Blue Nile Inc. -- Is the Sparkle Gone

Blue Nile Inc. (symbol NILE) is the largest retailer of jewelry on the internet. It has seen explosive growth over the last decade, and some analysts have been touting it for a continued bright future. This seems wrong to me. Indeed, NILE may be reaching the end of its run. Let me explain.

Blue Nile has prospered to date by selling diamond engagement rings; they comprise about two thirds of all sales revenue. In essence, what this means is that men who are buying rings for their prospective brides are making most of the choices. This is key; the customers are men buying jewelry for women. While this may sound sexist, there is a marked difference between the way that men buy women's jewelry and the way that women buy it. Perhaps the best summary is that men buy jewelry on statistics and women want something more. There needs to be a style or a different fashion sense to the jewelry for the women to select it. Let me put it this way: a man could easily walk into a jewelry store and say that he wants a half carat diamond engagement ring; a woman would be much more descriptive.

So why is all this relevant to Blue Nile? Most of the jewelry sold in the USA is chosen by women, not men. Indeed, other than engagement rings, a very small proportion of jewelry sales are selected by men. Blue Nile's site, however, is clearly tailored to men. The Blue Nile site has the look of a wholesale catalogue. It lists styles and gem sizes and shows them in rows of photos that lack any style. Only the product is presented, nothing more. This will never get the attention of most women.

Indeed, there are now companies that have appeared which are filling the void on the internet for jewelry sold to women. One such site is called Adornia. It is a private company, so there is no public data on its sales, but a quick comparison of the Blue Nile site with the Adornia site shows the major difference in approach.

I would be very wary about investing in NILE at this point. It may do well if the economy picks up and jewelry sales in general rise. Nevertheless, without a radical restructuring of its presentation, NILE is unlikely to continue to achieve revenue growth; its segment of the jewelry market is just too small.

DISCLOSURE: I have no interest in Blue Nile and no plans to invest in that company.