As the world's biggest online diamond retailer, Blue Nile
Despite its inherent strengths, Blue Nile lost its sparkle in recent quarters. Last week, the stock was hammered after the e-tailer unveiled disappointing earnings for its fourth quarter. Net income fell 32% from a year ago, with earnings of $0.30 a share for the period. Analysts had expected $0.42 a share. Sales were hurt by increased marketing costs and weakened demand for engagement diamonds. As a result, the stock took a beating. However, shares still trade at a rich 43 times this year's earnings.
An indecent proposal
As an investor, you hope that negative results spur positive action. Unfortunately, Blue Nile's new plan could be destined for disaster. Blue Nile will further reduce prices in an effort to grow sales. This mimics the desperation of Aeropostale
Blue Nile hopes that by offering lower prices it will increase its customer base. Still, I'm not sure this would matter much because most of Nile's engagement shoppers are one-time customers. Blue Nile creates a positive experience for its customers by educating them on a diamond's quality characteristics and encouraging customers to build custom engagement rings. But the problem with the bridal business is that you don't get the repeat business that you would as a jeweler like Tiffany
In the past year, Blue Nile has lost nearly half of its value. The company's prices are already among the lowest. Compared with other online diamond retailers such as James Allen and Diamonds.com, a one-carat diamond with similar color, clarity, and cut will cost you $12,790 from James Allen, $6,115 from Diamonds, and just $5,865 from Blue Nile. Slashing prices further will hurt already low margins, which I believe will stall growth in the long run.
Take a stand
I love the convenience of online shopping, and I believe in Blue Nile's business model. But I'm concerned about management's new pricing strategy coupled with its commitment to boost ad spending. For these reasons, I'm giving the stock an underperform rating in my CAPS portfolio in Motley Fool CAPS. As an investor, I encourage you to track these stocks by adding them to your watchlist. In case you're not familiar, My Watchlist is a free tool that lets you track and monitor your favorite stocks. Sign up for the free service now and you will also receive a special free report from The Motley Fool's top analysts -- click here to get started.