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NILE > SEC Filings for NILE > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for BLUE NILE INC

Form 10-Q for BLUE NILE INC


6-May-2014

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
Blue Nile is 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. 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 enhancements to our user experience, development of our engagement and non-engagement product lines, and expansion of our international operations.
The engagement product category includes gold or platinum engagement rings with a diamond center stone and loose diamonds. 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. Regardless of diamond pricing dynamics we will remain focused on 1) utilizing our aggressive retail pricing; 2) developing and expanding our product lines as well as deepening our supply chain; and 3) continuing to provide 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.
Our non-engagement product category includes rings, earrings, necklaces, pendants, bracelets, gifts and accessories containing precious metals, diamonds, gemstones or pearls. 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 further drive growth in our non-engagement category, we will continue to expand a refined assortment of wedding bands, diamond jewelry and fashion jewelry and utilize disruptive and innovative technology such as the Band Matcher enhanced visualization and adaptive website to provide our non-engagement consumers with a compelling shopping experience.


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As part of our plan to expand our international business, we are extending our capabilities into markets with the highest potential for growth. We believe that the Asia-Pacific market, specifically Greater China, represents a significant long-term opportunity for us. We have and will continue to increase our investments in personnel, infrastructure, fulfillment capabilities, product selection, website and mobile experience, and marketing to drive growth and gain market share.
First Quarter of 2014 Summary of Results of Operations We achieved first quarter net sales of $103.7 million, a 6.8% increase from the first quarter of 2013. Net sales increased across each of our three main categories - U.S. engagement net sales increased 8.0%, U.S. non-engagement net sales increased 7.6% and net sales of both engagement and non-engagement products in our international markets increased 1.9% from the first quarter of 2013. International net sales comprised 17.3% of our total net sales for the quarter. Our gross profit increased $1.5 million in the first quarter of 2014, an 8.4% increase compared to the first quarter of 2013. Net income per diluted share was $0.08 in the first quarter of 2014, compared to $0.07 for the first quarter of 2013.

Results of Operations
Comparison of the Quarter Ended March 30, 2014 to the Quarter Ended March 31,
2013
The following table presents our operating results for the quarters ended
March 30, 2014 and March 31, 2013, including a comparison of the financial
results for these periods (dollars in thousands, except per share data):

                                                    Quarter ended
                                              March 30,       March 31,
                                                 2014           2013          $ Change      % Change
Net sales                                    $  103,726     $    97,111     $    6,615          6.8  %
Cost of sales                                    84,601          79,465          5,136          6.5  %
Gross profit                                     19,125          17,646          1,479          8.4  %
Selling, general and administrative expenses     17,517          16,488          1,029          6.2  %
Operating income                                  1,608           1,158            450         38.9  %
Other income, net:
Interest income                                      48              42              6         14.3  %
Other income, net                                    (2 )           102           (104 )     (102.0 )%
Total other income, net                              46             144            (98 )      (68.1 )%
Income before income taxes                        1,654           1,302            352         27.0  %
Income tax expense                                  575             470            105         22.3  %
Net income                                   $    1,079     $       832     $      247         29.7  %
Basic net income per share                   $     0.08     $      0.07     $     0.01         14.3  %
Diluted net income per share                 $     0.08     $      0.07     $     0.01         14.3  %

Net Sales
Net sales increased 6.8% during the first quarter of 2014 as compared with the first quarter of 2013, as a result of the execution of growth initiatives across our three main categories. The total net sales increase was due to an increase in average order value partially offset by a decrease in orders. The increase in average order value was driven by a shift in the mix of products we sell, specifically by a higher growth rate in the sale of engagement rings and loose diamonds.
Net sales in the U.S. increased 7.9% to $85.8 million for the first quarter of 2014, compared with $79.5 million in the same quarter last year. U.S. engagement net sales for the first quarter of 2014 increased 8.0% to $59.7 million, compared to $55.3 million for the first quarter of 2013. U.S. non-engagement net sales for the first quarter 2014 increased 7.6% to $26.1 million, compared to $24.2 million for the first quarter 2013.


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International net sales increased 1.9% to $17.9 million from $17.6 million in the first quarter of 2014. Growth was particularly strong in Asia, offset by weaknesses in Canada and Australia due to unfavorable foreign currency exchange rates in these markets. 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 first quarter of 2014, compared to the rates in effect during the first quarter of 2013, had a negative impact of approximately 4.5% on international net sales. Excluding the impact of changes in foreign exchange rates, international net sales increased 6.4% for the first quarter of 2014 compared to the first quarter of 2013.

