Blue Nile Q107 Earnings Review

Brian Bolan, research analyst at Jackson Securities, sent a note to clients on Blue Nile's (NILE) Q107 earnings (see conference call transcript). Key excerpts follow:

Company Description

Blue Nile is a leading online retailer of high quality diamonds and fine jewelry. Blue Nile specializes in the customization of diamond jewelry with a “Build Your Own” feature that offers customers the ability to customize diamond rings, pendants and earrings. While not providing the lowest cost diamonds, the company believes its formula of no pressure sales, high quality educational material and reasonable prices will result in higher profits.

Valuation and Recommendation

Blue Nile reported another good quarter, but tempered enthusiasm for next quarter by suggesting analysts recalibrate their model. Our previous notion of a stretched valuation has been helped out by a $0.04 beat of estimates, we maintain our hold rating and our price target is under review.

Earnings Release

Blue Nile announced revenue of $67.9M for the first quarter of 2007. This represents an increase of 34% from the same period a year ago, and well above our estimate of $62M and the Wall Street consensus of $61.9M.

The company posted earnings of $0.19 per share beating our estimate of $0.15 and Wall Street consensus of $0.15 per share. The out performance in earnings was due to higher than expected interest income and other income. Please refer to the table at the end of the report that highlights the margins for the quarter and the difference from our estimates.

Orders and ASPs

The average sales price [ASP] was $1,536, up 17% from a year ago, and up 3.6% from the prior quarter. Orders were up 29% from a year ago, well ahead of our expectations of approximately 41,000. We have modeled in assumptions for next quarter of an ASP of $1685 and total orders just over of 40,000. Those assumptions give us a topline number that is at the top end of guidance.

Blue Nile posted 7 transactions that were priced at $100,000 or more. Transactions of $25,000 or more grew by 84% from the year ago period. In the prior quarter the company posted 40 transactions over $50,000 in value. The company believes that this is a signal that there is more faith in the online model, and their brand in particular.

On the conference call, management noted that there were purchases of $140K and $130K. These high value transactions also are a drag on gross margins, but as Blue Nile tries to build its high value business they are willing to take a little less in order to gain return business at lower price levels with higher gross margins.

Traffic, Margins and the Mix

On the conference call, management noted that they continue to see increases in traffic and conversions. In the quarter the company noted they had double digit gains in both traffic and conversions.

Shares outstanding and the buy back

During the quarter, Blue Nile repurchased 344,655 shares of its common stock for about $13.5M. This works out to an average price of $39.16. We would expect that the recent increase in share price may slow the pace of future repurchases.

There is approximately $79.7M left on a buyback that expires in August of 2008.

Guidance and our Model

In the earnings release, Blue Nile guided Wall Street to topline of between $65.5M - $67.5M and a bottom line number between $0.16 - $0.17 per share for the second quarter of 2007.

For the fiscal year 2007, the company guided to $295M - $305M on the topline and between $0.86 - $0.91 per share on the bottom line. The expected tax rate for 2007 is 35.2%.

Our model is calling for $67.9M on the topline and $0.17 per share in earnings for the second quarter of 2007. A very modest 18.7% gross margin is also assumed by our model which might even be too low. As we did last quarter, an update of our estimates will be published prior to the earnings release date.

For the year, we had modeled total revenues of $307M, just slightly above the top end of the guided range. With an adjustment for this quarters out performance on the top line, we expect this number to creep higher by at least $4 million.

Recent Research

We noted only a few weeks ago that the valuation of Blue Nile is getting somewhat lofty from a P/E perspective. This quarter did a little to justify the lofty valuation on a trailing basis, but did help solve the issue of rising costs. On a going forward basis, we believe that our estimates are likely to change with regard to interest income and the bottom line.

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