Agenda
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Investment Thesis
Company Overview
Competition
Risks
Key Financials
Q&A
1
Investment Thesis
• Unusual for IAG, this is a growth company
• Neal knows growth
– Genentech went up ~10%
• Alina knows jewelry
– Movado went up ~16%
It just makes sense.
Company Overview
• Blue Nile is the leading online
retailer of diamonds and fine
jewelry
• Founded in 1999
by CEO Mark Vadon
• Survived dot-com bubble
• May 2004 - IPO at $20.50
2
Company Overview
• Premium brand in a growing market
• Superior customer experience
• Significant supply chain advantage
• Highly scalable business model
• Awards
– “Forbes Favorite” Online Jeweler: 2000-2006
– American Business Awards’ Best Overall Company Category
Finalist
– Bizrate.com’s Circle of Excellence Platinum Award: 2002-2005
Business Model
• Price transparency
• Heavily discounted (30-40%)
• Dell-style customization
– 2001 - Arranged a deal with wholesalers in which
their inventory would be listed directly on the website
– Almost no inventory holding costs
• Customer service
3
Industry Overview
U.S. Jewelry:
$57.2 Bn
Diamond Jewelry:
$33.7 Bn
Diamond
Engagement:
$4.5 Bn
Source: U.S. Census Bureau, Diamond Information Center and J. Walter Thompson
Revenue Breakdown
U.S. Jewelry
10%
Diamond
Jewelry
18%
Diamond
Engagement
72%
4
Diamonds…online?
Diamond Edumacation
CUT
CARAT
COLOR
CLARITY
5
Customer Experience
Customer Experience
• Education and guidance
• In-depth web content
• Interactive tools
• Call center staffed with
product experts
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Customer Experience
• Broad selection
• > 60,000 independently
certified Diamonds
• Industry leading
customization
• Custom product delivered
in four business days
Customer Experience
TRADITIONAL
BLUE NILE
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Emotional significance
Significant cost
Price uncertainty
Lack of objective
comparison
Limited selection
• High pressure sales
• Limited control of
experience
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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
7
Competition
• Jewelers (both independent and chains)
• Online retailers and auction sites
• Department stores
• Catalogue and television retailers
• Discount superstores and wholesale clubs
Competitors
- Have to call for pricing
- Harder to navigate
- Just plain annoying
- Similar educational tools
- Too bad no one’s heard of it
- Heavily retail based
- For the price conscious (cheap) consumer
- Great brand name
- That’s what you tell yourself after getting ripped off
- You can get it, no matter what it may be
- It will end up being stolen cubic zirconium
- Would you seriously buy diamonds from the same
place you bought your textbooks?
- Yes, they sell jewelry
- No, your girlfriend will not appreciate a ring from QVC
Denotes Forbes Best of the Web: Luxury Shopping
8
Competition
• Greater than 50% of the market still
dominated by mom and pop stores
• Typical markups of about 70%
• Refer to Blue Nile as the “evil empire” as
they continue to go out of business
Fighting Words for Tiffany’s
• "We want to be the Tiffany for the
next generation"
• Sells as many engagement rings in
the U.S. as Tiffany & Co
• Blue Nile's average engagement
ring runs $5,200, compared with
$9,500 at Tiffany
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Risks
• Hefty valuation
• Market risk
• Customer tastes
• Insider sales
Growth
• 259% growth for int’l segment
• Customer service fuels repeat sales
– Repeat buyers account for 15% of sales
– 30% of new customers have been referred by a friend
• Brand awareness through high-ticket sales
• Aggressive diamond pricing strategy
• Great management!
• Krish & Andrew don’t like it
10
And more growth
• Diamond price inflation at multi-year lows
– 3% average for 2006, 1.3% for Q4
– well below the 20% inflation hit Q4 04
• Keyword pricing killed earnings in Q4 05,
but were benign throughout 2006
– Stable 4% increase
– Higher rank in searches with less aggressive
competition
Strong Financial Growth
$250
$200
20
200
0 1-
5
+
GR
CA
200
$150
1-2
9%
4 2.
005
+
GR
CA
9%
4 1.
$100
$50
$0
2001
2002
2003
2004
Net Sales
Gross Profit
2005
11
Significant Operating Leverage
$250
40.0%
$200
30.0%
$150
20.0%
$100
10.0%
$50
$0
0.0%
2001
2002
2003
Net Sales
2004
2005
SG&A %
Q3 Financial Highlights
• Q3 net sales of $53.2M, up 26.8% from
Prior Year
– Due to higher sales volume
• Increased 13.5% over Q3 05
• Average order value also increased
• Q3 share repurchases of $50.2 Million, or
9% of outstanding shares
12
Upcoming Q4 Overview
• Seasonal fluctuations
– Q4: 36%, 38% and 38% of sales in 2005-2003
Fast Money
• Earnings
– Average 3-day volatility for last four earnings reports
= 12.79%
• Short Squeeze
– 3.95 M shares held short as of 12/12/06
– 28.20% of the float
– Shares short / average volume = 19
• Headlines
– Large ticket sales grab media attention
13
Q&A
14