e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
January 3,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-50763
Blue Nile, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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91-1963165
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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705 Fifth
Avenue South, Suite 900
Seattle, Washington 98104
(206) 336-6700
(Address and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $.001 Par Value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES þ NO o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). YES o NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). YES o NO þ
The aggregate market value of the voting stock held by
nonaffiliates of the registrant at July 5, 2009 was
approximately $562 million, based on the last trading price
of $39.89 per share, excluding approximately 0.4 million
shares held by directors and executive officers of the
registrant. This calculation does not exclude shares held by
organizations whose ownership exceeds 10% of the
registrants outstanding common stock as of July 5,
2009 that have represented on Schedule 13G filed with the
Securities and Exchange Commission that they are registered
investment advisers or investment companies registered under
Section 8 of the Investment Company Act of 1940.
The number of shares outstanding of the registrants common
stock as of February 22, 2010 was 14,484,283.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Companys definitive Proxy Statement to be
filed with the Commission pursuant to Regulation 14A in
connection with the 2010 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Annual
Report on
Form 10-K.
BLUE
NILE, INC.
ANNUAL
REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 3, 2010
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PART I
This Annual Report on
Form 10-K
contains forward-looking statements that involve many risks and
uncertainties. These statements, which relate to future events
and our future performance, are based on current expectations,
estimates, forecasts and projections about the industries in
which we operate and the beliefs and assumptions of our
management as of the date of this filing. In some cases, you can
identify forward-looking statements by terms such as
would, could, may,
will, should, expect,
intend, plan, anticipate,
believe, estimate, predict,
potential, target, seek, or
continue, the negative of these terms or other
variations of such terms. In addition, any statements that refer
to projections of our future financial performance, our
anticipated growth and trends in our business and other
characterizations of future events or circumstances, are
forward-looking statements. These statements are only
predictions based upon assumptions made that are believed to be
reasonable at the time, and are subject to risk and
uncertainties. Therefore, actual events or results may differ
materially and adversely from those expressed in any
forward-looking statement. In evaluating these statements, you
should specifically consider the risks described under the
caption Item 1A Risk Factors and elsewhere in
this
Form 10-K.
These factors, and other factors, may cause our actual results
to differ materially from any forward-looking statements. Except
as required by law, we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
Overview
We were incorporated as a Delaware corporation on March 18,
1999 as RockShop.com, Inc. On May 21, 1999, we purchased
certain assets of Williams & Son, Inc., a Seattle
jeweler, including a website established by that business. In
June 1999, we changed our name to Internet Diamonds, Inc. In
November 1999, we launched the Blue Nile brand and changed our
name to Blue Nile, Inc. We are the leading online retailer of
high quality diamonds and fine jewelry. We offer an exceptional
customer experience including substantial education, guidance,
selection, customization capability, convenience and value and
have successfully built Blue Nile into a premium brand. Our
principal corporate offices are located in Seattle, Washington.
In May 2007, we commenced operations of two new wholly-owned
subsidiaries, Blue Nile Worldwide, Inc. (Worldwide)
and Blue Nile Jewellery, Ltd. (Jewellery).
Worldwide, a Delaware corporation, offers high quality diamond
and fine jewelry products for sale to customers through the
www.bluenile.co.uk website. Jewellery is an Irish limited
liability company that operates a customer service and
fulfillment center in Dublin, Ireland.
We derive our revenues through our three websites:
www.bluenile.com, www.bluenile.ca and www.bluenile.co.uk. Prior
to 2008, we served customers in the United States, Canada and
the United Kingdom through these websites. We began expanding
our operations in 2008 and continued to do so in 2009. We
currently offer products for sale to customers in over 40
countries and territories throughout the world. In March 2009 we
enhanced our websites by giving customers the ability to
transact in their local currency. As a result, we now support 24
foreign currencies in addition to the U.S. dollar. In
fiscal year 2009, our net sales were $302.1 million.
We have built a well respected consumer brand by employing an
informative sales process that empowers our customers while
offering a broad selection of high quality jewelry at very
competitive prices. Our websites showcase tens of thousands of
independently certified diamonds and styles of fine jewelry,
including rings, wedding bands, earrings, necklaces, pendants,
bracelets and watches. We specialize in the customization of
diamond jewelry with our Build Your Own feature that
offers customers the ability to customize diamond rings,
pendants and earrings. We have developed an efficient online
cost structure and a unique supply solution that eliminates
traditional layers of diamond wholesalers and brokers, which
generally allow us to purchase most of our product offerings at
lower prices by avoiding
mark-ups
imposed by those intermediaries. While we may selectively
acquire diamond inventory that we believe will be attractive to
our customers, our supply
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solution enables us to purchase only those diamonds that our
customers have ordered. As a result, we are able to minimize the
costs associated with carrying diamond inventory and limit our
risk of potential mark-downs.
The importance of a purchase of diamonds and fine jewelry leads
consumers to seek out substantial information and trusted
guidance throughout their purchasing process. Our comprehensive
websites and expertly trained customer service representatives
(diamond and jewelry consultants) improve the
traditional purchasing experience by providing education and
detailed product information that enable our customers to
objectively compare diamonds and fine jewelry products, and make
informed decisions. Our websites feature an interactive search
functionality that allows our customers to quickly find the
products that meet their needs from our broad selection of
diamonds and fine jewelry. In September 2009, we launched our
new bluenile.com website with a new look and feel, enhanced
shopping tools, diamond search capabilities and product
visualization.
Business
Strategies
Our objective is to maximize our revenue and profitability and
increase market share both domestically and internationally by
offering exceptional value to our customers through a high
quality customer experience that leverages supply chain
efficiencies and an efficient cost structure. We are pursuing
the following strategies for future growth:
Innovate
and Enhance the Blue Nile Customer Experience
We continue to refine the customer service we provide in every
step of the purchase process, from our websites to our customer
support, product quality and fulfillment operations. The Blue
Nile customer experience is designed to empower our customers
with knowledge and confidence as they evaluate, select and
purchase diamonds and fine jewelry. By innovating in the areas
of website functionality, product visualization, and customer
features, we intend to further enhance customer satisfaction.
Expand
International Markets
We have and will continue to selectively pursue opportunities in
international markets in which we can leverage our existing
infrastructure and compelling value proposition. We are pursuing
these opportunities based on each markets consumer
spending on jewelry, adoption rate of online purchasing and
competitive landscape, among other factors. As of
January 3, 2010, we ship to more than 40 countries and
territories worldwide. Our primary website serves the United
States (U.S.) and 14 additional countries and territories
throughout the world. All member states of the European Union
(E.U.) are served from our United Kingdom (U.K.) website and
Canadian customers are supported from our Canada website. In
March 2009, we further enhanced our websites giving our
customers the ability to transact in 22 additional foreign
currencies.
We define international sales as products sold through our U.S.,
U.K. and Canadian websites and delivered to customers outside
the U.S. International sales totaled $33.2 million,
$27.7 million and $17.0 million for the fiscal years
ended January 3, 2010, January 4, 2009 and
December 30, 2007, respectively. Financial information by
geographic area is included in Note 11 to the consolidated
financial statements in Item 8 of this Annual Report on
Form 10-K.
Optimize
Profitability and Cash Flow
We have established and will continue to refine our scalable,
capital-efficient business model that enables growth with lower
working capital requirements than traditional store-based
jewelry retailers. We focus on optimizing the cash flow dynamics
of our business by managing inventory balances along with vendor
payment terms. We further intend to optimize our profitability
by rigorously managing our variable and semi-variable costs such
as marketing, customer service, fulfillment, and payment
processing fees to correspond with sales levels. Over the longer
term, our goal is to increase revenues, profit, and cash flow by
leveraging our relatively fixed cost technology and operations
infrastructure as we achieve sales increases.
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Enhance
Product Assortment
We have and will continue to selectively expand our jewelry
offerings, in terms of both price points and product mix,
through additional customized and complete products. The online
nature of our business allows us to test new products and
efficiently add promising new merchandise to our overall
assortment.
Blue
Niles Product Offerings and Supplier
Relationships
Our merchandise consists of high quality diamonds and fine
jewelry, with a particular focus on engagement diamonds and
settings. Our online business model, combined with the strength
of our supplier relationships, enables us to pursue a dynamic
merchandising strategy. Our exclusive diamond supplier
relationships allow us to display suppliers diamond
inventories on the Blue Nile websites for sale to consumers
without holding the diamonds in our inventory until the products
are ordered by customers. We purchase polished diamonds from
several dozen suppliers, most of whom have long-standing
relationships with us. We typically enter into multi-year
agreements with diamond suppliers that provide for certain
diamonds to be offered online to consumers exclusively through
the Blue Nile websites. Our diamond supply agreements have
expiration dates ranging from 2010 to 2014. Our diamond
suppliers purchase rough and polished diamonds from sources
throughout the world. Their ability to supply us with diamonds
is dependent upon their ability to procure these diamonds.
Diamonds represent the most significant component of our product
offerings. While we currently offer tens of thousands of
independently certified diamonds, we aim to limit our diamond
offerings to those possessing characteristics associated with
high quality. Accordingly, we offer diamonds with specified
characteristics in the areas of shape, cut, color, clarity and
carat weight.
A significant portion of our revenues is derived from the sale
of diamonds. Generally, we purchase diamonds on a just in
time basis from our suppliers when a customer places an
order for a specific diamond. We then assemble the diamond with
a ring, pendant or earring setting from our inventory into
customized diamond jewelry according to our customers
specifications. The finished jewelry is delivered to the
customer generally within three business days from the order
date.
We offer a broad range of other fine jewelry products and
watches to complement our selection of high quality customized
diamond jewelry. Our fine jewelry selection includes diamond,
gemstone, platinum, gold, pearl and sterling silver jewelry and
accessories as well as settings, wedding bands, earrings,
necklaces, pendants and bracelets. In the case of fine jewelry,
unlike most diamonds that we sell, we typically take products
into inventory before they are ordered by our customers. Our
fine jewelry and watches are purchased from over 40
manufacturers, most of whom have long-standing relationships
with us. We do not enter into long-term supply agreements with
our fine jewelry and watch vendors. We do enter into purchase
order agreements with suppliers of fine jewelry and watches.
These purchase order agreements establish terms for quantity,
price, payment and shipping. Additionally, we enter into
operating agreements with these suppliers that include product
quality requirements, product specifications and shipping
procedures. We believe that our current suppliers are able to
sufficiently meet our product needs and that there are
alternative sources for most fine jewelry and watch items that
we purchase.
Marketing
Our marketing strategy is designed to increase Blue Nile brand
recognition, generate consumer traffic, acquire customers, build
a loyal customer base and promote repeat purchases. We believe
our customers generally seek high quality diamonds and fine
jewelry from a trusted source in a non-intimidating environment,
where information, guidance, reputation, convenience and value
are important characteristics. Our marketing and advertising
efforts include online and offline initiatives, which primarily
consist of search engines, portals and targeted website
advertising, affiliate programs, direct online marketing, social
networking and public relations.
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Customer
Service and Support
A key element of our business strategy is our ability to provide
a high level of customer service and support. We augment our
online information resources with knowledgeable, highly trained
support staff through our call centers to give customers
confidence in their purchases. Our diamond and jewelry
consultants are trained to provide guidance on all steps in the
process of buying diamonds and fine jewelry, including, among
other things, the process for selecting an appropriate item, the
purchase of that item, financing and payment alternatives, and
shipping services. Our commitment to customers is reflected in
both high service levels that are provided by our extensively
trained diamond and jewelry consultants, as well as in our
guarantees and policies. We prominently display all of our
guarantees and policies on our websites to create an environment
of trust. These include policies relating to privacy, security,
product availability, pricing, shipping, refunds, exchanges and
special orders. We typically offer a return policy of
30 days. We generally do not extend credit to customers
except through third-party credit cards, although we maintain a
relationship with a consumer financing company that offers
financing to our customers.
Fulfillment
Operations
Our fulfillment operations are designed to enhance value for our
customers by fulfilling orders quickly, securely and accurately.
When an order for a customized diamond jewelry setting is
received, the third-party supplier who holds the diamond in
inventory generally ships it to us, or to independent
third-party jewelers with whom we maintain ongoing relationships
for assembly, within one business day. Upon receipt, the
merchandise is sent to assembly for setting and sizing, which is
performed by our jewelers or independent third-party jewelers.
Each diamond is inspected upon arrival from our suppliers, and
each finished setting or sizing is inspected prior to shipment
to a customer. Prompt and secure delivery of our products is a
high priority, and we ship nearly all diamond and fine jewelry
products via nationally recognized carriers. Loose diamonds and
customized diamond jewelry products may be shipped by Blue Nile
or directly by our suppliers or third-party jewelers to our
customers.
Technology
and Systems
Our technology systems use a combination of proprietary,
licensed and open-source technologies. We focus our internal
development efforts on creating and enhancing the features and
functionality of our websites and order processing and
fulfillment systems to deliver a high quality customer
experience. We license third-party information technology
systems for our financial reporting, inventory management, order
fulfillment and merchandising. We use redundant Internet
carriers to minimize the risk of downtime. Our systems are
monitored continuously using third-party software, and an
on-call team is staffed to respond to any emergencies or
unauthorized access in the technology infrastructure.
Seasonality
We generally experience seasonal fluctuations in demand for our
products. Our quarterly sales are impacted by various gift
giving holidays including Valentines Day (first quarter),
Mothers Day (second quarter) and Christmas (fourth
quarter). As a result, our quarterly revenue is generally the
lowest in the third quarter (as a result of the lack of
recognized gift giving holidays) and highest in the fourth
quarter. The fourth quarter accounted for approximately 34%, 29%
and 35% of our net sales in the years ended January 3,
2010, January 4, 2009 and December 30, 2007,
respectively.
Competition
The diamond and fine jewelry retail market is intensely
competitive and highly fragmented. Our primary competition comes
from online and offline retailers that offer products within the
higher quality segment of the jewelry market. In the future, we
may also compete with other retailers that move into the higher
quality jewelry segment. Current or potential competitors
include the following:
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independent jewelry stores,
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retail jewelry store chains,
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online retailers that sell jewelry,
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department stores, chain stores and mass retailers,
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online auction sites,
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catalog and television shopping retailers,
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discount superstores and wholesale clubs, and
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Internet shopping clubs.
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In addition to these competitors, we may face competition from
suppliers of our products that decide to sell directly to
consumers, either through physical retail outlets or through an
online store. We also face competition from entities that make
and market synthetic stones and gems to compete in the market
for diamonds and diamond jewelry.
We believe that the principal competitive factors in our market
are product selection and quality, customer service and support,
price, brand recognition, reputation, reliability and trust,
website features and functionality, convenience, and delivery
performance. We believe that we compete favorably in the market
for diamonds and fine jewelry by focusing on these factors.
Intellectual
Property
We rely on general intellectual property law and contractual
restrictions and, to a limited extent, copyrights and patents,
to protect our proprietary rights and technology. These
contractual restrictions include confidentiality agreements,
invention assignment agreements and nondisclosure agreements
with employees, contractors, suppliers and strategic partners.
Despite the protection of general intellectual property law and
our contractual restrictions, it may be possible for a
third-party to copy or otherwise obtain and use our intellectual
property without our authorization. In addition, we pursue the
registration of our trademarks and service marks in the
U.S. and certain other countries. However, effective
intellectual property protection or enforcement may not be
available in every country in which our products and services
are made available in the future. In the U.S. and certain
other countries, we have registered Blue Nile,
bluenile.com, the BN logo, the Blue Nile BN stylized
logo and Build Your Own Rings as trademarks. We have
also registered copyrights with respect to images and
information set forth on our websites and the computer codes
incorporated in our websites, and filed U.S. patent
applications relating to certain features of our websites. We
also rely on technologies that we license from third parties,
particularly software solutions for financial reporting,
inventory management, order fulfillment and merchandising.
Employees
At January 3, 2010, we employed 183 full-time
employees, five part-time employees and one independent
contractor. We also utilize temporary personnel on a seasonal
basis. Our employees are not party to any collective bargaining
agreement and we have never experienced an organized work
stoppage. We believe our relations with our employees are good.
Available
Information
We make available, free of charge, through our primary website,
www.bluenile.com, our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to those reports as soon as reasonably
practicable after electronically filing such material with or
furnishing it to the Securities and Exchange Commission
(SEC). Our SEC reports, as well as our corporate
governance policies and code of ethics, can be accessed through
the investor relations section of our website. The information
found on our website is not part of this or any other report
filed with or furnished to the SEC. All of our filings with the
SEC may be obtained at the SECs Public Reference Room at
100 F Street, NE, Washington, DC 20549. For
information regarding the operation of the SECs Public
Reference Room, please contact the
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SEC at
1-800-SEC-0330.
Additionally, the SEC maintains an Internet site that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC at
www.sec.gov. Amendments to, and waivers from, the code of ethics
that apply to our principal executive officer, principal
financial officer and principal accounting officer, or persons
performing similar functions, and that relates to any element of
the code of ethics definition enumerated in Item 406(b) of
Regulation S-K
will be disclosed at the website address provided above and, to
the extent required by applicable regulations, on a current
report on
Form 8-K.
You should carefully consider the risks described below and
elsewhere in this report, which could materially and adversely
affect our business, results of operations or financial
condition. Our business faces significant risks and the risks
described below may not be the only risks we face. Additional
risks not presently known to us or that we currently believe are
immaterial may materially affect our business, results of
operations, or financial condition. If any of these risks occur,
the trading price of our common stock could decline and you may
lose all or part of your investment.
General
economic factors may materially and adversely affect our
financial performance and results of operations.
Our financial performance and results of operations depend
significantly on worldwide economic conditions and their impact
on consumer spending. Luxury products, such as diamonds and fine
jewelry, are discretionary purchases for consumers. Recessionary
economic cycles, higher interest rates, higher fuel and energy
costs, inflation, levels of unemployment, conditions in the
residential real estate and mortgage markets, access to credit,
consumer debt levels, unsettled financial markets, and other
economic factors that may affect consumer spending or buying
habits could materially and adversely affect demand for our
products. In addition, the recent turmoil in the financial
markets has had and may continue to have an adverse effect on
the United States and world economies, which could negatively
impact consumer spending patterns for the foreseeable future.
Reductions in consumer spending or disposable income may affect
us more significantly than companies in other industries and
companies with a more diversified product offering. In addition,
current global economic conditions may materially and adversely
affect our suppliers financial performance, liquidity and
access to capital. This may affect their ability to maintain
their inventories, production levels
and/or
product quality, and could cause them to raise prices, lower
production levels or cease their operations.
Further, any reduction in our sales will affect our liquidity.
As discussed under Liquidity and Capital Resources
in Part II, Item 7 of this
Form 10-K,
our liquidity is primarily dependent upon our net cash from
operating activities. Our net cash from operating activities is
sensitive to many factors, including changes in working capital
and the timing and magnitude of capital expenditures. Working
capital at any specific point in time is dependent upon many
variables, including our operating results, seasonality,
inventory management and assortment expansion, the timing of
cash receipts and payments, and vendor payment terms.
Although the Company does not anticipate needing additional
capital in the near term, financial market disruption may make
it difficult for the Company to raise additional capital, when
needed, on acceptable terms or at all. The interest rate
environment and general economic conditions could also impact
the investment income the Company is able to earn on securities
it may hold from time to time.
The prices of commodity products upon which we are substantially
dependent, such as diamonds, colored gemstones, platinum, gold
and silver, are subject to fluctuations arising from changes in
supply and demand, competition and market speculation. Rapid and
significant changes in commodity prices, particularly diamonds,
may materially and adversely affect our sales and profit margins
by increasing the prices for our products. Economic factors such
as increased shipping costs, inflation, higher costs of labor,
insurance and healthcare, and changes in other laws,
regulations, and taxes may also increase our cost of sales and
our selling, general and administrative expenses, and otherwise
adversely affect our financial condition and results of
operations.
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We
expect our quarterly financial results to fluctuate, which may
lead to volatility in our stock price.
