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Blue Nile (NASDAQ:NILE)

Q4 2013 Earnings Call

February 06, 2014 8:30 am ET

Executives

Nancy Shipp

Harvey S. Kanter - Chairman, Chief Executive Officer, President and Member of Stock Award Committee

David B. Binder - Chief Financial Officer, Principal Accounting Officer and Member of Stock Award Committee

Analysts

Kevin LaBuz - Deutsche Bank AG, Research Division

Stephen Shin - Morgan Stanley, Research Division

David Wu - Telsey Advisory Group LLC

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Shawn C. Milne - Janney Montgomery Scott LLC, Research Division

R. Scott Tilghman - B. Riley Caris, Research Division

Andrew Marok - Cowen and Company, LLC, Research Division

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Operator

Good morning, ladies and gentlemen. My name is Tony. I will be your host operator on this call. [Operator Instructions] At this time, I would like to introduce Nancy Shipp, Director of Investor Relations of Blue Nile.

Nancy Shipp

Good morning, and thank you for joining us on our conference call today to review our fourth quarter and full year 2013 financial results. With me today are Harvey Kanter, Chairman, President and Chief Executive Officer; and David Binder, Chief Financial Officer. Both will be available for Q&A following today's prepared remarks.

Before we begin, I would like to remind you that we will make forward-looking statements during this call regarding the company's future performance.

These statements are only predictions based on assumptions that are believed to be reasonable at the time they are made and are subject to significant risks and uncertainties.

You should not rely on these forward-looking statements as representing our views in the future, and we undertake no obligation to publicly update or revise these statements. Our actual results may differ materially and adversely from any forward-looking statements discussed on this call.

Our quarterly reports on Form 10-Q, our annual reports on Form 10-K and other forms on file with the SEC identifying important risk factors and uncertainties that you should consider when making an investment decision regarding Blue Nile, and that may affect whether our forward-looking statements prove to be correct.

Also, please note that during the course of this conference call, we may discuss certain non-GAAP financial measures as we review the company's performance. We will discuss non-GAAP free cash flow, which is defined as net cash provided by or used in operating activities or operating cash flow, less outflows for purchases of fixed assets, including internally-used software and website development. We will discuss international sales on a constant exchange rate basis. And we will also discuss non-GAAP adjusted EBITDA, which is defined as earnings before interest and other income, taxes, depreciation and amortization adjusted to exclude the effects of stock-based compensation expense. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release, which contains reconciliation of non-GAAP measures to the nearest comparable GAAP measures.

Now, I'd like to turn the call over to Harvey.

Harvey S. Kanter

Good morning. Before I make my formal remarks, I want to comment on my voice, and I would like to say that I lost it celebrating with the 700,000 other 12th MAN Seahawks fans in yesterday, but unfortunately, I just have a dozer [ph] of a head cold and I am hopeful I will make it through the full call.

Thanks to you Nancy, and good morning, formally, to the Blue Nile's fourth quarter and full year earnings conference call. Our execution during the fourth quarter finished up a solid year for Blue Nile in 2013. This was our second consecutive year of delivering top line revenue momentum and stronger growth rates. And at $450 million in total revenue, we've added over $100 million to our business since the end of 2011. Sales of our engagement products in the U.S., the core of our business, grew 13% in the year and by an average growth rate of 17% over the past 2 years. We posted 9% growth in the sales of non-engagement jewelry in the U.S., accelerating from the growth in 2012 and driven by diamond jewelry and wedding bands. This dynamic is consistent with our merchandising strategy and bodes well for the long-term momentum in our business.

Sales in our international markets grew by 17% to over $73 million, and we're continuing to position and prioritize the planning and execution across the world for even greater growth.

These growth metrics are important measures of the health and potential for Blue Nile. But they only tell a part of the story. As we look ahead, we believe the opportunities for growth in our U.S. business and international markets are very meaningful. In 2014, building profitable growth and market share by driving our leadership position by focusing on 4 key initiatives remains our ultimate objective. First, is tablet. Last year, we drove our focus to be on the customer experience recognizing that the shift to multi-platform shopping and the growing importance of mobile commerce will drive the essential requirements for high-end retailers. We developed and launched the core components of an adaptive website in time for the holidays. This brought many compelling aspects of shopping at Blue Nile to the PC, tablet and mobile phone. We know this development is essential for our long-term growth and as the leading online retailer in the category, the development of our platform will further distance us from competitors. In 2013, we made good progress in addressing the shift to multi-platform shopping and the growing importance of mobile commerce, but it is very dynamic and continues to evolve.

This initiative will continue to be a priority and when we know has continued upside, but likewise, has challenges which can affect the experience. In Q4, the full breadth of these initiatives for our website were not complete. And until we further evolve and fine-tune the experience, we will be challenged to optimize growth. However, we have a roadmap in place to continue the adaptive platform in 2014 and this will further position us to continue to build momentum.

