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NILE > SEC Filings for NILE > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for BLUE NILE INC

Form 10-Q for BLUE NILE INC


7-Aug-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 our 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 a 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. We are also focused on increasing the value proposition that we deliver to our consumers by utilizing more aggressive retail pricing and deepening our supply chain.
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. In periods of rapidly rising diamond costs, the value that we are able to provide to customers and/or our gross margin may decrease compared to brick and mortar retail competitors with inventory that was purchased prior to price increases. Regardless of diamond pricing dynamics we will remain focused on utilizing our aggressive retail pricing, developing and expanding our product lines as well as deepening our supply chain, and continuing to provide our customers with a compelling website experience across all devices.
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.
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, marketing and enhancing the user experience to drive growth and gain market share.
Second Quarter of 2014 Summary of Results of Operations


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We achieved second quarter net sales of $106.6 million, a 1.3% decrease from the second quarter of 2013. U.S. engagement net sales decreased 4.6%, U.S. non-engagement net sales increased 2.6% and net sales of both engagement and non-engagement products in our international markets increased 4.8% from the second quarter of 2013.
International net sales comprised 16.8% of our total net sales for the quarter. Our gross profit increased $0.1 million in the second quarter of 2014, a 0.4% increase compared to the second quarter of 2013. Net income per diluted share was $0.18 in the second quarter of 2014, compared to $0.17 for the second quarter of 2013.
We believe that our financial results for the second quarter of 2014 were negatively impacted by volatility in cost of diamonds during the first half of 2014.

Results of Operations
Comparison of the Quarter Ended June 29, 2014 to the Quarter Ended June 30, 2013
The following table presents our operating results for the quarters ended
June 29, 2014 and June 30, 2013, including a comparison of the financial results
for these periods (dollars in thousands, except per share data):

                                                  Quarter ended
                                              June 29,     June 30,
                                                2014         2013       $ Change    % Change
Net sales                                    $ 106,571    $ 108,014    $ (1,443 )     (1.3 )%
Cost of sales                                   86,404       87,917      (1,513 )     (1.7 )%
Gross profit                                    20,167       20,097          70        0.4  %
Selling, general and administrative expenses    16,980       16,685         295        1.8  %
Operating income                                 3,187        3,412        (225 )     (6.6 )%
Other income, net:
Interest income, net                                24           22           2        9.1  %
Other income, net                                   36           38          (2 )     (5.3 )%
Total other income, net                             60           60           -          -  %
Income before income taxes                       3,247        3,472        (225 )     (6.5 )%
Income tax expense                               1,076        1,266        (190 )    (15.0 )%
Net income                                   $   2,171    $   2,206    $    (35 )     (1.6 )%
Basic net income per share                   $    0.18    $    0.18    $      -          -  %
Diluted net income per share                 $    0.18    $    0.17    $   0.01        5.9  %

Net Sales
Net sales decreased 1.3% during the second quarter of 2014 as compared with the second quarter of 2013. The total net sales decrease was due to a decrease in orders partially offset by a slight increase in average order value. Net sales in the U.S. decreased 2.5% to $88.6 million for the second quarter of 2014, compared with $90.9 million in the same quarter last year. U.S. engagement net sales for the second quarter of 2014 decreased 4.6% to $60.9 million, compared to $63.9 million for the second quarter of 2013. U.S. engagement net sales decreased primarily as a result of diamond price volatility during the second quarter of 2014. U.S. non-engagement net sales for the second quarter 2014 increased 2.6% to $27.7 million, compared to $27.0 million for the second quarter 2013.


