Weekly Winner & Losers: SIG and HQY
Diving into the context and setup for two big movers last week
Welcome to this week's edition of the Portrait Weekly Winners & Losers.
This week, we saw big moves from Signet Jewelers and Healthequity following their earnings reports. The market applauded a turnaround in same-store sales for Signet, while growing disappointed at Healthequity for profitability deterioration and rising fraud costs.
HQY
Following its Q4 FY2025 announcement, HQY's stock fell 17%. after missing EPS expectations. Notably, the company blamed $15mm in incremental costs related to sophisticated fraud activity.
Analysis of HealthEquity's Recent Stock Weakness
Key Issues Driving Market Disappointment in Recent Earnings
HealthEquity's Q4 FY2025 earnings report (released March 18, 2025) revealed several significant issues that triggered an 11.59% stock decline in aftermarket trading. The primary concerns centered around profitability metrics, operational challenges, and forward guidance:
Profitability Deterioration
EPS Miss: Q4 non-GAAP EPS of $0.69 fell short of consensus expectations of $0.72, representing a 4.2% miss
EBITDA Underperformance: Adjusted EBITDA of $107.8M missed consensus of $114.6M by 5.9%, indicating material margin pressure
Margin Compression: Q4 Adjusted EBITDA margin was 35%, down significantly from 38% in Q4 FY24
Substantial Fraud-Related Costs
The company incurred approximately $15 million in additional service costs in Q4 related to sophisticated fraud activity
These costs include both reimbursing affected members and increased service expenses to handle fraud-related inquiries
This follows an $8 million impact from similar issues in Q3, indicating an escalating problem
Operational Challenges
The company faced multiple operational hurdles simultaneously:
Rolling out new chip-enabled "stacked benefits" cards to millions of members
Migrating existing clients to newer platforms
Responding to increased cyber threats and fraud attacks
Managing record new HSA member onboarding during peak season
Disappointing Forward Guidance
EBITDA Guidance Below Consensus: FY26 adjusted EBITDA guidance of $525-545M fell short of consensus expectations of $545.9M
Growth Deceleration: FY26 revenue guidance of $1.28-1.305 billion represents only 7-9% growth, a significant deceleration from FY25's 20% growth
Continued Cost Pressure: Management explicitly warned of "heavier than normal costs in our first 2 quarters" before margins improve later in the year
Interestingly, while Healthequity's fraud struggles are not entirely unique, they certainly seem to be more severe than peers. With some quick research, I found that competitor WEX invested in fraud prevention, seeing a reduction of 12-15 bps in fraud exposure.
Analysis of Fraud Trends Across Financial and Healthcare Services Companies
Executive Summary
Based on a comprehensive review of recent financial disclosures, earnings calls, and regulatory filings, HealthEquity's recent struggles with fraud appear to be more severe than those experienced by industry peers, though not entirely unique. While fraud remains an acknowledged risk factor across the industry, HealthEquity has experienced a material financial impact from fraud that exceeds what comparable companies have reported in the same timeframe. However, there is evidence of broader industry-wide fraud concerns, particularly in the healthcare sector, suggesting that HealthEquity's challenges exist within a context of elevated fraud activity across multiple segments of the financial services and healthcare industries
From WEX (on 3/14/25)
Based on this special call transcript with WEX Inc. executives, fraud does not appear to be a significant current concern or focus area for the company. The transcript contains minimal discussion of fraud-related issues, suggesting this is not a pressing challenge the company is currently facing or highlighting to investors.
The only substantive mention of fraud comes when CEO Melissa Smith references past investments in fraud prevention: "We made investments in credit loss and fraud. We're able to bring down our fraud exposure and our product exposure to between 15 and 12 basis points of last and last couple of years." This statement indicates:
WEX has previously invested in fraud mitigation capabilities
These investments have successfully reduced fraud exposure to 12-15 basis points
This reduction occurred over "the last couple of years" (suggesting a longer-term trend rather than a recent spike)
The company positions this as a success story rather than an ongoing challenge
What signs were there, in hindsight?
Looking back over the past 6-12 months, we also discover that these fraud issues are not completely new for Healthequity, especially as the company undergoes leadership changes.