We expect our net sales and operating results to vary
significantly from quarter to quarter due to a number of
factors, including changes in:
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demand for our products;
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the costs to acquire quality diamonds and precious metals;
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our ability to attract visitors to our websites and convert
those visitors into customers;
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general economic conditions, both domestically and globally;
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our ability to retain existing customers or encourage repeat
purchases;
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our ability to manage our product mix and inventory;
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wholesale diamond prices;
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consumer tastes and preferences for diamonds and fine jewelry;
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our ability to manage our operations;
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the extent to which we provide for and pay taxes;
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stock-based compensation expense as a result of the nature,
timing and amount of stock options and restricted stock units
granted, the underlying assumptions used in valuing stock
options, the estimated rate of stock option and restricted stock
unit forfeitures and other factors;
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advertising and other marketing costs;
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our, or our competitors, pricing and marketing strategies;
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the introduction of competitive websites, products, price
decreases or improvements;
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conditions or trends in the diamond and fine jewelry industry;
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conditions or trends in the Internet and
e-commerce
industry;
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the success of our geographic, service and product line
expansions;
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foreign exchange rates;
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interest rates; and
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costs of expanding or enhancing our technology or websites.
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As a result of the variability of these and other factors, our
operating results in future quarters may be below the
expectations of public market analysts and investors. In this
event, the price of our common stock may decline.
As a
result of seasonal fluctuations in our net sales, our quarterly
results may fluctuate and could be below
expectations.
We have experienced and expect to continue to experience
seasonal fluctuations in our net sales. In particular, a
disproportionate amount of our net sales has been realized
during the fourth quarter as a result of the December holiday
season, and we expect this seasonality to continue in the
future. Approximately 34%, 29% and 35% of our net sales in the
years ended January 3, 2010, January 4, 2009 and
December 30, 2007, respectively, were generated during the
fourth quarter of each year. In anticipation of increased sales
activity during the fourth quarter, we may incur significant
additional expenses, including higher inventory of fine jewelry
and additional staffing in our fulfillment and customer support
operations. If we experience lower than expected net sales
during any fourth quarter, it may have a disproportionately
large impact on our operating results and financial condition
for that year. Further, we may experience an increase in our net
shipping cost due to complimentary upgrades, split-shipments,
and additional long-zone shipments necessary to ensure
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timely delivery for the holiday season. We also experience
considerable fluctuations in net sales in periods preceding
other annual occasions such as Valentines Day and
Mothers Day. In the future, our seasonal sales patterns
may become more pronounced, may strain our personnel and
fulfillment activities, and may cause a shortfall in net sales
as compared with expenses in a given period, which could
substantially harm our business and results of operations.
We may
not accurately forecast net sales and appropriately plan our
expenses.
We may base our current and future expense levels on our
operating forecasts and estimates of future net sales. Net sales
and operating results are difficult to forecast because they
generally depend on the volume and timing of the orders we
receive, which are uncertain. Additionally, our business is
affected by general economic and business conditions in the
U.S. and international markets. A softening in net sales,
whether caused by changes in customer preferences or a weakening
in the U.S. or global economies, may result in decreased
revenue levels. Some of our expenses are fixed, and as a result,
we may be unable to adjust our spending in a timely manner to
compensate for any unexpected shortfall in net sales. This
inability could cause our net income in a given quarter to be
lower than expected. We also make certain assumptions when
forecasting the amount of expense we expect related to our
stock-based compensation, which includes the expected volatility
of our stock price, the expected life of options granted and the
expected rate of stock option and restricted stock unit
forfeitures. These assumptions are partly based on historical
results. If actual results differ from our estimates, our net
income in a given quarter may be lower than expected.
Our
failure to acquire quality diamonds and fine jewelry at
commercially reasonable prices and lead times would result in
higher costs and damage our operating results and competitive
position.
Our high quality customer experience depends on our ability to
provide expeditious fulfillment of customer orders. If we are
unable to acquire quality diamonds and fine jewelry at
commercially reasonable prices and lead times, our costs may
exceed our forecasts, our gross margins and operating results
and customer experience may suffer and our competitive position
could be damaged. The success of our business model depends, in
part, on our ability to offer quality products to customers at
prices that are below those of traditional jewelry retailers.
Because of our virtual inventory model, our prices are much more
sensitive to rapid fluctuations in the prices of commodities,
particularly diamonds, which traditional retailers hold in
inventory.
A majority of the worlds supply of rough diamonds is
controlled by a small number of diamond mining firms. As a
result, any decisions made to restrict the supply of rough
diamonds by these firms to our suppliers could substantially
impair our ability to acquire diamonds at commercially
reasonable prices, if at all. We do not currently have any
direct supply relationships with these firms. Our ability to
acquire diamonds and fine jewelry is also substantially
dependent on our relationships with various suppliers.
Approximately 24%, 22% and 22% of our payments to our diamond
and fine jewelry suppliers for each of the years ended
January 3, 2010, January 4, 2009 and December 30,
2007 were made to our top three suppliers for that year. Our
inability to maintain and expand these and other future diamond
and fine jewelry supply relationships on commercially reasonable
terms or the inability of our current and future suppliers to
maintain arrangements for the supply of products sold to us on
commercially reasonable terms would substantially harm our
business and results of operations. The financial performance
and viability of our suppliers are also significantly dependent
upon worldwide economic conditions and consumer demand for
diamonds and fine jewelry. The failure of any of our principal
suppliers to remain financially viable could adversely impact
our supply of diamonds and fine jewelry for sale to our
customers.
Suppliers and manufacturers of diamonds as well as retailers of
diamonds and diamond jewelry are vertically integrated and we
expect they will continue to vertically integrate their
operations either by developing retail channels for the products
they manufacture or acquiring sources of supply, including,
without limitation, diamond mining operations. To the extent
such vertical integration efforts are successful, some of the
fragmentation in the existing diamond supply chain could be
eliminated, our ability to obtain an adequate supply of diamonds
and fine jewelry from multiple sources could be limited and our
competitors may be able to obtain diamonds at lower prices.
10
Our
failure to meet customer expectations with respect to price
would adversely affect our business and results of
operations.
Demand for our products has been highly sensitive to pricing
changes. Changes in our pricing strategies have had and may
continue to have a significant impact on our net sales, gross
margins and net income. In the past, we have instituted retail
price changes as part of our strategy to stimulate growth in net
sales and optimize gross profit. We may institute similar price
changes in the future. Such price changes may not result in an
increase in net sales or in the optimization of gross profits.
In addition, many external factors, including the costs to
acquire diamonds and precious metals and our competitors
pricing and marketing strategies, can significantly impact our
pricing strategies. If we fail to meet customer expectations
with respect to price in any given period, our business and
results of operations would suffer.
Our
net sales may be negatively affected if we are required to
collect taxes on purchases.
We collect sales and/or other taxes related to purchases by
customers located in the State of Washington and the State of
New York, and certain taxes required to be collected on sales to
customers outside of the United States. One or more states or
foreign countries have sought and others may seek to impose
additional sales or other tax collection obligations on us in
the future. A successful assertion by one or more states or
foreign countries to require the collection of sales or other
taxes on the sale of our products could result in substantial
tax liabilities for past sales, discourage customers from
purchasing products from us, decrease our competitive advantage,
cause us to discontinue certain successful sales and marketing
initiatives or otherwise substantially harm our business and
results of operations.
While we believe that current law restricts state and local
taxing authorities outside the State of Washington from
requiring us to collect sales and use taxes from purchasers
located within their jurisdictions, taxing authorities outside
the State of Washington have, and in the future could, disagree
with our interpretation. For example, a number of states, as
well as the U.S. Congress, are considering or have adopted
various initiatives designed to impose sales, use and other
taxes on Internet sales. The successful implementation of any
such initiatives could require us to collect sales, use and
other taxes from purchasers located in states other than
Washington. The imposition by state and local governments of
various taxes upon Internet commerce could create administrative
burdens for us and could significantly decrease our future net
sales.
We may
not succeed in continuing to establish the Blue Nile brand,
which would prevent us from acquiring customers and increasing
our net sales.
A significant component of our business strategy is the
continued establishment and promotion of the Blue Nile brand.
Due to the competitive nature of the market for diamonds and
fine jewelry, if we do not continue to establish our brand and
branded products, we may fail to build the critical mass of
customers required to substantially increase our net sales.
Promoting and positioning our brand will depend largely on the
success of our marketing and merchandising efforts and our
ability to provide a consistent, high quality product and
customer experience. To promote our brand and branded products,
we have incurred and will continue to incur substantial expenses
related to advertising and other marketing efforts.
A critical component of our brand promotion strategy is
establishing a relationship of trust with our customers, which
we believe can be achieved by providing a high quality customer
experience. In order to provide a high quality customer
experience, we have invested and will continue to invest
substantial amounts of resources in the development and
functionality of our multiple websites, technology
infrastructure, fulfillment operations and customer service
operations. Our ability to provide a high quality customer
experience is also dependent, in large part, on external factors
over which we may have little or no control, including, without
limitation, the reliability and performance of our suppliers,
third-party jewelry assemblers, third-party carriers, third
party diamond grading labs, and networking vendors. During our
peak seasons, we rely on temporary employees to supplement our
full-time customer service and fulfillment employees. Temporary
employees may not have the same level of commitment to our
customers as our full-time employees. If our customers are
dissatisfied with the quality of the products or the customer
service they receive, or if we are unable to deliver products to
our customers in a timely manner or at all, our customers
11
may stop purchasing products from us. We also rely on third
parties for information, including product characteristics and
availability that we present to consumers on our websites, which
may, on occasion, be inaccurate. Our failure to provide our
customers with high quality products and high quality customer
experiences for any reason could substantially harm our
reputation and adversely impact our efforts to develop Blue Nile
as a trusted brand. The failure of our brand promotion
activities could adversely affect our ability to attract new
customers and maintain customer relationships, and, as a result,
substantially harm our business and results of operations.
We
face significant competition and may be unsuccessful in
competing against current and future competitors.
The retail jewelry industry is intensely competitive, and we
expect competition in the sale of diamonds and fine jewelry to
increase and intensify in the future. Increased competition may
result in price pressure, reduced gross margins and loss of
market share, any of which could substantially harm our business
and results of operations. Furthermore, our competitors may
react to falling consumer confidence by reducing their retail
prices. Such reduction
and/or
inventory liquidations can have a short-term adverse effect on
our sales. Current and potential competitors include:
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independent jewelry stores;
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retail jewelry store chains, such as Tiffany & Co.;
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online retailers that sell jewelry, such as Amazon.com;
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department stores, chain stores and mass retailers, such as
Nordstrom and Neiman Marcus;
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online auction sites, such as eBay;
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catalog and television shopping retailers, such as Home Shopping
Network and QVC;
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discount superstores and wholesale clubs, such as Wal-Mart and
Costco Wholesale; and
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Internet shopping clubs, such as Gilt Groupe and Rue La La.
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In addition to these competitors, we may face competition from
suppliers of our products that decide to sell directly to
consumers, either through physical retail outlets or through
online stores. We also face competition from entities that make
and market synthetic stones and gems to compete in the market
for diamonds and diamond jewelry.
Many of our current and potential competitors have advantages
over us, including longer operating histories, greater brand
recognition, existing customer and supplier relationships, and
significantly greater financial, marketing and other resources.
In addition, traditional store-based retailers offer consumers
the ability to physically handle and examine products in a
manner that is not possible over the Internet as well as a more
convenient means of returning and exchanging purchased products.
Some of our competitors seeking to establish an online presence
may be able to devote substantially more resources to website
systems development and exert more leverage over the supply
chain for diamonds and fine jewelry than we can. In addition,
larger, more established and better capitalized entities may
acquire, invest or partner with traditional and online
competitors as use of the Internet and other online services
increases. Our online competitors may duplicate many of the
products, services and content we offer, which could harm our
business and results of operations.
We
rely on our suppliers, third-party carriers and third-party
jewelers as part of our fulfillment process, and these third
parties may fail to adequately serve our
customers.
We significantly rely on our suppliers to promptly ship us
diamonds ordered by our customers. Any failure by our suppliers
to sell and ship such products to us in a timely manner will
have an adverse effect on our ability to fulfill customer orders
and harm our business and results of operations. Our suppliers,
in turn, rely on third-party carriers to ship diamonds to us,
and in some cases, directly to our customers. We also rely
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on a limited number of third-party carriers to deliver inventory
to us and product shipments to our customers. We and our
suppliers are therefore subject to the risks, including employee
strikes, inclement weather, power outages, national disasters,
rising fuel costs and other financial constraints associated
with such carriers abilities to provide delivery services
to meet our and our suppliers shipping needs. In addition,
for some customer orders we rely on third-party jewelers to
assemble and ship the product. Our suppliers, third-party
carriers or third-party jewelers failure to deliver
high-quality products to us or our customers in a timely manner
or to otherwise adequately serve our customers would damage our
reputation and brand and substantially harm our business and
results of operations.
If our
fulfillment operations are interrupted for any significant
period of time, our business and results of operations would be
substantially harmed.
Our success depends on our ability to successfully receive and
fulfill orders and to promptly and securely deliver our products
to our customers. Most of our inventory management, jewelry
assembly, packaging, labeling and product return processes are
performed in a single fulfillment center located in the United
States. We also have a fulfillment facility located in Ireland.
These facilities are susceptible to damage or interruption from
human error, fire, flood, power loss, telecommunications
failure, terrorist attacks, acts of war, break-ins, earthquake
and similar events. Our business interruption insurance may be
insufficient to compensate us for losses that may occur in the
event operations at our fulfillment centers are interrupted. Any
interruptions in our fulfillment center operations for any
significant period of time could damage our reputation and brand
and substantially harm our business and results of operations.
We
rely on the services of our small, specialized workforce and key
personnel, many of whom would be difficult to
replace.
We rely upon the continued service and performance of key
technical, fulfillment and senior management personnel. If we
lose any of these personnel, our business could suffer.
Competition for qualified personnel in our industry is intense.
We believe that our future success will depend on our continued
ability to attract, hire and retain key employees. Other than
for our Executive Chairman, we do not have key
person life insurance policies covering any of our
employees. In addition, illness, severe adverse weather
conditions or natural disasters could impede our ability to
service our customers.
We
face the risk of theft of our products from inventory or during
shipment.
We have experienced and may continue to experience theft of our
products while they are being held in our fulfillment centers or
during the course of shipment to our customers by third-party
shipping carriers. We have taken steps to prevent such theft.
However, if security measures fail, losses exceed our insurance
coverage or we are not able to maintain insurance at a
reasonable cost, we could incur significant losses from theft,
which would substantially harm our business and results of
operations.
If the
single facility where substantially all of our computer and
communications hardware is located fails, our business, results
of operations and financial condition would be
harmed.
Our ability to successfully receive and fulfill orders and to
provide high quality customer service depends in part on the
efficient and uninterrupted operation of our computer and
communications systems. Substantially all of the computer
hardware necessary to operate our websites is located at a
single leased facility. Our systems and operations are
vulnerable to damage or interruption from human error, fire,
flood, power loss, telecommunications failure, terrorist
attacks, acts of war, break-ins, earthquake and similar events.
We do not presently have redundant systems in multiple locations
and our business interruption insurance may be insufficient to
compensate us for losses that may occur.
Our
systems are vulnerable to cyber attacks.
Our technology systems are vulnerable to cyber attacks including
computer viruses, malware, denial of service attacks, physical
or electronic break-ins, heavy spidering or bot activity,
hackers who could encode our
13
encryption secrets and similar disruptions. Such disruptions
could lead to interruptions, delays, loss of critical data, the
inability to fulfill customer orders or the unauthorized
disclosure of confidential company
and/or
customer data which could substantially harm our business and
results of operations.
Our
failure to protect confidential information of our customers and
our network against security breaches could damage our
reputation and brand and substantially harm our business and
results of operations.
A significant barrier to online commerce and communications is
the secure transmission of confidential information over public
networks. Our failure to prevent security breaches could damage
our reputation and brand and substantially harm our business and
results of operations. Currently, a majority of our sales are
billed to our customers credit card accounts directly. We
rely on encryption and authentication technology licensed from
third parties to effect secure transmission of confidential
information, including credit card numbers. Advances in computer
capabilities, human errors, new discoveries in the field of
cryptography or other developments may result in a compromise or
breach of the technology used by us to protect customer
transaction data. In addition, any party who is able to
illicitly obtain a users password could access the
customers transaction data. An increasing number of
websites and Internet companies have reported breaches of their
security. Any such compromise of our security could damage our
reputation, business and brand and expose us to a risk of loss
or litigation and possible liability, which would substantially
harm our business and results of operations. In addition, anyone
who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in
our operations, damage our computers or those of our users, or
otherwise damage our reputation and business. These issues are
likely to become more difficult as we expand the number of
countries in which we operate. We may need to expend significant
resources to protect against security breaches or to address
problems caused by breaches.
Our
net sales consist exclusively of diamonds and fine jewelry, and
demand for these products could decline.
Our net sales and results of operations are highly dependent on
the demand for diamonds and diamond jewelry, particularly
engagement rings. Should prevailing consumer tastes for diamonds
decline or customs with respect to engagement shift away from
the presentation of diamond jewelry, demand for our products
would decline and our business and results of operations would
be substantially harmed.
The significant cost of diamonds results in part from their
scarcity. From time to time, attempts have been made to develop
and market synthetic stones and gems to compete in the market
for diamonds and diamond jewelry. We expect such efforts to
continue in the future. If any such efforts are successful in
creating widespread demand for alternative diamond products,
demand and price levels for our products would decline and our
business and results of operations would be substantially harmed.
In recent years, increased attention has been focused on
conflict diamonds, which are diamonds extracted from
war-torn regions in Africa and sold by rebel forces to fund
insurrection. Diamonds are, in some cases, also believed to be
used to fund terrorist activities in some regions. We support
the Kimberley Process, an international initiative intended to
ensure diamonds are not illegally traded to fund conflict. As
part of this initiative, we require our diamond suppliers to
sign a statement acknowledging compliance with the Kimberley
Process, and invoices received for diamonds purchased by us must
include a certification from the vendor that the diamonds are
conflict free. In addition, we prohibit the use of our business
or services for money laundering or terrorist financing in
accordance with the USA Patriot Act. Through these and other
efforts, we believe that the suppliers from whom we purchase our
diamonds exclude conflict diamonds from their inventories.
However, we cannot independently determine whether any diamond
we offer was extracted from these regions. Current efforts to
increase consumer awareness of this issue and encourage
legislative response could adversely affect consumer demand for
diamonds. Consumer confidence is dependent, in part, on the
certification of our diamonds by independent laboratories. A
decline in the quality of the certifications provided by these
laboratories could adversely impact demand for our products.
Additionally, a decline in consumer confidence in the
credibility of independent diamond grading certifications could
adversely impact demand for our diamond products.
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Our fine jewelry offerings must reflect the tastes and
preferences of a wide range of consumers whose preferences may
change regularly. Our strategy has been to offer primarily what
we consider to be classic styles of fine jewelry, but there can
be no assurance that these styles will continue to be popular
with consumers in the future. If the styles we offer become less
popular with consumers and we are not able to adjust our product
offerings in a timely manner, our net sales may decline or fail
to meet expected levels.
System
interruptions that impair customer access to our websites would
damage our reputation and brand and substantially harm our
business and results of operations.
The satisfactory performance, reliability and availability of
our websites, transaction processing systems and network
infrastructure are critical to our reputation, our ability to
attract and retain customers, and to maintain adequate customer
service levels. Any future systems interruptions, downtime or
technical difficulties that result in the unavailability of our
websites or reduced order fulfillment performance could result
in negative publicity, damage our reputation and brand, and
cause our business and results of operations to suffer. We may
be susceptible to such disruptions in the future. We may also
experience temporary system interruptions for a variety of other
reasons in the future, including power failures, failures of
Internet service and telecommunication providers, software or
human errors, or an overwhelming number of visitors trying to
reach our websites during periods of strong seasonal demand or
promotions. Because we are dependent in part on third parties
for the implementation and maintenance of certain aspects of our
systems and because some of the causes of system interruptions
may be outside of our control, we may not be able to remedy such
interruptions in a timely manner, or at all.
We may
be unsuccessful in further expanding our operations
internationally.
For the year ended January 3, 2010, international net sales
represented more than 10% of our total annual net sales. In 2008
and 2009, we increased our product offerings and marketing and
sales efforts throughout Europe, Canada and the Asia-Pacific
region, and anticipate continuing to expand our international
sales and operations in the future either by expanding local
versions of our website for foreign markets or through
acquisitions or alliances with third parties. Any international
expansion plans we choose to undertake will increase the
complexity of our business, require attention from management
and other personnel and cause additional strain on our
operations, technology systems, financial resources, and our
internal financial control and reporting functions. Further, our
expansion efforts may be unsuccessful. We have limited
experience selling our products in international markets and in
conforming to the local cultures, standards or policies
necessary to successfully compete in those markets. We cannot be
certain that we will be able to expand our global presence if we
choose to further expand internationally. In addition, we may
have to compete with retailers that have more experience with
local markets. Our ability to expand and succeed internationally
may also be limited by the demand for our products, the ability
to successfully transact in foreign currencies, the ability of
our brand to resonate with consumers globally and the adoption
of electronic commerce in these markets. Different privacy,
censorship and liability standards and regulations, and
different intellectual property laws in foreign countries may
prohibit expansion into such markets or cause our business and
results of operations to suffer.
