By Michelle Graff
Signet Jewelers saw same-store sales drop 2 percent in the second quarter but the company’s CEO said he was “not sure” how much the allegations of systematic, widespread “stone swapping” at Kay Jewelers stores played into the decline.
Akron, Ohio--Sales surprisingly fell short for Signet Jewelers Ltd. in the second quarter, due principally to weakness in states where the economy is tied to the energy industry, its CEO said Thursday.

Signet’s same-store sales fell 2 percent year-over-year in the quarter ended July 30. Total sales reached $1.37 billion, down 3 percent (1 percent at constant exchange rates) from $1.41 billion a year ago.

It was the company’s first quarterly decline in same-store sales since the third quarter 2009 and caught analysts by surprise.

Net income for the company, which operates Kay Jewelers, Jared the Galleria of Jewelry, Zales and Piercing Pagoda, increased from $62.2 million to $81.9 million.

On the company’s earnings call Thursday morning, CEO Mark Light called the results “disappointing” and attributed the dip to sales weakness in states such as Texas, Louisiana and Oklahoma and, in Canada, Alberta, as well as “fundamental issues” in merchandising and advertising that persist at Jared.

He also mentioned the “unique” presidential election, which is impacting the mindset of the middle America consumer. “Once we get through the elections, hopefully we’ll see some stability and we’ll recover like we have … in the past years,” he said.

When asked if the company’s “reputational issues” that arose in the second quarter--the allegations of systematic diamond “swapping” at Kay Jewelers’ stores--impacted sales, Light said he was not sure.

But, he noted, surveys show that the Kay brand is still very well perceived among consumers and the Kay chain actually outperformed the rest of Signet’s stores.

Same-stores sales at Kay in the second quarter slipped 0.5 percent, compared with an 8 percent decline at Jared and a 2 percent drop in the company’s Zale division, which includes Zales stores in the United States and Canada as well as Piercing Pagoda.

Signet’s top performer was Piercing Pagoda, which recorded a 6 percent increase in same-store sales.

Product-wise, Ever Us continues to be a strong seller for the company, and Light said they are testing line extensions ahead of the holiday season.

The company also will be expanding its popular Vera Wang Love bridal line into fashion jewelry in nearly all Zales stores and is rolling out the Chosen Diamond program to all Jared stores. The Chosen Diamond is not unlike De Beers’ Forevermark brand in that the marketing pitch is that the diamond’s journey from mine to market is traceable.

Also on Thursday, Signet announced that private equity firm Leonard Green & Partners is investing $625 million in the company in the form of convertible preferred shares, a move Signet made to support its stock, which has slid this year.

Signet will use the money to buy back shares and, as part of the deal, will add Leonard Green’s Jonathan Sokoloff to its board when the transaction closes, which is expected to occur in the third quarter.

The company also is in the process of reviewing its much-maligned credit portfolio.

Signet Jewelers has cut its outlook for the year, now forecasting a 1 to 2 percent decrease in same-store sales.

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