Blue Nile cited the lack of consumer credit availability as its greatest headwind to generating sales, especially among young diamond engagement ring buyers who have limited credit history.

 

Despite this challenge, total sales advanced by 9.7 percent in the second quarter. The total order volume rose by 3.5 percent, and its average order value was up by a solid 6.0 percent.

 

Management said sales trends were uneven in the second quarter. Sales showed solid gains in April and early May, but weakened notably after Mother’s Day. They remained weak through June and early July, but began to pick up in late July, a trend that has continued through early August. The second quarter sales choppiness is in stark contrast to Blue Nile’s strong first quarter, when sales leaped ahead by nearly 19 percent.

 

The unevenness of Blue Nile’s sales is no surprise: in a recovery period, sales trends are often choppy. The good news is that the company has continued to post strong positive sales comparisons on a quarterly basis.

 

While Blue Nile’s second quarter sales showed solid gains, its margins deteriorated from the same three-month period a year ago. Its gross margin fell by 40 basis points, its operating margin declined, and its pretax margin dropped by 70 basis points. Several factors had a negative impact on its margins – mostly related to a higher sales mix of lower-margin goods.

 

The table below summarizes the company’s key second quarter financial results.

 

 

Blue Nile’s management is forecasting that the company’s sales will be in the range of $325 to $335 million this year, a gain ranging from 7.5 percent to 11.0 percent from 2009. It is expecting third quarter sales to be “muted,” with a more robust fourth quarter of 2010.

 

Blue Nile Second Quarter Highlights

·        Blue Nile’s sales were driven by strong sales of non-engagement jewelry, including diamond bands, diamond earrings, diamond necklaces, and diamond bracelets. In addition, pearl jewelry and sterling silver jewelry demand was very strong. Pearls and sterling silver jewelry typically carry lower retail price points.

 

·        Management also noted that demand for high-quality jewelry was strong, especially at the higher retail price points.

 

·        Management told Wall Street that its polished diamond prices increased by as much as 16 percent in the second quarter versus the same period a year ago; this caused its retail prices to rise. In contrast, the IDEX Online Global Polished Diamond Price Index rose by about 7 percent in the second quarter of 2010 versus the second quarter of 2009. Clearly, Blue Nile’s diamond sales mix reflects higher-priced goods which are somewhat scarce.

 

·        Blue Nile’s management has predicted that polished diamond prices are likely to soften in the second half of 2010 due to weak consumer demand. The IDEX Online Index does not yet confirm that potential trend.

 

·        The company shipped 39,407 orders, an increase of 3.5 percent over last year. Its average order value was $1,944, up 6.0 percent, in the quarter. This is far above the average ticket for mass market and most guild jewelers.

 

·        International sales rose to $9.1 million in the second quarter; this was a 21 percent increase over last year, based on constant currency. Domestic U.S. second quarter sales were $67.5 million, up 7.5 percent.

 

·        For the first six months of 2010, Blue Nile’s total U.S. sales were up just over 9 percent. In contrast, total U.S. jewelry sales are up just over 8 percent in the first half, with specialty jewelers’ sales up slightly less. In short, Blue Nile continues to pick up market share from store-based jewelers.

 

·        Blue Nile’s gross margin was 21.1 percent in the second quarter, down modestly from last year’s 21.5 percent. Three factors primarily had a negative impact on the company’s gross margin:

 

o       A greater sales mix at higher retail price points which have an inherently lower margin.

o       The impact of higher precious metals prices.

o       The particular sales mix of fashion jewelry during the quarter yielded lower margins.

 

·        The company’s operating cost ratio rose to 15.6 percent of sales versus last year’s 15.3 percent. This was due primarily to two factors: 1) a more normal level of marketing expense versus last year when the company reduced marketing due to the recession; and, 2) lack of expense leverage due to weak sales in late May and June – the company had staffed for higher sales levels.

 

·        Management noted that while it was holding just over $47 million in cash, its interest income was minimal due to very low interest rates.

 

·        Blue Nile’s “days payable” with vendors are now running at about 70 days, up from 63 days in last year’s second quarter. Blue Nile’s sterling credit rating and ability to meet payment terms has allowed vendors to extend particularly attractive terms to the company.

 

·        Blue Nile management noted that it had added a significant level of high-quality, high-priced diamonds to its offering; these items are selling well.