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Blue Nile Inc. (NASDAQ:NILE)

Q1 2014 Results Earnings Conference Call

May 1, 2014 8:30 AM ET

Executives

Nancy Shipp - Director, Investor Relations

Harvey Kanter - President and CEO

David Binder - Chief Financial Officer

Analysts

Mark Miller - William Blair

Kevin LaBuz - Deutsche Bank

Rohit Kulkarni - RBC

David Wu - Telsey Advisory Group

Trisha Dill - Wells Fargo Securities

Kevin Kopelman - Cowen and Company

Paul Bieber - Bank of America Merrill Lynch

Scott Tilghman - B. Riley

Operator

Good morning, ladies and gentlemen. My name is Regina, and I will be your host operator on this call. Your lines will be placed on a listen-only mode. At the end of the presentation, management will be available for question. (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 First Quarter 2014 Financial Results. With me today are Harvey Kanter, 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 and 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 on 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, our President and CEO. Harvey?

Harvey Kanter

Thanks, Nancy. Good morning. And welcome to the Blue Nile’s first quarter earnings conference call. Today we announced first quarter sales of $103.7 million, an increase of 6.8% as compared to first quarter of 2013, maintaining a double-digit two-year average growth rate and building on our strong growth in the prior year.

We entered the year with a strong belief that our future growth and profitability will come by driving our leadership position through three key initiatives, first, enhancing the user experience, second, product line development, and third, international expansion.

We continue to believe in these initiatives and are making progress in the execution of long-term strategy. Consistent with our focus on building profitable growth, we delivered expanded profitability with earnings per share of $0.08, an increase 14.3%, net income of $1.1 million, an increase 29.6% and adjusted EBIDTA of $3.6 million, an increase of 16.5%.

We believe that balancing our key initiatives is critical to accomplishing our goal, which is to be nothing less than the worldwide leading retailer of bridal and fine jewelry. Before we talk more specifically about the progress we have made on our key three initiatives, I want to provide an update on the strategic roadmap we outlined in early 2012.

We are now 24 months into the plan and while we continue to refine and adjust as we measure our performance, we remain focused on one thing, building Blue Nile as the premier specialty retailer of jewelry by offering consumers high-quality products at compelling value through empowering shopping experience.

This strategy has achieved an increase in revenue of nearly 25% over the last 24 months and basically doubled our rate of new customer acquisition over the same last two years. Our customers are having a great initial experience as evident by achieving a net promoter score to which many other companies would inspire.

Now, turning to the first of our three initiatives, enhancing the user experience, we believe that as the consumer continues to evolve their usage across mobile devices, our efforts to create a seamless experience across any device will be required to maintain our leadership position.

In 2013, we developed and launched the core component of adaptive website, providing consumers with a consistent and compelling experience across all devices. In Q1, we continued our investment in the adaptive platform, launching many new features that continue to improve shopping, while also refining the elements that we launched late last year.

We are beginning to see progress our effort, recognizing that revenue attribution is the Holy Grail. Revenue attributed to visitors for mobile devices grew by over 40% and our revenue attributed to visitors for tablets increased to over 20% during Q1.

As the innovators and early adopters who buy in this channel extends to the larger consumer universe. We know the mixed shift will work in our favor as revenue per visitor on these devices continues to grow. This will be an ongoing process as we measure performance and continuously improve the experience based on the feedback from our consumers.

Product evolution and product line development is our second key initiative. U.S. engagement products are at the core of our business and sales of U.S. engagement products grew by 8%, maintaining a double-digit two-year average growth rate of 13.5%.

We know that value is paramount in part of this -- of our business and our customers must receive the highest quality and most compelling product for their budget. While we are seeing a greater level of volatility in the price of loose diamonds this year than last and we know that prices will ebb and flow, regardless of the current trend of the market, Blue Nile provides a superior value to the consumer. We are able to deliver this value through sufficient inventory management and a lean operating cost structure.

As we remain committed to the value propositions, that is our foundation, we will continue to focus on deepening our supply chain to provide consumers with the best value, shorter lead times and access to the world’s largest selection of certified high-quality stones.

Sales of non-engagement products in the U.S. are a natural adjacency to our core engagement ring business. Our U.S. non-engagement sales grew by 7.6%, led by diamond jewelry and wedding bands, both of which saw double-digit growth rates.

Our work to evolve the products is a key contributor to our growth, specific to band, our existing band matcher enhancement of visualizations now in concert whether extended assortment continues to create a disruptive and innovative online shopping experience.

While we are pleased with the results to-date we know we must leverage this functionality to increase sales and expand profitability even greater. In the diamond jewelry category, we launched Monique Lhuillier line of non-bridal diamond jewelry last fall, both this and Monique Lhuillier’s non-bridal continue to perform well.

