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 4, 2009
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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 o NO þ
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 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 o
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Non-accelerated
filer o
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Smaller reporting
company o
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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 June 29, 2008 was
approximately $678 million, based on the last trading price
of $46.92 per share, excluding approximately 0.6 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 June 29,
2008 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 25, 2009 was 14,497,425.
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 2009 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 4, 2009
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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 a leading online retailer of
diamonds and fine jewelry that offers an exceptional customer
experience including substantial education, guidance, 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 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 only served customers in the United States, Canada
and the United Kingdom through these websites. In 2008, we
expanded our operations to offer products for sale to customers
in over 35 additional countries and territories throughout the
world. In fiscal year 2008, our net sales were
$295.3 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
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 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 significant costs of diamonds and fine jewelry lead
consumers to seek out substantial information and trusted
guidance throughout their purchasing process. Our comprehensive
websites and expertly trained
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customer service representatives 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 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.
Business
Strategies
Our objective is to maximize our revenue and profitability as
well as 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 will 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. In August 2004, we
launched a website in the U.K., www.bluenile.co.uk, through
which we offered a limited number of products. In September
2005, we began offering customization tools on our U.K. website
to provide customers with the ability to customize their diamond
jewelry products and to purchase wedding bands. In January 2005,
we launched a website in Canada, www.bluenile.ca, through which
we offer diamond and jewelry products for sale. In May 2007, we
updated our U.K. and Canadian websites to transact in local
currency and opened a fulfillment center in Dublin, Ireland to
serve our U.K. and Ireland customers. In January 2008, we
expanded shipping destinations from our primary and U.K.
websites. As of January 4, 2009, we ship to more than 40
countries and territories worldwide. Our primary website serves
the United States and 14 additional countries and territories
throughout the world. All member states of the E.U. are served
from our U.K. website and Canadian customers are supported from
our Canada website. 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
$27.7 million, $17.0 million and $8.3 million for
the fiscal years ended January 4, 2009, December 30,
2007 and December 31, 2006, 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,
lower cost business model that enables growth with less 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 non-customized 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 2009 to 2013. 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.
Customers may purchase customized diamond jewelry by selecting a
diamond and then choosing from a variety of ring, earring and
pendant settings that are designed to match the characteristics
of each individual diamond. The customized product is then
assembled and delivered to the customer, typically within three
business days.
We offer a broad range of other fine jewelry products to
complement our selection of high quality customized diamond
jewelry. This selection includes diamond, gemstone, platinum,
gold, pearl and sterling silver jewelry and accessories. Our
fine jewelry assortment includes settings, wedding bands,
earrings, necklaces, pendants, bracelets and watches. In the
case of fine jewelry and watches, 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 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, 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 center 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 generally offer a return policy of
30 days. We generally do not extend credit to customers
except through third-party credit cards, although we maintain
relationships with a financial institution and consumer
financing company that offer 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 and
licensed 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 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/New Years
(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
29%, 35% and 36% of our net sales in the years ended
January 4, 2009, December 30, 2007 and
December 31, 2006, 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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other 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, and
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discount superstores and wholesale 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 and the Blue Nile BN
stylized logo 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 4, 2009, we employed 170 full-time
employees, seven part-time employees and three independent
contractors. 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 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 applies to our principal executive
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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. In those cases, 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 may have an adverse effect on the United States and
world economy, which could negatively impact consumer spending
patterns for the foreseeable future. There can be no assurances
that government responses to the disruptions in the financial
markets will restore consumer confidence. Reductions in consumer
spending or disposable income may affect us more significantly
than companies in other industries and companies with a
diversified product offering.
The prices of commodity products, 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. Also, economic factors
such as increased shipping costs, inflation, higher costs of
labor, insurance and healthcare, and changes in other laws and
regulations may increase our cost of sales and our selling,
general and administrative expenses, and otherwise adversely
affect our financial condition and results of operations.
Our
cash and cash equivalents are concentrated in a few financial
institutions.
We maintain the majority of our cash and cash equivalents in
accounts with three major financial institutions in the United
States of America, in the form of demand deposits, money market
accounts and other short-term investments. Deposits in these
institutions may exceed the amounts of insurance provided on
such deposits. If any of these institutions becomes insolvent,
it could substantially harm our financial condition and we may
lose some, or all, of such deposits.
Our
limited operating history makes it difficult for us to
accurately forecast net sales and appropriately plan our
expenses.
We were incorporated in March 1999 and have a limited operating
history. As a result, it is difficult to accurately forecast our
net sales and plan our operating expenses. We 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 growth. 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
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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 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.
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 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
internationally;
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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 granted, the underlying
assumptions used in valuing these options, the estimated rate of
stock option 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 29%, 35% and 36% of our net sales in the
years ended January 4, 2009, December 30, 2007 and
December 31, 2006, respectively, were generated during the
fourth quarter of each year. In anticipation of increased sales
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activity during the fourth quarter, we may incur significant
additional expenses, including higher inventory of 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 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 would substantially harm our business
and results of operations.
Our
failure to acquire quality diamonds and fine jewelry at
commercially reasonable prices would result in higher costs and
damage our operating results and competitive
position.
If we are unable to acquire quality diamonds and fine jewelry at
commercially reasonable prices, our costs may exceed our
forecasts, our gross margins and operating results 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 commodity prices, particularly for diamonds that 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 relationship with these firms. Our ability to
acquire diamonds and fine jewelry is also substantially
dependent on our relationships with various suppliers.
Approximately 21% of our payments to our diamond and fine
jewelry suppliers for each of the years ended January 4,
2009, December 30, 2007 and December 31, 2006 were
made to our top three suppliers. 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 demands 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 for the products
that they sell. To the extent such vertical integration efforts
are successful, some of the fragmentation in the existing
diamond supply chain could be eliminated, and 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.
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.
10
Our
net sales may be negatively affected if we are required to
collect taxes on purchases.
We do not collect or have imposed upon us sales or other taxes
related to the products we sell, except for certain corporate
level taxes, sales taxes with respect 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 of America. Additionally, one or
more states or foreign countries may seek to impose sales or
other tax collection obligations on us in the future. A
successful assertion by one or more states or foreign countries
that we should be collecting 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 with respect to
traditional retailers or otherwise substantially harm our
business and results of operations.
Currently, decisions of the U.S. Supreme Court restrict the
imposition of obligations to collect state and local sales and
use taxes with respect to sales made over the Internet. However,
implementation of the restrictions imposed by these Supreme
Court decisions is subject to interpretation by state and local
taxing authorities. While we believe that these Supreme Court
decisions currently restrict 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 could disagree with our interpretation of these
decisions. Moreover, a number of states, as well as the
U.S. Congress, have been considering various initiatives
that could limit or supersede the Supreme Courts position
regarding sales and use taxes on Internet sales. If any state or
local taxing jurisdiction were to disagree with our
interpretation of the Supreme Courts current position
regarding state and local taxation of Internet sales, or if any
of these initiatives were to address the Supreme Courts
constitutional concerns and result in a reversal of its current
position, we could be required to collect sales and use 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 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 online 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 customer
experience. To promote our brand and branded products, we have
incurred and will continue to incur substantial expense 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 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 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 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
11
our ability to attract new customers and maintain customer
relationships, and, as a result, substantially harm our business
and results of operations.
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
which we have online-advertising arrangements could provide
advertising services to other online or traditional retailers,
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.
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. and
Bailey Banks & Biddle;
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other 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; and
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discount superstores and wholesale clubs, such as Wal-Mart and
Costco Wholesale.
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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 can duplicate many of the
products, services and content we offer, which could harm our
business and results of operations.
12
We may
be unsuccessful in further expanding our operations
internationally.
To date, international net sales have represented less than 10%
of our total annual net sales. In 2008, 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 minimal
experience in selling our products in international markets and
in conforming to the local cultures, standards or policies
necessary to successfully compete in those markets. Outside of
the United Kingdom and Canada, we have very limited web content
localized for foreign markets and 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 foreign consumers 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; and
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geopolitical events, including war and terrorism.
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Our failure to successfully expand our international operations
may cause our business and results of operations to suffer.
13
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 on
third-party carriers for product shipments to our customers. We
and our suppliers are therefore subject to the risks, including
employee strikes, inclement weather and rising fuel costs
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 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 smaller 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 key personnel, any 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.
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. In addition, our
servers are vulnerable to computer viruses, denial of service
attacks, physical or electronic break-ins and similar
disruptions, which could lead to
14
interruptions, delays, loss of critical data, the inability to
fulfill customer orders or the unauthorized disclosure of
confidential customer data. The occurrence of any of the
foregoing risks 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.
We
rely exclusively on the sale of diamonds and fine jewelry for
our net sales, 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, increasing 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 seek to 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.
15
Our 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.
Interruptions
to our systems 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 and our ability to
attract and retain customers and to maintain adequate customer
service levels. Any future systems interruptions or 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.
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.
Repurchases
of our common stock may not prove to be the best use of our cash
resources.
On February 2, 2006, our board of directors authorized the
repurchase of up to $100 million of our common stock during
the subsequent
24-month
period following the approval date of such repurchase. This
repurchase program expired on February 2, 2008. On
July 27, 2006, our board of directors authorized the
repurchase of up to an additional $50 million of our common
stock within the
24-month
period following the approval date of such additional
repurchase. This repurchase authorization expired on
July 27, 2008. On February 6, 2008, our board of
directors authorized the repurchase of up to an additional
$100 million of our common stock within the
24-month
period following the approval date of such additional
repurchase. 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 Jewellery, 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.
