Blue Nile slips as analyst downgrades to 'Hold'

Stifel Nicolaus & Co. analyst Scott Devitt cut his rating on the stock to "Hold" from "Buy," saying the luxury market remains weak in the U.S. In the second quarter, international sales accounted for just 11 percent of total revenue--leaving the company very much impacted by trends in the domestic economy.

Devitt said the core engagement-ring category may remain weak while consumers scale down to less expensive rings. Engagement rings make up about 70 percent of the company's product mix, Devitt said.

Devitt also expects sales of additional rings for occasions such as birthdays and anniversaries to remain weak and not improve until the economy rebounds.

On the positive side, Devitt said the company's operating costs are low, compared to traditional brick-and-mortar stores that have commissioned sales people and expensive rent.

"Blue Nile's operating costs on a cash basis remain below 12 percent in an industry of at least 40 percent average operating expense infrastructure," Devitt wrote in a client note.

Devitt said he has confidence in management's ability to navigate the current tough environment, but thinks investors "may be offered a more compelling entry point in the shares over the intermediate term."

Shares fell $3.22, or 7 percent, to $43.06.