Well, that’s a big drop.

Jewelry retailer Signet Jewelers Ltd. (NYSE:SIG) reported fourth-quarter numbers that were largely slightly better than expectations. But those good results were overshadowed by management unveiling a massive, three-year transformation plan that makes for an ugly near-term picture. As part of that plan, the company is essentially shuttering its black box credit business, closing a bunch of stores, pouring a bunch money into digital investments, buying back shares and spending an arm and a leg to regain jewelry market dominance.

Put all those changes together, and it makes for a pretty ugly near-term financial picture for SIG stock. That is why SIG’s fiscal 2019 earnings guide missed expectations by a mile. Analysts were looking for over $6 in earnings per share next year. Instead, management said earnings will come in right around $4 per share.

That’s a big miss. And it’s the main reason SIG stock was down 20% as of March 14.

But if you look past all the smoke related to huge near-term changes, you’ll see that this is a pretty valuable company trading at a dirt-cheap valuation. I think there is opportunity in the rubble for patient, long-term oriented investors.

Here’s why:

Signet’s Business Is Changing for the Better

Upon first glance, the quarterly numbers for Signet are really bad. Same store sales are down across all of its major brands, leading to a total same store sales decline of 5.2%. Gross margins are falling. The operating expense rate is climbing. Operating margins are dropping. Earnings are in free-fall.

Those numbers look especially bad next to numbers from higher end peer Tiffany & Co. (NYSE:TIF). Tiffany reported a same store sales increase of 5% in the holiday period. Gross margins are up. Operating margins, too. Earnings are growing.

Clearly, there is something wrong with Signet and not the jewelry industry at large. That “something wrong” is the fact that Signet has missed the boat on essentially every current consumer trend, leaving the company with antiquated jewelry brands operating on antiquated business models.

The company has a ton of mall exposure. And we aren’t talking just one store per mall. In many instances, Signet operates several stores in the same mall. That is a recipe for disaster in today’s dynamic retail environment in which malls are dying.

The company also has a very small digital commerce footprint at only 8% of sales. Granted, jewelry sales aren’t typically considered the type of purchases to be made online, but people said the same thing about athletic apparel a few years ago — people want to try it on and see how it feels. Now, Amazon.com, Inc. (NASDAQ:AMZN) is making a huge online athletic retail push while 20% of sales at Dicks Sporting Goods Inc (NYSE:DKS) were made online last quarter.

In other words, essentially every form of shopping is migrating at least partially to the online channel, and Signet has completely missed the boat on this.

Bigger Picture for Signet Stock

Big picture: Signet has failed over the past several years to adapt its business model to the changing needs of consumers who are used to an on-demand and digitally-infused shopping experience.

Bigger picture: Signet is changing its business to finally accommodate those needs.

Signet is exiting the consumer lending business and using the proceeds to affect real change across its remaining business. The company plans to close all those stores that are right next to each other in the same mall, update the existing ones, and build out its digital footprint. The net result will be a much smaller “old” brick-and-mortar business and a much bigger “new” digital business. All the while, the company plans to buyback shares and pay down debt. 

In five years, then, Signet will be a much different and much more successful company than it is today. There will be fewer stores, but the ones that are around will look updated and designed for the modern shopping era. The digital business will be a much bigger driver, and there will likely be huge synergies between the digital and brick-and-mortar business — such as look online and pick up in store. Profitability will be higher, thanks to a better consumer value proposition. The share count will be down, as will the debt load on the balance sheet.

These are all long-term positives which the market seems to be ignoring right now. When the market chooses to focus on near-term troubles and ignore long-term benefits, I tend to find strong buying opportunities.

Bottom Line on Signet Stock

Demand for mid-price jewelry will always be strong.

Right now, SIG is just having trouble capitalizing on that enduring demand, thanks to an antiquated business model that isn’t designed to meet the needs of modern consumers. But SIG is now starting to modernize and digitize its business to meet the needs of consumers everywhere.

Consequently, things will get better for SIG in the long term. Fiscal 2019 might be ugly, but over the next five years, SIG stock should head significantly higher.

As of this writing, Luke Lango was long SIG, AMZN, and DKS.