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International net sales increased 4.8% to $18.0 million in the second quarter of 2014 from $17.1 million in the second quarter of 2013. 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 second quarter of 2014, compared to the rates in effect during the second quarter of 2013, had a negative impact of approximately 1.9% on international net sales. Excluding the impact of changes in foreign exchange rates, international net sales increased 6.7% for the second quarter of 2014 compared to the second quarter of 2013. Gross Profit
Gross profit in the second quarter of 2014 increased 0.4% to $20.2 million from $20.1 million in the second quarter of 2013. Gross margin was 18.9% for the second quarter of 2014 and 18.6% for the second quarter of 2013. The increase in gross profit and gross margin resulted primarily from changes in our product mix to a higher proportion of non-engagement products in the second quarter of 2014. Our non-engagement products provide higher gross margin than our engagement products. In the second quarter of 2014, sales of our engagement products equaled 70.7% of our total revenue versus 71.9% in the second 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 1.8% to $17.0 million in the second quarter of 2014 compared to $16.7 million in the second quarter of 2013. 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. Depreciation expense related to additional assets added approximately $0.1 million to expenses. These expense increases were partially offset by a decrease of approximately $0.2 million in stock-based compensation expense primarily due to a lower number of options outstanding at lower option fair values in the second quarter of 2014. Selling, general and administrative expenses as a percentage of net sales increased to 15.9% in the second quarter of 2014 compared to 15.4% in the second quarter of 2013 as selling, general and administrative expenses accelerated faster than sales. Operating Income
Operating income was $3.2 million in the second quarter of 2014 compared to $3.4 million in the second quarter of 2013. The decrease in operating income is primarily due to the $0.3 million increase in selling, general and administrative expenses partially offset by the $0.1 million increase in gross profit.
Income Taxes
Our effective tax rate decreased to 33.1% in the second quarter of 2014 from 36.5% in the second quarter of 2013. The decrease is primarily due to the domestic production activities income tax benefit related to and recorded in the second quarter of 2014, which was not recorded in the second quarter of 2013.


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Comparison of the Year to Date Ended June 29, 2014 to the Year to Date Ended
June 30, 2013
The following table presents our operating results for the years to date ended
June 29, 2014 and June 30, 2013, including a comparison of the financial results
for these periods (dollars in thousands, except per share data):
                                                  Year to date ended
                                               June 29,        June 30,
                                                 2014            2013         $ Change      % Change
Net sales                                    $   210,297     $  205,125     $    5,172          2.5  %
Cost of sales                                    171,005        167,382          3,623          2.2  %
Gross profit                                      39,292         37,743          1,549          4.1  %
Selling, general and administrative expenses      34,497         33,173          1,324          4.0  %
Operating income                                   4,795          4,570            225          4.9  %
Other income, net:
Interest income, net                                  72             64              8         12.5  %
Other income, net                                     34            140           (106 )      (75.7 )%
Total other income, net                              106            204            (98 )      (48.0 )%
Income before income taxes                         4,901          4,774            127          2.7  %
Income tax expense                                 1,651          1,736            (85 )       (4.9 )%
Net income                                   $     3,250     $    3,038     $      212          7.0  %
Basic net income per share                   $      0.26     $     0.24     $     0.02          8.3  %
Diluted net income per share                 $      0.26     $     0.24     $     0.02          8.3  %

Net Sales
Net sales increased 2.5% during the year to date ended June 29, 2014, compared with the year to date ended June 30, 2013, 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 2.3% to $174.4 million during the year to date ended June 29, 2014, compared with $170.4 million during the year to date ended June 30, 2013. U.S. engagement net sales for the year to date ended June 29, 2014 increased to $120.6 million from $119.2 million for the year to date ended June 30, 2013. U.S. non-engagement net sales for the year to date ended June 29, 2014 increased to $53.8 million, compared to $51.2 million for the year to date ended June 30, 2013.
International net sales increased 3.5% in the year to date ended June 29, 2014 to $35.9 million, from $34.7 million in the year to date ended June 30, 2013. Foreign exchange rates during the year to date ended June 29, 2014, compared to the rates in effect during the year to date ended June 30, 2013, had a negative impact of approximately 3.1% on international net sales. Excluding the impact of changes in foreign exchange rates, international net sales increased 6.6% in the year to date ended June 29, 2014 compared to the year to date ended June 30, 2013.
Gross Profit
Gross profit increased $1.5 million to $39.3 million in the year to date ended June 29, 2014 compared to $37.7 million in the year to date ended June 30, 2013. The increase in gross profit resulted primarily from an increase in net sales. Gross margin was 18.7% in the year to date ended June 29, 2014 as compared to 18.4% in the year to date ended June 30, 2013. This percentage increase was primarily due to product mix. Engagement net sales was 71.1% of our total year to date revenue versus 71.8% in the prior year. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 4.0% to $34.5 million in the year to date ended June 29, 2014 compared to $33.2 million in the year to date ended June 30, 2013. Compensation and benefits expense increased $0.8 million due to increased headcount to support key business initiatives and higher compensation rates of our employees. Marketing and advertising costs increased $0.3 million, primarily due to increased spending on online marketing vehicles and other marketing efforts to drive traffic to our website, both domestically and


