Signet Drops as Oil-Patch Swoon, Gem-Swap Reports Hit Chain

  • Company cuts profit forecast in sign trends won’t improve soon
  • Jeweler announces $625 million investment from Leonard Green

Shares of the jewelry company that owns the Kay, Zales and Jared chains tumbled as much as 18 percent after earnings missed analysts’ estimates, hurt by diamond-swapping allegations and falling sales in energy-reliant regions of the U.S.

Second-quarter profit at Signet Jewelers Ltd. was $1.14 a share, excluding some items, in the period ended July 30, the company said on Thursday. Analysts estimated $1.45, on average. The Akron, Ohio-based company also cut its forecast for the year.

Signet attributed the weaker performance, centered in its Jared stores, to sluggish demand in energy-dependent regions of the U.S., where employment and spending have been hurt by declining oil prices. New shoppers also may have been deterred by a drumbeat of negative reports alleging that Signet’s chains swapped out customers’ gems for lower-quality stones when they brought their jewelry in for service.

“Although a second-quarter miss and fiscal-year guidance update were expected, the magnitude of both was worse than the market was thinking,” Brian Tunick, an analyst at RBC Capital Markets, said in a note.

The shares fell as low as $78.71 in New York, the biggest intraday drop since November 2007. Signet already had slid 23 percent this year through Wednesday.

Negative Perception

Chief Executive Officer Mark Light said the negative social-media perception of Kay due to the scandal faded in July and August. To increase transparency and regain trust from customers, the company will test a new technology that will be able to highlight the unique marks of a diamond and e-mail the picture to shoppers. The technology will be used in its Kay stores.

Tunick said the diamond-swapping scandal may have hurt demand, though the company isn’t able to measure the impact.

“It’s impossible to really know for sure if it’s affected our sales or not,” Light said.

Same-store sales dropped 0.5 percent at the Kay chain during the second quarter and fell 7.6 percent at Jared, according to the company. Total revenue fell 2.6 percent to $1.37 billion, missing analysts’ $1.44 billion projection.

Forecast Cut

Profit will be $7.25 to $7.55 a share in the current year, the company said. That’s down from a previous projection of as much as $8.55 and trails analysts’ $8.24 average estimate.

In a bid to restore investors’ confidence, the company announced a $625 million stock buyback, funded by an investment of the same amount from private equity firm Leonard Green & Partners. In exchange for the infusion, the firm will receive convertible preferred shares and Signet will expand its board to add Leonard Green managing partner Jonathan Sokoloff as a director.

Fitch Ratings cut Signet’s long-term issuer default rating to junk status following the gloomy second-quarter performance. The rating was dropped one notch to BB+ from BBB- due to the weakening operating trends across brands, coupled with Leonard Green’s investment, which Fitch treats as debt.

Signet also is reviewing its in-house credit operations after investors raised concerns that the company relies too heavily on the business for profit. Light said the company received feedback from interested banks and parties regarding its credit portfolio and plans to speed up its decision process.

“We’re just now dissecting some of the proposals we’re getting, so we’ll get Leonard Green up to speed,” Light said in an interview. “We want to be thoughtful, but we will need to get this done as quickly as we possibly can.”

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