Our current and future international operations may also fail to
succeed due to other risks inherent in foreign operations,
including:
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the need to develop new supplier and jeweler relationships;
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international regulatory requirements, tariffs and duties;
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difficulties in staffing and managing foreign operations;
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longer payment cycles from credit card companies;
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greater difficulty in accounts receivable collection;
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our reliance on third-party carriers for product shipments to
our customers;
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risk of theft of our products during shipment;
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limited shipping and insurance options for us and our customers;
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potential adverse tax consequences;
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foreign currency exchange risk;
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lack of infrastructure to adequately conduct electronic commerce
transactions or fulfillment operations;
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unclear foreign intellectual property protection laws;
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laws and regulations related to corporate governance and
employee/employer relationships;
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price controls or other restrictions on foreign currency;
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difficulties in obtaining export, import or other business
licensing requirements;
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increased payment risk and greater difficulty addressing credit
card fraud;
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consumer and data protection laws;
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lower levels of adoption or use of the Internet;
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geopolitical events, including war and terrorism; and
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the need to conduct business in foreign languages on both the
website and in our customer service calls.
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Our failure to successfully expand and manage our international
operations may cause our business and results of operations to
suffer.
In
order to increase net sales and to sustain or increase
profitability, we must attract customers in a
cost-effective
manner.
Our success depends on our ability to attract customers in a
cost-effective manner. We have relationships with providers of
online services, search engines, directories and other websites
and
e-commerce
businesses to provide content, advertising banners and other
links that direct customers to our websites. We rely on these
relationships as significant sources of traffic to our websites.
Our agreements with these providers generally have terms of one
year or less. If we are unable to develop or maintain these
relationships on acceptable terms, our ability to attract new
customers would be harmed. In addition, many of the parties with
whom we have online-advertising arrangements could provide
advertising services to other companies, including retailers
with whom we compete. As competition for online advertising has
increased, the cost for these services has also increased. A
significant increase in the cost of the marketing vehicles upon
which we rely could adversely impact our ability to attract
customers in a cost-effective manner and harm our business and
results of operations.
If we
are unable to accurately manage our inventory of fine jewelry,
our reputation and results of operations could
suffer.
Except for loose diamonds, substantially all of the fine jewelry
we sell is from our physical inventory. Changes in consumer
tastes for these products subject us to significant inventory
risks. The demand for specific products can change between the
time we order an item and the date we receive it. If we
under-stock one or more of our products, we may not be able to
obtain additional units in a timely manner on terms favorable to
us, if at all, which would damage our reputation and
substantially harm our business and results of operations. In
addition, if demand for our products increases over time, we may
be forced to increase inventory levels. If one or more of our
products does not achieve widespread consumer acceptance, we may
be required to take significant inventory markdowns, or may not
be able to sell the product at all, which would substantially
harm our results of operations.
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Our
stock price has been volatile historically, and may continue to
be volatile. Further, the sale of our common stock by
significant stockholders may cause the price of our common stock
to decrease.
The trading price of our common stock has been and may continue
to be subject to wide fluctuations. Our stock price may
fluctuate in response to a number of events and factors, such as
quarterly variations in operating results, announcements by us
or our competitors, announcements relating to strategic
decisions, announcements related to key personnel, service
disruptions, changes in financial estimates and recommendations
by security analysts, the operating and stock price performance
of other companies that investors may deem comparable to us, and
news reports relating to trends in our markets or general
economic conditions.
In addition, several of our stockholders own significant
portions of our common stock. If these stockholders were to sell
all or a portion of their holdings of our common stock, the
market price of our common stock could be negatively impacted.
The effect of such sales, or of significant portions of our
stock being offered or made available for sale, could result in
strong downward pressure on our stock price. Investors should be
aware that they could experience significant short-term
volatility in our stock if such stockholders decide to sell all
or a portion of their holdings of our common stock at once or
within a short period of time.
Repurchases
of our common stock may not prove to be the best use of our cash
resources.
We have and plan to continue to opportunistically repurchase
shares of our common stock. Since the inception of our share
repurchase program in the first quarter of 2005 through
January 3, 2010, we have repurchased 4.4 million
shares for a total of $161.2 million. In February 2010, our
board of directors authorized the repurchase of up to
$100 million of our common stock during the subsequent
24-month
period. These repurchases and any repurchases we may make in the
future may not prove to be at optimal prices and our use of cash
for the stock repurchase program may not prove to be the best
use of our cash resources and may adversely impact our future
liquidity.
We
have foreign exchange risk.
The results of operations of Blue Nile Jewellery, Ltd., our
Ireland subsidiary, are exposed to foreign exchange rate
fluctuations. Upon translation from foreign currency into
U.S. dollars, operating results may differ materially from
expectations, and we may record significant gains or losses.
In March 2009, we expanded the capabilities of our websites from
allowing customers to purchase our products in two foreign
currencies to allowing purchases in 24 foreign currencies. This
expansion increases our exposure to foreign exchange rate
fluctuations and we may record significant gains or losses as a
result of such fluctuations.
Our
cash, cash equivalents and short-term investments are subject to
a risk of loss based upon the solvency of the financial
institutions in which they are maintained.
We maintain the majority of our cash, cash equivalents and
short-term investments in accounts with major financial
institutions within and outside the United States, in the form
of demand deposits, money market accounts, time deposits,
U.S. Treasury Bills and other short-term investments.
Deposits in these institutions may exceed the amounts of
insurance provided, or deposits may not at all be covered by
insurance. If any of these institutions becomes insolvent, it
could substantially harm our financial condition and we may lose
some, or all, of such deposits.
Failure
to adequately protect or enforce our intellectual property
rights could substantially harm our business and results of
operations.
We rely on a combination of patent, trademark, trade secret and
copyright law, and contractual restrictions to protect our
intellectual property. These afford only limited protection.
Despite our efforts to protect and enforce our proprietary
rights, unauthorized parties have attempted, and may in the
future attempt, to copy aspects of our website features,
compilation and functionality or to obtain and use information
that we
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consider as proprietary, such as the technology used to operate
our websites, our content and our trademarks. We have registered
Blue Nile, bluenile.com, the BN logo,
the Blue Nile BN stylized logo and Build Your Own
Ring as trademarks in the United States and in certain
other countries. Our competitors have, and other competitors
may, adopt service names similar to ours, thereby impeding our
ability to build brand identity and possibly leading to consumer
confusion. In addition, there could be potential trade name or
trademark infringement claims brought by owners of other
registered trademarks or trademarks that incorporate variations
of the term Blue Nile or our other trademarks. Any claims or
consumer confusion related to our trademarks could damage our
reputation and brand and substantially harm our business and
results of operations.
We currently hold the bluenile.com, bluenile.co.uk and
bluenile.ca Internet domain names and various other related
domain names. Domain names generally are regulated by Internet
regulatory bodies. If we lose the ability to use a domain name
in a particular country, we would be forced to either incur
significant additional expenses to market our products within
that country, including the development of a new brand and the
creation of new promotional materials and packaging, or elect
not to sell products in that country. Either result could
substantially harm our business and results of operations. The
regulation of domain names in the United States and in foreign
countries is subject to change. Regulatory bodies could
establish additional top-level domains, appoint additional
domain name registrars or modify the requirements for holding
domain names. As a result, we may not be able to acquire or
maintain the domain names that utilize the name Blue Nile in all
of the countries in which we currently or intend to conduct
business.
Litigation or proceedings before the U.S. Patent and
Trademark Office or similar international regulatory agencies
may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets and domain names
and to determine the validity and scope of the proprietary
rights of others. Any litigation or adverse priority proceeding
could result in substantial costs and diversion of resources and
could substantially harm our business and results of operations.
We sell and intend to increasingly sell our products
internationally, and the laws of many countries do not protect
our proprietary rights to as great an extent as do the laws of
the United States.
The
success of our business may depend on our ability to
successfully expand our product offerings.
Our ability to significantly increase our net sales and maintain
and increase our profitability may depend on our ability to
successfully expand our product lines beyond our current
offerings. If we offer a new product category that is not
accepted by consumers, the Blue Nile brand and reputation could
be adversely affected, our net sales may fall short of
expectations and we may incur substantial expenses that are not
offset by increased net sales. Expansion of our product lines
may also strain our management and operational resources.
Assertions
by third parties of infringement by us of their intellectual
property rights could result in significant costs and
substantially harm our business and results of
operations.
Third parties have, and may in the future, assert that we have
infringed their technology or other intellectual property
rights. We cannot predict whether any such assertions or claims
arising from such assertions will substantially harm our
business and results of operations. If we are forced to defend
against any infringement claims, whether they are with or
without merit or are determined in our favor, we may face costly
litigation, diversion of technical and management personnel, or
product shipment delays. Furthermore, the outcome of a dispute
may be that we would need to develop non-infringing technology
or enter into royalty or licensing agreements. Royalty or
licensing agreements, if required, may be unavailable on terms
acceptable to us, or at all.
Increased
product returns and the failure to accurately predict product
returns could substantially harm our business and results of
operations.
We generally offer our customers an unconditional
30-day
return policy that allows our customers to return most products
if they are not satisfied for any reason. We make allowances for
product returns in our financial statements based on historical
return rates and current economic conditions. Actual merchandise
18
returns are difficult to predict and may differ from our
allowances. Any significant increase in merchandise returns
above our allowances would substantially harm our business and
results of operations.
Purchasers
of diamonds and fine jewelry may not choose to shop online,
which would prevent us from growing our business.
The online market for diamonds and fine jewelry is significantly
less developed than the online market for books, music, toys and
other consumer products. If this market does not gain widespread
acceptance, our business may suffer. Our success will depend, in
part, on our ability to attract consumers who have historically
purchased diamonds and fine jewelry through traditional
retailers. Furthermore, we may have to incur significantly
higher and more sustained advertising and promotional
expenditures or price our products more competitively than we
currently anticipate in order to attract additional online
consumers to our websites and convert them into purchasing
customers. Specific factors that could prevent consumers from
purchasing diamonds and fine jewelry from us include:
|
|
|
|
|
concerns about buying luxury products such as diamonds and fine
jewelry without a physical storefront,
face-to-face
interaction with sales personnel and the ability to physically
handle and examine products;
|
|
|
|
delivery time associated with Internet orders;
|
|
|
|
product offerings that do not reflect consumer tastes and
preferences;
|
|
|
|
pricing that does not meet consumer expectations;
|
|
|
|
concerns about the security of online transactions and the
privacy of personal information;
|
|
|
|
delayed shipments or shipments of incorrect or damaged products;
|
|
|
|
inconvenience associated with returning or exchanging Internet
purchased items; and
|
|
|
|
usability, functions and features of our websites.
|
If use
of the Internet, particularly with respect to online commerce,
does not continue to increase as rapidly as we anticipate, our
business and results of operations will be harmed.
Our future net sales and profits are substantially dependent
upon the continued growth in the use of the Internet as an
effective medium of business and communication by our target
customers. Internet use may not continue to develop at
historical rates and consumers may not continue to use the
Internet and other online services as a medium for commerce.
Failures by some online retailers to meet consumer demands could
result in consumer reluctance to adopt the Internet as a means
for commerce, and thereby damage our reputation and brand and
substantially harm our business and results of operations.
In addition, the Internet may not be accepted as a viable
long-term commercial marketplace for a number of reasons,
including:
|
|
|
|
|
actual or perceived lack of security of information or privacy
protection;
|
|
|
|
possible disruptions, computer viruses, spyware, phishing,
attacks or other damage to the Internet servers, service
providers, network carriers and Internet companies or to
users computers; and
|
|
|
|
excessive governmental regulation.
|
Our success will depend, in large part, upon third parties
maintaining the Internet infrastructure to provide a reliable
network backbone with the speed, data capacity, security and
hardware necessary for reliable Internet access and services.
Our business, which relies on a contextually rich website that
requires the transmission of substantial secure data, is also
significantly dependent upon the availability and adoption of
broadband Internet access and other high speed Internet
connectivity technologies.
19
Our
failure to address risks associated with payment methods, credit
card fraud and other consumer fraud could damage our reputation
and brand and may cause our business and results of operations
to suffer.
Under current credit card practices, we are liable for
fraudulent credit card transactions because we do not obtain a
cardholders signature. We do not currently carry insurance
against this risk. To date, we have experienced minimal losses
from credit card fraud, but we face the risk of significant
losses from this type of fraud as our net sales increase and as
we expand internationally. Our failure to adequately control
fraudulent credit card transactions could damage our reputation
and brand and substantially harm our business and results of
operations. Additionally, for certain payment transactions,
including credit and debit cards, we pay interchange and other
fees. These fees may increase over time, which would raise our
operating costs and lower our operating margins.
We
rely on our relationship with a third-party consumer credit
company to offer financing for the purchase of our
products.
The purchase of the diamond and fine jewelry products we sell is
a substantial expense for many of our customers. We currently
rely on our relationship with a consumer finance company to
provide financing to our customers. If we are unable to maintain
this or other similar arrangements, we may not be able to offer
financing alternatives to our customers, which may reduce demand
for our products and substantially harm our business and results
of operations.
We may
undertake acquisitions to expand our business, which may pose
risks to our business and dilute the ownership of our existing
stockholders.
A key component of our business strategy includes strengthening
our competitive position and refining the customer experience on
our websites through internal development. However, from time to
time, we may selectively pursue acquisitions of businesses,
technologies or services. Integrating any newly acquired
businesses, technologies or services may be expensive and
time-consuming. To finance any acquisitions, it may be necessary
for us to raise additional funds through public or private
financings. Additional funds may not be available on terms that
are favorable to us, and, in the case of equity financings,
would result in dilution to our stockholders. If we do complete
any acquisitions, we may be unable to operate such acquired
businesses profitably or otherwise implement our strategy
successfully. If we are unable to integrate any newly acquired
entities or technologies effectively, our business and results
of operations could suffer. The time and expense associated with
finding suitable and compatible businesses, technologies or
services could also disrupt our ongoing business and divert our
managements attention. Future acquisitions by us could
also result in large and immediate write-offs or assumptions of
debt and contingent liabilities, any of which could
substantially harm our business and results of operations. We
have no current plans, agreements or commitments with respect to
any such acquisitions.
Our
failure to rapidly respond to technological change could result
in our services or systems becoming obsolete and substantially
harm our business and results of operations.
As the Internet and online commerce industries evolve, we may be
required to license emerging technologies useful in our
business, enhance our existing services, develop new services
and technologies that address the increasingly sophisticated and
varied needs of our prospective customers and respond to
technological advances and emerging industry standards and
practices on a cost-effective and timely basis. We may not be
able to successfully implement new technologies or adapt our
websites, proprietary technologies and transaction-processing
systems to customer requirements or emerging industry standards.
Our failure to do so would substantially harm our business and
results of operations. We may be required to upgrade existing
technologies or business applications, or implement new
technologies or business applications. Our results of operations
may be affected by the timing, effectiveness and costs
associated with the successful implementation of any upgrades or
changes to our systems and infrastructure.
20
We may
have exposure to greater than anticipated tax
liabilities.
We are subject to income, payroll, duties and other business
taxes in both the United States and foreign jurisdictions. In
the ordinary course of our business, there are many transactions
and calculations where the ultimate tax determination is
uncertain. Our determination of our tax liability is always
subject to review by applicable taxing authorities. Any adverse
outcome of such a review could have a negative effect on our
operating results and financial condition. Although we believe
our estimates are reasonable, the ultimate tax outcome may
differ from the amounts recorded in our financial statements and
may materially affect our financial results in the period or
periods for which such determination is made. In addition, the
imposition of additional tax obligations on our business by
state and local governments could create significant
administrative burdens for us, decrease our future sales, and
harm our cash flow and operating results.
Government
regulation of the Internet and
e-commerce
is evolving and unfavorable changes could substantially harm our
business and results of operations.
We are not currently subject to direct federal, state or local
regulation other than regulations applicable to businesses
generally or directly applicable to retailing and online
commerce. However, as the Internet becomes increasingly popular,
it is possible that laws and regulations may be adopted with
respect to the Internet, which may impede the growth of the
Internet or other online services. These regulations and laws
may cover issues such as taxation, advertising, intellectual
property rights, freedom of expression, pricing, restrictions on
imports and exports, customs, tariffs, information security,
privacy, data protection, content, distribution, electronic
contracts and other communications, the provision of online
payment services, broadband residential Internet access, and the
characteristics and quality of products and services. Further,
the growth of online commerce may prompt calls for more
stringent consumer protection laws. Several states have proposed
legislation to limit the uses of personal user information
gathered online or require online companies to establish privacy
policies. The Federal Trade Commission has also initiated action
against at least one online company regarding the manner in
which personal information is collected from users and provided
to third parties. The adoption of additional privacy or consumer
protection laws could create uncertainty in Internet usage and
reduce the demand for our products and services.
We are not certain how our business may be affected by the
application of existing laws governing issues such as property
ownership, copyrights, personal property, encryption and other
intellectual property issues, taxation, libel, obscenity,
qualification to do business, and export or import matters. The
vast majority of these laws were adopted prior to the advent of
the Internet. As a result, they do not contemplate or address
the unique issues of the Internet and related technologies.
Changes in laws intended to address these issues could create
uncertainty for those conducting online commerce. This
uncertainty could reduce demand for our products and services or
increase the cost of doing business as a result of litigation
costs or increased fulfillment costs and may substantially harm
our business and results of operations.
We may
need to implement additional finance and accounting systems,
procedures and controls as we grow our business and organization
and to satisfy new reporting requirements.
As a public reporting company, we are required to comply with
the Sarbanes-Oxley Act of 2002 and the related rules and
regulations of the SEC, including expanded disclosures and
accelerated reporting requirements and more complex accounting
rules. Compliance with these and other new requirements may
increase our costs and require additional management time and
resources. We may need to implement additional finance and
accounting systems, procedures and controls to satisfy new
reporting requirements. If our internal control over financial
reporting is determined to be ineffective, investors could lose
confidence in the reliability of our internal control over
financial reporting, which could adversely affect our stock
price.
Our
failure to effectively manage the growth in our operations may
prevent us from successfully expanding our
business.
We have experienced, and in the future may experience, rapid
growth in operations, which has placed, and could continue to
place, a significant strain on our operations, services,
internal controls and other
21
managerial, operational and financial resources. To effectively
manage future expansion, we will need to maintain our
operational and financial systems and managerial controls and
procedures, which include the following processes:
|
|
|
|
|
transaction processing and fulfillment;
|
|
|
|
inventory management;
|
|
|
|
customer support;
|
|
|
|
management of multiple supplier relationships;
|
|
|
|
operational, financial and managerial controls;
|
|
|
|
reporting procedures;
|
|
|
|
management of our facilities;
|
|
|
|
recruitment, training, supervision, retention and management of
our employees; and
|
|
|
|
technology operations.
|
If we are unable to manage future expansion, our ability to
provide a high quality customer experience could be harmed,
which would damage our reputation and brand and substantially
harm our business and results of operations.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
As of January 3, 2010, our operational facilities consisted
of three separate locations: a corporate headquarters and
fulfillment center located in Seattle, Washington and a
fulfillment center located in Dublin, Ireland. Our corporate
headquarters consists of approximately 24,000 square feet
of office space and is subject to a
sub-lease
that expires in April 2011. Our U.S. fulfillment center
consists of approximately 27,000 square feet of warehouse
space and is subject to a lease that expires in October 2011.
Our Ireland fulfillment center consists of approximately
10,000 square feet of combined office and warehouse space
and is subject to a lease expiring in December 2011. Certain of
the leases include renewal provisions at our option. We believe
that the facilities housing our corporate headquarters and our
fulfillment centers will be adequate to meet our current
requirements for our operations and that suitable additional or
substitute space will be available as needed.
|
|
Item 3.
|
Legal
Proceedings
|
See discussion of legal proceedings in Note 4 to the
consolidated financial statements included in Item 8 of
this Report.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter ended January 3, 2010.
22
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information and Dividend Policy
Our Common Stock is quoted on The NASDAQ Stock Market LLC under
the symbol NILE. On February 19, 2010 we had
approximately 41 stockholders based on the number of record
holders.