Rounding up non-engagement category’s fashion jewelry, this category addresses a large market and introduces new customers to our brand and shopping experience. To enhance this product set late in the quarter, we launched The Designer Collective.

The Designer Collective features a curetted collection of uniquely designed jewelry, including precious, semiprecious and diamond jewelry from four exclusive designers, plus our own Blue Nile studio line.

While still early, we are pleased with the initial results. We are curetting for our customers, a collection and unique partnerships that increase the mixes proprietary offer and extend Blue Nile product assortment.

Our third and final key initiative centers on expanding our business internationally. Sales in our international markets provide 1.9% to $17.9 million. The short-term performance of our international business continues to be challenged primarily by unfavorable exchange rate, particularly in Canada and Australia.

This is not unique to us and we will navigate through this challenging macroeconomic environment. It is important to recognize the core of our international growth strategy continues to be growth in China. The addressable market specifically engagement and diamond jewelry will surpass the size of the U.S. in the near future.

The aspects of our business that resonate with consumers in the U.S. translate well to China and we continue to see evidence of this from our experience on the ground. We continue to deploy additional resources to improve the customer experience, including product offerings and shortened lead times, while sales in Mainland China are relatively small we are building a framework, a framework that will be significant part of our business in the future.

As always, I could not end my comments without acknowledging the continued efforts and dedication of our team at Blue Nile. They have worked tirelessly to provide a superior customer experience at all touch points.

We continue to have high expectations and know this team will continue to lead the industry and continue to remain energized by their work and what it creates for the future potential.

Now, I will turn the call over to David for detailed review of our financial results.

David Binder

Thanks, Harvey, and welcome to everyone on the call this morning. As Harvey mentioned, we generated $103.7 million in net revenue in the first quarter, an increase of 6.8% versus the first quarter of the prior year. This represents a two-year average growth rate of 11.8%.

Engagements products in the U.S., the core of our business, generated $59.7 million in revenue. This represents a growth rate of 8% compared to the same period last year and an average rate of 13.5% over the past two years. Sales of our non-engagement products in the U.S. generated $26.1 million and grew by 7.6% versus last year and by an average rate of 7.5% over the past two years.

Consistent with the prior two quarters, growth in the sales of wedding bands and diamond jewelry exceeded 10%. This is an important measurement of success for the primary area of focus in our non-engagement product strategy and an important confirmation that our plan is working and diversifying the types of products we sell.

Our international business drove $17.9 million in sales, up by 1.9% and equal to 17.3% of the company’s total revenue. On a constant currency basis, international sales grew 6.4%.

This part of our business represents the biggest gap between our expected and our actual financial results. The primary issue is that weakening currencies in Canada and Australia created challenges for growth as local prices in those countries increased sharply.

We recognize that currency headwinds making may continue to be a challenge and will cautiously manage our investments in marketing and in the pricing of our products and local currency.

In contrast, sales in Asia-Pacific grew by nearly 11% and represents nearly 60% of our total international revenue in the quarter. This result was driven disproportionately by our performance in Greater China. We continue to invest for growth through marketing both online and offline, through enhanced product assortment and in-country sales and customer service.

For the overall business, gross profit as percent of net sales was 18.4%, compared to 18.2% last year, an increase of 20 basis points. Overall, the mix of revenue from the sales of engagements products remained steady at 72% of the total and improved profitability was driven across a broad range of our assortment.

In total, gross profit $19.1 million, compared to $17.6 million in the first quarter of 2013, an increase of $1.5 million.

Non-GAAP adjusted EBIDTA for first quarter was $3.6 million, increasing by 16.5% and equal to 3.5% of net sales, the highest EBITDA margin for the first quarter since 2011. This is an important data point in context of our strategic growth plan.

In the first quarter of 2012, we invested in margin, marketing and in targeted areas of operating expense to re-accelerate growth. Since that quarter, we have gradually increased our rates of profitability, demonstrating financial leverage from these investments. In addition to our expanding gross margin for the first quarter, we continued careful management of our operating cost structure and yielded greater overall profitability.

Net income for the first quarter totaled $1.1 million compared to $800,000 last year. SG&A expense totaled $17.5 million from the quarter compared to $16.5 million in the first quarter of 2013, an increase of $1 million. As a percentage of net sales, SG&A was 16.9%, slightly lower than the same period last year of 17%.

In the first quarter, marketing expense equaled 6% of revenue, which is the same rate in the first quarter last year. We continue to closely monitor the level of marketing investment and efficiency of this spend, balancing opportunities to accelerate revenue growth versus our ability to increase profitability.

Within other areas of our cost structure, we continued with investments to improve the user experience on our website, which we believe will further drive increases in conversion. We also continue to deploy resources in Mainland China, where we see the greatest opportunity for growth in our international business.

