Is Blue Nile Back?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
They were supposed to be one of the jewels of e-commerce; they were supposed to disrupt an industry that needed to put the consumer back in control. For a while it looked like they were doing just that. Then the recession hit, compounded by a revolving door in the C-Suite and Blue Nile (NASDAQ: NILE) found itself as a tarnished gem that was tossed aside by investors and consumers alike.
That was until they reported their second quarter earnings which included revenue growth of 13%, sending shares up as much as 45%. Revenue of $91 million was ahead of the $88.9 million the street was looking for while earnings of $0.11 a share were also higher than the $0.07 a share analysts were predicting. For the first time in a long time it looks like Blue Nile might be back on track to disrupt the jewelry industry.
In their earnings press release CEO Harvey Kanter summed up the quarter by saying, “We are pleased to report significant revenue growth along with improved profitability, and we are especially excited about the continued acceleration in the sales of engagement products. This affirms that our current strategy is working, particularly with favorable conditions in the diamond supply market. As we move forward, we are very excited about our plans to ignite growth in the sales of our non-engagement products through the evolution of our assortment.” While it is nice to see a pickup in sales of engagement products, the key growth driver will be in their ability to take market share in the non-engagement market. For most of us, an engagement purchase is a one-time event, meaning that Blue Nile has to continue to find new customers. The buying of jewelry for every other occasion is recurring revenue stream that could stabilize their sales and profits if they can take advantage of it.
Unfortunately, from my own personal experience, they haven’t offered a very compelling product line to turn me into a return customer. When I tried to buy my wife something for Christmas, the bracelet I picked turned out to be too big and because of its construction could not be altered. We sent it back without a problem, but she couldn’t find anything else she liked on their website. I really hope that the evolution of their assortment does indeed prove to be a compelling proposition to draw customers to return. Otherwise they’ll always be a one and done shopping experience instead of a trusted lifelong partner.
The problem that I see is their need to improve the value proposition they are offering customers. On the engagement side, their whole competitive advantage stems from being a viable alternative to Tiffany (NYSE: TIF) or Signet Jewelers (NYSE: SIG), whose stores include Kay Jewelers and Jared. They offer potential customers education, pricing and a less pressure filled convenient environment that they cannot find in stores.
On the non-engagement side customers can of course go back to any of the brick and mortar locations mentioned above and find something nice, but you pay for the overhead and markups. For everyday jewelry, a trip to Kohl’s (NYSE: KSS) or JC Penney (NYSE: JCP) can easily do the trick. But in that case you’re paying again for overhead and while you might pay a more value orientated price, the quality isn’t the same.
This is where Blue Nile stands to gain. If they can offer exceptional products at value pricing they have the potential to offer a really compelling advantage to customers. They have the advantage of online scale to go with an advantage cost structure, but it’s the delivery of a value proposition that they’ve yet to truly take advantage of. You can see why I’m concerned when you look at how they are not growing this business; they saw non-engagement sales of $24.2 for the quarter, just slightly over the $23.8 million for the same quarter last year. Compare this to their engagement sales, which grew by $8.5 million over the same time frame.
While it was nice to see this beaten down name get a nice boost, one quarter doesn’t necessarily mean they’ve turned things around. I’d like to see meaningful growth in their non-engagement business before giving them the green light. While I’m out of special occasions until Christmas, they better not continue to disappoint customers like me again if they want to continue on their track of disruption and value creation.
latimerburned owns shares of and has an options position in Blue Nile. The Motley Fool owns shares of Tiffany & Co. Motley Fool newsletter services recommend Blue Nile. 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.If you have questions about this post or the Fool’s blog network, click here for information.