Brilliant Earth Group, Inc. (NASDAQ:BRLT) Q1 2023 Earnings Call Transcript

Brilliant Earth Group, Inc. (NASDAQ:BRLT) Q1 2023 Earnings Call Transcript May 11, 2023

Brilliant Earth Group, Inc. beats earnings expectations. Reported EPS is $0.03, expectations were $0.017.

Operator: Good day and thank you for standing by. Welcome to the Brilliant Earth First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Allison Malkin of ICR.

Allison Malkin: Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal year 2023 earnings conference call. Joining me today are Beth Gerstein, our Chief Executive Officer; and Jeff Kuo, our Chief Financial Officer. For our call today, Beth will begin with highlights of our first quarter financial and operational performance and update the progress we have made on our strategic priorities. Jeff will follow with more details on the quarter and share our outlook. Following this, the operator will begin the Q&A session with our presenters, Beth and Jeff available to answer the questions you have for us today. Before we start, I would like to remind you that management will make certain remarks today that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These future forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for a description of the risks that could cause our actual performance and the results to differ materially from those expressed or implied in these forward-looking statements. These forward-looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events unless required by law. Also, during this call, we will discuss both GAAP and non-GAAP financial measures. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these GAAP to non-GAAP measures in today’s earnings release, which is available at the Investor Relations section of our website at investors.brilliantearth.com.

A live broadcast of this call is also available at the Investor Relations section of our website. And with that, I’ll turn the call over to Beth.

Beth Gerstein: Good afternoon and thank you for joining us today to review our first quarter fiscal 2023 results. It’s been a good start to the year with our performance reflecting the continued execution against our near and long term growth goals with an unrelenting focus on building our brand, growing our share in a dynamic and highly fragmented market and delivering ongoing sustained profitability. I’m pleased to report that in the eight weeks since we shared our year end performance, we are reporting first quarter results today that have again exceeded our expectations. We’re pleased to deliver these results in a macro environment that has remained relatively unchanged from just two months ago. Highlights include revenue was $97.7 million, which represents minus 2% year-over-year growth and a 27% four year CAGR.

Gross margin was 54.9% a 480 basis point increase versus Q1, 2022. And we delivered adjusted EBITDA of $5.5 million or a 6% adjusted EBITDA margin. For those of you who know Brilliant Earth you will recognize the consistency of our mission driven focus to disrupt and transform the jewelry industry and to extend our lead as The Jeweler for today’s consumer. As I said under a yearend earnings call, our priorities for 2023 will remain consistent to continue on our path to become the premier global jewelry brand for today’s and tomorrow’s consumer driving awareness, resonance and relevance, to expand and refine our product offerings to create distinctive high quality products, to expand and elevate a seamless omni-channel experience across our showrooms and e-commerce, and to invest in the technology and systems to enable our growth.

Today, I’d like to touch briefly on a few of the first quarter drivers of our performance against those priorities. As always, it starts with our brand. For us sustainability, transparency and inclusivity are embedded in our DNA and we aim to reflect them in the product and stories that we share with our customers. As we do, we see growing awareness and share gains for our brand. In Q1, we grew our share of voice with 85% more media impressions than last year by featuring our trend leading product with influencers, like Nick Viall from the Bachelor who shared his proposal with a Brilliant Earth ring with his 1.1 million Instagram followers, or singer songwriter Kelsea Ballerini wearing Brilliant Earth at the Grammys. Our ability to execute milestone moments with our distinctive product, and social and cultural influencers extends our reach as the largest single brand independent jewelry company in the US.

It is also elevated our position to be among the top jewelry brands for Share of Voice. In our most recent brands survey, aided brand awareness with our demographic grew to 66%. This is a 12 point increase from our measurement approximately two years ago, and an indicator of the continuing success we’ve had in engaging with our millennial and Gen Z target audience. Over the past many years, word of mouth recommendations have been primary building blocks for the brand. We expect that to continue while we also expand the channels, platforms and people that amplify our voice and bring new consumers to Brilliant Earth. We’ve seen expansion of our reach reflected in our total customer growth as well as growing fine jewelry self purchase rates. One of the biggest moments in Q1 was of course Valentine’s Day.

We take tremendous pride in our ability to capture moments of celebration and love for our customers. And what better example than Valentine’s Day. Our heart diamond assortment generated strong results, along with our expanding assortment of personalized and customizable products. And as a result, for the Valentine’s Day holiday gifting period, we generated approximately 70% year-over-year growth in fine jewelry orders. This is sustainability transparency and inclusivity are core to our brand so it is the quality craftsmanship and uniqueness of our product. Our partnership with Steph Sapp founder of Future Earth is a great example of how we bring those principles to life with beautiful and meaningful product. This Earth Day together with staff, we launched a 10 day campaign to advance our shared mission.

