Psst! Wanna buy some diamonds, cheap, over the Internet?

Shady as it sounds, this isn't the latest Nigerian e-mail scam -- it's the business model for Motley Fool Rule Breakers recommendation Blue Nile (Nasdaq: NILE). The company reports its fourth-quarter and full-year 2007 numbers just the other side of this weekend. Tuesday afternoon, to be precise.

What analysts say:

  • Buy, sell, or waffle? Thirteen analysts take a loupe to Blue Nile, giving it two buy ratings, 11 holds, and no sells.
  • Revenues. On average, they're looking for 25% quarterly sales growth to $113.3 million.
  • Earnings. Profits should pace sales growth at 26%, or $0.44 per share.

What management says:
As fellow Fool Rick Munarriz relayed last month, Blue Nile threw us a curveball in January. In an effort to allay the fears of investors who had already heard bad news out of Tiffany (NYSE: TIF) and Zale (NYSE: ZLC) (comps down 2% and 9%, respectively), Blue Nile released its own sales figures for the then-just-completed holiday season ahead of schedule. Of course, it didn't hurt that Blue Nile's news was actually good -- sales were up a healthy 24% year over year.

What management does:
Sales are nice, but what investors really want to see is profit -- so how's Blue Nile doing on that score? Judging from the table below, not half bad. Gross margins remain higher than 20%, rolling operating margins have risen for two quarters straight, and even the net bounced back last quarter.

Relative to other e-commerce stars, Blue Nile scores fatter operating margins than everything-including-the-kitchen-sink e-tailer Amazon.com (Nasdaq: AMZN), while also inexplicably lagging me-too operator Bidz.com (Nasdaq: BIDZ) in the margin department. (Of course, none of those companies score better operating margins than uber-auctioneer eBay (Nasdaq: EBAY), which competes in both the jewelry and kitchen-sink spaces.)

Margins

7/06

10/06

12/06

4/07

7/07

9/07

Gross

21.1%

20.6%

20.2%

20.0%

20.2%

20.2%

Operating

7.6%

6.8%

6.6%

6.5%

6.7%

6.9%

Net

5.9%

5.4%

5.2%

5.2%

5.1%

5.3%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Let no one say I'm not consistent. Against all the evidence and all the arguments to date, I remain convinced that Blue Nile's margins are going to take a fall next week. While analysts like Citigroup, which predicted a bumper crop of sales for Blue Nile late last year, have clearly been proven right, I can't help but think a key factor has been overlooked in how Blue Nile secured those sales.

As I wrote in "This Just In" back in December, Blue Nile was offering 20% discounts on any items up to $500 in value, paid for through eBay's PayPal service. That offer later switched over to the equivalent of a 50% discount on merchandise sold for $100 (or $50 off on pricier wares). Both offers were tailor-made to bump up sales at Blue Nile, and appear to have succeeded in spades. What remains to be seen, and what we'll focus on next week, is the question: "At what cost?"

Fools of a feather rarely flock together. Rich's skepticism notwithstanding, Blue Nile remains an active recommendation at Motley Fool Rule Breakers, where we've picked it twice, netting our subscribers 44% and 74% gains. Find out if we'd pick it again given the chance, when you take a free trial of the service.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.