The work we have done so far has shown great results in engaging visitors to the website and converting them into customers. We are learning from what we've done so far, and will continue to pursue the leadership position in developing enhancements. This leadership is a priority embedded in our DNA. And in the reality, the marketplace is changing, it will continue to do so as far as the eye can see and beyond.

Product is the second component of our key initiatives and is focused on the sale of wedding bands and diamond jewelry to expand the scale of Blue Nile and leverage our core business. We recognized an opportunity to capture a greater share of our engagement ring customers as they purchase these products using our brand and marketing to reach and attract new customers. In 2013, we launched a band matching feature on the website to give a compelling way to visualize our wedding band assortment with a matching engagement ring. We also launched Vendor on Demand ordering. A way to greatly extend our assortment without an investment in inventory. Both of these features contributed to our success last year, and we expect to continue to drive growth in 2014.

The 2013 growth rate of revenue from the sale of wedding bands in the U.S. accelerated to nearly 15%, and the attachment rate from engagement ring purchases improved 25%.

In diamond jewelry, we are focused on compelling products and value for basics and expanded our assortment in certain fashion elements. This worked to accelerate growth from these products in the U.S. to 10% for the year and 13% in the fourth quarter. Our recent success gives us confidence in this part of our strategy and the belief that we can continue to accelerate growth in the sale of diamond jewelry.

Our third key initiative is international expansion. Performance in our international markets in the year and even more so in the fourth quarter, underscore the importance of our strategy to focus on Greater China. In the international markets, Asia Pacific represents over 50% of our international revenue. Revenue in this region grew by over 25% and accelerated to 24% in the quarter. While we're encouraged by the growth, we also recognized that this can and it should be a bigger part of our business. The elements of our diamond supply that resonate with U.S. customers also resonate in China. However, the experience of buying an engagement ring needs to be better with broader assortment and quicker delivery. We have plans in place and resources in Mainland China to make material improvement in 2014.

And fourth, designers. We continue to see strong results from Monique Lhuillier's line of products. In the fourth quarter, we launched Monique Lhuillier's non-bridal diamond jewelry and we are pleased by the initial volume. We also quietly tested a small mix of an expanded designer product in non-engagement jewelry and we were pleased by early reads. This part of our business continues to grow, and we believe products developed by branded designers will further differentiate our offer. In the first half of this year, we will launch new product featuring exclusive, unique and compelling jewelry developed in partnership with designers, and will also evolve the website experience to leverage this new designer offer. We are optimistic that this will help us further accelerate growth in the sale of non-engagement.

Lastly, our Nordstrom relationship, which in reality is only a test, but it underlines our pursuit to extend Blue Nile's reach to the engagement ring consumer and give them the opportunity to experience our high quality products in person. We believe this is a marriage of 2 great brands, pun intended. At the end of 2013, we launched a trial to showcase our engagement rings and wedding bands representing in the Nordstrom's flagship store in Seattle. At the end of January, we launched a second store at Roosevelt Field in Long Island, New York. These are tests to see if the display of our products in a retail store, along with face-to-face interaction with a diamond jewelry consultants will materially increase our conversion rates. The design of a retail space is inventory light. The customer still makes the purchase online and this entails a very low investment in overhead expense, as we need to -- and we need very little space to showcase our products. Through this test partnership, we maintain our low-cost capital, efficient business model and get closer to consumers, which in turn develop a connection to bridal apartment at Nordstroms. While this is only a test, we are excited about what this type of partnership could mean for the long-term future of Blue Nile.

Now before I turn the call over to David, I'll close, as I always do, by thanking the Blue Nile team. It is hard to convey the level of impact they are making on the business with our consumers, but they are -- literally the difference that sets us apart. They work tirelessly and with excellence to thrill our customers throughout the holiday season. This level of effort comes from every department in the company and over the course of the full year, we heightened our efforts to develop industry-leading technology, and we'll continue to push offering a website experience that is leaps and bounds better than any other retailer in the category. We have accomplished this due to their skill, their dedication and their commitment to our customers. And in that regard, I must thank each of them again, and again.

I'll now turn the call over to David.

David B. Binder

Thanks, Harvey, and welcome to everyone on the call this morning. I'd like to start with some of the metrics that highlight our overall performance in the year and the results in the fourth quarter. In 2013, we generated $450 million in net revenue, an increase of 12.5% versus the prior year. And considering the high growth rate in 2012, this represents an average 2-year growth rate of 13.7%.

Sales of engagement products in the U.S., the core of our business, generated $255.8 million in revenue, grew by 12.9% in the year and by an average rate of 17.3% over the past 2 years. Sales of non-engagement products in the U.S. generated $121 million and grew by 8.9% in the year. This represents acceleration in the growth rate from this category, up from 4.9% in 2012. Further, growth in the sales of wedding bands and diamond jewelry, the primary area of focus, both exceeded 10% in the year.

Our International business drove $73.2 million in sales, equal to 16.3% of the company's total revenue. Asia-Pacific grew by nearly 30% and equaled half of our total international revenue in the year.

