Blue Nile Inc. (NASDAQ:NILE)
Q1 2006 Earnings Conference Call
May 2, 2006, 5:00 p.m. EST
Nancy Shipp - IR
Mark Vadon - CEO
Diane Irvine - CFO
Scott Devitt - Stifel Nicolaus
Jim Friedland - SG Cowen
Mark Mahaney - Citigroup
Doug Anmuth - Lehman Brothers
Jordan Rohan - RBC Capital
Good afternoon, ladies and gentlemen. (Operator Instructions). At this time, I went introduce Nancy Shipp, Director of Investor Relations of Blue Nile.
Good afternoon and thank you for joining us on our conference call today to review our first quarter 2006 financial results. With me today is Mark Vadon, Chief Executive Officer of Blue Nile, and Diane Irvine, Chief Financial Officer.
During this call, we will discuss non-GAAP financial measures to supplement Blue Nile's consolidated financial statements presented in accordance with generally accepted accounting principles. 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 plus outflows for purchases of fixed assets, including internal-use software and web site development.
We'll also discuss non-GAAP net income, which is defined as GAAP net income less FAS 123R stock-based compensation expense and the related income tax effects. Lastly, we will discuss non-GAAP SG&A costs, which is defined as GAAP selling, general, and administrative expenses excluding stock-based compensation. We report these measures to provide additional tool to evaluate our operating results and financial conditions.
Please refer to our website at www.bluenile.com to obtain a copy of our non-GAAP financial measures which contain a full reconciliation of free cash flow, non-GAAP net income, and non-GAAP SG&A to their nearest respective GAAP financial measures.
As a reminder, during the course of this call, we will make forward-looking statements, including without limitations statements regarding expectations of future financial performance including expectations of net sales, gross margins, expenses, net income, operating cash flow, capital investments, and other financial statements 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 certain risks and uncertainties. Actual results may differ materially and adversely from any projections in forward-looking statements given by management.
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. We undertake no obligation to publicly update or revise these forward-looking statements.
At the conclusion of the call, we will conduct a question-and-answer session. During the Q&A session, we ask that you please limit yourself to one question out of courtesy to others. Now, I would like to introduce Mark Vadon, Chief Executive Officer of Blue Nile.
Thanks Nancy. Good afternoon, everyone and thank you for joining us today. I would like to start the call by reviewing our first quarter results and discussing our business priorities for the remainder of 2006. During the first quarter, we delivered solid growth in sales and earnings despite a challenging environment for both high-end jewelry retail and online retail. We achieved net sales of $50.7 million, up 14.9% from the prior year. Earnings per diluted share totaled $0.13.
Effective with the beginning of our fiscal year 2006, Blue Nile adopted the new accounting requirements related to expensing stock-based compensation, which reduced net income by $0.03 per diluted share for the first quarter. As a result, net income in the first quarter totaled $2.4 million or $0.13 per diluted share compared to $2.6 million or $0.14 per diluted share in the prior year. Excluding stock-based compensation, net income would have increased 10.3% to $2.9 million or $0.16 per diluted share.
I'd like to highlight the strength of our cash generation results for the first quarter. Non-GAAP free cash flow increased 53.9% to $29.6 million for the trailing 12 months compared to $19.2 million for the trailing 12-month period ended April 3rd, 2005. Net cash provided by operating activities increased 47.4% to $31.1 million for the trailing 12 months compared to $21.1 million for the trailing 12-month period ended April 3rd, 2005.
Over the past year, we have achieved significant improvements in working capital management. In Q1, the benefits of these improvements clearly helped drive tremendous gains in free cash flow. During the first quarter, we repurchased 187,400 shares of our common stock for $6.1 million. After these repurchases, we ended the quarter with total cash and marketable securities of $89.7 million.
Despite the challenging cost environment for online marketing, which is creating difficulties for Internet retailers in general and the relative softness that is being experienced in high-end jewelry retail, we delivered on our growth initiatives and demonstrated the strong cash generation capabilities of our business model. We achieved good profitability despite continued pressure from inflation in some of our key input costs, most notably online marketing costs and rapidly rising metals prices.
Although the costs of online advertising remained high, we increased the amount of traffic to our web site in the first quarter. We will continue to focus on efficiency throughout all of our online marketing efforts and will look to broaden our marketing mix in appropriate and profitable ways as we move through the year.
