Citi analyst Mark Mahaney does a traffic analysis and concludes that Blue Nile will have a lousy Q2. Diamonds not big sellers in a recession...
comScore Q2 Traffic Softens - Per comScore, NILE had 1.83MM cumulative unique visitors in Q2, down 17% Y/Y, representing a material deceleration vs. Q1 decline of 8% Y/Y, and flat Y/Y growth in Q4. While NILE's monthly traffic can be very volatile - e.g. Mar '08 up 20% Y/Y, May '08 down 29% - traffic to Blue Nile has been down Y/Y in 9 out of the last 12 months, and when combined with the macroeconomic overhang, we view the Q2 datapoint as a clear negative for NILE.
Lowering Q2 Estimates Below Street on Lower Unit Volume - We are lowering our revenue and EPS estimates to $72.0MM (low end of guidance) and $0.17, down from $74.6MM and $0.18 (vs. Street at $74.7MM and $0.18), based on our conversion analysis of the traffic. All in, we have lowered our Q2 unit estimate by 4% from 42,612 to 41,105. Anecdotally, we believe that jewelry and bridal related industry trends have been soft YTD. At the margin, we believe there could still be downside risk to our new estimates and provide a Q2 revenue sensitivity analysis in this report.
Maintain Hold & $47 PT - Near-term negatives include: material macro headwinds, no near-term catalysts, tough Q2 & Q3 comps, with guidance requiring H2 revenue acceleration. Offsetting long-term positives include: clear market leadership, a long-term international growth opportunity, attractive valuation based on 7% '08 FCF yield with buyback potential, and unique supplier relationships. Trough valuation (since '06) would be $33 (7.7% '08 FCF or 13X P/FCF).
