We are all familiar with the ongoing recession. It seems that every day more bad economic news hits the headlines. Of course, jewelry has been hit especially hard as it is often considered a discretionary and luxury item. A few days ago, The Wall Street Journal ran an interesting article No Sparkle for Jewelers on Feb. 14: Recession Pummels Chain Stores as More Buyers Turn Their Back on Bling (subscription required).
The recession pummeled jewelers hard during the holidays, when usually they earn an average of 30% of their annual revenues, as consumers avoided gems and other premium goods. Sales of luxury items, including jewelry, fell 34% compared to a year ago, according to MasterCard SpendingPulse.
Hopes that Valentine's Day, the third-biggest holiday for jewelry sales after Christmas and Mother's Day, would put some sparkle in results are fading. But Market researcher IBISWorld Inc. said it expects jewelry sales for the Feb. 14 holiday to fall 5.1% to $1.48 billion from $1.56 billion a year ago.
Of course, even before December's poor sales, local jewelry stores and regional and national chains had been disappearing at an alarming rate. For all of 2008, 1,140 jewelry businesses closed -- more than half of them retailers -- and the number of bankruptcies rose 19%, according to the Jewelers Board of Trade, a Rhode Island-based credit research and collections bureau for the jewelry industry.
Obviously, the jewelry industry along with the rest of the economy is struggling.
Moving away from an overall industry view, I note that the analyst estimates of Blue Nile's revenue and earnings are as follows:
- Average Revenue Estimate (Current Quarter): $94.84M;
- Average Revenue Estimate (Current Year): $304.35M.
- Average Earnings Estimate (Current Quarter): $0.36; and
- Average Earnings Estimate (Current Year): $0.87.
Considering the overall state of the economy and industry, these numbers look relatively strong.
If you have not read Seeking Alpha's Blue Nile information, I urge you to do so. As described by its latest quarterly conference call transcript, Blue Nile is in a strong position financially and competitively.
Throughout this year we have operated in a disciplined and conservative manner in our business execution. Our focus is on delivering exceptional products at an outstanding value to our customers. We believe that this focus, combined with our discipline in running our business efficiently, will enable us to capture market share and enhance our consumer experience while many of our competitors are forced to pullback in this environment.
Let’s take a look at the overall retail jewelry environment in the U.S. On a year-to-date basis through Q3, more than 3% of the capacity of the jewelry industry has been removed through store closures, consolidations, and bankruptcies. Many stores are liquidating inventory at heavy discounts. We believe there is much more shake out to come. The retail jewelry environment in the U.S. has worsened in the past quarter and we believe the competitive landscape will look very different in the future.
This environment is extremely tough for brick and mortar jewelers. They are holding significant inventory at a time when consumer demand is weak and commodity prices are falling. We believe that the weak players will fail, there will be additional consolidation in the industry, and Blue Nile will continue to take share. We are extremely well positioned in this environment. Blue Nile is financially and competitively strong.
We believe that the strength and benefits of our unique business model allow us to navigate through these challenging conditions. For example, we can operate profitably even in a situation where sales decline at the level we saw in the month of October. This means we can emerge even stronger when the economy begins to improve, while many competitors will have gone out of business.
With this backdrop and assuming that the S&P remains within a range of 800 – 950, I expect Blue Nile stock to trade within a range of $20 – $25. eChristianInvesting, another Seeking Alpha contributor, has a more bearish outlook as expressed in his article Earnings Preview: Blue Nile.
Shares are now trading at 28x consensus 2009 EPS estimates. This is still well above the relative valuations of its peer group despite the big drop in share price last year. We would expect shares to drop further following the company's quarterly results and don't expect to see any positive catalysts until there are clear signs of economic recovery.
Recommendation: Sell with an $18 price target.
I am not swayed by price-to-earnings multiples. I know that they are horrendous at present because of the recession. I also know, however, that the economy will eventually rebound. And when it does, Blue Nile's competitive position will have strengthened. In fact, many of its competitors have already ceased to exist. As stated, I expect Blue Nile to trade within a range of $20 – $25 so long as the S&P remains within a range of 800 – 950. Should the economy continue to falter, then I expect Blue Nile to falter too. But when the economy does begin to show signs of strength, I expect Blue Nile to outperform the S&P by a healthy margin.
As an example of Blue Nile's strength, look at an article I wrote two years ago, Primer For Blue Nile's Conference Call On 12 February 2007, and you will note that the estimates were as follows:
- Average Revenue Estimate (Current Quarter): $91.90M;
- Average Revenue Estimate (Current Year): $252.71M.
- Average Earnings Estimate (Current Quarter): $0.31; and
- Average Earnings Estimate (Current Year): $0.73.
As we can see, the estimates now are still above levels two years ago. Most jewelers wish they could enjoy the same strength of estimates.
The major troubling point, however, is that I have no clue as to how long this recession will last or how deep it will be. With that statement, I agree with eChristianInvesting in that there are no positive catalysts.
Given Blue Nile's current price of about $23 and lack of positive catalysts, I am neither a seller nor a buyer.
Disclosure: I am long Blue Nile stock.