Blue Nile Announces Third Quarter 2008 Financial Results.

Reports Third Quarter Net Sales of $65.4 Million Earnings per Diluted Share Total $0.15 Repurchases $23.2 Million of Stock in the Third Quarter

SEATTLE -- Blue Nile, Inc. (Nasdaq: NILE), the leading online retailer of diamonds and fine jewelry, today reported financial results for its third quarter ended September 28, 2008.

Blue Nile reported net sales of $65.4 million compared to $67.4 million in the third quarter of 2007, a decrease of 2.9%. Non-GAAP adjusted EBITDA was $5.4 million for the quarter, consistent with the third quarter of 2007. Net income totaled $2.3 million, or $0.15 per diluted share compared to $3.0 million, or $0.18 per diluted share in the third quarter last year.

"Our top-line growth declined as a result of the further weakening in the economic environment in the U.S. during the third quarter," said Diane Irvine, Chief Executive Officer. "At the same time, our disciplined focus on managing the business profitably in this difficult retail climate allowed us to achieve our earnings per share guidance.

"We believe that our offering of exceptional diamonds and fine jewelry at a compelling value resonates with consumers especially during difficult times. We are excited about the new diamond, gemstone, pearl and silver jewelry that we are introducing for the holidays. However, our expectation is that this will be a very challenging holiday season based on the uncertainty in the external environment and extremely cautious consumer spending trends.

"Blue Nile is well positioned to generate profitability and cash flow even in difficult market conditions. We remain confident in our ability to continue to gain market share and to emerge from this economic downturn in an even stronger competitive position," concluded Irvine.

During the quarter, the Company repurchased 593,700 shares of its common stock for $23.2 million. Since the inception of the buyback program in the first quarter of 2005, the Company has repurchased 4.4 million shares for a total of $160.0 million.

Selected Financial Highlights

* International sales for the third quarter grew 53% to $6.9 million, compared to $4.5 million in the third quarter of 2007.

* Gross profit for the third quarter was $13.3 million. As a percent of net sales, gross profit increased to 20.3% compared to 19.8% in the third quarter of 2007.

* Operating income for the quarter totaled $3.3 million. Operating income as a percentage of net sales was 5.0% for the third quarter.

* Selling, general and administrative expenses for the quarter were $10.0 million, compared to $9.7 million in the third quarter of 2007. Selling, general and administrative expenses include stock-based compensation expense of $1.6 million, compared to $1.4 million in the third quarter of 2007.

* Net income per diluted share for the quarter includes stock-based compensation expense of $0.07, compared to $0.05 for the third quarter of 2007.

* Net cash provided by operating activities totaled $23.0 million for the trailing twelve month period ended September 28, 2008. Non-GAAP free cash flow was $20.1 million for the trailing twelve month period ended September 28, 2008.

* The Company's cash and cash equivalents totaled $26.6 million at September 28, 2008.

* Capital expenditures in the third quarter totaled $0.7 million, compared to $1.5 million in the third quarter of 2007.

Financial Guidance

The deterioration in the economic climate and the uncertainty surrounding consumer spending patterns combine to create a lack of visibility into expectations for the upcoming holiday season. As a result of the uncertainty in the external environment, the Company is not providing financial guidance at this time for the fourth quarter and fiscal year.

Forward-Looking Statements 

This press release contains forward-looking statements that include risks and uncertainties, including, without limitation, all statements related to future financial performance, estimated stock-based compensation expense, anticipated effective tax rate, anticipated capital expenditures and plans to grow our business. Words such as "expect," "anticipate," "believe," "will" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon our current expectations. Forward-looking statements involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, risks related to general economic conditions, our fluctuating operating results, seasonality in our business, our ability to acquire products on reasonable terms, our online business model, demand for our products, our ability to attract customers in a cost effective manner, our limited operating history, the strength of our brand, competition, fraud, system interruptions, our ability to fulfill orders and other risks detailed in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 30, 2007. Additional information will be set forth in our Quarterly Report on Form 10-Q for the quarter ended September 28, 2008, which we expect to file with the Securities and Exchange Commission on or before November 7, 2008. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. All forward-looking statements are qualified in their entirety by this cautionary statement, and Blue Nile undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date hereof.

Conference Call

The Company will host a conference call to discuss its third quarter financial results today at 2:00 p.m. PT/5:00 p.m. ET. A live webcast of the conference call may be accessed at http://investor.bluenile.com. Following the completion of the call, a recorded replay of the webcast will be available for 30 days at the same Internet address. This call will contain forward-looking statements and other material information regarding the Company's financial and operating results. In the event that any non-GAAP financial measure is discussed on the conference call that is not described in this release, related complementary information will be made available at http://investor.bluenile.com as soon as practicable after the conclusion of the conference call.

Non-GAAP Financial Measures

To supplement Blue Nile's consolidated financial statements presented in accordance with generally accepted accounting principles ("GAAP"), Blue Nile uses non-GAAP adjusted EBITDA and non-GAAP free cash flow as measures of certain components of financial performance. Blue Nile defines non-GAAP adjusted EBITDA as earnings before interest and other income, taxes, depreciation and amortization, adjusted to exclude the effects of stock-based compensation expense. Blue Nile defines non-GAAP free cash flow as net cash provided by or used in operating activities less cash outflows for purchases of fixed assets, including internal use software and website development. Blue Nile's management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors should also note that the non-GAAP financial measures used by Blue Nile may not be the same non-GAAP financial measures, and may not be calculated in the same manner, as that of other companies. Whenever Blue Nile uses such non-GAAP financial measures, it provides a reconciliation of non-GAAP financial measures to the most closely applicable GAAP financial measures. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

Blue Nile's management believes that non-GAAP adjusted EBITDA and non-GAAP free cash flow, as defined, provide meaningful supplemental information to the company and to investors. Blue Nile believes that both management and investors benefit from referring to these non-GAAP measures in assessing the performance of Blue Nile and when planning and forecasting future periods. Further, management believes that the inclusion of the non-GAAP adjusted EBITDA and non-GAAP free cash flow calculations provide consistency in Blue Nile's financial reporting and comparability with similar companies in Blue Nile's industry.

A reconciliation of non-GAAP adjusted EBITDA is as follows (in thousands):

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

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About Blue Nile, Inc.

Blue Nile, Inc. is the leading online retailer of diamonds and fine jewelry. The Company delivers the ultimate customer experience, providing consumers with a superior way to buy engagement rings, wedding rings and fine jewelry. Blue Nile offers in-depth educational materials and unique online tools that place consumers in control of the jewelry shopping process. The Company offers thousands of independently certified diamonds and fine jewelry at prices significantly below traditional retail, with quality standards that are among the highest in the industry. Blue Nile can be found online at www.bluenile.com, www.bluenile.ca and www.bluenile.co.uk. Blue Nile's shares are traded on the Nasdaq Stock Market LLC under the symbol NILE.

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