166 Blue Nile, Inc., Underweight, $23.67 We expect luxury goods spending to be negatively impacted by deteriorating market conditions in 2009, and, as such, are forecasting a 5.6% Y/Y r
Trang 1Table 87: Amazon Annual Income Statement
$ in millions
Cost of sales 11,482 14,564 17,044 20,568
Gross profit 3,354 4,147 4,650 5,597
Gross Margins 22.6% 22.2% 21.4% 21.4%
Fulfillment 1,253 1,572 1,817 2,188
Technology and content 715 859 984 1,151
General and administrative 200 234 271 322
Other operating expense (income) 9 (28) 16 16
Stock-based compensation (1) 185 282 345 383
Amortization of other intangibles - - - -
Restructuring-related and other - - - -
Total operating expenses 2,697 3,367 3,946 4,672
Total recurring operating expenses 2,512 3,130 3,601 4,289
Operating Profit (Pro Forma) 840 1,017 1,049 1,308
Operating Margin (Reported) 4.4% 4.2% 3.2% 3.5%
Operating Margin (Pro Forma) 5.7% 5.4% 4.8% 5.0%
Income (loss) from continuing operations 840 1,017 1,049 1,308
Interest Expense (78) (75) (47) (57)
Total non-operating expenses, net 12 33 33 23
Income (loss) before equity in losses of equity-method investees 852 1,050 1,082 1,331
Income (loss) before change in accounting principle (reported) 852 1,050 1,082 1,331
- - - Cumulative effect of change in accounting principle - - - -
GAAP Income before taxes 661 811 737 948
Provision (benefit) for taxes 184 231 214 275
Pro Forma Net income (loss) 668 819 868 1,056
Remeasurement of 6.875% PEACS and other (7) (2) - -
Other gains (losses), net - (4) - -
Total Extraordinary Items (7) (11) - -
GAAP Net income (loss) 477 571 523 673
Shares Outstanding 424 432 437 439
% Of Revenue
Fulfillment 8.4% 8.4% 8.4% 8.4%
Technology and content 4.8% 4.6% 4.5% 4.4%
General and administrative 1.3% 1.3% 1.2% 1.2%
Y/Y Change
Technology and content 18% 20% 14% 17%
General and administrative 14% 17% 16% 19%
PF Operating Income 71% 21% 3% 25%
Source: Company reports and J.P Morgan estimates
Trang 2162
Table 88: Amazon Quarterly Income Statement
$ in millions
Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08E Q1-09E Q2-09E Q3-09E Q4-09E Net sales 3,015 2,886 3,262 5,673 4,135 4,063 4,264 6,249 4,597 4,499 4,920 7,678
Total operating expenses 574 585 639 899 758 750 845 1,014 861 889 972 1,225 Total recurring operating expenses 540 539 588 845 704 722 775 929 779 805 885 1,133
Income (loss) before chg in accnting principle (reported) 180 162 177 333 261 236 252 301 242 252 255 333
Pro Forma Net income (loss) 147 129 133 259 199 190 193 237 195 204 206 263
GAAP EPS $0.26 $0.19 $0.19 $0.48 $0.34 $0.37 $0.27 $0.35 $0.26 $0.27 $0.27 $0.39
Trang 3Table 88: Amazon Quarterly Income Statement (cont.)