First quarter earnings per diluted share equaled $0.08 compared to $0.07 for first quarter of 2013. Net income per diluted share included stock-based compensation expense of $0.06 in the first quarter this year compared to $0.05 in the first quarter last year.

We ended the quarter with $56.7 million in cash. Our inventory balance was $35.2 million, up by 3.4%. For the sixth consecutive quarter, inventory continues to grow at rates lower than revenue, driving higher returns and further improving our working capital efficiency. Additionally, we are currently on track with our plan to purchase as much as $40 million worth of our shares this year.

In the quarter, we purchased 476,000 shares for a total of $16.5 million. Year-to-date through April 30th, we purchased a total of 922,000 shares for a total of $31.9 million. I’ll conclude this portion of the call with a discussion of our guidance for the second quarter and full year and then turn the call over to the operator to take your questions.

For the second quarter of 2014, we expect net sales to be between $108 million and $113 million and earnings per diluted share between $0.18 and $0.21. For the full year, we expect net sales to be between $485 million and $510 million and earnings per diluted shares to be between $0.85 and $0.90.

While we are confident in our ability to manage for long term and profitable growth, we recognize that there currently are challenges in the market that may negatively impact our short-term growth. And these are cautiously reflected in our guidance. I should also highlight that this range of guidance for EPS does not include the impact from potential future share repurchases.

I’ll now turn the call over to the operator and we will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Mark Miller with William Blair. Please go ahead.

Mark Miller - William Blair

Good morning, everyone. I was hoping you could address your domestic market share. Not the percent penetration but how that is changing. We look at the USD commerce market overall. It’s growing in the lower teens. What do you think the growth is for your categories online right now? You talk about the two-year stack growth but why do you think it’s become harder to comp on the prior year? So is it just getting traction on your initiatives or are there competitive or market factors that are affecting this?

David Binder

I will start this and then maybe Harvey can jump in. We certainly are recognizing that our one-year growth rates are tapering our core engagement business, which is the core driver of growth. It’s actually holding up fairly well. And you can look at it in context of overall e-commerce. And it is slightly behind the average.

I think that in short-term periods we can be more susceptible to volatility in the pricing of the products that we are selling. And I think that’s consistent with other online competitors, specifically in the category selling loose diamonds. And as we mentioned a couple of times in their prepared remarks, as prices become more volatile meaning they are either going up, going down but they are certainly changing a lot. In the short term, that can impact our ability to grow.

Mark Miller - William Blair

Okay. Can you address then specifically within mobile obviously getting the adaptive design is important for the company but you highlighted your objective to increase the conversion. How is that progressing? And what is anticipated in your guidance for the full year? Thanks.

David Binder

Sure. Harvey mentioned some pretty important and impressive stats for the progress we’ve made so far on mobile. Specifically when we look at the conversion rates and revenue that is being attributed to people who first come to us on their phone or on their tablet, we are looking at pretty significant double-digit growth rates in revenue per visit on those devices versus last year.

And that is something that we can see directly correlates with platform enhancements that we began at the end of last year and have continued to progress this year. What we’re looking for in our -- in the development of our strategy is the continued elements or bringing on elements that we have not yet completed and further refining those elements. Because once we get to a great enough appreciation and revenue per visitor on those devices, it gives us a greater ability to lean into more marketing to invest for greater growth.

So far we have seen that we are on a good trajectory. We see other abilities to increase that performance, which then gives us the ability to invest in marketing. And that our guidance, fairly cautiously, includes some improvements from that. But I would say fairly cautiously until we see more data.

Harvey Kanter

This is Harvey. The other thing I would add and while we won’t talk to specifics, it is in our perspective the fact that the innovators and early adopters are definitely ramping. And we can specifically see both what you specifically asked, conversion change and average revenue per visitor continue to move.

The fact of the matter is that penetration to a mobile device is growing at an accelerating rate and about where we expected. But I might characterize, if you remember this year, last year comparison on a mobile device is truly appreciated. And so not everyone is yet willing to make that move and our investments, we believe, are definitely the right investments over the long term. And it’s a question of building it as they move into that. And we believe it is more of the market will continue to move into mobile platform and actually execute, we will continue to see that mix shift move in our favor.

Mark Miller - William Blair

Great. Thanks. Maybe just a final one for me is, Harvey, I know you have been spending more time internationally with the transition that announced last quarter. Just update us on what you feel you need from a personnel standpoint and what we should expect? Thanks.

Harvey Kanter

It’s actually a great question. And we didn’t formally announce a release but we have announced a new President of our International Business Unit and we are really excited because it is a gentleman, Jon Sainsbury, who has actually been leading Blue Nile’s marketing efforts and has an incredible tenure with the organization.

