In preparation for the Blue Nile, Inc. (NILE) conference call, which is schedule for Monday, 12 February 2007 at 5 pm ET, I will provide my thoughts.
Yesterday, Zale Corporation (ZLC) announced that sales are going well (see SEC 8-K filing) with the last quarter's sales having increased by 1.4%. Consequently, Zale is comfortable guiding to the higher end of its guidance. Zale went up yesterday $0.35 to $28.95 for a 1.22% gain, while Blue Nile shot up $1.65 to $41.62; for a 4.13% gain. So what is good for Zale is even better for Blue Nile.
In an earlier article Blue Nile: A Short Squeeze Setup I used Yahoo's information. The information quoted then remains the same today. Some additional information from Yahoo's site will prove helpful too:
- Average Earnings Estimate (Current Quarter): $0.31;
- Average Earnings Estimate (Current Year): $0.73;
- Average Revenue Estimate (Current Quarter): $91.90M; and
- Average Revenue Estimate (Current Year): $252.71M.
If you have not read Seeking Alpha's information on Blue Nile, I urge you to do so. Their latest Blue Nile quarterly earnings call is quite informative.
When we began our business in 1999, one of the first things we did was field a consumer study to help us understand how people thought about purchasing engagement rings and fine jewelry. The results of that study dictated the fundamental design of our business model and our brand.
In that study, we asked consumers what factors were most important when they chose a retailer of fine jewelry. We gave them 21 different factors to rate, and when the results came back, the top factors rated by consumers were, in order:
- Good value for the money;
- Knowledgeable salesperson; and
- The salesperson does not pressure me.
Interestingly, consumers said the lowest ranking factor out of all 21 was "I am able to closely examine the diamonds and jewelry."
As we designed our business, we methodically tried to make sure Blue Nile would perform extremely well on all of the most important purchasing measures for consumers. We did this well out of the gates and our performance has only gotten better over time.
In the study, consumers told us they wanted value, and we listened. We priced some 30% lower than a normal physical retailer of jewelry. In the first eight years of our business, we believe we have saved our consumers over $500 million compared to what they would have spent if they shopped at a typical jewelry store.
Consumers told us they wanted knowledgeable sales people. To meet this need, we put our customer service team through extensive training before they ever interact with customers. That said, their best training comes on the job.
Statistically, a typical sales person in a jewelry store will sell approximately a dozen engagement rings per year. In comparison, a customer service agent at Blue Nile typically sells over 1,000 engagement rings per year. To put it another way, a typical jewelry store sales person would have to work for over 83 years to get the same experience a Blue Nile agent receives in just one year. The knowledge of our customer service team cannot be matched by stores.
In addition to the above quote, the company discusses positive sales trends and its strongest markets in San Francisco, Washington, D.C., and Boston. The company also discusses Blue Nile's growing focus on international sales, including the U.K. and Canada. What I find interesting is that as more young people become acquainted and comfortable with buying from Blue Nile over the internet, its sales should increase quite dramatically. Blue Nile discusses how its sales are strongest on the coasts and less so in the heartland of America. As more people buy from Blue Nile, however, word-of-mouth referrals will grow and the company should do very well. In the question and answer session, Blue Nile discusses how its website is gaining even more traction by improving the conversion rate.
In terms of competition, the company is doing exceedingly well. It is stealing share from traditional brick and mortar stores. During the conference call, the company discussed the value proposition for customers buying diamonds that are more expensive. Quoting a short passage from SeekingAlpha:
Literally, we are one of the biggest buyers of diamonds in the world, so we buy at very low cost and we are running -- when you look at $100,000 plus diamond, we are running on single-digit margins, high-single-digit margins, so stores just cannot compete. Even if they want to compete with us on that type of product, they literally in many cases have to pay more for the diamond than we are willing to sell to the consumer for.
The company is also focused on increasing shareholder value by buying back its stock. At the time of the last conference call, Blue Nile still had $96.4 million remaining to be spent under the $150 million in authorized stock repurchase program.
Given that the economy has been reasonably healthy and that Zale did well in its recent quarter, I expect Blue Nile to do well too. The stock has done well over the past the past three months as shown by the linked Yahoo Chart. If the company stumbles, the share price might stumble too because it is richly valued with a forward PE of nearly 45. But if the company hits the cover off the ball, the stock could do very well, especially considering that about 30% of the publicly available shares are shorted.
The information discussed in this article, including the linked documents, and my prior article should serve as a good primer to Monday's conference call. Please note, although I referenced the SEC website, I use 10KWizard for researching my stocks. I find this website extremely helpful. I do not have any affiliation with 10KWizard except as a satisfied customer.
As a matter of disclosure, I am long Blue Nile and short Zale.
The photograph by Paula Anddrade is hosted at Flickr. If you click on her picture above, you will be taken to a larger version at her photostream on Flickr, where she has many other beautiful pictures.
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