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Is Blue Nile Losing Its Luster?

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Blue Nile (Nasdaq: NILE  ) , the largest online diamond and jewelry retailer, reported fourth-quarter results last night that did little to impress shareholders. The company reported a quarterly profit of $0.41 on revenue of $114.8 million, versus consensus estimates of $0.43 on revenue of $110.6 million. Even more disturbingly, first-quarter guidance fell well short of expectations, with Blue Nile forecasting earnings of $0.14 to $0.16 on revenue of $76 million to $78.5 million, compared to consensus expectations of $0.20 on revenue of $79.7 million.

Blue Nile was uncharacteristically quiet about the reasons for its lower-than-expected forecast, but it did predict a vague double-digit increase in revenue and EPS in 2011. Although Blue Nile didn't divulge the reasons behind this apparent slowdown, I have three ideas why the company may be losing its luster.

Rising diamond prices
Blue Nile appeals to consumers because it lets them surf through a vast list of high-end, laboratory-graded diamonds from the convenience of their homes. For investors, Blue Nile's competitive advantage lies in the millions of dollars it need not tie up in idle inventory. Its constantly updated diamond vendor lists allow Blue Nile to purchase diamonds only when needed, which typically translates into lower-priced diamonds than those offered in brick-and-mortar stores.

On the other hand, that lower overhead might have created a false sense of security. Diamond prices are on the rise again, and with Blue Nile's low to mid single-digit margins, the company could be pricing its diamonds too cheaply for current market conditions.

The company also sells a wide swath of gold and platinum engagement rings alongside its diamond selection. In the past year, both gold and platinum spot prices have risen by double-digit percentages. Couple this rise with Blue Nile's razor-thin margins, and it's possible that the company's margins are getting squeezed even further.

Rising expenses
Blue Nile did state that fourth-quarter expenses rose by $2 million year over year, mostly because of increased ad spending. That's particularly interesting because brick-and-mortar competitors Zale (NYSE: ZLC  ) and Signet (NYSE: SIG  ) have both closed a sizable amount of stores over the past two years, yet their same-store sales have risen strongly in the most recent quarter.

In other words, Blue Nile is competing against fewer stores, yet still struggling to maintain its growth rate. Zale and Signet are both discount retailers, so it's possible that consumers are taking a more cost-conscious route when purchasing diamonds. Then again, Tiffany's (NYSE: TIF  ) quarterly report showed strength in high-end consumer buying, with an 10% same-store sales increase. Discount retailers are strengthening, as are high-end retailers, but it appears that Blue Nile's ad spending isn't doing the trick.

At 49 times forward earnings, with a cloudy margin picture, I'm going to have to say no to Blue Nile at these levels.

What's your take? Does Blue Nile just need a good steam cleaning or is there a big flaw analysts are missing? Tell us in the comments section below!

Fool contributor Sean Williams does not own shares in any companies mentioned in this article, but admits his bias, considering he is involved in the jewelry industry. You can follow him on CAPS under the screen name TMFUltraLong. Blue Nile is a Motley Fool Rule Breakers choice. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy which glitters like gold.

Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 12, 2011, at 6:51 AM, TruffelPig wrote:

    Analysis ok but it gives no reason of why Blue Nile is doing bad in comparison with the competitors. It can not be consumer spending because that is up. It can not be the diamond price because competitors would feel that badly too. The underlaying causes for the small profit margins must be somewhere in the design of the company.

    How about the following as a hypothesis - like when you buy a suite it might be important to really try on jewelry in a store. If that is correct Zales and cohorts will have an edge over the internet stores.

    Regardless, I won't consider stocks in this company because of the growths numbers.

  • Report this Comment On February 12, 2011, at 8:21 AM, Strawsinthewind wrote:

    Blue Nile is a company running scared of its customer base. They refuse to say where their so-called conflict free diamonds are cut & polished and increasing numbers of their customers want to know if they are funding war crimes in Gaza. See here: - Queries about the provenance of conflict free diamonds leads to censorship by world's leading online diamond retailer.

  • Report this Comment On February 13, 2011, at 5:30 PM, thisworks wrote:

    Agreeing with the comment above. Blue Nile's lack of transparency and censorship of consumers questions relating to whether their "conlict free" diamonds do not include Israeli processed diamonds is worrying to say the least.

  • Report this Comment On February 14, 2011, at 4:58 AM, Maurenmour wrote:

    Zales, Signet and Tiffany are all showing approx 10% SSS growth, all are effected by raw material price increases. But Blue Nile are also getting around 10% SSS growth...what they arent getting is performance in excess of their Brick and Mortar competition, and its that growth rate that persumably in the past has justified their massive P/E.

    As mentioned above, critical consideration on diamond buying is seeing the product and talking to someone about its origins....thats going to eat into any online price competitive advantage.

    But key could be the article comment on how BN source their product on an as and when needed basis - no economies of scale available there !! Their competitors can get much better access to prices due to scale, and can with prices going upwards with hedging practices in place can defer/mitigate price increases which BN will have a harder time of.

  • Report this Comment On February 17, 2011, at 1:14 PM, MoniqueBuckner wrote:

    Blue Nile has been deleting questions by customers on its Facebook page about where its diamonds are cut and polished. If any of Blue Nile's diamonds have been processed in Israel, these most certainly fund a conflict- a brutal military occupation by Israel of Palestinian territory. Blue Nile claims to be ethically-sourced and 'conflict-free' but refuses to provide the proof. People have been blocked from commenting; posts have mysteriously been censored and no answers have been given as to why Blue Nile is using these devious tactics. I'm not surprised customers are voting with their feet. Personally, I would rather buy from a company that answers my questions and proves to me that what they claim is true. Blue Nile, on the other hand, do not know how to treat people and are not being forthright. I would advise people not to shop with them because they have something to hide.

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