Kevin Stecyk

Making Sense of Blue Nile's Web Traffic Data

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On Nov 16 08:28 AM bdrose wrote:

> Do you think they are actually going to grow year-over-year, rather than sequentially, for the 4th quarter?

Last year, "Blue Nile reported net sales for the 14-week fourth quarter of $85.8 million..."

investor.bluenile.com/...=

According to their 3Q press release,

>>We are projecting fourth quarter net sales between $100 million and $109 million, and diluted earnings per share in the range of $0.35 to $0.39.

(See my quote and link in the published article above.)

Because they are forecasting year on year sales increase for the fourth quarter, the answer to your question is "yes."

Blue Nile's Strong Q3: The Outlook Just Got Brighter

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On Nov 12 08:59 PM Michael Shulman wrote:

> Your note was amusing since it relied on data and numbers rather
> than hope and hype -- but how can you be bullish on a company so
> grossly overvalued facing 2% growth?

Odd, I received the same negative comments back when NILE was $20.

> They have experienced margin
> expansion due to cost controls and reductions -- a one time event

Did you listen to the conference call? Margins are expanding for two reasons: 1) Product mix and 2) Better sourcing. And product mix will be an increasing benefit. In other words, it ain't over yet.

> -- and sales are essentially stagnant. They are selling for 80 times earnings -- if they grew profits 20% a year it would still take them four years to grow into the premium the market is assigning to them.

Earnings in the depths of a huge recession, one of the worst since the Great Depression, one where the U-6 Unemployment rate is 17.5%. Hey, I am happy they have profits at all.

But not only do they have profits, they have growing profits and growing cash flow. And they might even be buying back shares soon. As any investor knows, next year's earnings in the depths of a recession are not that important. Often companies will have extremely high p/e during the depths of a recession. So what?

But more importantly, while Blue Nile is growing its profits and cash flow and gaining market share, it's competition is struggling just to survive. Or put differently, Blue Nile is profitably increasing market share. And that's a good thing.

Blue Nile Q1: Targets Raised on Strong Performance

Thank you for your well written article Eric. I was hoping to write my own positive article when Seeking Alpha released the transcript from the latest conference call. Perhaps SA is just late, in which case I will write my article in the near future.

Anyway, for those who didn't listen to the conference call, I urge you to do so. It wasn't a barn burner, but it was better than I expected.

Blue Nile: Diamond in the Rough?

Thanks for the article Eric.

Four Factors Guiding Blue Nile's Price Range

:::"As far as having little physical assets, would you prefer that Blue Nile be saddled with a lot of unproductive leases in various malls across the world that are unable to turn a profit? Capital light is a beautiful thing."

I wrote the above paragraph in my earlier response. A lease is an operating cost (operating lease).

So I should have written, "As far as having little physical assets, would you prefer that Blue Nile be saddled with a lot of physical infrastructure (Property Plant and Equipment) with large buckets of local inventory as each location?"

Four Factors Guiding Blue Nile's Price Range

::: 1. They withdrew guidance. A clear indication that they believe that trends are worsening. The retail environment is terrible, and Nile is not immune to the economic reality of the moment.

Agreed, but so what. That's already known. Moreover, would any guidance by any jeweler be credible?


:::2. They indicated in the cc that sales in the currnet quarter are trending off 15% already, and in my view they are likely to get worse before we see any improvement. In the first q of 2008 their gross revenues were 70M. That would indicate they are trending towards gross revenues of approx 59.5M for this quarter.


Only 15% down is darn good, no? How are their competitors fairing?


::: 3. Their gross margins for the last quarter and the last year are about 21%, resulting in expected gross profits for the current q of about 12.4M.


And what's the gross margins for their competitors? Not even close to 21% Just a guess, Blue Nile will become a stronger competitor.


4. S G and A last quarter was 12.4M, and that should be very close to the current overhead run rate.

12.4M is correct for SG&A for the last quarter. Could SG&A be reduced if sales were reduced? Absolutely, just look back to 2006. Then Revenue was $203M, SG&A was $27.1M or $7M per quarter. So we know that SG&A is not fixed.

::: 5. At a revenue run rate of 59-60M they break even! That is what the facts provided during the cc would indicate.

A quote from the conference call relating to break-even cash flow (as opposed to earnings):

Diane Irving...

"And I would say, while it’s difficult to give a number, I think you would be looking at positive free cash flow for the year if the sales are north of say $230 million something like that."

So your numbers are not far off the mark.

The question you have to ask yourself is, if Blue Nile has a large drop-off in sales, what happens to its competition? Won't they be in even worse condition? And does that leave the Blue Nile stronger relative to its competition when the economy does improve?


:::6. Any deterioration from a revenue run rate of at least 60M/q will result in losses.

That's the definition of break-even as you expressed in point five?


:::1. Although they ended the December q with 54M in cash, they also had 63M in trade payables!!