And we’ve asked him to move over and he was the initial partner for Blue Nile involved in both Canada and Europe-U.K. as we moved in. And so we are really excited about that opportunity. He has a great operating regiment. He has an incredible understanding of customer, both domestically and internationally. And he was also the gentleman who help steer us in the development of our long-range plan. So we are looking forward to our movement.

To your point and the last time actually we saw each other, I moved over to China for a couple weeks. Only about six weeks ago, we did our second wedding show. We feel really good about the prospects. We definitely got more traction in the second wedding show than the first wedding show and we are continuing to move forward in the back-end infrastructure developing basically the ability to deliver the customer faster and to expand the assortment. And those are all things we have spoken about. In spite of the currency conversion, we know that these things will come back to us and we’ll get more traction as we move forward.

Mark Miller - William Blair

Thanks for that.

Operator

Your next question will come from the line of Ross Sandler with Deutsche Bank. Please go ahead.

Kevin LaBuz - Deutsche Bank

Hi. Thank you. This is actually Kevin LaBuz on behalf of Ross. My first question also centers on mobile. You highlighted some pretty impressive growth statistics there. But I was wondering, what percentage of your overall sales mix comes from mobile? And also, if you are seeing any difference in ASPs between tablets and smartphones? And I have got a follow up. Thank you.

David Binder

I will start with that. So overall sales mix, we don’t necessarily talk about this specific number. But it hovers around 20% and it’s growing at a much faster rate than the overall growth. That’s the direct numbers. And what we’re really focused on is, more specifically, what revenue you can attribute to something that starts on the mobile experience.

So while revenue directly from old devices is around 20%, it is much more significant when you look at the customer’s life cycle, which device they started on. And then you see actually a higher percentage of our revenue coming from something that initiated on a mobile device.

Kevin LaBuz - Deutsche Bank

Thanks. Again any difference that you are seeing in average prices between tablets and smartphones?

Harvey Kanter

Yeah. I mean, we certainly see the tablet is a better device for a higher-ticket purchase. As you would expect that you would see, directly transactions that happened on those devices, the mobile phone is going to be relatively lower and the next tablet is higher and then PC is your highest ASP.

Kevin LaBuz - Deutsche Bank

Okay. Thank you. And then just on guidance, I know you said there were a number of challenges that you saw that were incorporated into guidance looking forward. And you mentioned this quarter, on the international side of business that FX is a drag. So just in your guidance for 2Q and for the year, is that incorporated the FX had been continuing?

Harvey Kanter

That is. And again, it is, specifically in a couple of markets that are relatively large, Canada and Australia. We expect that to be continuing to be a challenge. And again on the commodity side, we expect some continued challenges in the short run.

Kevin LaBuz - Deutsche Bank

Great. That’s all for me. Thank you.

Operator

Your next question will come from the line of Rohit Kulkarni with RBC. Please go ahead with your question.

Rohit Kulkarni - RBC

It’s been nicely bumped a little bit but you said that engagement was still 72% of total. So wondering what we have led to that and whether any higher ASPs, lower ASPs or any other mix shift?

David Binder

I’m sorry. We didn’t hear the first part of the question. Can you repeat that, please?

Rohit Kulkarni - RBC

I’m sorry. On the gross margin side, it increased year-over-year for the first time in quite a few quarters. And -- but you did mention that engagement is still around 72% of total. So wondering what other factors or other product category mix shifts may have caused that?

David Binder

The improvement in gross margin was very broad-based. So it was both in the engagement and in non-engagement categories. And I would say that it is a combination of very careful pricing, along with good management of our inbound costs from our suppliers. We are also becoming more and more disciplined and regimented about the promotions that we offer. Promotions have a role in any retailer, especially when you are around holiday season. But we sell a very considered purchase and so we have a very good balance in discipline approach there and that helped improve our gross margin, those 20 basis points.

Rohit Kulkarni - RBC

Okay.

Harvey Kanter

The other thing that I would comment on is that the growth that we’ve been achieving, if you think about diamond jewelry, bands and even non-engagement fashion. We have had some growth, certainly double-digit in the two core categories. And those are north of the average. So to David’s point, we have both, mixed shift as well as in category movement that is really working to generate the 20 basis point move.

Rohit Kulkarni - RBC

Okay and got it. And then, can I ask you, in the past year, you’ve mentioned that both volatile diamond prices and stronger U.S. dollar, when both these things come together in the quarter you sort of have a double whammy on your international growth rate. Your consumer purchasing power goes down that much more incrementally and it amplifies. And over the last -- maybe, couple of quarters you’ve seen, at least especially in Q1, you saw dramatic deceleration in international. Was that the only driver, or you called out the personnel changes as well, anything else that we should think of?