The following table sets forth the high and low sales prices of
our common stock for fiscal years 2009 and 2008. The quotations
are as reported in published financial sources.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal year 2009:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
36.61
|
|
|
$
|
18.34
|
|
Second Quarter
|
|
$
|
51.23
|
|
|
$
|
32.03
|
|
Third Quarter
|
|
$
|
63.00
|
|
|
$
|
36.00
|
|
Fourth Quarter
|
|
$
|
67.16
|
|
|
$
|
55.03
|
|
Fiscal year 2008:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
70.80
|
|
|
$
|
38.35
|
|
Second Quarter
|
|
$
|
55.95
|
|
|
$
|
41.73
|
|
Third Quarter
|
|
$
|
52.50
|
|
|
$
|
33.76
|
|
Fourth Quarter
|
|
$
|
44.98
|
|
|
$
|
20.09
|
|
We have not paid any cash dividends on our common stock since
inception, and it is not anticipated that cash dividends will be
paid on shares of our common stock in the foreseeable future.
Any future determination to pay dividends will be at the
discretion of our board of directors.
23
Performance
Measurement Comparison(1)
The following graph compares the total cumulative stockholder
return on the Companys common stock with the total
cumulative return of the Nasdaq Market Index and the RDG
Internet Composite Index for the five-year period ending on
January 3, 2010, our 2009 fiscal year end. Historical stock
price performance should not be relied upon as an indication of
future stock price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN(2)
Among Blue Nile, Inc., The NASDAQ Composite Index
And The RDG Internet Composite Index
PLOT POINT TO COME
|
|
|
(1) |
|
This Section is not soliciting material, is not
deemed filed with the SEC and is not to be
incorporated by reference in any of our filings under the
1933 Act or the 1934 Act whether made before or after
the date hereof and irrespective of any general incorporation
language in any such filing. |
|
(2) |
|
Assumes $100 was invested on January 2, 2005 at the closing
price on this day, in Blue Niles common stock and each
index, and all dividends have been reinvested. No cash dividends
have been declared on Blue Niles common stock. Stockholder
returns over the indicated period should not be considered
indicative of future stockholder returns. |
24
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The table below shows selected consolidated financial data for
each of our fiscal years ended January 3, 2010,
January 4, 2009, December 30, 2007, December 31,
2006, and January 1, 2006. The consolidated statements of
operations data and the additional operating data for each of
the fiscal years ended January 3, 2010, January 4,
2009, and December 30, 2007 and the consolidated balance
sheets as of January 3, 2010 and January 4, 2009 are
derived from our audited consolidated financial statements
included elsewhere in this report. The consolidated statements
of operations for the fiscal years ended December 31, 2006
and January 1, 2006 and the consolidated balance sheet data
as of December 30, 2007, December 31, 2006 and
January 1, 2006, are derived from audited consolidated
financial statements not included in this report.
You should read the following selected consolidated financial
and operating information together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our audited consolidated financial
statements and the related notes included elsewhere in this
Annual Report on
Form 10-K.
The historical results presented below are not necessarily
indicative of future results. See Note 10 of the related
notes to our consolidated financial statements for the
calculation of weighted average shares outstanding used in
computing basic and diluted net income per share.
25
BLUE
NILE, INC.
SELECTED
CONSOLIDATED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
January 1,
|
|
|
|
2010
|
|
|
2009(2)
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
302,134
|
|
|
$
|
295,329
|
|
|
$
|
319,264
|
|
|
$
|
251,587
|
|
|
$
|
203,169
|
|
Gross profit
|
|
|
65,344
|
|
|
|
59,996
|
|
|
|
65,204
|
|
|
|
50,853
|
|
|
|
45,042
|
|
Selling, general and administrative expenses
|
|
|
45,997
|
|
|
|
44,005
|
|
|
|
42,792
|
|
|
|
34,296
|
|
|
|
26,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
19,347
|
|
|
|
15,991
|
|
|
|
22,412
|
|
|
|
16,557
|
|
|
|
18,049
|
|
Income before income taxes
|
|
|
19,678
|
|
|
|
17,856
|
|
|
|
26,587
|
|
|
|
19,980
|
|
|
|
20,553
|
|
Income tax expense
|
|
|
6,878
|
|
|
|
6,226
|
|
|
|
9,128
|
|
|
|
6,916
|
|
|
|
7,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,800
|
|
|
$
|
11,630
|
|
|
$
|
17,459
|
|
|
$
|
13,064
|
|
|
$
|
13,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.88
|
|
|
$
|
0.78
|
|
|
$
|
1.10
|
|
|
$
|
0.79
|
|
|
$
|
0.75
|
|
Diluted net income per share
|
|
$
|
0.84
|
|
|
$
|
0.75
|
|
|
$
|
1.04
|
|
|
$
|
0.76
|
|
|
$
|
0.71
|
|
Shares used in computing basic net income per share
|
|
|
14,534
|
|
|
|
14,925
|
|
|
|
15,919
|
|
|
|
16,563
|
|
|
|
17,550
|
|
Shares used in computing diluted net income per share
|
|
|
15,216
|
|
|
|
15,505
|
|
|
|
16,814
|
|
|
|
17,278
|
|
|
|
18,597
|
|
Additional Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
39,018
|
|
|
$
|
(2,927
|
)
|
|
$
|
41,455
|
|
|
$
|
40,518
|
|
|
$
|
31,272
|
|
Gross profit margin
|
|
|
21.6
|
%
|
|
|
20.3
|
%
|
|
|
20.4
|
%
|
|
|
20.2
|
%
|
|
|
22.2
|
%
|
Selling, general and administrative expenses as a percentage of
net sales
|
|
|
15.2
|
%
|
|
|
14.9
|
%
|
|
|
13.4
|
%
|
|
|
13.6
|
%
|
|
|
13.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
January 1,
|
|
|
|
2010
|
|
|
2009(2)
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
78,149
|
|
|
$
|
54,451
|
|
|
$
|
122,793
|
|
|
$
|
78,540
|
|
|
$
|
71,921
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,767
|
|
|
|
42,748
|
|
Short-term investments
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,835
|
|
|
|
1,709
|
|
|
|
3,576
|
|
|
|
1,640
|
|
|
|
1,877
|
|
Inventories
|
|
|
19,434
|
|
|
|
18,834
|
|
|
|
20,906
|
|
|
|
14,616
|
|
|
|
11,764
|
|
Accounts payable
|
|
|
76,128
|
|
|
|
62,291
|
|
|
|
85,866
|
|
|
|
66,625
|
|
|
|
50,157
|
|
Working capital(1)
|
|
|
29,662
|
|
|
|
7,589
|
|
|
|
53,455
|
|
|
|
41,881
|
|
|
|
76,869
|
|
Total assets
|
|
|
130,415
|
|
|
|
89,665
|
|
|
|
160,586
|
|
|
|
122,106
|
|
|
|
138,005
|
|
Total long-term obligations
|
|
|
964
|
|
|
|
1,213
|
|
|
|
1,418
|
|
|
|
666
|
|
|
|
863
|
|
Total stockholders equity
|
|
|
43,269
|
|
|
|
19,308
|
|
|
|
63,477
|
|
|
|
47,303
|
|
|
|
81,515
|
|
|
|
|
(1) |
|
Working capital consists of total current assets, including
cash, cash equivalents and short-term investments, less total
current liabilities. |
|
(2) |
|
Fiscal year 2008 consists of 53 weeks, which is one week
longer than the other fiscal years presented. |
26
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
the consolidated financial statements and related notes which
appear elsewhere in this report. This discussion contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of
various factors, including those discussed below and elsewhere
in this report, particularly under the heading
Item 1A. Risk Factors.
Management
Overview
About
Blue Nile
Incorporated in 1999, we are the leading online retailer of
diamonds and fine jewelry that offers an exceptional customer
experience, including substantial education, guidance,
selection, customization capability, convenience and value. We
believe we have successfully built Blue Nile into a premium
brand.
Our long-term financial focus is primarily on sustainable growth
in free cash flow
1.
Non-GAAP free cash flow is primarily driven by increasing our
operating income and efficiently managing working capital and
capital expenditures. Increases in operating income primarily
result from increases in sales through our websites,
improvements in operating margins and the efficient management
of operating costs, offset by the investments that we make in
longer-term strategic initiatives.
We have an obsessive focus on the customer. We design our
websites to offer easy to understand,
step-by-step
guides to visualizing, evaluating, selecting and purchasing
diamonds and fine jewelry. Our customer support centers are
staffed with non-commissioned product experts who offer advice
and guidance to customers. We continue to invest in optimizing
our fulfillment operations to ensure that our customized
products can be delivered as soon as one business day, but
generally within three business days of order.
Customer feedback and customer satisfaction ratings are among
the key non-financial measures we review. We believe that
maintaining high overall customer satisfaction is critical to
our ongoing efforts to elevate the Blue Nile brand and to
increase our net sales and net income. We actively solicit
customer feedback on our website functionality as well as on the
entire purchase experience. To maintain a high level of
performance by our diamond and jewelry consultants, we also
undertake an ongoing customer feedback process.
Differentiating
Factors and Value Proposition
We have built an innovative business model that delivers
exceptional value and service to customers. We have developed
relationships with a large number of independent vendors with
whom we have exclusive agreements as an online retailer. Our
unique inventory model allows us to offer our customers access
to a large selection of high quality diamonds. In most cases, we
purchase diamonds from our suppliers only when a customer has
ordered them from us. As a result, we do not incur the
significant costs typically associated with carrying high levels
of diamond inventory as in physical retail. Our efficient
operating model also provides for negative working capital
benefits. Payments are received from customers within a few days
of their orders, but our vendor payment terms are typically in
the
60-90 day
range.
As an online retailer, we also do not incur most of the
operating costs associated with physical retail stores,
including occupancy costs and related overhead. As a result,
while our gross profit margins are lower than those typically
maintained by traditional diamond and fine jewelry retailers, we
are able to realize relatively higher operating income as a
percentage of net sales. In the year ended January 3, 2010,
we had a 21.6% gross profit margin, as compared to what we
believe to be gross profit margins of up to 50% or more by some
traditional retailers. Our lower gross profit margins result
from lower retail prices that we offer to our
1 Blue
Nile defines free cash flow, a non-GAAP financial measure, as
net cash provided by (used in) operating activities less cash
outflows for purchases of fixed assets, including internal use
software and website development.
27
customers. We believe that these lower prices, in turn, will
result in increasing our market share in the luxury jewelry
retail space.
Diamonds represent the most significant component of our product
offerings. World diamond prices began to decline in the fourth
quarter of 2008 and continued to decline throughout the first
quarter of 2009. Prices stabilized in the second quarter of
2009, remained relatively stable throughout the remainder of
2009, and continued to be lower on a
year-over-year
basis. We believe our just in time inventory model
allows us to adjust our retail prices more quickly than
traditional retailers that maintain larger physical inventories.
As a result, we believe we are at a greater competitive
advantage when diamond prices decline because our business model
allows us to pass on lower prices more quickly than physical
jewelry retailers. We believe our online model, our consumer
value proposition and a focus on the customer experience have
led Blue Nile to overall market share gains.
Seasonality
We generally experience seasonal fluctuations in demand for our
products. Our quarterly sales are impacted by various gift
giving holidays including Valentines Day (first quarter),
Mothers Day (second quarter) and Christmas (fourth
quarter). As a result, our quarterly revenue is typically lowest
in the third quarter (as a result of the lack of recognized gift
giving holidays) and highest in the fourth quarter.
Future
Growth Opportunities
A customers first purchase from Blue Nile is often an
engagement ring. Our goal is to provide an unrivaled customer
experience such that we become our customers jeweler for
life. We have continued to expand our product lines to include
non-engagement diamond jewelry as well as other products such as
pearls, gemstones and various silver, gold and platinum
offerings and watches. Our satisfied customers are also an
important source of referrals that we believe will help drive
future growth.
We intend to selectively pursue opportunities in international
markets in which we can leverage our existing infrastructure and
compelling value proposition. In 2008, we expanded our website
offerings to include shipment to over 40 countries and
territories throughout the world and in 2009, we expanded the
capabilities of our websites from allowing customers to purchase
our products in two foreign currencies to allowing purchases in
24 foreign currencies. We believe that offering local currencies
makes it easier for our international customers to recognize the
value in our product offerings and improve their shopping
experience. We will prioritize and pursue future international
opportunities based on a number of factors, including, but not
limited to, each markets consumer spending on jewelry,
adoption rate of online purchasing and overall competitive
landscape.
In September 2009, we launched our new bluenile.com website with
a new look and feel, improved shopping tools, highly advanced
diamond search capabilities and enhanced product images. Our
website is the foundation of our business and these improvements
continue to elevate our customer experience and brand
positioning, contributing to our current and future growth.
Trends
The extensive weakening of the U.S. and global economies
that began in 2008 continued in 2009. Macroeconomic conditions
continued to be weak in the first half of 2009, then improved in
the second half of the year; however, these conditions continue
to have a significant impact on consumer spending, including the
sale of luxury products such as diamonds and fine jewelry. In
the U.S., the contraction in retail jewelry capacity that
started in 2008 continued in 2009. Our low-cost business model
provided us the flexibility to operate profitably throughout the
difficult consumer environment while the industry as a whole has
struggled. We believe that our broad selection, focus on
exceptional service and the value that we offer to consumers led
to an increase in market share, as demonstrated by our sales and
earnings growth in fiscal year 2009.
28
Critical
Accounting Policies
The preparation of our consolidated financial statements
requires that we make certain estimates and judgments that
affect amounts reported and disclosed in our consolidated
financial statements and related notes. We base our estimates on
historical experience and on other assumptions that we believe
to be reasonable under the circumstances. Actual results may
differ from these estimates. The following are the critical
accounting policies that we believe require significant
estimation and management judgment.
Revenue
Recognition
We recognize revenue and the related gross profit on the date on
which ownership passes from Blue Nile to our customers. For
customers in the U.S., Canada and the E.U., this is at the time
the package is received by the customer. For other customers,
ownership passes at the time the product is shipped. As we
require customer payment prior to order shipment, any payments
received prior to the transfer of ownership are not recorded as
revenue. For U.S., Canadian and E.U. shipments, we utilize our
freight vendors tracking information to determine when
delivery has occurred, which is typically within one to three
days after shipment. We reduce revenue by a provision for
returns, which is based on our historical product return rates
and current economic conditions. Our contracts with our
suppliers generally allow us to return diamonds purchased and
returned by our customers.
Stock-based
Compensation
We account for stock-based compensation in accordance with the
fair value recognition provisions of Accounting Standards
Codification (ASC) Topic 718 Stock Compensation. We
use the Black-Scholes-Merton option valuation model, which
requires the input of highly subjective assumptions. These
assumptions include estimating the length of time employees will
retain their vested stock options before exercising them
(expected term) and the estimated volatility of our
common stock price over the expected term (expected
volatility). Changes in these assumptions can materially
affect the estimate of the fair value of employee stock options
and consequently, the related amount of stock-based compensation
expense recognized in the consolidated statements of operations.
We performed the following sensitivity analysis using changes in
the expected term and expected volatility that could be
reasonably possible in the near term. If we assumed a six-month
increase or decrease in the expected term or a 500 basis
point increase or decrease in expected volatility, the value of
a newly granted hypothetical stock option would increase
(decrease) by the following percentages:
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
Expected term(1)
|
|
|
5.5
|
%
|
|
|
(6.0
|
)%
|
Expected volatility(1)
|
|
|
7.6
|
%
|
|
|
(7.8
|
)%
|
|
|
|
(1) |
|
Sensitivity to change in assumptions was determined using the
Black-Scholes-Merton valuation model compared to the following
original assumptions: stock price and exercise price equal to
the closing market price of Blue Nile, Inc. common stock on
December 31, 2009, expected term of 4.0 years,
expected volatility of 55.12%, expected dividend yield of 0.0%
and a risk-free interest rate of 1.37%. |
In addition, we are required to estimate the expected forfeiture
rate and only recognize stock-based compensation expense for
grants that are expected to vest. We estimate the forfeiture
rate based on historical experience. To the extent our actual
forfeiture rate is different from our estimate, stock-based
compensation expense is adjusted accordingly.
29
Results
of Operations
The following table presents our historical operating results
for the periods indicated as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
21.6
|
|
|
|
20.3
|
|
|
|
20.4
|
|
Selling, general and administrative expenses
|
|
|
15.2
|
|
|
|
14.9
|
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
6.4
|
|
|
|
5.4
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6.5
|
|
|
|
6.0
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
2.3
|
|
|
|
2.1
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4.2
|
%
|
|
|
3.9
|
%
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following describes certain line items set forth in our
consolidated statements of operations:
Net Sales. Substantially all of our net sales
consist of diamonds and fine jewelry sold via the Internet, net
of estimated returns. Historically, net sales have been higher
in the fourth quarter as a result of higher consumer spending
during the holiday season. We expect this seasonal trend to
continue in the foreseeable future.
Gross Profit. Our gross profit consists of net
sales less the cost of sales. Our cost of sales includes the
cost of merchandise sold to customers, inbound and outbound
shipping costs, depreciation on assembly-related assets,
insurance on shipments and the costs incurred to set diamonds
into ring, earring and pendant settings, including labor and
related facilities costs. Our gross profit has fluctuated
historically and we expect it to continue to fluctuate based
primarily on our product acquisition costs, product mix and
pricing decisions.
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses consist primarily of payroll and related benefit costs
for our employees, stock-based compensation, marketing costs and
credit card fees. These expenses also include certain
facility-related costs, and fulfillment, customer service,
technology and depreciation expenses, as well as professional
fees and other general corporate expenses.
Fiscal Year. The Companys fiscal year
generally ends on the Sunday closest to December 31. Each
fiscal year consists of four 13-week quarters, with one extra
week added in the fourth quarter every five to six years. Our
fiscal year 2008 included one extra week in the fourth quarter,
or 53 weeks for the fiscal year, as a result of our 4-4-5
retail reporting calendar.
30
The following table presents our historical operating results,
including a comparison of the financial results for the periods
indicated (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of
|
|
|
Comparison of
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2010 to
|
|
|
January 4, 2009 to
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
January 4, 2009
|
|
|
December 30, 2007
|
|
|
|
2010
|
|
|
2009(1)
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
302,134
|
|
|
$
|
295,329
|
|
|
$
|
319,264
|
|
|
$
|
6,805
|
|
|
|
2.3
|
%
|
|
$
|
(23,935
|
)
|
|
|
(7.5
|
)%
|
Cost of sales
|
|
|
236,790
|
|
|
|
235,333
|
|
|
|
254,060
|
|
|
|
1,457
|
|
|
|
0.6
|
%
|
|
|
(18,727
|
)
|
|
|
(7.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
65,344
|
|
|
|
59,996
|
|
|
|
65,204
|
|
|
|
5,348
|
|
|
|
8.9
|
%
|
|
|
(5,208
|
)
|
|
|
(8.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
45,997
|
|
|
|
44,005
|
|
|
|
42,792
|
|
|
|
1,992
|
|
|
|
4.5
|
%
|
|
|
1,213
|
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
19,347
|
|
|
|
15,991
|
|
|
|
22,412
|
|
|
|
3,356
|
|
|
|
21.0
|
%
|
|
|
(6,421
|
)
|
|
|
(28.6
|
)%
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
122
|
|
|
|
1,420
|
|
|
|
3,760
|
|
|
|
(1,298
|
)
|
|
|
(91.4
|
)%
|
|
|
(2,340
|
)
|
|
|
(62.2
|
)%
|
Other income, net
|
|
|
209
|
|
|
|
445
|
|
|
|
415
|
|
|
|
(236
|
)
|
|
|
(53.0
|
)%
|
|
|
30
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
1,865
|
|
|
|
4,175
|
|
|
|
(1,534
|
)
|
|
|
(82.3
|
)%
|
|
|
(2,310
|
)
|
|
|
(55.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
19,678
|
|
|
|
17,856
|
|
|
|
26,587
|
|
|
|
1,822
|
|
|
|
10.2
|
%
|
|
|
(8,731
|
)
|
|
|
(32.8
|
)%
|
Income tax expense
|
|
|
6,878
|
|
|
|
6,226
|
|
|
|
9,128
|
|
|
|
652
|
|
|
|
10.5
|
%
|
|
|
(2,902
|
)
|
|
|
(31.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,800
|
|
|
$
|
11,630
|
|
|
$
|
17,459
|
|
|
$
|
1,170
|
|
|
|
10.1
|
%
|
|
$
|
(5,829
|
)
|
|
|
(33.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.88
|
|
|
$
|
0.78
|
|
|
$
|
1.10
|
|
|
$
|
0.10
|
|
|
|
12.8
|
%
|
|
$
|
(0.32
|
)
|
|
|
(29.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.84
|
|
|
$
|
0.75
|
|
|
$
|
1.04
|
|
|
$
|
0.09
|
|
|
|
12.0
|
%
|
|
$
|
(0.29
|
)
|
|
|
(27.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
(1) |
|
Fiscal year 2008 consists of 53 weeks, which is one week
longer than the other fiscal years presented |
Comparison
of Year Ended January 3, 2010 to Year Ended January 4,
2009
Net
Sales
Net sales increased 2.3% in the year ended January 3, 2010,
compared with the year ended January 4, 2009. Excluding the
additional week of sales included in 2008, net sales would have
increased 3.3% in 2009 when compared to the prior year. The
increase in net sales was due to an increase in the average
retail value per order shipped, partially offset by a decrease
in the number of orders shipped to customers. Year over year
sales trends improved each quarter of the year culminating with
strong performance in the fourth quarter of 2009, which had
20.0% sales growth. Net sales in the U.S. increased by 0.5%
to $268.9 million in 2009 compared with $267.6 million
in the prior year. International sales increased 19.9% to
$33.2 million for the year ended January 3, 2010,
compared to $27.7 million for the year ended
January 4, 2009.