In the fourth quarter, total revenue was $146 million, up by 7.2% from the prior year and by 14.2% on a 2-year basis. This result builds on top of a high 21.2% growth rate in 2012. And while it represents a solid 2-year result, it is at the low end of our expectation. Investments we made in our websites to adopt in mobile devices worked to increase conversion and not to the level we had planned. Our International business suffered from weak currencies in Canada and Australia, driving higher prices for customers in those markets.

And finally, consistent with what you've probably heard from many other retailers, we believe that the relatively fewer number of shopping days between Thanksgiving and Christmas worked against us, not giving customers as much time this holiday season to plan a large and highly considered jewelry purchase. While these were challenges in the quarter, we did a good job of driving sales of wedding bands and diamond jewelry in the U.S. This is an important measurement of success for the primary area of focus of our non-engagement product strategy. An important confirmation that our plan is working.

Looking forward, we see great opportunities to optimize the user experience. Further driving increases in conversion and enabling us to invest marketing spend that more effectively to drive growth. In the International business, recognizing that currency headwinds maybe an ongoing challenge in some of our more mature markets, we will continue with our focus on China, deploying assets to improve the customer experience there.

In addition, our business continues to generate solid cash flow and we ended the year with $115.9 million in cash. Our Board of Directors recently authorized us to spend up to $100 million towards repurchasing shares. Our current plan is to purchase as much as $40 million of stock in this year. We will execute and adjust this plan based on our cash position and market conditions throughout the year. I will point out that this is not factored into our guidance for EPS.

Now turning to the details of the financial results from the fourth quarter. In the fourth quarter, net sales totaled $146 million compared to $136.1 million in the fourth quarter of 2012. U.S. engagement sales for the fourth quarter were $78.7 million compared to $73.6 million for the fourth quarter of 2012, a growth rate of 6.9%. The 2-year average growth rate was 19%, which is in line with our performance from last quarter and above the 2-year growth rate in the full year of 2013 of 17.3%.

U.S. non-engagement sales for the fourth quarter were $45.9 million, compared to $42.5 million in the fourth quarter of 2012, growth of 8%. The 2-year average growth rate was 6.6%. Our international sales in this quarter were $21.4 million, compared to $20 million in the prior year, an increase of 6.8%. The 2-year average growth rate was 16.8%. On a constant-currency basis international sales grew 10.9%. The increase in sales was primarily driven by strong growth in Asia Pacific.

For the overall business, gross profit in the quarter totaled $27.2 million compared to $25.7 million in the fourth quarter of 2012, an increase of $1.5 million. As a percentage of net sales, gross profit was 18.6% compared to 18.8% for the fourth quarter of 2012. The decrease in gross margin as a percentage of revenue was driven by a shift in mix to higher price point engagement in diamond jewelry. I should point out that we did not offer higher levels of promotional discount in the quarter versus the prior year.

SG&A expense totaled $20 million for the quarter compared to $18.6 million in the fourth quarter of 2012, an increase of $1.4 million. As a percentage of net sales, SG&A was 13.7%, the same as in the prior year. In the fourth quarter of 2013, marketing expense equaled 6% of revenue versus 5.6% in the prior year. Given the compressed holiday calendar, we made the decision to continue to deploy marketing with the belief that consumer spending would greatly accelerate in those last days of the season. As we fell short of our expectation, our investment in marketing group disproportionate to revenue.

Net income for the fourth quarter of 2013 and 2012 both equaled $4.9 million. Fourth quarter earnings per diluted share equaled $0.38 compared to $0.39 in the fourth quarter of the prior year. Net income per diluted share include stock-based compensation expense of $0.06 in the fourth quarter, the same level as of expenses in the prior year.

Now turning to the details of the financial results for the full year of 2013. Net sales totaled $450 million versus $400 million in 2012, an increase of 12.5%. Gross profit was $83.7 million compared to $75.1 million in the prior year, an increase of $8.6 million. Gross profit as a percentage of net sales decreased to 18.6% compared to 18.8% in 2012. For the full year, the sale of engagement products equaled 70% of total revenue compared to 69.1% in 2012.

SG&A expense in 2013 was $69.3 million versus $62.8 million in 2012, an increase of $6.5 million. As a percentage of net sales, SG&A expense equaled 15.4% in 2013 versus 15.7% in the prior year, decreasing by 30 basis points. Marketing expense relative to net sales grew to 5.7% for the full year versus 5.6% in 2012, representing slight deleverage and driven by the higher level of spend in the second half of the year particularly in the fourth quarter. Other operating expenses gained efficiency equaling 9.7% of net sales versus 10.1% in 2012, decreasing by 40 basis points.

Operating income of 2013 totaled $14.3 million compared to $12.3 million in 2012. This result is driven by the increase in gross profit of $8.6 million, partially offset by an increase of SG&A of $6.6 million. Nearly half of the increase in SG&A was driven by marketing expense. Net income in 2013 was $10.9 million, and earnings per diluted share were $0.85 versus $0.63 in 2012. It is important to note that this result includes the benefit of $1.1 million associated with certain discrete income tax savings in the third quarter of 2013. The discrete tax items represent $0.08 per share in that quarter.

