Blue Nile Q1 2008 Earnings Call Transcript

May. 7.08 | About: Blue Nile, (NILE)

Blue Nile, Inc. (NASDAQ:NILE)

Q1 2008 Earnings Call

May 6, 2008 5:00 pm ET

Executives

Eileen Askew - Manager, Investor Relations

Diane Irvine - President, Chief Executive Officer, Director

Terri Maupin - Principal Financial and Accounting Officer, Vice President - Finance, Controller, Secretary

Mark C. Vadon - Executive Chairman of the Board

Analysts

Doug Anmuth - Lehman Brothers

Mark Mahaney - Citigroup

Jack Murphy - William Blair

Jim Friedland - Cowen and Company

Lorraine Maikis - Merrill Lynch

Kristine Koerber - JMP Securities

Marianne Wolk - Susquehanna Financial Group

Dan Geiman - McAdams Wright Ragen

Stephen Ju - RBC Capital Markets

Operator

Good afternoon, ladies and gentlemen. My name is Marcello and I will be your host operator on this call. (Operator Instructions) At this time, I would like to introduce Eileen Askew, Manager of Investor Relations of Blue Nile. Ms. Askew, you may begin.

Eileen Askew

Good afternoon and thank you for joining us on our conference call today to review our first quarter 2008 financial results. With me today are Mark Vadon, Executive Chairman;

Diane Irvine, President and Chief Executive Officer; and Terri Maupin, Vice President of Finance and Controller.

Before we begin, I would like to remind you that some of the comments we will make on this call are forward-looking, including without limitation statements regarding expectations of future financial performance, net sales, gross margin, expenses, net income, operating cash flow, capital expenditures, international growth, stock-based compensation expense, and other financial statement or balance sheet items, as well as statements about our future plans and objectives, beliefs, expectations, targets, goals, outlooks or predictions for the future.

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 projections and 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 identify 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 internal use software and website development.

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 reconciliations of non-GAAP measures to the nearest comparable GAAP measures.

At the conclusion of the call, we will conduct a question and answer session. Now I would like to turn the call over to Diane Irvine.

Diane Irvine

Thank you, Eileen. Good afternoon, everyone. During today’s call, I’ll provide an update on the progress we’ve made on our goals in Q1, our thoughts on the economic environment, and an update on our international business and our stock buy-back program. Terri will then take you through a review of our first quarter results and our financial goals for the year. Following our prepared comments, Mark and I will be happy to take your questions.

During our February conference call, we stated that the health of the U.S. economy and general consumer confidence were at the forefront of our minds. We felt that the jewelry sector, as a luxury category was perhaps more prone to economic downturns than other categories of retail. We indicated in February that we expected our first quarter sales to be relatively flat with last year.

While we were disappointed to set expectations at this level, we felt our guidance was appropriate given the external environment. Today we reported Q1 sales of $70.5 million, up 3.8% from the same period last year. While we obviously would have liked to deliver higher revenues, we are pleased to have delivered results that exceeded our expectations against a difficult economic backdrop.

In addition, we are pleased with our overall performance against a very difficult comparison with last year’s first quarter, in which we achieved a growth rate of 34%, the highest growth rate in our history as a public company.

In terms of the sales trend during the quarter, we experienced very weak sales as the quarter began but saw sales strengthen each month as we moved through the quarter. For the quarter overall, we experienced a slowdown across most product categories, especially at higher price points.

We believe that our first quarter performance was impacted by cautionary behavior on the part of consumers that it tied to U.S. economic pressures, as we have heard from many other retailers.

Within diamonds, prices below $5,000 showed the most strength while the very high end experienced weakness during the quarter.

I would like to provide some perspective on the overall retail jewelry environment in the U.S. and contrast the strength and benefits of our unique model with the situation faced by physical store jewelers.

While our sales improved marginally as the quarter progressed, the environment remains very difficult in the U.S. jewelry market. Consumers appeared to have pulled back on the purchase of high ticket items and we believe many individuals who might have financed this type of purchase in years past are facing difficult accessing credit for their purchase.

In addition to the economic uncertainties that are influencing consumers in the U.S., commodities prices have risen dramatically over the last year, with gold up approximately 30% and platinum up approximately 50% from the same time a year ago.

