Signet’s Wall Street Brushfire

Why, after announcing strong results, did the stock of America’s largest jeweler crater last week?

Last week, just as JCK Las Vegas was in full swing, Signet’s stock cratered, dropping from $108.37 on May 26 to hit $85.90 on June 7. It has recovered a bit since then—it is currently trading at $89.46—boosted by purchases from company insiders. But it’s a surprising performance, especially after America’s largest jeweler also announced generally good first quarter results last week.

Two issues spurred this great spiral downward: first, questions about the company’s credit policies; and second, a series of articles spurred by customer complaints about repairs at Kay—which were both highlighted in a June 2 article in James Grant’s investment newsletter. Some close to the company feel that this is the work of an organized—and so far pretty successful—campaign by short-sellers to drive down the company’s stock, which involves feeding critical information about the company to investment publications and possibly even to journalists. But let’s look at the substance.

The main point of contention regarding Signet’s credit policies is a little-used, if perfectly legitimate, accounting method called recency. (An article in Bloomberg details the issue, which has divided analysts.) But there is also perhaps suspicion underlying all this: Why is Signet doing so well, when the rest of retail is not?

In response to these questions about credit—and perhaps other disconcerting ones raised in the past—Signet has hired Goldman Sachs to evaluate its credit portfolio. One analyst estimated that Signet could net $1.5 billion if it sold the portfolio, but would also lose about $800 million in revenue.

The customer complaints, meanwhile, have been the subject of two articles in BuzzFeed and numerous other publications. The first told of women whose rings were “lost or ruined” while being repaired at Kay Jewelers. The second, two weeks later, was even more damaging, telling of women who said their diamonds were switched for moissanite during repairs.

While problems with repairs happen, the idea that stone-switching is endemic or systematic at Kay seems pretty far-fetched. To state something most people in the industry know: Stone-switching is theft and a crime. People have gone to jail for it. It would certainly be unusual for a $5 billion company to regularly steal from customers. If it did happen, it was most likely the result of some rogue employees.

Signet’s statement on the matter makes similar points:

… [W]e strongly object to recent allegations on social media, republished and grossly amplified, that our team members systematically mishandle customers’ jewelry repairs or engage in “diamond swapping.” Incidents of misconduct, which are exceedingly rare, are dealt with swiftly and appropriately.

So what’s the issue? Signet has always tried to hire top people. Its current CEO, Mark Light, is not a numbers person. He comes from retail and for years headed the company’s Sterling division. He helped build both Kay and Jared to their current sizes. He surely realizes that customer service—and customer trust—is paramount in the jewelry category.

That said, the service at Signet’s big chains has always had the reputation of being inconsistent. (Which, to be fair, is true of many big retailers, save perhaps Apple.) If Signet does have an issue with quality control in its repairs, it may be because the company has grown too big. No matter how dedicated to service you are, it isn’t easy keeping up standards at 3,000-plus stores. (For the record, Signet, says that it handles 4 million service and repairs every year, and more than 99 percent are completed without negative feedback.)

It remains to be seen whether the spate of negative publicity—and it’s remarkable watching it spread to all corners of the internet—will hurt the Kay brand, which is Signet’s largest and most successful (which might be why it was targeted). The current Kay Jewelers Facebook page is full of customer complaints. (To its credit, the company’s social media team is responding to each and every one of them.) As I’ve argued, in this case Signet’s size works against it, as it may not be able to handle customer complaints as personally and nimbly as an independent.

On the other hand, Signet’s size could help it here, too. Most Kay stores are in malls. If consumers stay away from them, they might just head to another mall jeweler. Like Zales.

JCK News Director