Blue Nile Seems Like a Long Tearful River

Does it make sense for you to walk down to the shopping center to pick up a gift for your loved one when you have the entire shop displayed on your computer screen by the retailer? Be it flowers or jewelry, you're only a click away from placing an order. The Internet is the fastest growing retail market. And, as more people buy smartphones and tablets, the Internet retail market tends to expand further.

Considering all this, investors just don't accept disappointing numbers from Internet retailers. When online diamond and jewelry retailer Blue Nile (Nasdaq: NILE  ) recently posted lower-than-expected third-quarter profits, investors sent its shares on a free fall of nearly 18%.

International influence
Blue Nile's top line grew to a better-than-expected $75 million, 11% up from the year-ago period. Unlike other jewelry retailers such as Signet Jewelers (NYSE: SIG  ) and Zale, Blue Nile operates on an online platform. This gives the company exposure to global markets. Its international quarterly sales grew by a staggering 55% compared with the same period last year.

Numbers that make you blue
Beyond this, things don't look good. The company failed to translate its earnings into profits. Blue Nile earned a net income of $1.9 million, a steep 32% fall from the same quarter last year. Earnings per share of $0.13 did not meet analysts' estimate of $0.17 per share, again falling short of market expectation for the second consecutive quarter. Moreover, Blue Nile offered a weak profit outlook for the next quarter, too. Now, that is a lot of disappointment.

At a growth rate of 15% compared with last year, Blue Nile's expenses grew faster than its revenue. Rises in diamond costs and the company's inability to curb its operating expenses have pinched profitability margins to a great extent. Diamond prices are up by 25% compared with what they were last year. This did not get along well with the company's inventory cycle, which pressured the gross margins.

Now, Blue Nile is planning to shift toward the non-diamond jewelry space, such as colored gemstones and pearls, to offset the impact of higher diamond costs.

Moreover, adding fuel to fire, CEO Diane Irvine, who has been with the company since its inception, has resigned, spreading a sense of insecurity among investors. This news, along with the softness in Blue Nile's numbers, has directly affected the company's stock price.

The Foolish bottom line
Blue Nile looks fundamentally weak. Although the Internet retail industry continues to boom, difficulties managing inventory efficiently, along with cost pressures in the diamond market, do not make me feel too confident about the company.

However, if you are interested in this online-diamond-retail company, click here to add Blue Nile to your watchlist. It will help you stay updated on all the news and analysis about this stock.

Navjot Kaur does not own shares in any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Blue Nile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.