As 2008 has progressed, diamond prices have also begun to rise. With prices for the raw materials of fine jewelry rising, consumers are even less able to afford significant purchases in the category.

Given all of these factors, we believe most U.S. jewelers are facing significantly negative comp-store sales. Already this year we have seen several large jewelers in the U.S. file for bankruptcy protection while other large chains have announced significant store closures.

While the economic environment and the increases in commodity prices affect us, we are more confident than ever in the strength of our differentiated business model. We are financially strong and we are intent on maintaining our focus in building our business cost effectively.

We will execute with discipline but we will also continue to invest in initiatives that allow us to deliver the best consumer experience in the industry.

While we are not satisfied with sales growth at the current levels, we believe that at these levels we are actually gaining market share in a sizable market that is experiencing near-term contractions in demand.

As we manage through these uncertain times, we are confident that our model is better positioned than any in the industry. We believe that the current environment provides the opportunity for us to further enhance our competitive position. We are the low cost player in the industry with a capital efficient model unlike our land based competition. This model can weather an economic downturn like few other retail businesses and we therefore have a significant opportunity to strengthen our relative competitive position during this time.

We provide our customers with an exceptional value proposition which we believe is especially important in the current environment. In fact, we believe the Blue Nile brand resonates with consumers, especially in challenging economic times. We are an extremely challenging competitor to traditional retail jewelers in any environment and perhaps even more so in the current one.

Despite the economic environment in the U.S., our international business is experiencing robust growth and is performing very well. In Q1, our non-U.S. sales grew by more than 120% to $5.7 million and represented over 8% of our total sales.

International sales were less than 4% of our business in Q1 a year ago and were approximately 6.5% of our sales in Q4. While our international business is still very young, the growth has been tremendous. In Q1, our sales to Canada and the U.K. rose by approximately 100%. In addition, during February we launched the ability to purchase select items from Blue Nile for shipment to other countries. This launch started with 12 countries and has since expanded to a total of 25 countries in Europe and Asia-Pacific.

While we are very early in the build-out of this part of our business, with a limited offering for customers and little marketing support, the response from consumers has been tremendous right out of the gates.

In March, this offering to new countries represented almost 2% of our total demand. These results are very promising and demonstrate the strength of the Blue Nile customer experience and the appeal of our brand beyond the U.S. market.

Looking ahead many years, our sales outside of the United States are likely to be a very significant part of our business.

Last quarter, I outlined our goals for 2008. These goals were to enhance the Blue Nile customer experience, manage an efficient and lean cost structure, and drive growth of Blue Nile beyond the United States.

During the first quarter, we focused on delivering against these goals and we made significant progress. As the year goes on, we will align our resources behind these priorities in order to continue to build Blue Nile into an iconic brand that delivers an unmatched consumer experience in the jewelry industry.

I would like to touch more specifically on our initiatives in the area of customer experience, which is the hallmark of the Blue Nile brand. You’ve often heard us talk about the ways in which every one of us at Blue Nile obsesses about our customers. One f our key initiatives in 2008 is our focus on the beautiful, high quality products for which we are known. A specific area of focus is to broaden our collection of settings with designs that complement our classic favorites and with designs that take our offering to a new level of aesthetics.

Another key initiative in this area is the implementation of an all-new comprehensive service and training program for our customer service team. We set the bar high in this area and we look to continually improve the knowledge and enthusiasm with which we deliver the Blue Nile experience to our customers.

We are performing a comprehensive review of every touch point of the Blue Nile brand with our customers. With respect to our website, we are focused on the enhancement of our website features and functionality. Our entire team is focused on and committed to delivering an evermore compelling customer experience.

I would now like to take a moment to review our share buy-back program. In the first quarter, we invested $41.7 million to repurchase nearly 1 million shares of our stock at an average price per share of $42.05. We began repurchasing stock for the first time in February 2005, a little more than eight months after our initial public offering. Since that time, we have invested over $136 million to retire almost 3.8 million shares of our stock at an average price per share of just over $36.

One of the great advantages of our business model is capital efficiency. Our business generates significant operating cash flow and needs very little capital investment, even as it grows. As we generate cash, we continuously evaluate how best to return capital to our shareholders in an efficient way.