We ended the quarter with cash, cash equivalents and short-term investment totaling $115.9 million compared to $87 million at the end of last year. During 2013, we purchased approximately 299,000 shares under our repurchase program for $10.4 million. As I mentioned earlier, we continue to value the repurchase program as an important and appropriate use of cash and intend to actively purchase shares this year.

Cash flow from operations totaled $23.4 million in 2013 and $57.3 million in the fourth quarter. This level of cash flow over the prior 12 months compares to net income of $10.9 million. We continue to generate cash from operations significantly in excess of our operating income, which is has consistent with the fundamentals of our business model.

Our inventory totaled $34.5 million at the end of the fiscal year versus $33.3 million in the prior year, expanding by 3.8% and yielding higher turn rates. We're pleased by the continued improvement in the inventory efficiency and look to build upon the success in 2014. Full year 2013 capital expenditures totaled $5.5 million compared to $2.5 million for the full year of 2012 resulting from investments and improving our customers' website experience, as well as investment in our facilities as we expand our operations.

I'll conclude this portion of the call with a discussion of our guidance for the first order and full year of 2014, and then turn the call over to the operator to take your questions. For the first quarter of 2014, we expect net sales to be between $102 million and $108 million, and earnings per diluted share to be between $0.05 and $0.09. For the full year, we expect net sales to be between $485 million and $520 million. And earnings per diluted share of between $0.85 and $0.92. I should highlight again, that this range in guidance does not include the impact from potential share repurchases. I would also like to highlight that fiscal 2014 includes an additional week in the fourth quarter.

I will now turn the call back over to the operator and we'll take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ross Sandler with Deutsche Bank.

Kevin LaBuz - Deutsche Bank AG, Research Division

This is actually Kevin LaBuz on behalf of Ross. Please excuse me because I joined a few minutes late. But I was just wondering, did you get the percentage of your traffic that was from mobile this quarter? I believe last quarter you said you expected it to be approaching 50%? And also what percentage of your transactions were in mobile and then I'll have a follow-up.

David B. Binder

Kevin, this is David. So we did see traffic ship significantly towards mobile and by measurements consistent with how we were looking at last year, we were at and above 50% during periods throughout the quarter. So the shift was significant. But we're seeing now, and this is probably something that we're doing more so than just industry trend that traffic is really shifting more towards tablets versus smartphones. And regarding transaction or revenue volume coming from old devices, we don't specifically disclose that metrics. I will tell you that revenue coming from mobile devices is growing disproportionate to the rest of the business. So we're seeing higher revenue coming from mobile devices, higher percentage of our revenue coming from mobile devices and higher revenue for mobile visitor than we did in the prior year.

Kevin LaBuz - Deutsche Bank AG, Research Division

'14, I know you said or it sounded like branded designers will be a larger focus, but anything else you're focused on there looking at the year ahead?

David B. Binder

Sure. So first of all, we should note that we launched Monique Lhuillier over a year ago, and she's specific in our bridal collection, both engagement rings and wedding bands, and has continued to perform really well for us. So we know that, that resonates very well with our customers. We also know that this is a strong trend within the industry bringing on the bridal names or -- not bridal but designer names within jewelry. So we are looking to expand this year with a handful of designers and our designer collective, which will be an area on our site that is specific to their design aesthetic and will be an interesting test for us to see how well our designers work within our retail environment.

Operator

Your next question comes from the line of Stephen Shin with Morgan Stanley.

Stephen Shin - Morgan Stanley, Research Division

In terms of the calling of mobile as a headwind in the quarter and potentially going forward, as Blue Nile builds out a more integrated and multi-platform presence, can you give us a sense of how big of a headwind it is in the quarter, and how your expectations of how that evolved throughout 2014? And then I have a follow-up.

David B. Binder

Sorry, this is David, again. One thing I would say is that mobile is not really a headwind for us. It's -- our challenges in the fourth quarter and I think more so in the earlier part of 2014, we'll be increasing conversion on mobile devices enough to really keep ahead of it, and I think that our platform has given us the basis to really optimize that experience. So we're looking for an acceleration in the conversion rates for mobile devices and that in turn will give us a better ability to deploy marketing dollars because as conversion rate increase you effectively can spend more money to drive traffic for mobile devices.

Stephen Shin - Morgan Stanley, Research Division

So the conversion rate in Q4 is kind of, I guess, in line with your expectation, or the traffic hit the 50% mark?

David B. Binder

Yes, it's -- the conversion rate was below our expectation, better than the prior year, although we're looking for its improvement and I would say that the current trends are -- it's not improving, as fast as we had hoped when we initially deployed the dollars. And I think the good learning for us is that it's the right thing to do. It takes a while to get the user experience exactly right.

