think equity partners growth conference - iis windows...

Think Equity PartnersThink Equity PartnersGrowth ConferenceGrowth Conference

September 12, 2006September 12, 2006

1

Blue Nile, Inc.Blue Nile, Inc.

Safe Harbor StatementOur presentation includes, and our responses to various questions may include, forward-looking statements, including statements regarding expectations of net sales, gross margin, operating results, earnings, operating cash flow, capital investment and other financial statement or balance sheet items, and statements about our future plans and objectives. Generally speaking, statements regarding the Company’s or management’s beliefs, expectations, targets, goals, plans, outlooks or predictions for the future are forward-looking. Any such statements are subject to a number of risks and uncertainties that could cause the actual results and the implementation of the Company’s plan and operations to vary materially from the anticipated results implied by the forward-looking statements. More information about factors that could potentially affect Blue Nile’s financial results is included in Blue Nile’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K and its quarterly reports on Form 10-Q.

Our CompanyOur Company

3

Company OverviewCompany Overview

Founded in 1999

Blue Nile is the Leading Online Retailer of Diamonds and Fine Jewelry

Premium Brand in a Growing Market

Superior Customer Experience

Significant Supply Chain Advantage

Highly Scalable Business Model

Excellent Profitability with Strong Cash Flow

4

Company Snapshot Company Snapshot -- 20052005

$203.2 million of Net Sales

$13.2 million in Net Income –31.7% Y/Y Growth

$30.2 million in Free Cash Flow*

Repurchased $17.4 million of Common Stock (3.3% of outstanding shares)

Cash and Marketable Securities totaled $114.8 million at year end

Debt Free

*GAAP Operating Cash Flow less Capital Expenditures, See Appendix

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Key Participant in the U.S. Jewelry MarketKey Participant in the U.S. Jewelry Market

U.S. Jewelry (2004):$57.2 Bn

Diamond Jewelry: $31.5 Bn

DiamondEngagement:

$4.5 Bn

Source: U.S. Census Bureau, Diamond Information Center and J. Walter Thompson.

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72% revenue in 2005Average price $5,600~3.2% U.S. market shareEstimated > 50% U.S. online market share

U.S. Jewelry (2004):$57.2 Bn


DiamondEngagement:

$4.5 Bn

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U.S. Jewelry (2004):$57.2 Bn


DiamondEngagement:

$4.5 Bn


18% revenue in 2005

High growth opportunity capitalizing on engagement position

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U.S. Jewelry (2004):$57.2 Bn


DiamondEngagement:

$4.5 Bn


10% revenue in 2005

>50% units

Helps develop both repeat and trial purchase opportunities

Customer ExperienceCustomer Experience

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Blue Nile Delivers a Superior Customer Blue Nile Delivers a Superior Customer ExperienceExperience……

Emotional significance

Significant cost

Price uncertainty

Lack of objective comparison

Limited selection

High pressure sales

Limited control of experience

Traditional Retail JewelryPurchasing Experience

11

Blue Nile Delivers a Superior Customer Blue Nile Delivers a Superior Customer ExperienceExperience……

Emotional significance

Significant cost

Price uncertainty

Lack of objective comparison

Limited selection

High pressure sales

Limited control of experience

Trust and guidance

Superior value

Price transparency

Detailed information and objective certifications

Broad selection and ability to customize

Non-commissioned sales

Customer controls purchasing experience

Traditional Retail JewelryPurchasing Experience The Blue Nile Solution

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Diamonds are Well Suited for Online RetailingDiamonds are Well Suited for Online Retailing

BroadSelection and

Dynamic DisplayCertifiable

Small Size/Ease of Shipping

Small Size/Ease of Shipping

SignificantProduct

Information

SignificantProduct

Information

Speed,Convenience and Flexibility

BroadSelection and

Dynamic Display

OnlineDiamond Jewelry

Retailing

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The Blue Nile Purchase ExperienceThe Blue Nile Purchase Experience

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Blue Nile Customer ExperienceBlue Nile Customer Experience

Education and Guidance

In-depth Web Content

Call Center Staffed with Product Experts

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Broad Selection; > 50,000 Independently Certified Diamonds

Interactive Tools to Select the Perfect Diamond for Each Customer

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Industry Leading Customization

Hundreds of Ring, Earring and Pendant Settings

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Tools to Help Consumers Visualize Final Customized Product

Customized Product Delivered to Consumers Four Business Days After Order is Placed

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Elegant Product PresentationElegant Product Presentation

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Becoming the Jeweler for LifeBecoming the Jeweler for Life

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. . . Increasing Consumer Trust and Confidence . . . Increasing Consumer Trust and Confidence and Reinforcing Our Premium Brandand Reinforcing Our Premium Brand

$14

$44 $49

$72

$129

$169

$203

$0

$50

$100

$150

$200

$250

1999 2000 2001 2002 2003 2004 2005

$MM

“Forbes Favorite”Online Jeweler (2000-2006)

Bizrate.com's Circle of Excellence Platinum Award

(2002-2005)

American Business Awards’ Best Overall

Company Category Finalist

Net Sales

Our BusinessOur Business

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Significant Supply Chain AdvantageSignificant Supply Chain Advantage

