Why Signet Jewelers Limited Soared on Thursday

A bundle of Zales diamond rings. Source: Signet Jewelers.

What: Shares of Signet Jewelers rose as much as 15% on Thursday morning before settling down closer to a 12% gain around noon, all on heavy trading volume. The jewelry retailer reported second-quarter results in the early morning hours, posting earnings 11% above Wall Street's consensus targets.

So what: In the second quarter, Signet's revenues rose 15% year over year to $1.42 billion. Adjusted earnings jumped 20% higher, landing at $1.28 per diluted share. Analysts would have settled for earnings of $1.15 per share on $1.38 billion in total sales.

Same-store sales increased 4.2%. The Zale division, acquired for $1.4 billion in the spring of 2014, posted particularly strong same-store improvements and even more impressive growth in more recently opened locations.

Looking ahead, management set third-quarter earnings guidance roughly in line with the current analyst view.

Now what: For a company that tends to post earnings within a couple of pennies of the Street consensus, a $0.13 beat is big news. And it was done with Signet's twin growth engines humming along in tandem.

The Kay Jewelers and Jared flagship brands posted predictably solid sales improvements, averaging approximately 7% higher sales year over year. Meanwhile, the smaller but faster-growing Zale brands posted 57% higher revenues overall, despite a 4% currency headwind to Zale's operations in the British Isles.

Zale's fantastic growth comes at a price, of course. The division barely posted a profit in the second quarter, with a minuscule 0.5% net margin. Excluding Zale, Signet's net margin was a far juicier 9.9%. The growth-driving expenses are not going into new store openings, but into heavy marketing campaigns and sales staff training programs.

"The integration of Zale continues to go well, and we have begun to see the benefit of net synergies positively impact our operating results," said Signet CEO Mark Light.

Signet shares may look pricey, trading at 26 times trailing earnings. Investors pay a premium for the retailer's strong sales growth, and the Zale buyout is starting to pay dividends. Analysts expect Signet's business momentum to continue through the next five years, making the stock look relatively affordable in a long-term perspective.

The article Why Signet Jewelers Limited Soared on Thursday originally appeared on Fool.com.

Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.