Up 60% in Three Months, Can This Bargain Stock Keep Gaining?

Signet Jewelers (NYSE: SIG) is the world's largest retailer of diamond jewelry, but as a leader in a mature market, the stock has been overlooked by investors hungry for growth in the artificial intelligence (AI) era.

That's led Signet, which owns banners like Kay, Jared, and Zales, to trade at a bargain valuation, and the stock looks more attractive after surging on its first-quarter earnings report. The company returned to same-store sales growth for the first time in several quarters and beat estimates on the top and bottom lines.

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Signet posted a same-store sales increase of 2.5%, thanks in part to 8% growth in average unit retail (AUR), or average prices. This was driven by a surge in lab-grown diamonds in its fashion segment, meaning non-bridal jewelry. Overall revenue in the quarter rose 2% to $1.54 billion, which topped the consensus at $1.52 billion. It showed off growth throughout the income statement, a credit to the improved assortment that led to comparable-sales growth.

Gross margin rose 100 basis points to 38.8%, driven by improving merchandise margin and as it gained leverage on fixed costs. Adjusted operating income jumped from $57.8 million to $70.3 million. Adjusted earnings per share rose from $1.11 to $1.18, which beat the consensus at $1.04. Signet stock jumped as much as 16.8% on Tuesday on the news.

Image source: Getty Images.

Grow Brand Love

In an interview with The Motley Fool, CFO/COO Joan Hilson credited the company's Grow Brand Love strategy for the improvement in Signet's business.

New CEO J.K. Symancyk introduced the strategy in its fourth-quarter earnings report, saying the company would focus on more style and design-led product in its assortment. This includes a reorganization of the business.

Hilson said part of that strategy means a sharper focus on Signet's top three banners, Kay, Zales, and Jared, saying that one point of growth at those banners was equal to six points of growth at its other brands.

"This is the most immediate way for us to drive short-term growth," she said.

Those efforts seem to have paid off as an improved assortment helped drive sales growth, with Signet particularly strong in fashion items at a price point of $250 to $500. Additionally, the company said that sales of lab-grown diamonds in the fashion segment jumped 60%. This shows that it's finding a new way to meet customer demand, as lab-grown diamonds offer the ability to get more karats for a lower price point than natural diamonds.

What's next for Signet?

Looking ahead, management said the company got off to a strong start in the second quarter. Quarter-to-date revenue was near or above the high end of its guidance for the quarter, calling for same-store sales of -1.5% to +1%. The company did not adjust its second-half expectations for the year, except to account for $117.5 million in share repurchases in Q1, or 5% of shares outstanding, showing another way Signet is delivering value for investors.

For the full year, the company raised its revenue guidance from $6.53 billion to $6.80 billion to $6.57 billion to $6.8 billion, and now expects adjusted earnings per share of $7.70 to $9.38, up from a previous range of $7.31 to $9.10. That guidance factors in current tariffs, which the company expects to manage through vendor negotiations and other tactics, and management said the consumer remained resilient.

At the midpoint of that guidance, the stock trades at a forward price-to-earnings ratio of just 8.5. This makes the stock attractively priced, especially after returning to growth and opportunistically buying back stock.

Signet is now up 60% since its low point in March after the company reported disappointing Q4 results, which shows that the Grow Brand Love strategy has already had a significant effect.

Looking ahead, the stock looks positioned for further gains due to its low valuation, improved assortment, growth in lab-grown diamonds, and ability to repurchase stock. Signet stock could easily move higher from here.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.