Our core bridal jewelry category experienced sales trends
consistent with the overall business. Sales of our
non-engagement jewelry, which is more discretionary, were more
impacted by the pullback in consumer spending and were weak in
the first half of 2009. Our non-engagement jewelry sales began
to improve in the third quarter and strengthened considerably in
the fourth quarter holiday season.
International sales contributed significantly to the overall
increase in net sales in 2009, representing 1.9% of the 2.3%
sales growth. In 2009, we enhanced our websites, expanding our
customers ability to shop and transact in 22 additional
foreign currencies. We believe this expansion, increased
marketing efforts and expanded brand awareness contributed to
the increase in our international sales in 2009 compared to
2008. Internally, we also monitor our international sales
performance on a non-GAAP basis which eliminates the positive or
negative effects that result from translating international
sales into U.S. dollars (constant exchange
31
rate basis). International sales growth was negatively
impacted approximately 7.5% due to changes in foreign exchange
rates in 2009 compared to the rates in effect during 2008.
Excluding the impact of changes in foreign exchange rates,
international sales increased 27.4% in the year ended
January 3, 2010.
Gross
Profit
Gross profit increased $5.3 million or 8.9% in the year
ended January 3, 2010 compared to the year ended
January 4, 2009, primarily due to the $6.8 million
increase in net sales. Gross profit as a percentage of net sales
increased by 130 basis points to 21.6% in the year ended
January 3, 2010 compared to 20.3% in the year ended
January 4, 2009. The increase in gross profit as a
percentage of sales is attributable to the continued emphasis on
cost optimization related to product sourcing and product sales
mix.
Costs for our jewelry 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. While prices for diamonds and precious
metals will continue to fluctuate based upon global supply and
demand dynamics, we cannot adequately predict the amount and
timing of any such fluctuations. We expect that gross profit
will 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 4.5% to
$46.0 million in the year ended January 3, 2010
compared to $44.0 million in the year ended January 3,
2009 due to several factors. Incentive compensation was
approximately $1.3 million compared to zero in the prior
year. A $0.4 million increase in payroll and related
expenses was attributable to technology projects in support of
business growth and key initiatives, as well as general staffing
levels. Depreciation expense related to additional capitalized
assets added approximately $0.5 million to expenses. Credit
card processing fees increased $0.3 million due to higher
sales volumes. Stock-based compensation expense increased
approximately $0.2 million primarily due to lower expenses
in the prior year related to forfeited options of former
employees. These increases were offset by a $0.6 million
decrease in marketing and advertising costs primarily related to
decreased spending in online marketing vehicles and a
$0.6 million decrease in legal expenses due to lower
spending on intellectual property and other corporate matters.
As a percentage of net sales, selling, general and
administrative expenses were 15.2% and 14.9% for the years ended
January 3, 2010 and January 4, 2009, respectively.
Other
Income, Net
The decrease in interest income for the year ended
January 3, 2010 as compared with the year ended
January 4, 2009 was due to lower interest rates.
Income
Taxes
The effective income tax rate for the year ended January 3,
2010 was 35.0% as compared to 34.9% for the year ended
January 4, 2009.
Comparison
of Year Ended January 4, 2009 to Year Ended
December 30, 2007
Net
Sales
Net sales decreased 7.5% in the year ended January 4, 2009,
compared with the year ended December 30, 2007. Excluding
the additional week of sales included in the year ended
January 4, 2009, net sales would have decreased
approximately 8.7% when compared to the year ended
December 30, 2007. The decrease in net sales was due to a
decrease in the number of orders shipped to customers, partially
offset by an increase in the average retail value per order
shipped. In 2008, our sales were significantly impacted by the
extensive weakening of the U.S. and global economies, which
has had a severe impact on consumer spending, particularly for
luxury products such as jewelry.
32
Our 2008 sales were also impacted by rising prices for diamonds.
We purchase diamonds on a just in time basis from
our suppliers when a customer places an order for a specific
diamond. As diamond pricing in the overall market rises and
falls, we generally adjust our retail prices to take these price
changes into account. This results in us passing along price
increases or decreases to customers more quickly than
traditional retailers that maintain larger inventories. As a
result, our sales can be impacted negatively in a rapidly rising
price environment for diamonds. World diamond prices increased
throughout much of 2008, but started to decline late in the
fourth quarter.
International sales were $27.7 million for the year ended
January 4, 2009, comprising 9.4% of 2008 sales, compared to
$17.0 million for the year ended December 30, 2007,
comprising 5.3% of 2007 sales. In 2008, we began offering our
products for sale through our websites to over 35 new countries
and territories throughout the world. This expanded offering
primarily contributed to the increase in our international sales
in 2008 compared to 2007. Although international sales increased
in 2008, in the fourth quarter we experienced sales declines,
which we believe were the results of the strengthening of the
U.S. dollar combined with global economic weakness. On a
constant exchange rate basis, international sales increased in
the fourth quarter of 2008.
Gross
Profit
Gross profit decreased 8.0% in the year ended January 4,
2009 compared to the year ended December 30, 2007,
primarily due to the decrease in net sales. Gross profit as a
percentage of net sales was 20.3% in the year ended
January 4, 2009 compared to 20.4% in the year ended
December 30, 2007. The decrease in gross profit as a
percentage of net sales is attributed to changes in product mix.
Our engagement category, which typically carries a lower gross
margin than our jewelry category, performed relatively better
than the non-engagement jewelry in the year ended
January 4, 2009. Sales of non-engagement jewelry appear to
have been more impacted from consumers pulling back on
discretionary purchases. Additionally, costs for our jewelry
products are impacted by prices for 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 precious
metals, which in turn, affect the gross margin that we realize
from such products.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased 2.8% to
$44.0 million in the year ended January 4, 2009
compared to $42.8 million in the year ended
December 30, 2007 due to several factors. Stock-based
compensation expense increased approximately $1.3 million
due to the number of options granted and the fair value of these
stock options expensed during the year partially offset by
forfeited options of former employees. Legal costs increased
approximately $0.6 million related to intellectual property
and corporate matters. Marketing and advertising costs increased
approximately $0.3 million, driven by spending in online
marketing vehicles, such as search, affiliate channels, online
portals and other marketing initiatives to drive higher sales
volumes. Depreciation expense added approximately
$0.2 million to expenses, primarily due to the expansion of
our U.S. fulfillment facility and the addition of our
Ireland fulfillment center in 2007. These increases were
partially offset by a $0.9 million decrease in payroll and
related costs due primarily to no management incentive pay in
2008. Credit card processing fees decreased $0.2 million
due to lower sales volumes. As a percentage of net sales,
selling, general and administrative expenses were 14.9% and
13.4% for the years ended January 4, 2009 and
December 30, 2007, respectively.
Other
Income, Net
The decrease in interest income for the year ended
January 4, 2009 as compared with the year ended
December 30, 2007 was due to a decrease in interest rates
and lower overall cash balances, primarily due to share
repurchases.
33
Income
Taxes
The effective income tax rate for the year ended January 4,
2009 was 34.9% as compared to 34.3% for the year ended
December 30, 2007. The 0.6% increase in the effective tax
rate was due primarily to lower blended tax rates.
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 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.
Recessionary economic cycles, investment and credit market
conditions, unemployment levels and other economic factors
impact consumer spending patterns. The extensive weakening of
the U.S. and global economies that began in 2008 continued
in the first half of 2009 and had a significant impact on
consumer spending, including the sale of luxury products such as
diamonds and fine jewelry. Macroeconomic conditions have
improved beginning in the second half of 2009, however, we
believe our revenue, cash flow from operations and net income
would be impacted if conditions were to significantly
deteriorate.
Our liquidity is primarily dependent upon our net cash from
operating activities. Our net cash from operating activities is
sensitive to many factors, including changes in working capital
and the timing and magnitude of capital expenditures. Working
capital at any specific point in time is dependent upon many
variables, including our operating results, seasonality,
inventory management and assortment expansion, the timing of
cash receipts and payments, and vendor payment terms.
As of January 3, 2010, working capital totaled
$29.7 million, consisting of cash, cash equivalents and
short-term investments of $93.1 million, inventory of
$19.4 million and other current assets totaling
approximately $3.3 million, offset by accounts payable of
$76.1 million and other current liabilities totaling
approximately $10.1 million. Due to the seasonal nature of
our business, cash and cash equivalents, short-term investments,
inventory and accounts payable are generally higher in the
fourth quarter, resulting in fluctuations in our working capital.
Net cash provided by operating activities was $39.0 million
in the year ended January 3, 2010 compared to net cash used
in operating activities of $2.9 million in the year ended
January 4, 2009 and net cash provided by operating
activities of $41.5 million in the year ended
December 30, 2007. The increase in cash provided by
operating activities in the year ended January 3, 2010 was
primarily attributable to the working capital dynamics of our
model associated with the increase in sales in the fourth
quarter and the resulting build up in accounts payable. Accounts
payable increased $13.8 million in the year ended
January 3, 2010 compared to a decrease of
$23.6 million in the year ended January 4, 2009. We
experience greater cash flow from operations in our fourth
quarter compared to other quarters due to the significant
increase in revenue from our holiday sales. In the first quarter
we typically have a significant pay down of our accounts payable
balance that was accumulated during the fourth quarter holiday
season. Accrued liabilities also generally fluctuate in relation
to sales activity. Accrued liabilities increased
$3.2 million at January 3, 2010 compared to a net
decrease of $3.0 million in the year ended January 4,
2009. Non-cash benefits realized upon the exercise of stock
options, which represent the tax deductions in excess of stock
compensation expense recorded in the financial statements,
increased to $1.8 million in the year ended January 3,
2010, from $0.5 million in the year ended January 4,
2009 due to the number of options exercised and the market price
of our common stock. These increases were partially offset by a
decrease in working capital from inventory of $0.6 million
for the year ended January 3, 2010 compared to a net
increase in working capital from inventory of $2.1 million
for the year ended January 4, 2009.
The decrease in cash provided by operating activities in the
year ended January 4, 2009 compared to the year ended
December 30, 2007 was primarily attributable to the slower
than historical build up of accounts payable in the fourth
quarter due to lower sales volume and, to a lesser extent, our
decrease in net income of
34
$5.8 million. Accounts payable decreased $23.6 million
in the year ended January 4, 2009 compared to an increase
of $19.2 million in the year ended December 30, 2007.
Similarly, accrued liabilities decreased $3.0 million
compared to an increase of $2.2 million in 2007. Tax
benefits realized upon the exercise of stock options decreased
to $0.5 million in the year ended January 4, 2009,
from $6.8 million in the year ended December 30, 2007.
These decreases were partially offset by an increase in
inventory balance of $2.1 million for the year ended
January 4, 2009 compared to a decrease in inventory balance
of $6.3 million for the year ended December 30, 2007.
Net cash of $17.3 million was used in investing activities
in the year ended January 3, 2010, due to the purchase of
$15.0 million in short-term investments and
$2.3 million in property and equipment. Net cash of
$2.0 million was used in investing activities in the year
ended January 4, 2009 for the net purchase of property and
equipment. Net cash provided by investing activities was
$15.0 million for the year ended December 30, 2007,
primarily related to the net sales of marketable securities.
Our capital needs are generally minimal and include computer
hardware and software to operate our websites, capital
improvements to our leased warehouse and office facilities, and
furniture and equipment. Additionally, we have the ability to
reduce
and/or delay
capital investments in challenging economic conditions without
significant disruption to our business or operations. We do not
anticipate significant growth in our capital expenditures for at
least the next 12 months.
Net cash provided by financing activities in the year ended
January 3, 2010 was $2.0 million, primarily related to
the proceeds from stock option exercises.
Net cash used in financing activities in the year ended
January 4, 2009 was $63.4 million, primarily related
to the repurchase of our common stock. During the year ended
January 4, 2009, we repurchased 1.6 million shares of
our common stock for an aggregate purchase price of
approximately $66.5 million. In the year ended
January 3, 2010 no repurchases were made. Since the
inception of our buyback programs in the first quarter of 2005
through January 3, 2010, we have repurchased
4.4 million shares for a total of $161.2 million.
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 are determined by
management based on our evaluation of market conditions and
other factors. 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.
Net cash used in financing activities in the year ended
December 30, 2007 was $12.3 million, related primarily
to repurchases of our common stock. In the year ended
December 30, 2007, we purchased 438,755 shares of our
common stock for an aggregate purchase price of approximately
$20.0 million. Proceeds from stock option exercises and
excess tax benefits from stock option exercises partially offset
the cash used to repurchase common shares.
The following table summarizes our contractual obligations and
the expected effect on liquidity and cash flows as of
January 3, 2010 (in thousands).
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
Over 5
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Years
|
|
|
Operating leases
|
|
$
|
1,245
|
|
|
$
|
474
|
|
|
$
|
479
|
|
|
$
|
292
|
|
|
$
|
|
|
Financing obligation
|
|
|
310
|
|
|
|
59
|
|
|
|
129
|
|
|
|
122
|
|
|
|
|
|
Purchase obligations(1)
|
|
|
8,841
|
|
|
|
8,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations(2)
|
|
|
344
|
|
|
|
325
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,740
|
|
|
$
|
9,699
|
|
|
$
|
627
|
|
|
$
|
414
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes open merchandise purchase orders at January 3,
2010. |
|
(2) |
|
Includes commitments for advertising and marketing and other
services at January 3, 2010. |
We believe that our current cash and cash equivalent balances
will be sufficient to meet our anticipated operating and capital
expenditure needs for at least the next 12 months. We do
not carry any long or short-
35
term debt. 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. However, there can be no
assurance that additional equity, debt or other financing
transactions will be available in amounts or on terms acceptable
to us, if at all.
Off-Balance
Sheet Arrangements
At January 3, 2010, we did not have any off-balance sheet
arrangements or relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as
structured finance or special purposes entities, which are
typically established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or
limited purposes.
Impact of
Inflation
The effect of inflation and changing prices on our operations
was not significant during the periods presented.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
We are exposed to financial market risk that results primarily
from fluctuations in interest rates. We maintain the majority of
our cash, cash equivalents and short-term investments in
accounts with major financial institutions within and outside
the United States, in the form of demand deposits, money market
accounts, time deposits, U.S. Treasury Bills and other
short-term investments. Deposits in these institutions may
exceed the amounts of insurance provided, or deposits may not at
all be covered by insurance. To date, we have not experienced
any losses on our deposits of cash, cash equivalents and
short-term investments.
The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields
without significantly increasing risk. To achieve this
objective, we invest in short-term, high quality, interest
bearing securities. To minimize our exposure to an adverse shift
in interest rates, we invest in short-term securities and
maintain an average maturity of one year or less. If interest
rates had averaged 100 basis points higher than they did in
the year ended January 3, 2010, interest income for the
year would have increased approximately 319%, or
$0.5 million. If interest rates had averaged 100 basis
points higher than they did in the year ended January 4,
2009, interest income for the year would have increased
approximately 30%, or $0.4 million.
Foreign
Currency Exchange Risk
The majority of our revenue, expense and capital expenditures
are transacted in U.S. dollars. Commencing in March 2009,
we expanded the capabilities of our websites from allowing
customers to purchase our products in two foreign currencies to
allowing purchases in 24 foreign currencies. This expansion
increases our exposure to foreign exchange rate fluctuations and
to foreign currency exchange risk from the transaction date to
when the cash is ultimately converted to U.S. dollars.
Because the majority of foreign currency transactions are
through third party credit cards that settle within three to
four business days, the impact of foreign currency exchange was
not material to our results of operations for the fiscal years
ended January 3, 2010 and January 4, 2009.
The functional currency of Jewellery, our Irish subsidiary, is
the Euro. Assets and liabilities of Jewellery are translated
into U.S. dollars at the exchange rate prevailing at the
end of the period. Income and expenses are translated into
U.S. dollars at an average exchange rate during the period.
Foreign currency gains and losses from the translation of
Jewellerys balance sheet and income statement are included
in other comprehensive income.
36
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Index to
Consolidated Financial Statements
|
|
|
|
|
|
|
Page
|
|
Financial Statements
|
|
|
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
44
|
|
|
|
|
58
|
|
Financial Statement Schedule
|
|
|
|
|
|
|
|
59
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
|
|
|
|
|
37
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Blue Nile, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheets of
Blue Nile, Inc. and subsidiaries (the Company) as of
January 3, 2010 and January 4, 2009, and the related
consolidated statements of operations, stockholders
equity, and cash flows for each of the three fiscal years in the
period ended January 3, 2010. Our audits also included the
financial statement schedule listed in the Index at
Item 15. These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Blue
Nile, Inc. and subsidiaries as of January 3, 2010 and
January 4, 2009, and the results of their operations and
their cash flows for each of the three fiscal years in the
period ended January 3, 2010, in conformity with accounting
principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
January 3, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 25, 2010,
expressed an unqualified opinion on the Companys internal
control over financial reporting.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 25, 2010
38
BLUE
NILE, INC.
(In
thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
78,149
|
|
|
$
|
54,451
|
|
Short-term investments
|
|
|
15,000
|
|
|
|
|
|
Trade accounts receivable
|
|
|
1,594
|
|
|
|
984
|
|
Other accounts receivable
|
|
|
241
|
|
|
|
725
|
|
Inventories
|
|
|
19,434
|
|
|
|
18,834
|
|
Deferred income taxes
|
|
|
449
|
|
|
|
670
|
|
Prepaids and other current assets
|
|
|
977
|
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
115,844
|
|
|
|
76,733
|
|
Property and equipment, net
|
|
|
7,332
|
|
|
|
7,558
|
|
Intangible assets, net
|
|
|
325
|
|
|
|
271
|
|
Deferred income taxes
|
|
|
6,769
|
|
|
|
5,014
|
|
Other assets
|
|
|
145
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
130,415
|
|
|
$
|
89,665
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
76,128
|
|
|
$
|
62,291
|
|
Accrued liabilities
|
|
|
9,805
|
|
|
|
6,607
|
|
Current portion of long-term financing obligation
|
|
|
44
|
|
|
|
41
|
|
Current portion of deferred rent
|
|
|
205
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
86,182
|
|
|
|
69,144
|
|
Long-term financing obligation, less current portion
|
|
|
796
|
|
|
|
839
|
|
Deferred rent, less current portion
|
|
|
168
|
|
|
|
374
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000 shares
authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 300,000 shares
authorized; 19,810 shares and 19,659 shares issued,
respectively; 14,644 shares and 14,493 shares
outstanding, respectively
|
|
|
20
|
|
|
|
20
|
|
Additional paid-in capital
|
|
|
156,030
|
|
|
|
144,913
|
|
Accumulated other comprehensive income
|
|
|
61
|
|
|
|
17
|
|
Retained earnings
|
|
|
48,999
|
|
|
|
36,199
|
|
Treasury stock, at cost; 5,166 shares outstanding
|
|
|
(161,841
|
)
|
|
|
(161,841
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
43,269
|
|
|
|
19,308
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
130,415
|
|
|
$
|
89,665
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
39
BLUE
NILE, INC.
