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Blue Nile Vs. The Nouveau Riche

Posted on Friday, Dec 9th 2011

Diamond prices have been on the rise during the year. In the first half of 2011, prices rose 40% owing to high demand in the Chinese and Indian markets. Since then, prices have fallen by up to 20% in a six-week period through September. However, the December 2011 Diamond Prices Index of 232.7 was still nearly 9% higher than previous year’s 213.7. The increasing prices are hurting online jeweler, Blue Nile. (Nasdaq:NILE)

Blue Nile’s Financials
Blue Nile’s Q3 revenues of $75 million grew 11% over the previous year. EPS for the quarter came in at $0.13. The market was expecting revenues of $72.6 million with EPS of $0.18.

With Blue Nile’s sites now present in 40 countries, international sales reported growth of 54.8% and reached their highest ever levels of $14.4 million. Excluding the foreign exchange impact, international revenues would have grown 46% over the year.

During the quarter, Blue Nile bought back $30.9 million worth of their common stock.

Blue Nile’s projections fell short of market expectations. For the current quarter, Blue Nile expects revenues to be $121 million-$125 million with EPS of $0.41-$0.43. The company expects to end the year with revenues of $356 million-$360 million and EPS of $0.87-$0.89. Analysts were expecting revenues of $357 million for the year with EPS of $0.98 and revenues of $122.6 million for the quarter with EPS of $0.46.

Till a few years ago, Blue Nile was winning over competitors because of its ability to reduce overhead costs by not having to maintain a larger inventory. However, the rising raw material costs have hurt the company’s business model. Unlike traditional jewelers, Blue Nile does not stock up on raw material and instead stocks it based on consumer demand. With raw material prices rising, Blue Nile, unfortunately, is now paying vendors these new higher prices and has to resort to either increasing their own prices or reducing margins, thus losing out on their competitive advantage.

Blue Nile’s Customer Focus
Meanwhile, Blue Nile continued to improve services offered to their customers. For the upcoming holidays, they are now offering services such as free FedEx shipping, lifetime warranty, and additional advice columns. Recently, they tied up with LivingSocial to launch a Cyber Monday deal that let buyers purchase jewelry vouchers worth $200 for $100 each.

As part of their mobile initiative expansion, they released a new mobile shopping app for iOS devices that includes an enhanced engagement ring shopping platform that lets consumers shop for different styles while offering better visualization. Consumers can also access their full jewelry line, and international consumers can shop in their local currency directly through the app’s shopping cart.

The stock is trading at $38.76 with a market capitalization of $525 million. It touched a 52-week high of $64.45 in February of this year. The recent news of CEO Diane Irvine resigning has not helped to pick up the stock’s price, either.

WebMD’s Financials
Online player WebMD’s (Nasdaq:WBMD) Q3 revenues fell marginally over previous year’s $135.3 million to $135.1 million. Revenues missed the market’s expected $135.9 million. EPS of $0.20 was, however, ahead of the Street’s targeted $0.17.

By segment, advertising and sponsorship revenues grew 2% to $115 million with the number of page views to their Web site growing 26% to 2.24 billion. But the growth was offset by 10% fall in revenues from private services to $20.1 million.

For the current quarter, WebMD projects revenues of $147 million-$157 million, significantly short of the market’s projections of $171 million. They expect to end the year with revenues of $555 million-$565 million, compared with $534.5 million reported a year ago, and short of the Street’s consensus of $581.4 million. WebMD normally projects for a healthier Q4. However, owing to a “cautious business outlook” by their large customers, they lowered their current quarter estimates.

WebMD’s Partnerships
WebMD continued to expand their product offerings and recently launched a diabetes-focused product in the form of interactive diabetes tools and content in partnership with Rite Aid. WebMD and Rite Aid will provide a personalized comprehensive online and mobile access to for people with diabetes and for their caregivers.

WebMD also launched their new eye health center in partnership with Bausch & Lomb. The two have paired to provide a first-of-its-kind suite of online resources aimed to improve eye care for all ages.

According to market rumors, private equity firms may be interested in buying WebMD. Their stock is trading at $35.51 with a market capitalization of $2 billion. It touched a 52-week high of $58.55 and has fallen nearly 40% since May of this year. Investor Carl Icahn has already upped his holding from a 7.9% to 9.5% stake because of WebMD’s cash-generating capabilities, and, compared to other Internet stocks, reasonable valuation.

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