16
We also currently transact in Canadian dollars on our Canadian
website and Pounds British Sterling on our U.K. website, which
exposes us to foreign currency exchange rate fluctuations. As we
expand our international operations and provide more
international customers the ability to purchase our products in
their local currencies, our exposure to foreign exchange rate
fluctuations will increase, and we may record significant gains
or losses.
We
have incurred significant operating losses in the past and may
not be able to sustain profitability in the
future.
We experienced significant operating losses in each quarter from
our inception in 1999 through the second quarter of 2002. As a
result, our business has a limited record of profitability and
may not continue to be profitable or increase profitability. If
we are unable to acquire diamonds and fine jewelry at
commercially reasonable prices, if net sales decline or if our
expenses otherwise exceed our expectations, we may not be able
to sustain or increase profitability on a quarterly or annual
basis.
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 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 and the Blue Nile BN stylized logo 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,
17
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
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 increasing net sales.
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 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
18
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.
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, which may increase over time and raise our operating costs
and lower our operating margins.
We
rely on our relationships with third-party consumer credit
companies 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 relationships with a financial institution and a
consumer finance company to provide financing to our customers.
If we are unable to maintain these 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
19
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.
We may
have exposure to greater than anticipated tax
liabilities.
We are subject to income, payroll, duties and other 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.
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.
20
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 Section 404 of the Sarbanes-Oxley
Act of 2002 and other requirements may increase our costs and
require additional management time and resources. We may need to
continue 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 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
|
In December 2008, we received a comment letter from the United
States Securities and Exchange Commission (SEC)
staff regarding certain prior year filings. We responded to the
SEC staffs comments on January 29, 2009. We are
currently awaiting the completion of the SEC staffs review
of our response regarding a requested clarification to our
initial response to a Liquidity and Capital Resources question.
As of January 4, 2009, 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
21
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 fiscal fourth quarter ended January 4, 2009.
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 25, 2009 we had
approximately 46 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 2008 and 2007. The quotations
are as reported in published financial sources.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
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
|
|
Fiscal year 2007:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
42.45
|
|
|
$
|
36.54
|
|
Second Quarter
|
|
$
|
62.30
|
|
|
$
|
40.53
|
|
Third Quarter
|
|
$
|
106.16
|
|
|
$
|
60.69
|
|
Fourth Quarter
|
|
$
|
103.69
|
|
|
$
|
64.20
|
|
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.
22
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 period beginning on
May 20, 2004, the date of our initial public offering,
through January 4, 2009, our 2008 fiscal year end.
Historical stock price performance should not be relied upon as
an indication of future stock price performance.
COMPARISON
OF 55 MONTH CUMULATIVE TOTAL RETURN(2)
Among Blue Nile, Inc., The NASDAQ Composite Index
And The RDG Internet Composite Index
|
|
|
(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 May 20, 2004, at the closing
price on the date of Blue Niles initial public offering,
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. |
Issuer
Purchases of Equity Securities
On February 2, 2006, our board of directors authorized the
repurchase of up to $100 million of our common stock during
the subsequent
24-month
period following the approval date of such repurchase. This
repurchase program expired on February 2, 2008. On
July 27, 2006, our board of directors authorized the
repurchase of up to an additional $50 million of our common
stock within the
24-month
period following the approval date of such additional
repurchase. This repurchase authorization expired on
July 27, 2008. On February 6, 2008, our board of
directors authorized the repurchase of up to an additional
$100 million of our common stock within the
24-month
period following the approval date of such additional
repurchase. The shares may be repurchased from time to time in
open market transactions or in negotiated transactions off the
market. The timing and amount of any shares repurchased is
determined by management based on our evaluation of market
conditions and other factors. Repurchases may also be made under
a
Rule 10b5-1
plan,
23
which would permit shares to be repurchased when we might
otherwise be precluded from doing so under insider trading laws.
The following table describes the shares repurchased during the
quarter ended January 4, 2009 under the repurchase program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Value of Shares
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
that May Yet Be
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans or
|
|
|
Purchased Under the
|
|
|
|
Purchased
|
|
|
per Share
|
|
|
Programs
|
|
|
Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
September 29, 2008 through
October 26, 2008
|
|
|
31,400
|
|
|
$
|
37.47
|
|
|
|
31,400
|
|
|
$
|
83,550
|
|
October 27, 2008 through
November 23, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
83,550
|
|
November 24, 2008 through
January 4, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
83,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares purchased
|
|
|
31,400
|
|
|
|
|
|
|
|
31,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The table below shows selected consolidated financial data for
each of our fiscal years ended January 4, 2009,
December 30, 2007, December 31, 2006, January 1,
2006 and January 2, 2005. The consolidated statements of
operations data and the additional operating data for each of
the fiscal years ended January 4, 2009, December 30,
2007 and December 31, 2006 and the consolidated balance
sheets as of January 4, 2009 and December 30, 2007 are
derived from our audited consolidated financial statements
included elsewhere in this report. The consolidated statements
of operations for the fiscal years ended January 1, 2006
and January 2, 2005 and the consolidated balance sheet data
as of December 31, 2006, January 1, 2006 and
January 2, 2005, 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.
24
BLUE
NILE, INC.
SELECTED
CONSOLIDATED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2,
|
|
|
|
2009 (2)
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
295,329
|
|
|
$
|
319,264
|
|
|
$
|
251,587
|
|
|
$
|
203,169
|
|
|
$
|
169,242
|
|
Gross profit
|
|
|
59,996
|
|
|
|
65,204
|
|
|
|
50,853
|
|
|
|
45,042
|
|
|
|
37,584
|
|
Selling, general and administrative expenses
|
|
|
44,005
|
|
|
|
42,792
|
|
|
|
34,296
|
|
|
|
26,993
|
|
|
|
22,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
15,991
|
|
|
|
22,412
|
|
|
|
16,557
|
|
|
|
18,049
|
|
|
|
14,857
|
|
Income before income taxes
|
|
|
17,856
|
|
|
|
26,587
|
|
|
|
19,980
|
|
|
|
20,553
|
|
|
|
15,629
|
|
Income tax expense
|
|
|
6,226
|
|
|
|
9,128
|
|
|
|
6,916
|
|
|
|
7,400
|
|
|
|
5,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,630
|
|
|
$
|
17,459
|
|
|
$
|
13,064
|
|
|
$
|
13,153
|
|
|
$
|
9,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.78
|
|
|
$
|
1.10
|
|
|
$
|
0.79
|
|
|
$
|
0.75
|
|
|
$
|
0.80
|
|
Diluted net income per share
|
|
$
|
0.75
|
|
|
$
|
1.04
|
|
|
$
|
0.76
|
|
|
$
|
0.71
|
|
|
$
|
0.56
|
|
Shares used in computing basic net income per share
|
|
|
14,925
|
|
|
|
15,919
|
|
|
|
16,563
|
|
|
|
17,550
|
|
|
|
12,450
|
|
Shares used in computing diluted net income per share
|
|
|
15,505
|
|
|
|
16,814
|
|
|
|
17,278
|
|
|
|
18,597
|
|
|
|
17,885
|
|
Additional Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(2,927
|
)
|
|
$
|
41,455
|
|
|
$
|
40,518
|
|
|
$
|
31,272
|
|
|
$
|
29,751
|
|
Gross profit margin
|
|
|
20.3
|
%
|
|
|
20.4
|
%
|
|
|
20.2
|
%
|
|
|
22.2
|
%
|
|
|
22.2
|
%
|
Selling, general and administrative expenses as a percentage of
net sales
|
|
|
14.9
|
%
|
|
|
13.4
|
%
|
|
|
13.6
|
%
|
|
|
13.3
|
%
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
January 1,
|
|
|
January 2,
|
|
|
|
2009 (2)
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,451
|
|
|
$
|
122,793
|
|
|
$
|
78,540
|
|
|
$
|
71,921
|
|
|
$
|
59,499
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
19,767
|
|
|
|
42,748
|
|
|
|
41,868
|
|
Accounts receivable
|
|
|
1,709
|
|
|
|
3,576
|
|
|
|
1,640
|
|
|
|
1,877
|
|
|
|
1,028
|
|
Inventories
|
|
|
18,834
|
|
|
|
20,906
|
|
|
|
14,616
|
|
|
|
11,764
|
|
|
|
9,914
|
|
Accounts payable
|
|
|
62,291
|
|
|
|
85,866
|
|
|
|
66,625
|
|
|
|
50,157
|
|
|
|
37,775
|
|
Working capital(1)
|
|
|
7,589
|
|
|
|
53,455
|
|
|
|
41,881
|
|
|
|
76,869
|
|
|
|
77,838
|
|
Total assets
|
|
|
89,665
|
|
|
|
160,586
|
|
|
|
122,106
|
|
|
|
138,005
|
|
|
|
128,382
|
|
Total long-term obligations
|
|
|
1,213
|
|
|
|
1,418
|
|
|
|
666
|
|
|
|
863
|
|
|
|
1,071
|
|
Total stockholders equity
|
|
|
19,308
|
|
|
|
63,477
|
|
|
|
47,303
|
|
|
|
81,515
|
|
|
|
83,620
|
|
|
|
|
(1) |
|
Working capital consists of total current assets, including cash
and cash equivalents, less total current liabilities. |
|
(2) |
|
Fiscal year 2008 consists of 53 weeks, which is one week
longer than prior fiscal years. |
25
|
|
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, Blue Nile is a leading online retailer of
diamonds and fine jewelry that offers an exceptional customer
experience, including substantial education, guidance and value.