David Binder

Sure. And I think that there are two things that we have identified really are the key drivers. And when you look at the areas where the cross section between diamond prices and dollar strengthening versus the local currencies are the most acute, that’s specifically where the problem is. And I think that the order of magnitude that we saw in the first quarter was enough, that it impacted the high ticket part of the business, which is a big driver in topline revenue.

And when you can’t bring in the high ticket in those markets, it’s very hard to generate material growth. So it is really that. I would not say that it is personnel. I think that we’re looking to evolve the operating regimen and discipline as some of the markets and particular in China becomes more advanced. And the personnel changes are really around that evolution. It does not have to do with the performance in the first quarter.

Rohit Kulkarni - RBC

Okay. Great. And quick one on mobile, when I tried out the app it is very nice, looked at the popup stores as well. As in, what are the use cases that you are targeting? As in broadly, is that, you’re trying to educate the customer about pricing, about the shopping process, so there is research element or there is price comparison for a iPhone shopper or do you actually see people converting on high ticket prices or a certain subsection of ticket prices, so what are the -- ?

Harvey Kanter

This is Harvey. That’s a great question. I might remind you that we were one of the first jewelers, if not literally, the first jeweler since 2010 to have the app in place. And initially, our app was green to market the experience in a way that would most interact with our loyal customer and the customer that knew us and that wanted to go deeper. In addition, it provides access in a non-mobile based environment to, quite honestly, be in our competition and to help educate the consumer. One of the things we believe is embedded in our DNA is education, counsel and guidance. And that app actually provides an extended opportunity to do that wherever you are.

In addition to that though, the fact of the matter is that that customer that is driven through experience with us is coming back and using that app in ways that are unique, both at the initial onset through things like DreamBox, which is the ability to be inspired by multiple, different rings that we have executed for other customers. You may or may not know this but you can shake that app. And the average number of times that app is shaken, literally to be inspired, if you will is 27 times as a woman, when we assume it’s a woman, is shopping for a ring. And so she is shaking it, seeing 27 different versions of the ring and is very compelled by our offer.

In addition to that though, to your point, it provides access to customers to be able to compare and contrast real time. So when they are in a store, when they are looking at alternative ways, they can search our 140,000 or 150,000 stones and see real time, the differences in price, not just the metrics, if you will, of the qualities of the stone but the actually price.

And so it crosses across many different elements of the shopping experience from the initial process to actually bringing them across the finish line. And ultimately, what we saw in fourth quarter, we continue to see as one of the higher levels of growth year-over-year on average revenue per visit, when they’re in the conversion.

Rohit Kulkarni - RBC

Okay. Great. Thanks a lot, guys.

Operator

You next question will come from the line of David Wu with Telsey Advisory Group.

David Wu - Telsey Advisory Group

Hi. Good morning, everyone. In the non-engagement category, you talked about how both, diamond jewelry and wedding bands are still are up double digits, which, obviously implies that some of the other categories in non-engagement were a bit softer. But can you perhaps talk about sort of the other categories, which ones sort of underperformed? And if you could elaborate more, sort of, on the initial traction of some of the new product launches such as Designer Collective and if it is performing in line with your expectations?

Harvey Kanter

Yeah. This is Harvey. A couple things. I’m providing you too much detail in a really public setting. We have definitely seen some movement in some of our core businesses. The pearl category continues to be really important to us, as is the gem category. And from the non-engagement fashion side of the mix, we saw some acceleration in certain categories, things like rose gold and gold in general but really rose gold, specifically continues to perform and move forward.

In the designer offering, to be honest, I would say it’s too early. You may or may not realize but we literally launched on the 24th of March. And so it is pretty early in the process. But our belief based on having a unique mix in the offer, is that -- and we have seen this initially with the launch. The customer is definitely responding to certain elements. And cross those five designers, including one that is actually the Blue Nile Studio.

The fact of the matter is that we have seen the customer starting to pick and choose between the offers. To the point, it will continue to give us more and more direction. And then, Monique Lhuillier’s diamond jewelry offer, actually performed measurably better than we anticipated. Mind you, we had a fairly -- not necessarily a meeker expectation. But the initial launch was an extension of bridal and we didn’t expect it to be as big as bridal.

The other parts, I think are worth noting in the diamond jewelry category, in the band category, which we specifically spoke of. We have definitely seen the customer moving, both up market in average price point in one of the two categories without talking about the specifics. And the other category continues to be an extension of the relationship we are trying to build with our customer.

We talked very publicly about the attachment rate and what we believe will be critical to moving the customer through the pipeline and based on their initial engagement ring purchase. And we’re seeing that both across the, what we would say is the female gender and the male gender. And it is more defined by what they are buying, where we can connect the dots, i.e., basic bands are, we believe are certainly him and we’re seeing an appreciation in that, so lot of different sound bites. The reality is we don’t want to put it altogether and share what would be considered competitive insights too broadly.

