Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NILE > SEC Filings for NILE > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for BLUE NILE INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BLUE NILE INC


6-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q and the Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Risk Factors." Management Overview
We are the leading online retailer of high-quality diamonds and fine jewelry. We offer our products for sale through the Blue Nile website in over 40 countries and territories throughout the world. Our primary focus is on growing our business by providing unparalleled quality, selection and value to consumers and delivering exceptional customer service.
We believe that our extensive and unique product selection, connection with our customers through our marketing and customer service efforts, and the value we provide to our customers through our competitive pricing will enable us to maximize our revenue and profitability and increase market share both domestically and internationally. Our online business model allows us to avoid many of the costs that are typically incurred by physical retail stores. As a result, we are able to realize lower gross profit margins while remaining profitable.
In order to increase our sales and market share, we are focused on accelerating the sales growth rate of our business through initiatives across three main categories: 1) the sale of engagement products in the U.S.; 2) the sale of non-engagement products in the U.S.; and 3) the sale of both engagement and non-engagement products in international markets. The engagement product category includes gold or platinum engagement rings with a diamond center stone and loose diamonds. Our non-engagement product category includes rings, earrings, necklaces, pendants, bracelets, gifts and accessories containing precious metals, diamonds, gemstones or pearls.
We believe that value is one of the most important drivers of engagement sales, and the current cost of diamonds is a significant factor to our growth rate. Generally, we purchase our diamonds on a real time basis from our suppliers when a customer places an order for a specific diamond. When the cost of diamonds is relatively steady or declines, we believe that our business benefits because we are able to immediately pass those lower costs on to consumers. Diamond prices decreased year-over-year through most of 2012 before stabilizing in the fourth quarter of 2012. Diamond prices have been relatively stable since the fourth quarter of 2012 and throughout the year-to-date ended June 30, 2013. Regardless of diamond pricing dynamics we will remain focused on 1) utilizing our aggressive retail pricing; 2) investing heavily in our engagement products; and
3) providing our customers with a compelling website experience across all devices in order to maintain our momentum, gain market share, and increase our value proposition compared to our competitors. The total addressable market for the sale of non-engagement products is much greater than that for engagement, and we believe our brand is well positioned to gain market share. To accelerate growth in our non-engagement category, we are
1) maximizing our opportunity to sell wedding bands to both new and repeat customers through refined pricing, promotion, messaging and user experience; 2) refining the diamond jewelry assortment; 3) focusing on quality and understandable designs to drive sales in fashion jewelry; and 4) providing our customers with a compelling website experience across all devices in order to maintain our momentum, gain market share, and increase our value proposition compared to our competitors. We have and will continue to invest in this area. As part of our plan to accelerate growth in our international business, we are extending our capabilities into markets with the highest potential for growth. We expect significant growth from international markets, both in countries where we have many years of experience, as well as emerging markets. We believe that the Asia-Pacific market, specifically China, represents significant long-term opportunities for us. For fiscal year 2013, we have and will continue to increase our investments in infrastructure, product selection, website and mobile experience, and marketing. In addition, we will continue to explore strategic partnerships to better serve our customers in these markets.


Table of Contents

Investments during 2012 and the first quarter of 2013 have increased our selling, general and administrative expenses and increased the amount of inventory we carried compared to the same period last year. We believe that these investments will lead to increased growth in all categories of our business and provide higher profitability over the long-term. Second Quarter of 2013 Summary of Results of Operations We achieved second quarter net sales of $108.0 million, an 18.7% increase from the second quarter of 2012. Net sales increased across our three main categories
- U.S. engagement net sales increased 22.0%, U.S. non-engagement net sales increased 11.3% and net sales in our international markets increased 19.1% from the second quarter of 2012. International net sales comprised approximately 15.9% of our total net sales for the quarter. Our gross profit increased $2.9 million in the second quarter of 2013, a 16.9% increase compared to the second quarter of 2012. Net income per diluted share was $0.17 in the second quarter of 2013, compared to $0.11 for the second quarter of 2012.