Harvey S. Kanter

Okay, this is Harvey. I just wanted to make one additional comment. The reality is that the conversion rate on the PC is the highest and as the consumer continues to shift to a mobile device, our challenge is to continue to raise those conversion rates which are inherently lower than the PC. And so to Dave' point, we had an expectation of a certain level of conversion through the adaptive experience we've created and we're chasing what we expect to be the right number, but it is a moving target with the consumer's evolution to the mobile device to what that right number really will ultimately be.

Stephen Shin - Morgan Stanley, Research Division

Okay, and then in terms of your guidance, your guidance seems to imply potentially a step up in expenses, I'm just trying to understand is this sort of related to maybe spending more in terms of developing the mobile platform, or is there something in gross margin that we need to be aware of?

David B. Binder

Well, within our guidance, we're expecting slight leverage going into 2014. So we expect just our marketing spend will be slightly more efficient than it has been in recent quarters. So we're not expecting expense growth to outpace revenue growth.

Operator

Your next question comes from the line of David Wu with Telsey Advisory Group.

David Wu - Telsey Advisory Group LLC

Overall, total sales came in at the lower end of your guidance range. And I was wondering sort of which regions or categories sort of led to the majority of the sell shortfall relative to on your expectations?

David B. Binder

This is David. A couple of observations about the dynamics of revenue for us. In general, it was broadly felt across all product categories, which to us felt like the compressed calendar was really at play and if you look at the dynamics throughout the quarter, coming out of Thanksgiving this year, it was a slower to ramp demand curve which you would expect because we were 6 days behind the 2012 calendar. We saw it really accelerate. It just didn't have that compounded effect that we were expecting to see that if customers we're making up for the lost days. And so that was telling to us that it was relatively broad. And we'll highlight that on the international side of our business, that the markets were U.S. dollar is the strongest relative to lower currency, so pretty significant decreases. And that's a macro headwind that we think will give us a little bit of challenges going into the first part of this year and then hard to predict coming out of that.

David Wu - Telsey Advisory Group LLC

Got it and then in terms of the marketing, I mean, it sounds like you didn't drive sort of attraction that you we're expecting over the holidays. And I was wondering if you perhaps maybe just update us on the marketing strategy there and if you're may be exploring any other ways sort of to reach out to customers besides obviously what you're doing now with Nordstrom?

David B. Binder

Yes, and we can continually explore ways to expand our marketing channels and make the existing channels more effective and efficient. The dynamics in the fourth quarter really felt like a compressed calendar issue where you deploy your marketing dollars and you can read the early data and decide whether or not you should pull back. Our belief was the consumers were getting ready to complete their purchases, and we really only had 3 days at the very end whether it was going to happen or not. And so, our belief and what we thought was absolutely the right thing to do is continue to have that marketing presence out there. So when the consumer or if the consumer becomes ready, they will come to us and that didn't happen to the extent that we had planned.

David Wu - Telsey Advisory Group LLC

Got it. And can you elaborate perhaps more on just your partnership with the Nordstrom, what the cost of the investments are? And how many showrooms could you ultimately sort of rollout? And I just want to clarify that it really serves only as a sort of showrooms that you can only purchase the product online and not in the store?

David B. Binder

Right, right, first of all, I would say that it's a test. And so, we're going at it both sides. We're going at it with 2 stores on a limited basis. It's an inventory light model. We actually don't sell any products out of the store. We don't hold any diamonds in this. So -- but what it does is it gives customers an ability to see, touch and feel the settings and wedding bands, and speak directly with a diamond jewelry consultant, so they can sit down and get counseled and go through our website together on an iPad. It fits within the bridal suite of Nordstrom. So the belief is that it drives a lot more awareness to all the great things that they're doing within the bridal department. So it helps bringing the traffic and drive customers. The levels of investments for 2 stores are really nominal. I mean that's the key of this type of partnership. It is inventory light, it is cost efficient, very little incremental expense and we can measure it -- to certain extent we can measure it precisely because we know the sales that are generated from the relationships we build in those suites. We know that there's an additional benefit of general awareness and people going home and going on to decide and making their purchase. So we think that as long as the most directly measurable benefit is worth the expenses than there's additional benefits out there that we're capturing as well.

David Wu - Telsey Advisory Group LLC

And the jewelry consultants, are they your employees or are those Nordstrom employees?

David B. Binder

Those are our employees.

David Wu - Telsey Advisory Group LLC

Got it. And is there any way that you can measure sort of the effectiveness of the showrooms when customer does go online to buy after visiting the showroom?

David B. Binder

Well, there's a direct measurement, which I talked about knowing who the customer is and then there's attribution, which we're obviously doing, which becomes somewhat precise to not very precise. And so, we do our best job of measuring the benefits from that.

David Wu - Telsey Advisory Group LLC

Great and obviously with the Valentine's Day, a week away, can you perhaps comment on what you're seeing out there, and if you're doing anything differently right now just in terms of marketing and merchandising versus last year?

