Outside the glare of the public markets, is Blue Nile now free to grow?

For a while, smart people have been telling me that Blue Nile needs to be a private company. That chatter only increased when former Blue Nile chairman Mark Vadon bought 5 percent of the company in June.

Yesterday, it happened. Bain Capital Private Equity and Bow Street LLC bought out the e-tailer, in a $500 million deal that might prove its unlikely salvation. The thinking behind taking it private goes like this: Blue Nile posts steady but unspectacular profits (net income for fiscal 2015: $10.1 million). Which is fine, but the stock market wants growth. Lately, Blue Nile hasn’t figured out a way to generate any. Its results for this latest quarter were particularly bad, with both sales and earnings taking a hit. 

Blue Nile has experimented with a variety of strategies, including opening webrooms and starting fashion brands. Both those strategies have merit but have yet to yield noticeable results. (And while the webrooms are pretty well-executed, it’s hard to see how five—or even 50—will substantially move the needle. In addition, they jeopardize Blue Nile’s sales tax advantage, one of its big advantages over brick-and-mortar stores.)  

What the company really needs, many feel, is a long-term growth strategy that it invests in and really sticks to, which might even require spending a few quarters in the red. But that is not always possible when you are operating as a public company. (In February, Blue Nile paid a first-ever special dividend that some viewed as a giveaway to unhappy investors.) That’s why the company has long seemed stuck.

Now, other dot-coms, in particular Amazon, regularly generate losses. But that company has fundamentally evolved its business. It’s introduced the Kindle, it’s gone into web services, it is now largely based on Prime. To a large extent, Blue Nile operates with the same cheap engagement ring model it began with.

Bain and Bow Street paid $500 million for Blue Nile, a price that is slightly above its annual sales number. That struck some as a lot of money for a company that only generates about $10 million a year, even one that has $157 million in assets. But the two buyers obviously see potential there.   

One knowledgeable observer suggested that the real play may be overseas. If Blue Nile can leverage its existing diamond relationships and establish itself in markets like India and China—possibly in partnership with, or through the purchase of, a local player—that could turn it into a more profitable company that might again go public down the line. The economics of webrooms might work better overseas as well.

But all that requires money, and lately Blue Nile hasn’t had much to play with. (Among the complaints I’ve heard: It needs to upgrade its technology.) A note to employees yesterday specifically talked about the “additional resources that come with this partnership.” So while it may not make sense to pay half a billion dollars for the current iteration of Blue Nile, the two investment funds may be looking to build the Blue Nile of the future.

Rob Bates

JCK News Director