High prices for diamonds bit into Blue Nile’s revenues and earnings, prompting the Seattle-based online jewelry retailer to reduce its profit margin on some diamonds in order to spur more sales.
Sales of engagement jewelry in the U.S. fell 4.6 percent to $60.9 million in the quarter ended in June from the same period a year ago. Executives attributed the decline to sticker shock, as the cost of small-sized diamonds rose by double-digit percentages from last year.
But CEO Harvey Kanter said in a conference call that the company knows what to do when price volatility strikes: bring prices down in order to gain market share. Blue Nile did so in 2012 and it worked well, but this time the company is not cutting back its profit margins as much, Kanter told investors.
“We believe this is the right strategy for both our short and long term business,” he said.
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The cutbacks began in June and have already resulted in accelerated growth, chief financial officer David Binder said. Of course, this means that profit margins are expected to shrink in the current quarter, but the company expects to offset some of that by efficiency gains, Binder said.
Blue Nile posted earnings of $2.17 million, or 18 cents per share, down from $2.2 million in the same period last year. Wall Street expected earnings of 19 cents per share. Sales dropped 1.3 percent to $106.6 million, while analysts expected around $110 million.
Blue Nile shares closed down 61 cents, or 2.39 percent, at $24.86 on Tuesday.
Analysts with RBC Capital Markets wrote in a research note that the sales decline in U.S. engagement jewelry was the first since the end of 2011.
Blue Nile has made major investments in technology and marketing in the past few years, wrote the analysts, who have a “hold” rating on the company. The analysts said more stable prices for diamond and metal, as well as better demand for high-end jewelry, would improve their outlook.
Bloomberg has reported that prices for rough diamonds rose about 10 percent this year in the wake of U.S. economic recovery and China’s growth.
Blue Nile said that in addition to the large price increases for small stones, mid-sized diamonds also saw prices rise. Larger diamonds saw more moderate cost increases, and the company’s sales continued to grow in that segment.
Sales of jewelry not directly related to engagements, such as wedding bands, rose 15 percent, the fourth straight quarter of double-digit growth, said Binder.
International sales grew by 6.7 percent, excluding the impact of currency fluctuations. Asia Pacific sales grew 15 percent, mainly thanks to higher demand in China.