Diane Irvine : We don’t provide guidance in terms of free cash flow but we expect to have good profitability this year. We’ll be able to manage through whatever the environment becomes. You won’t have the one-time impact that we saw a year ago from converting to being a cash taxpayer. We also have lower cap ex during the year and I think we can do an even better job in terms of our working capital management. We’ll have a strong number for free cash flow in 2008.
In terms of marketing, we did see pricing pressure in Q4, which we always see during holiday. January where we saw weakness, our marketing spend on average was higher than we normally see, but I don’t think that is a trend on an ongoing basis. As you look at costs on the margin thus far in the quarter, we’ve had higher marketing costs. But if you look at the full year, what we’re really pointing to in terms of cost structure would be related to the renovation of our domestic fulfillment center in 2007 as well as the startup of our international operations.
Lorraine Maikis (Merrill Lynch): The inventory seemed to be a bit higher than you were expecting coming out of holiday. What is that? Is that non-engagement jewelry and is there clearance risk there?
Diane Irvine: If you look at our inventory, there is no risk there in terms of the product itself. We ended up a bit higher than we would have liked. We’ll be in good shape as we go through 2008. It would be setting for engagements, certainly a significant portion of our inventory at any given point in time is settings for diamond rings because we also want to be able to monetize the diamond. Then it would be other forms of jewelry. But if you look at our offering it’s classic merchandise. There’s nothing there that’s worrisome from that standpoint. It just ended up a bit higher than we would have liked.
Bridget Weishaar (JP Morgan): You’ve seen traffic levels down. Could you discuss what you’re seeing in terms of your conversion rates? Also have you experimented at all with prices to see what price elasticity is amongst your customers?
Mark Vadon: In Q4, we did not see traffic levels down. Traffic levels were in the mid-teens and conversion improved as well. With our 23% growth, a little more than half of that was traffic and the rest was conversion. That’s a healthy combination of drivers there. On price elasticity, over the years, we’ve run at many different price levels trying to understand price elasticity in the market and we have a fairly price-sensitive consumer. There is elasticity to what we’re doing here. At any given time, we’re playing with pricing in individual small areas of the inventory. There’s roughly 60,000 diamonds for sale on the website and when we feel that there’s parts of the market where there’s more demand than supply, there’s parts of the market that are weak, we will raise prices there and try to get a little bit more margin. In more commoditized areas, we’ll drop price and try to compete on price more. We’re maximizing where we’re at today, but that’s one where we continue to play with it. Right now our mindset is to maintain pricing on any given product line where it is today.
Doug Anmuth (Lehman Brothers): What did you see in terms of the user experience in changes to user behavior from updates that you made to the site and note number?
Diane Irvine: We’ve seen great things with our updated website. We see great results in terms of conversion. We have customers who are looking for more information, more tools in terms of doing their diamond searches and creating their customized product and that’s gone very well. Our team continues to do a great job in terms of making incremental improvements each and every day that speak to the consumer. That’s something we will continue to focus on this year. Especially, we look at whoever is coming to our website, we want to make it better and better for them to make their purchase and do their searches, get through that process. That’s gone well but we always feel like we have room to do even better.
Jennifer Bennett (JMP Securities): Could you talk about performance of engagement versus non-engagement? We think of engagement as relatively recession resistant and so is it really the non-engagement diamond and other jewelry that is being challenged?
Diane Irvine: We’ve seen a slow down at the very high end so that is impacting us, but more broadly if you look at this category of diamonds as being a luxury product, we’re seeing a pullback on the part of the consumer. We saw great results in 2007 and in Q4 and so I have no doubt that over the long term we continue to take share and we represent a great value and place for people to come who are in the market. We need to work through some of what we’re seeing in the economy.
Mark Vadon: I do believe the engagement category is more recession proof than other parts of the market, but a couple caveats to that. One is you can see periods of time where people will put off the purchase and wait until they feel a little better. They won’t put it off permanently, obviously, they’re still going to go ahead and get engaged and get married, but they will put it off. The other part, within engagement, there’s a piece of that market for us which we think of as upgrade rings. It’s people who’ve already been married for a significant amount of time buying the ring that they’ve always wanted and in that part of the market, it is much more of a luxury purchase as opposed to a necessity. That’s where we see, typically when we’re seeing the $50,000, the $100,000.
Jennifer Bennett (JMP Securities): A good part of your business is driven by referrals and word of mouth. How are you planning to drive brand awareness in new international markets?
Diane Irvine: Yes, word of mouth is so powerful for us and I do think that’s what we’re seeing even in the past week, we’re doing very little marketing in those markets and there is demand for the Blue Nile brand and for our product. We love what we’re seeing there where that is being driven off of word of mouth and awareness through referral. We’ll begin to put some marketing dollars in those areas but the early results are fantastic for us there.
Mark Vadon: Within the UK and Canada, we’ve got much more robust marketing programs in place there, where referral is still an important piece but we’re doing everything from search to some banner advertising. We have affiliate programs, we’re layering in an email program in those markets. In some of these newer markets, we’ve never done any marketing whatsoever yet. We’re already seeing demand. The orders we’ve seen so far out of those 12 new markets range from $2,000 up to $28,000 and they’re people who are finding us and people who’ve heard about us. It’s people who’ve become aware of us over time and are now in those markets seeding the very beginning of the referral. It’s made us realize that there’s a lot more opportunity internationally than we thought. That’s a big direction going forward is turning a lot of our resources to pursue that market more aggressively.
|
More:
