Blue Nile reported three trends in its second fiscal quarter ended June which were similar to those reported by other jewelers:

 

• Sales of high ticket goods suffered more than moderate-priced goods.
• Bridal demand is its strongest category.
• Its year-to-year sales decline is moderating.

However, Blue Nile also reported a few trends that set it apart from its store-based competition:

 

• The company reported a solid profit in the quarter. Most store-based jewelers are reporting losses. 

• Blue Nile’s gross margin rose during the quarter versus the same period a year ago, and inventory turned nearly 14 times on an annual basis. In contrast, most store-based jewelers report that their gross margins are under pressure because they are selling older high-cost inventory. Further, store-based jewelers’ carrying costs – interest, insurance and related expense – related to their extremely slow inventory turn – one turn or less annually – are also depressing margins.

• Blue Nile’s average ticket during the quarter was $1,834, far above mass market store-based jewelers’ average of about $350, and well above guild jewelers’ average ticket of $1,200 or so.

• Blue Nile generated 73 percent of its sales from big-ticket engagement rings, well above the average bridal sales mix for mass market jewelers of 40 percent and above the average bridal sales mix of about 20 percent for guild jewelers.

The table below summarizes the company’s key financial trends during the second calendar quarter ended June 2009.

 

Source:  Company Reports

 

Second Quarter Highlights

The following are highlights from Blue Nile’s second quarter.

 

• Blue Nile’s revenues decline by 5.2 percent during the quarter.
  • Domestic U.S. revenues were down 4.3 percent to $62.8 million.
  • International revenues declined by 12.3 percent to $7.1 million. However, on a constant currency basis, international revenues were down just 1.2 percent. While Blue Nile is shipping jewelry to about 40 markets worldwide, Canada and the United Kingdom are its two key international markets. In particular, U.K. sales have been hard-hit by the global economic downturn. Further, in the second quarter of 2008, Blue Nile received several large orders from customers in the U.K.; this made comparisons difficult this year, since it did not receive a similar level of large orders from customers in that market.

• On a year-to-year sequential basis, Blue Nile’s quarterly sales comparisons have improved, as the graph below illustrates. Fourth quarter 2008 sales declined by a dramatic 23 percent and first quarter sales dipped by 11 percent. Second quarter sales were down a more moderate 5 percent.

Source:  Company Reports

• Blue Nile management said that products at price points below $5,000 retail performed relatively stronger than its overall business, while higher-end sales at price points above $25,000 experienced greater weakness.

• The best performing category was bridal jewelry, including diamond engagement rings and wedding bands. Unit volume of engagement rings and wedding bands rose from last year.

• The total number of orders in the second quarter fell by about 9 percent. However, this was offset by a higher average ticket – $1,834 – which was up nearly 3 percent over last year’s second quarter. Both website traffic and the conversion rate (browser-to-buyer) were down modestly in the quarter.

• Blue Nile’s gross margin in the quarter was 21.5 percent, up notably from last year’s 20.5 percent. In theory, Blue Nile’s sales mix should have hurt its margins – engagement ring sales, a low-margin category were 73 percent of sales in the second quarter, up from 70 percent a year ago. However, because of lower polished diamond costs, better vendor deals and a greater sales mix of lower-priced goods which carry an inherently higher margin, Blue Nile was able to increase its gross margin. Blue Nile noted that it “passed most of the lower costs [of diamonds] on to its customers, while capturing a portion of the benefit in [its] gross margin.”

• Operating costs were 15.3 percent of sales versus 14.6 percent of sales in last year’s second quarter. During this year’s second quarter, legal costs and marketing expenses fell as a percentage of sales, but this decline was more than offset by higher payroll costs and depreciation. Further, some of the expense differential year-to-year was due to fixed costs which were spread over a smaller sales base this year.

• Blue Nile’s inventory levels fell by 6.3 percent in the quarter, about in line with the sales decline. Its annualized inventory turn was 13.9X, based on owned inventory.
  
• While cautious, Blue Nile’s management says it believes that third quarter sales could be flattish to down modestly. This would be an improvement over the 5 percent revenue decline reported in the second quarter.
  
  For the full year, management is providing guidance suggesting that revenues could be between $288 and $295 million, flat to slightly down from last year’s $295.3 million. At this level, Blue Nile’s sales are roughly the equivalent to about 295 free-standing mass market jewelers.
  
  Management also said that it expected its gross margins to continue to rise versus the prior year, as it takes advantage of great vendor deals and lower diamond prices. With polished diamond prices down, it is able to offer customers a better value than store-based jewelers who own high-cost diamonds (and turn their inventory once a year or less), while being able to raise its gross margin.
  
  Management predicted that polished diamond prices could remain low. It noted that Alrosa and DeBeers are likely to bring more diamonds to the market in an effort to raise cash (DeBeers apparently has some debt payments due), but Blue Nile said that it appears that the market may not be ready to absorb additional diamonds. Cutting center diamantaires do not have the bank borrowing capacity to support additional inventory of rough or polished stones, since polished diamond demand remains soft and sales are slow.
  
  Capital expenditures will be a very modest $2.5 million this year; this should support sales of $295 million or higher.