bands, which tend to be higher-value purchases. They noted that while January and early February were soft, things picked up in late February and March, which aligns with their previous expectations that US engagements could rise 5% to 10% in FY25. If that recovery actually materializes, it could help stabilize what has been a rough stretch for bridal jewelry sales. That said, I’m a bit more skeptical. Marriage rates have already been trending lower for years, and I don’t see a real reason for that to reverse in a meaningful way. Younger generations are growing up glued to their smartphones, living in an era where AI is going to reshape everything. As they reach prime marriage age, I think their relationship with traditional milestones like marriage will be different. Unless something changes culturally, I expect marriage rates to keep declining, which would be a structural headwind for engagement ring demand. That doesn’t mean there won’t be short-term bumps and rebounds, but over the long run, Signet is fighting an uphill battle in bridal. If management is relying too much on an engagement recovery to drive growth, that could be a flawed assumption.

The Hidden Risk: Warranties & Service Revenue

There’s a less obvious but serious risk lurking in Signet’s business, and that’s the impact of lab-grown diamonds on warranty and service revenue. The Lifetime Jewelry Protection Plan has historically been a huge cash generator, since customers buying high-end natural diamonds were willing to pay up for protection. But as LGD penetration increases, ASPs are falling, and with that, the willingness to buy expensive warranties might be dropping too. The issue is straightforward: cheaper engagement rings make warranties feel less necessary, and customers who do opt for protection may choose lower-cost plans, leading to margin contraction. LJPP has long been a reliable, high-margin revenue stream, but if take rates decline or price points shift downward, the profitability of this segment will erode. There are already signs of this happening, while Signet’s overall merchandise AUR was up 7%, bridal AUR rose only 2%, indicating a mix shift toward lower-priced items. Meanwhile, fashion jewelry, where LGD growth is strongest, saw an 8% AUR increase, but much of that was driven by volume rather than higher prices. Management hasn’t explicitly addressed LJPP margin trends, but they have acknowledged mix-related pressure on gross margins and the need to adjust service pricing. If service revenue declines while fixed costs remain, operating margins will come under pressure, making it harder to sustain current levels of free cash flow. This is a potential risk worth watching. If LJPP margins are indeed shrinking, it could signal a structural hit to SIG’s cash flow, impacting everything from profitability to share buybacks. The key question is whether management can reposition warranties and services to remain a strong contributor despite shifting consumer preferences. With LGD now an unavoidable force in the industry, SIG will need to navigate this carefully. This could end up being a much bigger deal than it currently appears.

Valuation

At a $2.5B market cap, Signet is trading at 3.8x EBITDA, a 17% FCF yield, and just 5.0x pre-tax earnings. That’s objectively cheap for a company with a healthy balance sheet and strong free cash flow generation. If you don’t think this business is a melting ice cube, there are multiple ways to win, even if revenue stays flat or declines slightly.

To generate a 15% annualized return over the next three years, Signet’s market cap needs to grow from $2.5B to $3.8B. That could happen if EBITDA stays at $650M and the stock rerates to a 5.8x–5.9x multiple, which is still below where retailers with strong cash flow typically trade. If the multiple expands to 5x, EBITDA would need to grow 17% to approximately $760M over three years to generate a 15% IRR. At its current valuation of just 3.8x EBITDA, the market is pricing in either a permanent earnings decline or a lack of durability in the business model. Historically, jewelry retailers and other discretionary brands with strong cash flow and defensible market positions have traded at higher multiples, and if investors begin to see Signet as a steady cash generator rather than a melting ice cube, the re-rating alone would deliver substantial upside. Given Signet’s ability to manage expenses, optimize store locations, and drive incremental gains from its high-margin service business, even a modest expansion in earnings should be within reach. This scenario does not require significant revenue growth, just steady execution, maintaining profitability, and slight improvements in operating leverage.

