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Article Excerpt
COLLIS BOYCE, ANALYST, MORGAN STANLEY: Okay. So we're joined today by Blue Nile. My name is Collis Boyce and I work in research at Morgan Stanley. I'm on the Internet team. I'm joined by CEO, Diane Irvine, and CFO, Marc Stolzman.
Before we start, they're going to give a presentation, but before we start I just need to read the disclosures. Please note that all important disclosures including by personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures. And to start it off is Diane.
DIANE IRVINE, CEO, PRESIDENT & DIRECTOR, BLUE NILE, INC.: Thank you, Collis. Good afternoon, everyone. Thanks for being here and thank you to Morgan Stanley for the invitation. We have some handouts that you'll find on the tables and that also includes our Safe Harbor statement.
I know that some of you are familiar with Blue Nile and others are newer to the story, so I thought we would give an overview of our business, who we are, how we started, talk about our financial model and then probably most specifically want to focus on the economic environment and how our model acts within this environment and also the opportunities that we see.
Blue Nile was formed in 1999 and we are the online leader in sales of diamonds and fine jewelry over the Internet on a global basis. We're based in Seattle and we've grown in that time frame in under 10 years to about $300 million in revenue. So I think quite a model that really resonates with consumers, and actually when we were formed it was because we believed the physical model for retail jewelry was a broken one, and we were formed with with the consumer in mind, essentially trying to redefine the way consumers purchased this product.
And when you think of buying a diamond, this is a product where I think consumers don't feel knowledgeable. If they walk into a store, they feel intimidated, they feel vulnerable by asking questions. And if they have made a purchase, end up leaving feeling like I'm not sure what the value should have been but I think I just got taken, I'm just not sure how. So we were formed to really answer a need for consumers where we're showing all of the information possible to know about a diamond so that a consumer can feel confident in their purchase.
Our primary purchases are made by men. Men are about 80 to 85% of our revenue. And in this category, men make 70% of the purchases above $1,000. Our real value to consumers is that because of our model, which I'll talk about in terms of the economic model, we're selling at prices that are 20% to 40% below the typical retail jewelry store. So that's the real value to the consumer, and we can do that because we have a different type of model.
Our average ticket as a business overall is about $2,000. So we're very much about high ticket purchases. We operate at the high end of quality, so we're building a brand that's a specialty brand by nature. We operate at the high end, so we're selling well-cut, high color, high clarity diamonds, and that matches up with the highest quality available on a global basis.
So we have a delicate balance here where we're building a premium brand yet selling at a great discount to consumers. And so this is what we look to continue to build for the future, is this premium brand, and we have a fundamental belief that the consumer is smart, so we think this is the smart way to shop. And as you think of consumers who will be buying diamonds in the future, they're very comfortable with technology and aren't really differentiating online versus offline shopping, so we think that's really our future.
We have a very lean cost structure, a different type of inventory model and low CapEx needs, and so that's really what makes the business run and results in great cash flow dynamics.
In 2008, our revenue was $295 million. And that was down 7.5% from the year before, so it was the first time on an annual basis we saw a decline in our sales. As the weakness in the economy impacted high ticket purchases, especially in the fourth quarter where you saw any business with a ticket above $1,000 was really impacted.
But given that, we generated $25 million of EBITDA for the year, which I think, when you step back and look at the cash flow generation, it's tremendous. We ended the year with $54.5 million in cash and we have no debt on our balance sheet. So very clean balance sheet.
And we think our model is superior. It's really why we were formed, that we felt the traditional model was broken and I think it really shines through in these times, in this environment.
I would like to talk a bit about the overall market for jewelry. In the United States, jewelry is a $65 billion market. So it's a massive market opportunity that we have, and more than half of that is diamonds.
With engagement at the core at about $5 billion. And engagement is where we started. It's really been our focus from the...
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