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Originally published Wednesday, February 13, 2008 at 12:00 AM

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Blue Nile warns of weakening high-end diamonds sales

Blue Nile stock plunged more than $10 in after-hours trading Tuesday as the Seattle company warned of "tremendous uncertainty in the luxury retail sector." The online retailer says demand for pricey jewelry is slowing, setting the stage for a weak 2008.

Seattle Times business reporter

Hope your significant other surprises you with a pricey piece of jewelry this Valentine's Day?

Better not.

Blue Nile, the Internet's largest diamond retailer, says 2008 is off to a disappointing start as consumers pull back on buying top-of-the-line jewelry.

Blue Nile reported a fourth-quarter profit that beat Wall Street's expectations, but a sharp decline in its outlook for the first quarter and full year was described by one analyst as a "real shocker."

Shares of Blue Nile plunged more than $10 in after-hours trading Tuesday to $43 as the Seattle company warned of "tremendous uncertainty in the luxury retail sector."

"Consumers are holding back," Blue Nile founder Mark Vadon told analysts during a conference call after the close of regular trading. "We're in a very, very transitional time right now, and the market is relatively weak."

Blue Nile said sales in the fourth-quarter, which included the all-important holiday shopping season, rose 23 percent from a year ago to $111.9 million, while its profit increased 31 percent to $7.5 million.

Blue Nile's per-share profit of 45 cents narrowly beat Wall Street's consensus estimate of 44 cents.

Vadon called 2007 an "excellent year for the company" but painted a different picture for 2008.

He said Blue Nile has begun to experience "weakness at very high price points," shooting a hole through the theory that wealthy consumers would continue to splurge on luxury products despite economic turmoil.

Blue Nile now predicts a per-share profit in the first quarter of between 11 and 14 cents, well below the 23 cents Wall Street had forecast. For the full year, Blue Nile expects its per-share profit will be roughly the same as in 2007, or $1.04.

Sales of jewelry with price tags above $25,000 "all of a sudden are very, very weak," Vadon said. "The very, very high-end consumer is finally showing some vulnerability."

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Dan Geiman, who follows Blue Nile as an analyst at McAdams Wright Ragen in Seattle, said the company's outlook surprised him.

"Their last couple of quarters have been perhaps their strongest quarters as a public company, and that was in the midst of a consumer environment that was weakening," Geiman said.

"Now, it appears that they're feeling the pinch. Maybe they're not as immune as some of us thought," Geiman said.

Also Tuesday, Blue Nile announced that Vadon had given up his title of chief executive and assumed a newly created position of executive chairman. President Diane Irvine takes over as CEO.

Vadon, who remains chairman of the board, will provide "strategic direction" with an aim toward growing the company in the U.S. and throughout the world, Blue Nile said.

The company recently expanded its overseas reach by beginning shipments to a dozen new markets in Europe and Asia. Blue Nile's international presence had been limited to Canada, the United Kingdom and Ireland.

"Our international markets are doing great," Irvine said, adding that the pullback in spending is a U.S. problem.

"We've seen some improvement for Valentine's Day," she said. "But it's not a trend, so we want to be cautious in our outlook."

In other news, Blue Nile's board authorized the repurchase of up to $100 million of company stock over the next two years, adding to a previously announced buyback of $50 million.

Blue Nile stock has been trading between $106.16 and $37.85 a share during the last year.

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

Copyright © 2008 The Seattle Times Company

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