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Blue Nile Recovering

Posted on Monday, Jun 15th 2009

After having had a depressing run in the past quarters, Blue Nile (NASDAQ:NILE), a leading jewelry retailer with annual revenue of $295.3 million, seems to be back on track. While economic conditions have not improved drastically, the company’s performance is definitely upbeat.

Q1 revenues of $62.4 million fell 11% over the year with EPS of $0.13 compared to $0.16 earned a year ago. The market was expecting revenues of $58.3 million with EPS of $0.10 for the quarter. Though the company refused to give any guidance for the coming quarters, they expect to regain their year-on-year growth trend by Q4 of the fiscal 2009.

Domestic sales fell 12.1% over the year while international sales fell 3.4% to $5.6 million due to the strengthening of the US dollar. On a constant currency basis, international sales registered growth of 19% over the year, and the company saw enough traction in the newer markets in Europe and Asia-Pacific. Blue Nile already ships to nearly 40 markets worldwide and sees tremendous growth opportunities in international markets.

Overall orders fell 13% over the year while the average order value grew 1.5% to $1,662. The performance of their engagement rings and wedding bands category was relatively better than the overall sales average and represented a larger portion of overall sales mix compared to the previous year. Sales of the non-engagement jewelry have been more impacted by cutbacks in discretionary spending. For similar reasons, the high-end engagement and jewelry sales at price points above $25,000 were the most affected and had greater year-over-year declines compared to their overall sales. Hopefully Blue Nile will not see the current trend as a justification not to diversify into the non-engagement category. Once the economy reverses, this trend is sure to do the same.

Their focus on controlling inventory helped reduce inventory levels by 17% over the year. They are continuing to improve their sourcing methods with suppliers and are able to maintain flexibility in inventory management while ensuring that their product assortment and selection remain strong. Given that diamond prices have fallen nearly 5-10% in the quarter compared to a year ago, and because Blue Nile purchases diamonds on a just-in-time basis, they are able to pass on these savings to consumers in the form of lower prices. Since the industry is consolidating, this relatively low fixed cost, low inventory model of Blue Nile is sure to get more results.

Enhancing overall customer experience was one of their major initiatives for the year. Later this year, they will launch a redesigned website with enhanced branding and innovative functionality in important areas such as the Diamond Search and the Build Your Own Ring process. Their new website will include enhanced product visualization, as well as additional customer features. While they did not give further details on the “additional customer features”, I am hoping personalization improvement is one of them.

The stock has risen significantly in the quarter and hit a 52-week high of $45.13; it is currently trading around $43 with market capitalization around $630 million.

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