For years, Signet Jewellers, the biggest jewellery retailer in the country, has been in the midst of a shocking 69,000 person class-action sex discrimination suit, which is going to trial this year.

The disturbing allegations, which management called a “purported parallel universe” on an earnings call with investors on Thursday, describe an environment in which women were treated like objects and male managers could expect sexual favours from subordinates in exchange for promotions.

And the emergence of these accusations, which date back to an arbitration claim from 2008, couldn’t be happening at a worse time for the company. Signet, which owns household names like Kay Jewellers and Zale’s, is in the most precarious position it’s been in since the financial crisis.

Some stats from Thursday’s earnings statement:

• Signet’s overall comps (sales in stores that have been open for a year plus) decreased 4.5%.
• Total Signet sales decreased 5.1%
• Total sales in the UK fell 19.5%
• Zales comps were down 5.2%
• In Canada, total sales declined 5.6% and comp sales were down 7.2%.

Horrible. And while the overall stock market has been ripping higher since the beginning of the year, Signet’s stock is down 25% in that same period (which, by the way, includes Valentine’s Day — a field day for jewellery retailers). The company said it
plans to close around 165 to 170 stores in 2017 and open 90 to 115 new stores.

On the call, management blamed just about everything under the sun for those dismal results — falling foot traffic in malls, its not-quite-yet-improved online presence, and “deeper jewellery promotional activity elsewhere.” The company said it “chose not to match and protected our margins instead.”

Management also dismissed the idea that it may have an image problem that goes beyond this harassment suit.

Last year a number of customers accused the company of swapping out diamonds that they had sent in for repair. A BuzzFeed story on the issue sent the stock roiling.

On the Thursday call, management said that “based on the company’s investigations, reports of systemic diamond swapping are categorically false.” It said that it had invested some money in additional security measures at their repair facilities.

However, allegations of diamond swapping have persisted. And then of course, there’s the hype Signet created over the most common diamond in the world, the “chocolate diamond” — or as it’s more commonly known among women the “if he buys it for me it’s over” diamond.

Stories like this can all be very suspect to Signet’s customer base, and can have a very real, lasting impact on sales. Analysts at RBC think that if Signet can stick to its guidance, the company could recover its earnings for 2017. Unfortunately, the company has made a habit of missing guidance for several quarters now.

Now, one of the reasons investors in Signet are holding on to the stock is to see what happens once the company sells its in-house credit facility. This is something the company has been promising to do for about a year, and RBC analysts were psyched that the company is still talking about it.

From the RBC note:

“Although SIG did not announce a decision on the potential sale of its credit book, we highlight that the company was more clear about its preference for sale versus keeping it and this was the first public call where it mentioned the sale would likely involve two partners (with an already identified primary partner).

“This gives us incremental confidence that we will likely hear about the sale in the near term. We continue to expect SIG could receive ~ $US1.5B for its gross receivables balance of $US1.9B, which it will primarily use to offset dilution from removal of credit ops. After paying down portion of debt & keeping some of the cash on BS, we believe SIG could buyback 8-10M shares at current stock price (approx equivalent to shares short).”

Maybe. Or it could be that the company’s purported tailwind is actually a headwind.

As Business Insider found out last year, there may be some issues with the credit facility.

Wall Street has said it’s loaded with subprime customers whose payments have been made to look more consistent through the controversial accounting method Signet uses, called recency. The US Federal Reserve discourages the use of this method for banking of any kind, according to Bloomberg. Signet says that it will change its method once it sells its credit book, but has assured investors that changing its method won’t impact sales.

To put it most simply, recency makes payments look more current and whole than they are, which means it makes credit books look more whole and current than they are. As long as the customer makes a “qualifying payment” by its due date, that customer is considered current. That payment has to be at least 75% of the amount due and be paid on time, according to a company presentation from earlier this year.

So if you owe $US1,000 and pay only $US750, that is marked as a “qualifying payment” and you are good to go, for the first 60 days. A full scheduled payment is demanded 60 to 90 days after purchase. After that, the customer must start making payments on money past due, according to the company.

This is why short sellers have been circling around the company for some time now, as RBC noted. The shorts don’t think Signet will get 100 cents on the dollar for its credit book, if they sell it at all.

“Their earnings per share has been artificially high,” said Marc Cohodes, a vocal Signet short and retired hedge fund manager, referring to the company’s $US7 earnings per share estimates. “The dog has caught the bus on their credit book. If they get rid of it, I don’t think that number’s going to be north of $US5.”

If the shorts are right, getting rid of the credit book could mean plummeting sales for the company since fewer buyers would be considered creditworthy, although the company denied this on Thursday’s call. The company could also get hit with accounting impairments that haven’t been run through its books yet.

Todd Spitzer, Signet’s chairman, provided an “update” on the sale on Thursday’s call in which he simply said that selling the credit book was difficult because of the complexity of the sale. No real update. Analysts on the call did not seem impressed.

As for the harassment suit, management pointed on the call out that “43 — read that — 43 of the class members, or about 0.06% of the class, allege they experienced any form of sexual harassment.” They also pointed out that they hired many women over the years. The defence came on a management call with only male executives.

These are not the answers anyone is looking for.

This is an opinion column. The thoughts expressed are those of the author.

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