Fool on Call: Blue Nile to Shine in Europe

Blue Nile's (Nasdaq: NILE  ) top-line growth was outstanding through the first half of fiscal 2007, with revenues up 30.1% compared to the same period a year ago. (For the quarterly numbers, read our earnings take.) Business is booming for the online jewelry retailer, that much we know, but can it fully capitalize on what is sure to be a busy holiday shopping season and the company's first in Europe?

One hurdle that younger retailers face is that it takes time to develop the capacity necessary to handle a high-volume sales environment like the holidays. In 2003, its first holiday season as a publicly traded enterprise, RedEnvelope (Nasdaq: REDE  ) , for example, didn't have an adequate inventory management system to properly manage customer traffic and buying patterns. Its shares suffered through much of 2004 as a result.

What steps has Blue Nile's management team taken to get ready for its first holiday season in Europe? To help us answer this question, we turn to Blue Nile's latest quarterly earnings conference call.

Bringing the bling to international markets
In his opening statement, CEO Mark Vadon asserts, "International growth will remain a priority for us going forward." To prepare for international opportunities that will come over the remainder of this fiscal year and beyond, Blue Nile has introduced some important initiatives.

One step was the opening of a new operation center in Ireland, which was unveiled in May. The new center enhances the company's ability to serve the U.K. market, as well as provide a "base of operations for expansion into the EU over the next several years," explains Vadon. However the focus on the immediate term lies in having the facility ready for the holiday season.

Another measure that Blue Nile has undertaken is broadening its jewelry offering. We learned in the question-and-answer session of the call that the U.K. and Canadian product offering isn't as deep as its U.S. counterpart. For that reason, shoppers in these regions have been "more focused on the engagement product line." A drawback of this is that engagement rings are less profitable than non-engagement jewelry.

So, one expectation is that margins from its international operation should improve over time as Blue Nile introduces more non-engagement items to the market. Just don't expect Blue Nile to diversify outside of jewelry anytime soon. During the Q&A, Vadon made it very clear that the company has no intentions "to take the brand beyond the jewelry category." He explains:

I think we feel the jewelry category is tremendously large; it's a $60 billion domestic market. And if we execute really well within that market, we'll be able to grow for a very long time. I think, when we look at the brand, we believe one of the mistakes a lot of retailers make is they expand too far. They expand their product lines too far and it dilutes the brand. I think we'd rather be really well known for being the best in the world at what we do rather than trying to put other luxury categories up there and gain a little more sales in the short term at the expense of the long-term value of the brand.

Focusing on being the best in the jewelry biz makes sense to me. My colleague Rick Aristotle Munarriz pointed out that there are other quasi-players in this market, ranging from high-end specialists like Tiffany (NYSE: TIF  ) and Birks & Mayors (AMEX: BMJ  ) to discounters like Wal-Mart (NYSE: WMT  ) and Overstock (Nasdaq: OSTK  ) . But so far, Blue Nile is ahead of the class ... way ahead. Why ruin what should remain a good thing for years to come? That seems to be the logic that Blue Nile's management team is employing.

As Blue Nile continues to expand its jewelry listings, it was also necessary to update its websites for the U.K. and Canada. Beyond displaying a deeper product listing, the new sites allow customers to purchase jewelry in local currencies. And once purchased, the items are insured and shipped for free via FedEx (NYSE: FDX  ) Priority International.

These efforts appear to be paying off already. According to Vadon, sales in the U.K. exploded in the second quarter, up 133% from a year ago.

High expectations
While sales accelerate overseas, Blue Nile hasn't lost sight of the importance of the domestic market. The newest additions to its domestic distribution center are expected to increase capacity to nearly $1 billion in sales. To put this in perspective, the e-tailer's total sales for 2006 were roughly $250 million.

Given the new capacity levels, it's clear that management has very high expectations. As the holiday season approaches, it will be exciting to see how these initiatives -- domestically and abroad -- pay off for the company and for shareholders.

Is more bling in store for Blue Nile? It sure looks like a dazzling holiday season is on the way.

Related Foolish bling:

Blue Nile has been recommended to Rule Breakers and Hidden Gems subscribers. Amazon is a Motley Fool Stock Advisor selection. Wal-Mart is anInside Value pick. Try any of these market-beating newsletters free for 30 days.

Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy that shines day and night.


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