At Dec 30, 2007, the company had about $123M in cash and cash equivalents, and $86M in Accounts Payable.

At Jan 4, 2008, the company had about $54M in cash and cash equivalents, and $62M in Accounts Payable.

Quote from Marc Stolzman during the conference call:

:::For the full year 2008, we purchased 1.6 million shares for $66.5 million representing approximately 10% of outstanding shares at the beginning of 2008.


So what's the problem? A/P has gone down along with sales. If you were to add back the share buyback to the cash position, the company would have about $120 million in cash again. The company decided to spend some of its cash on shares.


:::2. In addition, their inventories were 19M at the end of the q, a decline of about 10% from the prior year, though revenues for the q were down 20%.

Their inventories are rather lean compared to traditional brick and mortar retailers? And Blue Nile can simply hold back on reordering to bring inventory back in line?


:::3. Current assets exceeded Current liabilites at the end of the quarter by only 8M. They don't have much on the balance sheet other than current assets and libailbities. Book Value, if you accept all values as accurate was 19M at the end of the quarter.

First, I place little value on book value, pun intended. Book value has many issues associated with it. I encourage you to read "The Essays of Warren Buffett: Lessons for Corporate America."

With regard to current assets and current liabilities, the company could have chosen to not buy back its shares, which in hindsight would have been a better choice, and had even more current assets. However, it chose a different path.

As far as having little physical assets, would you prefer that Blue Nile be saddled with a lot of unproductive leases in various malls across the world that are unable to turn a profit? Capital light is a beautiful thing.


:::4. There are just under 15M diluted shares outstanding, resulting in a stated book value of 1.26/share. Any write down of inventory or fixed assets would reduce that number further.

As we discussed, its inventory is light compared brick and mortar. The company's inventory doesn't age like that of its competitors. What's the turn rate on its inventory? Do you think it is over 12, implying that inventory lasts less than month? Do you really think its inventory will suffer a massive devaluation when it enjoys a rapid turnover?

And we just finished discussing fixed assets. There are few fixed assets, a wonderful thing in this environment.


:::At current trading levels the stock is trading at almost 17 x book!

Again, don't care about book value. So what?


:::At current trading levels, the stock is trading at an infinte p/e. there is no "e".

We will see about the no "e." Riddle me this: would you prefer to be leading Blue Nile or one of its traditional brick and mortar competitors? Who do you think will emerge from this recession in a relatively stronger position?


:::Management will not have the cash resources to support the stock price for much longer. Note they used their cash to buy back 66M worth of stock in 2008 (it appears they reduced the diluted share count by 2M shares for an average of about 33/share). Without the management bid in the market, the only other logical source of support is short buy backs. Once they dissipate, the stock should descend.


As I write this message to you, I note that it is another brutal day in the markets, with the S&P down 3.3% and Blue Nile up 3.9% to about $22.05.

I am comfortable with my long position, are you comfortable with your (short) position?


:::Given these facts, it is very hard to understand how anyone, let alone someone who is employed as an analyst could recommend this stock.

Who said I was recommending it? Go back and read my two recent articles. I merely stated that I believe Blue Nile will hover around $20-$25 so long as the S&P remains in the range of 800-950. At present, the S&P is about 744, and Blue Nile is still north of $20. So far, I think I've done rather well. The bears, on the other hand, were hoping for a plunge after the latest earnings release.

Thank you for your comment, and I wish you happy trading or investing.

Prepping for Blue Nile's Wednesday Report

<i>What are you swayed by then? Doesn't this allow you to justify any price?</i>

You're right in the sense that the stock price is highly dependent upon key assumptions, which in Blue Nile's case can vary widely.

I am swayed by Blue Nile's competitive strengths; it's ability NOT to lose money, even though most of its competitors are; and my belief that it will do much better than the market and its competitors when the economy recovers.

Regarding share buybacks, you might wish to consult the prior transcript:

seekingalpha.com/artic...

<i>Over the past 12 months we have been very active in repurchasing shares. At the end of September, 2008 our shares outstanding totaled 14.5 million compared to 16.0 million a year ago. Since the inception of the buyback program in the first quarter of 2005, we have repurchased 4.4 million shares for a total of $160.0 million. This amount represents 25% of the shares outstanding at the inception of the program. <b>Our share repurchase program continues to be a priority for our uses of cash and we will look for opportunities to strategically execute our repurchase program.</b><... [emphasis added)

<i> NILE should trade around 8x earnings until it can both prove that it's industry will have meaningful results and it can be a meaningful player in it. </i>

If we were to accept your valuation and accept analysts' forecasts of roughly $0.90 per share for the year 2008, the you believe that Blue Nile should trade for $7.20 per share.

You and I obviously disagree. Your value is less than one-half of the "Low Target" on Yahoo!: finance.yahoo.com/q/ao....

Note that my range of $20-$25 is less than the Median Target of $28. So I am hardly a raging bull. But nor am I a raging pessimist.