Due to the current high cost of driving online traffic, one of our key focuses in the first half of 2006 is to aggressively work to increase conversion on our website. We have always driven strong revenue relative to our traffic levels due to our exceptional customer experience, but as it becomes more costly to drive traffic, we will put even greater effort into maximizing conversion.
We have made improvements to conversion through many different initiatives, but one effort I would like to touch on today is web site innovation. In late March, we launched an enhanced version of our interactive diamond search, which is industry-leading in its capabilities. Our new search functionality allows consumers complete flexibility in sorting and refining their diamond selections based on individual preferences. Our diamond search is the most important functionality on our website and our recent innovations take this area of our site to an entirely new level.
Another way in which we pursued higher conversion in Q1 was through more aggressive pricing. In mid-February, we instituted lower prices for our diamonds with the objective of maximizing dollar profit growth and free cash flow. As our products are very price sensitive, we believe that price adjustments will be effective in generating profitable growth.
We will continue to pursue ways to profitably drive traffic to our web site, but in the near-term, we believe money invested in reducing prices will have a greater impact on driving profits than a commensurate increase in marketing spending.
In addition to driving growth, we believe our pricing decisions are strategically important. While rapid increases in online advertising rates present challenges for us as a retailer, we believe that these increases are having a much larger impact on many of our online competitors, who generally spend a greater percentage of their revenue on marketing. The current advertising environment may last for quite some time, but with more aggressive product pricing we believe we can achieve our financial objectives while simultaneously increasing our online market share and enhancing our already dominant leadership position in the online jewelry category.
I would like to give some color on sales trends during the first quarter. In January, we saw continued softness in sales that was similar to the sales trends we experienced in December. As we progressed through the quarter, our net sales accelerated, with sales up more than 23% year-over-year in the month of March. We are pleased with this growth trend, as expect that many of our Q1 changes will take some time to fully impact revenue growth.
We diligently managed costs with great efficiency throughout our operations. G&A costs, excluding stock-based compensation costs, barely increased year-over-year while supporting 14.9% net sales growth. We performed at a high level for our customers and executed diligently on our fundamental business drivers.
In 2006, international growth will remain a priority. While the U.S. market remains the main growth engine of our business, we have begun to develop a presence in international markets, specifically in Canada and the UK.
At the beginning of the fourth quarter of 2005, we introduced customization tools for diamond jewelry on our UK web site and this offering clearly resonated with UK customers. We continue to see the positive results of these offerings in the first quarter of 2006. We are particularly encouraged by the early success and development potential of the UK business.
For the first quarter, we generated approximately $1.4 million in net sales through our international websites. While this is still a modest base of sales, it represents over 193% growth compared to the first quarter of 2005.
I would like to provide an update on our share repurchase program. As I mentioned previously, we repurchased 187,400 shares during the first quarter for an aggregate purchase price of $6.1 million. This leaves a remainder of $93.9 million to spend under our stock repurchase program over the next 21 months.
Since the inception of our share repurchase program in February 2005 through the end of Q1 2006, we have retired approximately 4.3% of the outstanding shares of the Company for a total purchase price of $23.4 million. This is the sixth consecutive quarter in which we have reduced diluted shares outstanding. This program underscores our commitment to enhancing value for our shareholders. The demonstrated success of our business model provides us with a strong balance sheet as well as financial flexibility.
We believe that repurchasing Blue Nile shares is an attractive investment opportunity for the Company, based upon current market conditions and the confidence we have in our ability to scale and grow our business with minimal capital expenditures.
I believe that the first quarter underscored the long-term potential of our business model as well as the strength of our industry-leading position in online diamond and jewelry retailing. Spurred by innovation on our website and strong execution throughout our operations, we focused on balanced profitability during the quarter. In the process, we delivered above the high end of our earnings guidance.
Overall, we're very pleased with our results for the first quarter 2006 and we're confident that we're well-positioned to achieve our 2006 goals. Through the balance of the year, we will focus on enhancing the Blue Nile customer experience and building upon our market leadership position. We will, as always, remain disciplined in our focus on profitable growth. I'm confident that we will achieve our business objectives and create sustained growth and value for the benefit of our shareholders over time. I will now turn the presentation over to Diane to review our first quarter results in more detail.