David Wu - Telsey Advisory Group

Great. And can you comment at all on, sort of early reads around Mother’s Day and sort of your merchandising marketing plans around it?

Harvey Kanter

If you remember last year at Mother’s Day, was exceptionally strong for us.

David Wu - Telsey Advisory Group

Right.

Harvey Kanter

It actually generated more revenue than on Valentine’s Day, which is the first time in the company’s history we’ve seen that dynamic. We are a solid seven, eight days away from seeing the full ramp of the holidays. And so we are optimistic but we are really little bit cautious right now that the ramp has been relatively gradual. And reading what we are seeing externally, it feels like there could be a little bit of consumer pullback, when you’re looking at GDP data and data coming from the NRF. So we are a little bit cautious that this Mother’s Day may not be as strong as last year’s and that’s obviously reflected in the guidance.

David Binder

And the only thing I would remind you is that literally had a record performance in Mother’s Day. I will actually remind you that it was the biggest Mother’s Day in our history and the first time Mother’s Day ever exceeded Valentine’s Day. So there was somewhat of an anomaly and it creates a two year comparison that may be more challenging than others have.

David Wu - Telsey Advisory Group

Right. And can you talk about the initial test results from the showrooms at Nordstrom in Seattle and reserve field, if you are see it help driving better traffic conversion at all in those region to the site and if you are planning to expand the showrooms at all to more locations?

Harvey Kanter

The fact of the matter is, it is a test and the important part is that we are trying to learn more than anything. So it is not about a land grab or maximizing the upside at the moment. It is more about learning. Can I see, touch and feel to get an outcome? But specifically to your question, we are encouraged by the results. We believe that it will continue to grow and develop.

We have definitely seen it getting more traction. And remember, one of them has been in place about four and a half months, the other one about three months. The average buying cycle when he buys is one at three months. When she is involved, it is four to six months. So we are looking at extended test and before we move forward in anyway.

Both on our end, although it is pretty much cost -- it’s a low price investment is a better way to say. But investment is both, on our end and also allocations based on Nordstrom’s end. And so we don’t have great expectations. We’re going to roll it out in a comprehensive way until we really understand the metrics and the traction we’re getting. But we are encouraged by it. I have actually recently visited the Roosevelt Field store.

We were encouraged to hear that people literally have been driving from Boston, Philadelphia, New Jersey and Connecticut into the Roosevelt Field store. And quite a few are also making the trip from Manhattan, so definitely getting some traction. The Seattle store were more embedded, if you will, in the market where we have a greater awareness and it has performed even better.

David Wu - Telsey Advisory Group

Great. And then just lastly, if you can just comment, I mean, you touched a little bit on it earlier. But if you could tell us what are you seeing in just the overall or sort of jewelry promotional environment and how you are planning promotions for Mother’s Day and the rest of the second quarter?

Harvey Kanter

Yes. What David said is accurate on our end. And while I can’t characterize a great deal on competitors and what we believe we see is at a minimum of maintenance of the competitive posture and quite honestly in some level, we think it is hotter. It definitely appears, quite honestly, we get all of the emails of all of the competitors. I’m assuming they do with us as well. And most of them are talking to pretty deep discounts and consistent promotions. We really haven’t accelerated our depth of promotion, even if you look at our current Mother’s Day promotion with 20% to 25% off our model, it’s different. We offer greater values every day and we don’t go as deep.

We look at many of our competitors between 30% and 60% off. Sometimes, 60% plus, 20% on extended, extending those promotions. It’s a different model. And so it’s hard to calibrate for the customer or probably for you all, the relative price comparison. And so you have to get into nuts and bolts. We clearly believe that the value in our mix is appropriate but we don’t demonstrate this level of depth in discounting.

David Wu - Telsey Advisory Group

Excellent. Thank you very much.

Operator

Your next question will come from the line of Trisha Dill with Wells Fargo Securities.

Trisha Dill - Wells Fargo Securities

Good morning. Thanks for taking my question. Just I had one on marketing. Maybe you could talk a little bit more about the consumer response to marketing during the quarter and maybe how that compared to Q4. When you said it was a bit tougher to get the customer to respond and ultimately convert. I know it is hard to separate the marketing challenges you had from the shortened holiday season. So, just wondering if you are seeing any improvement there? Thanks.

David Binder

Hey, Trisha, this is David. I’ll start with the question. We are actually seeing that customer response and conversion across all platforms are looking pretty strong. So even the PC is looking good and it’s improving. And then, we talked a little bit about customers coming to us on the mobile phone or on the tablet and getting a better response from them. So I think that when the customers engage with us, we’re seeing a very good behavior.

