Why Signet Jewelers (SIG) and Zale Corporation (ZLC) are Soaring

NEW YORK (TheStreet) -- Signet Jewelers (SIG) and Zale Corporation (ZLC) are soaring in premarket trading after the former announced it would buy the latter in a deal worth around $1.4 billion.

Before the bell, Signet had climbed 13.5% to $90 while Zale exploded 40.3% to $20.92.

Bermuda-based Signet, the largest specialty retail jeweler in the U.S. and U.K., will acquire all issued and outstanding stock of Zale for $21 a share, a 41% premium on Tuesday's close of $14.91.

"This transformational acquisition further diversifies our businesses and extends our international footprint, opening the door to greater growth and innovation across the enterprise," said Signet CEO Mike Barnes in a statement.

Signet has entered into a voting and support agreement with Golden Gate Capital, a stakeholder which owns around 22% of Zale's stock.

The acquisition, financed through bank debt and the securitization of its account portfolio, is expected to be high single-digit percentage accretive to earnings in the first full fiscal year after the transaction.

The transaction is subject to Zale's shareholder approval and regulatory approval.

TheStreet Ratings team rates SIGNET JEWELERS LTD as a Buy with a ratings score of B+. The team has this to say about their recommendation:

"We rate SIGNET JEWELERS LTD (SIG) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • SIG's revenue growth has slightly outpaced the industry average of 6.8%. Since the same quarter one year prior, revenues slightly increased by 7.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • SIG's debt-to-equity ratio is very low at 0.02 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, SIG has a quick ratio of 1.52, which demonstrates the ability of the company to cover short-term liquidity needs.
  • Compared to its closing price of one year ago, SIG's share price has jumped by 27.24%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, SIG should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • SIGNET JEWELERS LTD' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, SIGNET JEWELERS LTD increased its bottom line by earning $4.36 versus $3.72 in the prior year. This year, the market expects an improvement in earnings ($4.53 versus $4.36).
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Specialty Retail industry and the overall market on the basis of return on equity, SIGNET JEWELERS LTD has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.

TheStreet Ratings team rates ZALE CORP as a Hold with a ratings score of C. The team has this to say about their recommendation:

"We rate ZALE CORP (ZLC) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, revenue growth and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including generally higher debt management risk and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • ZALE CORP has improved earnings per share by 5.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, ZALE CORP turned its bottom line around by earning $0.02 versus -$0.96 in the prior year. This year, the market expects an improvement in earnings ($0.50 versus $0.02).
  • Despite its growing revenue, the company underperformed as compared with the industry average of 6.8%. Since the same quarter one year prior, revenues slightly increased by 1.4%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • The gross profit margin for ZALE CORP is rather high; currently it is at 53.44%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -7.53% is in-line with the industry average.
  • The debt-to-equity ratio is very high at 3.31 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company.
  • Net operating cash flow has decreased to -$86.95 million or 20.08% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.

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