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
Net sales
|
|
$
|
302,134
|
|
|
$
|
295,329
|
|
|
$
|
319,264
|
|
Cost of sales
|
|
|
236,790
|
|
|
|
235,333
|
|
|
|
254,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
65,344
|
|
|
|
59,996
|
|
|
|
65,204
|
|
Selling, general and administrative expenses
|
|
|
45,997
|
|
|
|
44,005
|
|
|
|
42,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
19,347
|
|
|
|
15,991
|
|
|
|
22,412
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
122
|
|
|
|
1,420
|
|
|
|
3,760
|
|
Other income, net
|
|
|
209
|
|
|
|
445
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
331
|
|
|
|
1,865
|
|
|
|
4,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
19,678
|
|
|
|
17,856
|
|
|
|
26,587
|
|
Income tax expense
|
|
|
6,878
|
|
|
|
6,226
|
|
|
|
9,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,800
|
|
|
$
|
11,630
|
|
|
$
|
17,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.88
|
|
|
$
|
0.78
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.84
|
|
|
$
|
0.75
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
40
BLUE
NILE, INC.
Consolidated
Statements of Changes in Stockholders Equity
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred Stock
|
|
|
|
|
|
Comprehensive
|
|
|
Treasury Stock
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Retained Earnings
|
|
|
Income (Loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
Balance, December 31, 2006
|
|
|
19,073
|
|
|
$
|
19
|
|
|
$
|
115,751
|
|
|
$
|
(180
|
)
|
|
$
|
7,110
|
|
|
$
|
(2
|
)
|
|
|
(3,101
|
)
|
|
$
|
(75,395
|
)
|
|
$
|
47,303
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,459
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unrealized loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,536
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
6,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,848
|
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172
|
|
Reversal of deferred compensation relating to canceled options
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options
|
|
|
438
|
|
|
|
1
|
|
|
|
5,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,875
|
|
Issuance of common stock to directors
|
|
|
2
|
|
|
|
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
5,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,642
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(439
|
)
|
|
|
(19,996
|
)
|
|
|
(19,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 30, 2007
|
|
|
19,513
|
|
|
|
20
|
|
|
|
134,207
|
|
|
|
(3
|
)
|
|
|
24,569
|
|
|
|
75
|
|
|
|
(3,540
|
)
|
|
|
(95,391
|
)
|
|
|
63,477
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,630
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,572
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510
|
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Exercise of common stock options
|
|
|
142
|
|
|
|
|
|
|
|
2,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,989
|
|
Issuance of common stock to directors
|
|
|
4
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
7,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,077
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,626
|
)
|
|
|
(66,450
|
)
|
|
|
(66,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 4, 2009
|
|
|
19,659
|
|
|
|
20
|
|
|
|
144,913
|
|
|
|
|
|
|
|
36,199
|
|
|
|
17
|
|
|
|
(5,166
|
)
|
|
|
(161,841
|
)
|
|
|
19,308
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,800
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,844
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
1,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,793
|
|
Exercise of common stock options
|
|
|
147
|
|
|
|
|
|
|
|
1,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,903
|
|
Issuance of common stock to directors
|
|
|
4
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
7,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 3, 2010
|
|
|
19,810
|
|
|
$
|
20
|
|
|
$
|
156,030
|
|
|
$
|
|
|
|
$
|
48,999
|
|
|
$
|
61
|
|
|
|
(5,166
|
)
|
|
$
|
(161,841
|
)
|
|
$
|
43,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
41
BLUE
NILE, INC.
Consolidated
Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,800
|
|
|
$
|
11,630
|
|
|
$
|
17,459
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,593
|
|
|
|
2,110
|
|
|
|
1,772
|
|
Loss (gain) on disposal of property and equipment
|
|
|
63
|
|
|
|
20
|
|
|
|
(8
|
)
|
Stock-based compensation
|
|
|
7,325
|
|
|
|
7,114
|
|
|
|
5,832
|
|
Deferred income taxes
|
|
|
(1,534
|
)
|
|
|
(1,396
|
)
|
|
|
(1,407
|
)
|
Tax benefit from exercise of stock options
|
|
|
1,793
|
|
|
|
510
|
|
|
|
6,848
|
|
Excess tax benefit from exercise of stock options
|
|
|
(118
|
)
|
|
|
(142
|
)
|
|
|
(1,847
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(126
|
)
|
|
|
1,867
|
|
|
|
(1,935
|
)
|
Inventories
|
|
|
(600
|
)
|
|
|
2,072
|
|
|
|
(6,291
|
)
|
Prepaid expenses and other assets
|
|
|
36
|
|
|
|
(21
|
)
|
|
|
(306
|
)
|
Accounts payable
|
|
|
13,794
|
|
|
|
(23,575
|
)
|
|
|
19,241
|
|
Accrued liabilities
|
|
|
3,196
|
|
|
|
(2,967
|
)
|
|
|
2,234
|
|
Deferred rent and other
|
|
|
(204
|
)
|
|
|
(149
|
)
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
39,018
|
|
|
|
(2,927
|
)
|
|
|
41,455
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,345
|
)
|
|
|
(2,010
|
)
|
|
|
(4,897
|
)
|
Proceeds from the sale of property and equipment
|
|
|
|
|
|
|
10
|
|
|
|
23
|
|
Purchases of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(20,230
|
)
|
Proceeds from the sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
Purchase of short-term investments
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
Transfers of restricted cash
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(17,345
|
)
|
|
|
(2,000
|
)
|
|
|
15,016
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(66,450
|
)
|
|
|
(19,996
|
)
|
Proceeds from stock option exercises
|
|
|
1,903
|
|
|
|
2,989
|
|
|
|
5,875
|
|
Excess tax benefit from exercise of stock options
|
|
|
118
|
|
|
|
142
|
|
|
|
1,847
|
|
Principal payments under long-term financing obligation
|
|
|
(40
|
)
|
|
|
(38
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,981
|
|
|
|
(63,357
|
)
|
|
|
(12,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
44
|
|
|
|
(58
|
)
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
23,698
|
|
|
|
(68,342
|
)
|
|
|
44,253
|
|
Cash and cash equivalents, beginning of period
|
|
|
54,451
|
|
|
|
122,793
|
|
|
|
78,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
78,149
|
|
|
$
|
54,451
|
|
|
$
|
122,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
42
BLUE
NILE, INC.
Consolidated
Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
January 3,
|
|
January 4,
|
|
December 30,
|
|
|
2010
|
|
2009
|
|
2007
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
6,777
|
|
|
$
|
7,342
|
|
|
$
|
3,894
|
|
Cash paid for interest relating to long-term financing obligation
|
|
|
19
|
|
|
|
21
|
|
|
|
15
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property additions financed by long-term financing obligation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
940
|
|
The accompanying notes are an integral part of these
consolidated financial statements
43
BLUE
NILE, INC.
|
|
Note 1.
|
Description
of the Company and Summary of Significant Accounting
Policies
|
The
Company
Blue Nile, Inc. (the Company) is the a leading
online retailer of high quality diamonds and fine jewelry. In
addition to sales of diamonds, fine jewelry and watches, the
Company provides education, guidance and support to enable
customers to more effectively learn about and purchase diamonds
as well as classically styled fine jewelry. The Company, a
Delaware corporation, based in Seattle, Washington, was formed
in March 1999. In May 2007, the Company commenced operations at
two new wholly-owned subsidiaries, Blue Nile Worldwide, Inc.
(Worldwide) and Blue Nile Jewellery, Ltd.
(Jewellery). Worldwide offers diamond and fine
jewelry products for sale to customers in the E.U. Jewellery
operates a customer service and fulfillment center in Dublin,
Ireland. The Company serves consumers in over 40 countries and
territories all over the world and maintains its primary website
at www.bluenile.com. The Company also operates the
www.bluenile.co.uk and www.bluenile.ca websites.
Fiscal
Year
The Companys fiscal year ends on the Sunday closest to
December 31. Each fiscal year consists of four 13-week
quarters, with one extra week added in the fourth quarter every
five to six years. The Companys fiscal year 2008, which
ended January 4, 2009, included one extra week in the
fourth quarter as a result of the Companys 4-4-5 retail
reporting calendar.
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Blue
Nile, LLC (LLC), Worldwide and Jewellery. The
Company, LLC and Worldwide are Delaware corporations located in
Seattle, Washington. Jewellery is an Irish limited company
located in Dublin, Ireland. All significant intercompany
transactions and balances are eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Some of
the more significant estimates include the allowance for sales
returns and the estimated fair value of stock options granted.
Actual results could differ materially from those estimates.
Foreign
Currency
The functional currency of Jewellery is the Euro. The assets and
liabilities of Jewellery have been translated to
U.S. dollars using the exchange rates effective on the
balance sheet dates, while income and expense accounts are
translated at the average rates in effect during the periods
presented. The resulting translation adjustments are recorded in
accumulated other comprehensive income (loss).
The Company offers customers the ability to transact in 24
foreign currencies. In addition some of the Companys
entities engage in transactions denominated in currencies other
than the entitys functional currency. Gains or losses
arising from these transactions are recorded in Other
income, net in the consolidated statements of operations.
44
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board
(FASB) issued The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles which established the Accounting Standards
Codification (ASC) as the authoritative source of
GAAP in the United States. This guidance also recognized the
rules and interpretative releases of the Securities and Exchange
Commission (SEC) under authority of federal
securities laws as sources of authoritative GAAP for SEC
registrants. The ASC was effective for financial statements
issued for interim and annual periods ending after
September 15, 2009. The adoption of this guidance in the
third quarter of 2009 did not have a material impact on the
Companys consolidated results of operations or financial
condition. The Company included references to the ASC in the
notes to the consolidated financial statements.
In September 2006, the FASB issued guidance that was codified in
Topic 820, Fair Value Measurements and Disclosure,
of the ASC which established a common definition for fair value,
established a framework for measuring fair value, and expanded
disclosure about such fair value measurements. In January 2008,
the FASB delayed the effective date of this standard by one year
for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The adoption of this
standard for these nonfinancial assets and liabilities in the
first quarter of 2009 did not have a material impact on the
Companys consolidated results of operations or financial
condition.
In April 2008, the FASB issued guidance that was codified in
Topic 350, Intangibles Goodwill and
Other, of the ASC which amended the factors that should be
considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset.
This guidance was effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The adoption of this guidance
in the first quarter of 2009 did not have a material impact on
the Companys consolidated results of operations or
financial condition.
In May 2009, the FASB issued guidance that was codified in Topic
855, Subsequent Events of the ASC which established
principles and disclosure requirements for subsequent events,
which are defined as events that occur after the balance sheet
date but before financial statements are issued or are available
to be issued. This guidance was effective for financial
statements issued for interim and annual periods ending after
June 15, 2009. The adoption of this guidance in the second
quarter of 2009 did not have a material impact on the
Companys consolidated results of operations or financial
condition.
In August 2009, the FASB issued Accounting Standards Update
No. 2009-05
(ASU
2009-05),
an update to Topic 820, Fair Value Measurements and
Disclosures. This update provides amendments to reduce
potential ambiguity in financial reporting when measuring the
fair value of liabilities. Among other provisions, this update
provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value
using one or more of the following valuation techniques:
(1) a valuation technique that uses the quoted market price
of an identical liability or similar liabilities when traded as
assets; or (2) another valuation technique that is
consistent with the principles of Topic 820. This guidance
became effective in the first reporting period after issuance,
which for the Company was the fourth quarter of 2009. The
adoption of this guidance did not have a material impact on the
Companys consolidated results of operations or financial
condition.
In January 2010, the FASB issued Accounting Standards Update
No. 2010-06
(ASU
2010-06),
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. ASU
2010-06 requires reporting entities to make new disclosures
about recurring or nonrecurring fair value measurements
including significant transfers into and out of Level 1 and
Level 2 fair value measurements and information on
purchases, sales, issuances, and settlements on gross basis in
the reconciliation of Level 3 fair value measurements. ASU
2010-06 is
effective for annual reporting periods beginning after
December 15, 2009, except for Level 3 reconciliation
disclosures which are effective for annual periods beginning
after
45
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 15, 2010. The adoption of ASU
2010-06 is
not expected to have a material impact on the Companys
consolidated results of operations or financial condition.
In February 2010, the FASB issued Accounting Standards Update
No. 2010-09 (ASU 2010-09), Subsequent
Events (Topic 855): Amendments to Certain Recognition and
Disclosure Requirements, which removed the requirement for
SEC filers to disclose the date through which an entity has
evaluated subsequent events to alleviate potential conflict with
the current SEC guidance. ASU 2010-09 also clarified that
an entity that is a conduit bond obligor for conduit debt
securities that are traded in a public market must evaluate
subsequent events through the date of issuance of its financial
statements and must disclose that date. ASU 2010-09 is
effective upon issuance, except for the use of the issued date
for conduit debt obligors. That amendment is effective for
interim or annual periods ending after June 15, 2010. The
adoption of
ASU 2010-09
did not have a material impact on the Companys
consolidated results of operations or financial condition.
Concentration
of Risk
The Company maintains the majority of its cash, cash equivalents
and short-term investments in accounts with four major financial
institutions within and outside the United States, in the form
of demand deposits, money market accounts, time deposits,
U.S. Treasury Bills and other short-term investments.
Deposits in these institutions may exceed the amounts of
insurance provided, or deposits may not at all be covered by
insurance. The Company has not experienced any losses on its
deposits of cash, cash equivalents or short-term investments.
The Companys trade accounts receivable are derived from
credit card purchases from customers and the majority are
settled within two business days.
The Companys ability to acquire diamonds and fine jewelry
is dependent on its relationships with various suppliers from
whom it purchases diamonds and fine jewelry. The Company has
reached agreements with certain suppliers to provide access to
their inventories of diamonds for its customers, but the terms
of these agreements are limited and do not govern the purchase
of diamonds for its inventory. The Companys inability to
maintain these and other future diamond and fine jewelry supply
relationships on commercially reasonable terms would cause its
business to suffer and revenues to decline. Purchase
concentration by major supply vendor in fiscal year 2009 with
comparative information for fiscal years 2008 and 2007, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
|
Payments
|
|
|
Payments
|
|
|
Payments
|
|
|
Vendor A
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
Vendor B
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
7
|
%
|
Vendor C
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
%
|
|
|
22
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
The Company considers all highly liquid investments with
maturities of three months or less, from the date of purchase,
to be cash equivalents.
Short-term
Investments
The Company classifies highly liquid investments with maturities
greater than three months but less than one year as short-term
investments. In August 2009, the Company purchased an investment
in the form of a time deposit with a financial institution. The
$15.0 million investment matured in January 2010.
46
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories
The Companys diamond, fine jewelry and watch inventories
are classified at the lower of cost or market, using the
specific identification method for diamonds and weighted average
cost method for fine jewelry and watches. The Company also lists
loose diamonds and watches on its websites that are typically
not included in inventory until the Company receives a customer
order for those diamonds or watches. Upon receipt of a customer
order, the Company purchases a specific diamond or watch and
records it in inventory until it is delivered to the customer,
at which time the revenue from the sale is recognized and
inventory is relieved.
Property
and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Maintenance and repairs are expensed as incurred.
Depreciation is calculated on a straight-line basis over the
estimated useful lives of the related assets. The cost and
related accumulated depreciation of assets sold or otherwise
disposed of are removed from the accounts and the related gain
or loss is reported in the statement of operations. Estimated
useful lives by major asset category are as follows:
|
|
|
Asset
|
|
Life (in years)
|
|
Software
|
|
2-5
|
Computers and equipment
|
|
3-5
|
Leasehold improvements
|
|
Shorter of lease term or asset life
|
Building
|
|
Shorter of lease term or asset life
|
Furniture and fixtures
|
|
5-7
|
Capitalized
Software
The Company capitalizes costs to develop its websites and
internal-use software and amortizes such costs on a
straight-line basis over the estimated useful life of the
software once it is available for use.
Impairment
of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets,
including property and equipment and definite-lived intangible
assets, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. To the extent
the estimated future cash inflows attributable to the assets,
less estimated future cash outflows, are less than the carrying
amount, an impairment loss would be recognized.
Intangible
Assets
Intangible assets are recorded at cost and consist primarily of
the costs incurred to acquire licenses and other similar
agreements with finite lives, which were acquired in October
2004 and April 2009. The gross carrying amount of these licenses
was $0.5 million as of January 3, 2010 and
$0.4 million as of January 4, 2009. Accumulated
amortization was $209,000 and $162,000 as of January 3,
2010 and January 4, 2009, respectively. Amortization
expense was $46,000 in the fiscal year ended January 3,
2010 and $33,000 in the fiscal year ended January 4, 2009.
Amortization expense is estimated to be $51,000 in fiscal 2011
and fiscal 2012, $49,000 in fiscal 2013, $42,000 in fiscal 2014,
and $30,000 in fiscal 2015.
Intangible assets that are not being amortized relate to the
Companys domain names, with total carrying amounts of
$33,000 as of January 3, 2010 and January 4, 2009.
These assets are tested for impairment annually and more
frequently if certain circumstances indicate that impairment may
have occurred.
47
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Financial Instruments
The carrying amounts for the Companys cash, short-term
investments, accounts receivable, accounts payable and accrued
liabilities approximate fair value due to their short maturities.
Treasury
Stock
Treasury stock is recorded at cost and consists primarily of the
repurchase of the Companys common stock in the open market.
Income
Taxes
Deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets
and liabilities and are measured using the tax rates that will
be in effect when the differences are expected to reverse.
Future tax benefits, such as return reserves, are recognized to
the extent that realization of such benefits is considered to be
more likely than not.
The Company utilizes a two-step approach to recognizing and
measuring uncertain tax positions. The first step is to evaluate
the tax position for recognition by determining if the weight of
available evidence indicates it is more likely than not that the
position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount which is
more than 50% likely of being realized upon ultimate settlement.
The Company considers many factors when evaluating and
estimating tax positions and tax benefits, which may require
periodic adjustments and which may not accurately forecast
actual outcomes. The Company does not have any unrecognized tax
benefits. If interest and penalties related to unrecognized tax
benefits were incurred, such amounts would be included in the
Companys provision for income taxes.
Revenue
Recognition
Net sales consist of products sold via the Internet and shipping
revenue, net of estimated returns and promotional discounts and
excluding sales taxes. The Company recognizes revenue when all
of the following have occurred: persuasive evidence of an
agreement with the customer exists, delivery has occurred or
services have been rendered, the selling price is fixed or
determinable and collectability of the selling price is
reasonably assured. The Company evaluates whether it is
appropriate to record the gross amount of product sales and
related costs or the net amount earned. Generally, revenue is
recorded at the gross amount when the Company is the primary
obligor, is subject to inventory and credit risk, has latitude
in establishing price and product specification, or has most of
these indicators. When the Company is not primarily obligated
and has no latitude in establishing the price, revenue will be
recorded at the net amount earned.
The Company requires payment at the point of sale. Amounts
received before the customer assumes the risk of loss are not
recorded as revenue. For sales to customers in the U.S., Canada
and the E.U., the Company recognizes revenue when delivery has
occurred. For international sales, other than to Canada and the
E.U., revenue is recognized upon shipment. The Company generally
offers a return policy of 30 days and provides an allowance
for sales returns during the period in which the sales are made.
At January 3, 2010 and January 4, 2009, the reserve
for sales returns was $0.9 million and $0.8 million,
respectively, and was recorded as an accrued liability. Sales
and cost of sales reported in the consolidated statements of
operations are reduced to reflect estimated returns. The
estimates are based on the Companys historical product
return rates and current economic conditions.
The Company generally does not extend credit to customers,
except through third party credit cards. The majority of sales
are through credit cards, and accounts receivable are composed
primarily of amounts due from financial institutions related to
credit card sales. The Company does not maintain an allowance
for doubtful accounts because payment is typically received
within two business days after the sale is complete.
48
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shipping
and Handling Costs
The Companys shipping and handling costs primarily include
payments to third-parties for shipping merchandise to the
Companys customers. Shipping and handling costs of
$2.8 million, $3.0 million and $2.9 million in
the fiscal years ended January 3, 2010, January 4,
2009 and December 30, 2007, respectively, were included in
cost of sales.
Cost
of Sales
Cost of sales consists of the cost of merchandise sold to
customers, inbound and outbound shipping costs, depreciation on
assembly related costs, insurance on shipments and the costs
incurred to set diamonds into ring, earring and pendant
settings, including labor and related facility costs.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses consist primarily
of payroll and related benefit costs for the Companys
employees, marketing costs, stock-based compensation and credit
card fees. These expenses also include certain facility-related
costs, and fulfillment, customer service, technology and
depreciation expenses, as well as professional fees and other
general corporate expenses.
