Blue Nile Gets Physical

Diamonds may be a girl’s best friend, but even the best of friends have a falling out every now and again. And it seems 2015 was just that kind of year for the ladies and their sparkliest companions.

The world’s most famous and recognizable jewelry brand Tiffany reported holiday sales down 5 percent — a reality the company chalked up to “restrained consumer spending tied to challenging and uncertain global economic conditions.” Just this week, landmark Manhattan jeweler and bridal firm Michael C. Fina announced it was rolling up shop in the real world and decamping to a digital-only model in partnership with Amazon.

And while Michael C. Fina is excited about seeking out better fortunes on digital shores, Blue Nile has spent the last quarter proving that selling online isn’t exactly an easy solution to take on. In fact, it is a particularly difficult maneuver on big-ticket items, like diamonds and gold, as those tend to be the sorts of purchases consumers like to make in person after throughly inspecting the merchandise.

Blue Nile posted a big miss on earnings in Q4, sending its stock into a downward spiral. Net sales hit $150 million — a 4.8 percent decline from the same time a year ago. Analysts had been looking for $165.5 million so the miss was pretty significant. Net sales during the generally considered crucial holiday quarter were $480.1 million — an increase of 1.4 percent from last year but still well below The Street’s pre-earnings estimates of $498 million.

The news was not all doom and gloom, though — few earnings reports are. Net income for the quarter was $5 million, or $0.43 per share, which is about what Wall Street was looking for. However, on the yearly forecast, Blue Nile missed, clocking in $10.5 million, or $0.90 per share, again missing analyst predictions of $1.05 per share.

In the week since that report came out, the market has been less than kind to Blue Nile, which has shed around 30 percent of its share price since the beginning of the year. Those weaknesses have been officially explained in-house — but also by analysts — as the culminating effects of consumers less inclined toward big-ticket items, currency headwinds and a less than totally well-timed weakening in Blue Nile’s core product: engagement jewelry. Blue Nile is selling more diamond totems to love, but what it is selling costs less.

Blue Nile CEO and President Harvey Kanter, rather expectedly, remains bullish on his firm’s future.

“In spite of these challenges, we sold a record number of engagement rings, expanded gross margin rate and drove success in our new Webroom,” Kanter said. “As we look out on 2016, we will push harder on elements that are working: engagement ring units, wedding band attach rates, continued expansion of margin and the Webroom concept.”

Blue Nile has had some success in the first few of those areas since the year began, though, at this point, not enough to push its stock price out of idling in neutral territory. Some of that success comes in getting better at increasing control of its margins. In 2015, gross margin improved from 18.1 percent of sales to 19.4 percent.

But the most interesting, and perhaps most curious, part of Blue Nile’s plan is its increased focus on the Webroom concept, which entails opening physical locations strategically to drive consumers to the Web-based jewelry shops. Curious because Blue Nile, in a world full of eCommerce startups that come and go, has been around for a while. Founded in 1999, the online shop was one of the few survivors that lived to tell the tale of the Web 1.0 bubble-pop and has been one of the few non-Amazon, non-eBay cases for running a successful eRetail-only experience.

So, why go real world, especially when it seems that real world is increasingly going online?

According to Julie Yoakum, Blue Nile’s chief merchandising officer, the point of the physically located Webrooms is to offer up the main advantage of the brick-and-mortar store — the ability to physically interact with the gemstones — while innovating on the rest of the experience to make it more in line with the digital brand. Consumers can see and touch the merchandise at a Blue Nile physical location, but the buying and selling still occurs online at the Blue Nile site — “via in-store tablets and with the help of non-commissioned consultants.”

“The Webroom is on the other end of the spectrum from traditional jewelry stores, in terms of both physical look and shopping experience. We’re going to shock some people, in a good way,” Yoakum noted.

Blue Nile’s physical rollout is limited and proceeding at a conservative pace. The brand already opened one store in Roosevelt Field Mall in Garden City, New York, with another planned for White Plains later this year. Blue Nile also has two Webrooms opening outside of New York — one in the Tysons Corner Center Mall in the Washington D.C. metro Area and one in Portland.

“Expanding … to the West Coast is a huge move for us and one we think will benefit customers in the Seattle and Portland markets who might want to see an engagement ring in person before buying online,” Yoakum said in a statement.

The choice of Portland, incidentally, caused some online stir since Seattle is Blue Nile’s hometown. As of yet, there are no Webrooms planned for the city and no comments on when one might be built.

The question that remains is can Blue Nile make a store where one emerges with nothing physical to call their own a working concept in retail, since arguably one of the main benefits of going to a physical retailer is the ability to emerge with the desired good same-day. While offering up Webroom limits is at least one of the pain points associated with Blue Nile’s particular brand of high-end retail, customers don’t like to spend hundreds and thousands of dollars on goods sight-unseen but leaves another one firmly in place: Customers generally don’t like to wait for goods if they’ve gone to a store to buy them.

But Blue Nile — facing falling profits and brick-and-mortar competitors who have gotten hip to the online and mobile game — needs to change and simply reverse-engineering traditional jewelry retail is an equally unworkable solution.

So, we’ll keep you posted on if Webrooming works for Blue Nile and if the trend catches on.