November 9, 2007

Brian Bolan
Director of Research;
312-253-0578; BBolan@JacksonSecurities.com
Recent price: NILE 82.55

Review of Blue Nile’s 3Q07 earnings call

Summary

After crushing the estimate last quarter, we moved our estimates above the top end of the guided range for
the third quarter of 2007. This proved to be too much, as the company fell short of our aggressive
estimates on the top and the bottom lines. We are going to maintain our aggressive stance towards Blue
Nile and its financial results for the final quarter of 2007, as we believe that the valuation that it sports
indicates that there should be enough powder in the cannon for another firework of sorts.

Earnings

Blue Nile posted revenue of $67.4M in the third quarter, 7% below our estimate of $72.4M and barely
below the street consensus of $67.8M. This represented growth of 26.5% from the same period a year ago
but a decline of 6.6% from the previous quarter. Earnings per share of $0.18 were fully five cents below
our estimate, but $0.02 above a very soft consensus estimate. This translates to a 54% jump in earnings
from the year ago period but a 23% decline from the most recent quarter.

Valuation

We continue to believe that Blue Nile has been over-priced for some time, and its valuation needs to
undergo a fundamental correction. While we have been incorrect on our stance for most of the year, we
believe that a correction to Blue Nile shares is not only likely, but necessary. We maintain our sell rating
and target price of $70 per share.

Important Disclosures
Jackson Securities, LLC does or seeks to do business with companies covered in its
research reports. As a result, investors should be aware that the firm may have a conflict
of interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decisions. Please also refer to
the important disclosures found on pages 4 thru 6. Analyst Certification is found on
page 4.

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Orders and ASP’s

The average sales price (ASP) was $2,093, up 28% from a year ago, and up 11% from the prior quarter.
Orders were up 16% from a year ago, but well below our expectation of more than 38,000. We have
modeled in assumptions for next quarter of an ASP of $1400 and total orders just over of 85,000. Those
assumptions give us a topline number that is just above the guided range of $109M to $115M.

Bullet points from the conference call

∗ Gross margins clocked in at 19.8%, well below our 21% expectation.

∗ SG&A was 14.5% of net sales, ahead of our estimate of 14%.
∗ Operating margin was 5.4%, well below our estimate of 7%.
∗ Ended quarter with $74.3M in cash on the balance sheet, which translates to $4.39 per share.
∗ Inventory stood at $15.3M at the end of the quarter, up from $14.6M in the prior quarter

Key Takeaway:

With margins dipping and growth in the $25,000 and above segment slipping 1%, investors have lost
some of the faith that was previously put in Blue Nile. We believe that our aggressive estimates will
prove to be much closer to the mark in the fourth quarter of 2007. That said, we believe that 65x 2007
EPS is still a very rich multiple. We anticipate a mid December release of our 2008 estimates, and likely
alteration of our rating and target price.

Looking ahead

Our model is call for some good growth in the fourth quarter despite the turmoil that is present in the rest
of the market. We believe that a non-engagement ring heavy mix will drive up gross margins to 21.8%,
and earnings to come in ahead of expected range of $0.40 to $0.45 per share. Our model is calling from
EPS of $0.47 on 17M shares outstanding. Our topline estimate of $119M is above the guided range, but
we believe that the valuation of the stock and previous out performance by the company indicate this is
certainly possible.

Target Price and Model

Our target price of $70 is based on our expected earnings per share of $1.07 for 2007. This means a 65x
multiple is being used in this instance. This target price is fully 10% below where shares have been
trading recently so we recommend that investors sell shares and lock in profits.

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 Blue Nile 3Q07 comparison to estimates and
previous quarters

Source: Jackson Securities, company reports

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 Hold initiated 2/07/07: $39.18 Downgrade to Sell 5/21/07 : Sell 8/31/07: 82.93
Target: $40.00 $53.05 Target $46 Target:$70

Sell 11/09/07: 82.55

Target: $70

Disclosures:

Analyst Certification
I, Brian Bolan, hereby certify that the views expressed in this research report accurately reflect
my personal views about the subject securities and issuers. I also certify that no part of my
compensation was, is, or will be, directly or indirectly, related to the specific recommendations or
views expressed in this research report. I may be compensated in part based on the overall
profitability of Jackson Securities, LLC, which includes earnings from investment banking and all
other aspects of the firm’s business.

Conflicts of interest:
Neither Jackson Securities nor any of its publishing analysts or their immediate family members
has a position in the securities described herein.

Compensation:

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 • The research analyst has not received compensation based upon investment banking
revenues or from the subject company in the last 12 months.
• Jackson Securities has not in the last 12 months managed or co-managed a public
offering of securities, received compensation for investment banking services from the
subject company or any compensation for products or services other than investment
banking
• Jackson Securities will seek investment banking compensation from the subject company
in the next 3 months.

Position as Officer or Director:

Neither the research analysts nor members of their immediate households occupy positions as
an officer or director with the company/companies mentioned in this report.

Market Making:
Jackson Securities does not make a market in this stock

Explanation of Ratings:
Buy - Expected 12-month absolute performance of +10% or higher than the market price at which time
the rating was issued.
Hold - Expected 12-month absolute performance of +5% to –5% from the price at the time the rating was
issued.
Sell - Expected 12-month absolute performance of –10% or lower than the market price at which time the
rating was issued.

Distribution of Ratings:
Jackson Securities, LLC has a distribution of ratings among its coverage universe as follows:

Buys – 50.0% (19 of 38 active recommendations)

Holds – 44.7% (17 of 38 active recommendations)
Sells – 5.3% (2 of 38 active recommendations)

Jackson Securities has provided investment banking services within the previous 12 months with the
following percentage of the companies they have rated:

Buys – 0.0% (0 of 38 active recommendations)

Holds – 0.0% (0 of 38 active recommendations)
Sells – 0.0% (0 of 38 active recommendations)

Risks: General economic conditions, economic slowdown/recession, adverse industry news.

Other Important Disclosures and Disclaimers

Disclaimer: This communication is neither an offer to sell nor a solicitation of an offer to buy any
securities mentioned herein. This material should not be construed as an offer to sell or the solicitation of
an offer to buy any securities mentioned herein in any jurisdiction where such an offer or solicitation
would be illegal. We are not soliciting any action based on this material. This document is for general
information only, and it does not constitute a personal recommendation or take into consideration the
particular investment objectives, financial condition or financial needs of any clients. Before acting on any
advise or recommendation in this research report, clients should consider seek professional advice. Past

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performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original
capital may occur.

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