Blue Nile Announces Third Quarter 2009 Financial Results

http://www.businesswire.com/news/home/20091105006407/en

Sales Total $66.9 Million, Representing Growth of 2.4%

Non-GAAP Adjusted EBITDA Increases 17.4%, Reaching Record Third Quarter Level

Earnings Per Diluted Share Increase to $0.17 from $0.15

Company Raises Financial Guidance
SEATTLE--(Business Wire)--
Blue Nile, Inc. (Nasdaq:NILE), the leading online retailer of diamonds and fine
jewelry, today reported financial results for its third quarter ended October 4,
2009.

Net sales of $66.9 million increased 2.4% compared to the third quarter of 2008
on strength in bridal jewelry sales and growth in international markets.
Operating income for the quarter grew 17.6% to $3.9 million compared to $3.3
million in the third quarter last year. Operating margin expanded 80 basis
points to 5.8% of net sales compared to 5.0% of net sales in the third quarter
of 2008. Net income improved 10.3% to $2.6 million, or $0.17 per diluted share
compared to $2.3 million, or $0.15 per diluted share in the third quarter of
2008.

Non-GAAP adjusted EBITDA for the third quarter totaled $6.3 million, an increase
of 17.4% over the same quarter in 2008 and a record level for any third quarter
in the Company`s history. As a percent of sales, non-GAAP adjusted EBITDA
improved to 9.5% compared to 8.3% in the third quarter of 2008. Net cash
provided by operating activities totaled $23.4 million for the trailing twelve
month period ended October 4, 2009. Non-GAAP free cash flow for the trailing
twelve month period ended October 4, 2009 increased to $20.9 million from $20.1
million a year ago.

"Our third quarter results were excellent and reflect continued positive
momentum in the business. We returned to top line growth and delivered strong
profitability," said Diane Irvine, Chief Executive Officer. "The Blue Nile brand
is resonating with consumers in the current environment, and we are gaining
market share. As we look toward the important holiday season, we are well
positioned with a broad selection of diamond engagement rings and fine jewelry
and a newly redesigned website to showcase these products."

Selected Financial Highlights

* International sales grew 27.5% in the quarter to a record level $8.8 million
compared to $6.9 million in the third quarter of 2008. Excluding the impact from
changes in foreign exchange rates, international sales increased 34.8%.
* Gross profit for the quarter totaled $14.8 million. As a percent of sales,
gross profit improved 180 basis points to 22.1% compared to 20.3% for the third
quarter of 2008. The Company continued to achieve year over year gross margin
improvement due largely to improved product sourcing in both diamonds and
jewelry.

* Selling, general and administrative expenses for the quarter were $10.9
million, compared to $10.0 million in the third quarter of 2008. The increase
was due to lower expenses in the third quarter of 2008 related to forfeited
options and a reduction in incentive accruals. In addition, 2009 includes
expenses related to technology investments in support of key initiatives such as
the website redesign. Selling, general and administrative expenses include
stock-based compensation expense of $1.8 million in the third quarter of 2009,
compared to $1.6 million in the third quarter last year.
* Net income per diluted share for the quarter includes stock-based compensation
expense of $0.08 compared to $0.07 for the third quarter of 2008.
* Cash and cash equivalents plus short-term investments at the end of the third
quarter totaled $47.5 million compared to $26.6 million at the end of the third
quarter last year.

Financial Guidance

"The trends in the business during the third quarter improved sequentially, and
we project that trend to continue in the fourth quarter. Based on our third
quarter results and our expectations for the fourth quarter, we are raising our
guidance," said Marc Stolzman, Chief Financial Officer. "We are projecting
fourth quarter net sales between $100 million and $109 million, and diluted
earnings per share in the range of $0.35 to $0.39."

Forward-Looking Statements

This press release contains forward-looking statements that include risks and
uncertainties, including, without limitation, all statements related to future
financial and business performance, market opportunity and plans to grow our
business. Words such as "expect," "anticipate," "believe," "project," "will" and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements are based upon our current expectations.
Forward-looking statements involve risks and uncertainties. Our actual results
and the timing of events could differ materially from those anticipated in such
forward-looking statements as a result of these risks and uncertainties, which
include, without limitation, risks related to general economic conditions, our
fluctuating operating results, seasonality in our business, our ability to
acquire products on reasonable terms, our online business model, demand for our
products, our ability to attract customers in a cost effective manner, the
strength of our brand, competition, fraud, system interruptions, our ability to
fulfill orders and other risks detailed in our filings with the Securities and
Exchange Commission, including our Annual Report on Form 10-K for the year ended
January 4, 2009. Additional information will also be set forth in our Quarterly
Report on Form 10-Q for the quarter ended October 4, 2009, which we expect to
file with the Securities and Exchange Commission on or before November 13, 2009.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this press release. All
forward-looking statements are qualified in their entirety by this cautionary
statement, and Blue Nile undertakes no obligation to revise or update any
forward-looking statements to reflect events or circumstances after the date
hereof.

