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Jewelers Go From Posh To Pixels

Posted: Aug 08, 2008 09:45 AM by Will Ashworth

Tickers in this Article: EBAY, TIF, OSTK, NILE, BIDZ

Three years ago, I was looking to buy an engagement ring for my then girlfriend, now wife. It seemed like everyone had an opinion where I should purchase it. I eventually settled for a local jeweler that I knew. If I had only turned on my computer, I probably could have saved myself some time and money. It seems that the internet is the perfect venue for buying and selling jewelry.

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Walls Cost Money
Traditional jewelers like Tiffany (NYSE:TIF) are slowly figuring out that selling expensive items online is possible. According to Internet Retailer magazine, Tiffany had $150 million in online sales in 2007, approximately 5% of its $2.9 billion in total revenue. Those numbers make it the third largest online jewelry retailer behind No.1, Blue Nile (Nasdaq:NILE) and No.2, Bidz.com (Nasdaq:BIDZ). Blue Nile's sales in 2007 were more than double the Tiffany's online sales. Tiffany allocated $186 million in capital expenditures in 2007, producing $627 million in ttm EBITDA. It spent approximately thirty cents to make a dollar. Now contrast that with Blue Nile and BIDZ.com. Blue Nile allocates twenty cents to make a buck and Bidz.com five cents. Both clearly benefit from lower overhead. (To learn more, read A Clear Look At EBITDA and Value Investing Using The Enterprise Multiple.)

Not The Only Option
BIDZ.com actually got its start in 1998 selling merchandise on eBay (Nasdaq:EBAY), setting up its own site in February 1999. It is conceivable that you could find something there. Another possibility is Overstock.com (Nasdaq:OSTK). Jewelry and watches, along with clothing and accessories accounted for 25% of its $856 million in gross bookings in 2007. Back in 1999, CEO Patrick Byrne saw the potential in selling off excess inventory through the internet, and since then Overstock has grown its bookings from just $1.8 million in eight short years. Unfortunately, its bottom line isn't quite as rosy losing $41 million from continuing operations in 2007.

Bidz.com's Model Business Model
To me, Bidz.com operates much like a casino. The bidding process for its live auctions allows some items to sell for a loss, approximately 15-25% of the total sold annually according to their 10-K. A $1 minimum bid brings in additional traffic producing an overall gross margin of 29.1%, keeping the profits rolling. The evidence that this is working can be found in Bidz.com's pre-tax margins, which have grown from 1.2% in 2004 to 11.2% in 2007. The average customer buys 3.5 times per year and it recoups its customer acquisition cost after just one purchase. With 12,000 items sold each day, revenues accumulate quickly. In 2007, they were up 42% to $187.1 million. Since 2003, its compound annual growth rate for revenues is 41%. That’s not surprising given the annual domestic online jewelry growth rate since 2000 is 21.7% versus 4.8% for the overall jewelry market. It provides the right product at the right price at the right time. (For related reading, check out Getting To Know Business Models.)

Down The Blue Nile
As mentioned previously, Blue Nile is the biggest online jewelry retailer in the United States. It started in 1999 as RockShop.com and bought a Seattle jeweler the same year, changing its name to Blue Nile Inc. In 2007, revenue grew 26.9% to $319.3 million and net income was up 33.6% to $17.5 million. That’s solid growth for sure. However, 2008 isn’t looking nearly as successful. Its second quarter sales grew just 2.2% or $1.6 million to $73.7 million and net income of $3.2 million, $600,000 less than the same quarter in 2007. Its full-year guidance calls for mid-single-digit increase in revenue, with earnings per share flat with 2007 at $1.04 a share. All of this leaves analysts mixed; RBC Capital Markets lowered target $10 to $44, with a 'sector perform' rating. At the same time, ThinkPanmure LLC lowered its price target to $60. Nonetheless, they still rate Blue Nile a 'buy'. Both cite diamond prices for the changes.

Bottom Line
Whether buying jewelry or buying stocks, your success depends a great deal on your research. While Blue Nile is the industry leader, and probably the site I'd use if I were buying an engagement ring, in the end it's all about the numbers and the business model. By any criteria, Bidz.com is the clear diamond in the rough.

To learn how to value an online businesses, read Choosing The Winners In The Click-And-Mortar Game.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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