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

Shady as it sounds, this isn't the latest Nigerian email scam -- it's the business model for Motley Fool Rule Breakers recommendation Blue Nile (NASDAQ:NILE). And yet, investors are treating the two as if they're one and the same.

Come to think of it, with Blue Nile stock down more than 50% over the past year, I suspect those email scams may be more popular than Blue Nile stock right now. Let's see if tomorrow's second-quarter earnings report can change that.

What analysts say:

  • Buy, sell, or waffle? Eighteen analysts take a loupe to Blue Nile, giving it two buy ratings, 13 holds, and three sells.
  • Revenues. On average, they're looking for 3% quarterly sales growth to $74.5 million.
  • Earnings. Profits are predicted to fall 26% to $0.17 per share.

What management says:
Three months ago, fellow Fool Rick Munarriz looked over Blue Nile's first-quarter report, compared its slowing sales growth to the double-digit increases at Bidz.com (NASDAQ:BIDZ), Amazon.com (NASDAQ:AMZN), and Overstock.com (NASDAQ:OSTK), and declared: "Blue Nile is starting to show its age."

And Blue Nile's management admitted as much, in a way. While attributing much of the company's troubles to "the weak consumer environment in the U.S.," and pointing out the "rapid growth" of its international business, CEO Diane Irvine also committed to "vigorously managing our costs."

What management does:
What was Irvine referring to? Presumably the growth in operating costs as a percentage of revenue. After multiple quarters of uninterrupted margin expansion, operating and net margins both took a turn for the worse last quarter. While the company's not down to Zale's (NYSE:ZLC) level of profitability yet, it's a far cry from Tiffany (NYSE:TIF).

Margins

12/06

4/07

7/07

9/07

12/07

3/08

Gross

20.2%

20.0%

20.2%

20.2%

20.4%

20.5%

Operating

6.6%

6.5%

6.7%

6.9%

7.0%

6.8%

Net

5.2%

5.2%

5.1%

5.3%

5.5%

5.2%

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:
Call me a relentless optimist, but I don't think the margins problem is a huge one just yet. And we're not talking about a terribly expensive stock. Blue Nile today looks pretty reasonably priced at just more than 24 times trailing free cash flow, with analysts projecting 21% long-term growth. It's not quite "cheap" just yet, but if earnings should happen to disappoint tomorrow because management needs a little more time to get its costs in order -- and investors conclude that this means no one's buying diamonds because we're all going into Recession for Eternity -- well, you just might get a chance to pick up some shares on the cheap.

Fools of a feather rarely flock together. Do the Fools at Motley Fool Rule Breakers believe you need to wait for a hissy fit from Mr. Market before buying, or would they tell you to pick up some shares right here, right now? Claim your free trial to the service and find out.

Related Foolishness:

Fool contributor Rich Smith does not own shares of any company named above. Blue Nile is a Rule Breakers selection. Amazon is a Stock Advisor pick. The Motley Fool has a disclosure policy.