Stock In Kay Jewelers Owner Is Tumbling After A Critical Report

Shares in Signet Jewelers fell by as much as 12% after a financial publication warned it risks more damaging exposes of its business practices.

The share price of Signet Jewelers, parent company of jewelry chains Kay and Zales, crashed by as much as 12% on Thursday after a report raised concerns about the company's operations, including complaints that customers' diamonds have been swapped out or lost during routine servicing by the company.

The stock was down 7.5% by Thursday afternoon.

The report was published in Grant's Interest Rate Observer, a widely read, $1,200-a-year financial tip-sheet whose articles about companies can move stock prices. On top of unhappy customers, Grant's questioned Signet's heavy use of in-store financing for diamond purchases, and said its competitors are poised to take market share from the jeweler.

In late April, BuzzFeed News reported on extensive complaints by Kay Jewelers customers, some of whom had their diamonds replaced by inferior or imitation stones after bringing them to the store for cleaning.

The Grant's article cited the BuzzFeed News reports, and quoted investor Marc Cohodes as saying Signet is vulnerable to a "a Lumber Liquidator’s scenario," in reference to the flooring company whose stock price has tanked since a damning expose by 60 Minutes.

"Any news show can send in hidden cameras and then the stock gets cut in half," Cohodes told Grant's. "Who is to say that ABC or 60 Minutes doesn’t walk into one of these stores with a hidden camera and gets the diamond appraised and the clerk hands it back not as the A-grade stone that the customer actually bought but as Moissanite or as a D-grade diamond instead?”

In a statement to BuzzFeed News, Signet stood by their business practices and slammed the claims as "grossly amplified."

The Grant's article largely concerned Signet's financing of diamond purchases — roughly 60% of the company's sales are paid for with credit provided by the company. The Consumer Financial Protection Bureau has been scrutinizing consumer loans offered by companies outside of the traditional banking system, and in a May 23 note, analysts at Height Securities said complaints about Signet's debt collection practices "could lead to the agency taking action."

Grant's said a review of complaints filed with the CFPB shows consumers alleging the company made harassing calls to the work phone numbers and reported incorrect information to credit bureaus. Almost 3,300 personal bankruptcy filings listed Signet, or a Signet brand like Kay, as a creditor in the second quarter of this year alone.

Signet's financing business doesn't just drive purchases of its diamonds, it also turns a tidy profit of its own: $39 million in the first quarter of this year. The company said in a recent quarterly earnings announcement that Goldman Sachs would "conduct a strategic evaluation," of the loans it issues to customers.

Mark Light, Signet's chief executive officer, said that the review by Goldman could result in "outsourcing of all of our credit functions" or choosing to outsource only some of the credit business.

Signet stock has fallen by more than 16% since it reported quarterly results on May 26. Those results showed revenue was less than what Wall Street analysts expected, and projected same store sales would only rise 1% to 2% in the coming quarter.

Goldman Sachs analysts (not affiliated with the Goldman bankers working with the company), downgraded the company from a "buy" rating to "neutral" after the earnings report, which they described as disappointing. "Our enthusiasm for SIG’s long-term growth prospects is dampened by a surprising deceleration in business momentum that materialized in April and persisted into May," the analysts said.

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