Signet and Tiffany Look Much Healthier than Blue Nile

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Mall shops and retail stores compete with online jewelry vendors for shoppers' attention. Blue Nile (NASDAQ: NILE) challenged retail standards like Signet (NYSE: SIG) and Tiffany (NYSE: TIF) by offering shoppers the opportunity to purchase jewelry at lower prices online. Signet and Tiffany seem like they've held up to their online competition fairly well, while Blue Nile looks like it's in trouble.

Blue Nile's accounts receivable and inventories increased significantly in 2011. Inventories rose from $20.2 million to $29.3 million, trade accounts receivable went from $1.41 million to $2.32 million, and other accounts receivable increased from $366,000 to $2.55 million. The company's cash on hand also dropped. These figures imply that Blue Nile purchased a lot of jewelry last year that it is struggling to sell, which is not a good sign. Blue Nile's revenue for the year did increase, but its operating costs increased more, so the company's net income fell. The company's 4Q 2011 figures showed an even sharper drop compared to 4Q 2010, as net income for the quarter dropped from $6.2 million to $4.2 million.

Blue Nile seems to be addressing the drop in its stock price by using its cash reserves to buy its stock back. Although stock buybacks can show that a company's managers remain confident in a firm's future growth, if Blue Nile's weak performance continues, investors can just use the stock buybacks as another opportunity to short the stock. In 2011, Blue Nile spent $40 million to buy its stock back, while it reported net income of $11.4 million.

Blue Nile currently trades at a price to earnings ratio of 44. Although a valuation like this can make sense for a rapidly growing technology company, for a company that is reporting weaker sales figures, it suggests that Blue Nile has a lot farther to fall. The British vendor Signet Jewelers, which owns the US mall chain Kay Jewelers, trades at a 15.9 P/E right now. Although Signet is also vulnerable to online competition, it looks like a much healthier company. Signet will release its 2011 annual report on March 22.

Signet's 3Q 2011 report shows that its inventory increased from $1.3 billion to $1.41 billion. Growing inventory levels can suggest selling difficulties, but this increase isn't big enough to be a concern. Signet's accounts receivable rose from $770 million to $891 million, although the size of this increase is also reasonable for a company with rising sales. With $95 million in net income during the first three quarters of 2010, and $168 million net income during the period in 2011, Signet looks like it is having little trouble selling its jewelry to shoppers.

Blue Nile competes with Tiffany to attract high end shoppers. Like Signet, Tiffany hasn't announced its 4Q 2011 and fiscal 2011 results yet, and the release is scheduled for March 20. Tiffany's 3Q 2011 results also show rising inventories, in this case, an increase from $1.65 billion in 3Q 2011 to $2.07 billion in 3Q 2011. Tiffany's accounts receivables showed some improvement, dropping from $179 million in 3Q 2010 to $170 million in 3Q 2011. This inventory growth is somewhat concerning, but Tiffany's sales figures are good. Tiffany, like Signet, reported improvements in earnings and revenue growth. Tiffany's revenue for the first three quarters of 2011 improved by 23.8 percent over the period in 2010, and its income for the period improved by 39.3 percent. With a price to earnings ratio of 20.49, it doesn't look overvalued either.

Tiffany and Signet both look like good investments, as their income growth shows that their stores remain attractive to shoppers. Blue Nile looks like it will continue to struggle and attract more short interest.  

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