28 February 2006

NILE


Blog Hog John C. asked me about BlueNile.com today.

Funny, because NILE caught my eyes and ears earlier today, while seated on the elliptical at the gym (I refuse to run--it's a feat that I finally stopped riding the bike) I heard a caller during the Lightning Round ask about NILE. Cramer said something like "expensive, expensive, expensive" but that it had a solid niche on the internet. He placed it second on the web, to some company I cannot recall (hey, I'm a lawyer, not a court reporter). But then he gave the stock a bullish, but not a "Buy! Buy! Buy!" call.

My blogless friend Grimm made his second or third largest purchase at BlueNile.com. He used their site to learn all about diamonds, beyond the four C's. I even think he sent a diamond back because he wanted something better. Nevertheless, he found the entire process worthwhile. I considered going the NILE route for my so-far largest purchase (living in Manhattan means I rent my place, and don't own a car), but even an online vendor could not come close to my mom's employee discount.

So I was going into the digging-up-research phase with a positive attitude.

Morningstar gives NILE four stars, with a Fair Value Estimate of $42.00.

SmartMoney.com's competition page offers up numbers you'd expect:

NILE vs. Tiffany & Co. (TIF) and Zale Corp. (ZLC)
Net Profit Margin - 6.50% - 13.70% - 3.40%
Proj. Long-Term EPS Growth - 30.0% - 12.9% - 13.5%
Forward P/E - 46.1 - 20.5 - 14.0
PEG - 1.54 - 1.59 - 1.04
ROE - 16.00% - 18.90% - 11.90%
ROA - 11.60% - 12.50% - 6.40%

Tiffany's impeccable brand garners the highest profit margins, and returns on equity and assets. Zale lags, and thus is discounted by Wall Street. NILE has tighter profit margins, but is a leaner just-in-time retailer without the bricks and mortar costs, so it has a healthier ROE/ROA than one may expect. But the key is NILE has wonderful projected growth. Growth trumps value when it comes to share price.

But shareholders owning for growth can be a fickle bunch. Any sign of slowing growth, and many will flee for the latest growth flavor-of-the-month.

And that just happened with NILE, which is another reason I'm checking it out. Kimberly Picciola at Morningstar recently commented on a bump in the growth road:

On Tuesday, Blue Nile NILE reported disappointing fourth-quarter numbers and provided a soft outlook for 2006. Revenue was up 13.5% and operating profits grew 10% from the year-ago period, slightly lower than we expected.

Picciola goes on to relate that NILE was hurt by the increased costs relating to keyword-search-advertising. Jeff Matthews at his excellent blog also discussed this problem.

While I would not go so far as to put this bit of bad news in the BNBNRBN category, the recent drop in the price of NILE was certainly a good opportunity to enter a profitable position in a reputable leader in online jewelry.

Let's look back to rosier times, say, last August, when fool.com ran a positive piece by Alyce Lomax:

The end of spring and early summer might not spark as many marriage proposals as the holidays or Valentine's Day, but Blue Nile (Nasdaq: NILE) seems to be doing fine nonetheless. The company that pioneered online diamond sales reported some rather impressive earnings numbers yesterday evening.

Blue Nile's second-quarter net income increased 50% to $2.8 million, or $0.15 per diluted share. Sales increased 25% to $43.8 million. Average order size was $1,441, an 11% increase from this time last year. Gross profit increased 26% on a year-over-year basis, while gross margin increased to 22.8%, which Blue Nile said was its highest gross margin since the first quarter of 2004.
...
Plenty of Fools are Blue Nile fans -- after all, it's a Motley Fool Rule Breakers selection. Among the stock's possible catalysts are recent data showing that people are increasingly willing to buy fine jewelry online. Match that with research predicting skyrocketing use of broadband Internet -- Forrester sees broadband in 62% of households by 2010, compared with just 29% last year -- and you've got a recipe for some pretty good times for Internet retail.
...
Blue Nile's numbers argue that the company continues to make headway in a market that only recently seemed a questionable draw for customers. The intrusion of competitors, and Blue Nile's continued sales and earnings increases, show that the space is a solid one. If it can continue to differentiate itself from rivals, provide users with a better shopping experience, and capitalize on some of the current trends in e-commerce, Blue Nile's got the wind at its back.


Buying NILE last August, and selling it in November would have been the ideal situation. This most-recent dip is a buying opportunity, but I'm wary of the fact that NILE's elevated stock price is dependent on significant continued growth. The soft '06 outlook is refreshingly honest (again, check out Jeff Matthews' post linked above), but I'm not sure honesty will be rewarded. NILE is attractive--it's got one of the four C's covered, clarity. But like when I bought my diamond, I think I'm going to put my money elsewhere, even though I like NILE.

1 comment:

Anonymous said...

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