Blue Nile Announces Second Quarter 2009 Financial Results

Blue Nile, Inc. (Nasdaq:NILE), the leading online retailer of diamonds and fine jewelry, today reported financial results for its second quarter ended July 5, 2009.

Net sales totaled $69.9 million, a decline of 5.2% from the second quarter of 2008. This represents a significant improvement in sales trends compared to the declines of 11.4% and 23.3% for the first quarter of 2009 and fourth quarter of 2008, respectively. Operating income for the quarter totaled $4.3 million compared to $4.4 million in the second quarter last year. Operating margin expanded 30 basis points to 6.2% of net sales compared to 5.9% of sales in the second quarter of 2008. Net income totaled $2.8 million, or $0.19 per diluted share compared to $0.20 per diluted share in the second quarter of 2008.

Non-GAAP adjusted EBITDA for the second quarter totaled $6.8 million, an increase from the prior year and a record level outside of any fourth quarter in the Company’s history. Non-GAAP adjusted EBITDA improved to 9.8% of net sales compared to 9.2% in the second quarter of 2008. Net cash provided by operating activities totaled $25.1 million for the trailing twelve month period ended July 5, 2009. Non-GAAP free cash flow for the quarter ended July 5, 2009 increased to $14.9 million from $3.9 million a year ago. Non-GAAP free cash flow was $22.8 million for the trailing twelve month period ended July 5, 2009.

"Blue Nile delivered excellent financial results in a challenging retail environment, with strong profitability and market share gains,” said Diane Irvine, Chief Executive Officer. "We are managing with focus and discipline throughout the business, enabling us to drive a record level of adjusted EBITDA for a non-holiday quarter. Our financial performance reflects the way in which the Blue Nile brand and our compelling value proposition are resonating with consumers.”

Selected Financial Highlights

• Gross profit for the quarter totaled $15.0 million. As a percent of sales, gross profit improved 100 basis points to 21.5% compared to 20.5% for the second quarter of 2008. The improvement in gross profit margin is primarily related to improved product costs as well as our ability to capture the benefit of a declining diamond price environment.
• Selling, general and administrative expenses for the quarter were $10.7 million, compared to $10.8 million in the second quarter of 2008. Selling, general and administrative expenses include stock-based compensation expense of $1.9 million, equal to the second quarter of 2008.
• Net income per diluted share includes stock-based compensation expense of $0.08 for the second quarter of both 2009 and 2008.
• International sales totaled $7.1 million in the quarter, a decrease of 12.3% from the second quarter of 2008. This decrease was driven almost entirely by foreign currency impact due to the stronger U.S. Dollar versus last year. Excluding the impact from changes in foreign exchange rates, international sales declined 1.2%. We also experienced continued economic weakness in key markets, particularly the U.K.
• Cash and cash equivalents at the end of the second quarter totaled $48.0 million compared to $47.2 million at the end of the second quarter last year and $32.3 million at the end of the first quarter of 2009.
• Inventories were $15.7 million at July 5, 2009, a decline of 6.3% from the end of the second quarter of 2008.

Financial Guidance

"The second quarter marked continued improvement in year-over-year sales trends. For the balance of the year, we anticipate further improvement in sales. For Q3, we expect sales will be flat to slightly down compared to last year,” said Marc Stolzman, Chief Financial Officer. "We are projecting full year net sales between $288 million and $295 million, and diluted EPS in the range of $0.78 to $0.82.”

Forward-Looking Statements

This press release contains forward-looking statements that include risks and uncertainties, including, without limitation, all statements related to future financial and business performance, market opportunity and plans to grow our business. Words such as "expect,” "anticipate,” "believe,” "project,” "will” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon our current expectations. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, risks related to general economic conditions, our fluctuating operating results, seasonality in our business, our ability to acquire products on reasonable terms, our online business model, demand for our products, our ability to attract customers in a cost effective manner, the strength of our brand, competition, fraud, system interruptions, our ability to fulfill orders and other risks detailed in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended January 4, 2009. Additional information will also be set forth in our Quarterly Report on Form 10-Q for the quarter ended July 5, 2009, which we expect to file with the Securities and Exchange Commission on or before August 14, 2009. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. All forward-looking statements are qualified in their entirety by this cautionary statement, and Blue Nile undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date hereof.

Conference Call

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

Non-GAAP Financial Measures

To supplement Blue Nile’s consolidated financial statements presented in accordance with generally accepted accounting principles ("GAAP”), Blue Nile uses non-GAAP adjusted EBITDA and non-GAAP free cash flow as measures of certain components of financial performance. Blue Nile defines non-GAAP adjusted EBITDA as earnings before interest and other income, taxes, depreciation and amortization, adjusted to exclude the effects of stock-based compensation expense. Blue Nile defines non-GAAP free cash flow as net cash provided by (used in) operating activities less cash outflows for purchases of fixed assets, including internal use software and website development. The Company reports sales information in accordance with GAAP. Internally, management monitors its sales performance on a non-GAAP basis that eliminates the positive or negative effects that result from translating international sales into U.S. dollars (the "constant exchange rate basis”). Blue Nile’s management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors should also note that the non-GAAP financial measures used by Blue Nile may not be the same non-GAAP financial measures, and may not be calculated in the same manner, as that of other companies. Whenever Blue Nile uses such non-GAAP financial measures, it provides a reconciliation of non-GAAP financial measures to the most closely applicable GAAP financial measures. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

Blue Nile’s management believes that non-GAAP adjusted EBITDA and non-GAAP free cash flow, as defined, as well as international sales on a constant exchange rate basis provide meaningful supplemental information to the company and to investors. Blue Nile believes that both management and investors benefit from referring to these non-GAAP measures in assessing the performance of Blue Nile and when planning and forecasting future periods. Further, management believes that the inclusion of the non-GAAP adjusted EBITDA and non-GAAP free cash flow calculations provide consistency in Blue Nile’s financial reporting and comparability with similar companies in Blue Nile’s industry. Management believes the constant exchange rate measurement provides a more representative assessment of the sales performance and provides better comparability between reporting periods.

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

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

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

About Blue Nile, Inc.

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