Blue Nile Earnings Call Nuggets: Diamond Pricing and Expectations for Non-Engagement

Blue Nile, Inc. (NASDAQ:NILE) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Diamond Pricing

Andrew Ruud – Morgan Stanley: The first one I wanted to ask was just around diamond pricing and what sort of assumptions going to your guidance for the full year 2013 specifically towards the upper-end of the range, are you assuming that there’s a subsequent decrease in diamond pricing? I mean, if you kind of dissect the guidance a little bit, which parts of your business are you really looking to see acceleration in the coming year?

Harvey Kanter – CEO and President: Andrew, it’s Harvey Kanter. Two answers to your two different questions. Relative to diamond prices we basically seen moderation and we expect some small movement increase in prices, but we don’t necessarily build any expectation beyond that materially lower prices and materially higher prices and that’s part of our guidance. Then with respect to the other half of your question. We continue to have an expectation to see a significant growth opportunities in the engagement category which is our core business, but as you might expect a greater growth as a percent of sales in the non-engagement business and hopefully we’ve steered a little bit of that direction and insight into the categories where we see greater opportunity or not as great opportunity in our opening comments.

Expectations for Non-Engagement

David Wu – Telsey Advisory Group: Just first on your first quarter guidance assumes some level of op margin improvement and I’m just wondering if that’s really just driven by your expectations for non-engagement to pick up.

David Binder – CFO: As we are coming out of 2012 and into 2013 we’ve got some core improvements in our margin rates broadly across categories both engagement and non-engagement, and that was the trajectory that we had planned the business to be and coming out of, a deeper investment in price in 2012, and so the guidance going into the first quarter this year really reflects the current trends we’re seen in the business leading up to Valentine’s Day which is our second largest holiday we have of the year. And the plans we have to operate product pricing and our margin rates for the remainder of 2013.

David Wu – Telsey Advisory Group: Just secondly on non-engagement could you elaborate on your key learning’s from the new merchandise mix and sort of what you plan to do to drive better traction there and can you talk about some of your marketing initiatives in non-engagement and how you plan sort of communicate the new merchandise and reach that female self-purchaser?

Harvey Kanter – CEO and President: Sure, this is Harvey. I would answer the question with three kind of broad statements. One, our biggest learning is really how far that at least our current customer we can move in terms of the level of fashion in the mix. We explored a pretty broad range, and I would tell you that it was relatively broad in assortment and also not as deep in its offer. So, ultimately the good news is our inventory is really well aligned to our year-end and the opportunity to accelerate some of those things that really worked was at some level not maximized because we didn’t invest as deeply and then conversely the products that didn’t sell as well for the lack of better way it would be the higher level of fashion and more trend oriented product and you may or may not remember, but we’ve talked before specifically about things like threaders and danglers, which are really more fashion-forward earrings, those are the elements that were too far if you will conversely the things that work best what I would define is more updated classic or understandable fashion and the consumer seem to respond to those pretty well. The second element of the challenge was our ability which we talked about over the 30 months transition of what we are trying to accomplish was our ability to evolve the website materially enough to help the customer build a shop and have the experience. And while I certainly feel good about the actions we took and what was on the website in terms of the user experience, the ability to help her engage and to browse the offer through more curated pages and marketing elements, which I’ll get to in a second, we basically understood wasn’t far enough. And the ability for her to move from search to browsing, we didn’t make enough progress and so one of the challenges was making sure that she could assess in a fairly passive way the breadth of offer and see the full gamut of the non-engagement jewelry mix. At some level what our learning was is that we have to continue to push on the website experience because the only way she can actually experience that in the way she wants to shop is to evolve the website more than we are able to in fourth quarter. And then last but not least in terms of marketing, you may have noticed a whole series of different elements both the creative execution, the way we positioned the homepage and some of the specific segments of the non-engagement business. We also explored some off-line elements and in totality we believe we got less traction than we expected and again it goes back to I think the fact that we put our toe in the water, we thought we would get a better result out of some of the product that we brought to market and either it was too far forward or she really wasn’t able to experience the breadth of offer that we did, bring to market in the way that we thought would be required and ultimately we felt short. As we move forward into ’13 I mentioned the word understandable fashion and it’s a question of balancing what we would call updated classics and understandable fashion in direct comparison to what we might call high fashion or trend product, and today the consumer that we have is clearly oriented around more in pearls, more non-engagement jewelry. It’s the order of magnitude of how far we can push and the acquisition strategies that we continue to pursue to really address the addressable market, if you will, in a more meaningful way.

David Wu – Telsey Advisory Group: How much of engagement sales during the quarter was driven by the credit program with ADS?

Harvey Kanter – CEO and President: So we don’t discuss the specific metrics. To give you a little bit of context though, the credit program that we launched earlier this year is performing at levels above what we’ve seen in the far history of the business when we had the best programs in place. So I would say that the program is exceeding our expectations we don’t breakout the specific metric, but we definitely view this as something that is contributing to the momentum in the business.

David Wu – Telsey Advisory Group: Then just lastly can you perhaps just talk about the merchandising marketing plans that you have lined up for Valentine’s Day?

David Binder – CFO: Well for the most part what you see is what you get for that what is I say two days away from the holiday, but what you can see if you’ve been on the website or go back and look at a few of the things that I’ll talk to. We’ve continued to drive a positioning that resonates for both him and for her and make really it easier to shop. We believe the symbol of the shopping experience and the quicker that the consumer can really access the offer is critical. So our Valentine’s Day gift guide is a perfect example that gift guide is really an extension of what we did in holiday and which worked well in the holiday, we’ve really focused that. Number two different level of imagery and you can see smaller elements of branding that are evolving that mix to create some level of inspiration as well as the curated pages, but I would tell you that our understanding at this point based on Q4 results is that we have a long way to go in that regard. And then last, but not least I think probably the single biggest thing which is outside of the direct website is really our social media presence and partner deals. So we’ve steered our marketing to a partnership with OpenTable that is a really exciting promotion if you will to tap into their database that we partnered with them on and then we’ve created a promotion on our social media where you basically have the ability send a love note if you will to someone and it’s kind of a gamesmanship which is certainly something very relevant in the online world today with respect to social media and in both cases they are really tapping into the success we had in the 12 extraordinary days of the holiday season, which was one of our greatest avenues to acquisition of emails and new customers in Q4. So those are elements that are really resonating with our consumer, we’ll continue to pursue those. They obviously most resonate with her and what I refereed earlier in my – just comments where the once that resonate more with him in terms of the simplify shopping experience and the elements that we will make it easier for him to buy a gift.

A Closer Look: Blue Nile Earnings Cheat Sheet>>