Results of Operations
Comparison of the Quarter Ended June 30, 2013 to the Quarter Ended July 1, 2012
The following table presents our operating results for the quarters ended
June 30, 2013 and July 1, 2012, including a comparison of the financial results
for these periods (dollars in thousands, except per share data):

                                                 Quarter ended
                                              June 30,     July 1,
                                                2013        2012       $ Change    % Change
Net sales                                    $ 108,014    $ 90,981    $ 17,033       18.7  %
Cost of sales                                   87,917      73,790      14,127       19.1  %
Gross profit                                    20,097      17,191       2,906       16.9  %
Selling, general and administrative expenses    16,685      14,867       1,818       12.2  %
Operating income                                 3,412       2,324       1,088       46.8  %
Other income, net:
Interest income                                     22          45         (23 )    (51.1 )%
Other income, net                                   38          67         (29 )    (43.3 )%
Total other income, net                             60         112         (52 )    (46.4 )%
Income before income taxes                       3,472       2,436       1,036       42.5  %
Income tax expense                               1,266         858         408       47.6  %
Net income                                   $   2,206    $  1,578    $    628       39.8  %
Basic net income per share                   $    0.18    $   0.11    $   0.07       63.6  %
Diluted net income per share                 $    0.17    $   0.11    $   0.06       54.5  %

Net Sales
Net sales increased 18.7% during the second quarter of 2013 as compared with the second quarter of 2012. U.S. engagement net sales for the second quarter of 2013 increased 22.0% to $63.9 million, compared to $52.4 million for the second quarter of 2012 due to an increase in both average shipment value and the number of shipments. These increases were driven by marketing and pricing strategies to maximize sales. U.S. non-engagement net sales for the second quarter 2013 increased 11.3% to $27.0 million, compared to $24.2 million for the second quarter 2012 due to an increase in the average shipment value offset by a decrease in the number of shipments. We refined our marketing efforts and product assortment in this category during the second quarter of 2013 to generate greater sales. These efforts were targeted at certain products which typically sell at a higher price than the average of the products in this category. As we generated more sales of these items, our average shipment value increased.
International net sales increased 19.1% to $17.1 million from $14.4 million in the second quarter of 2012 due to an increase in shipments slightly offset by lower average shipment value. The increase in shipments is the result


Table of Contents

of greater product selection and an increase in our localized marketing efforts. Internally, we monitor our international sales performance on a non-GAAP basis which eliminates the positive or negative effects that result from translating currency from international sales into U.S. dollars ("constant exchange rate basis"). Changes in foreign exchange rates during the second quarter of 2013, compared to the rates in effect during the second quarter of 2012, had a negative impact of approximately 1.5% on international net sales. Excluding the impact of changes in foreign exchange rates, international net sales increased 20.6% for the second quarter of 2013 compared to the second quarter of 2012.

Gross Profit
Gross profit in the second quarter of 2013 increased 16.9% to $20.1 million from $17.2 million in the second quarter of 2012. The increase in gross profit resulted primarily from the growth in net sales. Gross profit as a percentage of net sales was 18.6% for the second quarter of 2013 compared to 18.9% for the second quarter of 2012. The decrease in gross profit as a percentage of net sales resulted primarily from changes in our product mix. Our engagement products provide lower gross profit as a percentage of revenue than our non-engagement products. In the second quarter of 2013, sales of our engagement products grew faster than our non-engagement products and equaled 71.9% of our total revenue versus 70.2% in the second quarter of 2012.
Costs for our products are impacted by prices for diamonds and precious metals including gold, platinum and silver, which rise and fall based upon global supply and demand dynamics. In making retail pricing decisions, we take into account fluctuations in the pricing of diamonds and precious metals, which in turn, affect the gross margin that we realize from such products. We expect that gross profit will continue to fluctuate in the future based on changes in product acquisition costs, particularly diamond prices, product mix and pricing decisions.
Selling, General and Administrative Expenses Selling, general and administrative expenses increased 12.2% to $16.7 million in the second quarter of 2013 compared to $14.9 million in the second quarter of 2012. Compensation and benefits expense increased $0.7 million due to increased headcount to support key business initiatives. Marketing and advertising costs increased $0.5 million in the second quarter of 2013, primarily due to increased spending on online marketing vehicles and other marketing efforts to drive traffic to our website, both domestically and internationally. Credit card interchange and payment processing fees increased approximately $0.5 million in the second quarter of 2013 due primarily to higher sales volumes and increase in rates. Selling, general and administrative expenses as a percentage of net sales decreased to 15.4% in the second quarter of 2013 compared to 16.3% in the second quarter of 2012 as sales accelerated faster than expenses. Our online business model with a relatively low fixed cost structure allows us to gain efficiency as sales increase.
Operating Income
Operating income was $3.4 million in the second quarter of 2013 compared to $2.3 million in the second quarter of 2012. The $1.1 million increase in operating income is primarily due to the $2.9 million increase in gross margin partially offset by the $1.8 million increase in selling, general and administrative expenses.
Income Taxes
Our effective tax rate increased to 36.5% in the second quarter of 2013 from 35.2% in the second quarter of 2012. The increase in the effective rate is primarily due to the valuation allowance related to deferred tax assets recognized by our international subsidiaries in 2013.