We have successfully built Blue Nile into a premium brand.
Our long-term financial focus is primarily on sustainable growth
in free cash
flow1.
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.
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 an enormous 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 in physical retail.
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 4, 2009,
we had a 20.3% 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 customers. We
believe that these lower prices, in turn, will result in
increasing our market share in the luxury jewelry retail space.
Our efficient operating model 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.
We have an obsessive focus on the customer. We develop 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 within approximately 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 promote the Blue Nile brand and to
increase our net sales and net income. We actively solicit
customer
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.
26
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.
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 / New
Years (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. Our satisfied customers are also an important source
of referrals that 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. To-date, we have launched sites
offering local currency pricing in the U.K. and Canada. In 2008,
we expanded our website offerings to include shipment to over 35
additional countries and territories throughout the world. We
will prioritize and pursue future 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.
Trends
In 2008, global economic and financial market conditions
weakened, creating uncertainty for consumers. This macroeconomic
downturn has had a significant impact on consumer spending, most
notably on purchases of high ticket items, including jewelry. It
is uncertain how long the current challenging economic
conditions will continue.
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
U.S., Canadian and U.K. customers, 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 U.K. 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.
27
Stock-based
Compensation
We account for stock-based compensation in accordance with the
fair value recognition provisions of Financial Accounting
Standards Board (FASB) Statement No. 123R
(Revised 2004), Share-Based Payment
(SFAS 123R). 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)
|
|
|
5.8
|
%
|
|
|
(6.3
|
)%
|
Expected volatility(1)
|
|
|
8.3
|
%
|
|
|
(8.5
|
)%
|
|
|
|
(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
January 2, 2009, expected term of 4.0 years, expected
volatility of 48.1%, expected dividend yield of 0.0% and a risk
free interest rate of 2.5%. |
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 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
20.3
|
|
|
|
20.4
|
|
|
|
20.2
|
|
Selling, general and administrative expenses
|
|
|
14.9
|
|
|
|
13.4
|
|
|
|
13.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5.4
|
|
|
|
7.0
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
0.6
|
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6.0
|
|
|
|
8.3
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
2.1
|
|
|
|
2.8
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3.9
|
%
|
|
|
5.5
|
%
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following describes certain line items set forth in our
consolidated statement 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.
28
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, 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.
The following table presents our historical operating results
for the periods indicated, 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 4, 2009 to
|
|
|
December 30, 2007 to
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
December 30, 2007
|
|
|
December 31, 2006
|
|
|
|
2009(2)
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
295,329
|
|
|
$
|
319,264
|
|
|
$
|
251,587
|
|
|
$
|
(23,935
|
)
|
|
|
(7.5
|
)%
|
|
$
|
67,677
|
|
|
|
26.9
|
%
|
Cost of sales
|
|
|
235,333
|
|
|
|
254,060
|
|
|
|
200,734
|
|
|
|
(18,727
|
)
|
|
|
(7.4
|
)%
|
|
|
53,326
|
|
|
|
26.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
59,996
|
|
|
|
65,204
|
|
|
|
50,853
|
|
|
|
(5,208
|
)
|
|
|
(8.0
|
)%
|
|
|
14,351
|
|
|
|
28.2
|
%
|
Selling, general and administrative expenses
|
|
|
44,005
|
|
|
|
42,792
|
|
|
|
34,296
|
|
|
|
1,213
|
|
|
|
2.8
|
%
|
|
|
8,496
|
|
|
|
24.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
15,991
|
|
|
|
22,412
|
|
|
|
16,557
|
|
|
|
(6,421
|
)
|
|
|
(28.6
|
)%
|
|
|
5,855
|
|
|
|
35.4
|
%
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
1,420
|
|
|
|
3,760
|
|
|
|
3,323
|
|
|
|
(2,340
|
)
|
|
|
(62.2
|
)%
|
|
|
437
|
|
|
|
13.2
|
%
|
Other income, net
|
|
|
445
|
|
|
|
415
|
|
|
|
100
|
|
|
|
30
|
|
|
|
7.2
|
%
|
|
|
315
|
|
|
|
nm
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,865
|
|
|
|
4,175
|
|
|
|
3,423
|
|
|
|
(2,310
|
)
|
|
|
(55.3
|
)%
|
|
|
752
|
|
|
|
22.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
17,856
|
|
|
|
26,587
|
|
|
|
19,980
|
|
|
|
(8,731
|
)
|
|
|
(32.8
|
)%
|
|
|
6,607
|
|
|
|
33.1
|
%
|
Income tax expense
|
|
|
6,226
|
|
|
|
9,128
|
|
|
|
6,916
|
|
|
|
(2,902
|
)
|
|
|
(31.8
|
)%
|
|
|
2,212
|
|
|
|
32.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,630
|
|
|
$
|
17,459
|
|
|
$
|
13,064
|
|
|
$
|
(5,829
|
)
|
|
|
(33.4
|
)%
|
|
$
|
4,395
|
|
|
|
33.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.78
|
|
|
$
|
1.10
|
|
|
$
|
0.79
|
|
|
$
|
(0.32
|
)
|
|
|
(29.1
|
)%
|
|
$
|
0.31
|
|
|
|
39.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.75
|
|
|
$
|
1.04
|
|
|
$
|
0.76
|
|
|
$
|
(0.29
|
)
|
|
|
(27.9
|
)%
|
|
$
|
0.28
|
|
|
|
36.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
nm not meaningful |
|
(2) |
|
Fiscal year consists of 53 weeks |
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.
29
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 rising price
environment for diamonds. Similarly, we believe we are at a
competitive advantage in a declining price environment for
diamonds, as our business model allows us to pass on lower
prices to consumers on a real-time basis more
quickly than traditional retailers. World diamond prices
increased throughout much of 2008, but started to decline late
in the fourth quarter.
Our international sales are defined as products sold through our
U.S., U.K. and Canadian websites and delivered to customers
outside the U.S. 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
total 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 dollar basis, international sales increased in the
fourth quarter of 2008.
We are pleased with the growth in our international sales in
2008 and the long-term opportunities we see in international
markets. However, we believe that the recent tightening of
credit and deterioration of the global economic environment, in
addition to the weakening of many major currencies against the
U.S. dollar, could impact our international sales growth in
the near-term.
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.
While prices for diamonds and precious metals increased for much
of 2008, they began to decline in the latter part of 2008 as a
result of lower demand caused by global economic weakness. We
anticipate that 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, product mix and pricing decisions.
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 under SFAS 123R. 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
30
Ireland fulfillment center in 2007. These increases were
partially offset by a $0.9 million decrease in payroll and
related costs due primarily to lower 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.
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.
Comparison
of Year Ended December 30, 2007 to Year Ended
December 31, 2006
Net
Sales
Net sales increased 26.9% to $319.3 million in the year
ended December 30, 2007 from $251.6 million in the
year ended December 31, 2006. The increase in net sales in
the year ended December 30, 2007 was primarily due to
growth in sales volumes, nearly all due to an increase in the
number of orders shipped to customers and, to a lesser extent,
the average shipment value. International sales totaled
$17.0 million for the year ended December 30, 2007
compared to $8.3 million for the year ended
December 31, 2006, an increase of 104.8% primarily due to
an increase in the number of orders shipped to customers. We
believe our marketing efforts to increase brand awareness, our
transition to local currency on our U.K. and Canadian websites,
and our continued efforts to expand our product selection and
lower our retail prices all contributed to the increased order
volumes for the year ended December 30, 2007.
Gross
Profit
The increase in gross profit in the year ended December 30,
2007 compared to the year ended December 31, 2006 resulted
primarily from increases in net sales volume, as discussed
above. Gross profit as a percentage of net sales was 20.4% in
the year ended December 30, 2007 compared to 20.2% in the
year ended December 31, 2006. The increase in gross profit
as a percentage of net sales was primarily due to volume
increases in the non-engagement jewelry category, which
typically carries a higher gross margin than the engagement
category, partially offset by cost increases of metal components
of our jewelry products that were not fully passed on to our
customers. The engagement category, which includes diamonds and
ring settings, represented approximately 68% of our total net
sales in the year ended December 30, 2007, compared to 70%
in the year ended December 31, 2006.
Selling,
General and Administrative Expenses
The increase in selling, general and administrative expenses in
the year ended December 30, 2007 compared to the year ended
December 31, 2006 was due to several factors. Marketing
costs increased approximately $2.6 million in the year
ended December 30, 2007 compared to the year ended
December 31, 2006, primarily due to increased spending in
online marketing vehicles, such as search, affiliate channels,
online portals and other marketing initiatives to drive higher
sales volumes. Payroll and related costs increased approximately
$2.2 million in the year ended December 30, 2007
compared to the year ended December 31, 2006, due to
additional personnel and increased compensation costs.
Stock-based compensation increased approximately
$1.3 million to $5.6 million compared to the year
ended December 31, 2006, due to the number and fair value
of stock options expensed under SFAS 123R. Credit card
processing fees increased approximately $1.3 million in the
year ended December 30, 2007 compared to the year ended
December 31, 2006,
31
due to the increase in sales volume. The increase in selling,
general and administrative expenses also includes costs related
to the establishment of our new international facility in
Ireland. As a percentage of net sales, selling, general and
administrative expenses were 13.4% and 13.6% in the years ended
December 30, 2007 and December 31, 2006, respectively.
The decrease in selling, general and administrative expenses as
a percentage of net sales in the year ended December 30,
2007 resulted primarily from our ability to leverage our fixed
cost base.
