Signet Jewelers (SIG 1.58%) stock has been an under-the-radar winner during the pandemic, tripling since the start of 2020 as it's benefited from both external tailwinds and the company's own turnaround strategy.

With consumer spending on goods rising due in part to multiple rounds of stimulus checks, Signet posted 50% revenue in fiscal 2022, which ended on Jan. 29. This represents a 27.5% increase over a two-year span as revenue dipped in fiscal 2021 during the lockdown period.

At the same time, the company has cut costs and streamlined its business to boost operating margins, which reached 11.6% on an adjusted basis last year, and management aims to keep them in the double-digits. The jewelry market may be mature, but Signet, which owns banners including Kay, Zales, and Jared, has used acquisitions to help drive growth. Last week, it said it would buy online jewelry retailer Blue Nile, which generated more than $500 million in revenue last year, for $360 million in all-cash transition. The takeover comes less than a year after it bought Diamonds Direct, showing the company is aggressively executing its acquisition strategy.  

Why Blue Nile?

Based on the terms of the deal, Signet is valuing Blue Nile at close to double the price-to-sales ratio that Signet trades for, but Blue Nile brings a number of valuable assets to Signet, the world's biggest diamond retailer.

Founded in 1999, Blue Nile helped define the online jewelry industry and has one of the highest levels of awareness of any online jewelry retailer today. It retains a younger, more diverse, more affluent customer base that makes it attractive to Signet, which aims to expand its mid-market positioning into "accessible luxury" brands like Blue Nile. That type of customer base not only complements Signet's core business well, but it also "positions us to open up the top of the funnel to bring more customers into the segment banners," Signet CFO Joan Hilson said in an interview with The Motley Fool. In other words, it allows Signet to cross-market its other banners to a new set of customers, giving its organic revenue a boost in addition to what it will get directly from Blue Nile.

Another unique feature that attracted Signet is Blue Nile's showroom strategy. The company has 21 showrooms around the country, small footprint brick-and-mortar locations that aren't full stores where it showcases merchandise that can then be purchased online. The showroom strategy has become popular with online brands like Bonobos, Suitsupply, and Casper, and even Nordstrom has employed it with its Nordstrom Local stores. 

The showroom strategy is new to Signet, and Hilson said that the company was interested in learning more about the concept. The showrooms feature innovative technologies that the company expects to unlock new opportunities, and they offer the benefit of having low inventory and a smaller real estate footprint. Thus, the showrooms don't require the same level of investment as a full-line store, though they have the potential to drive a similar level of sales. Management expects the Blue Nile acquisition to be accretive to earnings by the fourth quarter of fiscal 2024, so it will take another year to fully integrate the company. 

Is Signet a buy?

In the same press release announcing the Blue Nile acquisition, Signet also cut its guidance for fiscal 2023, lowering its full-year revenue range from $8.03 billion-$8.25 billion to $7.6 billion-$7.7 billion. It also slashed its adjusted operating income forecast from $921 million-$974 million to $787 million-$828 million. The guidance cut mirrors other consumer discretionary companies that have been hit by inflation, declining consumer confidence, and a shift in spending habits back to services like travel and restaurants. Hilson said that the company saw sales soften in July with a particular hit on higher-price-point products. 

The new revenue guidance calls for a slight decline from the strong results last year, but the company still expects revenue growth of 25% from fiscal 2020, its last year before the pandemic, showing the company is in a much better position today.

Management is still targeting $9 billion in annual revenue and double-digit operating margin as long-term goals, meaning that it sees $1 billion in operating income in its sights. With a current market cap of $3.1 billion, or just three times its operating income target, Signet looks like a bargain if it can execute on that goal. The Blue Nile deal should help it get there.