Image source: Blue Nile.
In conjunction with its third-quarter earnings report on Monday, online jeweler Blue Nile (NILE +0.00%) surprised investors by announcing its intention to go private. The news that Blue Nile has entered into a definitive agreement to be acquired by an investor group comprised of funds managed by Bain Capital Private Equity and Bow Street LLC for roughly $500 million came as the retailer posted weaker sales results and declining profitability. Blue Nile stockholders will receive $40.75 in cash per share, representing a premium of roughly 34% over Blue Nile's closing price on Friday, according to the company.
Focusing first on the earnings report, here's how the headline results stacked up against the prior-year period:
|
Metric |
Q3 2016 Actuals |
Q3 2015 Actuals |
Growth (YOY) |
|---|---|---|---|
|
Revenue |
$105 million |
$110 million |
(5%) |
|
Net income |
$1.3 million |
$2 million |
(35%) |
|
Earnings per share |
$0.11 |
$0.17 |
(35%) |
YOY = Year over year. Data source: Blue Nile's financial filings.
What happened this quarter?
For the second straight quarter, Blue Nile's revenue figure missed the low end of management's guidance. The jeweler's profits just barely met expectations, though.
Key highlights of the quarter include:
- U.S. engagement jewelry sales fell for the fourth straight quarter, and the decline accelerated to a 9% pace from 4% in the prior quarter.
- U.S. non-engagement sales ticked up by 1%, marking a slowdown as well.
- International sales rose by 4% after accounting for foreign-currency swings.
- Gross profit edged up to 20% of sales from 19%.
- Higher expenses ate into the bottom line to push operating margin down to 2% from 3% last year.
- Operating cash flow improved to $19 million over the past 12 months, compared with $15 million in the prior-year period.
What management had to say
Blue Nile executives didn't comment on the third-quarter results and canceled their quarterly conference call due to the acquisition news. In a separate press release, CEO Harvey Kanter and his team explained the rationale for deciding to exit the public markets at a roughly 34% premium over the most recent closing price.
"The terms of the all-cash deal provide substantial value to Blue Nile's stockholders," the press release said. Kanter was quoted as expressing optimism that all parties will come out ahead from this agreement: "Since its inception, Blue Nile's guiding principle has been to provide value to its customers, suppliers, and shareholders, and this transaction provides tremendous value to all. Blue Nile will continue its innovative drive that has disrupted the diamond industry and made us the smartest, easiest, and most pressure-free way for consumers to buy a diamond."
Ryan Cotton, a managing director at Bain Capital Private Equity, was quoted as saying: "This is an opportunity to acquire a true disruptor in a fundamentally attractive and growing segment of the diamond industry."
Looking forward
Despite its prime market position, worsening results suggest the retailer would have trouble hitting its goal of maintaining revenue in 2016. Yet by going private, the company removes much of the pressure to achieve a fast rebound and gives Kanter and his team flexibility to nurse long-term initiatives like its network of physical retailing locations.
The buyout terms include a 30-day period during which Blue Nile can solicit competing acquisition bids. If this time passes without another bidder stepping forward, shareholders can expect their stock holdings to convert to cash at $40.75 per share sometime in the first quarter of 2017.