Warning Signs Over the Past 6-12 Months
Several warning signs emerged in the months preceding the recent disappointment that could have predicted incoming trouble:
1. Escalating Fraud and Cybersecurity Issues
A cybersecurity incident was disclosed in July 2024, involving unauthorized access to personally identifiable information (PII) and protected health information (PHI) through a compromised business partner account
Fraud-related costs first appeared in Q3 FY2025 at approximately $8 million before worsening to $15 million in Q4
The company acknowledged being "overly optimistic" about resolving these issues quickly
2. Leadership Transition Uncertainty
In November 2024, HQY announced CEO Jon Kessler would retire effective January 6, 2025
The incoming CEO, Scott Cutler, came from e-commerce backgrounds (StockX, eBay) rather than healthcare or benefits administration
3. Slowing Organic Growth and Acquisition Dependency
New HSAs from sales declined 5% year-over-year in Q4 (471K vs. 497K)
The company added 616K HSAs through the BenefitWallet acquisition versus organic growth of approximately 384K
Service revenue grew only 5% year-over-year in FY2025, significantly lagging overall revenue growth of 20%
CDB accounts (Consumer-Directed Benefits) grew only 2% year-over-year (7.14M vs. 7.01M)
Who else might be impacted, and what next?
Looking for companies which may also be affected by Healthequity's trends, we find that other HSA providers or healthcare technology companies may see growth decelerations.
Companies and Sectors Potentially Affected
The issues facing HealthEquity could have implications for several related companies and industry segments:
Direct HSA Competitors
Bank of America (BAC): Second-largest HSA provider with similar interest rate sensitivity and potential fraud exposure
Fidelity Investments: Major HSA custodian specifically mentioned as gaining market share
Optum Bank (UnitedHealth Group): Leading HSA provider potentially facing similar growth and yield challenges
Webster Financial/HSA Bank: Significant HSA competitor mentioned in company filings
Consumer-Directed Benefits Administrators
WEX Inc. (WEX): Offers HSA and other consumer-directed benefit solutions with similar market exposure
Benefitfocus (BNFT): Benefits administration platform potentially facing similar operational challenges
Businessolver: Private benefits administration company potentially facing similar headwinds
Wageworks: Acquired by HealthEquity in 2019, but other similar CDB administrators could face comparable issues
Healthcare Technology Sector
Teladoc Health (TDOC): Healthcare technology company potentially facing similar margin pressures and cybersecurity concerns
Accolade (ACCD): Healthcare navigation platform with potential growth deceleration concerns
Cerner (now Oracle Health): Healthcare IT provider mentioned as potentially affected by similar trends
Allscripts (MDRX): Healthcare technology company potentially facing similar challenges
Looking forward, HQY's ability to mitigate fraud and see margin recovery will be key for investors.
Key Debates and Concerns Going Forward
1. Fraud Mitigation Timeline and Effectiveness
Will the company's investments in fraud prevention be sufficient to address the issue?
Can they meet their projection of normalizing costs by the second half of FY26?
The CEO's first hire was a Chief Security Officer (CSO), indicating prioritization of this issue, but execution remains uncertain
2. Margin Recovery Path
Management expects service costs to normalize starting in Q1 but also warns of "heavier than normal costs" in the first two quarters
Can gross margins return to historical levels (65% mentioned by an analyst)?
Will operational efficiencies offset the impact of potentially declining interest rates on custodial revenue?
3. Interest Rate Sensitivity
How will potential interest rate cuts affect custodial revenue, which grew 41% and now represents 45% of total revenue?
Can the Enhanced Rates program (which reached 30% of HSA cash) provide sufficient protection against interest rate fluctuations?
Will the significant drop in yield to 1.9% for FY2027 repricing (affecting $4.1B in assets) materially impact earnings?
4. New CEO's Strategic Direction
Will Scott Cutler's e-commerce background bring valuable digital transformation expertise, or does his lack of healthcare experience represent a risk?
How will the new leadership approach the balance between growth and profitability?
Will there be significant changes to the company's acquisition strategy or technology investments?
SIG
After reporting its Q4 results, SIG's stock jumped ~17%. Let's dive into what drove the company's strength.
What happened?
Using Portrait, we learn that Signet's same-store sales growth is undergoing a turnaround, flipping from -3.4% growth for full year 2024 to -1.1% in Q4. Importantly, same-store sales growth was positive in January. Simultaneously, the company is strategically cutting exposure to underperforming mall stores while demonstrating pricing power.
Unpacking Signet Jewelers' Recent Stock Strength
Recent Earnings Report: Key Drivers of Market Excitement
Signet Jewelers' Q4 FY2025 earnings report (March 19, 2025) revealed several significant developments that have fueled investor enthusiasm despite ongoing industry challenges:
1. Earnings Outperformance & Sequential Improvement
While Q4 revenue declined 5.8% year-over-year to $2.35 billion, SIG delivered adjusted EPS of $6.62, significantly exceeding analyst expectations of $6.25-$6.39. More importantly, same-store sales declined just 1.1% in Q4, showing substantial improvement from the full-year decline of 3.4%. This sequential improvement culminated in positive same-store sales in January, with management confirming this positive momentum has continued into Q1 FY2026.
