Financial Analysis Project
Part 2

SUMMARY OF MANAGEMENT DISCUSSION ANALYSIS

Blue Nile, Inc. is the leading online retailer of high quality diamonds and fine jewelry. The company was formed in 1999 and is a Delaware corporation based in Seattle, Washington. The company’s customer base is in over 40 countries around the world. Blue Nile, Inc.’s fiscal year ends on the Sunday closest to December 31. Each fiscal year consists of four 13-week quarters.

The key points of the management overview are the realization of lower gross profit margins because of being and online retailer. The long-term financial focus is to increase sales through the internet, by improving operating margins, efficiently managing operating costs, and investments in longer-term strategic initiatives.

To realize lower rates and better savings which can be passed on to the customer, Blue Nile, Inc. has negotiated exclusive agreements with a large number of diamond suppliers. They do not have a large investment in inventory because diamonds are purchased as they are ordered. Their efficient operating model provides for negative working capital benefits because customer payments are received within a few days of merchandise shipment and vendor payments terms are between 45 – 120 days.

Blue Nile’s growth objectives will be met by increasing brand awareness as well as building a distinctive and aspirational brand. Plans to increase the variety of non-engagement products which will appeal to a broader audience will spur growth. They want to diversify marketing by promotions, events, and television advertisement. Additionally, they plan to expand the foreign language capabilities in their customer service.

Sales for 2012 were negatively impacted by commodity prices and economical condition within the United States and throughout Europe. Diamonds and rare metals were at a historical high price level. Even with the high level of unemployment in the U.S., low consumer confidence, and the economic instability abroad Blue Nile realized a 4.5% growth.

Revenue and the related gross profit are recognized on the date which merchandise ownership passes from Blue Nile to the customer. Within the U.S., Canada, E.U. ownership passes to the customer when it is received by the customer. In other countries is passes when the merchandise is shipped. Reduced revenue for returns are an estimated based on historical data and current economic conditions.

Blue Nile accounts for stock-based compensation at fair value. They use the Black-Scholes-Merton option valuation model (mathematical model of a financial market containing certain derivative investment instruments) 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.

Their selling, general and administrative expenses consist primarily of payroll and related benefit costs for employees, stock-based compensation, and marketing and credit card fees. Also included are certain facility-related costs, customer service, technology, depreciation expenses, professional fees, and general corporate expenses.

Blue Nile has seen their bottom line shrink from $11.4M USD to $8.4M USD despite an increase in revenue from $348.0M USD to $400.0M USD. An increase in the percentage of sales devoted to cost of goods sold went from 79.27% to 81.24% which is a key component in the falling bottom line in the face of rising revenues.