% Of Revenue
Q/Q Change
Y/Y Change
Source: Company reports and J.P Morgan estimates
Trang 4164
Table 89: Amazon Annual Balance Sheet
$ in millions
ASSETS:
Cash/Equivalents 2539.1 2417.5 3456.0 4929.0
ST Investments 573.0 674.0 674.0 674.0
Inventories 1200.0 1499.8 1928.6 2394.3
A/R, net and other current 852.0 874.9 1199.9 1481.9
Total Current Assets 5164.1 5466.2 7258.5 9479.2
Equipment, Net 543.0 746.0 751.0 838.0
Other LT Assets 296.0 722.0 722.0 722.0
L.T Investments 260.0 278.0 278.0 278.0
Goodwill/Intang 0.0 0.0 0.0 0.0
Goodwill 222.0 405.0 405.0 405.0
Total Other Assets 1321.0 2151.0 2156.0 2243.0
Total Assets 6485.1 7617.2 9414.5 11722.2
LIABILITIES:
Accounts Payable 2795.0 2999.6 3708.0 4470.1
Accrued Expense 902.0 999.9 1352.4 1670.3
Unearned Revenue 0.0 0.0 0.0 0.0
Oth Curr Liab 0.0 0.0 0.0 0.0
Curr.Port.LT Debt 17.0 0.0 0.0 0.0
Advertising 0.0 0.0 0.0
Total Current Liabs 3714.0 3999.4 5060.3 6140.5
Long Term Debt 1574.0 895.0 895.0 895.0
Capital Leases 0.0 0.0 0.0
Total Long Term Debt 1574.0 895.0 895.0 895.0
Total Liabilities 5288.0 4894.4 5955.3 7035.5
SHAREHOLDER EQUITY:
Total Equity 1197.1 2722.8 3459.2 4686.7
Source: Company reports and J.P Morgan estimates
Trang 5Table 90: Amazon Annual Cash Flow Statement
$ in millions
OPERATING CASH FLOWS
Net Income 476.5 571.3 523.4 673.3
Depreciation and amortization 246.0 291.0 370.0 426.0
Stock-Based Amort 185.0 282.0 345.0 383.0
Other operating expense (31.0) - -
Excess tax benefit on stock awards -
Amort Intangibles 3.0 - - -
Mrktbl.Secs - (3.0) - -
Remeasurement and other 10.0 (16.0) - -
Deferred Taxes (99.0) (46.0) - -
Changes current assets 835.0 105.2 150.0 460.7
Inventories (303.0) (314.8) (299.8) (428.8)
Prepaid Exp./Other (254.0) (57.5) 147.3 (171.4)
Accounts Payable 928.0 232.6 204.6 708.4
Accrued Expense 430.0 177.9 97.9 352.5
Other Operating 200.0 67.0 - -
Non-Cash Items (166.0) - - -
Cash From Operations 1406.5 993.4 1388.4 1943.0
INVESTING CASH FLOWS
Mat./ST Investments 1,269.6 1,034.0 - -
Purch./ST Investment (930.0) (1,229.0) - -
Capital Expenditures (223.0) (332.0) (350.0) (470.0)
Acquisitions (76.0) (407.0) - -
Cash From Investing 40.6 (934.0) (350.0) (470.0)
FINANCING CASH FLOWS
Options Exercised 91.0 10.0 - -
Tax benefit of stock awards 160.0 - -
Proceeds/LT Debt 36.0 53.0 - -
Repay LTD (69.4) (26.0) - -
Repayment of Debt (17.0) (331.0) - -
Purch./Sale of Stock (248.0) - - -
Foreign Exch Effects 20.0 (47.0) - -
Net Change In Cash 1,516.7 (121.6) 1,038.4 1,473.0
Beginning Cash 1,022.4 2,539.1 2,417.5 3,456.0
Source: Company reports and J.P Morgan estimates
Trang 6166
Blue Nile, Inc., Underweight, ($23.67)
We expect luxury goods spending to be negatively impacted by deteriorating market conditions in 2009, and, as such, are forecasting a 5.6% Y/Y revenue decline in F’09 Additionally, we think operating margins will contract due to SG&A deleverage
Blue Nile trades at 12.9x our F’09 EBITDA estimate of $25.8M Given our expectation for negative EBITDA growth, we believe this premium is undeserved and thus maintain our Underweight rating We are introducing a $20 December 2009 price target
• We expect revenue to decline in 2009 as discretionary spending continues to
slow With the tightening of the credit markets and further macroeconomic
weakness, we think consumers will continue to cut back on discretionary spending, especially high-ticket items such as jewelry We believe Blue Nile will see both order volume and AOV declines in 1H’09 as consumers purchase less and trade down to lower price points
• We expect EBITDA margins to decline in F’09 We think roughly 35-50% of
Blue Nile’s SG&A expenses are fixed As such, with revenue expected to decline