Comparison of the Year to Date Ended June 30, 2013 to the Year to Date Ended
July 1, 2012
The following table presents our operating results for the years to date ended
June 30, 2013 and July 1, 2012, including a comparison of the financial results
for these periods (dollars in thousands, except per share data):

                                       15
--------------------------------------------------------------------------------
  Table of Contents

                                                  Year to date ended
                                               June 30,        July 1,
                                                 2013            2012        $ Change      % Change
Net sales                                    $   205,125     $  174,084     $  31,041         17.8  %
Cost of sales                                    167,382        141,615        25,767         18.2  %
Gross profit                                      37,743         32,469         5,274         16.2  %
Selling, general and administrative expenses      33,173         29,926         3,247         10.9  %
Operating income                                   4,570          2,543         2,027         79.7  %
Other income, net:
Interest income                                       64             85           (21 )      (24.7 )%
Other income, net                                    140             80            60         75.0  %
Total other income, net                              204            165            39         23.6  %
Income before income taxes                         4,774          2,708         2,066         76.3  %
Income tax expense                                 1,736            976           760         77.9  %
Net income                                   $     3,038     $    1,732     $   1,306         75.4  %
Basic net income per share                   $      0.24     $     0.13     $    0.11         84.6  %
Diluted net income per share                 $      0.24     $     0.12     $    0.12        100.0  %

Net Sales
Net sales increased 17.8% during the year to date ended June 30, 2013, compared with the year to date ended July 1, 2012, due primarily to an increase in the average shipment value partially offset by a decrease in the number of orders shipped. Net sales in the U.S. increased 17.0% to $170.4 million during the year to date ended June 30, 2013, compared with $145.6 million during the year to date ended July 1, 2012. U.S. engagement net sales for the year to date ended June 30, 2013 increased to $119.2 million from $98.8 million for the year to date ended July 1, 2012. U.S. non-engagement net sales for the year to date ended June 30, 2013 were $51.2 million, compared to $46.8 million for the year to date ended July 1, 2012.
International net sales increased 22.0% in the year to date ended June 30, 2013 to $34.7 million, from $28.5 million in the year to date ended July 1, 2012. Foreign exchange rates during the year to date ended June 30, 2013, compared to the rates in effect during the year to date ended July 1, 2012, had a negative impact of approximately 1.3% on international net sales. Excluding the impact of changes in foreign exchange rates, international net sales increased 23.3% in the year to date ended June 30, 2013 over the year to date ended July 1, 2012. Gross Profit
Gross profit increased $5.3 million to $37.7 million in the year to date ended June 30, 2013 compared to $32.5 million in the year to date ended July 1, 2012. The increase in gross margin dollars resulted primarily from an increase in net sales. Gross profit as a percentage of net sales was 18.4% in the year to date ended June 30, 2013 as compared to 18.7% in the year to date ended July 1, 2012. This percentage decrease was primarily due to product mix. Engagement net sales was 71.8% of our total year to date revenue versus 69.9% in the prior year. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 10.9% to $33.2 million in the year to date ended June 30, 2013 compared to $29.9 million in the year to date ended July 1, 2012. Compensation and benefits expense increased $1.6 million due to increased headcount to support key business initiatives and higher incentive compensation expense. Marketing and advertising costs increased $1.0 million, primarily due to increases in the rate and volume of our online marketing activities and other marketing strategy efforts to acquire new customers in our domestic and international markets. Credit card interchange and payment processing fees increased approximately $0.9 million due to higher sales volumes and rates. Rent expense increased by $0.1 million due to a new facility in Shanghai, People's Republic of China and additional space for the corporate headquarters in Seattle, Washington. These increases were partially offset by a decrease in professional fees of $0.2 million and depreciation expense of