In addition to educating our community about small steps they can take toward a more sustainable earth this partnership highlights what makes our fine jewelry special. We use recycled precious metals and ethically sourced and sustainably created diamonds and gemstones to deliver on our promise to provide beautiful, unique trend leading and coveted products to our customers. This builds on our already strong bridal offering customers recognize Brilliant Earth as a leader and innovator in bridal from the new trend leading and proprietary designs we create to the varied on trends, fancy shapes and broad selection of natural and lab diamonds lab diamonds across all budgets. In Q1 we launched the mosaics collection exclusively available at Brilliant Earth, further reinforcing our design leadership with distinctive engagement rings and wedding bands.

As you’ve heard me say often, bridal is a highly resilient category even as we know we are coming off an unprecedented period for weddings. While we anticipate some normalizing throughout this year, we are quite competent in our ability to continue to grow both demand and market share, as we are increasingly recognized as the go to brand for high quality, distinctive bridal jewelry. As planned we’ve started the years with openings of six new showrooms in Charlotte, Brooklyn, Tampa, Pasadena, Nashville and Fairfax, bringing our total showrooms to 31. The overall sales uplift that our showrooms generate when we opened a new markets is of course an important business driver. And we’ve continued to see strong performance including a year one post opening metro bookings uplift of approximately 100% for showrooms open at least one year.

Showrooms are also an important part of our overall brand building efforts. Take Brooklyn for example we had our eyes on Williamsburg in Brooklyn for some time, as we all know that it’s a vibrant community. And our data suggests it would be a great market for us given its popularity with Gen Z and millennials. We opened in a great location on Sixth Street, which is a popular spot for other luxury retailers and D2C millennial focused brands. Opening weekend was a huge success as our appointment schedule was 100% booked. And we’ve had great early response to both our bridal and fine jewelry collections. As we progress through the year, you can expect that we will continue to test and evolve our showroom concepts and executions, including new formats such as mall based showrooms and evolving the overall customer experience.

We’re on track to end the year with at least 35 showrooms in total. As a digital first company our success in scaling our omni-channel model is fueled by the investments we continue to make and the technology and systems that will enable our growth as well as our continuous test, learn an iterative approach. Our agile development cycle allows us to release new features and functionality every several weeks, including features that enhance our ability to adapt and individualized customer shopping experience to their preferences, ongoing refinements to curation and personalization, and our ever improving and evolving e-commerce experience. These all reflect our obsession with the customer and in turn our commitment to providing the most personalized and joyful experience for them.

I’ll close by reiterating how pleased we are with our start to the year and by thanking our team and expressing my competence in our team’s ability to continue to execute both our near and long term growth plans. With Mother’s Day only three days away we’re excited to help our customers celebrate a great Mother’s Day. Thank you for your continued interest and support. Here’s Jeff.

Jeff Kuo: Thanks Beth. And good afternoon everyone. Thank you for joining us today to discuss our first quarter fiscal 2023 results. As Beth mentioned, we are pleased with our start to the new year with the delivery of first quarter revenue and profitability ahead of our expectations, again demonstrating our ability to operate the business in an agile fashion. We are particularly pleased to report these results in a macro and consumer environment that remains relatively uncertain. Let’s talk about our priorities for 2023 and our focus on continuing to expand the reach and resonance of our brand, while also delivering healthy, sustainable, profitable growth. Today’s results reflect those efforts. In the first quarter, we reported revenue of $97.7 million, a 2% decline year-over-year and growth of 27% on a four year CAGR basis.

This result was better than the expected range we communicated on our Q4 earnings call and is consistent with our expectation of continued year-over-year order growth, which for the quarter was approximately 10% offset by an anticipated decline in AOV which for the quarter was approximately 11%. I’m pleased to report that we also continued to deliver robust gross margins. Q1 gross margin expanded 480 basis points year-over-year to 54.9%. Consistent with prior quarters the sustained strength of our gross margin illustrates how our agile, asset light data driven business model allows us to nimbly adapt to dynamic market conditions to optimize both margin and revenue. This better than expected expansion was driven by the continued growing resonance of our brand the differentiation we provide in our product offerings that are increasingly well received by consumers and ongoing benefits from our price optimization engine, procurement efficiencies in our supply chain, and our enhanced extended warranty program.

