Shares of Tiffany & Co. (NYSE:TIF) soared in late 2019 after the American jeweler agreed to LVMH's (OTC:LVMUY) takeover bid of $16.2 billion. But with Tiffany's stock now trading near LVMH's offer of $135 per share, there's no real reason for investors to start fresh positions.

Instead, investors seeking a promising jewelry play should take a closer look at Tiffany's smaller industry peer Signet Jewelers (NYSE:SIG), which recently popped after reporting surprisingly robust holiday sales and fourth-quarter guidance.

A woman kisses a diamond ring.

Image source: Getty Images.

A deeper dive into Signet Jewelers

Signet, the world's largest diamond retailer, owns Zales, Kay Jewelers, Jared, H.Samuel, Ernest Jones, Peoples, Piercing Pagoda, and JamesAllen.com. Unlike Tiffany and LVMH's Bvlgari, which both target high-end customers, Signet's banners mainly focus on mid-range shoppers.

Signet has struggled with two major headwinds over the past few years. A large number of its stores were located in struggling malls across America, and jewelry shoppers gravitated toward higher-end stores.

Last year, Signet unveiled plans to shutter hundreds of stores, mainly in struggling malls, to streamline its business. It ended the third quarter of fiscal 2020 with 3,274 stores, down from 3,478 stores a year earlier. It expects its net selling square footage to decline 2.7% for the full year.

Signet generated 90% of its sales from North America last quarter. Kay, Zales, and Jared accounted for 39%, 19%, and 18% of that core region's sales, respectively. Here's how those banners fared over the past year:

Comps growth

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Kay

0.7%

(1.6%)

(1.4%)

(2.7%)

3.8%

Zales

2.8%

2%

(1.4%)

2%

2.8%

Jared

0%

(8.4%)

(2%)

(3.5%)

(2.9%)

Source: Signet quarterly reports.

Signet attributes Kay's turnaround to a "strategic" reduction in inventory to make way for more appealing holiday products in the third quarter. Zales comps were lifted by strong sales of its new Marilyn Monroe collection and art deco-themed bridal jewelry. Jared is still struggling, but the company is clearing out its inventories with promotions and expanding its selection of bridal jewelry and custom rings.

Meanwhile, Piercing Pagoda and its online retailer James Allen -- which together generated 11% of Signet's sales last quarter -- both generated double-digit comps growth in the third quarter. Signet is capitalizing on the strength of Piercing Pagoda and expanding the banner into Kay's stores with piercing services.

That growth, along with Signet's improving comps at Kay and Zales, enabled the company to post 2.8% comps growth last quarter, which represented a significant acceleration from its previous quarters:

Period

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Comps growth

1.6%

(2%)

(1.3%)

(1.5%)

2.1%

Source: Signet quarterly reports.

Moreover, Signet's promotions aren't crushing its gross margins. Its non-GAAP gross margin of 31.1% in the third quarter remained flat from the prior year quarter. However, Signet's operating margin remained negative, due to its ongoing store closures and investments in fresh products and marketing campaigns.

A better-than-expected holiday season

Signet recently reported that its holiday comps rose 1.6% in November and December. Kay's comps rose 0.2%, Zales' comps grew 5.4%, and Jared's comps declined 3.5%.

Piercing Pagoda's comps only rose 6.9%, but James Allen's comps surged 26.9% -- indicating that more of its customers were shopping online. Its total e-commerce sales grew 13.5% and mostly offset its 0.2% dip in brick-and-mortar sales.

A display case at a jewelry store.

Image source: Getty Images.

Those stronger-than-expected results prompted Signet to raise its fiscal 2020 comps guidance to 0.1% growth, compared to its prior outlook for a 1%-1.7% decline. It expects its fourth-quarter comps to rise 1.1%, and for its non-GAAP earnings to dip just 7%-9% annually, compared to analysts' expectations for an 18% drop.

Analysts expect Signet's revenue and non-GAAP earnings to dip 1% and 4% next year, respectively, as it closes more stores. However, its comps growth should remain positive as it implements turnaround plans for its core banners and nurtures the growth of Piercing Pagoda and James Allen.

Signet's growth rates initially look anemic, but they indicate that it's surviving the retail apocalypse by developing new products, expanding its e-commerce capabilities, and launching targeted marketing campaigns. Meanwhile, the stock still trades at less than 8 times forward earnings and pays a forward dividend yield of 5.3%. That low valuation and high yield should set a floor under the stock under its core business recovers.

Looking shinier

Signet's stock remains cheap because it's a mall-based retailer in a highly competitive market. Yet Signet's turnaround efforts, which started after CEO Virginia Drosos took the helm in 2017, are stabilizing the business and better positioning it for future growth. Signet isn't out of the woods yet, but it could climb higher this year if it continues to win back shoppers.