David B. Binder

Sure. That's a great question. And I think that's a good opportunity for me to talk a little bit about the first quarter guidance. We remain very optimistic about performance in Valentine's Day. We think we're positioned well. I would say that the first 5, 5.5 weeks this year has been fairly volatile for us, which has been interesting. We've seen high end purchases do very well and we've seen the core come and go, and so we're a little bit cautious, and that's what's reflected in our first quarter guidance that there's general volatility out there. The general read on retail is that traffic has been relatively soft. We've seen pockets of great strength, which gives us comfort and confidence but there's been days where we feel like the consumer might be the pulling back.

David Wu - Telsey Advisory Group LLC

Got it. And are you -- I mean it seems like to, at least if you look across the brick-and-mortars, seeing a little bit more sort of promotional activity, and are you planning to stay the course on promotions and not increase it relative to last year?

Harvey S. Kanter

This is Harvey. We actually haven't been asked the question yet but neither in Q4 nor our plan as we move forward do we have an expectation become more promotional. Changing our margin structures really driven by mix change and to David's comment about large ticket, higher ticket have been inherently lower margin. But our promotional pace in Q4 was actually very comparable and our promotional pace at this moment at least for the first quarter and Valentine's Day is again, comparable and we don't intend to increase it over the course of time. We really concentrate on the savings we're bring in the market every day at 20% to 40% core part of our business. And just the value overall from the business model.

Operator

Your next question comes from line of Trisha Dill with Wells Fargo.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Just a quick question on the consumer and the volatility that you've seen. Would you say that's a change from what you saw in 4Q? That's the first question.

David B. Binder

This is David. Yes, I mean 4Q is really about great relative demand if you really have those extra days. If you could line up the calendar of this year or more precisely with the calendar of last year. We saw some really significant increases like on Black Friday and Cyber Monday and so we felt like the consumer was there and healthy, and just didn't have the days. I would say that the first couple of weeks of January felt pretty good, and then it feels like the consumer has shifted a little bit. We keep an eye on the equity markets and it coincides with that, I don't know if that's a direct attribution but it feels like there's been a little bit of a pullback at least from our consumers.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Okay, and then just on the guidance, can you maybe go through some of the puts and takes to gross margin and what you're expecting for the year and maybe how the designer partners impact the rate and more importantly gross margin dollars for '14?

David B. Binder

Sure and your question's specific about Q1 or for the full year?

Trisha Dill - Wells Fargo Securities, LLC, Research Division

For the full year.

David B. Binder

Okay. For the year. First of all, I would say that in the fourth quarter -- so you understand the dynamics, our margin rates for our non-engagement products actually improved versus the prior year. So that speaks to less promotion to drive sales. The pressure that we're seeing on margin, which I would cause relatively slight but it's coming down a little bit and that has to do with mix towards high end engagements, which is great, but it comes in a lower gross margin percentage and more and more in large diamond jewelry items. In our guidance, we're considering very moderate improvement versus the prior year and if actually for your models you can call as flat, and it's really a continuation of that dynamic on a full year basis. We expect non-engagement revenue to grow a little bit faster than engagement, which is consistent with our long-term plan that should help margins a little bit, but we continue to see this mix shift compression, which for the time being what we included in our models going forward. So I hope that helps.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

That's great, and then just one more quick one. Just on the -- you mentioned that you plan on seeing leverage on the expense side, but it just didn't drive as much flow through the EPS in the guidance as you would expect particularly given there's an extra week. So maybe if you could just give any more color there and maybe specifically what the extra week contributes to you guys?

David B. Binder

Sure, and on EPS specifically, the most important thing is to pull out $0.08 from 2013, and then there might be why it's hard to see some incremental leverage. In the third quarter of 2013, we received tax benefits from out-of-period events, which was worth $0.08, it was $1.1 million. So if you were actually to reduce that benefit this year and model what out, you would see some leverage.

Operator

Your next question comes from the line of Shawn Milne with Janney Capital Markets.

Shawn C. Milne - Janney Montgomery Scott LLC, Research Division

I know it's been asked a couple of times but Harvey, or David, can you just talk maybe a little bit about the roadmap going forward, on the responsive designs implementation? Is there a better timeline where we think more of the features will be rolled out? And I guess the second question is if you get to a point where you do see mobile conversion rates hit expectation and further improve, looking at retail's generally a bit soft, isn't this the time where the Blue Nile's operating a little more efficiently and is this the time to maybe get go after more market share? I know the company has kept a very close eye on profitable growth but it just seems to me that market share would be a lot more important than any potential stock buybacks?

