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Here's why jewelry stocks have lost their luster

·Nicole Goodkind

So far, 2016 hasn’t had a lot of sparkle for jewelry companies. Tiffany & Co (TIF) is down 15.21% year-to-date, Signet Jewelers (SIG), which owns Kay Jewelers, Zales, and Jared, is down more than 22%, and online jewelry retailer Blue Nile (NILE) is down 30%.

The consumer discretionary sector (XLY) is down around 4.5% for the year, significantly less than jewelry companies. So, what gives?

“You don’t have to be a rocket scientist to see that any company that appeals to the aspirational middle class is in trouble,” says Howard Davidowitz, chairman of Davidowitz & Associates, a national retail and consulting investment firm headquartered in New York City.

As of late 2015, the middle class no longer makes up a majority in the United States—making up just under half of the population and holding just 43% of U.S. income, according to Pew Research Center. Poverty has also grown significantly. About 45.3 million people in the U.S. earn an annual salary of less than $11,892 for individuals and $23,836 for a family of four. That’s more than 8 million people since 2008.

Malls have long been the mecca of middle class shoppers, but large national retail chains like Macy’s (M) and Nordstrom (JWN) are closing traditional stores and shifting their focus to budget outlets. These changes are helping department store bottom lines, but they’re hurting already ailing malls as they lose their anchor stores.

Sears (SHLD) has closed 152 mall stores since 2007, and JC Penney (JCP) closed 40 mall locations in 2015. In 2000, there were 20 different department store brands anchoring malls, today there are eight. All of this adds up to tough times for mall specialty stores—and that includes jewelers.

Pandora Jewelry (PNDORA.CO) is well aware of these problems. The retailer plans to open 250 new stores globally in 2016, but it is tempering its mall strategy. “We take a quality-over-quantity approach to the malls we select,” says Scott Burger, president of the Americas at Pandora. “So we typically only open stores in ‘A’ and ‘B+’ malls.”  While the average mall is losing traffic, high-end luxury malls are actually at pre-2008 occupancy levels.

The company is also looking at mall alternatives. They’ve started opening stores in high-end shopping districts internationally and are looking at popular urban areas within the U.S. in order to target younger populations.

According to Davidowitz, jewelers need to focus on closing mall stores and reallocating resources to online sales and urban stores if they want to succeed. But he doesn’t see a turnaround anytime soon. “Ultimately a lot of these companies are going to go broke,” he says.  “If you’re in a mall, and you’re appealing to the middle class you’ve got a huge problem.”