Signet Jewelers (SIG -0.84%) doesn't get a lot of attention on Wall Street, but the latest earnings report from the world's largest diamond jewelry retailer should turn a few heads.

The retail stock jumped 20% Tuesday and tacked on another 6% Wednesday after the company easily beat estimates in its third-quarter earnings report and raised its guidance, even as it faced difficult comparisons with the quarter a year ago and a volatile macroeconomic environment.

Revenue in the quarter rose 2.9%, or 4.2% in constant currency, to $1.58 billion, ahead of estimates at $1.5 billion. Same-store sales were down 7.6% as the company lapped a quarter in which consumers were still benefiting from government stimulus and as it experienced some macroeconomic pressure.

Person putting a necklace on another person.

Image source: Getty Images.

While the slide in comparable sales led to a decline in gross margin and overall profitability, with adjusted earnings per share falling from $1.43 to $0.74, that was still much better than the analyst consensus at $0.31.

In addition to the earnings beat, Signet shares seemed to jump because the company proved that it is managing well through a challenging environment, and the stock is a great value at the current price.

A hidden gem

Though the third-quarter numbers alone may not look that impressive, CFO Joan Hilson said that the company is executing on its primary goal: to gain market share, grow the top line, and deliver double-digit operating margin. The company's improvement is also clearer when compared to its pre-pandemic performance.

Signet, which owns jewelry banners including Jared, Kay, and Zales, grew revenue by 33% compared to the pre-pandemic quarter three years ago, and flipped an adjusted operating loss of $29.3 million to an adjusted operating income of $57.9 million.

Those results show that its multi-banner strategy is successfully moving customers up the value chain, generating higher transaction value and improved spending at higher price points. While inflation has impacted lower-income customers more, the company is also seeing evidence that its marketing strategies are paying off as average transaction value increased 8% over the last year and up 27% over the last three years as the company said on its earnings call.

The company has also successfully managed its inventory at a time when much of the retail sector has been burdened with excess merchandise after anticipating supply chain headwinds and overestimating customer demand. Signet's inventory was actually down 2%, excluding its acquisitions of Diamonds Direct and Blue Nile, and its clearance levels are at their lowest since the company began implementing its "inspiring brilliance" strategy.

Is the stock a buy?

Signet's guidance shows that the company expects a strong holiday quarter, even as much of the rest of the retail sector has said the opposite.  

For the fourth quarter, the company expects revenue of $2.59 billion to $2.66 billion, which was in line with the consensus at $2.64 billion, and it raised full-year adjusted EPS guidance from $10.98-$11.57 to $11.40-$12.00, ahead of estimates at $10.90. That guidance implies adjusted EPS of $5.04 to $5.64 in the fourth quarter, which compares to expectations of $4.96 and is an improvement from the quarter a year ago.

Based on that improved guidance, the stock trades at a price-to-earnings of less than 7, a sign the market still seems skeptical that Signet can deliver on its goal of gaining market share, growing the top line, and posting double-digit operating margins.

The company has been buying back stock, and management said on the call that it believes the stock is "significantly undervalued." Based on its current performance and momentum in a challenging retail environment, the stock looks like a good bet to outperform if it can execute on those strategic goals.