Blue Nile was uncharacteristically quiet about the reasons for its lower-than-expected forecast, but it did predict a vague double-digit increase in revenue and EPS in 2011. Although Blue Nile didn't divulge the reasons behind this apparent slowdown, I have three ideas why the company may be losing its luster.
Rising diamond prices
Blue Nile appeals to consumers because it lets them surf through a vast list of high-end, laboratory-graded diamonds from the convenience of their homes. For investors, Blue Nile's competitive advantage lies in the millions of dollars it need not tie up in idle inventory. Its constantly updated diamond vendor lists allow Blue Nile to purchase diamonds only when needed, which typically translates into lower-priced diamonds than those offered in brick-and-mortar stores.
On the other hand, that lower overhead might have created a false sense of security. Diamond prices are on the rise again, and with Blue Nile's low to mid single-digit margins, the company could be pricing its diamonds too cheaply for current market conditions.
The company also sells a wide swath of gold and platinum engagement rings alongside its diamond selection. In the past year, both gold and platinum spot prices have risen by double-digit percentages. Couple this rise with Blue Nile's razor-thin margins, and it's possible that the company's margins are getting squeezed even further.
Blue Nile did state that fourth-quarter expenses rose by $2 million year over year, mostly because of increased ad spending. That's particularly interesting because brick-and-mortar competitors Zale
In other words, Blue Nile is competing against fewer stores, yet still struggling to maintain its growth rate. Zale and Signet are both discount retailers, so it's possible that consumers are taking a more cost-conscious route when purchasing diamonds. Then again, Tiffany's
At 49 times forward earnings, with a cloudy margin picture, I'm going to have to say no to Blue Nile at these levels.
What's your take? Does Blue Nile just need a good steam cleaning or is there a big flaw analysts are missing? Tell us in the comments section below!
Fool contributor Sean Williams does not own shares in any companies mentioned in this article, but admits his bias, considering he is involved in the jewelry industry. You can follow him on CAPS under the screen name TMFUltraLong. Blue Nile is a Motley Fool Rule Breakers choice. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy which glitters like gold.