Summary
The the economy may not be the only factor affecting Blue Nile's performance in 2008. Here's why.
Analysis
After a stellar performance in 2007, the company is projecting weaker performance in 2008 as the US economy continues to slow. Some say a recession is inevitable. If so, Blue Nile should be positioned to weather the down turn better than many of its bricks and mortar competitors. Nonetheless, its stock price has dropped from a high of $106.16 in September 2007 to a 52 week low of $38.21 in part because of management’s pessimistic outlook.
Relative to the sector, Blue Nile's focus on larger, center stone diamond rings and jewelry for the marriage market is a good place to be. . Projected to grow at about 30%, more marriages means engagement ring sales should grow in units sold in the US market. Granted the average sale may decline due to a slowing economy, but unlike so many other gift purchases, engagement rings and wedding band purchases aren’t likely to be postponed even if the nation slips into a recession.
Price is also on Blue Niles side too. An established low cost provider of services, Blue Nile's low average sale price is driven much more by diamond value than precious metal content. That should insulate Blue Nile's margins as precious metal prices continue to escalate. Blue Nile’s prices should also be more stable. Larger diamond prices have not risen as much as precious metals. Unlike many of its competition which have been forced to raise retail prices to maintain margins as precious metal prices topped $900/toz, Blue Nile has been able to maintain many of its key price prints. This price stability should strengthen Blue Nile's low price position in the market place.
Despite all it has going for it, Blue Nile’s management seems to be less confident in the company’s ability to continue to steal market share in today’s price conscious, inflationary economy. Granted, the company may have to fine tune its assortment and price points to better reflect some changes in its customers buying behavior; especially at the low end., but if management remains focused on delivering low price and good customers service, it may be as relevant in today’s economy than before, maybe more so. But that’s a big.
The fact is Blue Nile’s founder and its principal executives made a lot of money as the stock sky rocketed in value during 2007. Both Mark Vadon and Dianne Irvine became independently wealthy as they sold substantial amounts of Blue Nile stock during the price run up. Whether they are financially secure for life depends on the life style they choose, but such a sudden increase in wealthy and liquidity can change a company's management from eager and entrepreneurial to calm and complacent.
Today, there are few signs that Blue Nile management attitude has changed, perhaps for the worse. First, the company’s weak guidance for 2008 was surprising given its competitive advantages in the marketplace. In a weak economy, sales growth has to come from stealing the competitions market share. Tiffany recognized this as it reaffirmed its plans to roll out small format stores in smaller US markets. More stores will make it more accessible to consumers that value the Tiffany brand. Accordingly, you would expect Blue Nile to aggressively leverage its strong low price position to appeal to a broader segment of the US marriage market. But management has chosen to concentrate on its meager international business, a strategy for success that is problematic at best.
Second, the company is arbitrarily changing management structure, while losing key employees. For instance, company founder Mark Vadon assumed the elitist title of Executive Chairman. In the process, the new EC took a $100,000 cut in pay which was used to fund a pay increase for Dianne Irvine after she assumed the role of President & CEO.
Now, CFO Robin Easton has resigned after 7 months in that position. Dianne Irvine was the company’s CFO until her promotion to President and CEO in February 2007. Easton joined the company 8 months later in September 2007. Just what his reasons were for leaving so quickly aren’t clear. Now the company is looking for a new CFO from outside the company.
Where all this will lead Blue Nile remains to be seen. I was always skeptical about Blue Nile’s plan to become a billion dollar company, but I respected its management’s chutzpa for trying. Unfortunately, big cash gains by management, less gusto for the businesses, and unexpected, quick departure by the company’s CFO suggest that something more insidious than the economy may be afoot at Blue Nile.
