Blue Niles cash flows have been stable and have mainly been used for share repurchases.
Zale Corporation (NYSE:ZLC) has posted negative operating cash flows in the last two years. Capital expenditure is higher vs. Blue Nile due to its bricks-and-mortar model. Further, post FY08, the company discontinued its share repurchase.
Blue Nile Inc (NASDAQ:NILE) has been able to maintain a steady cash balance, averaging $85 million. Further, its balance sheet is debt-free.
Zale Corporation (NYSE:ZLC)’s cash balances have declined by 60%, from $61 million in FY08 to $24.6 million in FY12. It has a Debt/Equity ratio of 244.4. Its Debt/EBITDA ratio improved to 7.3x only due to its strong 2Q13 results vs. FY12 Debt/EBITDA ratio of 8.0x
As seen in the adjacent chart Zale Corporation (NYSE:ZLC)’s share price has been fairly volatile. Though in the last one year share price has increased 30%, it is still trading 50% below its 52-week high of $7.
Blue Nile on the other hand did experience a downtrend in the beginning of the year but its share price has moved in a fairly stable fashion, trading at mid level of its 52 week range of $22-$43.
Similarly, over 5 years, Zale Corp’s share price has declined almost 79% vs. 17% decline in Blue Nile’s share price.
The convenience and savings of shopping online is undeniable and Forrester Research projects that U.S. e-commerce sales will increase from $202 billion in 2011 to $327 billion in 2016, an annual growth rate of 10.1%.
Zale Corporation (NYSE:ZLC) reported an astounding 2Q13 but whether it will be able to maintain this momentum only time will tell.
It is true that the company is trading at a premium of ~55 times its earnings with earnings growth not supporting the premium multiple. However, given Blue Nile Inc (NASDAQ:NILE)’s stable sales growth and margins supported by a strong and debt free balance sheet, I would recommend this company for the long haul.
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