At the end of the first quarter, we had approximately $108 million remaining in our buy-back program, and we will look for opportunities to continue to repurchase stock.

Before I turn the call over to Terri, I want to comment on a very important announcement that we made today in addition to our earnings announcement. We announced today that Marc Stolzman will be joining Blue Nile as our CFO on June 9th. Marc joins us from Imperium Renewables where he is currently CFO. Marc previously spent 13 years at Starbucks where he held a number of executive leadership positions, including senior vice president of finance and business development of Starbucks Coffee International, Chief Financial Officer of Starbucks Coffee Japan, and Vice President North America Finance.

Marc brings 20 years of finance and retail experience and has great depth of financial and international expertise, as well as a strong record of delivering results in a growing consumer business. We look forward to welcoming Marc to Blue Nile next month and to introducing you to him in the near future. I am thrilled that he will be joining our team.

I would now like to turn the call over to Terri to review our first quarter results in more detail.

Terri Maupin

Thank you, Diane and good afternoon, everyone. In the first quarter, we posted net sales of $70.5 million, representing an increase of 3.8% over the first quarter of 2007. Gross profit for the quarter was $13.9 million, an increase of 5.1% year over year. As a percentage of net sales, gross margin for the quarter was 19.8%, an improvement of 30 basis points from a year ago. We are very pleased with our gross margin performance, especially with the significant increases that have taken place in metal prices over the past year.

For the quarter, total orders were down 3% as compared to a year ago and our average selling price per order increased 6.5% to $1,637 in the first quarter. However, it is important to note that our order total a year ago included a Google checkout promotion that drove a significant number of low ticket orders. Excluding this special promotion from last year’s totals, orders in the first quarter of 2008 increased approximately 8% over last year and our average ticketed declined approximately 4%.

Net income for the quarter was $2.6 million. Earnings per diluted share were $0.16, exceeding the high-end of our guidance range by $0.02. Net income per diluted share for the quarter includes stock-based compensation of $0.07, compared to $0.05 for the first quarter of 2007.

I would also like to point out that in the first quarter of 2007, EPS of $0.19 included $0.01 of earnings related to income from legal settlements.

SG&A totaled $10.9 million for the first quarter. SG&A included $1.7 million in stock compensation expense in the first quarter of 2008 compared to $1.2 million in the first quarter a year ago. Excluding stock-based compensation expense, SG&A as percentage of sales was 13% compared to 12.2% in the first quarter of 2007.

Our first quarter results include higher costs year-on-year related to our recently expanded domestic fulfillment center and our international operations. We continue to make the investments in our business that will allow us to capitalize on the significant opportunities that we see to build our brand, capture additional market share, and further enhance our category leadership position.

Operating income for the first quarter totaled $3 million, representing an operating margin of 4.3%.

Non-GAAP adjusted EBITDA, which we define as earnings before interest and other income, income taxes, depreciation and amortization, adjusted to exclude the effects of stock-based compensation expense, was $5.2 million for the quarter compared to $5.4 million in the first quarter of 2007.

Interest income totaled approximately $800,000 for the quarter compared to approximately $1 million in last year’s first quarter. The decrease in interest income is primarily due to lower interest rates than in the first quarter of 2007.

Our effective tax rate for the quarter was 34.9%, equivalent to the rate a year ago. We ended the quarter with a cash balance of $42.7 million after having repurchased $41.7 million of stock in our buy-back program.

Turning to the statement of cash flows, as a reminder, cash from operations is typically negative in the first quarter of our fiscal year due to the significant reduction in accounts payable following the fourth quarter holiday season. In the first quarter, cash used in operating activities was $38.3 million. For the remaining three quarters of the year, we typically expect to generate significant positive cash flow from operations.

At the end of the first quarter, our trailing 12 months non-GAAP free cash flow was $24.2 million.

I would now like to discuss our guidance for the second quarter and full year of 2008. As a reminder, we operate on a 52-53 week fiscal calendar. Our fiscal year 2008, which will end on January 4, 2009, will include 53 weeks rather than the normal 52 weeks. The additional week will occur in our fourth quarter ending January 4, 2009.