Thank you, Mark and good afternoon, everyone. Net sales for the quarter were $50.7 million compared to $44.1 million in Q1 of 2005, an increase of 14.9% in net sales year-over-year. During the quarter, total orders increased 12.1% as compared to a year ago. Our ASP per order was $1,483 in the first quarter compared to $1,415 in the first quarter of 2005. Gross profit for the quarter was $10.4 million compared to $9.7 million in the first quarter of 2005. This represents a 7% increase in gross profit year-over-year.
Gross margin for the quarter was 20.5% compared to 22% a year ago. The decrease in gross margin is primarily the result of our decision to lower our diamond prices during the quarter, as Mark discussed. In addition, gross margins were negatively impacted by cost increases for gold, silver, and platinum jewelry that we did not fully pass on to consumers in the first quarter of 2006.
Net income in the first quarter totaled $2.4 million or $0.13 per diluted share compared to $2.6 million or $0.14 per diluted share in the first quarter of 2005. These results exceeded the high end of the Company's Q1 guidance of $49 million for net sales and net income of $0.12 per diluted share.
This is the first quarter that Blue Nile's financial results include stock-based compensation expenses from the adoption of the new accounting standard, FAS 123R. Non-GAAP net income, which Blue Nile defines as GAAP net income excluding FAS 123R stock-based compensation expense and the related income tax effect, was $2.9 million or $0.16 per diluted share for the first quarter.
Turning to the cost side, our selling, general, and administrative expense, or SG&A, for the first quarter of 2006 totaled $7.7 million compared to $6.1 million in the first quarter of 2005. As a percentage of net sales, SG&A expenses were 15.2% in the first quarter compared to 13.9% a year ago. The largest component of the increase in SG&A expenses in the quarter was additional stock-based compensation expense related to the implementation of FAS 123R on January 2nd, 2006.
These costs relate to recording expense for the fair value of stock options granted to employees. In the first quarter, stock-based compensation costs included in SG&A expense totaled approximately $865,000 compared to approximately $73,000 in the first quarter of 2005. Excluding these stock-based compensation costs, non-GAAP SG&A expenses as a percentage of sales improved to 13.5% in Q1 of 2006 compared to 13.7% in Q1 of 2005.
The increase in SG&A expense for the quarter also reflects higher marketing costs as compared to a year ago. Marketing costs increased approximately $664,000 year-over-year, corresponding with our net sales growth and also due to higher costs of online marketing. As Mark mentioned, we were very disciplined in managing our G&A costs during the quarter.
Interest income was $985,000 for the quarter compared to $501,000 in last year's first quarter. The year-over-year increase was the result of higher interest rates and the higher cash balance in the first quarter of 2006.
Our effective tax rate for financial reporting purposes was 35.5% in Q1 2006. Our tax provision for interim periods is determined using an estimate of the annual effective tax rate.
Turning to the statement of cash flows, I would like to touch on the working capital impact and seasonality of cash flow. In the first quarter, cash used in operating activities was $19.8 million compared to cash used in operating activities of $19.7 million in the first quarter of 2005.
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 holiday quarter. For the remaining three quarters of the year, we typically expect to generate significant positive cash flow from operations.
We believe one of the most informative measures of our financial performance is non-GAAP free cash flow. Due to the seasonality in working capital, we believe that trailing 12 months free cash flow is a meaningful metric. At the end of the first quarter, our trailing 12 months non-GAAP free cash flow was $29.6 million compared to $19.2 million in the prior year, an increase of 53.9%. This strong cash flow performance reflects the very attractive cash flow dynamics of our business model. Free cash flow generation is the key financial goal that we focus on as a Company.
I would like to point out some reporting changes in our statement of cash flows as a result of the adoption of the new stock-based compensation accounting rule. Prior to our adoption of FAS 123R, any excess tax benefits related to stock-based compensation were presented as net cash from operating activities in our statement of cash flows. Under FAS 123R, benefits related to excess stock based compensation deductions are presented as cash from financing activities in the statement of cash flows.
In effect, the new rules require a reclassification between operating cash flows to financing cash flows. Tax benefits resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes, which negatively impacted cash from operating activities in the first quarter of 2006, totaled $418,000 in Q1. It is important to note that there's no change in economic substance related to this change in reporting classification.
