Blue Nile: losing its sparkle Introducing reason to the buying of jewellery, as Blue Nile has done, has risks. The world's biggest online diamond retailer shortens the supply chain to reduce mark-ups, sells exclusively on the internet to cut overheads and its website is flawlessly transparent. But a groom-to-be could take this rationality too far, realise he is in danger of dropping 10 grand on a crystal chip and instead head to the pub, where he can find real value. Over time, though, the approach has worked. Blue Nile has septupled annual sales, to $350m, over a decade. Because the company buys its gems only after customers order, it is remarkably capital efficient, ending last year with $60m in negative working capital. So even with single-digit margins, the company earns very respectable returns on equity. But some of the glitter came off last week. The company reported disappointing fourth-quarter sales: high diamond prices were keeping customers away and, along with higher marketing spend, reducing gross margins. Particularly surprising given reports from other jewellers, sales growth at the high end ($25,000 and up) slowed sharply. Perhaps more frightening, Blue Nile indicated that it would ramp up its marketing effort further and cut prices more, in an effort to grow. Margins, which took a step down in 2011, are not done dropping. The stock lost a 10th of its value after the results - but still trades at 45 times this year's earnings. This combination of undercutting physical retailers, negative working capital, slowing growth, low margins falling further on increased spending, weak recent stock performance and a high valuation is starting to look like another retailer named after a river, Amazon. And both companies may be coming to the same realisation. Even if you take share from bricks-and-mortar rivals, discount retail is a tough business.