The worst day for mall diamonds in 25 years

Most diamonds in the world are cut here
Most diamonds in the world are cut here

Kay, Jared and Zales' diamonds are losing their sparkle.

Sales fell at the three mall-based affordable jewelers. Parent company Signet warned that profit heading into next year will be light.

Hurricanes and weak sales on engagement and wedding rings led to a "challenging" quarter, CEO Virginia Drosos said on Tuesday.

Revenue fell $30 million during the quarter ending in late October, pushed lower by a 7% decline at Kay.

A customer service mishap contributed to Kay's slowdown. Kay was in the middle of overhauling its store credit program, and disruptions with the switch caused some customers to cancel rewards plans.

Kay has more than 1,200 stores across the country and makes up about a third of Signet's total revenue, estimated Citi senior analyst Paul Lejuez.

The sluggish report alarmed investors: Signet's (SIG) stock plunged 30% on Tuesday. It was the worst day for the stock in 25 years. Shares have now dropped 44% this year.

Signet holds a 13% market share on a $43 billion affordable jewelry industry, more than double its nearest rival, according to Cowen retail analyst Oliver Chen.

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But lagging mall traffic is squeezing stores, said Lejuez.

The lower-cost jewelry business is a race to the bottom, driven by struggling retailers dropping their prices to stay competitive.

Department chains such as Target, JCPenney, Nordstrom and Macy's offer jewelry selections. JCPenney noted last week that jewelry sales were up on the quarter and expects the uptick to continue during the holidays.

Mom-and-pop stores are also challenging Signet, said Lejuez. Local stores are often promotion-driven or can offer reductions because they're liquidating.

Amazon (AMZN) and Walmart's (WMT) online jewelry collection are also taking a bite out of Signet sales.

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Signet clearly recognizes the dwindling power of its mall brands. The company announced it would shed 125 stores in 2018, primarily at malls.

In addition to shutting down underperforming stores, Signet also bought R2Net, the owner of online wedding ring site James Allen, for $328 million in August.

James Allen immediately gave Signet a boost: The company's overall digital sales spiked 56% during the quarter.

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