Why Shares of Signet Jewelers Ltd. Plunged 13% Today

By Travis HoiumMarketsFool.com

What happened

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Shares of Kay Jeweler and Jared the Galleria of Jewelry owner Signet Jewelers Ltd. (NYSE: SIG) fell as much as 13.2% on Tuesday, after a scathing report of sexual harassment at the company hit news wires. At 3:50 p.m. EST, shares were still down 12.7% in trading.

So what

The Washington Post ran a story last night that highlights sexual-harassment allegations by 250 men and women at the Sterling Jewelers division, which includes Kay and Jared. The revelation stems from a case that's been in arbitration since 2008 and now includes 69,000 women who are current or former employees of the company. The company disputes the allegations, but that may not matter from an investment standpoint.

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What investors should be concerned about is whether this situation damages the Kay and Jared brands, and I think the easy answer is that it will. Buying jewelry and engagement rings is an expensive proposition, and the idea that you could be supporting a company with a problematic culture is going to be troubling for any buyer. Even if this news affects 5% or 10% of customers, the impact could be huge on the bottom line, given the operating and inventory costs that go into running a jewelry store.

Now what

This is the kind of report that would have me running for the hills from this stock. We don't know what the arbitration ruling will be or where any legal actions may lead, but the reputational damage could be immense. As I mentioned, this is a high-fixed-cost business, and a loss of even a small percentage of sales could be very damaging for the company in the long term. Given that we don't know the downside, this is a stock I would be fleeing from today.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.