* Q2 EPS 32 cents vs. Street est. 23 cents
* Sales fall 7.6 pct
* Ups free cash flow target by $100 mln
* Shares up 13.9 percent (Adds more comments, updates stock action)
By Aarthi Sivaraman
SEATTLE, Sept 9 (Reuters) - Top jewelry retailer Signet Jewelers Ltd (SIG.N) posted a higher-than-expected quarterly profit on Wednesday as cost-cuts helped to offset weak demand, and its shares surged over 14 percent.
As the critical holiday season approaches, UK-based Signet said it stands to gain from the consolidation in the jewelry sector as smaller rivals have shuttered stores in the economic slump, while others like Finlay Enterprises Inc FNLYQ.OB have filed for bankruptcy protection.
“We are taking advantage of reduction in sector capacity taking place to gain market share,” Chief Executive Terry Burman said in a conference call.
Signet, which has shaved expenses to fight a sales slump, said it is on track to save up to $100 million in costs at its U.S. unit, which accounts for about 80 percent of its sales.
Signet earned $27.6 million, or 32 cents a share, in the second quarter ended Aug. 1, compared with $19.7 million, or 23 cents a share, a year earlier.
Analysts on average had expected earnings of 23 cents a share, according to Reuters Estimates.
Sales at Signet, with Kay Jewelers and Jared The Galleria of Jewelry stores in the United States and Ernest Jones and H Samuel in Britain, fell about 7.6 percent to $710.8 million.
Jewelers like Signet and Zale Corp ZLC.N and even upscale chain Tiffany & Co (TIF.N) have faced weak sales as the economic slump has forced shoppers to turn frugal. In turn, retailers have cut costs to offset lower demand.
But in a possible sign that the decline might not worsen, Tiffany pointed to slightly recovering demand for jewelry late last month, though it noted that it does not expect any material change in the economic environment. [ID:nBNG513912]
Signet took a similar stand, saying “the consumer environment in both the U.S. and UK remains very uncertain” in the short term. But it said it is prepared to face the fast-approaching holiday sales season.
Signet’s lower cost structure and the prospect of higher free cash flow bodes well not just for the UK-based retailer, said Dana Telsey, retail analyst at the Telsey Advisory Group.
“All in all, the jewelry industry is seeing signs of being less negative,” Telsey said.
Signet, the world’s largest specialty retailer, had said in June that its marketing efforts and more exclusive merchandise were helping to bolster its market share. It has benefited as many rivals have closed stores or gone bankrupt.
While cost-cuts aided its profits in the most recent quarter, sales must grow for Signet to get back to its previous levels of profitability, the company’s finance director Walker Boyd said in an interview.
Signet would still use discounts to entice shoppers, Boyd said .
Signet now expects free cash inflow of $275 million to $325 million for the year, up $100 million from its prior target.
Signet said it is closing about 75 stores in the current fiscal year and “will be selective” with new stores until it gets a clearer picture of the economy.
Signet shares were up $3.57 to $28.10 in afternoon New York Stock Exchange trading. (Reporting by Aarthi Sivaraman in Seattle, with additional reporting by Dhanya Skariachan in Bangalore; Editing by Maureen Bavdek and Gerald E. McCormick)