Table of Contents

$0.2 million. As a percentage of net sales, selling, general and administrative expenses were 16.2% in the year to date ended June 30, 2013, as compared to 17.2% in the year to date ended July 1, 2012 as sales accelerated faster than expenses. Our business model allows us to gain efficiency with a relatively low fixed cost structure.
Operating Income
Operating income increased 79.7% to $4.6 million in the year to date ended June 30, 2013 compared to $2.5 million in the year to date ended July 1, 2012. The increase in operating income for the year to date ended June 30, 2013 was due to an increase in gross margin dollars partially offset by an increase in selling, general and administrative expenses. Income Taxes
Our effective tax rate increased to 36.4% in the year to date ended June 30, 2013 from 36.0% in the year to date ended July 1, 2012. The increase in the effective rate is primarily due to the valuation allowance related to deferred tax assets recognized by our international subsidiaries in 2013. Liquidity and Capital Resources
We are primarily funded by our cash flows from operations. The significant components of our working capital are inventory and liquid assets such as cash and trade accounts receivable, reduced by accounts payable and accrued expenses. Our business model typically provides certain beneficial working capital characteristics. While we collect cash from sales to customers within several business days of the related sale, we typically have extended payment terms with our suppliers.
Our liquidity is primarily dependent upon our net cash provided by operating activities. Our net cash provided by operating activities is sensitive to many factors, including changes in working capital and the timing and magnitude of expenditures. Working capital at any specific point in time is dependent upon many variables, including our operating results, seasonality, inventory management, the timing of cash receipts and payments, and vendor payment terms. As of June 30, 2013, we had a working capital deficiency of $1.8 million, including cash and cash equivalents of $47.3 million and inventory of $31.6 million, offset by accounts payable of $77.7 million. Current levels of cash and cash equivalents reflect the seasonal pay down of accounts payable and the strategic decision to repurchase shares of our common stock in the second half of 2012 and the year to date ended June 30, 2013.
Net cash of $34.1 million was used in operating activities for the year to date ended June 30, 2013, compared to net cash used in operating activities of $25.8 million for the year to date ended July 1, 2012. The increase in cash used for operating activities was attributable to a higher net payment of accounts payable and accrued liabilities in the current year. Net payment of accounts payable totaled $38.3 million for the year to date ended June 30, 2013 compared to $33.2 million for the year to date ended July 1, 2012. The net payment of accrued liabilities totaled $4.4 million for the year to date ended June 30, 2013 compared to $3.3 million for the year to date ended July 1, 2012. In the first quarter of each year, we generally have a significant pay down of our accounts payable balance built up during the previous year's fourth quarter holiday season.
Net cash of $2.2 million and $5.5 million was used in investing activities for the year to date periods ended June 30, 2013 and July 1, 2012, respectively. In May 2012, net cash of $4.0 million was used to purchase preferred shares in a privately-held company and provide a loan to the same privately-held company in exchange for a note receivable. Net cash of $2.2 million and $1.5 million was used for the year-to-date periods ended June 30, 2013 and July 1, 2012, respectively, for purchases of property and equipment to support our operations. Our capital needs are generally relatively low and include, without limitation, investments in technology and website enhancements, capital improvements to our leased warehouse and office facilities, and furniture and equipment. Net cash used in financing activities for the year to date ended June 30, 2013 was $3.4 million, primarily related to the repurchase of common stock of $3.9 million, partially offset by $0.5 million of proceeds from stock option exercises. Net cash used in financing activities for the year to date ended July 1, 2012 was $4.4 million, primarily related to repurchases of common stock of $8.4 million offset by proceeds from stock option exercises of $4.0 million.