Other
Income, Net
Other income, net consists primarily of interest income. The
increase of $0.4 million in interest income in the year
ended December 30, 2007 compared to the year ended
December 31, 2006 was due to an increase in the average
cash balance partially offset by a decrease in interest rates.
Income
Taxes
The effective income tax rate for the year ended
December 30, 2007 was 34.3% as compared to 34.6% for the
year ended December 31, 2006. The December 30, 2007
effective tax rate reflects a benefit of $0.1 million due
to deferred tax asset adjustments.
Liquidity
and Capital Resources
Since inception, we have funded our operations through cash
generated by operations, the sale of equity securities,
subordinated indebtedness, credit facilities and capital lease
obligations. 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 has had a
significant impact on consumer spending, including the sale of
luxury products such as jewelry. If the current challenging
general economic conditions continue, we believe our revenue,
cash flow from operations and net income will be negatively
impacted and may decline from historical levels.
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 4, 2009, working capital totaled
$7.6 million, consisting of cash and cash equivalents of
$54.5 million, inventory of $18.8 million and other
current assets totaling approximately $3.4 million, offset
by accounts payable of $62.3 million and other current
liabilities totaling approximately $6.8 million. Due to the
seasonal nature of our business, cash and cash equivalents,
inventory and accounts payable are generally higher in the
fourth quarter, resulting in fluctuations in our working capital.
Net cash used in operating activities was $2.9 million in
the year ended January 4, 2009 compared to net cash
provided by operating activities of $41.5 million and
$40.5 million in the fiscal years ended December 30,
2007 and December 31, 2006, respectively. 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 working
capital dynamics of our model associated with the sales decline
in the fourth quarter and the resulting slower than historical
build up of accounts payable and, to a lesser extent, our
decrease in net income of $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. We experience greater cash flow
from operations in our fourth quarter compared to other quarters
due to the significant increase in revenue from our
32
holiday sales. In the first quarter, we typically have a
significant pay down of our accounts payable balance that was
built up during the fourth quarter holiday season. Due to lower
sales volumes in the year ended January 4, 2009,
particularly in our fourth fiscal quarter, we experienced a net
decrease in payables for the year ended January 4, 2009,
compared to a net increase in payables for the year ended
December 30, 2007. Similarly, accrued liabilities decreased
$3 million compared to an increase of $2.2 million in
2007. 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,
decreased to $0.5 million in the year ended January 4,
2009, from $6.8 million in the year ended December 30,
2007 due to the number of options exercised and the change in
the market price of our common stock. These decreases were
partially offset by an increase in working capital from
inventory of $2.1 million for the year ended
January 4, 2009 compared to a net decrease in working
capital from inventory of $6.3 million for the year ended
December 30, 2007.
The increase in cash provided by operating activities in the
year ended December 30, 2007 compared to the year ended
December 31, 2006 was primarily due to cash generated from
net income of $17.5 million, non-cash stock-based
compensation expense of $5.8 million, tax benefits realized
upon the exercise of stock options of $6.8 million, and
growth in accounts payable related to net sales growth and
extended payment terms with our suppliers. These increases were
partially offset by an increase in inventory balances, the
change in deferred income taxes resulting from the utilization
of our tax net operating losses and, to a lesser extent, a
higher accounts receivable balance due to settlement timing
differences at December 30, 2007 compared to
December 31, 2006.
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 and $21.1 million in the
fiscal years ended December 30, 2007 and December 31,
2006, respectively, 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 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. On July 27, 2006, our
board of directors authorized the repurchase of up to
$50 million of our common stock within the
24-month
period following the approval date of such additional
repurchase. This repurchase authorization expired on
July 27, 2008. On February 6, 2008, our board of
directors authorized the repurchase of up to an additional
$100 million of our common stock within the
24-month
period following the approval date of such additional
repurchase. As of January 4, 2009, approximately
$83.5 million remains under this repurchase authorization.
Since the inception of our buyback programs in the first quarter
of 2005 through January 4, 2009, 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 is determined by
management based on our evaluation of market conditions and
other factors. Repurchases may also be made under a
Rule 10b5-1
plan, which would permit shares to be repurchased when we might
otherwise be precluded from doing so under insider trading laws.
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.
33
Net cash used in financing activities in the year ended
December 31, 2006 was $55.0 million relating primarily
to the repurchases of our common stock. In the year ended
December 31, 2006, we purchased approximately
1.8 million shares of our common stock for an aggregate
purchase price of approximately $57.4 million. The cash
used to repurchase shares was partially offset by the proceeds
from stock option exercises and excess tax benefits from stock
option exercises.
The following table summarizes our contractual obligations and
the expected effect on liquidity and cash flows as of
January 4, 2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
Over 5
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Years
|
|
|
Operating leases
|
|
$
|
1,799
|
|
|
$
|
514
|
|
|
$
|
831
|
|
|
$
|
321
|
|
|
$
|
132
|
|
Financing obligation
|
|
|
369
|
|
|
|
59
|
|
|
|
120
|
|
|
|
136
|
|
|
|
54
|
|
Purchase obligations(1)
|
|
|
4,152
|
|
|
|
4,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations(2)
|
|
|
132
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,452
|
|
|
$
|
4,857
|
|
|
$
|
951
|
|
|
$
|
457
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes open merchandise purchase orders at January 4,
2009. |
|
(2) |
|
Includes commitments for advertising and marketing services at
January 4, 2009. |
We believe that our current cash and cash equivalents 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-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 4, 2009, 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 market risk from changes in interest rates. We
maintain the majority of our cash and cash equivalents in
accounts with three major financial institutions in the United
States of America, in the form of demand deposits, money market
accounts and other short-term investments. Deposits in these
institutions may exceed the amounts of insurance provided on
such deposits. To date, we have not experienced any losses on
our deposits of cash and cash equivalents.
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 4, 2009, interest income for the
year would have increased approximately 30.3%, or
$0.4 million. If interest rates had averaged 100 basis
points higher
34
than they did in the year ended December 30, 2007, interest
income for the year would have increased approximately 19.8%, or
$0.7 million.
Foreign
Currency Exchange Risk
The majority of our revenue, expense and capital expenditures
are transacted in U.S. dollars. Commencing in May 2007,
sales transactions through our Canadian and U.K. websites are
denominated in local currency, subjecting us to foreign currency
exchange risk from the transaction date to when the cash is
ultimately converted to U.S. dollars. The impact of foreign
currency exchange was not material to our results of operations
for the fiscal years ended January 4, 2009 and
December 30, 2007. As we continue to expand our
international customers options to transact in their local
currencies, our exposure to foreign exchange risks will increase
in the future.
In addition, the functional currency of Blue Nile Jewellery, Ltd
(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.
35
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Index to
Consolidated Financial Statements
|
|
|
|
|
|
|
Page
|
|
Financial Statements
|
|
|
|
|
|
|
|
37
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
43
|
|
|
|
|
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.
|
|
|
|
|
36
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 4, 2009 and December 30, 2007, and the related
consolidated statements of income, stockholders equity,
and cash flows for each of the three fiscal years in the period
ended January 4, 2009. 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 4, 2009 and
December 30, 2007, and the results of their operations and
their cash flows for each of the three years in the fiscal
period ended January 4, 2009, 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.
As discussed in Note 1 to the consolidated financial
statements, on December 31, 2006, the Company initially
applied the provisions of Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in the Current
Year Financial Statements, and recorded a cumulative effect
adjustment to beginning accumulated deficit in 2006.
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 4, 2009, 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 March 3, 2009, expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 3, 2009
37
BLUE
NILE, INC.
(In thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2009
|
|
|
2007
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,451
|
|
|
$
|
122,793
|
|
Trade accounts receivable
|
|
|
984
|
|
|
|
2,452
|
|
Other accounts receivable
|
|
|
725
|
|
|
|
1,124
|
|
Inventories
|
|
|
18,834
|
|
|
|
20,906
|
|
Deferred income taxes
|
|
|
670
|
|
|
|
799
|
|
Prepaids and other current assets
|
|
|
1,069
|
|
|
|
1,072
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
76,733
|
|
|
|
149,146
|
|
Property and equipment, net
|
|
|
7,558
|
|
|
|
7,601
|
|
Intangible assets, net
|
|
|
271
|
|
|
|
286
|
|
Deferred income taxes
|
|
|
5,014
|
|
|
|
3,489
|
|
Other assets
|
|
|
89
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
89,665
|
|
|
$
|
160,586
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
62,291
|
|
|
$
|
85,866
|
|
Accrued liabilities
|
|
|
6,607
|
|
|
|
9,549
|
|
Current portion of long-term financing obligation
|
|
|
41
|
|
|
|
38
|
|
Current portion of deferred rent
|
|
|
205
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
69,144
|
|
|
|
95,691
|
|
Long-term financing obligation, less current portion
|
|
|
839
|
|
|
|
880
|
|
Deferred rent, less current portion
|
|
|
374
|
|
|
|
538
|
|
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; 19,659 shares and 19,513 shares issued,
respectively; 14,493 shares and 15,973 shares
outstanding, respectively
|
|
|
20
|
|
|
|
20
|
|
Additional paid-in capital
|
|
|
144,913
|
|
|
|
134,207
|
|
Deferred compensation
|
|
|
|
|
|
|
(3
|
)
|
Accumulated other comprehensive income
|
|
|
17
|
|
|
|
75
|
|
Retained earnings
|
|
|
36,199
|
|
|
|
24,569
|
|
Treasury stock, at cost; 5,166 shares and 3,540 shares
outstanding, respectively
|
|
|
(161,841
|
)
|
|
|
(95,391
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
19,308
|
|
|
|
63,477
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
89,665
|
|
|
$
|
160,586
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
38
BLUE
NILE, INC.