The most straightforward way to drive shareholder value, though, is aggressive buybacks. With $430M in FCF, they could retire 6M–7M shares per year, potentially shrinking the share count by nearly 40% over three years. Even if earnings are flat, EPS would skyrocket simply from buybacks. If the market cap remains unchanged, but shares outstanding decline significantly, intrinsic value per share rises organically, driving a strong return for investors. This strategy is particularly compelling because Signet is not reliant on revenue growth or external factors; it is purely about intelligent capital allocation and extracting value from its own cash flow. If management executes on this front while keeping margins stable, the path to a 15% IRR is clear, even with a stagnant top line. The biggest risk to this thesis is FCF sustainability, as a large portion of SIG’s FCF comes from warranties and service contracts. If warranty attachment rates fall, especially as LGD continue replacing high-ticket natural diamond sales, FCF could decline, making buybacks less impactful. However, even in a low-growth scenario, Signet’s valuation leaves plenty of room for upside.

This all aligns with what I wrote about Signet in 2023. A multiple rerating isn’t likely in the near term due to macro uncertainty and secular headwinds, and management’s credibility took a hit after the recent guidance cut. That makes Signet a show me story where investors need proof before bidding it up. The best-case scenario for shareholders? The stock stays cheap and management keeps aggressively buying back shares. If management prioritizes efficient capital allocation and leverages Signet’s FCF to aggressively reduce shares outstanding, it creates a valuation floor and a self-reinforcing cycle where intrinsic value per share grows even if the market remains skeptical.

It is important to acknowledge that given the near-term concerns surrounding a potential recession and the longer-term headwinds stemming from lower marriage rates and the emergence of lab-grown diamonds, it is unlikely for SIG to experience a multiple rerating in the foreseeable future. The recent cut to guidance by management has also resulted in a loss of credibility, turning the investment into a "show me" story, where concrete actions and results will be required to restore confidence.

In this context, the most promising path for generating an attractive return lies in Signet's ability to generate healthy FCF and utilize it for share buybacks. As a shareholder, the ideal scenario would be for the stock price to remain low, allowing management to repurchase shares at the lowest possible prices. By doing so, Signet can enhance shareholder value and potentially drive a solid return, even without a significant rerating of the stock or topline growth.

Therefore, it becomes crucial for Signet Jewelers' management to focus on efficient capital allocation, leveraging the company's FCF to repurchase undervalued shares. This approach provides an opportunity for investors to benefit from the company's financial strength and can put in a valuation floor.

Now, there’s an interesting twist: Select Equity Group recently disclosed a 9.7% stake in Signet and is actively pushing for the company to explore strategic alternatives, including a potential sale. They’ve made it clear they believe Signet is deeply undervalued and that operational missteps have weighed on performance, turning what should be a steady cash machine into a credibility overhang. This kind of activist pressure doesn’t guarantee a sale, but it could absolutely be a catalyst for change, especially if other shareholders get behind it. That said, I don’t really see a strategic buyer emerging here. The overlap between Signet’s value-focused jewelry brands and the priorities of luxury players like LVMH or Richemont just isn’t that strong. It’s hard to imagine a global luxury house wanting to dive into a lower-AUR, mall-based U.S. retail footprint. Same goes for most large retailers or tech players—there’s just not a compelling strategic angle for them. Where a deal starts to make sense is on the PE side. With strong FCF, a clean balance sheet, and a business that could be levered up, Signet is pretty much textbook LBO material. A PE firm could step in, slap on a reasonable amount of debt, fund buybacks or restructuring with internal cash flow, and generate a solid IRR just by harvesting cash and tightening operations. So if something does happen on the M&A front, PE is far and away the most realistic buyer. The odds of this actually playing out depend on two things: how aggressive Select Equity wants to get, and whether management is open to engaging or digs in. If SIG continues to trade at depressed multiples despite stable earnings, pressure will build. And if the board isn’t willing to act, you can bet the activist campaign will escalate. It’s definitely a catalyst to keep an eye on.

Bottom line, Signet’s stock is undeniably cheap, backed by a strong balance sheet and the potential for massive per-share growth through buybacks. If the business holds steady, there’s a clear path to meaningful upside, with a 15% IRR achievable through a mix of multiple expansion, aggressive share repurchases, and even modest earnings growth. The real question is whether management truly understands its competitive positioning and makes the right capital allocation decisions. If they get it right, this could turn into one of the more compelling capital return stories in retail.