Investors went wild over Blue Nile (NASDAQ:NILE) Wednesday following the online diamond purveyor's first-quarter earnings release. After Blue Nile's admission last quarter that online marketing expenses were proving too costly to justify, this quarter's results give us more information to chew on. At the moment, it appears that Blue Nile is on an aggressive campaign to continue to grow its business while keeping profitability intact for shareholders.
First-quarter earnings declined to $2.4 million, or $0.13 per share (which includes stock-based compensation expenses under new accounting rules), although Blue Nile still beat analysts' expectations by a penny. Backing out those expenses, its net income came in at $2.9 million, or $0.16 per share. Net sales increased by 14.9% to $50.7 million, with total orders up 12.1% and the average selling price per order increasing to $1,483 from $1,415.
Although gross profit increased 7%, gross margin declined to 20.5% from 22% because of Blue Nile's decision to lower the price of diamonds as well as the higher cost for precious metals. However, the cost-cutting strategy takes us back to last quarter, when the company described the expensive environment for online advertising, as pricing for search-related keywords increased (think Google (NASDAQ:GOOG)). (In Tuesday's conference call, Blue Nile co-founder and CEO Mark Vadon made the point that "every time you see Google's numbers coming up, somebody is paying for it and it tends to be the retailers.")
Blue Nile revealed that it's experimenting with aggressively lower pricing on diamonds, which it sees as a more profitable way to gain customers at the moment than too much marketing spending. As much as lower margins might give some investors pause (although not at the moment, judging by the stock's surge), Vadon described the experiment as dynamic, with "fine-tuning" on a weekly basis and "trying to real-time maximize the profit" the company can generate through that strategy.
Vadon further described what struck me as a take-no-prisoners attitude toward the competition, saying that aggressive pricing should help prevent other rivals from entering the market as well as make it more difficult for them to compete over the course of time. Flash back to David Gardner's interview with Vadon in March and you will discover that Vadon considers major competitors to be Tiffany (NYSE:TIF) as well as smaller local players that vie for the high-end diamond customer. (Both David and his brother Tom have particular interest in Blue Nile because they recommended it in Motley Fool Rule Breakers and Motley Fool Hidden Gems, respectively.)
Despite Blue Nile's experimental phase, there are plenty of things to like about this online retailer (not the least of which are its sizable cash cushion, its lack of long-term debt, and its longstanding vow to return cash to shareholders through share buybacks). Back in March, I nominated Blue Nile as "Best Small Cap" because of its focus on shareholder value and its long-term business, and it doesn't seem like anything has changed in that regard.
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Alyce Lomax does not own shares of any of the companies mentioned.