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
$
|
295,329
|
|
|
$
|
319,264
|
|
|
$
|
251,587
|
|
Cost of sales
|
|
|
235,333
|
|
|
|
254,060
|
|
|
|
200,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
59,996
|
|
|
|
65,204
|
|
|
|
50,853
|
|
Selling, general and administrative expenses
|
|
|
44,005
|
|
|
|
42,792
|
|
|
|
34,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
15,991
|
|
|
|
22,412
|
|
|
|
16,557
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
1,420
|
|
|
|
3,760
|
|
|
|
3,323
|
|
Other income, net
|
|
|
445
|
|
|
|
415
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
1,865
|
|
|
|
4,175
|
|
|
|
3,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
17,856
|
|
|
|
26,587
|
|
|
|
19,980
|
|
Income tax expense
|
|
|
6,226
|
|
|
|
9,128
|
|
|
|
6,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,630
|
|
|
$
|
17,459
|
|
|
$
|
13,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.78
|
|
|
$
|
1.10
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.75
|
|
|
$
|
1.04
|
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
39
BLUE
NILE, INC.
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Retained Earnings
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred Stock
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Treasury Stock
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit)
|
|
|
Income (Loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
Balance, January 1, 2006
|
|
|
18,646
|
|
|
$
|
19
|
|
|
$
|
106,341
|
|
|
$
|
(480
|
)
|
|
$
|
(6,362
|
)
|
|
$
|
5
|
|
|
|
(1,315
|
)
|
|
$
|
(18,008
|
)
|
|
$
|
81,515
|
|
Adjustment to beginning accumulated deficit (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
408
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,064
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,057
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
2,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,961
|
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
Reversal of deferred compensation relating to cancelled options
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options
|
|
|
425
|
|
|
|
|
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,251
|
|
Issuance of common stock to directors
|
|
|
2
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
4,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,135
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,786
|
)
|
|
|
(57,387
|
)
|
|
|
(57,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 cancelled 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
40
BLUE
NILE, INC.
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,630
|
|
|
$
|
17,459
|
|
|
$
|
13,064
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
(used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,110
|
|
|
|
1,772
|
|
|
|
1,868
|
|
(Gain) loss on disposal of property and equipment
|
|
|
20
|
|
|
|
(8
|
)
|
|
|
5
|
|
Stock-based compensation
|
|
|
7,114
|
|
|
|
5,832
|
|
|
|
4,434
|
|
Deferred income taxes
|
|
|
(1,396
|
)
|
|
|
(1,407
|
)
|
|
|
2,654
|
|
Tax benefit from exercise of stock options
|
|
|
510
|
|
|
|
6,848
|
|
|
|
2,739
|
|
Excess tax benefit from exercise of stock options
|
|
|
(142
|
)
|
|
|
(1,847
|
)
|
|
|
(172
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
1,867
|
|
|
|
(1,935
|
)
|
|
|
236
|
|
Inventories
|
|
|
2,072
|
|
|
|
(6,291
|
)
|
|
|
(2,852
|
)
|
Prepaid expenses and other assets
|
|
|
(21
|
)
|
|
|
(306
|
)
|
|
|
88
|
|
Accounts payable
|
|
|
(23,575
|
)
|
|
|
19,241
|
|
|
|
16,468
|
|
Accrued liabilities
|
|
|
(2,967
|
)
|
|
|
2,234
|
|
|
|
2,194
|
|
Deferred rent and other
|
|
|
(149
|
)
|
|
|
(137
|
)
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(2,927
|
)
|
|
|
41,455
|
|
|
|
40,518
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,010
|
)
|
|
|
(4,897
|
)
|
|
|
(1,908
|
)
|
Proceeds from the sale of property and equipment
|
|
|
10
|
|
|
|
23
|
|
|
|
1
|
|
Purchases of marketable securities
|
|
|
|
|
|
|
(20,230
|
)
|
|
|
(75,030
|
)
|
Proceeds from the sale of marketable securities
|
|
|
|
|
|
|
40,000
|
|
|
|
98,000
|
|
Transfers of restricted cash
|
|
|
|
|
|
|
120
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(2,000
|
)
|
|
|
15,016
|
|
|
|
21,065
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(66,450
|
)
|
|
|
(19,996
|
)
|
|
|
(57,387
|
)
|
Proceeds from stock option exercises
|
|
|
2,989
|
|
|
|
5,875
|
|
|
|
2,251
|
|
Excess tax benefit from exercise of stock options
|
|
|
142
|
|
|
|
1,847
|
|
|
|
172
|
|
Principal payments under long-term financing obligation
|
|
|
(38
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(63,357
|
)
|
|
|
(12,296
|
)
|
|
|
(54,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(58
|
)
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(68,342
|
)
|
|
|
44,253
|
|
|
|
6,619
|
|
Cash and cash equivalents, beginning of period
|
|
|
122,793
|
|
|
|
78,540
|
|
|
|
71,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
54,451
|
|
|
$
|
122,793
|
|
|
$
|
78,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
7,342
|
|
|
$
|
3,894
|
|
|
$
|
325
|
|
Cash paid for interest relating to long-term financing obligation
|
|
$
|
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
42
BLUE
NILE, INC.
|
|
Note 1.
|
Description
of the Company and Summary of Significant Accounting
Policies
|
The
Company
Blue Nile, Inc. (the Company) is a leading online
retailer of high quality diamonds and fine jewelry in the United
States. In addition to sales of diamonds, fine jewelry and
watches, the Company provides 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.
Basis
of Presentation
The accompanying consolidated financial statements include the
accounts of Blue Nile, Inc. and its wholly-owned subsidiaries,
Blue Nile, LLC, Blue Nile Worldwide, Inc. and Blue Nile
Jewellery, Ltd. 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 of
America 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.
Concentration
of Risk
The Company maintains the majority of its cash and cash
equivalents in accounts with three major financial institutions
in the United States of America, in the form of demand deposits,
money market accounts and other short-term investments. Deposits
in these institutions may exceed the amounts of insurance
provided on such deposits. The Company has not experienced any
losses on its deposits of cash and cash equivalents. 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 its revenues to decline. Purchase
concentration by major supply
43
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
vendor in fiscal year 2008 with comparative information for
fiscal years 2007 and 2006, respectively, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
|
Payments
|
|
|
Payments
|
|
|
Payments
|
|
|
Vendor A
|
|
|
9
|
%
|
|
|
8
|
%
|
|
|
9
|
%
|
Vendor B
|
|
|
6
|
%
|
|
|
7
|
%
|
|
|
6
|
%
|
Vendor C
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
The Company considers all highly liquid investments with
maturity of three months or less when purchased to be cash
equivalents.
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 on its websites that are typically not included
in inventory until the Company receives a customer order for
those diamonds. Upon receipt of a customer order, the Company
purchases a specific diamond 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 is 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 internally developed software costs and
website development costs in accordance with the provisions of
Statement of Position
98-1,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use and Emerging Issues Task Force
Issue
No. 00-2,
Accounting for Website Development Costs.
Capitalized costs are amortized on a straight-line basis over
the estimated useful life of the software once it is available
for use.
44
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impairment
of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets,
including property and equipment, 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. The gross carrying amount of these licenses was
$0.4 million as of January 4, 2009 and
December 30, 2007. Accumulated amortization was $162,000
and $130,000 as of January 4, 2009 and December 30,
2007, respectively. Amortization expense was $33,000 in each of
the fiscal years ended January 4, 2009 and
December 30, 2007. Amortization expense is estimated to be
$33,000 in each fiscal year for 2009 and through 2013.
Intangible assets that are not being amortized relate to the
Companys domain names, with total carrying amounts of
$33,000 and $16,000 as of January 4, 2009 and
December 30, 2007, respectively. These assets are tested
for impairment annually and more frequently if certain
circumstances indicate that impairment may have occurred.
Fair
Value of Financial Instruments
The carrying amounts for the Companys cash, 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.
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, products are shipped and the
customer takes delivery and assumes the risk of loss, the
selling price is fixed or determinable and collectability of the
selling price is reasonably assured. The Company evaluates the
criteria outlined in Emerging Issues Task Force
(EITF)
No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent, in determining whether it is appropriate to record
the gross amount of product sales and related costs or the net
amount earned.
The Company requires payment at the point of sale. Amounts
received before the customer assumed the risk of loss are not
recorded as revenue. For sales to U.S., Canadian and U.K.
customers, the Company recognizes revenue when delivery has
occurred. For international sales, other than to Canada and
U.K., revenue is recognized upon shipment. The Company offers a
return policy of generally 30 days and provides
45
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
an allowance for sales returns during the period in which the
sales are made. At January 4, 2009 and December 30,
2007, the reserve for sales returns was $0.8 million and
$1.3 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.
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
$3.0 million, $2.9 million, and $2.8 million in
the fiscal years ended January 4, 2009, December 30,
2007 and December 31, 2006, 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, stock-based compensation, marketing costs and credit
card fees. These expenses also include certain facility related
costs, 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 4, 2009,
December 30, 2007 and December 31, 2006 were
approximately $2.9 million, $2.9 million and
$2.4 million respectively.
The Company has procedures in place to detect and prevent credit
card fraud since 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 $0.1 million in the years ended January 4,
2009 and December 30, 2007.
