The Bull And Bear Takes On Blue Nile

David J. Phillips, publisher of the The 10Q Detective, was kind enough to leave a detailed comment on my blog regarding my article "Not Paying Attention To The Blue Nile (NILE) Bears."

Rather than responding in the comments section where few people will see his comment and my response, I have decided to promote his comment and respond to it in this article.

Kevin:

If I may -- you are misinformed with respect to your comment: "That means that the sale was affected pursuant to a Rule 10b5-1 trading plan adopted by the reporting person. The sale would have happened regardless of the most recent financial results...."

Although these trading plans provide an insider with an "affirmative defense" against any allegation that trades executed under the plan were based on inside information -- AS LONG AS THE NAMED EXECUTIVE OFFICER FILES AN 8-K, HE/SHE IS FREE TO TERMINATE the PRIOR-pre-arranged sale of the fully-disclosed amount of shares.

Ergo -- If management truly felt the stock was headed materially higher, as long as they filed their intent -- they could prematurely end their insider sales.
http://10qdetective.blogspot.com/2007/05/is-luster-off-blue-nile.html

Best-
David J Phillips, Publisher
www.10qdetective.blogspot.com

FULL DISCLOSURE: The 10Q Detective is short Blue Nile

Yes, David, you are technically correct. But that does not change my argument. As I stated in my article, I believe the shares are rich now. Moreover, I believe that Blue Nile is doing exceedingly well and that the share price will be higher this time next year. But if I were a stock- or option- or both- rich Blue Nile executive, I would take some off the table as well. I too would enter into a trading plan.

Does that mean if I were a rich executive that I lack faith in the company or its stock? No, not at all. Rather it means that I have lived through the last bubble and know how turbulent the markets can be. I further know that if I am smart, I need only get rich once. So I begin selling with a trading plan.

If Blue Nile gets taken private at a much higher price or the company continues to do well and the stock is much higher this time next year, that is okay. What I am guarding against is an unforeseen negative event. It could be company specific, or it could be the economy in general. Whatever, I would take appropriate measures today.

So unless I expected wildly different prices—either higher or lower—I would be inclined to leave my trading plan as is.

As mentioned, I believe the company will continue to do well. While it represents a reasonable portion of my portfolio, it is still a manageable risk. So I am content to sit and monitor.

I did read your article, and I found nothing alarming. I am not concerned about margins. They are making money and buying back stock. With regard to diamonds and international sales, international growth rates are exceptionally strong, in part because they are starting from a very low base. In Canada, however, our economy is doing exceptionally well, especially out west.

Traditional retailers are going to offer their own stores and fight back. Maybe, but their brick and mortar stores are being clobbered. I do not recall the exact data, but I believe Zale's (ZLC) online stores' average ticket is a couple hundred dollars while Blue Nile is above one thousand dollars. For Zale Corporation and others, their biggest worry is that online does catch on exceedingly well. Then what do they do with all the brick and mortar stores?

Listen to the conference calls of both companies. One company is consuming money and needs high margins to barely survive and the other is throwing off money with low margins and having fun all the while. I have listened to both Zale's and Blue Nile's conference calls for a few quarters, and from my vantage point, the difference in companies and their outlook could not be starker.

While I disagree with your viewpoint, I certainly appreciate your arguments. So it will be interesting to watch Blue Nile over the next several quarters.

Thank you for your comment. I think it is good for readers to see both sides of an argument and reach their own independent conclusions.

Disclosure: I am long Blue Nile and short Zale.