Conference Call

The Company will host a conference call to discuss its third quarter financial
results today at 2:00 p.m. PT/5:00 p.m. ET. A live webcast of the conference
call may be accessed at http://investor.bluenile.com. Following the completion
of the call, a recorded replay of the webcast will be available for 30 days at
the same Internet address. This call will contain forward-looking statements and
other material information regarding the Company`s financial and operating
results. In the event that any non-GAAP financial measure is discussed on the
conference call that is not described in this release, related complementary
information will be made available at http://investor.bluenile.com as soon as
practicable after the conclusion of the conference call.

Non-GAAP Financial Measures

To supplement Blue Nile`s consolidated financial statements presented in
accordance with generally accepted accounting principles ("GAAP"), Blue Nile
uses non-GAAP adjusted EBITDA and non-GAAP free cash flow as measures of certain
components of financial performance. Blue Nile defines non-GAAP adjusted EBITDA
as earnings before interest and other income, taxes, depreciation and
amortization, adjusted to exclude the effects of stock-based compensation
expense. Blue Nile defines non-GAAP free cash flow as net cash provided by (used
in) operating activities less cash outflows for purchases of fixed assets,
including internal use software and website development. The Company reports
sales information in accordance with GAAP. Internally, management monitors its
sales performance on a non-GAAP basis that eliminates the positive or negative
effects that result from translating international sales into U.S. dollars (the
"constant exchange rate basis"). Blue Nile`s 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 used by Blue Nile may not be the same non-GAAP financial measures, and
may not be calculated in the same manner, as that of other companies. Whenever
Blue Nile uses such non-GAAP financial measures, it provides 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 non-GAAP adjusted EBITDA and non-GAAP free
cash flow, as defined, as well as international sales on a constant exchange
rate basis provide meaningful supplemental information to the company and to
investors. Blue Nile believes that both management and investors benefit from
referring to these non-GAAP measures in assessing the performance of Blue Nile
and when planning and forecasting future periods. Further, management believes
that the inclusion of the non-GAAP adjusted EBITDA and non-GAAP free cash flow
calculations provide consistency in Blue Nile`s financial reporting and
comparability with similar companies in Blue Nile`s industry. Management
believes the constant exchange rate measurement provides a more representative
assessment of the sales performance and provides better comparability between
reporting periods.

A reconciliation of non-GAAP adjusted EBITDA to net income is as follows (in
thousands):

Quarter ended Quarter ended
October 4, 2009 September 28, 2008
Net income $ 2,575 $ 2,335
Income tax expense 1,386 1,226
Other income, net (100 ) (279 )
Depreciation and amortization 655 559
Stock-based compensation 1,827 1,560
Adjusted EBITDA $ 6,343 $ 5,401

Year to date ended Year to date ended
October 4, 2009 September 28, 2008
Net income $ 7,359 $ 8,111
Income tax expense 3,962 4,332
Other income, net (218 ) (1,770 )
Depreciation and amortization 1,868 1,512
Stock-based compensation 5,495 5,208
Adjusted EBITDA $ 18,466 $ 17,393

A reconciliation of differences of non-GAAP free cash flow from the comparable
GAAP measure of net cash provided by (used in) operating activities is as
follows (in thousands):

Quarter ended Quarter ended
October 4, 2009 September 28, 2008
Net cash (used in) provided by operating activities $ (263 ) $ 1,454
Purchases of fixed assets, including internal- (855 ) (673 )
use software and website development
Non-GAAP free cash flow $ (1,118 ) $ 781

Twelve months ended Twelve months ended
October 4, 2009 September 28, 2008
Net cash provided by operating activities $ 23,381 $ 23,003
Purchases of fixed assets, including internal- (2,520 ) (2,873 )
use software and website development
Non-GAAP free cash flow $ 20,861 $ 20,130

The following table reconciles year-over-year international sales percentage
increases (decreases) from the GAAP sales measures to the non-GAAP constant
exchange rate basis:

Quarter ended Year over year growth Effect of foreign exchange movements Year over year growth on constant exchange rate basis
October 4, 2009
International Sales 27.5% (7.3%) 34.8%

About Blue Nile, Inc.