in 2009, we are also forecasting a 50bps Y/Y decline in F'09 EBITDA margins
In addition, we are concerned with the company’s online advertising costs, as keyword pricing remains up on a Y/Y basis
• We expect international growth to continue to slow in 2009 We think Blue
Nile's international growth will continue to be pressured by FX headwinds as well as global economic deterioration However, we believe once the economy
starts to recover, NILE will benefit from further international expansion
• 2009 drivers In our view, the following factors will drive NILE shares in 2009:
(1) more limited access to credit for luxury purchases, (2) less discretionary spend, and (3) operating expense deleverage
• Maintaing 4Q’08 estimates We are maintaining our 4Q’08 revenue, EBITDA, and GAAP EPS estimates of $100.9M, $11.3M, and $0.42, respectively
Our current and newly introduced 2010 estimates are in the table below:
Table 91: Blue Nile Financial Snapshot
$ in millions, except per share data
NILE 4Q’08E F’08E F’09E F’10E F’08E Y/Y F’09E Y/Y F’10E Y/Y J.P Morgan
Revenue 100.9 310.4 293.0 322.9 -3% -6% 10% EBITDA 11.3 28.7 25.8 33.7 -4% -10% 30% EPS $0.42 $0.94 $0.76 $0.95 -10% -19% 25%
Consensus
Revenue 101.7 310.8 320.0 362.7 -3% 3% 13% EBITDA 10.5 26.2 26.4 33.9 -13% 1% 28% EPS $0.39 $0.90 $0.93 $1.20 -13% 3% 29% Source: J.P Morgan estimates, Company data, and Bloomberg
Trang 7Our Estimates and Outlook for 2009
We are now modeling F’09 revenue, EBITDA, and GAAP EPS estimates of
$293.0M, $25.8M, and $0.76, representing Y/Y declines of 5.6%, 10.2%, and 18.9%, respectively
We think macroeconomic weakness will continue to negatively impact consumer discretionary spending in 2009, causing both order volume and AOV to decline As such, we are forecasting a 5% Y/Y decrease in F’09 order volume, as well as a 2% decrease in F’09 AOV
Our Estimates and Outlook for 2010
We are introducing F’10 revenue, EBITDA, and GAAP EPS estimates of $322.9M,
$33.7M, and $0.95, representing Y/Y growth rates of 10.2%, 30.5%, and 25.4%, respectively
We support our estimates with the assumption that the U.S macro economy will recover in 2010, thus increasing consumer discretionary spending As such, we think increases in order volume and AOV will drive revenue growth in 2010 and are forecasting 7% Y/Y growth in F’10 order volume and 3% growth in F'10 AOV
In addition, we expect Blue Nile to benefit from further international expansion in
2010, with possible entrance into new markets outside Canada and the U.K
Operating margins will likely recover
We Are Introducing a Price Target of $20
In introducing price targets for our coverage, we have derived multiples based on 5-year forward EBIT CAGRs We believe the historical record does not provide a meaningful guide to valuation as (a) the majority of the companies in our coverage did not have a track record as public companies through the previous recession and (b) even the public companies were still in their early-growth (and, for some, rapid growth) stage during the last economic downturn
As such, given our projection for Blue Nile of a ~20% F’09 - F’14 EBIT CAGR, and our view of the beginning of a possible economic turnaround in 2H’09, we believe the stock should be trading closer to a 20x EV/EBIT multiple to our F’09 EBIT estimate (reflecting a more cautious sales outlook than the current valuation of 24x our F’09 estimate) and thus arrive at our December 2009 price target of $20
The parameters of our EV/EBIT multiple analysis are in the table below:
Table 92: Key Valuation Assumptions
5 yr forward EBIT CAGR 20%
1x EBIT Growth 20
