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Blue Nile (NASDAQ:NILE) shares are on the rise Tuesday morning, thanks to an enthusiastic note from Citigroup analyst Mark Mahaney.

Mahaney repeated his Buy rating on the online diamond retailer and upped his price target to $36, from $30. “While we still anticipate a very lengthy road to recovery for online jewelery and NILE, recent intra-quarter data points are less negative than Q4,” he writes. Here’s his bullish thesis:

  • Fundamentals are getting less worse.
  • Comps get easier throughout 2009.
  • Diamond prices are correcting.
  • NILE should benefit from “a depletion of its competitive set.” (In other words, jewelery stores are dropping like flies.)
  • The company should gain market share.

Mahaney notes that Tiffany (NYSE:TIF) saw same-store sales down 33% in its January quarter, but that things got gradually less worse: down 39% in November, 33% in December and 23% in January year over year; TIF said quarter-to-date sales are down 20%, and its forecast is for full year sales to be down 11%.

He also notes that diamond prices continue to slide, with prices in March down 8%-9% year over year. He notes that the company benefits from higher conversion rates as buyers get better deals, higher gross margins as NILE doesn’t pass on all of the benefit to customers, and flexible pricing with its no-inventory model.

NILE Tuesday is up $1.48, or 5%, to $31.09.

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Source: Blue Nile: Diamond in the Rough?