Blue Nile, Inc. is the leading online retailer of diamonds and fine jewelry. The
Company delivers the ultimate customer experience, providing consumers with a
superior way to buy engagement rings, wedding rings and fine jewelry. Blue Nile
offers in-depth educational materials and unique online tools that place
consumers in control of the jewelry shopping process. The Company has some of
the highest quality standards in the industry and offers thousands of
independently certified diamonds and fine jewelry at prices significantly below
traditional retail. Blue Nile can be found online at www.bluenile.com,
www.bluenile.ca and www.bluenile.co.uk. Blue Nile's shares are traded on the
Nasdaq Stock Market LLC under the symbol NILE.

BLUE NILE, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)

October 4, January 4,
2009 2009

ASSETS
Current assets:
Cash and cash equivalents $ 32,494 $ 54,451
Short-term investments 15,000 -
Trade accounts receivable 1,236 984
Other accounts receivable 142 725
Inventories 17,846 18,834
Deferred income taxes 223 670
Prepaids and other current assets 1,078 1,069
Total current assets 68,019 76,733
Property and equipment, net 7,711 7,558
Intangible assets, net 338 271
Deferred income taxes 6,228 5,014
Other assets 144 89
Total assets $ 82,440 $ 89,665

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 42,334 $ 62,291
Accrued liabilities 4,976 6,607
Current portion of long-term financing obligation 43 41
Current portion of deferred rent 205 205
Total current liabilities 47,558 69,144

Long-term financing obligation, less current portion 807 839
Deferred rent, less current portion 226 374

Stockholders' equity:
Common stock 20 20
Additional paid-in capital 152,017 144,913
Accumulated other comprehensive income 95 17
Retained earnings 43,558 36,199
Treasury stock (161,841 ) (161,841 )
Total stockholders' equity 33,849 19,308
Total liabilities and stockholders' equity $ 82,440 $ 89,665

BLUE NILE, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)

Quarter ended Year to date ended
October 4, September 28, October 4, September 28,
2009 2008 2009 2008

Net sales $ 66,943 $ 65,376 $ 199,198 $ 209,542
Cost of sales 52,146 52,114 156,168 167,233

Gross profit 14,797 13,262 43,030 42,309

Selling, general and
administrative expenses 10,936 9,980 31,927 31,636

Operating income 3,861 3,282 11,103 10,673

Other income, net:
Interest income, net 23 184 101 1,299
Other income, net 77 95 117 471
Total other income, net 100 279 218 1,770

Income before income taxes 3,961 3,561 11,321 12,443
Income tax expense 1,386 1,226 3,962 4,332
Net income $ 2,575 $ 2,335 $ 7,359 $ 8,111

Basic net income per share $ 0.18 $ 0.16 $ 0.51 $ 0.54

Diluted net income per share $ 0.17 $ 0.15 $ 0.49 $ 0.52

Shares used for computation:
Basic 14,538 14,621 14,515 15,080
Diluted 15,377 15,200 15,152 15,723

BLUE NILE, INC.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
(in thousands)

Year to date ended
October 4, September 28,
2009 2008

Operating activities:
Net income $ 7,359 $ 8,111
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,868 1,512
Loss on disposal of property and equipment 62 20
Stock-based compensation 5,615 5,298
Deferred income taxes (767 ) (981 )
Tax benefit from exercise of stock options 214 511
Excess tax benefit from exercise of stock options (47 ) (141 )
Changes in assets and liabilities:
Receivables 331 1,195
Inventories 988 2,944
Prepaid federal income taxes - (440 )
Prepaid expenses and other assets (64 ) 30
Accounts payable (19,964 ) (45,380 )
Accrued liabilities (1,632 ) (5,093 )
Deferred rent and other (147 ) (78 )
Net cash used in operating activities (6,184 ) (32,492 )

Investing activities:
Purchases of property and equipment (2,063 ) (1,553 )
Proceeds from the sale of property and equipment - 10
Purchase of short-term investments (15,000 ) -
Net cash used in investing activities (17,063 ) (1,543 )

Financing activities:
Repurchase of common stock - (65,273 )
Proceeds from stock option exercises 1,195 2,984
Excess tax benefit from exercise of stock options 47 141
Principal payments under long-term financing obligation (30 ) (28 )
Net cash provided by (used in) financing activities 1,212 (62,176 )

Effect of exchange rate changes on cash and cash equivalents 78 9

Net decrease in cash and cash equivalents (21,957 ) (96,202 )

Cash and cash equivalents, beginning of period 54,451 122,793
Cash and cash equivalents, end of period $ 32,494 $ 26,591

Blue Nile, Inc.
Eileen Askew, 206.336.6745 (Investors)
bluenileir@bluenile.com
or
John Baird, 206.336.6805 (Media)
johnb@bluenile.com

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