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Blue Nile Announces Fourth Quarter and Full Year Financial Results

Blue Nile Reports Record Q4 Net Sales of $64.5 Million, up 30% from Prior Year

Achieves Q4 Earnings Per Diluted Share of $0.24
Q4 Free Cash Flow Increases 100% Year Over Year to $29.6 Million
Cash and Marketable Securities Total $101.4 Million at Year-End
Board Authorizes up to $30 million Stock Repurchase Program

Seattle, WA - February 8, 2005: PRNewswire-FirstCall - Blue Nile, Inc. (Nasdaq: NILE) reported financial results for its fourth quarter and full year ended January 2, 2005.

Blue Nile reported record fourth quarter net sales of $64.5 million, compared to net sales of $49.6 million in the fourth quarter of 2003, an increase of 30.3%. Income before income taxes in the fourth quarter increased 38.3% to $7.1 million, compared to $5.2 million in the fourth quarter of 2003. Net income in the fourth quarter was $4.6 million, or $0.24 per diluted share. In the fourth quarter of 2003, net income and net income per diluted share were $20.9 million and $1.27, respectively. Net income for the fourth quarters of 2004 and 2003 are not directly comparable as a result of the accounting for income taxes. Net income for the fourth quarter of 2004 was fully subject to income taxes, while net income for the fourth quarter of 2003 included a $15.7 million tax benefit from the realization of deferred tax assets related primarily to net operating loss carryforwards.

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"Blue Nile's fourth quarter results reflect the strength in execution of our differentiated business model," said Mark Vadon, Chief Executive Officer. "During the holiday season, customers embraced our award-winning customer service and our expanded selection in customized diamond jewelry offerings. Operationally, we executed with excellence and efficiency. Our fourth quarter financial performance was strong across all key measures. The superior cash flow generation capabilities of our business model were evidenced in our fourth quarter non-GAAP free cash flow of $29.6 million, an increase of 100% from the prior year."

Net sales for the year ended January 2, 2005 were $169.2 million, an increase of 31.3% from $128.9 million in the year ended December 31, 2003. Income before income taxes was $15.6 million for the year ended January 2, 2005, compared to $11.3 million in the year ended December 31, 2003. Net income and net income per diluted share for the year ended January 2, 2005 were $10.0 million and $0.56, respectively, compared to $27.0 million and $1.65 per diluted share in the year ended December 31, 2003. Net income for the full years 2004 and 2003 are not directly comparable as a result of the accounting for income taxes. Net income for the full year 2004 was fully subject to income taxes, while net income for the full year 2003 included a $15.7 million tax benefit from the realization of deferred tax assets related primarily to net operating loss carryforwards.

Mr. Vadon added, "2004 was an exceptional year for Blue Nile. We solidified our position as the leader in online diamond and jewelry retailing. We built upon the strength of our supply chain relationships. As we begin 2005, we are well positioned for continued growth and are more confident than ever in the strength of our business model. 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."

Blue Nile also announced that its Board of Directors has authorized the repurchase of up to $30 million of the Company's common stock during the next 12 months. The shares may be repurchased from time to time in open market transactions. The timing and amount of any shares repurchased will be determined by the Company's management based on its evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5- 1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws.

"This program underscores our commitment to delivering value to our shareholders," said Mr. Vadon. "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. This program reflects the cash generation capabilities of our business and our strong financial position."

Other Financial Highlights

* Cash and marketable securities totaled $101.4 million at January 2, 2005.

* Gross profit for the fourth quarter was $14.1 million, compared to $11.1 million in the fourth quarter of 2003, an increase of 27.6%.

* Gross profit as a percentage of net sales was 21.9% in the fourth quarter of 2004 compared to 22.4% in the fourth quarter of 2003.

* Selling, general and administrative expenses increased 20.8% in the fourth quarter from $6.1 million to $7.3 million, reflecting the Company's increase in net sales, additional administrative expenses required as a public company and increased marketing expense. As a percentage of net sales, selling, general and administrative expenses were 11.4%, compared to 12.3% in the fourth quarter of 2003.

* For the fourth quarter of 2004, non-GAAP free cash flow was $29.6 million, compared to $14.8 million in the fourth quarter of 2003, an increase of 100%.

* Net cash provided by operating activities was $30.7 million in the fourth quarter, compared to $15.7 million in the fourth quarter of 2003.

* Capital expenditures in the fourth quarter totaled $1.1 million, compared to $948,000 in the fourth quarter of 2003.