No. of Recommendations: 8
Hi, FC-ers all!

Before I take off for a month in “the South” … meaning Girona in Spain, where my youngest son lives, the Toulouse area in France, where I have rented a vacation home, and a weekend in Avignon, France, where my oldest son lives, I want to share a discovery with you and ask what you think of it. The German weekly investment magazine I subscribe to (Boerse Online) regularly brings an article by a correspondent based in New York in which she talks about companies not necessarily on the average German's radar screen. One such company intrigued me so much that I looked up its website, and its SEC filings, and found my enthusiasm growing.

The company's name is Blue Nile (NILE:Nasdaq), and it is attempting to be the Dell of diamonds. It went public in May of this year, so it is too early to know how it will fare, financially and/or share-wise, but I find the company's idea fascinating and its website a real buyer's treat. Which should I describe first? Perhaps the idea:

Founded by Mark Vadon and Ben Elowitz (formerly of Fatbrain.com) in 1999 as an online jewelry store with the uninspiring name of InternetDiamonds.com, the company subsequently chose the more exotic, or more attractive “Blue Nile”. Vadon's motivation was his discouraging experience when he tried to buy an engagement ring for his fiancée. Men, he realized, aren't necessarily the most knowledgeable about women's jewelry, nor about women's tastes in the same. With Elowitz he constructed the business, and the website, to help guide the prospective male buyer through the maze of possibilities. One can click on Education and find out about diamonds in general – cuts, color, clarity, carat weight (with the help of good illustrations), or about ring material – platinum, gold, sterling silver, or, perhaps the most important, about how to discern what kind of jewelry the woman in one's life prefers. A list of questions guides the “tech-savvy Marc Antonys” seeking to “woo their Cleopatras”
(quotations from the IPO information on the business at http://moneycentral.hoovers.com/global/msn/factsheet.xhtml?COID=100858):
Does she wear primarily gold, silver, or platinum? Choose the metal she wears most.
Does she wear subtle stud earrings and thin chain necklaces or larger, more noticeable things like big hoop earrings and wide bangle bracelets? Make sure your gift matches her taste in jewelry size.
Does she have a few precious things, or does she have several ensembles she wears for different occasions? This will help you decide whether to spend more on one thing, or less on several things that go together (this is called a jewelry ensemble).
(Taken from the website http://www.bluenile.com)
The buyer can go at his purchase by product - clicking on diamonds, engagement rings, wedding rings, or others, or by material - clicking on platinum, gold, pearl and such.
Finally, and here is the Dell connection: The company offers loose diamonds and settings, the buyer chooses exactly what he wants, and the ring is then assembled. Delivery service is via FedEx and is free of charge.

What does the business world say about the quality of the Blue Nile's business? Blue Nile quotes (http://www.bluenile.com/in_the_news.asp?track=56): Since the fall of 2000 Blue Nile has continually held the position of "Forbes Favorite" online jeweler, their highest position in the ranking of the best Web sites. Further awards include Bizrate.com's Circle of Excellence Platinum Award and nomination for a Best Overall Company category finalist in the first national, American Business Awards.

I found the following story particularly intriguing (http://www.bluenile.com/fox_challenge.asp):
Blue Nile asked a Fox affiliate to compare their diamonds with those of traditional jewellers. Fox did just that, however undercover, so neither Nile nor the others knew who was doing what. The team bought diamonds at three jewelry stores and through Blue Nile, each for around $4000, and took them to a gemologist for analysis. Blue Nile's diamond was as good as all the others. The only difference? All of the rings came as stated on their appraisal certificates, and all of the rings cost us less than our gemologist appraised them for. But you know where we got the best deal? Blue Nile! "We're glad that it worked out and that everybody can see the value that we do offer" said Blue Nile representative Robin Codner. And what a value it was. We paid $4,000 for the ring, but according to our gemologist the retail value was $8,480!

So what do the financials say? A quick look at the pre-IPO figures is more than encouraging:

Dec. 03 Dec 02 Dec 01
Revenue 128.9 72.1 48.7
Gross Profit Margin 22.8% 25.2% 22.9%
Net Income 27.0 1.6 (7.4)
Short-Term Debt 0.0 8.0 --
Long-Term Debt 0.0 1.1 --

The company's 10Q for Q2 shows a number of good developments in 2004 as well (all figures in thousands):

Q2 2004 Q2 2003
Cash from operation 6,759,000 4,432,000
Free cash flow 6,436,000 3,916,000
July 4, 2004 December 31, 2003
Accounts receivable 517 843
Inventories 6,681 10,204
Accounts payable 13,786 26,786
YTD 7/4/2004 YTD 30/6/2003
Net sales 70,806 51,882
Operating income 5,720 4,053
Net income 3,768 (incl. tax) 3,934(excl. tax)
Increase (dec.) in cash 22,263 (9,379)

A final comment: The board of Blue Nile is no strict men's domain. While CEO, COO and two vice presidents are men, the CFO and the two other vice presidents are women. That appeals to me … purely subjective argument, I admit. Or is it?

I'd be interested in hearing your comments, doubts, questions!
Bazonga

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