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NILE Rebuttal

|Includes: Blue Nile, Inc. (NILE)

A recent StreetSweeper article cited several negative arguments against Blue Nile. There were multiple flaws in the arguments:

1. Diamond Pricing - The article does not compare like for like diamonds. The price variance is a result of different polish / cut / symmetry grades (NILE's are all better, hence the higher price)

a. If you actually compared equal stones (William Blair does a good monthly analysis) you'll see NILE's are materially cheaper than competition (~ 15% on average, which has held for many quarters)

2. Negative FCF - While the FCF amount has declined YoY, the negative Q3 was largely a result of seasonal negative working capital. It was $7.2MM use in 2014 vs. $5.6MM use in 2013, which largely due to a $1.5MM YoY swing in inventory

a. Excluding changes in working capital they're still generating +$14.3MM in LTM FCF (or if you prefer to include it they are + $11MM)

3. Online Cheap Model - Going back to 2005, NILE has grown at higher growth rate than traditional in store competitors (Tiffany's & Signet)

4. Competition - Comparing the core NILE shopper (relatively affluent mid 30s / 40s male; though females browse as well) to Wal-Mart (in store purchase / lower income) and QVC is irrational given the very different target demographics

A few positives you omit:

1. Declining diamond prices - The recent decline in diamond prices actually gives NILE a large advantage over in store jewelers who hold inventory.

2. International - They are making significant progress in China (~ 12MM weddings per year vs 2MM in the United States) at the diamond shows, with international revenue growing 26% in Q3

3. OpEx Leverage - NILE has held their opex relatively flat (and will be able to do so going forward), therbye allowing for operating leverage as the gross margin rate flattens

4. Long term offline to online purchase migration - While jewelry is at a much lower conversion rate than apparel / electronics, there's still a long-term shift in younger consumers buying more items online