Taking a look at our balance sheet at the end of the first quarter, inventory totaled $13.7 million. We ended the quarter with higher inventory levels than we would have liked and as a result, our average inventory turnover for the trailing 12 months at the end of the first quarter decreased to 15.1 times compared to 16.6 times for the trailing 12-month period at the end of the first quarter a year ago. We will focus on increasing our inventory turns as we move through the year.
Our financial position remained strong at April 2nd, 2006. After share repurchases of $6.1 million during the first quarter, we ended the quarter with $89.7 million in total cash and marketable securities. We have no long-term debt.
Looking ahead, I would like to review our financial guidance for the second quarter and update our guidance for the full year 2006. For the second quarter ending July 2nd, 2006, we expect net sales to be between $51 million and $54 million. Net income is expected to be $0.11 to $0.12 per diluted share. This guidance includes the estimated impact of expensing stock options under FAS 123R of approximately $0.03 to $0.04 per diluted share.
We are raising the low end of our 2006 financial guidance. We expect net sales for the full year 2006 to be between $230 million and $245 million and we expect net income per diluted share to be between $0.64 and $0.72 for 2006. This guidance includes the estimated impact of expensing stock options under FAS 123R of $0.14 to $0.16 per diluted share.
Actual stock-based compensation expense for the second quarter and full year 2006 may differ from these estimates based on the nature, timing, and amount of options granted, the assumptions used in valuing these options, and other factors.
Capital expenditures for the year are expected to total between $2.4 million and $3 million. The effective tax rate for financial statement purposes for the full year 2006 is expected to be approximately 35.5%. As a reminder, Blue Nile has not been a full cash taxpayer in prior periods as a result of net operating loss carryforwards for tax purposes. We expect to utilize our remaining tax net operating loss carryforwards in 2006 and will thus become a cash taxpayer for federal income tax purposes this year. I will now turn the call back to Mark for a brief closing comment.
Thanks Diane. In closing, I want to thank our investors and analysts participating on today's call. We're building this business for the long term and our decisions are made accordingly. We are committed to building value for our shareholders by doing what we do best: that is to expand our core business with exceptional execution for our customers. We will remain disciplined in our focus on profitable growth while investing in the long-term opportunities of our business in order to deliver value over time to our shareholders.
This is the end of our formal presentation and we will now open up the call for any questions you may have. Operator, will you please poll for questions?
(Operator Instructions) Our first question comes from Scott Devitt, Stifel Nicolaus.
Scott Devitt - Stifel Nicolaus
Two quick questions, Mark. I was wondering if you could maybe breakdown the gross profit margin impact year-over-year between the pricing change and commodity prices? Secondly, if you could talk to any material changes in product mix year-over-year. Thanks.
Thanks, Scott. On the gross profit, the impact of commodities price increases versus pricing decisions; pricing decisions were definitely the much larger part of that. Commodities prices continue to rise. For those of you not watching them, since the beginning of the year gold is up 25%, Platinum is up 19%, and silver is up 56%. I think we all should have been investing in metals. That is a small impact and we try to buffer that, but so much of our product that we ship is diamonds, so that is definitely the larger impact.
The pricing changes we made were mid-quarter and had a significant impact on margins. We continue to adjust those prices within diamonds, and what we're really trying to do is maximize the dollars in profit that come to the bottom line.
So we brought prices down midway through Q1, got a read on what type of growth that was delivering to us. We then adjusted prices up a little bit, actually, as we entered Q2. Week by week we're fine-tuning and trying to find the appropriate spot to maximize where we are today.
On product mix, I think we didn't see any significant shifts in product mix. You saw average ticket for the business rise by a few percent and I think that was pretty much across the board. It was the non-engagement products continue to grow a little bit faster than the engagement part. I think everything follows pretty much the same trend we've been seeing consistently for a while now.
Scott Devitt - Stifel Nicolaus
If I could just follow up on the buyback, any chance that you would increase the level of the buyback? I think you still have about $93 million left and you are a quarter into the eight quarters of the approval, so I was wondering if you'd be more aggressive or what use you may have for that excess cash on the balance sheet?
Scott, as we look at the buyback plan, our intention certainly is to fully utilize the $100 million that's been authorized over the two-year period which is now 21 months remaining, so we may get more aggressive. I think if you look at where we are to date, obviously we have a ways to go, but our intention of that period of time is to complete the plan and obviously look at what point that makes sense, but we'll be continuing to buy.