As Diane mentioned earlier, we remain cautious in our outlook for 2008, given the uncertainty in the macro environment and the slowdown in consumer spending in the United States. For the second quarter, we expect net sales growth to range from 0% to 5% compared to the second quarter of 2007. Net income is expected to be $0.15 to $0.18 per diluted share.

I would like to provide perspective in comparing Q2 with last year’s second quarter. In the second quarter of 2007, we had one individual sale that totaled $1.5 million. We also ran a significant promotion with Google Checkout that drove a similar amount of revenue. Excluding these non-comp revenue amounts, the high-end of our guidance for Q2 of this year reflects an adjusted growth rate assumption of approximately 10%.

It’s also important to note that our gross margin in the second quarter of 2007 increased by 30 basis points due to the benefit of a one-time refund of shipping charges. Additionally, Q2 2008 is expected to have higher stock compensation expense that equates to an incremental $0.03 of EPS compared to the prior year.

We are reiterating our goal for the year to grow net sales and non-GAAP adjusted EBITDA for 2008 by at least 10%. Our goal with respect to earnings per share is to achieve GAAP EPS that is approximately equal to our 2007 level.

There are a few important items to note with respect to EPS for 2008 compared to last year. First, the estimated impact of stock compensation expense for 2008 is approximately $0.30 per diluted share, which is $0.08 higher than the impact of stock compensation expense on EPS for 2007.

Second, we have assumed significantly lower interest income for the year as a result of the decline in interest rates compared to a year ago and lower cash balances resulting from our Q1 share repurchases.

Third, 2008 includes higher costs year-on-year related to our recently expanded domestic fulfillment center and our international operations. We expect capital expenditures for the year to approximate $2.5 million.

Now I would like to turn the call back to Diane.

Diane Irvine

Thank you, Terri. In summary, we believe we are extremely well-positioned to continue to enhance our leadership position in the category. We are focused on executing with excellence in order to capture the tremendous opportunities that we see for our business over the long-term.

Mark and I would be happy to take your questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Doug Anmuth with Lehman Brothers. Please go ahead.

Doug Anmuth - Lehman Brothers

Thank you for taking my question. First one, just looking at the revenue growth rate, particularly in the back half of the year, even when you normalize for some of the things you just mentioned in the second quarter, it still looks like you are expecting growth to accelerate pretty nicely in the back half. I know the comps get a little bit easier there but can you also talk about anything else in particular that you are thinking about there in the back half of the year?

And then also, can you comment on where you think you are positioned now in terms of inventory levels. It still looks a little bit high. I know that you had the issue coming out of the fourth quarter. How do you think you are positioned now in terms of inventory? Thank you.

Diane Irvine

Thanks, Doug. In terms of our revenue growth rate, we certainly have no better information on the economy and how the second half will look in the U.S. compared to anyone else. You know, I would tell you that our goal, as we have stated in our earnings release, is to grow revenue and EBITDA by at least 10% this year. We will certainly do everything we can internally in terms of managing the business and then we will see what the external environment holds.

International growth is doing well and I think our focus on conversion and the customer is what we are all about so I feel really good about the way we are operating internally.

In terms of inventory, as you point out we certainly made progress during the quarter. I’d say we ended the quarter still modestly higher than where we’d like to be and so that’s something that we’ll work through and we’ll continue to improve that position in Q2.

Doug Anmuth - Lehman Brothers

If I could follow-up, Diane, can you also comment on conversion rate trends during the quarter and also the traffic growth that you saw?

Diane Irvine

Doug, in terms of traffic, we saw healthy growth there and I think we won’t provide any other color in terms of exactly what was happening with either traffic numbers or further detail.

Doug Anmuth - Lehman Brothers

And that includes conversion as well?

Diane Irvine

Correct.

Doug Anmuth - Lehman Brothers

Okay. Thank you.

Lowell Singer

Thanks, Doug. Operator, next question, please.

Operator

Our next question is from the line of Mark Mahaney with Citigroup. Please go ahead.

