Before I begin commenting on the most recent quarter, for those that are unfamiliar with my earlier thoughts on Blue Nile, I direct to you to two prior articles:
To set the stage, I used Yahoo's financial website to pick up the analysts' estimates prior to the conference call.
|Financial Metric||Current Qtr
|Data Sources||Yahoo Finance 07 May 2007|
I updated the table below to reflect actual values and company forward guidance.
|Financial Metric||Current Qtr
|Data Sources||Company press release and conference call transcript|
|Revenue Estimates||67.9M||65.5M – 67.5M||295M – 305M|
|Earnings Estimates||0.19||0.16 – 0.17||0.86 – 0.91|
The company did much better than expected during the first quarter and raised guidance for the year. If you look carefully, you will note that the revised second quarter actually falls short of the prior estimates. However, the company chastised—very gently, I might add—the analysts for not recognizing the seasonality in Blue Nile's business. As an editorial comment, I am surprised how much spoon feeding still takes place.
To provide some flavor of the company's enthusiasm, consider the following quotes from the conference call.
The first quarter was a terrific one for Blue Nile. We experienced tremendous growth in our business and generated exceptional profitability. Our performance was driven by significant traction with consumers, as a result of the appeal of the Blue Nile customer experience and value proposition.
We delivered net sales of $67.9 million in the first quarter, representing year-over-year growth of 34%. This is the highest revenue growth rate we have reported since we became a public company in May of 2004, nearly three years ago. Net income of $3.2 million was up 34.3% from the first quarter of 2006. We are especially pleased with our reported net income per diluted share of $0.19, representing EPS growth of 46%. Our EPS of $0.19 for the quarter was $0.04 above the top end of our guidance range.
During the first quarter, our core business continued to grow robustly, and we made great progress in enhancing our leadership position in online diamond and jewelry retailing.
Let me give you some highlights of the quarter. While all product categories were strong in the first quarter, we are extremely enthusiastic about the performance of jewelry at price points above $25,000. Our net sales at these price points rose 84% year over year in the first quarter, representing our fastest-growth product category and reflecting the growing awareness and prestige of the Blue Nile brand. The number of orders at price points above $25,000 increased 69% from the prior year. In diamond jewelry, we had seven transactions above $100,000 during the first quarter.
I think it is quite a statement about the stature of the Blue Nile brand that so many people trust us with such exceptional purchases. Some of the most impressive sales this quarter included a 5-carat engagement ring for $140,000 and a 6.5-carat pair of diamond earrings for $130,000.
What I find extremely interesting is that Blue Nile is competing using price to attract customers yet it is marketing itself as a prestige brand. By keeping its margins low, Blue Nile is winning business, not only at the lower end of the spectrum, but also at the higher end. The company's website does not use gimmicky tactics to position itself as a thrifty place to shop for jewelry. In fact, the experience is the opposite. The company provides a prestige feel while delivering superior value. Blue Nile's brand awareness is growing, customers' comfort level with both Blue Nile and the internet is increasing, and customers are placing large ticket orders with Blue Nile.
The company also noted that, although in absolute terms internationals sales is a small figure, internationals sales in Canada and the U.K. climbed 84% compared to the same quarter last year. Given the strong domestic performance as well as the outstanding international performance, I believe Blue Nile is still in its infancy of its strong growth phase.
During the conference call, the company touched on other items as well such as slight tax rate changes; share repurchases; Google Checkout; payables; and inventory, with some emphasis on international. While each of these topics is an important topic, the key driver is revenue growth. As long as the company continues to perform exceedingly well on revenue growth, the other metrics will not move the needle in a meaningful way. And to ensure that the company continues to grow its revenue, Mark Vadon gave the strong impression that the company is fixated on customer service by achieving consistent perfect customer orders. As further evidence of the customers' appreciation, Mark provided a few customer responses, one of which is quoted below.
"I just wanted to let you know that I was totally blown away by what I saw when I opened that beautiful wooden box. The engagement ring I purchased for my fiancée is so exquisite than anyone hesitating to buy such an important piece of jewelry from you should really just do the math. Why on earth would anyone in their right mind pay nearly twice as much for a diamond ring of lesser quality?"
When I covered the company's last conference call, the short interest ratio was healthy value of about 15 – 24, Yahoo's and Short Squeeze's values respectively. Remember, the short interest ratio is the number of days of average trading to equal the total outstanding short position. The stock price was $38.60. Earlier today, Yahoo and Short Squeeze reported the short interest ratio was about 37.6 – 37.8. In after hours trading, the stock closed at $50.01, an increase of nearly 30% over the prior quarter.
Given that the company is performing extremely well and that the short position is extremely high, I expect the stock to go higher yet. But is the company overvalued? In order to prepare to answer that question, it is helpful to look at some metrics.
|Data Sources||Yahoo Finance, 07 May 2007 &
Company Press Release
|Forward P/E (fye 31-Dec-08)||45.53|
|PEG Ratio (5 yr expected)||2.8%|
|Enterprise Value/EBITDA (ttm)||29.088|
|Qtrly Revenue Growth (yoy)||34.0%|
Before taking the values at full face value, you need to consider that the values will be revised as analysts up their estimates given the company's strong performance. That said, the values still look rich. The PE multiple is high and the Enterprise Value to EBITDA is also high. However, these high values are being supported by strong performance as evidenced by a strong but not excessive PEG ratio. The short interest too provides some comfort because as the stock continues to climb, many shorts will eliminate or at least reduce their positions.
I mentioned earlier that the key driver is the revenue growth rate. As long as the company continues to have a laser like focus on the customer and continues to deliver compelling value, I expect the company to continue growing its revenue at a healthy rate. If the economy slows or if the company stumbles for a quarter, the revenue growth rate might slow and the valuation will take a hit. If current trends persist, the shareholders can likely look forward to higher prices.
I do not have a target price for Blue Nile. I will continue to monitor the company's performance, and as long as the company appears to be enjoying strong growth with tremendous customer satisfaction, I am inclined to remain long the stock. If I were looking to establish a new position in Blue Nile, I would do so cautiously. On Tuesday, the stock might see a bump up with some shorts covering their positions. So those wanting to get long Blue Nile should pick their spots carefully and buy over a period of time to establish a position. Just to be very clear: I am not making any recommendations. You must make your own independent decisions.
Disclosure: I am long Blue Nile stock.