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 4, 2009, December 30, 2007 and
December 31, 2006 was approximately $12.4 million,
$11.9 million and $9.7 million, respectively.
Stock-Based
Compensation
Effective January 2, 2006, the Company adopted the
provisions of Financial Accounting Standards Board
(FASB) Statement No. 123R (Revised 2007),
Share-Based Payment (SFAS 123R).
The Company
46
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
measures compensation cost for all options granted based on fair
value on the date of the grant, and recognizes compensation
expense over the service period for options 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. See Note 6 for additional details.
Initial
Adoption of Staff Accounting
Bulletin No. 108
At December 31, 2006, the Company applied Staff Accounting
Bulletin No. 108 (SAB 108),
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements, to two errors in the Companys previously
issued financial statements relating to deferred income taxes.
These errors were the result of the understatement of deferred
tax assets related to net operating loss carryforwards and fixed
assets in the aggregate amount of $0.4 million that should
have been recorded in 2003 ($0.4 million) and 2004
($54,000). Based on an analysis of the errors performed in
accordance with SAB 108, the Company has concluded that the
effect of the errors is not material to any of the individual
periods income statements or balance sheets in 2004 and
2005. As such, the Company has recorded the correction as a
cumulative effect adjustment to the fiscal year 2006 beginning
accumulated deficit, as follows (in thousands):
|
|
|
|
|
Accumulated deficit, January 2, 2006, as reported
|
|
$
|
(6,362
|
)
|
Cumulative effect adjustment
|
|
|
408
|
|
|
|
|
|
|
Accumulated deficit, January 2, 2006, as restated
|
|
$
|
(5,954
|
)
|
|
|
|
|
|
Foreign
Currency Translation
The assets and liabilities of Jewellery have been translated to
U.S. dollars using the exchange rates effective on the
balance sheet date, 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).
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standard (SFAS) No. 157, Fair
Value Measurements (SFAS 157).
SFAS 157 establishes a common definition for fair value,
establishes a framework for measuring fair value, and expands
disclosure about such fair value measurements. For financial
assets and liabilities, SFAS 157 was effective for fiscal
years beginning after November 15, 2007, and interim
periods within those fiscal years. In February 2008, the FASB
issued FASB Staff Position
FAS 157-2
(FSP
FAS 157-2),
delaying the effective date of SFAS 157 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. For these items,
SFAS 157 will go into effect in fiscal years beginning
after November 15, 2008.
The adoption of SFAS 157 for financial assets in the first
quarter of 2008 did not have a material impact on our
consolidated results of operations or financial condition. The
Company will adopt the SFAS 157 provisions for nonfinancial
assets in the first quarter of 2009, in accordance with FSP
FAS 157-2,
and the Company does not expect this statement to have a
material impact on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
permits all entities to elect to measure certain financial
instruments and other items at fair value with changes in fair
value reported in earnings. The Company adopted SFAS 159 in
the first quarter of 2008 and there was no material impact on
its consolidated results of operations or financial condition.
47
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In April 2008, the FASB issued FSP
FAS 142-3,
Determination of the Useful Life of Intangible
Assets (FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets.
FSP
FAS 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008. Early adoption is
prohibited. The Company does not expect the adoption of FSP
FAS 142-3
to have a material impact on its consolidated financial
statements.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2009
|
|
|
2007
|
|
|
Loose diamonds
|
|
$
|
695
|
|
|
$
|
690
|
|
Fine jewelry, watches and other
|
|
|
18,139
|
|
|
|
20,216
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,834
|
|
|
$
|
20,906
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3.
|
Property
and Equipment
|
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
|
2009
|
|
|
2007
|
|
|
Computers and equipment
|
|
$
|
3,823
|
|
|
$
|
4,770
|
|
Software and website development
|
|
|
7,040
|
|
|
|
6,225
|
|
Leasehold improvements
|
|
|
5,443
|
|
|
|
5,312
|
|
Furniture and fixtures
|
|
|
774
|
|
|
|
753
|
|
Building
|
|
|
940
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,020
|
|
|
|
18,000
|
|
Less: accumulated depreciation
|
|
|
(10,462
|
)
|
|
|
(10,399
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
7,558
|
|
|
$
|
7,601
|
|
|
|
|
|
|
|
|
|
|
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 $2.1 million and $1.4 million of
unamortized computer software and website development costs at
January 4, 2009 and December 30, 2007, respectively.
Total depreciation expense was $2.1 million,
$1.8 million and $1.9 million in the years ended
January 4, 2009, December 30, 2007 and
December 31, 2006, respectively. Of this amount,
depreciation and amortization of capitalized software and
website development costs was $0.7 million,
$0.6 million and $0.7 million in the years ended
January 4, 2009, December 30, 2007 and
December 31, 2006, 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
48
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 4, 2009 and December 30, 2007, the deferred
rent balance related to lease incentives was $0.5 million
and $0.7 million, respectively.
During 2007, the Company made tenant improvements to its
U.S. fulfillment center. In accordance with EITF Issue
No. 97-10,
The Effect of Lessee Involvement in Asset
Construction, 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 in accordance with
SFAS No. 98, Accounting for Leases.
Future minimum lease payments at January 4, 2009 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Financing
|
|
|
Operating
|
|
|
|
Obligation
|
|
|
Leases
|
|
|
2009
|
|
$
|
59
|
|
|
$
|
514
|
|
2010
|
|
|
59
|
|
|
|
514
|
|
2011
|
|
|
61
|
|
|
|
317
|
|
2012
|
|
|
68
|
|
|
|
162
|
|
2013
|
|
|
68
|
|
|
|
159
|
|
Thereafter
|
|
|
54
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
369
|
|
|
$
|
1,799
|
|
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
305
|
|
|
|
|
|
Residual value
|
|
|
575
|
|
|
|
|
|
Less: current maturities
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term financing obligation less current maturities
|
|
$
|
839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 4, 2009 and December 30, 2007, assets
under the long-term financing obligation amounted to
$0.9 million, net of accumulated depreciation of $71,000
and $70,000 at January 4, 2009 and December 30, 2007,
respectively. Such assets are classified within property and
equipment, net, in the accompanying balance sheet. 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 4,
2009, December 30, 2007 and December 31, 2006.
Litigation
In October 2008, Landmark Technology, LLC filed a complaint
against the Company and several other defendants in the United
States District Court for the Eastern District of Texas. The
complaint alleges that our website infringes on three of its
patents, each of which claims business methods for Internet
sales and financial transactions, and seeks injunctive relief,
monetary damages, and enhanced damages and attorneys fees
for alleged willful infringement. We dispute the allegations of
wrongdoing and intend to vigorously defend ourselves in the
matter.
In the ordinary course of business, the Company may be subject
from time to time to various other proceedings, lawsuits,
disputes or claims.
49
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 three years and expire 10 years from the date
of grant. Options granted under the 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 4,
2009, the Company reserved 4,025,247 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 from the date of grant with the
remainder vesting monthly over three years, and generally expire
10 years from the date of grant. Options granted under the
2004 Plan are granted at fair value on the date of the grant.
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 4, 2009, the Company reserved 374,214 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 49,500 options granted
under this plan in the year ended January 4, 2009.
Employee
Stock Purchase Plans
In April 2004, the Company adopted the 2004 Employee Stock
Purchase Plan (the Purchase Plan). As of
January 4, 2009, 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 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 are approved by the board of directors.
The Purchase Plan is intended to qualify as an
50
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code. As of
January 4, 2009, 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 in accordance with the provisions of
SFAS 123R and EITF Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
(EITF 96-18).
EITF 96-18
requires that such equity instruments be recorded at their fair
value on the measurement date.
Stock-Based
Compensation Expense
Effective January 2, 2006, the Company adopted the
provisions of SFAS 123R using the modified-prospective
transition method for all stock options issued after becoming a
public company. SFAS 123R requires measurement of
compensation cost for all options granted based on fair value on
the date of grant and recognition of compensation expense over
the service period for those options expected to vest.
Stock-based compensation expense recorded for the years ended
January 4, 2009, December 30, 2007 and
December 31, 2006 include the estimated expense for stock
options granted on or subsequent to January 2, 2006, based
on the grant date fair value estimated in accordance with the
provisions of SFAS 123R, and the estimated expense for the
portion vesting in the period for options granted between
March 11, 2004 (the date on which the Company was
considered to be a public company for accounting purposes) and
January 2, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123.
Options granted prior to March 11, 2004 have been accounted
for using the prospective transition method, which requires that
those options continue to be accounted for under Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees (APB
25) and related interpretations including FASB
Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of
APB Opinion No. 25. Under APB 25, compensation
expense was recognized for the difference between the market
price of the Companys stock on the date of grant and the
exercise price of the stock option. As prescribed under the
modified-prospective and prospective transition methods, results
for the prior periods have not been restated.
Prior to the adoption of SFAS 123R, the Company presented
all tax benefits resulting from the exercise of stock options as
operating cash inflows in the consolidated statements of cash
flows, in accordance with the provisions of EITF Issue
No. 00-15,
Classification in the Statement of Cash Flows of the
Income Tax Benefit Received by a Company Upon Exercise of a
Nonqualified Employee Stock Option. The tax benefits
resulting from the exercise of stock options granted prior to
March 11, 2004 will continue to be reported as operating
cash inflows in accordance with the prospective transition
method. SFAS 123R requires the benefits of tax deductions
in excess of the compensation cost recognized for those options
granted on or subsequent to March 11, 2004 to be classified
as financing cash inflows rather than operating cash inflows, on
a prospective basis. This amount is shown as Excess tax
benefit from exercise of stock options on the consolidated
statement of cash flows and amounted to $0.1 million,
$1.8 million and $0.2 million for the years ended
January 4, 2009, December 30, 2007 and
December 31, 2006, respectively.