Mark Mahaney - Citigroup

Thank you very much. Two questions, please; of the international markets outside of Canada and the U.K., could you maybe talk about one or two of the ones so far that have gained relatively material traction? And we know it’s early days. And then secondly, consistently in the past there’s always been this great gap between your U.S. sales and what we get from online -- I’m sorry, offline traditional retailers and it seems like that gap was much narrower this quarter. Is it that -- any comments on that, that kind of spread? If your U.S. sales were down roughly 1% year over year and it looks like for some of the traditional diamond retailers, they were down mid-single-digits versus the 20% gap we’ve seen in the past. Is there any -- as you think through the economic impact that all, everybody in the segment faces, any particular reason why it would cause that gap to narrow this quarter versus others?

Mark C. Vadon

On the international, we’re seeing some great progress. It is still early but some great progress from those new markets we’ve added. We don’t want to give any detail on what we think the best markets are purely for competitive reasons right now. We’ve got a lot of work left to do there and we’d rather do that work and push those markets before we give more detail on what we are seeing.

On the U.S. sales, I would say it is still early to know what happened in Q1 for the retailers that are out there. Our sense is that the environment got worse for the market as the quarter went on and that’s purely coming from talking to people on the supply side. But I think there hasn’t been a tremendous amount of data. I think we’ll be getting some more data in the next week or some from people starting to release their Q1 numbers.

I think the other part of that is our sense that people who are moving goods are discounting very, very heavily. I think one of the large public players out there had announced they are going to be running on gross margins about five points lower than they have been traditionally and I think some of the smaller players out there are just discounting to move inventory to keep cash coming in the door.

So I’d say two things there -- one is we don’t have a full picture of everybody’s Q1 yet and from a top line standpoint, and even when we have that, when people will release their Q1 comp store sales coming up, until the earnings come out and everybody is -- mostly people are on a January 31st year-end, so it is going to be a little while before we see the full financials for people, but our sense is the people who are moving stuff are moving at discounts that are going to be pretty unhealthy when it comes to what their bottom line looks like.

Mark Mahaney - Citigroup

Thank you, Mark.

Operator

Our next question is from the line of Jack Murphy with William Blair. Please go ahead.

Jack Murphy - William Blair

Thank you. Just a few questions; first a little more detail on how sales trended through the quarter -- could you give us a bit more specific sense on how Valentine’s Day and around there went for you? And does that give you any indication or any feeling about Mother’s Day?

Diane Irvine

Sure, thanks, Jack. In terms of the sales trend, as I mentioned it did improve as we went through the quarter. I think on our last call, which was just before Valentine’s day, we were saying that we had seen things improve.

I think in this economy, it is hard to predict but we did see sales improve as we got to the end of Q1 and so we are certainly doing all we can and I think we have such a great value proposition that we will continue to gain share and we are just very focused on that every day. But I think it’s not necessarily tied to what happens for Mother’s Day.

Jack Murphy - William Blair

Okay and then I think in the past you’ve talked a little bit about the high-end business, over $25,000 and sort of a rough growth rate there. I wonder if you could talk about that on a comparable basis to the way you have in the past in terms of at least directionally -- I know you said it’s weaker, but was that business growing in the quarter in total? Any kind of direction on that.

Mark C. Vadon

We’re seeing mixed things depending on the price point. When you look at over $100,000 price points, that part of the business is still there but it is very, very weak. We had a transaction earlier today of $200,000, so there’s still transactions happening there but it is very weak versus historically and especially versus the growth rates we saw there previously.

And then when you get below $100,000, it’s pretty mixed. You know, what we are seeing in general is kind of $25,000 to $50,000 is doing okay but $5,000 to $25,000 is also fairly weak. And it’s kind of hard to look at all the numbers and dissect what’s kind of the broader macroeconomic picture it’s telling us, but overall as you start piecing together, below $5,000 is growing stronger than other parts. But then as you get into that $5,000 to $25,000, more of that kind of aspirational part of the market, we are seeing weakness. You are seeing a little bit better kind of $25,000 to $100,000 price points, a little bit better growth in that area where the people buying those, it’s not necessarily aspirational purchases. It’s truly luxury purchases but then at the mega price points, I think people are sitting on the sidelines right now just watching the market.

