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1 Top Stock in the Fastest-Growing Retail Niche

By Taylor Weldon - Jun 23, 2021 at 11:46AM

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Diamond prices are on the rise and jewelry spending has skyrocketed from pre-pandemic levels. Here's how investors can capitalize on those trends.

At a recent auction by diamond mining titan De Beers, diamond buyers found that many of their favorite stones were selling for 10% more than their previous prices. Further, some of those buyers went on to resell their acquisitions to traders and manufacturers at even higher markups. This sparkly sticker shock can be traced back to a single cause: ballooning consumer demand for specialty jewelry.  

In May, jewelry spending was up by 203% year over year, and up by 45% from the pre-pandemic levels of May 2019. This outpaced the growth of apparel and home furnishings combined -- from both the 2020 and 2019 baselines.  

Signet Jewelers (SIG 2.20%), the owner of market-leading jewelry chains Zales, Jared, and Kay Jewelers, among others, is already benefiting from these market conditions -- and it's setting itself up to stay ahead by putting the user experience first.

A $100 bill and two $20 bills, each wrapped up tightly in gold jewelry, on a white background.

Image source: Getty Images.

Stellar earnings set the tone

Signet Jewelers' fiscal 2022 first-quarter earnings report made waves thanks to huge sales and earnings increases over both fiscal 2021 and fiscal 2020.

Total sales for the period that ended May 1 were $1.7 billion, up 18% from the company's fiscal first quarter two years ago  -- despite the fact that the company operates 467 fewer stores now than it did then. Signet also returned to GAAP profitability ($2.23 per share) from a loss in the prior year period.

This growth has been enabled by Signet's e-commerce efforts. Online sales were up 110% over the prior-year period and 124% over the fiscal first quarter two years ago. This increase is no coincidence, but it has to do with the company's smart investments in its online customer experience.

During the pandemic, Signet added more than 700 virtual jewelry consultants to assist customers who are shopping from home. Customers can look at inventory via one-way HD video feed, ask questions, customize jewelry, and decide between shipping or local pickup at one of Signet's stores. In the most recent fiscal quarter alone, the company added more than 100 new features to its websites in an effort to create a best-in-class online user experience in jewelry shopping.  

But too much e-commerce is not a good thing

Signet Jewelers CEO Gina Drosos said she believes that the pandemic has changed consumer shopping behaviors permanently. While the necessities of social distancing did drive more sales online across all industries, there are two important strategic points at play when considering how jewelry sales have moved online. First, Signet's competitive advantage lies partly in its scaled store footprint, and second, high-end diamond jewelry is most often purchased in person.

Even in mid-2020, when pandemic-related concerns were running high, a De Beers study found that most Americans still preferred to buy diamond jewelry in a store, as long as the environment was not unsafe. Signet's long-term strategy aligns with this powerful sentiment. Its e-commerce investments are a part of its "connected commerce" strategic plan. The goal is to provide customers with a superior online experience as a supplement to visits to physical jewelry stores, not as a replacement for them. For example, customers can speak with a virtual jewelry consultant and get their basic questions answered before coming to a store to complete the purchase.

Beyond Signet's e-commerce improvements, the company has two primary strategies in development to boost its U.S. market share from 6% (almost 10 times as large as its nearest competitor) to 10% in the long term. The first is to differentiate its major brands more effectively from one another (i.e., give Zales an image that is distinctive from Kay's so the brands aren't competing as much for the same customers). The second is to expand its high-margin service offerings (jewelry repairs, for example).  

Diamonds are forever, but is Signet's growth?

As the market leader by a wide margin in the U.S. and the largest diamond retailer worldwide, Signet Jewelers stands atop a highly fragmented jewelry industry. It hasn't been easy for the company to survive the retail apocalypse, though, even before the pandemic. Signet stock traded dangerously close to all-time-lows throughout early 2020 and reported negative earnings per share (EPS) consistently throughout 2019 and two quarters in a row following retail lockdowns in 2020.

Investors who bought Signet during the stock's 5-year lows in March and April 2020 have seen 10-bagger returns since then, but that doesn't mean there's no more room for growth. Signet's price/earnings ratio of around 14.5 implies room for upward movement -- especially when compared to the company's historical P/E ratios as high as 24.6 in the past six years. The company's most recently reported EPS was its highest since 2018, which proves Signet's ability to survive both the retail apocalypse and the pandemic.

As the icing on the cake, the company has reinstated its dividend and raised its full-year revenue guidance for fiscal 2022 from a range of $6 billion to $6.14 billion to a revised range of $6.50 billion to $6.65 billion in revenue. Especially if the company can hit these targets, Signet Jewelers could be a great buy to benefit from skyrocketing jewelry demand and diamond prices. Not only are the market conditions right, but the company has the strategies and proof of execution to create lasting growth.

Taylor Weldon 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.

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