What we are seeing is there is a lot of price inflation within the marketing channels and the space is becoming more crowded, in particular on the mobile devices. So there is a lot of expense growth through Google and through some of our other channels and it feels like there is this continued shift from omni channel players putting more of their budge there and really crowding out the space.

So the dynamic I think is that there is just more pricing pressure but we are getting the customers to engage and convert. And I alluded to this a little bit in my earlier comment that we think that that is the big impetus for growth in our business that when we really can get conversion rates across devices, we are in a much better position to compete with everyone else on those marketing channels. But as we continue with our plan getting conversion rates even greater, understanding revenue attribution when they come to us on the phone first, it gives us a much better position, a competitive advantage to bid for those marketing placement.

Trisha Dill - Wells Fargo Securities

Okay. And then you noted you kept your promotions relatively in line every year, which you’ve noticed as well. But at what point, would you get a little more promotional to go after shares, or even perhaps Mother’s Day, if you don’t see that ramp as you expect? Thanks.

Harvey Kanter

This is Harvey. Actually that’s a great question and you might appreciate it’s a balancing act, right. We have a brand, we have a market position and there are certain levels with which we can accelerate and certain things which we think are off-brand and not in the best interest of the long-term strategy. So while it’s not necessarily a non-answer answer, we don’t expect that we would push market share short term to basically drive sales growth in excess of an expectation that would be counter to a long-term strategy. We think our greater opportunity -- and Pearl is a perfect example to demonstrate the quality and value in the mix and try to help the customer understand really the differences.

Without naming names, there are a few products that we look at right now on our website that it’s difficult for customer to understand the appreciably higher quality product that we are offering. And other people are being challenging us on price and we are going head to head against that. But those are unique elements as opposed to broad site differentiation in terms of promotion going deeper, which just doesn’t make sense for the long-term brand. We provide and you can just see it in our margin rates, which are obviously driven by at some level our markup. We provide an incredibly different experience and value from the get-go. And the ability to run promotions that are 40%, 50%, 60% off is just not within the realm of our business and we don’t believe buying share in that sense makes any sense.

Trisha Dill - Wells Fargo Securities

Thank you.

Operator

The next question will come from the line of Kevin Kopelman with Cowen and Company.

Kevin Kopelman - Cowen and Company

Thanks so much. I just really have a follow-up on the previous question. But looking from the marketing expense angle, instead of promotion, you kept marketing expense really in line year-over-year as a percentage of revenue. How are you thinking about that spend as you go through the year? Thanks.

David Binder

This is David. We are constantly looking at ways to increase investments when we are seeing good yield on marketing. The balance that we struck in the first quarter really reflected how much cost inflation we saw in the market and that incremental dollars going into marketing didn’t have that yield. In the current dynamics, we would expect to gain incremental efficiency from where we are. So a little bit of improvement in profitability.

But I would add which we say often, when we see an ability to lean into growth, because we have the performance from those placements, we will lean into it. And so right now, we are in a position of really optimizing profitability based on what we see happening in the volatilities, diamond prices and currency. If we see a little bit of a better conversion rates, we might lean into higher marketing. But I would expect that would see that also on the reacceleration of revenue growth.

Kevin Kopelman - Cowen and Company

All right. Thanks so much.

Operator

Your next question will come from the line of Paul Bieber with Bank of America Merrill Lynch.

Paul Bieber - Bank of America Merrill Lynch

Good morning, Dave and Harvey. Thanks for taking my questions. Can you remind me of how big Australia and Canada are in terms of international revenue? And related to that, do you expect international to turn negative in Q2 because of the FX volatility? And then secondly, did I hear you correctly that you repurchased around 500,000 shares so far in Q2?

David Binder

Sure, this is David. So we don’t break out the numbers specifically on Canada and Australia but I will say that Canada is our largest single market. We talk about Greater China and Asia Pacific at 60%. That’s a couple of different countries and areas. So Hong Kong, Mainland China, Singapore, Thailand. Canada is the single largest market. So when it turns down, which it did in the first quarter, it’s really a challenge for us to grow.

In the second quarter, our guidance expectation is that growth rates moderate. We don’t necessarily expect internationals to be negative in the second quarter but we don’t expect it necessarily to be helping us much either. Your second question -- actually, I’m glad you asked that. The year-to-date number of shares purchased was 922,000 shares. So we purchased just under 500,000 in the first quarter and an incremental of 400,000 shares roughly in the second quarter so far. We are up to close to a million for the year.

Paul Bieber - Bank of America Merrill Lynch

Okay. Thank you.

Operator

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

Scott Tilghman - B. Riley

Thanks. Good morning. I have two sets of questions. First, I wanted to revisit the marketing topic. I’m wondering what your thinking is around marketing outside the core customer base for the balance of the year versus continuing to go back and mine the existing base. And on a related topic, I wonder what you are finding is more cost effective focusing on new customer acquisitions and the lifetime value of those customers, or are you using some discounting to get the core customer rates to come back and buy?