Implied Enterprise Value $272.3
Market Value $298.9
2009 Price Target $19.67 Source: Company reports and J.P Morgan estimates
Trang 8168
Our EV/EBIT valuation is based on the following projections for revenue and operating income growth
Table 3: 5-Year Growth Outlook
$ in millions
2009E 2010E 2011E 2012E 2013E 2014E Revenues 293.0 322.9 387.5 457.2 525.8 604.6
Less: Operating Expenses 279.4 305.3 366.1 432.1 496.9 571.4
Operating Income (Loss) 13.6 17.6 21.3 25.1 28.9 33.3
Source: Company reports and J.P Morgan estimates
Valuation and Rating Analysis
On an EV/EBITDA basis, NILE trades at 12.9x our F’09 EBITDA estimate of
$25.8M vs its e-commerce peers, which trade at 6.5x F’09 estimates We think this premium is undeserved given our expectation for negative EBITDA growth and are thus maintaining our Underweight rating
Risks to Our Rating
Blue Nile is highly dependent on its diamond and jewelry suppliers, and it would be difficult for the company’s business model to tolerate large price fluctuations in the price to acquire diamonds and jewelry Blue Nile faces competition from both offline and online competitors, which operate in different spaces in the jewelry market
Online competitors include: diamond.com, amazon.com, walmart.com, mondera.com, and Ashford If the company successfully executes its international business strategy or gains market share in the US from traditional retailers, our estimates could prove to be too conservative Further, if the economy and consumer spending turn around more quickly than we expect, the stock could outperform
Trang 9Table 93: NILE Annual Income Statement
$ in millions, except per share data
2007 2008E 2009E 2010E
Cost of Revenue 254.1 246.4 232.4 256.1
Pro forma FAS123R adjustment
Pro forma Cost of Revs 254.1 246.4 232.4 256.1
Gross Profit (Pforma) 65.2 64.0 60.6 66.7
FAS 123R Stock based compensation 5.8 7.2 8.1 9.2
Total Expenses 42.8 44.7 46.9 49.2
Total Recurring Expenses 37.0 37.5 38.8 40.0
Operating Profit (Reported) 22.4 19.3 13.6 17.6 Operating Profit (Pro Forma) 28.2 26.5 21.7 26.8
Operating Margin (Reported) 7.0% 6.2% 4.6% 5.4% Operating Margin (Pro Forma) 8.8% 8.5% 7.4% 8.3%
EBITDA Margin 9.4% 9.3% 8.8% 10.4%
Y/Y EBITDA Growth 33.7% -4.1% -10.2% 30.5%
Other Income (Expense) 4.2 2.7 3.6 4.0
Income Before Taxes (Reported) 26.6 22.0 17.2 21.6
Income Before Taxes (Pro Forma) 32.4 29.2 25.3 30.8
Income Taxes (Rpt) 9.1 7.7 6.1 7.6
Income Taxes (Pforma) 11.1 10.2 8.9 10.8
Tax Rate 34.6% 34.8% 35.2% 35.2%
Pforma Tax Rate
Inc From Ops After Taxes (Rpt) 17.5 14.3 11.2 14.0
Inc From Ops After Taxes (PF) 21.2 19.0 16.4 20.0
Reported Net Income 17.5 14.3 11.2 14.0
Pro Forma Net Income 21.2 19.0 16.4 20.0
% of Total Revenue
Cost of Revenue 79.6% 79.4% 79.3% 79.3%
Y/Y Change
Cost of Revenue 26.6% -3.0% -5.7% 10.2%
Source: Company reports and J.P Morgan estimates
Trang 10170
Table 94: NILE Quarterly Income Statement
$ in millions, except per share data
Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08E Q1-09E Q2-09E Q3-09E Q4-09E Total Revenue 67.9 72.1 67.4 111.9 70.5 73.7 65.4 100.9 59.5 65.1 63.4 104.9 Cost of Revenue 54.7 57.2 54.0 88.3 56.5 58.6 52.1 79.2 47.7 51.8 50.5 82.4
Gross Profit (Rpt) 13.2 14.9 13.4 23.7 13.9 15.1 13.3 21.7 11.8 13.3 12.9 22.6
Gross Margin (Rpt) 19.5% 20.7% 19.8% 21.1% 19.8% 20.5% 20.3% 21.5% 19.8% 20.5% 20.3% 21.5%
Restructuring
Total Expenses 9.6 9.9 9.7 13.6 10.9 10.8 10.0 13.0 11.2 11.1 10.2 14.5
Total Recurring Expenses 8.3 8.5 8.3 11.9 9.1 8.9 8.4 11.1 9.2 9.0 8.3 12.4
Inc From Ops After Taxes (Rpt) 3.2 3.8 3.0 7.5 2.6 3.2 2.3 6.2 1.0 2.0 2.2 5.9
Inc From Ops After Taxes (PF) 4.0 4.7 3.9 8.7 3.7 4.4 3.4 7.5 2.3 3.4 3.5 7.2