During the years ended January 2, 2005 and
December 31, 2003, the Company issued options to certain
employees under the 1999 Plan with exercise prices which the
board of directors, in good faith, determined to be equal to the
fair market value of the Companys common stock but which
were subsequently determined, for accounting purposes, to be
less than the fair market value of the Companys common
stock at the date of grant. In accordance with the requirements
of APB 25, the Company has recorded deferred stock-based
compensation for the difference between the exercise price of
the stock option and the subsequently determined fair market
value of the Companys stock at the grant date. In the
years ended January 2, 2005 and December 31, 2003, the
Company recorded deferred stock-based compensation of
$0.2 million and $1.4 million, respectively, related
to these options. This amount was amortized over the vesting
period of the awards. Deferred stock-based
51
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensation was fully amortized as of January 4, 2009. The
Company recorded compensation expense of $.003 million,
$0.2 million and $0.3 million during the years ended
January 4, 2009, December 30, 2007 and
December 31, 2006, respectively related to the amortization
of deferred stock-based compensation.
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. The
Company recognizes compensation expense on a straight-line basis
over the requisite service period for each stock option grant,
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 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
Stock option expense in selling, general and administrative
expenses
|
|
$
|
6,905
|
|
|
$
|
5,621
|
|
|
$
|
4,257
|
|
Stock option expense in cost of sales
|
|
|
79
|
|
|
|
114
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock option expense on the consolidated statement of
operations
|
|
$
|
6,984
|
|
|
$
|
5,735
|
|
|
$
|
4,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total related tax benefit
|
|
$
|
2,437
|
|
|
$
|
1,967
|
|
|
$
|
1,501
|
|
Stock-based compensation capitalized
|
|
$
|
96
|
|
|
$
|
79
|
|
|
$
|
64
|
|
Stock-based compensation capitalized is included in property and
equipment, net, on the consolidated balance sheets as a
component of the cost capitalized for the development of
software for internal use.
The fair value of the stock options was estimated at the grant
date with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
Expected term
|
|
|
4.0 years
|
|
|
|
4.5 years
|
|
|
|
4.5 years
|
|
Expected volatility
|
|
|
48.1
|
%
|
|
|
37.1
|
%
|
|
|
36.0
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free interest rate
|
|
|
2.5
|
%
|
|
|
4.3
|
%
|
|
|
5.0
|
%
|
Estimated weighted average fair value per option granted
|
|
$
|
17.23
|
|
|
$
|
29.26
|
|
|
$
|
11.86
|
|
|
|
|
|
|
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.
|
52
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes all stock option transactions from
January 1, 2006, through January 4, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Total
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance, January 1, 2006
|
|
|
2,095
|
|
|
$
|
15.84
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
585
|
|
|
|
31.49
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(425
|
)
|
|
|
5.30
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(69
|
)
|
|
|
26.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
6.88
|
|
|
$
|
8,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at January 4, 2009
|
|
|
2,084
|
|
|
$
|
33.14
|
|
|
|
6.73
|
|
|
$
|
8,772
|
|
Exercisable at January 4, 2009
|
|
|
1,406
|
|
|
$
|
26.37
|
|
|
|
5.78
|
|
|
$
|
8,770
|
|
The aggregate intrinsic value in the table above is before
applicable income taxes and represents the amount optionees
would have received if all options had been exercised on the
last business day of the period indicated, based on the
Companys closing stock price. Options granted during the
years ended January 4, 2009, December 30, 2007 and
December 31, 2006 have a weighted average grant date fair
value of $17.23, $29.26 and $11.86, respectively. Options
granted in the years ended January 4, 2009,
December 30, 2007 and December 31, 2006 were granted
with exercise prices equal to the market value on the date of
grant.
53
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total intrinsic value of options exercised was
$3.3 million, $22.6 million and $12.1 million in
the years ended January 4, 2009, December 30, 2007 and
December 31, 2006, respectively. As of January 4,
2009, the Company had total unrecognized compensation costs
related to unvested stock options of $12.9 million, before
income taxes. The Company expects to recognize this cost over a
weighted average period of 2.7 years. During the years
ended January 4, 2009, December 30, 2007 and
December 31, 2006, the total fair value of options vested
was $6.6 million, $5.8 million and $4.3 million,
respectively. The unrecognized compensation cost related to
stock options granted subsequent to March 11, 2004 will be
adjusted for any future changes in the rate of estimated
forfeitures. The unrecognized compensation cost related to stock
options granted prior to March 11, 2004 and accounted for
under the prospective application method will be adjusted for
actual forfeitures as they occur. The following table summarizes
information about stock options outstanding at January 4,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Weighted Average
|
|
Range of Exercise Price
|
|
Options
|
|
|
Life
|
|
|
Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
$0.25 - $26.02
|
|
|
463
|
|
|
|
4.25
|
|
|
$
|
5.97
|
|
|
|
438
|
|
|
$
|
4.84
|
|
$26.32 - $31.26
|
|
|
762
|
|
|
|
6.60
|
|
|
|
30.65
|
|
|
|
600
|
|
|
|
30.51
|
|
$31.43 - $41.13
|
|
|
502
|
|
|
|
7.53
|
|
|
|
35.93
|
|
|
|
268
|
|
|
|
33.27
|
|
$41.63 - $83.81
|
|
|
562
|
|
|
|
8.81
|
|
|
|
61.31
|
|
|
|
100
|
|
|
|
77.18
|
|
$84.42 - $99.98
|
|
|
1
|
|
|
|
8.72
|
|
|
|
90.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,290
|
|
|
|
6.88
|
|
|
|
34.38
|
|
|
|
1,406
|
|
|
|
26.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. This
repurchase program expired on February 2, 2008. 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. This repurchase authorization expired on
July 27, 2008. On February 6, 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 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. In the year ended
December 31, 2006, the Company repurchased 1.8 million
shares of the Companys common stock for an aggregate
purchase price of approximately $57.4 million.
As of January 4, 2009 the Company has $83.5 million
remaining under the share repurchase authorization.
|
|
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 for the year ended
January 4, 2009 and $0.1 million for the years ended
December 30, 2007 and December 31, 2006.
54
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The expense (benefit) for income taxes consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
Current income tax expense
|
|
|
7,112
|
|
|
|
3,685
|
|
|
|
1,389
|
|
Tax benefit from stock option exercises recorded in equity
|
|
|
510
|
|
|
|
6,848
|
|
|
|
2,961
|
|
Deferred income tax (benefit) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilization of net operating loss
|
|
|
|
|
|
|
|
|
|
|
3,008
|
|
Other, net
|
|
|
(1,396
|
)
|
|
|
(1,405
|
)
|
|
|
(442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
|
6,226
|
|
|
|
9,128
|
|
|
|
6,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(0.1
|
)%
|
|
|
(0.7
|
)%
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
34.9
|
%
|
|
|
34.3
|
%
|
|
|
34.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 4,
|
|
|
December 30,
|
|
|
|
2009
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Reserves and allowances
|
|
$
|
388
|
|
|
$
|
544
|
|
Deferred rent
|
|
|
72
|
|
|
|
78
|
|
Other
|
|
|
210
|
|
|
|
177
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
4,962
|
|
|
|
2,800
|
|
Excess of book over tax depreciation and amortization
|
|
|
|
|
|
|
439
|
|
Deferred rent
|
|
|
131
|
|
|
|
188
|
|
Financing obligation
|
|
|
294
|
|
|
|
308
|
|
Other
|
|
|
43
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
6,100
|
|
|
|
4,593
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Leased building
|
|
|
(304
|
)
|
|
|
(305
|
)
|
Excess of book over tax depreciation and amortization
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(416
|
)
|
|
|
(305
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
5,684
|
|
|
$
|
4,288
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2006, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$8.4 million. The net operating loss carryforwards were fully
utilized during the year ended
55
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2006. Income taxes payable at January 4,
2009 and December 30, 2007 were $0.6 million and
$0.9 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 4, 2009,
unremitted earnings of foreign subsidiaries were approximately
$202,000. The amount of unrecognized deferred tax liability
associated with these unremitted earnings is approximately
$37,000. 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.
Effective January 1, 2007, the Company adopted the
provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48),
which prescribes how a company should recognize, measure,
present and disclose in its financial statements uncertain tax
positions that the company has taken or expects to take on a tax
return.
The Company is no longer subject to U.S. federal income tax
examinations by tax authorities for years before 2005. The
Company recognizes interest and penalties related to
unrecognized tax benefits, if incurred, in the Companys
provision for income taxes. The Company has evaluated material
tax positions taken on all open years and has concluded that
material tax positions meet the more likely than not
test as set forth in FIN 48. As such, no liability for
unrecognized tax benefits is considered necessary and no
interest or penalties have been accrued.
The tax benefit realized for the tax deduction from stock option
exercises totaled $0.9 million, $7.5 million and
$3.0 million for the years ended January 4, 2009,
December 30, 2007 and December 31, 2006, 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
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 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
11,630
|
|
|
$
|
17,459
|
|
|
$
|
13,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
14,925
|
|
|
|
15,919
|
|
|
|
16,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.78
|
|
|
$
|
1.10
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
580
|
|
|
|
895
|
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and common stock equivalents
|
|
|
15,505
|
|
|
|
16,814
|
|
|
|
17,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.75
|
|
|
$
|
1.04
|
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
Stock options
|
|
|
606
|
|
|
|
112
|
|
|
|
1,159
|
|
|
|
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. Net sales were attributed on the
basis of the country to which the product was shipped. Revenue
from individual foreign countries was not material for
disclosure.
