Blue Nile says jewelry buyers are trading down

A year ago, Blue Nile was a Wall Street darling as its stock traded above $80 and U.S. consumers, seemingly oblivious to signs of a slowing economy, shelled out thousands of dollars for diamond-engagement rings.

Now, Blue Nile's stock is below $40, and consumers no longer are oblivious: In a conference call with analysts Tuesday, Blue Nile executives said consumers are trading down to less-expensive jewelry on its Web site amid tough economic conditions.

"Customers in the second quarter of 2008 on average bought smaller carat stones compared to a year ago," said Chief Financial Officer Marc Stolzman.

The Seattle company reported a second-quarter profit of $3.2 million, or 20 cents a share, down from $3.8 million, or 23 cents a share, a year ago.

Its sales for the three months that ended June 29 increased to $73.7 million from $72.1 million a year ago, due to an expansion of its business overseas.

Although Blue Nile's per-share profit topped the 17 cents that analysts, on average, had expected, its sales performance underwhelmed Wall Street, and shares declined about $1 in after-hours trading to $38.50. Earlier Tuesday, the stock closed up 74 cents at $39.52.

Still, analysts seemed more concerned with Blue Nile's tepid outlook than with its second-quarter results. The company maintained its prediction for a full-year, per-share profit in line with the $1.04 it posted last year, but some saw that as a lowering of expectations given that it ended the second quarter ahead of target.

And there was no disputing that Blue Nile became more cautious on the sales front, predicting year-over-year percentage growth in the mid-single digits, down from a previous estimate of 10 percent.

"It's a tough environment, and it doesn't seem as though it's getting better anytime soon," said Dan Geiman, who follows Blue Nile for McAdams Wright Ragen in Seattle. "In fact, it seems the environment has gotten a little worse over the last couple of months."

Fortunately for Blue Nile, it now ships to nearly 30 countries, which accounted for $8.1 million in sales during the second quarter, up from $2.9 million a year ago, when it did business in only four countries.

Chief Executive Diane Irvine told analysts Tuesday that a sudden rise in wholesale diamond costs at the end of May forced it to raise prices, even as U.S. consumers found themselves with less money to spend amid a tightening credit market.

Sales in the $5,000 to $50,000 range were weak, while sales under $5,000 and above $50,000 were "pockets of strength," executives said. They speculated that buyers in that troubled middle segment tend to finance their purchases with loans that in turn have become more difficult to get.

"At these prices, credit is very important to customers," Irvine said.

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com