Fulfillment costs include costs incurred in operating and
staffing the fulfillment center, including costs attributable to
receiving, inspecting and warehousing inventories and picking,
packaging and preparing customers orders for shipment.
Fulfillment costs in the years ended January 3, 2010,
January 4, 2009 and December 30, 2007 were
approximately $3.0 million, $2.9 million and
$2.9 million, respectively.
The Company has procedures in place to detect and prevent credit
card fraud because the Company has exposure to losses from
fraudulent charges. The Company records a reserve for fraud
losses based on the Companys historical rate of such
losses. This reserve is recorded as an accrued liability and
amounted to $0.09 million at January 3, 2010 and
$0.1 million at January 4, 2009.
Marketing
Marketing costs are expensed as incurred. Costs associated with
web portal advertising contracts are amortized over the period
such advertising is expected to be used. Costs of advertising
associated with radio, print and other media are expensed when
such services are used. Marketing expense for the years ended
January 3, 2010, January 4, 2009 and December 30,
2007 was approximately $11.6 million, $12.4 million
and $11.9 million, respectively.
Stock-Based
Compensation
The Company measures compensation cost for all stock options and
restricted stock units granted based on fair value on the date
of the grant. Stock-based compensation is reduced for estimated
forfeitures and compensation cost is recognized on a
straight-line basis over the requisite service period for each
stock option or restricted stock unit grant expected to vest.
The fair value of each stock option granted is estimated on the
grant date using the Black-Scholes-Merton option valuation
model. The fair value of each restricted stock unit is based on
the fair market value of the Companys common stock on the
date of the grant. See Note 6 for additional details.
49
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
|
2010
|
|
|
2009
|
|
|
Loose diamonds
|
|
$
|
297
|
|
|
$
|
695
|
|
Fine jewelry, watches and other
|
|
|
19,137
|
|
|
|
18,139
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,434
|
|
|
$
|
18,834
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3.
|
Property
and Equipment
|
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
|
2010
|
|
|
2009
|
|
|
Computers and equipment
|
|
$
|
3,902
|
|
|
$
|
3,823
|
|
Software and website development
|
|
|
8,343
|
|
|
|
7,040
|
|
Leasehold improvements
|
|
|
5,467
|
|
|
|
5,443
|
|
Furniture and fixtures
|
|
|
679
|
|
|
|
774
|
|
Building
|
|
|
940
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,331
|
|
|
|
18,020
|
|
Less: accumulated depreciation and amortization
|
|
|
(11,999
|
)
|
|
|
(10,462
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
7,332
|
|
|
$
|
7,558
|
|
|
|
|
|
|
|
|
|
|
Total depreciation expense was $2.5 million,
$2.1 million and $1.8 million in the years ended
January 3, 2010, January 4, 2009 and December 30,
2007, respectively.
Capitalized software costs include external direct costs and
internal direct labor and related employee benefits costs of
developing software for internal use. Amortization begins in the
period in which the software is ready for its intended use. The
Company had $2.7 million and $2.1 million of
unamortized computer software and website development costs at
January 3, 2010 and January 4, 2009, respectively.
Depreciation and amortization of capitalized software and
website development costs was $1.1 million,
$0.7 million and $0.6 million in the years ended
January 3, 2010, January 4, 2009 and December 30,
2007, respectively.
|
|
Note 4.
|
Commitments
and Contingencies
|
Leases
The Company leases its office and warehouse facilities and some
equipment under noncancelable lease agreements with initial
terms that generally range from 3 to 7 years. Certain of
the leases include renewal provisions at the Companys
option. At the inception of the lease, the Company evaluates
each agreement to determine whether the lease will be accounted
for as an operating or capital lease. The term of the lease used
for this evaluation includes renewal option periods only in
instances in which the exercise of the renewal option can be
reasonably assured and failure to exercise such option would
result in an economic penalty. The office and warehouse leases
contain rent escalation clauses and rent holidays. Rent expense
is recorded on a straight-line basis over the lease term with
the difference between the rent paid and the straight-line rent
expense recorded as a deferred rent liability. Lease incentive
payments received from the landlord are recorded as deferred
rent liabilities and are amortized on a straight-line basis over
the lease term as a reduction in rent. At January 3, 2010
and January 4, 2009, the deferred rent balance related to
lease incentives was $0.3 million and $0.5 million,
respectively.
50
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2007, the Company made tenant improvements to its
U.S. fulfillment center. Due to its financial involvement
in the construction of the leased property, the Company recorded
the building as property and equipment during the construction
period. Upon completion, the transaction did not meet the
criteria for sale-leaseback accounting, and accordingly, has
been recorded as a long-term financing obligation.
Future minimum lease payments at January 3, 2010 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Obligation
|
|
|
Leases
|
|
|
2010
|
|
$
|
59
|
|
|
$
|
474
|
|
2011
|
|
|
61
|
|
|
|
317
|
|
2012
|
|
|
68
|
|
|
|
162
|
|
2013
|
|
|
68
|
|
|
|
159
|
|
2014
|
|
|
54
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
310
|
|
|
$
|
1,245
|
|
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
264
|
|
|
|
|
|
Residual value
|
|
|
575
|
|
|
|
|
|
Less: current maturities
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term financing obligation less current maturities
|
|
$
|
796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 3, 2010 and January 4, 2009, assets
under the long-term financing obligation amounted to
$0.8 million and $0.9 million, respectively, net of
accumulated depreciation of $121,000 and $71,000, respectively.
Such assets are classified within property and equipment, net,
in the accompanying balance sheets. The residual value of the
long-term financing obligation represents the estimated fair
value of the financing at the end of the Companys lease
term. Rent expense, which includes certain common area
maintenance costs, was approximately $0.6 million for the
fiscal years ended January 3, 2010, January 4, 2009
and December 30, 2007.
Litigation
In the ordinary course of business, the Company may be subject
from time to time to various proceedings, lawsuits, disputes or
claims. Although the Company cannot predict with assurance the
outcome of any litigation, it does not believe there are
currently any such actions that, if resolved unfavorably, would
have a material impact on the Companys financial condition
or results of operations.
The Company has 5,000,000 shares of undesignated preferred
stock authorized for future issuance. Shares of preferred stock
may be issued from time to time in one or more series, with
designations, preferences, and limitations established by the
Companys board of directors.
|
|
Note 6.
|
Stock-Based
Compensation
|
Stock
Option Plans
The Companys 1999 Equity Incentive Plan (1999
Plan) provides for the grant of incentive stock options,
non-statutory stock options, stock bonuses and restricted stock
awards, which may be granted to employees, including officers,
non-employee directors and consultants. Options granted under
the 1999 Plan generally provide for 25% vesting on the first
anniversary from the date of grant with the remainder vesting
monthly over the subsequent three years and expire 10 years
from the date of grant. Options granted under the
51
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
1999 Plan were generally granted at fair value on the date of
the grant. For options granted prior to February 2001, the
options included an early exercise provision that allowed early
exercise of unvested stock options subject to a repurchase right
at original cost on unvested shares. As of May 19, 2004,
the effective date of the Companys initial public
offering, no additional awards were granted under the 1999 Plan.
The Companys 2004 Equity Incentive Plan (2004
Plan) provides for the grant of non-statutory stock
options, restricted stock awards, stock appreciation rights,
restricted stock units and other forms of equity compensation,
which may be granted to employees, including officers,
non-employee directors and consultants. As of January 3,
2010, the Company reserved 4,260,902 shares of common stock
for future grants under the 2004 Plan, which amount will be
increased annually on the first day of each fiscal year, up to
and including 2014, by five percent of the number of shares of
common stock outstanding on such date unless a lower number of
shares is approved by the board of directors.
Options granted under the 2004 Plan generally provide for 25%
vesting on the first anniversary of the date of grant with the
remainder vesting monthly over the subsequent three years, and
generally expire 10 years from the date of grant.
In the first quarter of 2009, the Company granted restricted
stock units (RSUs) to executives under the 2004
Plan. The RSUs vest 50% on the first anniversary of the date of
grant and the remainder on the second anniversary. Each RSU is
converted to one share of common stock when it vests.
The Companys 2004 Non-Employee Directors Stock
Option Plan (Directors Plan) provides for the
automatic grant of non-statutory stock options to purchase
shares of common stock to non-employee directors. As of
January 3, 2010, the Company reserved 402,214 shares
of common stock for future grants under the Directors
Plan, which amount will be increased annually on the first day
of each fiscal year, up to and including 2014, by the number of
shares of common stock subject to options granted during the
prior calendar year unless a lower number of shares is approved
by the board of directors. There were 21,500 options granted
under the Directors Plan in the year ended January 3,
2010.
Employee
Stock Purchase Plans
In April 2004, the Company adopted the 2004 Employee Stock
Purchase Plan (the Purchase Plan). As of
January 3, 2010, 1,000,000 shares of common stock are
authorized to be sold under the Purchase Plan. Commencing on the
first day of the fiscal year in which the Company first makes an
offering under the Purchase Plan, this amount will be increased
annually for 20 years. The increase in amount is the lesser
of 320,000 shares or one and one half percent of the number
of shares of common stock outstanding on each such date, unless
a lower number of shares is approved by the board of directors.
The Purchase Plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423
of the Internal Revenue Code. As of January 3, 2010, no
shares of common stock have been offered for sale under the
Purchase Plan.
Option
Grants to Non-Employees
The Company accounts for equity instruments issued to
non-employees at their fair value on the measurement date.
Stock-Based
Compensation Expense
The fair value of each stock option granted is estimated on the
grant date using the Black-Scholes-Merton option valuation
model. The assumptions used to calculate the fair value of
options granted are evaluated and revised, as necessary, to
reflect market conditions and the Companys experience.
52
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair values of the stock options were estimated at the grant
date with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
Expected term
|
|
|
4.0 years
|
|
|
|
4.0 years
|
|
|
|
4.5 years
|
|
Expected volatility
|
|
|
55.1
|
%
|
|
|
48.1
|
%
|
|
|
37.1
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free interest rate
|
|
|
1.4
|
%
|
|
|
2.5
|
%
|
|
|
4.3
|
%
|
Estimated weighted average fair value per option granted
|
|
$
|
11.32
|
|
|
$
|
17.23
|
|
|
$
|
29.26
|
|
|
|
|
|
|
Expected Term This is the estimated period of time
until exercise and is based primarily on historical experience
for options with similar terms and conditions, giving
consideration to future expectations. The Company also considers
the expected terms of other companies that have similar
contractual terms, expected stock volatility and employee
demographics.
|
|
|
|
Expected Volatility This is based on the
Companys historical stock price volatility, and prior to
2008, in combination with the implied volatility of its exchange
traded options.
|
|
|
|
Expected Dividend Yield The Company has not paid
dividends in the past and does not expect to pay dividends in
the near future.
|
|
|
|
Risk-Free Interest Rate This is the rate on nominal
U.S. Government Treasury Bills with lives commensurate with
the expected term of the options on the date of grant.
|
The fair value of each restricted stock unit is based on the
fair market value of the Companys common stock on the date
of the grant.
The Company recognizes compensation expense on a straight-line
basis over the requisite service period for each stock option
and restricted stock unit grant expected to vest, with
forfeitures estimated at the date of grant based on the
Companys historical experience and future expectations.
The following table represents total stock-based compensation
expense recognized in the consolidated financial statements (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
Stock-based compensation expense in selling, general and
administrative expenses
|
|
$
|
7,088
|
|
|
$
|
6,905
|
|
|
$
|
5,621
|
|
Stock-based compensation expense in cost of sales
|
|
|
77
|
|
|
|
79
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense in the consolidated
statements of operations
|
|
$
|
7,165
|
|
|
$
|
6,984
|
|
|
$
|
5,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total related tax benefit
|
|
$
|
2,508
|
|
|
$
|
2,437
|
|
|
$
|
1,967
|
|
Stock-based compensation capitalized
|
|
$
|
96
|
|
|
$
|
96
|
|
|
$
|
79
|
|
Stock-based compensation capitalized is included in property and
equipment, net, in the consolidated balance sheets as a
component of the cost capitalized for website development and
the development of software for internal use. As of
January 3, 2010, the Company had total unrecognized
compensation costs related to unvested stock options and
restricted stock units of $11.5 million, before income
taxes. The Company expects to recognize this cost over a
weighted average period of 2.6 years for stock options and
1.1 years for restricted stock units.
53
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes all stock option transactions from
December 31, 2006, through January 3, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Total
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance, December 31, 2006
|
|
|
2,186
|
|
|
|
21.73
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
349
|
|
|
|
78.27
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(439
|
)
|
|
|
13.40
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(59
|
)
|
|
|
33.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 30, 2007
|
|
|
2,037
|
|
|
|
32.84
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
520
|
|
|
|
43.11
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(142
|
)
|
|
|
21.01
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(125
|
)
|
|
|
60.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 4, 2009
|
|
|
2,290
|
|
|
|
34.38
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
562
|
|
|
|
25.88
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(147
|
)
|
|
|
12.92
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(69
|
)
|
|
|
46.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 3, 2010
|
|
|
2,636
|
|
|
$
|
33.44
|
|
|
|
6.68
|
|
|
$
|
83,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at January 3, 2010
|
|
|
2,527
|
|
|
$
|
33.36
|
|
|
|
6.59
|
|
|
$
|
80,024
|
|
Exercisable at January 3, 2010
|
|
|
1,683
|
|
|
$
|
31.86
|
|
|
|
5.57
|
|
|
$
|
55,584
|
|
The following table summarizes additional information about
stock options outstanding at January 3, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
Options
|
|
|
Exercise Price
|
|
Range of Exercise Price
|
|
(In thousands)
|
|
|
(In years)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
$0.25 - $21.22
|
|
|
799
|
|
|
|
6.53
|
|
|
$
|
14.52
|
|
|
|
348
|
|
|
$
|
5.98
|
|
$21.54 - $31.26
|
|
|
762
|
|
|
|
5.75
|
|
|
|
30.46
|
|
|
|
693
|
|
|
|
30.57
|
|
$31.43 - $44.44
|
|
|
690
|
|
|
|
7.16
|
|
|
|
38.70
|
|
|
|
456
|
|
|
|
36.64
|
|
$44.45 - $99.98
|
|
|
385
|
|
|
|
7.98
|
|
|
|
69.09
|
|
|
|
186
|
|
|
|
73.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,636
|
|
|
|
6.68
|
|
|
|
33.44
|
|
|
|
1,683
|
|
|
|
31.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of restricted stock unit activity for the year ended
January 3, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
RSUs
|
|
|
Value
|
|
|
Contractural Term
|
|
|
Intrinsic Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In years)
|
|
|
(In thousands)
|
|
|
Balance, January 4, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
12
|
|
|
|
21.22
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 3, 2010
|
|
|
12
|
|
|
$
|
21.22
|
|
|
|
0.64
|
|
|
$
|
779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at January 3, 2010
|
|
|
12
|
|
|
$
|
21.22
|
|
|
|
0.61
|
|
|
$
|
729
|
|
The aggregate intrinsic values in the tables above are before
applicable income taxes and represent the amounts recipients
would have received if all options had been exercised or
restricted stock units had been converted on the last business
day of the period indicated, based on the Companys closing
stock price.
The total intrinsic value of options exercised was
$6.2 million, $3.3 million and $22.6 million in
the years ended January 3, 2010, January 4, 2009 and
December 30, 2007, respectively. During the years ended
January 3, 2010, January 4, 2009 and December 30,
2007, the total fair value of options vested was
$7.4 million, $6.6 million and $5.8 million,
respectively.
On February 2, 2006, the Companys board of directors
authorized the repurchase of up to $100 million of its
common stock within the
24-month
period following the approval date of such repurchase. On
July 27, 2006, the Companys board of directors
authorized the repurchase of up to an additional
$50 million of its common stock within the
24-month
period following the approval date of such additional
repurchase. On February 5, 2008, the Companys board
of directors authorized the repurchase of up to
$100 million of its common stock within the
24-month
period following the approval date of such additional
repurchase. In the year ended January 3, 2010 the Company
did not repurchase shares of the Companys common stock. In
the year ended January 4, 2009, the Company repurchased
1.6 million shares of the Companys common stock for
an aggregate purchase price of approximately $66.5 million.
In the year ended December 30, 2007, the Company
repurchased 438,755 shares of the Companys common
stock for an aggregate purchase price of approximately
$20.0 million.
|
|
Note 8.
|
Employee
Benefit Plan
|
The Company has a defined contribution plan pursuant to
Section 401(k) of the Internal Revenue Code covering all
eligible officers and employees. The Company provides a
discretionary matching contribution, which has generally been
$0.50 for every $1.00 contributed by the employee up to 4% of
each employees salary. Such contributions were
approximately $0.2 million, $0.2 million, and
$0.1 million for the years ended January 3, 2010,
January 4, 2009 and December 30, 2007, respectively.
55
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The expense (benefit) for income taxes consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
Current income tax expense
|
|
$
|
6,619
|
|
|
$
|
7,112
|
|
|
$
|
3,685
|
|
Tax benefit from stock option exercises recorded in equity
|
|
|
1,793
|
|
|
|
510
|
|
|
|
6,848
|
|
Deferred income tax (benefit) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(1,534
|
)
|
|
|
(1,396
|
)
|
|
|
(1,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
6,878
|
|
|
$
|
6,226
|
|
|
$
|
9,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory Federal income tax rate to the
effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Other, net
|
|
|
0.0
|
%
|
|
|
(0.1
|
)%
|
|
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
35.0
|
%
|
|
|
34.9
|
%
|
|
|
34.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effect of temporary
differences between amounts recorded for financial reporting
purposes and amounts used for tax purposes. The major components
of deferred tax assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Reserves and allowances
|
|
$
|
453
|
|
|
$
|
388
|
|
Deferred rent
|
|
|
72
|
|
|
|
72
|
|
Other
|
|
|
203
|
|
|
|
210
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
7,156
|
|
|
|
4,962
|
|
Deferred rent
|
|
|
59
|
|
|
|
131
|
|
Financing obligation
|
|
|
279
|
|
|
|
294
|
|
Other
|
|
|
38
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
8,260
|
|
|
|
6,100
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(279
|
)
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Leased building
|
|
|
(287
|
)
|
|
|
(304
|
)
|
Excess of book over tax depreciation and amortization
|
|
|
(476
|
)
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(1,042
|
)
|
|
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
7,218
|
|
|
$
|
5,684
|
|
|
|
|
|
|
|
|
|
|
56
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company had no valuation allowance against its deferred tax
asset balances at January 3, 2010 and January 4, 2009
because it believes these deferred tax assets are more likely
than not to be fully realized. Income taxes payable at
January 3, 2010 and January 4, 2009 were
$0.5 million and $0.6 million, respectively, and were
included in accrued liabilities.
The Company has not provided for deferred taxes on unremitted
earnings of subsidiaries outside the United States where such
earnings are permanently reinvested. At January 3, 2010,
unremitted earnings of foreign subsidiaries were approximately
$0.5 million. The amount of unrecognized deferred tax
liability associated with these unremitted earnings is
approximately $0.1 million. If these earnings were
distributed in the form of dividends or otherwise, the Company
would be subject to U.S. income taxes less an adjustment
for applicable foreign tax credits.
The Company is no longer subject to U.S. federal income tax
examinations by tax authorities for years before 2005.
The tax benefit realized for the tax deduction from stock option
exercises totaled $2.1 million, $0.9 million and
$7.5 million for the years ended January 3, 2010,
January 4, 2009 and December 30, 2007, respectively.
|
|
Note 10.
|
Income
Per Share
|
Basic net income per share is based on the weighted average
number of common shares outstanding. Diluted net income per
share is based on the weighted average number of common shares
and common share equivalents outstanding. Common share
equivalents included in the computation represent shares
issuable upon assumed exercise of outstanding stock options and
conversion of unvested restricted stock units except when the
effect of their inclusion would be antidilutive.