The tables below represent information by geographic area (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
Net sales to external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
267,670
|
|
|
$
|
302,230
|
|
|
$
|
243,270
|
|
Other countries
|
|
|
27,659
|
|
|
|
17,034
|
|
|
|
8,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
295,329
|
|
|
$
|
319,264
|
|
|
$
|
251,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 4,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,148
|
|
|
$
|
7,075
|
|
|
$
|
3,391
|
|
Other countries
|
|
|
410
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,558
|
|
|
$
|
7,601
|
|
|
$
|
3,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
BLUE
NILE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 12.
|
Selected
Quarterly Financial Information (unaudited)
|
Summarized quarterly financial information for fiscal years 2008
and 2007 is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
67,910
|
|
|
$
|
72,093
|
|
|
$
|
67,355
|
|
|
$
|
111,906
|
|
Gross profit
|
|
|
13,249
|
|
|
|
14,943
|
|
|
|
13,357
|
|
|
|
23,655
|
|
Net income
|
|
|
3,163
|
|
|
|
3,781
|
|
|
|
2,972
|
|
|
|
7,543
|
|
Basic net income per share
|
|
|
0.20
|
|
|
|
0.24
|
|
|
|
0.19
|
|
|
|
0.47
|
|
Diluted net income per share
|
|
|
0.19
|
|
|
|
0.23
|
|
|
|
0.18
|
|
|
|
0.45
|
|
58
BLUE
NILE, INC.
SCHEDULE II
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)
|
|
|
Year ended January 4, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for sales returns
|
|
$
|
1,281
|
|
|
$
|
28,383
|
|
|
$
|
(28,836
|
)
|
|
$
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for fraud
|
|
$
|
130
|
|
|
$
|
20
|
|
|
$
|
(50
|
)
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for sales returns
|
|
$
|
1,179
|
|
|
$
|
26,743
|
|
|
$
|
(26,641
|
)
|
|
$
|
1,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for fraud
|
|
$
|
105
|
|
|
$
|
118
|
|
|
$
|
(93
|
)
|
|
$
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for sales returns
|
|
$
|
976
|
|
|
$
|
19,893
|
|
|
$
|
(19,690
|
)
|
|
$
|
1,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for fraud
|
|
$
|
151
|
|
|
$
|
(22
|
)
|
|
$
|
(24
|
)
|
|
$
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
Securities and Exchange Commission (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 include 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 4, 2009,
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 4, 2009.
Deloitte & Touche LLP, an independent registered
public accounting firm, has audited the effectiveness of our
internal control over financial reporting as of January 4,
2009, 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 4, 2009, 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 4, 2009, 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
accounting principles generally accepted in the United States of
America. 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 accounting principles generally
accepted in the United States of America, 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 4, 2009, 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 4, 2009 of
the Company and our report dated March 3, 2009 expressed an
unqualified opinion on those financial statements and financial
statement schedule and includes an explanatory paragraph
regarding the Companys application of Staff Accounting
Bulletin No, 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in the Current Year
Financial Statements.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 3, 2009
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 2009 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 2009
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 2009 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 2009 Annual Meeting of
Stockholders under the captions Compensation of Executive
Officers, Compensation Committee Interlocks and
Insider Participation, Report of the Compensation
Committee of the Board of Directors 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 2009 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 2009 Annual Meeting of
Stockholders under the caption 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 2009 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:
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
2.
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
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: March 4, 2009
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)
|
|
March 3, 2009
|
|
|
|
|
|
By
|
|
/s/ Marc
D. Stolzman
Marc
D. Stolzman, Chief Financial Officer
(Principal Accounting and Financial Officer)
|
|
March 4, 2009
|
|
|
|
|
|
By
|
|
/s/ Mark
C. Vadon
Mark
C. Vadon, Executive Chairman and Director
|
|
March 3, 2009
|
|
|
|
|
|
By
|
|
/s/ W.
Eric Carlborg
W.
Eric Carlborg, Director
|
|
March 2, 2009
|
|
|
|
|
|
By
|
|
/s/ Leslie
Lane
Leslie
Lane, Director
|
|
March 2, 2009
|
|
|
|
|
|
By
|
|
/s/ Ned
Mansour
Ned
Mansour, Director
|
|
February 26, 2009
|
64
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Michael
Potter
Michael
Potter, Director
|
|
March 2, 2009
|
|
|
|
|
|
By
|
|
/s/ Steve
Scheid
Steve
Scheid, Director
|
|
March 2, 2009
|
|
|
|
|
|
By
|
|
/s/ Mary
Alice Taylor
Mary
Alice Taylor, Director
|
|
March 4, 2009
|
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.
|
3.3(3)
|
|
Amendment to the Bylaws of Blue Nile, Inc.
|
4.1
|
|
Reference is made to Exhibits 3.1, and 3.2 and 3.3.
|
4.2(4)
|
|
Specimen Stock Certificate.
|
4.3(2)
|
|
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(2)*
|
|
Blue Nile, Inc. Amended and Restated 1999 Equity Incentive Plan.
|
10.1.2(2)*
|
|
Form of Stock Option Agreement pursuant to the Blue Nile, Inc.
1999 Equity Incentive Plan.
|
10.2.1(12)*
|
|
Third Amended and Restated 2004 Non-Employee Directors
Stock Option Plan.
|
10.2.2(7)*
|
|
Form of Stock Option Agreement pursuant to the Blue Nile, Inc.
2004 Non-Employee Directors Stock Option Plan.
|
10.2.3(13)*
|
|
Third Amended and Restated 2004 Non-Employee Directors
Stock Option Plan.
|
10.3(2)*
|
|
Blue Nile, Inc. 2004 Employee Stock Purchase Plan.
|
10.4.1(5)*
|
|
Blue Nile, Inc. 2004 Equity Incentive Plan.
|
10.4.2(7)*
|
|
Form of Stock Option Agreement pursuant to the 2004 Equity
Incentive Plan.
|
10.4.3(6)*
|
|
Blue Nile, Inc. Stock Grant Notice pursuant to the 2004 Equity
Incentive Plan.
|
10.4.4(14)*
|
|
Form of Restricted Stock Unit Grant Notice and Form of Award
Agreement under the Blue Nile, Inc. 2004 Equity Incentive Plan.
|
10.5.1(5)
|
|
Sublease Agreement, dated May 22, 2003, between Amazon.com
Holdings, Inc. and the registrant.
|
10.5.2(5)
|
|
First Amendment to Sublease Agreement, dated July 3, 2003,
between Amazon.com Holdings, Inc. and the registrant.
|
10.6.1(5)
|
|
Lease, dated June 28, 2001, between Gull Industries, Inc. and
the registrant.
|
10.6.2(5)
|
|
First Amendment to Lease, dated December 11, 2002 between Gull
Industries, Inc. and the registrant.
|
10.6.3(5)
|
|
Second Amendment to Lease, dated November 15, 2003, between Gull
Industries, Inc. and the registrant.
|
10.7(9)
|
|
Commercial lease, dated July 21, 2006, between Gull Industries,
Inc. and the registrant.
|
10.8(11)*
|
|
Offer Letter with Diane M. Irvine, dated December 1, 1999.
|
10.9(2)*
|
|
Offer Letter with Dwight Gaston, dated May 14, 1999.
|
10.10(2)*
|
|
Offer Letter with Susan S. Bell, dated August 22, 2001.
|
10.11(10)*
|
|
Offer Letter with Marc Stolzman, dated May 2, 2008.
|
10.12(14)*
|
|
Offer Letter with Marianne Marck, dated January 9, 2009.
|
10.13(5)*
|
|
Form of Indemnity Agreement entered into between Blue Nile, Inc.
and each of its directors and executive officers.
|
10.14.1(8)*
|
|
Blue Nile, Inc. 2008 Executive Officer Cash Incentive Program.
|
10.14.2(13)*
|
|
Amendment to the Blue Nile, Inc. 2008 Executive Officer Cash
Incentive Plan.
|
10.15(15)*
|
|
Compensation Arrangements with the registrants Chief
Executive Officer and Executive Chairman
|
10.16(14)*
|
|
Director Compensation
|
66
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
10.17(16)*
|
|
Severance Agreement with Robin Easton, dated March 18, 2008
|
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(17)
|
|
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(17)
|
|
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 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. |
|
(3) |
|
Previously filed as Exhibit 3.2 to Blue Nile, Inc.s
Current Report on
Form 8-K
(No. 000-50763),
as filed with the Securities and Exchange Commission on
February 7, 2008, and incorporated by reference herein. |
|
(4) |
|
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. |
|
(5) |
|
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. |
|
(6) |
|
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. |
|
(7) |
|
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. |
|
(8) |
|
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
May 19, 2008, 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
July 27, 2006, and incorporated by reference herein. |
|
(10) |
|
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. |
|
(11) |
|
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
|
|
|
(12) |
|
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. |
|
(13) |
|
Previously filed as Exhibit 10.2 to Blue Nile, Inc.s
Quarterly Report on
Form 10-Q
(No. 000-05763)
as filed with the Securities and Exchange Commission on
November 7, 2008 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) |
|
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
March 24, 2008, and incorporated by reference herein. |
|
(17) |
|
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. |
68