Harvey S. Kanter

It's Harvey. I'll take the first half before I run out of voice. The commentary on the user experience has been our predefined #1 initiative mobile first as of last year and continues moving forward. It is somewhat of a moving target. We really are trying to balance making sure that we keep our leadership position and don't get on the bleeding-edge, for lack of a better way to say it. Our Q1, Q2 timeline and map without going into truly competitive details will provide tangible increases in the experience each quarter to the point where that we have a belief that will continue to move to conversion. It's -- for lack of a better world, say the broad statement, as things like today our e-mails are not responsive design e-mails and that may seem technical thing or not but it's a private example where the consumer is moving and David already talked about over 50% of the traffic moving to a mobile device. The reality is, and I think the numbers are upwards, well upwards of 50% to 60% of consumers opening e-mails now on a mobile device and we just aren't able to maximize that traffic in that way. And so, as an example, responsive e-mails will come online over the course of this year. That has a longer tail to it but other elements that as tangible will happen in the next 6 months. That said, our expectation is that we will execute the roadmap that exists for 2014, but we wouldn't probably qualify it as completed at that point because we believe that right now, we are experiencing kind of a sea change in terms of the consumer and that mobile will continue to evolve not just in '14 but into '15 as well, because most certainly in technology, in the digital environment critically important. So I'm not trying to not give you a direct answer but I don't think it's black and white in saying it will be completed on this day and everything will work and will move forward. The other element of that is I'm trying to manage ongoing dynamics of what's happening in the mobile and digital marketplace, and I refer to things like PLAs and how marketing expenses are considered in the past more unique. So PC versus tablet and how they're evolving where in many cases the tablet is looked at as a PC, is changing the dynamics of both our marketing spend and how we measure conversion. So there's a lot of puts and takes for all retail and obviously as additional merchant and we're trying to evolve and understand what those metrics look like as they evolve and how do we get the most traction out of it.

David B. Binder

The second part of your question, which is a great one, is there an opportunity to gain more share especially given the shift in technology and where we feel like we're ahead of the curve. And we constantly pressure ourselves to find ways to accelerate our growth rates in our shared shift. I would decouple that from the share repurchase because we believe that there's plenty of cash and cash flow from this business to deploy a significant amount of capital towards the repurchase and also experiment on ways to accelerate share shift. We spend more marketing in the fourth quarter relative to revenue than we have historically, and we are now reading that data in our first read on is that incremental dollars really didn't do much to accelerate the growth but we're always looking for ways to find other ways to get more awareness out there, and we'll continue to pressure ourselves. The test we're doing with brick and mortar is a way to do that as well and if we see an amplification and awareness and then the ability to really grab more market share in those markets, I think it would be an interesting way for us than to expand more nationally. There are other things we're doing that are at too early stage to talk about in this forum, but we're always looking at ways to take our business model, and to accelerate its growth by creating greater awareness or greater suit of offer.

Shawn C. Milne - Janney Montgomery Scott LLC, Research Division

That's helpful. And then just a quick follow-up, clearly we saw the acceleration in PLAs this holiday, it's up over 100% by our math. And Harvey, were you with Blue Nile early and aggressive in that shift or is that something you're moving more towards in '14?

Harvey S. Kanter

No, I would definitely say we have been very early and aggressive. I'd like to think we're a retailer that is on the leading-edge of things of that nature and I believe we are, and we'll continue to push. But it also creates dynamics on a marketing front that are interesting and I think evolving.

Operator

Your next question comes from the line of Scott Tilghman with B. Riley.

R. Scott Tilghman - B. Riley Caris, Research Division

Wanted to just touch on 2 things following up on the market share questions, wondering if you're planning any shifts in marketing and targeting your new versus existing customers during 2014? And then the second question, just to put these both out there for you, as it pertains to the buyback I'm wondering what blackout periods do you have?

Harvey S. Kanter

It's Harvey. I'll handle the first one, David will touch the second one. In terms of major shifts, we expect that the continued push we're making on the adaptive design website will actually allow us to increase our repeat purchase rate and grow our file in terms of the conversion repeat purchase. We talk a lot about the growth of our customer acquisition while we don't talk specifics, we didn't have a pretty good year with new customer account. It continues to be an important part of the mix, but it's a balancing act between really growing and converting our core repeat purchaser from the lifetime purchase that they make at the initial interaction with us, which is very often is in fact true that the engagement ring is the first experience of Blue Nile through what should be the next 50 years of life experience is a net, that is really lifetime value, we've talked about that literally over the 2 years I've been here, and it's still really important component. That said to the way David described whether the test of Nordstrom's or other elements of our marketing program, we're looking for ways to engage and have new consumers experience Blue Nile and grow the file as well. So really both are important variables, we don't define publicly the balance between those 2, but we are definitely oriented towards market share growth, which will come out of new consumers, as well as raising the level of loyalty and advocacy as for the branch of repeat purchases.

David B. Binder

And the second question regarding the mechanics of the repurchase. We have tools in place to be purchasing at any point in time throughout the year. Some of it is problematic if we're in a closed window. Some of it can be for open market and discretionary. So depending on the plans we choose and how we operate, we could be in the market at any time.

Operator

Your next question comes from the line of Kevin Kopelman with Cowen and Company.

Andrew Marok - Cowen and Company, LLC, Research Division

This is Andrew Marok, I'm on for Kevin. Given your full year guidance, I was wondering if you could speak qualitatively to expectations for U.S. versus international? And separately, I was wondering what you we're seeing in terms of year-over-year diamond price changes for Q4 and quarter-to-date in the Q1.