The following table sets forth the computation of basic and
diluted net income per share (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
Net income
|
|
$
|
12,800
|
|
|
$
|
11,630
|
|
|
$
|
17,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
14,534
|
|
|
|
14,925
|
|
|
|
15,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.88
|
|
|
$
|
0.78
|
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options and restricted stock units
|
|
|
682
|
|
|
|
580
|
|
|
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and common stock equivalents
|
|
|
15,216
|
|
|
|
15,505
|
|
|
|
16,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.84
|
|
|
$
|
0.75
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the securities outstanding during
the respective periods that have been excluded from the
calculations because the effect on net income per share would
have been antidilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
Stock options
|
|
|
757
|
|
|
|
606
|
|
|
|
112
|
|
|
|
Note 11.
|
Segment
Information
|
The Companys only operating segment is online retail
jewelry. The Company sells jewelry to customers within and
outside the United States. No customer accounted for 10% or more
of the Companys revenues.
57
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net sales were attributed on the basis of the country to where
the product was shipped. Revenue from individual foreign
countries was not material to the financial statements.
The tables below represent information by geographic area (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
268,898
|
|
|
$
|
267,670
|
|
|
$
|
302,230
|
|
Other countries
|
|
|
33,236
|
|
|
|
27,659
|
|
|
|
17,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
302,134
|
|
|
$
|
295,329
|
|
|
$
|
319,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,044
|
|
|
$
|
7,148
|
|
|
$
|
7,075
|
|
Other countries
|
|
|
288
|
|
|
|
410
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,332
|
|
|
$
|
7,558
|
|
|
$
|
7,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12.
|
Selected
Quarterly Financial Information (unaudited)
|
Summarized quarterly financial information for fiscal years 2009
and 2008 is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
2009 quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
62,403
|
|
|
$
|
69,852
|
|
|
$
|
66,943
|
|
|
$
|
102,936
|
|
Gross profit
|
|
|
13,203
|
|
|
|
15,030
|
|
|
|
14,797
|
|
|
|
22,314
|
|
Net income
|
|
|
1,940
|
|
|
|
2,844
|
|
|
|
2,575
|
|
|
|
5,441
|
|
Basic net income per share
|
|
|
0.13
|
|
|
|
0.20
|
|
|
|
0.18
|
|
|
|
0.37
|
|
Diluted net income per share
|
|
|
0.13
|
|
|
|
0.19
|
|
|
|
0.17
|
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
2008 quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
70,460
|
|
|
$
|
73,706
|
|
|
$
|
65,376
|
|
|
$
|
85,787
|
|
Gross profit
|
|
|
13,924
|
|
|
|
15,123
|
|
|
|
13,262
|
|
|
|
17,687
|
|
Net income
|
|
|
2,571
|
|
|
|
3,205
|
|
|
|
2,335
|
|
|
|
3,519
|
|
Basic net income per share
|
|
|
0.16
|
|
|
|
0.21
|
|
|
|
0.16
|
|
|
|
0.24
|
|
Diluted net income per share
|
|
|
0.16
|
|
|
|
0.20
|
|
|
|
0.15
|
|
|
|
0.24
|
|
|
|
Note 13.
|
Subsequent
Events
|
The Companys repurchase authorization from
February 5, 2008 expired. On February 9, 2010, the
board of directors authorized the repurchase of up to
$100 million of the Companys common stock over
24 months. The Company has repurchased 292,100 shares
of its common stock for an aggregate purchase price of
$15.2 million under these two programs subsequent to
year-end. The repurchases were made under a
Rule 10b5-1
plan.
58
BLUE
NILE, INC.
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
to Revenue,
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs or
|
|
|
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Deductions(A)
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Reserve for sales returns:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2010
|
|
$
|
828
|
|
|
$
|
25,896
|
|
|
$
|
(25,834
|
)
|
|
$
|
890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 4, 2009
|
|
|
1,281
|
|
|
|
28,383
|
|
|
|
(28,836
|
)
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2007
|
|
|
1,179
|
|
|
|
26,743
|
|
|
|
(26,641
|
)
|
|
|
1,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for fraud:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2010
|
|
$
|
100
|
|
|
$
|
63
|
|
|
$
|
(70
|
)
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 4, 2009
|
|
|
130
|
|
|
|
20
|
|
|
|
(50
|
)
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2007
|
|
|
105
|
|
|
|
118
|
|
|
|
(93
|
)
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Deductions for sales returns and fraud consist of actual sales
returns and credit card chargebacks in each period. |
59
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
Disclosure controls and procedures are controls and other
procedures designed to ensure that information required to be
disclosed by us in our periodic reports filed with the SEC is
recorded, processed, summarized and reported, within the time
periods specified by the SECs rules and SEC reports.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it
files or submits under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is accumulated and
communicated to the issuers management, including its
principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
As of the end of the period covered by this report, an
evaluation was performed under the supervision and with the
participation of our management, including our chief executive
officer and chief financial officer (collectively, our
certifying officers), of the effectiveness of the
design and operation of our disclosure controls and procedures.
Based on their evaluation, our certifying officers concluded
that the Companys disclosure controls and procedures were
effective at the reasonable assurance level as of the end of the
period covered by this report.
Report of
Management on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13a-15(f)
under the Exchange Act. Internal control over financial
reporting includes those policies and procedures that
(1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect our transactions
and dispositions of our assets; (2) provide reasonable
assurance that our transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with
appropriate authorizations; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Because of its inherent limitations, our internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our
management, we assessed the effectiveness of our internal
control over financial reporting as of January 3, 2010,
using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on this
assessment, management has concluded that our internal control
over financial reporting was effective at the reasonable
assurance level as of January 3, 2010.
Deloitte & Touche LLP, an independent registered
public accounting firm, has audited the effectiveness of our
internal control over financial reporting as of January 3,
2010, as stated in their audit report below.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting during the quarter ended January 3, 2010, that
our certifying officers concluded materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
|
|
|
/s/ Marc
D. Stolzman
|
Chief Executive Officer and President
|
|
Chief Financial Officer
|
60
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Blue Nile, Inc.
Seattle, Washington
We have audited the internal control over financial reporting of
Blue Nile, Inc. and subsidiaries (the Company) as of
January 3, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Report of
Management on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of January 3, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended January 3, 2010, of
the Company, and our report dated February 25, 2010,
expressed an unqualified opinion on those financial statements
and financial statement schedule.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 25, 2010
61
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item relating to our executive
officers will be contained in our Proxy Statement with respect
to our 2010 Annual Meeting of Stockholders under the caption
Executive Officers and is incorporated herein by
reference. The information required by this Item relating to our
directors and nominees, including information with respect to
audit committee financial experts and our code of ethics, will
be contained in our Proxy Statement with respect to our 2010
Annual Meeting of Stockholders under the caption
Proposal 1 Election of Directors
and is incorporated herein by reference. The information
required by this Item regarding compliance with
Section 16(a) of the Securities Exchange Act will be
contained in our Proxy Statement with respect to our 2010 Annual
Meeting of Stockholders under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance and is incorporated herein by reference. The
Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days of the end of our fiscal year.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item will be contained in our
Proxy Statement with respect to our 2010 Annual Meeting of
Stockholders under the captions Compensation of Executive
Officers, Compensation Committee Interlocks and
Insider Participation, Compensation Committee
Report and Compensation of Directors, and is
incorporated herein by reference. The Proxy Statement will be
filed with the Securities and Exchange Commission within
120 days of the end of our fiscal year.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this Item will be contained in our
Proxy Statement with respect to our 2010 Annual Meeting of
Stockholders under the captions Security Ownership of
Certain Beneficial Owners and Management and Equity
Compensation Plan Information and is incorporated herein
by reference. The Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days of the
end of our fiscal year.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this Item will be contained in our
Proxy Statement with respect to our 2010 Annual Meeting of
Stockholders under the captions Transactions with Related
Persons and
Proposal 1-Election
of Directors and is incorporated herein by reference. The
Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days of the end of our fiscal year.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item will be contained in our
Proxy Statement with respect to our 2010 Annual Meeting of
Stockholders under the caption
Proposal 2-Ratification of Selection of Independent
Auditors and is incorporated herein by reference. The
Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days of the end of our fiscal year.
62
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
Index to Consolidated Financial Statements
a. The following documents are filed as part of this report:
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
1.
|
|
Financial Statements:
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
38
|
|
|
|
Consolidated Balance Sheets, as of January 3, 2010 and
January 4, 2009
|
|
|
39
|
|
|
|
Consolidated Statements of Operations, for the fiscal years
ended January 3, 2010, January 4, 2009 and
December 30, 2007
|
|
|
40
|
|
|
|
Consolidated Statements of Changes in Stockholders Equity,
for the fiscal years ended January 3, 2010, January 4,
2009 and December 30, 2007
|
|
|
41
|
|
|
|
Consolidated Statements of Cash Flows, for the fiscal years
ended January 3, 2010, January 4, 2009 and
December 30, 2007
|
|
|
42
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
44
|
|
2.
|
|
Financial Statement Schedule:
|
|
|
|
|
|
|
Schedule II, Valuation and Qualifying Accounts
|
|
|
59
|
|
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
|
|
|
|
|
3.
|
|
Exhibits:
|
|
|
|
|
|
|
The exhibits listed in the Index to Exhibits, which appears
immediately following the signature page and is incorporated
herein by reference, are filed as part of this Annual Report on
Form 10-K.
|
|
|
|
|
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: February 25, 2010
Blue Nile, Inc.
(Registrant)
Marc D. Stolzman
Chief Financial Officer
(Principal Accounting and Financial Officer)
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Diane M. Irvine
and Marc D. Stolzman, and each or any one of them, his or her
true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign
any and all amendments (including posting effective amendments)
to this report, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-facts
and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his or her substitutes or
substitutes, may lawfully do or cause to be done by virtue
hereof.
This report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated, pursuant to the requirements of the Securities
Exchange Act of 1934.
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Diane
M. Irvine
Diane
M. Irvine, Chief Executive Officer,President and
Director(Principal Executive Officer)
|
|
February 23, 2010
|
|
|
|
|
|
By
|
|
/s/ Marc
D. Stolzman
Marc
D. Stolzman, Chief Financial Officer(Principal Accounting and
Financial Officer)
|
|
February 25, 2010
|
|
|
|
|
|
By
|
|
/s/ Mark
C. Vadon
Mark
C. Vadon, Executive Chairman and Director
|
|
February 23, 2010
|
|
|
|
|
|
By
|
|
/s/ W.
Eric Carlborg
W.
Eric Carlborg, Director
|
|
February 23, 2010
|
|
|
|
|
|
By
|
|
/s/ Leslie
Lane
Leslie
Lane, Director
|
|
February 22, 2010
|
|
|
|
|
|
By
|
|
/s/ Ned
Mansour
Ned
Mansour, Director
|
|
February 22, 2010
|
64
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Michael
Potter
Michael
Potter, Director
|
|
February 22, 2010
|
|
|
|
|
|
By
|
|
/s/ Steve
Scheid
Steve
Scheid, Director
|
|
February 22, 2010
|
|
|
|
|
|
By
|
|
/s/ Mary
Alice Taylor
Mary
Alice Taylor, Director
|
|
February 22, 2010
|
65
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report
on
Form 10-K
or are incorporated herein by reference. Where an exhibit is
incorporated by reference, the number in parentheses indicates
the document to which cross-reference is made. See the end of
this exhibit index for a listing of cross-reference documents.
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
3.1(1)
|
|
Amended and Restated Certificate of Incorporation of Blue Nile,
Inc.
|
3.2(2)
|
|
Amended and Restated Bylaws of Blue Nile, Inc.
|
4.1
|
|
Reference is made to Exhibits 3.1, and 3.2.
|
4.2(3)
|
|
Specimen Stock Certificate.
|
4.3(19)
|
|
Amended and Restated Investor Rights Agreement dated
June 29, 2001 by and between Blue Nile, Inc. and certain
holders of Blue Nile, Inc.s preferred stock.
|
10.1.1(19)*
|
|
Blue Nile, Inc. Amended and Restated 1999 Equity Incentive Plan.
|
10.1.2(19)*
|
|
Form of Stock Option Agreement pursuant to the Blue Nile, Inc.
1999 Equity Incentive Plan.
|
10.2.1(11)*
|
|
Third Amended and Restated 2004 Non-Employee Directors
Stock Option Plan.
|
10.2.2(6)*
|
|
Form of Stock Option Agreement pursuant to the Blue Nile, Inc.
2004 Non-Employee Directors Stock Option Plan.
|
10.3(19)*
|
|
Blue Nile, Inc. 2004 Employee Stock Purchase Plan.
|
10.4.1(4)*
|
|
Blue Nile, Inc. 2004 Equity Incentive Plan.
|
10.4.2(6)*
|
|
Form of Stock Option Agreement pursuant to the 2004 Equity
Incentive Plan.
|
10.4.3(5)*
|
|
Blue Nile, Inc. Stock Grant Notice pursuant to the 2004 Equity
Incentive Plan.
|
10.4.4(13)*
|
|
Form of Restricted Stock Unit Grant Notice and Form of Award
Agreement under the Blue Nile, Inc. 2004 Equity Incentive Plan.
|
10.5.1(4)
|
|
Sublease Agreement, dated May 22, 2003, between Amazon.com
Holdings, Inc. and the registrant.
|
10.5.2(4)
|
|
First Amendment to Sublease Agreement, dated July 3, 2003,
between Amazon.com Holdings, Inc. and the registrant.
|
10.6.1(4)
|
|
Lease, dated June 28, 2001, between Gull Industries, Inc.
and the registrant.
|
10.6.2(4)
|
|
First Amendment to Lease, dated December 11, 2002 between
Gull Industries, Inc. and the registrant.
|
10.6.3(4)
|
|
Second Amendment to Lease, dated November 15, 2003, between
Gull Industries, Inc. and the registrant.
|
10.7(8)
|
|
Commercial lease, dated July 21, 2006, between Gull
Industries, Inc. and the registrant.
|
10.8(10)*
|
|
Offer Letter with Diane M. Irvine, dated December 1, 1999.
|
10.9(19)*
|
|
Offer Letter with Dwight Gaston, dated May 14, 1999.
|
10.10(19)*
|
|
Offer Letter with Susan S. Bell, dated August 22, 2001.
|
10.11(9)*
|
|
Offer Letter with Marc D. Stolzman, dated May 2, 2008.
|
10.12(13)*
|
|
Offer Letter with Marianne Marck, dated January 9, 2009.
|
10.13(12)*
|
|
Offer Letter with Kevin Frisch, dated March 31, 2009.
|
10.14(4)*
|
|
Form of Indemnity Agreement entered into between Blue Nile, Inc.
and each of its directors and executive officers.
|
10.15.1(7)*
|
|
Blue Nile, Inc. 2009 Executive Officer Cash Incentive Plan.
|
10.16(15)*
|
|
Compensation Arrangements with the registrants Chief
Executive Officer and Executive Chairman
|
10.17(13)*
|
|
Director Compensation
|
10.18(14)*
|
|
Severance Agreement with Kevin Frisch, dated October 7, 2009
|
10.19(17)*
|
|
Executive Bonus Plan
|
66
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
10.20(18)*
|
|
Change of Control Severance Plan
|
21.1(14)
|
|
Subsidiaries of the Registrant.
|
23.1(14)
|
|
Consent of Deloitte & Touche LLP.
|
24.1
|
|
Powers of Attorney of Officers and Directors signing this report
(see page 64).
|
31.1(14)
|
|
Certification of Principal Chief Executive Officer Required
Under
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended.
|
31.2(14)
|
|
Certification of Principal Financial Officer Required Under
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended.
|
32.1(16)
|
|
Certification of Principal Chief Executive Officer Required
Under
Rule 13a-14(b)
or
Rule 15d-14(b)
of the Securities Exchange Act of 1934, as amended, and
18 U.S.C. Section 1350.
|
32.2(16)
|
|
Certification of Principal Financial Officer Required Under
Rule 13a-14(b)
or
Rule 15d-14(b)
of the Securities Exchange Act of 1934, as amended, and
18 U.S.C. Section 1350.
|
|
|
|
* |
|
Denotes a management contract or compensatory plan, contract or
agreement, in which the Companys directors or executive
officers may participate. |
|
(1) |
|
Previously filed as Exhibit 3.1 to Blue Nile, Inc.s
Quarterly Report on Form
10-Q for the
quarterly period ended July 4, 2004
(No. 000-50763),
as filed with the Securities and Exchange Commission on
August 6, 2004, and incorporated by reference herein. |
|
(2) |
|
Previously filed as the like numbered exhibit to Blue Nile,
Inc.s Current Report on
Form 8-K
(No. 000-50763),
as filed with the Securities and Exchange Commission on
November 9, 2009, and incorporated by reference herein. |
|
(3) |
|
Previously filed as Exhibit 4.2 to Blue Nile, Inc.s
Registration Statement on
Form S-1/A
(No. 333-113494),
as filed with the Securities and Exchange Commission on
May 4, 2004, as amended, and incorporated by reference
herein. |
|
(4) |
|
Previously filed as the like numbered exhibit to Blue Nile,
Inc.s Registration Statement on
Form S-1/A
(No. 333-113494),
as filed with the Securities and Exchange Commission on
April 19, 2004, as amended, and incorporated by reference
herein. |
|
(5) |
|
Previously filed as Exhibit 10.1 to Blue Nile, Inc.s
Current Report on
Form 8-K
(No.
000-50763),
as filed with the Securities and Exchange Commission on
December 13, 2004, and incorporated by reference herein. |
|
(6) |
|
Previously filed as the like numbered exhibit to Blue Nile,
Inc.s Annual Report on
Form 10-K
(No. 000-50763),
as filed with the Securities and Exchange Commission on
March 25, 2005, and incorporated by reference herein. |
|
(7) |
|
Previously filed as Item 5.02 to Blue Nile, Inc.s
Current Report on Form
8-K
(No. 000-50763),
as filed with the Securities and Exchange Commission on
March 5, 2009, and incorporated by reference herein. |
|
(8) |
|
Previously filed as Exhibit 10.1 to Blue Nile, Inc.s
Current Report on
Form 8-K
(No.
000-50763),
as filed with the Securities and Exchange Commission on
July 27, 2006, and incorporated by reference herein. |
|
(9) |
|
Previously filed as Exhibit 10.1 to Blue Nile, Inc.s
Current Report on
Form 8-K
(No. 000-50763),
as filed with the Securities and Exchange Commission on
May 6, 2008, and incorporated by reference herein. |
|
(10) |
|
Previously filed as Exhibit 10.7 to Blue Nile, Inc.s
Registration Statement on
Form S-1
(No. 333-113494),
as filed with the Securities and Exchange Commission on
March 11, 2004, as amended, and incorporated by reference
herein. |
67
|
|
|
(11) |
|
Previously filed as Exhibit 10.1 to Blue Nile, Inc.s
Quarterly Report on
Form 10-Q
(No. 000-50763)
as filed with the Securities and Exchange Commission on
November 7, 2008, and incorporated by reference herein. |
|
(12) |
|
Previously filed as Exhibit 10.2 to Blue Nile, Inc.s
Quarterly Report on
Form 10-Q
(No. 000-50763)
as filed with the Securities and Exchange Commission on
May 13, 2009 and incorporated by reference herein. |
|
(13) |
|
Previously filed as the like numbered exhibit to Blue Nile,
Inc.s Annual Report on
Form 10-K
(No. 000-50763),
as filed with the Securities and Exchange Commission on
March 5, 2009, and incorporated by reference herein. |
|
(14) |
|
Filed herewith. |
|
(15) |
|
Previously filed as Item 5.02 to Blue Nile, Inc.s
Current Report on
Form 8-K
(No. 000-50763),
as filed with the Securities and Exchange Commission on
March 5, 2008, and incorporated by reference herein. |
|
(16) |
|
Filed herewith. The certifications attached as
Exhibits 32.1 and 32.2 accompany this Annual Report on
Form 10-K
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and shall not be deemed filed by Blue Nile, Inc. for
purposes of Section 18 of the Securities Exchange Act of
1934, as amended. |
|
(17) |
|
Previously filed as Exhibit 10.3 to Blue Nile, Inc.s
Quarterly Report on
Form 10-Q
(No. 000-50763)
as filed with the Securities and Exchange Commission on
May 13, 2009, and incorporated by reference herein. |
|
(18) |
|
Previously filed as Exhibit 10.2 to Blue Nile, Inc.s
Quarterly Report on
Form 10-Q
(No. 000-50763)
as filed with the Securities and Exchange Commission on
May 13, 2009, and incorporated by reference herein. |
|
(19) |
|
Previously filed as the like numbered exhibit to Blue Nile,
Inc.s Registration Statement on
Form S-1
(No. 333-113494)
as filed with the Securities and Exchange Commission on
March 11, 2004, and incorporated by reference herein. |
68