Signet Jewelers (SIG), a watch and diamond retailer, exceeded consensus estimates, raised full year guidance, and is trading up 5% in the premarket. However, the quality of this quarter’s earnings is lacking as the reversal of a valuation allowance accounts for nearly a quarter of net income. In its latest 10-Q, Signet disclosed it’s now confident it will be able to recognize certain state tax deferred assets it had created a reserve for the prior quarter. The company revealed:

“...recorded a $49.8 million tax benefit to release the valuation allowance against the Company's state deferred tax assets in the second quarter of Fiscal 2022.”

The tax benefit added $3.5 million to the quarter’s net income, or 1.58%. Despite the rosy outlook the company provided in its earnings release, the company is urging investors to lower their expectations for the holiday quarter. In the latest quarterly filing, Signet disclosed the holiday quarter— which accounts for between 35-40% of annual sales— may not be as strong as investors are used to:

“However, in Fiscal 2022, Signet has experienced shifts in discretionary spending and consumer behavior that may cause the fourth quarter to account for a lower percentage of annual sales and profits.”

The company did renegotiate its receivables purchase agreement on better terms, which should help if the holiday quarter is softer than usual. Earlier this year we exposed Signet’s strategy of targeting subprime diamond buyers and flipping the receivables at massive discounts.