Gross Profit
Gross profit in the first quarter of 2014 increased 8.4% to $19.1 million from $17.6 million in the first quarter of 2013. The increase in gross profit resulted primarily from the growth in net sales. Gross profit as a percentage of net sales was 18.4% for the first quarter of 2014 and 18.2% for the first quarter of 2013. In the first quarter of 2014, sales of our engagement and non-engagement products grew at approximately the same rate. In the first quarter of 2014, sales of our engagement products equaled 71.6% of our total revenue versus 71.7% in the first quarter of 2013.
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 the mix of products we sell and our pricing decisions. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 6.2% to $17.5 million in the first quarter of 2014 compared to $16.5 million in the first quarter of 2013. Marketing and advertising costs increased $0.4 million in the first quarter of 2014, primarily due to increased spending on online marketing vehicles to drive traffic to our website, both domestically and internationally. Compensation and benefits expense increased $0.4 million due to increased headcount to support key business initiatives as well as increases in the compensation rates of our employees. Selling, general and administrative expenses as a percentage of net sales decreased to 16.9% in the first quarter of 2014 compared to 17.0% in the first quarter of 2013 as sales accelerated faster than selling, general and administrative expenses. Operating Income
Operating income was $1.6 million in the first quarter of 2014 compared to $1.2 million in the first quarter of 2013. The increase in operating income is primarily due to the $1.5 million increase in gross margin partially offset by the $1.0 million increase in selling, general and administrative expenses. Income Taxes
Our effective tax rate decreased to 34.8% in the first quarter of 2014 from 36.1% in the first quarter of 2013. The decrease is primarily due to the domestic production activities income tax benefit related to and recorded in the first quarter of 2014, which was not recorded in the first quarter of 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,


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including our operating results, seasonality, inventory management, the timing of cash receipts and payments, and vendor payment terms.
As of March 30, 2014, we had working capital of $10.0 million, including cash and cash equivalents of $56.7 million and inventory of $35.2 million, offset by accounts payable of $81.9 million. Current levels of cash and cash equivalents reflect the seasonal pay down of accounts payable and the repurchase of shares of our common stock in the first quarter of 2014.
Net cash of $43.8 million was used in operating activities for the quarter ended March 30, 2014, compared to net cash used in operating activities of $44.4 million for the quarter ended March 31, 2013. The decrease in cash used for operating activities was attributable to a lower net payment of accounts payable and accrued liabilities in the current year. Net payment of accounts payable totaled $41.2 million for the quarter ended March 30, 2014 compared to $41.4 million for the quarter ended March 31, 2013. The net payment of accrued liabilities totaled $5.1 million for the quarter ended March 30, 2014 compared to $6.0 million for the quarter ended March 31, 2013. 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 $0.6 million and $0.9 million was used in investing activities for the quarters ended March 30, 2014 and March 31, 2013, respectively. In both years, cash used in investing activities was primarily the result of purchases of property and equipment, capitalized costs to develop our website and internal-use software 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 quarter ended March 30, 2014 was $14.8 million, primarily related to the repurchase of common stock of $15.8 million partially offset by $1.1 million of proceeds from stock option exercises. Net cash used in financing activities for the quarter ended March 31, 2013 was $1.2 million, primarily related to repurchases of common stock of $1.4 million partially offset by proceeds from stock option exercises of $0.2 million.
On October 28, 2013, 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. Since the repurchase authorization on October 28, 2013 through March 30, 2014, we have repurchased an aggregate of 476,144 shares for a total of $16.5 million. This left approximately $83.5 million under this repurchase authorization as of March 30, 2014.
Since the inception of the buyback program in the first quarter of 2005 through March 30, 2014, we have repurchased an aggregate of approximately 8.3 million shares for a total of $292.3 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.
For the fiscal year to date through May 5, 2014, we have repurchased a total of 922,059 shares of our common stock for $31.9 million.
On February 21, 2014, the Company renewed its Credit Agreement which provides for a $40.0 million Credit Limit under a Revolving Loan with an option to increase the Credit Limit to $50.0 million. 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.


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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 on Form 10-K filed with the SEC on February 25, 2014. Off-Balance Sheet Arrangements
As of March 30, 2014, 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. Our 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:

Effect of foreign Year over year growth on Quarter ended March 30, 2014 Year over year growth exchange movements constant exchange rate basis International net sales 1.9% (4.5)% 6.4% Effect of foreign Year over year growth on Quarter ended March 31, 2013 Year over year growth exchange movements constant exchange rate basis International net sales 24.8% (1.1)% 25.9%

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