On Thursday, jewelry retailer Signet Jewelers (NYSE: SIG ) made its way more than 20% higher on the back of stronger than expected second quarter results. Signet stock has been on the decline since 2016 as mall-based retailers struggled with falling traffic and changing consumer behavior.
However, investors were pleasantly surprised by Signet's second quarter beat and that took Signet stock markedly higher. Now, with the share price at its highest level so far this year, investors may be wondering if the firm can continue to climb back to its all-time highs above $140 reached back in 2015.
Second Quarter Win
The biggest reason for the recent Signet stock rally was the firm's impressive second quarter earnings report . Signet reported earnings per share of $0.52 on revenue of $1.42 billion, compared to estimates for EPS of $0.20 on revenue of $1.339 billion.
Perhaps the most shocking aspect of the report was Signet's same store sales, which accelerated by 1.7% instead of the 4.5% decline that analysts were expecting.
On top of a rosy second quarter, management also upped its full-year guidance to reflect the second quarter success.
The news was overwhelmingly positive, especially considering that Signet in the midst of turning its business around through a three-year strategic plan called a "Path to Brilliance."
However, it's worth noting that although CEO Virginia Drosos was optimistic about the firm's future, she remained cautious about the firm's all-important fourth quarter results in order to manage expectations and keep investors from getting their hopes up.
During the fourth quarter, Signet brings in the majority of the company's overall operating profit and Dross said the improved guidance reflects strength in the 2nd quarter but that management was still "appropriately cautious" in their outlook for the remainder of the year.
This year's Q4 will be closely watched not only because it represents a massive shopping opportunity for consumers, but because Signet stock will be launching several of its Path to Brilliance initiatives during that time.
That means that 4th quarter results will be a great litmus test to confirm whether or not Signet's turnaround plans are working.
Part of the reason for Signet's better than expected results was likely a shift in consumer behavior in the US. Not only have we seen unemployment rates improve dramatically, but U.S. shoppers have loosened their pursestrings and are more willing to spend on bigger ticket items like designer clothing and jewelry.
Signet wasn't the only one to surprise analysts this summer U.S. retail sales data last month also came as a shock when it jumped half a percent in July a 6.4% increase from last year.
That has certainly been a boon for Signet stock, the question is whether or not the company has made the necessary changes to weather another retail storm should things take a turn for the worst in the year to come.
Signet is still facing several headwinds, including less mall traffic and a complete overhaul of its digital marketing and ecommerce strategy. The firm's new strategy will come into play during the fourth quarter, a risky move since investors will be expecting big things from the all-important holiday quarter.
Not only will Signet's new strategy be expensive, but it could also cannibalize physical location sales- a problem many retailers looking to up their online game have run in to.
Can Signet Stock Climb Higher?
So, is this rally the beginning of something larger for Signet stock? It's difficult to say for sure. I think the 4th quarter will be the true test for Signet stock as favorable economic conditions were likely to be behind a lot of the company's most recent lift.
However, things certainly look promising for the jewelry retailer, and the company's position as one of the largest diamond retailers in the country gives it a lot of room to maneuver and make necessary changes.
Management's decision to remain cautious about the 4th quarter was a good one because it means that a strong holiday quarter will be an upside surprise, but if the firm's new strategy does hurt results investors won't be overly disappointed.
As of this writing, Laura Hoy didn't hold a position in any of the aforementioned securities.
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