David Binder

Sure. I think those are great questions and consistent with the discussions we have very often internally. We think of marketing in those two different areas and we continue to focus on new customer acquisition primarily through our current channels, which is primarily digital. And that’s an important part of the mix. We expect new customers to Blue Nile to be relatively flat versus last year, which is actually consistent with our growth strategy. We lifted the level of new customers to be at historic highs over the past couple of years. And we think we are currently at the right level, in part because of the mix of customers. We are bringing in higher ticket customers than we have in the past. We are bringing in more engagement, wedding bands and more diamond jewelry customers, who buy a bigger piece or bigger product than the lower ticket fashion items. So we see a greater lifetime value from those customers. So we think that we’ve got the right cadence for new customer acquisition and focusing a lot of marketing effort there.

Remarketing is very important to us. And I think it’s an area of greater opportunity than we’ve necessarily mined in the past. We have life cycle series. We’ve got targeted promotions that go out to our files of customers and those perform well. Repeat revenue has consistently grown as a percentage of our total. But there is a lot more opportunity out there for us to get the cadence of remarketing and the product offer right. And what’s distinct about our business versus a lot of other e-commerce companies is we sell extraordinary pieces of jewelry that are appropriate for somebody during very important moments in their lives and those moments are spaced out over multiple years. So, getting that cadence right is something that we continue to evolve.

Scott Tilghman - B. Riley

So if I hear you right presumably the remarketing effort should actually not experience as much of the advertising cost pressures that you would see if you’re going after new customer growth?

David Binder

I think that’s an insightful comment that if you can get repeat revenue growing more significantly, then it provides more efficiency in the cost structure. You are not investing as much for those customers. And again I think that there is tremendous opportunity there for us to continue to improve.

Scott Tilghman - B. Riley

That’s helpful. My second question was around international. You talked about the various pressures related to commodity and currency volatility and also the focus on the operating regime. With such a strong balance sheet, I’m wondering if you’re rethinking how you manage inventory at least in those markets?

Harvey Kanter

In particular, international is very diamond based product set. That’s where we have a consistent dial and fundamental value proposition that it’s easy for the customers to understand. And that is the part of our business that doesn’t carry inventory on the balance sheet until the customer makes the purchase.

So with international growth, we actually expect to drive a lot of the efficiency in working capital and inventory where we have opportunities to invest to bring products to market that sits in a warehouse until the customer purchases it is relatively small. We will take some bets here and there to see if we can broaden the assortment but that is not going to be the lion’s share of what the customer is choosing.

Scott Tilghman - B. Riley

Great, thank you.

Operator

We have time for one additional question. Your final question will come from the line of Rick Patel with Stephens.

Unidentified Analyst

Hi. This is (indiscernible) filling in for Rick. I wanted to ask about your diamond prices. You mentioned that it’s been very volatile. If can you give us an idea of how much they’ve changed year-over-year and what your expectations are for the rest of the year?

David Binder

Sure. This is David. And it’s not a very new phenomenon or specific to the first quarter but we’ve seen it increase recently. What you are seeing is this cadence where the rough miners are demanding more and more for their product and the polishers are then passing this cost onto retailers and listing the higher prices on our site and the customers are just saying no. And so there is this pressure, this dynamic in the market which will be interesting to see it plays out.

And because it’s a little disjointed where rough is rising, customers are saying no, it’s hard to predict what will play out for the rest of the year. We should expect in the short term that there will be continued volatility, which is not necessarily just prices going up but prices changing frequently and the breadth of the changes. In certain parts of our products set on smaller stones are up in the significant double-digit range versus last year. Some of our core products are up in the single percentages but it’s the matter of how quickly they’re changing and how broadly they change.

Unidentified Analyst

And then if I could just ask one more quick question on intra-quarter trends. Could you talk about specifically around Valentine’s Day and whether trends in the second half of February and March were consistent? Thanks.

David Binder

Sure. Valentine’s Day was okay for us. It wasn’t as strong as we had hoped and I think that was a good portion of where we are not doing as well as we had hoped to on the higher end. Coming out of Valentine’s Day, we actually saw a really good return to growth in our business and then we saw a little weakness at the end of the quarter which is leading us to our cautious guidance for the second quarter.

Unidentified Analyst

Thank you.

Operator

That concludes our question-and-answer portion of today’s call. Do you have any concluding remarks?

Nancy Shipp

Thank you for joining us today. We look forward to talking to you next quarter.

Operator

Ladies and gentlemen, this does conclude today’s conference call. Thank you all for joining and you may now disconnect.

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