2. "Grow Brand Love" Strategic Transformation
The company unveiled a comprehensive new strategy called "Grow Brand Love" that reorganizes the business around four distinct brand categories:
Core Milestone & Romantic Gifting: Kay, Peoples
Style & Trend: Zales, Banter
Inspired Luxury: Jared, Diamonds Direct
Digital Pure Play: Blue Nile, James Allen, Rocksbox This brand-focused approach aims to drive emotional connections with consumers while centralizing functions like media buying, core merchandising, and sourcing to realize scale advantages. The reorganization includes reducing the senior leadership team by ~30%, expected to deliver $50-60M in savings this year and at least $100M annualized.
3. Real Estate Transformation & Mall Exodus
SIG announced plans to transition over 10% of mall locations to off-mall and e-commerce channels over the next three years. This strategy includes evaluating 150 underperforming doors for potential improvement or closure over the next two years and repositioning ~200 stores from declining malls to off-mall locations. Management projects these actions will deliver approximately 1 point margin improvement in 4-wall contribution and reduce North American mall revenue penetration to under 30% over the next three years.
4. Pricing Power & Margin Resilience
Despite a challenging consumer environment, SIG demonstrated impressive pricing power with merchandise Average Unit Retail (AUR) growing 7% in Q4, including bridal AUR up 2% (best quarterly performance in 2 years) and fashion AUR up 8%. Gross merchandise margin expanded 30 basis points in Q4 despite overall sales decline, and management expects "moderate merchandise margin expansion" to continue throughout FY2026.
5. Strong Forward Guidance
The company provided optimistic guidance for Q1 FY2026, projecting revenue of $1.50-$1.53 billion and same-store sales growth of 0-2%. Management noted that Q1-to-date same-store sales are running at the high end of this guidance range, with growth across all categories including improved bridal trends.
What signs were there, in hindsight?
From reviewing the past 6-12 months, we find that SIG has been seeing six consecutive quarters of same-store sales improvement while also improving its capital structure.
Clues From the Past 6-12 Months That Predicted Incoming Strength
1. Sequential Same-Store Sales Improvement
SIG delivered six consecutive quarters of sequential same-store sales improvement through Q3 FY2025, with each quarter showing better performance than the last. This consistent trajectory improvement signaled building momentum that culminated in the positive January 2025 comps.
2. Capital Structure Optimization
In April 2024, SIG executed a major financial transaction involving its Series A Convertible Preference Shares, repurchasing half (312,500 shares) for approximately $414 million and modifying terms for the remaining shares. These actions reduced diluted share count by approximately 7.6% immediately, with further reductions through net share settlement, leading to a 9-10% increase in FY2025 EPS guidance. By December 2024, the company had completed redemption of all remaining preferred shares, contributing to an end-of-year share count reduction of more than 17% compared to FY2024.
3. Credit Facility Amendment & Balance Sheet Strength
In August 2024, SIG extended its asset-based credit facility maturity by over three years (to August 2029) while reducing the commitment from $1.5 billion to $1.2 billion, reflecting "reductions in inventory the Company has made over the last three years". The company maintained zero borrowings under this facility while expanding the borrowing base calculation, demonstrating both financial discipline and flexibility.
4. Services Growth Outpacing Merchandise
Services revenue consistently outperformed merchandise sales, growing 1.9% in Q3 FY2025 while carrying a 20-point margin premium to merchandise. Extended service agreement (ESA) attachment rates grew 170 basis points year-over-year in Q3, continuing a multi-quarter trend of services outpacing merchandise by significant margins.
5. Fashion Category Strength & Margin Expansion
Fashion sales turned positive in Q3 FY2025, with particularly strong performance in lab-created diamond fashion, which grew more than 30%. New merchandise penetration increased nearly 8 points year-over-year in core banners, with these new products carrying more than a 5-point margin premium compared to core average merchandise.
6. Orderly Leadership Transition
SIG executed a well-planned leadership transition with J.K. Symancyk succeeding Virginia "Gina" Drosos as CEO effective November 4, 2024. Simultaneously, Joan Hilson's role expanded from Chief Financial, Strategy and Services Officer to Chief Financial and Operating Officer, providing continuity while broadening operational oversight. The company also announced Helen McCluskey would succeed H. Todd Stitzer as Board Chair following the June 2024 Annual General Meeting, maintaining governance stability.
Who else might be impacted, and what next?