So I think overall, it’s pretty mixed, it is pretty choppy and I think that’s the story -- that’s the broader store is just, you know, it’s -- we’re trying to forecast and give guidance and things like that but it’s still a fairly murky picture as to how consumers are reacting to the environment.

Jack Murphy - William Blair

And then just one last quick question -- I’m wondering if you are happy with the payables dynamics that you saw in the quarter and if at this level of guidance, what level of free cash flow roughly you are thinking about?

Diane Irvine

Sure. Well, we don’t provide guidance on free cash flow, Jack, but to kind of talk about what’s happening there, I think there are really a couple of things specific to the quarter. One is of course that dynamic that you generally see in Q1 every year where we are paying down the payables that have built up during the holiday season. So you certainly see that and so we would expect a negative cash flow quarter.

Now with inventory being modestly higher than where we’d like it to be, clearly we didn’t have the working capital benefit there that I’d like to see. And then the other thing that you point out is with slower growth, you don’t see the same leverage from the payables in terms of the working capital.

But you know, as we look at the year, I think if we can achieve the goal we set forth for ourselves in terms of revenue growth, I think we will be in good shape in terms of our free cash flow generation capabilities.

Mark C. Vadon

I would just reiterate on that -- I think we really like what we are seeing as far as days payable, but without the significant growth in Q1, the dollars of payables being generated is not as great as we’ve seen in the past. So the ability to generate rally robust levels of free cash flow is tied to our growth numbers.

But as Diane was saying, I think with a little bit better growth and then with the increases we are seeing in payables and then hopefully getting ourselves in a better inventory position, as we put those together, I think you’ll see better free cash flow for the year than we were seeing over this last quarter.

Jack Murphy - William Blair

Thank you.

Operator

Our next question is from the line of Jim Friedland with Cowen and Company. Please go ahead.

Jim Friedland - Cowen and Company

Thanks. Two questions, first on commodity pricing in general -- you’ve pretty much passed it along and gross margins have been growing nicely. And if this trend continues, is that how you expect to run the business?

And then the second quarter is on your brand building efforts -- are we going to see anything new, maybe branching out into TV or more offline type spending? Or is it the same sort of blocking and tackling that you’ve been doing online? Thanks.

Diane Irvine

Sure. Thanks, Jim. In terms of commodity pricing, we do pass that along but I would say traditionally what we’ve done is we take a little bit longer to pass that on, so we’ve generally compressed our own margins for a bit and then we find our points once or twice a year to raise our retail prices if necessary based upon the inbound price of the raw materials. And so that is something -- you know, we’ll keep that policy this year. I think we performed really, really well on gross margin in Q1, so we are very pleased with that performance.

But clearly we want to drive those dollars to the bottom line so we’ll be monitoring that closely as we go through the year. Terri pointed out something special to gross margins a year ago in Q2 where we were at 20.7% and 30 basis points of that gross margin was caused by a one-time benefit from a shipping refund, such that that should be taken into account as you look year-on-year.

In terms of brand building, Mark’s chomping at the bit to talk here but I’ll just say I think we will -- you know, we are very disciplined in how we look at our marketing. We want every dollar of marketing to pay back, so I don’t see us doing things that are not in line with that philosophy, such as other campaigns.

I’d say we really are building our business literally one customer at a time and that’s how we build the brand, but I’ll let Mark jump in.

Mark C. Vadon

No, I think that’s right. We have no intention of being on TV anytime soon -- at least any TV where we have to pay the bill to have it happen.

Jim Friedland - Cowen and Company

Okay, fair enough and then just one quick question on trends in the non-engagement part of the business, can you just give a little color in terms of what you are seeing on your lower price point items in terms of demand?

Diane Irvine

Trends in terms of non-engagement and lower price point -- yeah, I’d say kind of the way we characterized the quarter, Jim, was that really we saw softness across all the product categories, and so we talked about some of the stand-outs in diamonds, you know, the price points below $5,000 and then the $25,000 to $50,000. But I think it was just a different type of quarter from that standpoint where really every category has a bit of softness.

Jim Friedland - Cowen and Company

Okay, great. Thanks a lot.