Table of Contents

On February 7, 2012, our board of directors authorized the repurchase of up to $100.0 million of our common stock during the 24-month period following such approval date under our buyback program. During the year to date ended June 30, 2013, we repurchased an aggregate of 122,495 shares of our common stock for $3.9 million. Since the reauthorization on February 7, 2012, we have repurchased an aggregate of 1,614,481 shares for a total of $42.7 million. As of June 30, 2013, approximately $57.3 million remains under this repurchase authorization, subject to limitations under Delaware law and the market conditions described below. Since the inception of the buyback program in the first quarter of 2005 through June 30, 2013, we have repurchased an aggregate of approximately 7.6 million shares for a total of $269.2 million. Our shares may be repurchased from time to time in open market transactions or in negotiated transactions off the market. The timing and amount of any shares repurchased is determined by our management based on their evaluation of market conditions and other factors, including our cash needs. Repurchases may also be made under a Rule 10b5-1 plan. We continually assess market conditions, our cash position, operating results, current forecasts and other factors when making decisions about stock repurchases.
On February 11, 2013, we entered into a Credit Agreement which provides for a $35.0 million unsecured, revolving credit facility (the "Revolving Loan"). We currently do not have any outstanding debt under the Credit Agreement. We believe that our current cash and cash equivalent balances, cash flow from operations and our ability to borrow under the Revolving Loan will be sufficient to meet our anticipated operating and capital expenditure needs for at least the next 12 months. However, projections of future cash needs and cash flows are subject to many factors and to uncertainty. We continually assess our capital structure and opportunities to obtain credit facilities, sell equity or debt securities, or undertake other transactions for strategic reasons or to further strengthen our financial position.
Contractual Obligations
There have been no material changes to our contractual obligations during the period covered by this report from those disclosed in our Annual Report filed with the SEC on February 25, 2013.
Off-Balance Sheet Arrangements
As of June 30, 2013, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Non-GAAP Financial Measures
To supplement our condensed consolidated financial statements presented in accordance with GAAP, our management internally monitors our sales performance on a non-GAAP constant exchange rate basis that eliminates the positive or negative effects that result from translating international sales into U.S. dollars. Our management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors should also note that the non-GAAP financial measures we used may not be the same non-GAAP financial measures, and may not be calculated in the same manner, as that of other companies. Whenever we use such non-GAAP financial measures, we provide a reconciliation of non-GAAP financial measures to the most closely applicable GAAP financial measures. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. Blue Nile's management believes that international sales on a constant exchange rate basis provide meaningful supplemental information to the company and to investors. Management believes the constant exchange rate measurement provides a more representative assessment of the sales performance and provides better comparability between reporting periods.
The following table reconciles year-over-year international net sales percentage increases (decreases) from the GAAP sales measures to the non-GAAP constant exchange rate basis:


Table of Contents

Quarter ended June                         Effect of foreign     Year over year growth on
30, 2013            Year over year growth  exchange movements  constant exchange rate basis
International net
sales                       19.1%                (1.5)%                   20.6%
Quarter ended July                         Effect of foreign     Year over year growth on
1, 2012             Year over year growth  exchange movements  constant exchange rate basis
International net           12.6%
sales                                            (3.7)%                   16.3%



Year to date ended                          Effect of foreign    Year over year growth on
June 30, 2013         Year over year growth exchange movements constant exchange rate basis
International net
sales                         22.0%               (1.3)%                  23.3%
Year to date ended                          Effect of foreign    Year over year growth on

July 1, 2012 Year over year growth exchange movements constant exchange rate basis International net 10.8%
sales (1.7)% 12.5%

  Add NILE to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NILE - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.