Scott Devitt - Stifel Nicolaus
Scott, that is $6.1 million was spent since the plan started, which was roughly mid-February.
It was about February 11th when we began the new plan, so it's not a full quarter that you see there.
Our next question comes from Jim Friedland, S.G. Cowen & Co.
Jim Friedland - S.G. Cowen & Co.
Thanks. Just some questions on the marketing. You said that you chose lower prices over increasing the marketing spend. First, on keyword advertising, are companies like Zales being really aggressive? Have you seen any easing of the prices there?
Also, can you talk about some new channels that you've been experimenting with in the quarter? Are you still at roughly that 4% level or has that picked up despite the fact you're focusing on lower pricing? Thanks.
Thanks, Jim. On keywords, the people bidding in those keywords changes almost daily. So I think we're seeing all different players coming in now to the market there. I think there's a lot of people experimenting and trying to figure out what they should be doing, so we see people enter the market and then leave.
As far as pricing trends, they keep going up. We are seeing higher prices for keywords this year than last year. We would expect it to continue.
On marketing channels, we don't intend to give guidance or to break out where we're spending money. I would just say when you look at redeploying money into marketing vehicles, some of those vehicles take some time. You can't turn them on and off overnight like you can with paid search. So we will look as we get through the year to continue to reinvest in some new ideas and some new channels.
In the short term, as we said, we felt when we looked at investing in the business to drive growth investing another, say, percent of revenue in marketing would not have the same impact as putting a money into gross margin. Diane, if you want to speak to marketing as a percentage of sales.
Yes, marketing as a percentage of sales, we're still roughly in that 4% range. And as Mark said, I think our decision is rather than say, move that up to 5% or 6%, our thought is it makes a lot more sense from a profitability standpoint to put that into pricing for our customers. We will most definitely continue to be primarily online with our marketing and always testing new vehicles and evaluating each one on its own merit.
Jim Friedland - S.G. Cowen & Co.
Great, thanks a lot.
Our next question comes from Mark Mahaney, Citigroup.
Mark Mahaney - Citigroup
I wanted to get a little bit of elaboration on the acceleration that you saw through the quarter. I guess one obvious question is, did you see that acceleration continue into April? Secondly, does that acceleration you saw in the quarter, was that just in revenue or did you also see it in terms of units and orders?
Thanks Mark. On the acceleration, we have been driving that with diamond pricing, so revenue definitely accelerates faster than units as we do that because it has much more of an impact on the higher ticket items. The purchasing cycle that we have is pretty long. It takes customers a while to buy these products, especially at the higher end. So whenever we make changes to pricing, it can take awhile for that really to kick in.
So we saw that happening in March. I think looking at our guidance for Q2, you can get a sense that we are continuing to see that into the second quarter. So we're feeling good about the ability, the decisions we made there and the ability to drive the business with those changes.
Mark Mahaney - Citigroup
A little bit more color on the international markets. I think you gave an overall number. Are you finding particular products that are selling well in the UK?
The UK has a very limited product offering right now from us. I'm amazed at how well the UK is selling for us relative to both the product offering we have out there and the web site we have out there for customers, because it is a work in process in many ways.
The product line today, you can build an engagement ring, you can build diamond stud earrings, some diamond pendants, but that's pretty much the limit of what we have out there. Customers still have to pay in US dollars, which I think is a pretty big obstacle for customers. It just makes it harder for them to do this. So there's more work for us to do to build out the product line, to build out the web site and add some more technology there to make that easier for consumers.
So what we're seeing though is a lot of engagement rings. The mix over there skews more towards the jewelry, the non-engagement side than we saw in the U.S. business at the same stage. I think that's just reflective of that market in general. The engagement part relative to the non-engagement part in the UK is a smaller percentage than it is here in the U.S. The U.S. is definitely the dominant market for engagement rings. So we're seeing good things there.
We are not really doing much marketing on the UK site at all. We're doing a very small amount. It's getting just a trickle of traffic and we feel we need to build that web site out more. We need to build that product line out more before we start putting marketing, before we feel good about really driving customers to it.