Mark C. Vadon

Sorry, the one category that performed probably better than we were expecting was diamond bands and wedding bands. We don’t know exactly what that means but I think to some degree, the diamond bands category is doing well because there may be some consumers that are trading down, you know, rather than buying a traditional solitaire engagement ring, they are getting a diamond band to use as their engagement ring. I think that was probably the one stand-out category and other than that, everything was relatively uniform.

Operator

Our next question is from the line of Lorraine Maikis with Merrill Lynch. Please go ahead.

Lorraine Maikis - Merrill Lynch

Thank you. Good afternoon. I just wanted to ask a quick follow-up on the accounts payable front. Do you still expect to be able to push days payable higher in this credit environment?

Diane Irvine

As Mark mentioned, Lorraine, we have been doing that and I think that really is a result of the volume that we are doing with our suppliers, where we dominate this category and so we have that ability and we certainly think we will continue to have that ability as we go forward in the next several years.

Mark C. Vadon

We continue to have suppliers lining up to work with us and I think one other aspect of that is right now there aren’t many retailers buying anything out there. I think as people had a relatively weak Christmas, they are in a position where they’ve got more than enough inventory and they are not buying and vendors are looking for an outlet for their merchandise.

So with the volume we are doing and the fact that we turn our inventory very fast, so we are buying every month and in diamonds, we are literally buying every day. I think we are in a position to be kind of the retailer of choice for the supply chain to work with.

Diane Irvine

And interestingly, Lorraine, in this category we pay earlier than most.

Lorraine Maikis - Merrill Lynch

Thank you, and then any comment on keyword pricing and any movement there since the economy has started to deteriorate, are you starting to get any benefit from that?

Diane Irvine

No, I think if you look at online marketing prices, we’ve seen what we’ve been seeing for the past several years, which is you continue to see rising prices. I think it takes longer probably for some of that to factor in, if it will, in terms of the marketing environment. So our focus is on managing really well in terms of looking at the payback on our investment for any of our keywords.

Lorraine Maikis - Merrill Lynch

Thank you very much.

Operator

(Operator Instructions) Our next question is from the line of Kristine Koerber with JMP Securities. Please go ahead.

Kristine Koerber - JMP Securities

As you look at international, can you talk about what your next major step or investment would be to really build out the international business?

Mark C. Vadon

No, I’d just say we have a lot of work left to do in front of us. We spent a couple of years working really hard on building Canada and the U.K. into more robust businesses and we have the infrastructure in place there now where we are able to deploy marketing dollars and continue to drive the growth of those businesses. With the other countries we are shipping to, and those range from Western Europe to earlier -- a few weeks ago we launched some in Eastern Europe and a number of markets in the Asia-Pacific region, across all of those markets there is a tremendous amount of work left to do. Really those businesses are very much in kind of a beta stage and are kind of right now a test to see where we are finding demand so that we can then go behind there and start building up the infrastructure.

But as far as specific steps that are next for us to initiate there, we are doing that work in the background and we’ll let you know as we do more progress there.

Kristine Koerber - JMP Securities

Thank you.

Operator

Our next question is from the line of Marianne Wolk with Susquehanna. Please go ahead.

Marianne Wolk - Susquehanna Financial Group

Thanks. I had a couple of quick questions -- given the relatively large inventory balance you held exiting Q4, can we assume the bulk of the spike in commodity prices that occurred over the last few months is going to actually be felt in the second quarter gross margin, especially if you are not passing along the price increase to consumers?

And then also, just a follow-up -- I mean, your guidance does seem to forecast an acceleration in growth to maybe 15% in the second half. Can you just give us a better feel for some of the variables that would drive that improved growth rate? Are you looking for better returns from the international business? What could give us more confidence in that pick-up? Thanks.

Diane Irvine

In terms of your gross margin question, I’d say no, you should not assume that. That’s something that we continue to manage. We are very focused on gross margin. Every product category is a little bit different in terms of when we have inventory receipts but our goal is we do take our time to increase prices and we manage that very carefully.

In terms of the second half and our guidance, again our goal is to grow by 10%. We don’t have a better view of what the economy will be like in the U.S. in the second half. We certainly have no better view of what the holiday season will be like, which clearly will drive the number overall.

