Slide1: Vickie Eisenstein & Steven Novakovic


About Blue Nile: About Blue Nile Founded in 1999. IPO’d May 20th 2004 at $20.50 a share. 9 consecutive quarters of positive net income. www.bluenile.com Let’s get in the investment boat and take a trip down the Blue Nile.


Why Blue Nile isn’t Tiffany’s: Why Blue Nile isn’t Tiffany’s All business is conducted online. They have the same certified diamonds from the retailers that Tiffany’s deals with. Less retail mark ups, and mark ups overall. More educational features. Customizable/build your own rings. No inventory! “Amazon-esque” -Steve


Why you should rough it down the river rather than take a cruise!: Why you should rough it down the river rather than take a cruise! STARTING VALUE OF A 1-CARAT DIAOMOND $1,200 MARKUP Blue Nile | Other Jewelers MINING & ROUGH BROKERING 61% 61% CUT/POLISH & WHOLESALE 96% 109% JEWELERY MANUFACTURING 0 5% JEWELRY RETAIL 25% 67% FINAL SALE $4,733 $7,080


Blue Nile vs. the Other Online Competition: Blue Nile vs. the Other Online Competition Blue Nile has been around the longest. Blue Nile has a wider selection of jewelry and watches. More than a dozen diamond wholesalers buy from one another through the website.


How Does Blue Nile Beat the Competition? High Visibility.: How Does Blue Nile Beat the Competition? High Visibility. Blue Nile had nearly twice as many top-20 and top-30 paid and organic search positions than all other sites examined, resulting in an overall Visibility Percentage of 79.09%. Diamond.com was the second most visible site at 45.08%, Tiffany & Co. at 32.58%, Zales at 16.52% Jewelry Television at 10.61%.


The Fertile Crescent: Most Recent 4Q Earnings Report:: The Fertile Crescent: Most Recent 4Q Earnings Report: Beat earnings estimates by 2 cents a share. Increased Free Cash Flow by 100% 30.3% Sales Growth.


Where’s Blue Nile Flowing?: Where’s Blue Nile Flowing? “In 2005, our priorities are clear. We will continue to focus on building our brand and expanding our market share in our core customized diamond jewelry business in the U.S. We intend to extend our brand in international markets as we develop our business in Canada and in the UK. Lastly, we will maintain our disciplined focus on profitable growth." January 1st, 2005 opened their Canadian website Disciplined focus= Blue Nile is controlling its growth.


Where the stock is flowing.: Where the stock is flowing. Blue Nile's board authorized the repurchase of up to $30 million of the company's common stock during the next 12 months. Over 23% Insider Holdings. "We believe a stock repurchase program 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 the business with minimal capital expenditures," CEO, Vadon said.


The Deluge of the Nile: The Deluge of the Nile Consistently beats analyst estimates! Past three quarters has beat analysts’ EPS estimates. Quarter Estimate Actual 12/04 qtr. $0.22 $0.24 09/04 qtr. $0.07 $0.09 06/04 qtr. $0.09 $0.11


Charting Blue Nile’s Price Flow: Charting Blue Nile’s Price Flow


Cash Flowsssss: Cash Flowsssss January 2, December 31, 2005 2003 (in thousands) Operating activities: Net income $9,987 $26,986 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,510 1,293 (Gain) loss on disposal of assets (5) 14 Stock-based compensation 375 90 Warrant-based interest expense -- 87 Restructuring charges -- (87) Deferred income taxes 5,388 (15,700) Changes in assets and liabilities: Receivables, net 83 (441) Inventories 290 (5,023) Prepaid expenses and other assets (581) (235) Accounts payable 11,487 10,497 Accrued liabilities 1,246 1,044 Deferred rent (29) 1,291 Net cash provided by operating activities 29,751 19,816


More Cash Flowsss: More Cash Flowsss January 2, December 31, 2005 2003 (in thousands) Investing activities: Purchases of property and equipment (1,833) (3,506) Proceeds from the sale of property and equipment 7 3 Purchases of marketable securities (82,870) -- Proceeds from the sale of marketable securities 41,000 -- Transfers of restricted cash 400 -- Net cash used in investing activities (43,296) (3,503) Financing activities: Proceeds from sale of common stock, net of issuance costs 42,516 -- Repurchase of restricted and common stock -- (8) Payments on subordinated notes payable -- (6,638) Payments on capital lease obligations -- (995) Payments on note payable to related party -- (1,140) Proceeds from warrant and stock option exercises 145 254 Net cash provided by (used in) financing activities 42,661 (8,527) Net increase in cash and cash equivalents 29,116 7,786 Cash and cash equivalents, beginning of period 30,383 22,597 Cash and cash equivalents, end of period $59,499 $30,383


Balance Sheet: Balance Sheet January 2, December 31, 2005 2003 (in thousands) Assets Current assets: Cash, cash equivalents and restricted cash $59,499 $30,783 Marketable securities 41,868 -- Total cash and marketable securities 101,367 30,783 Accounts receivable 760 843 Inventories 9,914 10,204 Deferred income taxes 8,442 5,300 Prepaids and other current assets 1,046 465 Total current assets 121,529 47,595 Property and equipment, net 3,916 3,979 Intangible assets, net 385 -- Deferred income taxes 2,475 10,654 Other assets 77 77 Total assets $128,382 $62,305


Balance Sheet: Balance Sheet January 2, December 31, 2005 2003 (in thousands) Liabilities and Stockholders' Equity (Deficit) Current liabilities: Accounts payable $37,775 $26,288 Accrued liabilities 5,713 4,467 Current portion of deferred rent 203 177 Total current liabilities 43,691 30,932 Deferred rent, less current portion 1,071 1,126 Commitments and contingencies Mandatorily redeemable convertible preferred stock -- 57,485 Stockholders' equity (deficit): Common stock 18 5 Additional paid-in capital 104,684 4,247 Deferred compensation (929) (1,352) Accumulated other comprehensive loss (2) -- Accumulated deficit (19,515) (29,502) Treasury stock (636) (636) Total stockholders' equity (deficit) 83,620 (27,238) Total liabilities and stockholders' equity (deficit) $128,382 $62,305


Statement of Operations: Statement of Operations Quarter Ended Year to Date Ended Jan. 2, Dec. 31, Jan. 2, Dec. 31, 2005 2003 2005 2003 (in thousands, except per share data) Net sales $64,548 $49,555 $169,242 $128,894 Cost of sales 50,404 38,468 131,590 99,476 Gross profit 14,144 11,087 37,652 29,418 Operating expenses: Selling, general and administrative 7,343 6,078 22,795 18,207 Restructuring charges -- (87) -- (87) 7,343 5,991 22,795 18,120 Operating income 6,801 5,096 14,857 11,298 Other income (expense) net: Interest income 329 35 709 109 Interest expense -- -- -- (209) Other income 10 33 63 88 339 68 772 (12) Income before income taxes 7,140 5,164 15,629 11,286 Income tax expense (benefit) 2,577 (15,700) 5,642 (15,700) Net income $4,563 $20,864 $9,987 $26,986 Basic net income per share $0.26 $4.80 $0.80 $6.98 Diluted net income per share $0.24 $1.27 $0.56 $1.65 Shares used for computation: Basic 17,705 4,349 12,450 3,868 Diluted 18,812 16,383 17,885 16,363


How the Nile feeds into our Portfolio.: How the Nile feeds into our Portfolio. We recommend a $2,000 position. A fabulous retail stock to replace Tiffany’s.