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internationally. Credit card interchange and payment processing fees increased approximately $0.1 million due to higher sales volumes and rates. As a percentage of net sales, selling, general and administrative expenses were 16.4% in the year to date ended June 29, 2014, as compared to 16.2% in the year to date ended June 30, 2013 as selling, general and administrative expenses accelerated faster than sales.
Operating Income
Operating income increased 4.9% to $4.8 million in the year to date ended June 29, 2014 compared to $4.6 million in the year to date ended June 30, 2013. The increase in operating income for the year to date ended June 29, 2014 was due to an increase in gross profit partially offset by an increase in selling, general and administrative expenses.
Income Taxes
Our effective tax rate decreased to 33.7% in the year to date ended June 29, 2014 from 36.4% in the year to date ended June 30, 2013. The decrease is primarily due to the domestic production activities income tax benefit related to and recorded in the year to date ended June 29, 2014, which was not recorded in the year to date ended June 30, 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 29, 2014, we had a working capital deficiency of $8.1 million, including cash and cash equivalents of $39.5 million and inventory of $32.1 million, offset by accounts payable of $77.1 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 year to date ended June 29, 2014.
Net cash of $38.8 million was used in operating activities for the year to date ended June 29, 2014, compared to net cash used in operating activities of $34.1 million for the year to date ended June 30, 2013. The increase in cash used for operating activities was primarily attributable to a higher net payment of accounts payable in the current year. Net payment of accounts payable totaled $45.7 million for the year to date ended June 29, 2014 compared to $38.3 million for the year to date ended June 30, 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. This was partially offset by cash provided by deferred income taxes of $1.9 million primarily due to the expiration and cancellation of former employee's underwater options. Net cash of $1.6 million and $2.2 million was used in investing activities for the year to date periods ended June 29, 2014 and June 30, 2013, respectively. In both years, cash used in investing activities was primarily the result of purchases of property and equipment which includes 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 year to date ended June 29, 2014 was $36.1 million, primarily related to the repurchase of common stock of $38.2 million partially offset by $2.3 million of proceeds from stock


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option exercises. Net cash used in financing activities for the year to date ended June 30, 2013 was $3.4 million, primarily related to repurchases of common stock of $3.9 million partially offset by proceeds from stock option exercises of $0.5 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 June 29, 2014, we have repurchased an aggregate of 1,150,715 shares for a total of $38.7 million. This left approximately $61.3 million under this repurchase authorization as of June 29, 2014.
Since the inception of the buyback program in the first quarter of 2005 through June 29, 2014, we have repurchased an aggregate of approximately 8.9 million shares for a total of $314.5 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 August 6, 2014, we have repurchased a total of 1,208,147 shares of our common stock for $40.3 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.
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. Off-Balance Sheet Arrangements
As of June 29, 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


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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 June 29, 2014 Year over year growth exchange movements constant exchange rate basis International net sales 4.8% (1.9)% 6.7% Effect of foreign Year over year growth on Quarter ended June 30, 2013 Year over year growth exchange movements constant exchange rate basis International net sales 19.1% (1.5)% 20.6%

Year to date ended June                       Effect of foreign    Year over year growth on
29, 2014                Year over year growth exchange movements constant exchange rate basis
International net sales         3.5%                (3.1)%                   6.6%
Year to date 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 22.0% (1.3)% 23.3%

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