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Signet Jewelers (SIG) is shining brightly after the world's largest retailer of diamond jewelry beat Q2 EPS expectations, continuing a winning streak versus EPS estimates that extends beyond five years, while also reaffirming its FY25 guidance across the board. A combination of macroeconomic and company-specific issues, such as digital banner integration missteps, have afflicted SIG, as reflected in the stock's 27% decline this year. However, based on SIG's Q2 earnings report, it's evident that business trends are improving in both the fashion and engagement categories.

• Perhaps the best indicator of the positive momentum underlying SIG's business is the upward trajectory in same store stores. After declining by 9.6% in Q4 and then by 8.9% in Q1, same store sales were down by just 3.4% this quarter. Better yet, SIG believes that comps could turn positive in Q3, guiding for comps of -1% to +1.5%.
• Although the rebound in engagements has been slower than SIG had anticipated -- the company estimated a 5-10% increase in engagements in FY25 in Q4, but now sees an increase of 5% -- the engagement business is experiencing a slow-but-steady improvement. On a Q3-to-date basis, engagement units are now in positive territory.
• The middle-income consumer has been shying away from making big-ticket purchases, and that has included jewelry. Once again, SIG saw a lower number of transactions in Q2, but the good news is, the higher-income customer is still showing up, as illustrated by a 1.6% increase in average transaction value in North America.
• Relatedly, recent trends on the fashion side have brightened and SIG is expecting more robust fashion sales in the back half of FY25. Stronger fashion sales also generated merchandise margin improvements in Q2, which helped to offset a deleveraging of fixed costs, leading to a modest 10 bps gain in gross margin to 38.0%.
• Meanwhile, SIG continues to keep a tight lid on costs as SG&A expenses decreased by 2.5% yr/yr to $498.4 mln. Even as business conditions strengthen, SIG intends to keep tightening the screws on spending. In fact, the company is now targeting up to $200 mln in cost savings in FY25, up from its prior guidance of $150-$180 mln, as it leverages technology such as AI and implements sourcing efficiencies.

The main takeaway is that expectations were muted ahead of SIG's earnings report, mainly due to sluggish consumer spending on big-ticket items, but its results and outlook show that trends are moving in the right direction. Along with a more positive demand picture, SIG's commitment to reducing expenses should enable SIG to return to positive EPS growth soon.