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Online jeweler Blue Nile (NASDAQ:NILE) posted second-quarter earnings results this week that showed continued weakness in demand -- with hints of a coming rebound. Sales were flat following two straight quarters of declines, and profits fell by double digits.

Here's how the headline results stacked up against the prior year period:


Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)


$114 million

$114 million


Net Income

$2.1 million

$2.3 million






Source: Blue Nile's financial filings.

What happened this quarter?

Blue Nile's revenue figure just missed the low end of management's guidance. Its profits were lower than projected as well. Yet the company posted improving sales trends and affirmed its full-year outlook.

Key highlights of the quarter include:

  • U.S. engagement jewelry sales fell for the third straight quarter, slipping 4%. However, that marked Blue Nile's second consecutive improvement in the trend (sales were down 8% in Q4 and 7% last quarter). This result compares favorably to rivals. Tiffany (NYSE:TIF), for example, last posted a 10% drop in quarterly revenue in the U.S. market. 
  • U.S. non-engagement sales rose 6%, which also represents the second straight quarter of better results in the category.
  • International sales picked up to a 6% growth pace.
  • Gross profit ticked up to 20% of sales from 19% in the prior-year period.
  • Increased expenses pushed operating income down to $3.3 million from $3.4 million.
  • As a result, bottom-line profitability slipped to 1.8% of sales from 2%.
  • Cash outflow didn't improve from the prior-year period's $51 million burn.
  • Blue Nile ended the quarter with $37 million in cash, down slightly from last year's $40 million.

What management had to say

CEO Harvey Kanter told investors that NILE's profit underperformance was driven by executives' decision to ramp up spending on long-term growth initiatives. "Our results reflect a higher level of investment than we anticipated, and while this impacted short-term results, we believe it will create long-term scale and profitability," Kanter said in a press release.

The retailer's "webroom" investments, which are physical storeroom locations where customers can see and try on its products, represent a key target for increased spending. "Blue Nile continues to reimagine the retail experience by bridging the on and offline user experience through the Webroom concept, which will feature five locations by year end," Kanter said.

Looking forward

Blue Nile's updated forecast suggests the company could enjoy its first quarter of sales growth in a year in Q3. For the current quarter, management staked out $111 million of revenue at the high end of its range, equating to a potential 1% uptick over the prior year. And while Kanter and his team slightly undershot their growth target in the most recent quarter, the improving sales trends and steady gross profitability strongly suggest that demand is finally stabilizing.

Meanwhile, increased spending isn't threatening to knock the retailer off of its profit plans for the year. Executives still believe they'll produce around $0.90 per share of earnings, the same as NILE generated in 2015. Given the tough industry headwinds that it has endured, and the extra spending on a push into physical retailing, management would likely be happy to take that flat result this year.

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