Blue Nile: Positioned Well Against Brick and Mortar Competition

| About: Blue Nile, (NILE)

This quote from Mark Vadon, Blue Nile, Inc. (NASDAQ:NILE) Executive Chairman, from Seeking Alpha's transcript of the Blue Nile 4Q 2007 conference call, explains why the stock was hammered:

On the guidance, I think we’re seeing what a lot of luxury retailers are seeing, is that consumers are behaving very differently over the last 10 weeks than they have been for quite some time. We had a weak January and things have actually picked up slightly going into February but, where we sit today, it’s pretty tough to give guidance for the full year just to be perfectly straight with you guys. What we saw in January was people pulled back. When I talked to people in the channel they’re telling me that stores are absolutely dead. We don’t know how long this continues, whether what we’re seeing is a reaction to people spending what money they were going to spend at Christmas time and then pulling back now, or if it’s something more sustained than that. So, our mindset is to give conservative guidance based on where we’re standing today and then if the situation improves, which we’re hopeful it does, we’ll continue to update. But, from a macro perspective our goal is really just to gain share. That’s all we can do. We can’t change whether or not consumers are going to come into the market to make a purchase but we can do our best to try taking those consumers when they do, and I think we’ve been doing that well for almost nine years now and regardless of what the market does we will grow faster than other people. That’s our intent and I think we’ll do that.

Our guidance is for that as well. The other anomaly we’ve seen over the last few weeks is that very high-end of the market, those price points above $25,000 that were healthy for a very long time for ourselves, as well as a lot of the other luxury players out there are all of a sudden very, very weak. I think we said in the call that high-end sales were 50% growth or above every single quarter of last year. We definitely didn’t see that in the last couple weeks of December and in January. I think the very, very high-end consumer is finally showing some vulnerability out there. The guidance we’re giving today is based on what we’ve seen so far. But if that changes we’ll update people.

Because I am late in providing my thoughts on the conference call, I will provide a shorter than usual article.

Key points from the earnings release and conference call are as follows:

  • Gross profit for the quarter grew 25.9% to $23.7 million, from $18.8 million for the fourth quarter of 2006. Gross profit as a percentage of sales increased to 21.1% for the quarter, compared to 20.7% for the fourth quarter of 2006.
  • Net income per diluted share for the quarter includes stock-based compensation expense of $0.06, compared to $0.04 for the fourth quarter of 2006.
  • International sales totaled $7.2 million in the quarter, an increase of 155% year over year. For the full year, international sales totaled $17.2 million, a 108% increase compared to sales of $8.3 million for fiscal 2006.
  • For the full year, net cash provided by operating activities was $41.5 million compared to $40.5 million for fiscal year 2006. Non-GAAP free cash flow for the year totaled $36.6 million, compared to $38.6 million in the prior year. Free cash flow for 2007 includes the change in deferred income taxes related to the full utilization of net operating losses for income tax purposes in 2006, as well as higher capital expenditures for 2007 related primarily to the expansion of the Company's domestic fulfillment center.
  • The effective tax rate for the quarter was 33.3%, compared to 35.5% for the fourth quarter of 2006. The lower tax rate is primarily due to deferred tax asset adjustments. The Company's effective tax rate for fiscal year 2007 was 34.3%, compared to 34.6% for fiscal year 2006.
  • Capital expenditures in the fourth quarter totaled $1.3 million, compared to $0.2 million in the fourth quarter of 2006. Full year 2007 capital expenditures totaled $4.9 million compared to $1.9 million in 2006. The higher capital expenditures for 2007 relate primarily to the expansion of the Company's domestic fulfillment center.
  • During the quarter, the Company repurchased 94,100 shares of its common stock for $6.5 million. For the full year, the Company repurchased 438,755 shares of its common stock for $20.0 million.
  • The average sales price in 2007 for an engagement ring sold on the website was just over $6,200, well above the industry average.
  • The international efforts are realizing tremendous success, despite a cautious U.S. outlook.
  • During the quarter Blue Nile repurchased 94,100 shares of stock for $6.5 million. For the full year 2007 it repurchased 438,755 shares of stock for $20 million.
    • Average purchase price for last quarter was $69.08 and for the year, $45.58.
  • Net sales are expected to be relatively flat with Q1 2007.
  • Net income is expected to be in a range of $0.11 to $0.14 per diluted share. The estimated net income per diluted share includes the estimated impact of stock compensation expense of approximately $0.07 per diluted share, compared to $0.05 per diluted share in the first quarter of 2007.
  • The effective tax rate for the quarter is expected to be approximately 35%.
  • Goal is to grow net sales by at least 10% for the year and to grow non-GAAP adjusted EBITDA by at least 10%.
  • Net income per diluted share goal for 2008 is to achieve a GAAP EPS level that approximates 2007.
  • Stock compensation expense for the year is estimated at approximately $0.29 per diluted share, an incremental impact of $0.07 per diluted share compared to 2007.
  • The effective tax rate for the year is expected to be approximately 35%.
  • Capital expenditures are expected to be approximately $2.5 million.

If you examine Blue Nile's history of buying back shares, you will note that the company has been opportunistic in its purchases. The average cost of its purchased shares last year was about $46 and for the last quarter it was about $70 per share.

I encourage you to listen to the conference call or read the transcript. While I certainly acknowledge the negative effects of U.S. housing slowdown, I do not think the country is headed for a major recession. The economy might worsen in the near to intermediate term, but it will strengthen again. And as Diane Irvine, President and CEO, indicated during the conference call, Blue Nile is well positioned against its traditional brick and mortar competition with their higher costs structures. I agree with her assessment that 2008 represents a tremendous opportunity.

Disclosure: I am long Blue Nile stock and options.

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Tagged: , Catalog & Mail Order Houses, Earnings
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