Exclusive, long-term supply relationships

Supplier competition creates favorable pricing dynamic

Enhanced value to suppliers

Real-time market intelligence

Sophisticated inventory management system

Efficiency of high volume through a single account

Increased inventory turns

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Blue NileBlue Nile’’s Working Capital Advantages Working Capital Advantage

Customer purchase

Receive diamond

from supplier

Ship item to customer

Customer receives product

Paysupplier

~40-55 Day Positive Cash Float

DAY 1 DAY 2 DAY 4-5 DAY 45-60

Paymentreceived

DAY 3-4

Fast Inventory Turnover

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• Eliminates layers

• Exclusive relationships

• Broadest selection with minimal inventory

• Suppliers finance growth

• Asset efficiency – increased ROA, ROIC, sales/employee

• Capital efficiency – low capex, low customer acquisition costs The Online Advantage

Unique Supply Chain Solution

Working Capital Advantage

Business Model HighlightsBusiness Model Highlights

Superior Cash Flow Generation

Financial ReviewFinancial Review

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Demonstrated Financial PerformanceDemonstrated Financial Performance

Rapid sales and earnings growth

Significant operating leverage

Strong cash flows from operations

Self-funding business model with minimal capex requirements

Debt-free balance sheet

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Revenue and Profit TrendRevenue and Profit Trend

TTM Net Revenue

$0

$50

$100

$150

$200

$250

2001

2002

2003

2004

2005

TTM EBITDA

($5)

$0

$5

$10

$15

$20

$25

2001

2002

2003

2004

2005

Net Sales EBITDA

28

$44 $49

$72

$129

$169

$203

$7$11

$18

$29

$38

$45

$0

$50

$100

$150

$200

$250

2000 2001 2002 2003 2004 2005$0

$10

$20

$30

$40

$50

$60

$70

Superior Net Sales and Gross Profit GrowthSuperior Net Sales and Gross Profit Growth($ in Millions)($ in Millions)

2000 – 2005 CAGR: +45.1%2000 – 2005 CAGR: +35.8%

Net Sales Gross Profit

Net Sales Gross Profit

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$49

$129

$169

$203

$4 $11 $15 $18

$72

($4)

($50)

$0

$50

$100

$150

$200

$250

2001 2002 2003 2004 2005

Significant Operating LeverageSignificant Operating Leverage($ in Millions)($ in Millions)

Net Sales/Operating Income SG&A %

Net Sales Operating Income (a) SG&A %(a) Excludes restructuring charges.

19.6%

31.7%

14.1% 13.5% 13.3%

0.0%

10.0%

20.0%

30.0%

40.0%

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Superior Free Cash Flow GenerationSuperior Free Cash Flow Generation

Free Cash Flow * FY 2005 ($mm)

*GAAP Operating Cash Flow less Capital Expenditures, See Appendix

$-

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

2005 GAAPOperating

Income

Stock-basedCompensation

Change inAccountsPayable

Change inInventories

Depreciation &Amortization

CapEx Interest Income& Other

Change inOther Assets &

Liabilities

2005 FCF

$18.0 $0.3

$12.4 ($1.9) $1.7 ($1.1)$2.5 ($1.9)

$30.2

$10.5 $0.7

31

Strong Balance SheetStrong Balance Sheet($ in thousands)($ in thousands)

76,200$Total Liabilities and Stockholders' Equity

44,222 Total Stockholders' Equity

31,978Total Liabilities

-Convertible Preferred Stock

752Deferred Rent, Less Current Portion

3,544 Other Current Liabilities

27,682$Accounts Payable

76,200 $Total Assets

1,687 Other Assets

3,056 Deferred Tax Assets

3,876 Fixed Assets

11,211 Inventory

56,370 $Cash, Cash Equivalents and Marketable Securities

July 2, 2006

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Q2 Financial HighlightsQ2 Financial Highlights

Q2 Net Sales of $56.9 Million, up 29.9% from Prior Year

Achieved Q2 Earnings Per Diluted Share of $0.18

Trailing Twelve Months’ Non-GAAP Free Cash Flow of $29.2 Million Increased 47.0% Year Over Year

Q2 Share Repurchases of $40.3 Million, or 7.3% of Outstanding Shares

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Criterion Scorecard

• $203 mm in 2005 net sales • Profitable with significant operating leverage

• Blue Nile model inherently scalable • Minimal capital investment required for growth

• Premium brand difficult to replicate • Exclusive arrangement with suppliers

• Geographically (U.S. and international) • Products (complementary and new categories)

PROVEN

SCALABLE

DEFENSIBLE

EXTENDIBLE

Key TakeKey Take--AwaysAways

The Winning Business Model

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AppendixAppendix

A reconciliation of differences of non-GAAP free cash flow from the comparable GAAP measure of net cash provided by operating activities is as follows (in thousands):

$ 30,200

Non-GAAP free cash flow

(1,072)

Purchases of fixed assets, including internal-use software and website development

$ 31,272

Net cash provided by operating activities

Year endedJanuary 1,

2006

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