Is A PR Disaster Afoot For Signet?

| About: Signet Jewelers (SIG)

Summary

Reports surfaced yesterday that Kay Jewelers is again being accused of swapping diamonds for cubic zirconia.

This is the second such allegation made over the course of the last year.

The company's response was inadequate and frankly comical.

Could a PR perfect storm be brewing for SIG?

By Parke Shall

Brand new diamond swapping allegations at Kay Jewelers likely won't bode well for Signet (NYSE:SIG) heading into the holiday season.

SIG has had its fair share of controversy over the last year. The company has been routinely challenged, most recently by Grant's Interest Rate Observer, about the quality of its credit book. Short sellers and skeptics have been piling onto the company using social media and calling into the question the credit that the company has issued to its customers.

Seeking Alpha laid out these concerns back in June of this year:

  • A contributing factor in the weakness is a report swirling around accusing employees at Kay of swapping out diamonds. A Facebook page that is stockpiling customer complaints is drawing some notice.
  • Also in the mix, Grant's took aim at Signet by calling the retailer the next Lumber Liquidators (NYSE:LL) in its latest issue. The publication is pointing at some bankruptcy data on top of the diamond-swapping issue.

All the while, SIG has had trouble meeting Wall Street estimates and has started falling. Here is a look and how the stock has performed over the last year.

Click to enlarge

Criticisms escalated in May of this year when a report came out alleging that certain Kay Jewelers were swapping out diamonds that customers were bringing in for cleaning or for maintenance:

Diamonds are supposed to be forever, unless, as some consumers are alleging, you shop at Kay Jewelers.

Some customers are claiming that after they took their diamond jewelry to Kay Jewelers, the rare stones were mysteriously replaced with cheap imitations. Kay said that it is "actively reviewing this issue." Shares of Signet Jewelers (SIG), Kay's parent company, fell as much as 11 percent on Thursday, although the share plunge came after the company's earnings fell short of analysts' estimates.

The report accused the company of replacing diamonds with much cheaper cubic zirconia and then returning the latter to customers. This would be horrible business practice if it were only just a couple of people doing it. If it was found to be widespread at the company and could somehow be proven as a practice that was encouraged by leaders of the company, it could be absolutely devastating for SIG. You could draw a straight line from those practices to the collapse of the business.

Our concern has peaked again recently as reports on social media yesterday started to surface about another group of customers in an entirely different geographic location making the same allegations against Kay Jewelers. A local Florida ABC affiliate reported a story of similar circumstances for local customers:

Sophie picked up her new rings at the Houston Galleria store a few weeks later. It wasn't until six months later when she dropped into another Kay Jewelers to have the rings cleaned and inspected - as required by the warranty - that she was alerted to a huge problem by a store employee.

"She asked me, 'Do you know about your center stone?'" Sophie recalled for Davis. "I kind of looked at her like, 'What about it?' And she said, 'Well, it's fake.'"

This now makes a second relatively legitimate looking report about a SIG company swapping out diamonds. With each new report in each different geographic location reported by each different source, it seems less and less likely that these are potentially made-up stories or disgruntled employees, and more likely that SIG may have a company-wide issue that it needs to address. For certain, there would be benefits to swapping out these diamonds for the individual employees, so it is not out of the question that employees have taken it upon themselves to do this. However, as the list of stores involved grows, it becomes more and more interesting to look at on a larger company-wide scale.

Whatever the cause of the issue, SIG needs to get it under control immediately. The statement that was provided to ABC news yesterday by the company was nothing short of ridiculous. The company stated:

Kay Jewelers spokesman Frank Cirillo didn't answer Davis' questions about how the customer's diamonds were swapped, but he sent this statement: "Delivering an exceptional customer experience is our number one priority and we regret any instance where a customer is less than completely satisfied. To help ensure that we deliver that exceptional experience, we maintain rigorous product and service quality procedures that are consistently monitored and refreshed. Greater than 99% of our service and repair transactions are completed without inquiry to our customer service centers each year. Nevertheless, we take every customer concern seriously and work hard to ensure that when issues do arise, we do everything we can to make things right. That is what we have sought to do with these customers. We are humbled by the trust our customers have placed in us for more than one hundred years and work hard every day to continue to be worthy of that trust."

We don't know who runs public relations for the company, but the statement they should have made should have addressed the problem head-on and stated that they are working with all parties involved in each individual matter to try and pinpoint the cause of all of these issues and assign accountability, while at the same time immediately rectifying the situation for the customer.

That is what you say in a situation like this, you don't come out with some overly vague statement talking about customer service and hope that it flies. To customers, it probably just reads like ignorance from the company. To us, as investors, it reads like the company is trying to avoid talking about the issue. It isn't quite an enormous red flag, but it certainly doesn't give us any comfort.

If we haven't learned anything from the Chipotle (NYSE:CMG) E. coli scandal, we have learned that news travels extraordinarily quickly, and once it is picked up on a national scale, it could have a devastating effect not only to a business, but also to investors in the company.

SIG public relations needs to address this issue with management directly, head on with both the market and with the company's customer base. Should the story get picked up by the national media or should a third set of accounts similar to this one arise, the damage to SIG brands may be irreversible. With the quality of the company's credit book in question and a potential looming PR disaster, not to mention potential fraud, hanging in the wings, we would not want to be investors in SIG at this point. We are currently short SIG.

Disclosure: I am/we are short SIG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.