Interestingly, Signet's embrace of lab-grown diamonds could shift dynamics in the diamond industry, and the company's move away from malls could further pressure REITs with mall exposure.
Companies/Sectors Potentially Affected by These Developments
1. Jewelry Retail Competitors
Specialty Jewelers: Tiffany & Co. (LVMH), Pandora, and Brilliant Earth face increased competitive pressure as SIG executes its brand-focused strategy and expands market share. SIG's success with lab-created diamond fashion jewelry (up 60% quarter-to-date in their big 3 brands) could particularly impact competitors' product mix strategies.
Department Store Jewelry Departments: Macy's, Nordstrom, and JCPenney jewelry departments may struggle to match SIG's enhanced brand differentiation and service offerings, potentially losing market share as SIG continues to expand its accessible luxury positioning.
Mass Market Retailers: Walmart, Target, and Costco jewelry departments could be impacted by SIG's push into more accessible price points and off-mall locations, particularly as SIG addresses merchandise assortment gaps at key gifting price points.
2. Diamond Industry
Natural Diamond Producers: De Beers (Anglo American), Alrosa, and Rio Tinto face mixed impacts from SIG's balanced approach to natural and lab-grown diamonds. SIG's partnership with De Beers for training, marketing, and new branded natural diamond collections could support natural diamond demand.
Lab-Grown Diamond Producers: Companies focused on lab-grown diamonds should benefit from SIG's expanded use in fashion jewelry, though continued price compression remains a challenge. SIG reported lab-grown diamond fashion sales up 60% quarter-to-date in their big 3 brands, driving both AUR growth and margin expansion.
3. Retail Real Estate
Mall REITs: Simon Property Group, Brookfield Properties, Macerich, and other mall operators face additional pressure from SIG's accelerated shift away from malls, with plans to transition over 10% of mall locations to off-mall and e-commerce over the next three years.
Off-Mall Retail Center Owners: Kimco Realty, Brixmor, and other strip center operators could benefit from SIG's transition to off-mall formats, particularly as the company repositions approximately 200 stores from declining malls over the next 2-3 years.
Finally, the market will be paying keen attention to SIG's new "Grow Brand Love" strategy as the company looks to implement its strategic transformation.
Key Debates and Concerns Going Forward
Execution Risk of "Grow Brand Love" Strategy
The comprehensive "Grow Brand Love" strategy represents a significant organizational transformation that carries substantial execution risk. While the brand-focused approach appears sound, implementing it across a large retail footprint with multiple brands requires disciplined execution. The 30% reduction in senior leadership and organizational restructuring could potentially disrupt operations in the short term, even as it delivers cost savings. Investors will closely monitor whether the new CEO can successfully implement this vision while maintaining operational excellence during the transition.
Evolving Diamond Market Dynamics
The rapidly evolving diamond market presents both opportunities and challenges for SIG. Lab-grown diamonds have experienced significant price declines, which SIG has leveraged successfully in the fashion category (with sales up 60% quarter-to-date in their big 3 brands). However, this price compression could potentially cannibalize natural diamond sales or create consumer confusion about value. SIG's balanced approach to natural and lab-grown diamonds appears promising, but the company must continue to clearly differentiate the value proposition of each diamond type across its brand portfolio to navigate this dynamic successfully. Additionally, concerns about global diamond supply due to geopolitical factors, including the potential sale of De Beers Diamond Company, create uncertainty in the supply chain.
Consumer Spending Environment and Competitive Pressures
Despite recent improvements, SIG continues to face a challenging consumer spending environment with persistent inflation and competition from experiential purchases like travel. The company's holiday performance in December 2024 fell short of expectations, with consumers gravitating toward lower price points more than anticipated and the company facing a "continued competitive environment". While SIG has demonstrated pricing power with AUR growth of 7% in Q4 FY2025, sustaining this in a value-conscious consumer environment remains challenging. The company must continue to balance premium positioning with accessible price points, particularly as it identified merchandise assortment gaps at key gifting price points that limited its ability to capitalize on consumer demand.
Digital Integration Challenges
SIG continues to face operational challenges with its digital banners (James Allen and Blue Nile), which contributed to a substantial $200.7 million in impairment charges in Q4 FY2025. These integration issues have negatively impacted overall performance, with Digital Banners reducing same-store sales by approximately 120 basis points in Q3 FY2025. While the company has taken steps to address these issues, including bringing on a new digital banner President with experience from Tiffany's and Home Depot Online, successfully integrating these acquisitions and resolving technical issues remains crucial for capturing the growing online jewelry market.
To dive further into HQY, SIG, or any other public company, head over to Portrait!