David B. Binder

Sure. This is David. First of all, on the guidance specific to the U.S. versus international, we expect the International business to grow faster than U.S. and pickup share relative. And what we're seeing the dynamic in the fourth quarter we expect to continue where we're going to struggle a little bit in Canada and even in Australia where local currencies are at very low points. And so, we've got that as a headwind for us. But on a positive side, Asia and we think Europe is even a growing opportunity for us where we think that can accelerate growth and as a total aggregate, we expect growth in the International business to outpace the total. And you're second question about diamond?

Andrew Marok - Cowen and Company, LLC, Research Division

Yes, year-over-year diamond price changes in Q4 and then what you're seeing so far into Q1?

David B. Binder

We're starting to see in total some gradual increases in diamond prices, which is what you would expect and that's what's considered in our guidance that the total body of diamonds will grow moderately throughout the year. What's a little interesting is that it's not equally felt by the type of diamond you're looking for. So right now, if you're looking for a small round diamond like for diamond-stud earring, you're seeing some very significant price inflation. And so, what we are looking to do is potentially shift customers from that to more fancy cut small diamonds, or to get customers to step up to a bigger stone. So it's a little bit of a disjointed relative price and that's across the different sizes and we're looking at 150,000 stones we have is a way to balance people into the items that are not as relatively expensive.

Andrew Marok - Cowen and Company, LLC, Research Division

Okay, and then if I could just give one quick follow-up in. I know in the past, you've disclosed the percentage of revenue -- percentage of total revenue from engagement and I was wondering if you have that figure for Q4?

David B. Binder

For Q4, I'm going to get it to you, we should probably go to the next question and I'll get it to you before we get off the phone, is that okay?

Andrew Marok - Cowen and Company, LLC, Research Division

Yes, that's great.

Operator

Ladies and gentlemen, we have time for one more question. You're final question comes from Paul Bieber with Bank of America.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

I was hoping if you could outline some of your goals for China in 2014. And then just a follow-up on the Nordstrom test, I was wondering what you've learned so far from the test and what the feedback with some customers?

Harvey S. Kanter

Yes. This is Harvey. In terms of the goals for China, it is really to extend our core engagement business and broader offering in that market without going into true competitive details, I would tell you that we are continuing to grow our staff there. We actually have put in place recently as if the first of this year a General Manager in China in a form of an ex-pat format, not literally but figuratively, if you will, is a member of our team here. We feel that requirements to continue to grow the business and really put people on the ground is critical to building relationships, bringing diamonds into the country, developing the product mix and furthering our offer. We're also extending technologically some of the offer from the U.S. there, and doing it in ways with our partnerships in place and then developing the ability to create faster time for delivery through fulfillment changes, which again, I'm not going to publicly put on the call, but fulfillment changes which will enhance the time for payment from the customer and ability to fulfill in terms of production for actually taking receipt of the product we've purchased. So a lot of things of that nature. We are actively participating in wedding shows. We did our first wedding show in December. Now we have, without giving the number, a series of wedding shows, which if you understand the Chinese market, it is a very important part of the market. So it's a pretty inexpensive date for us to do that, but we have a pretty comprehensive convention site, so to speak, where consumers can come in and actually make a transaction the day of the wedding show, and the next one is in 4 weeks and it will be our second and we will continue that path. So quite a few different elements all oriented around bringing product to market faster and making it more accessible to the consumer, shipping it in a way that will enhance with a broader offer and putting more people on the ground that will facilitate direct relationship in the Chinese marketplace. The second half of your questions, sorry, I can't remember, just repeat that.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

The second half of the question was what do you learn from the Nordstrom and feedback from customers.

Harvey S. Kanter

Yes. The biggest thing we're doing today is getting a great deal of qualitative feedback. To David's point, we have certain ways to track consumers and some of them are very tangible. We have an e-mail sign-up program. When we take their e-mail, we can certainly track them. We also -- literally because as you might imagine the numbers of consumers is not hundreds and hundreds every day. It's individual consumers coming and then spending time with us because they're very thoughtful in the purchase, so we actually in a very manual way track consumers and understand what they're coming for, their purpose and we try to understand that in the context of where it's going. We obviously understand real transactions and real customer accounts. We look at where they are in our file for our own benefit are they a current customer or a new customer, and we that provide information to our marketing team to be able to then get into a geo-targeted marketing efforts. To David's point, some of our marketing efforts are really being used to enhance geo-oriented interaction with the consumer whether it's specific to what we show up them on the websites or e-mails based on where geo-targeted location for lack of a better way to say it. So we're learning how to interact and we're not oriented towards leveraging anything today. We're oriented towards really getting in there and creating awareness and trying to see how far we can push it.

David B. Binder

And before we get off the phone, I should follow-up on the question on engagement revenue. In the fourth quarter, engagement revenue globally equaled 65.5% of our mix and that compares to the fourth quarter last year when it was 65.7%.

Operator

And there are no further questions at this time.

Nancy Shipp

Thank you very much for joining us today.

Operator

Thank you for your participation. This does conclude today's conference call. You may now disconnect.

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