Why Signet Jewelers Plunged This Week

Shares of jewelry retailer Signet Jewelers (NYSE: SIG) plunged 26.2% this week through Friday at 3 p.m. ET, according to data from S&P Global Market Intelligence.

Signet preannounced holiday sales on Tuesday, which turned out to be rather disappointing. Thus, it's no surprise to see the stock falling on the news, even though it looks quite cheap -- at least on the surface.

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A lump of coal for the holidays

On Tuesday, Signet announced a 2% decline in holiday same-store sales, which includes the days leading up to Christmas. That was below the company's prior forecast, which means Signet will likely disappoint when it reports full fourth-quarter numbers.

Management now expects same-store sales to decrease between 2% and 2.5% for the quarter, whereas before, it had anticipated flat to up 3% same-store sales. Fourth-quarter revenue should now come in between $2.320 billion and $2.335 billion, below the prior guidance of $2.38 billion to $2.46 billion.

The company said that while the engagement and service part of the business was within expectations, the nonengagement gifting and self-purchase categories were below expectations. Joan Hilson, chief financial and operating officer, noted in the release that "consumers gravitated to lower price points even more than anticipated in a continued competitive environment."

Like many other consumer discretionary retailers, Signet is feeling the pressure from consumers looking for deals and promotions. The past few years of food and housing inflation, along with the post-pandemic yearning for spending on experiences, have taken their toll on discretionary goods sales, such as jewelry.

Is Signet a value or value trap?

At first glance, Signet looks like a stunningly cheap stock right now, at just 6.6 times trailing earnings. However, there are a few factors to consider with its future, some of which may lead to Signet being a value trap.

The most consequential is the rise of lab-grown diamonds, a new innovation that is disrupting higher-priced "natural" diamonds that are mined. Lab-grown diamonds don't have the environmental footprint or political controversy inherent in traditional diamonds, and they're also much cheaper, usually between 60% and 85% less.

Obviously, Signet can pivot to sell lab-grown diamonds at its retail and online store brands. However, the rise of lab-grown diamonds could pressure revenue and profits for some time. On the bright side, Signet doesn't have too much debt, so it can probably adapt. However, the process will likely be messy, as we saw this week.

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Billy Duberstein and/or his clients have 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.