As you mentioned, international is growing very, very well so I think our hope and expectation there is to continue to see great results. And beyond that, it’s focus on the customer and conversion and so as long as we are doing all the right things internally, regardless of the economic environment externally, I feel that we’ll do a good job. But we want to put out our goals so that everyone can see that we have set a higher bar for ourselves and we will hope to achieve it.

Mark C. Vadon

And also I’d just say we are also -- I mean, we are fighting our way through comps in Q1 and Q2 of 2007 that were really -- those were extremely successful quarters and we talked earlier about some of the dynamics behind that. For instance in Q2, we had a single order from one customer that was $1.52 million. We had a promotion with a partner that drove a significant amount of revenue around Mother’s Day of last year.

And even with those things, those types of things happen in Q1 and Q2. We had those higher growth rates and then the comps get easier as you get into the back half of the year. And I think as you look at Q4 of 2007, that’s when the market started to slow down, so as we start to anniversary that, I think we are going to have easier comps to build on.

The other part of it is we have international building nicely underneath us, which gives us kind of an increasing amount of growth leverage. And I think if you look even a year ago I would as saying it would take a couple of years before international was at a scale where it could really meaningfully contribute to growth. We’re getting there sooner than we had thought we would.

So I think we’ve got a couple of elements that are there to try to help us and then we’re just -- we’re working hard behind the scenes to continue to do things in the U.S. business to keep pushing it along. But as Diane is saying, there’s a lot of uncertainty as we are sitting here today trying to predict what’s going to happen in November and December of this year.

Marianne Wolk - Susquehanna Financial Group

On the international front, this was the first seasonal or sequential decline we’ve seen in a while. Is it seasonality or are you seeing softness say in the U.K., where they are also reporting some economic pressure?

Mark C. Vadon

I don’t understand the question. Our international business grew 120%. You mean that is a lower growth rate than in Q4?

Marianne Wolk - Susquehanna Financial Group

No, no, no -- you went down sequentially from the $7 million you reported in Q4.

Diane Irvine

That’s the business in general.

Mark C. Vadon

Q4 has Christmas and we don’t have one of those in Q1, so it’s hard to comp those numbers. You would need a growth rate much, much faster than 120% to flow through the seasonality of Christmas.

Marianne Wolk - Susquehanna Financial Group

Okay. Thank you.

Operator

Our final question is from the line of Dan Geiman with McAdams Wright Ragen. Please go ahead.

Dan Geiman - McAdams Wright Ragen

Good afternoon. Just looking at again at trends within the quarter, are there any specific factors that really drove that growth that you saw from month to month during the quarter?

Diane Irvine

I think, Dan, it’s difficult to know. Our sense is when we got into January that there was kind of a post-Christmas pull-back on the part of consumers. Certainly January was our weakest month but we had a marginal improvement as we went through the quarters but I don’t think it was enough to point to anything specific. But I think we just keep doing the right things in terms of moving the business and converting customers.

Dan Geiman - McAdams Wright Ragen

Okay, great. Thanks very much.

Operator

And we are pausing for just a moment to continue queuing the roster. I do apologize, our final question is actually from the line of Stephen Ju with RBC Capital Markets. Please go ahead.

Stephen Ju - RBC Capital Markets

Good afternoon, Mark and Diane. Just one last one, as most of the questions have been asked, but are international gross margins similar to that of the U.S. across all segments? Thank you.

Diane Irvine

Sure, thanks, Stephen. In terms of the way we are pricing, we have very similar gross margin structures and clearly depending on the website you are purchasing from, you know, there’s a different currency there. I mentioned that we have a little marketing investment there, not looking at gross margin but in costs overall because those are small businesses, there’s a relatively higher spend in marketing, just because those businesses are small. But if you look at the U.K. business, I think we are very, very happy in terms of what we are seeing on a contribution margin basis. And the other businesses are operating, you know, for those countries where we are shipping out of the U.S., it’s operating off of the same margin structure.

Stephen Ju - RBC Capital Markets

Got it. Thank you.

Operator

And at this time, there are no other questions in queue. Do you have any final or closing remarks?

Diane Irvine

Yes, I would like to thank everyone for participating in today’s call and we look forward to updating you next quarter. Thanks, everyone.

Operator

And this does conclude today’s conference call. You may now disconnect.

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