This is a summary of the second quarter fiscal 2008 earnings call conducted by Blue Nile, Inc. (NILE) on August 5, 2008.
Management:
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CEO and President: Diane Irvine
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CFO: Marc Stolzman
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Manager, IR: Eileen Askew
Key Investor Issues:
- Net income fell to $3.2 million, or 20 cents per share in the second quarter, from $3.78 million, or 23 cents a share, a year ago.
- Blue Nile posted a 2% increase in the latest quarter revenue to $73.7 million.
- US sales declined 5%, while international sales increased 179% to $8.1 million.
- Blue Nile cut its sales forecast for 2008 and expects net sales to increase on a percentage basis in the mid-single digits, down from the previous guidance of 10% jump.
- For the third quarter, net sales are expected to be flat or rise 5%, while net earnings per share should range between 15 cents to 17 cents per share.
Second Quarter Highlights:
Since the beginning of 2008, retail in general has faced an extremely challenging economic environment in the US. The luxury sector, including jewelry, was more impacted by an economic downturn than other retail categories.
The company experienced 3.8% sales growth in the first quarter and saw slight improvements in sales trends in April and May.
However, the company has seen clear signs of further weakness in the economy in the past two months. The US economic environment and consumer sentiment have declined since the beginning of June. Consumer discretionary spending driven by rising oil and food prices, the severe decline in housing prices, and tight credit markets has had a significant impact on the industry. The severe tightening in credit markets has impacted the ability of consumers to access credit for the purchase of high ticket items such as jewelry.
The company saw a significant decline in its third-party financing program during the quarter as a result of the substantial decrease in credit approvals to consumers.
In addition to the difficulties in the economic environment, the company has seen significant inflation in costs this year. Diamond prices have been steadily rising in 2008 and there was single dramatic increase in wholesale diamond prices that took place in late May.
Diamond prices rose by an unprecedented 7% to 25% overnight in June.
This diamond price increase impacted sales in the month of June and thus second quarter results. Sudden changes in diamond prices can have a significant impact on the company’s business because Blue Nile purchases diamonds on a just-in-time basis from its suppliers in its virtual inventory model. With the real-time pricing from the suppliers, the company’s costs for diamonds and thus the retail prices change immediately as wholesale diamond prices change. These price increases were therefore passed on to consumers on a real-time basis, which had a negative impact on demand for the month of June. In addition to increases in diamond prices, the price of metals has risen substantially over the last year.
On a year-to-date basis through the end of the quarter, prices for gold increased 9%, silver prices rose 17%, and platinum prices were up 33%, significantly impacting the company’s merchandise costs.
As a result of these dynamics, the overall inventory costs have increased dramatically this year, at the same time that Blue Nile faced significant headwinds from the consumer environment.
Despite this challenging environment, second quarter sales growth of 2.2% was within the company’s expectations and Blue Nile achieved profitability of $0.20 per diluted share, which was well above the company’s guidance.
Despite the disruptions in the jewelry industry and the economic uncertainty facing US consumers, Blue Nile generated profitable growth in the first half of 2008 with sales up 3% over the first six months of 2007.
A number of large jewelers in the US have filed for bankruptcy protection this year, while other large chains have announced significant store closures and are liquidity inventory at heavy discounts. The management believes that Blue Nile is financially and competitively strong.
Given the increase in the cost of diamond and the weakening economic environment, Blue Nile is revising its financial goals downward for 2008.
In today’s environment, the company is executing on its initiatives for 2008 and is committed to delivering an exceptional experience and value to the customers.
Update on the progress against the company’s key initiatives for 2008:
