Should Blue Nile Have the Blues?

Following Blue Nile’s release of disappointing profit numbers and the resignation of its CEO—which led its stock to lose nearly a third of its value—people are starting to talk about just what is going on at the Internet retailer. Take, for example, this video, in which a team of analysts marvel that a dot-com stock that caters to the luxury market should be getting so hammered.

To be clear, Blue Nile isn’t in any trouble, and in the long-term, is going to be just fine. As chairman Mark Vadon noted on a recent conference call, the company currently faces no serious competitors in the jewelry dot-com space. But it is clearly not growing as fast as some would like, or as fast as other dot-coms. As TheStreet.com said, “its revenue growth significantly trails the [dot-com] industry average of 48.5%.” This is a company that before the recession boasted of eventually doing $1 billion in sales a year. In 2010, Blue Nile reported net sales of $332.9 million—not a huge leap from the $310 million it reported in 2007.

For the time being, the company has been caught in a lot of cross-winds. The rise of diamond prices seems to have had a particularly strong impact; because the company doesn’t own that much inventory, pricing is mostly at the discretion of suppliers, and so it feels the impact of market ups and downs more than other companies. All of which led the company to lower margins, which in turn impacted profits.

In the conference call, the company talked a lot about diversifying past its core engagement ring market into other types of jewelry. This makes sense, and it’s something it has been talking about since I’ve been following them. But, as Gemvara CEO Matt Lauzon told me on Twitter: “I think they’re smart to look beyond diamond engagement but my experience is you can’t apply same formula to other categories.” Indeed, selling other kinds of jewelry may eventually mean owning more inventory.

On the call, executives also talked about investing more in the company. In an article I did on Blue Nile four years ago (not online), an analyst called it “one of the most fiscally responsible brands I have ever covered,” adding, “They are not going to spend huge amounts of advertising just for the sake of advertising.” 

Yet not having much of an advertising budget comes at a cost. Everyone knows Zappos for shoes. But not as many know Blue Nile for diamonds, never mind other kinds of jewelry.

Here is another quote from the article, again from 2007, but just as true today: 

“You and I both know Blue Nile,” notes jewelry industry Kenneth Gassman. “But when I go and talk to my neighbors and say ‘Blue Nile,” they go, ‘Who?’ At some point, they are going to have to increase their market share. But how are they going to do that? All the low-hanging fruit has been picked.”

Blue Nile has had great success over the past decade with a very play-it-safe  business model, which involves not spending that much on inventory or marketing. But now it looks like, if Blue Nile really wants to grow, it will have to put itself more on the line. 

JCK News Director