Blue Nile Shares Plunge

The stock tumbles as investors fret over the company's growth rate.
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Updated from Oct. 26

Shares of

Blue Nile

(NILE)

dropped off a cliff on Wednesday amid concerns about the company's growth rate.

While the online jeweler bested Wall Street's earnings estimates with its third-quarter report on Tuesday, it offered somewhat disappointing guidance for the current quarter. More disturbingly, the company reported that its revenue growth has slowed dramatically over the past two quarters.

The company's revenue growth slowed to 23% year-over-year in the just completed quarter from 45% in the first quarter of this year, noted Piper Jaffray analyst Aaron Kessler in a research report on Wednesday. The company's sales are getting crimped by rising diamond prices, he said.

"Slowing growth is a cause for concern," Kessler said, adding that the company may need to increase its marketing spending to boost sales.

Kessler reiterated his "market perform" rating on Blue Nile shares, but cut his price target from $36 to $32 a share.

(Piper Jaffray does not have investment banking business with Blue Nile.)

Picking up on those worries, investors sold off Blue Nile on Wednesday. In recent trading, the company's shares were off $6.15, or 17.6%, to $28.85.

Blue Nile earned $1.66 million, or 9 cents a share, in the quarter. The company's net income was off 23% from the same period a year ago, when it earned $2.19 million, or 13 cents a share.

This year, though, the diamond dealer's bottom line was diminished by its having to pay income tax on its earnings. Last year, the company paid no income taxes because of previous losses. Excluding income taxes, Blue Nile's earnings would have been up 18% from the year-ago period, or a slower rate than its revenue.

The company's profit declined despite a rise in sales. Compared to the year-ago period, Blue Nile's revenue was up 23% in the quarter to $33.9 million.

Wall Street had forecast earnings of 7 cents a share on $33.6 million in sales, according to a poll of analysts by Thomson First Call. But analysts' estimates are down from July when Blue Nile

offered disappointing guidance. The company predicted then that it would earn 5 cents to 7 cents a share in the quarter on sales ranging from $32.5 million to $34 million.

Blue Nile expects to earn 20 cents to 23 cents a share in the fourth quarter on sales ranging from $58 million to $62 million. The midpoints of both ranges -- 21.5 cents and $60 million, respectively -- are just below Wall Street's estimates. Analysts are expecting the company to earn 22 cents a share in the holiday period on $61.3 million in sales.

Despite this, other analysts were not as concerned as Kessler. Diamond prices should stabilize "within the next several months," which should help Blue Nile boost its sales, said McAdams Wright Ragen analyst Dan Geiman, in a note issued Wednesday. Geiman reiterated his "buy" rating on the company's shares and his $40 price target.