But the site to me looks a lot like the Blue Nile U.S. site in 1999 or early 2000 where there was not a lot of marketing. People were just finding the web site through natural search and through referrals from other customers. I think it's so innovative for that market that it's converting very, very well. So you just look that site today, receives probably less than 1,000 visitors today, but it's converting those visitors quite well especially given what the product offering is.
Mark Mahaney - Citigroup
Thank you very much.
Our next question comes from Doug Anmuth, Lehman Brothers.
Doug Anmuth - Lehman Brothers
Great, thank you. I just wanted to go back to the pricing shift that you talked about. I am trying to get a sense. I know that you are obviously sort of tweaking prices week to week as you said, but do you think that the pricing shift overall is more of a permanent type of thing? , I mean taking down prices as dramatically as you have here? Is this something that you really think could be dialed back with customers? Do you have that type of flexibility within the customer base?
Second, I was hoping you can provide some more detail just in terms of what you're doing to really optimize your own internal search practices since the fourth quarter. Thank you.
Sure. On the pricing change, I think we will see. We still don't know if that is permanent or not. I think a lot of it has to do with what we see in the online market. What we are really looking at is the gross margin minus the marketing dollars and trying to optimize that. So rather than run at, say, 22% margin and spend 6% on marketing to try to drive it, we think it's more appealing for our customers and we can drive more profit at, say, 20% margins and 4% on marketing.
So I think it's dynamic, we'll try to see how this works. As the year goes on, if we find ways to drive higher levels of traffic, if we see changes in the online advertising space, we'd begin to edge that up again. We're really just looking at the numbers and trying to real-time maximize the profit that we drive out of the business.
I do think though, as we said in the opening remarks, I think one of the positives is overall the online advertising market, every time you see Google's numbers coming up, somebody is paying for it and it tends to be the retailers. So this environment is tough for online retailers. I think you're seeing that and will continue to see that in some people's numbers out there.
If we see any positive out of this, I think the positive comes we feel we can take this environment and get more aggressive. If it's hard on us, it's brutally hard on some of our competition out there. I think we, if this continues for awhile, we feel like maintaining aggressive pricing will, if anything, prevent entry from other people or make it that much harder on people who try to compete with us over time. So that is what is going on there.
On search, in general, we are doing a lot in-house to optimize that. We have been looking at using different outsourced solutions, either outsourcing parts of our keyword management or bringing in some technology solutions. So we are doing a lot there. We added a lot of internal resources in the kind of analytical and technology parts of our business to help manage search.
It's just search is something where it feels like every time you dig into it, there's further and further you can dig in. You can just keep optimizing it and cutting it finer and finer, and I think our team working on that has done a pretty good job over the last quarter.
Doug Anmuth - Lehman Brothers
Great, thank you.
We now have time for one final question. Your final question is from the line of Jordan Rohan, RBC Capital.
Jordan Rohan - RBC Capital
I was hoping you could characterize the competition that you see in the marketplace. Last time you said MSN Shopping was bidding for keywords, but you also said that these smaller, less well-known diamond distributors and retailers were the key culprits of the marketing spend. Any change in that or any well-known retailers in there bidding against you guys? For that matter, are they following suit on price? Any way for you to tell?
I think the list of people bidding there is continuously changing. If anything, I think it's now skewing more towards smaller players than larger players. I think Q4 was much more driven by offline retailers whereas now we're seeing a lot more very niche companies playing around in there. But it's so dynamic it literally changes hour by hour, who is doing what there.
I think our mindset overall though is just to continue to work on search and optimize it. In the long run, I think we drive more revenue and more profit out of the unique visitor coming out of search than other people in our space. So over time, we should be able to be the dominant player in Google in the keywords that are relevant to us as a business.
Jordan Rohan - RBC Capital
Do these smaller players follow suit in terms of lowering price against you guys?
You know, I think it depends. We've never been the cheapest place to buy a diamond online, and that's not our intent. There's other places you can go, but I think all in, we provide incredible value. A lot of the smaller players in the space run on much thinner gross margins than us, so as we get more aggressive with pricing for a lot of them, their is really no place to go. They can't really get much more aggressive because they are already running on razor thin margins.
Jordan Rohan - RBC Capital
Thank you very much.
I would just like to thank everyone for joining us today and we look forward to talking to you next quarter. Thanks.
This concludes today's first quarter 2006 earnings conference call. You may now disconnect.
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