SG&A for the quarter continue to reflect our investments in growing the Brilliant Earth brand expanding our omni-channel reach, including through our showroom rollouts, and scaling the business. For the quarter SG&A was 55% of revenue compared to 44.8% of revenue in Q1, 2022 with approximately 270 basis points of the change driven by expenses that are added fast in our presentation of adjusted EBITDA such as equity based compensation, showroom pre-opening expenses, depreciation and amortization and non-recurring expenses. The remaining approximately 750 basis points of Q1 year-over-year change in SG&A expenses are as follows. Marketing costs as a percentage of sales grew by approximately 330 basis points year-over-year. Our ongoing investments in building the Brilliant Earth brand continue to pay off in terms of growing awareness and demand for Brilliant Earth, particularly as we continue to reach new customers with the expansion of our omni-channel strategy and growth of fine jewelry.

Keep in mind that we continue to manage our marketing spend dynamically to balance marketing efficiency while growing our brand. We were pleased to realize strong brand growth while managing a sequential decline in marketing as a percentage of sales for Q1, 2023 versus Q4, 2022. During the quarter, employee costs were higher by approximately 260 basis points year-over-year. As we discussed previously, we remain disciplined in our approach to investing in new employee growth to support our showroom expansion as well as key corporate talent. Over each of the past three quarters, we have reduced the year-over-year deleverage in employee costs as a percentage of sales. Other G&A as a percentage of sales increased by approximately 160 basis points during the quarter driven by higher technology expenses to support our growth and rent associated with our increased number of showrooms.

Over each of the past three quarters we have also reduced year-over-year deleverage in other G&A as a percentage of sales as we have anniversary our public company operating costs and maintain a disciplined focus on management of G&A expenses. Our strong gross margin performance together with prudent management of OpEx in Q1 contributed to us exceeding or adjusted EBITDA expectations to deliver a Q1 adjusted EBITDA of $5.5 million or a 6% adjusted EBITDA margin. Our profitability and capital efficient operating model continue to differentiate us among direct to consumer companies. We ended Q1 with $146 million in cash. We continue to maintain a strong balance sheet with no net debt. And we operate the business in an asset light fashion with efficient working capital and our inventory terms are among the highest in the industry.

As we’ve mentioned in the past, as we successfully expand fine jewelry to be a larger part of our business, and grow our showroom footprint, we do anticipate our inventory model will evolve to accommodate those needs. That said, at the end of Q1, we reported our second consecutive quarter of sequential decline in inventory as we continue to tightly manage our inventory in a data driven fashion. As we have said, our plans for 2023 reflects the priorities best outlined earlier coupled with our clear and focused commitment to delivering profitable growth. As stated in our earnings release, we’ve reiterated our annual guidance which reflects our ability to gain share in an uncertain macroeconomic environment. Our guidance continues to include our expectation that full year 2023 net sales will be in the range of $460 million to $490 million which represents 5% to 11% growth versus fiscal year 2022 a four year CAGR of 23% to 25%, and a four year stacked growth of 128% to 143%.

We do anticipate higher year-over-year revenue growth rates in the second half of the year as we left lower comparative growth rates from the prior year and continue to see success in our showrooms and the performance of our fine jewelry assortment. We expect the distribution of revenue in the remaining three quarters of 2023 to be generally consistent with the shape of these quarters in 2021 which was representative of our historical seasonality pattern with a slightly higher second half weighting compared to 2021 given our outsides growth in fine jewelry, and expansion of our showroom footprint. We also expect to continue driving strong gross margin performance. While there may be puts and takes in any given quarter, we expect to continue managing full year 2023 gross margin towards our long term gross margin targets in the mid 50% range.

As I said last quarter, we are planning to exit 2023 driving year-over-year leverage on a run rate basis in adjusted SG&A as we continue our focus on driving sustainable, profitable growth. Our full year adjusted EBITDA guidance in the range of $17 million to $32 million also remains unchanged, as we expect to continue prudently managing investments to gain market share while managing the business for profitability. In closing, on behalf of Beth, myself, and our entire team, we thank you for your support, and we’ll be happy to answer your questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Oliver Chen with TD Cowen. You may proceed.

Operator: Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. You may proceed.

Operator: Thank you. Our next question comes from Noah Zatzkin with KeyBanc Capital Markets. You may proceed.

Operator: Thank you. Our next question comes from Matthew Boss from J.P. Morgan. You may proceed.

Operator: Thank you. Our next question comes from Edward Yruma with Piper Sandler. You may proceed.

Operator: Thank you. Our next question comes from Randy Konik with Jefferies. You may proceed.

Operator: Thank you. Our next question comes from Rick Patel from Raymond James. You may proceed.

Operator: Thank you. Our next question comes from Oliver Chen with TD Cowen. You may proceed.

Operator: Thank you. Our next question comes from Dylan Carden with William Blair. You may proceed.

Operator: Thank you. And this concludes the Q&A session. I now like to turn the call back over to Beth Gerstein for any closing remarks.

Beth Gerstein: Thank you, everyone, for joining us on our Q1, 2023 conference call. And I wanted to wish all the mothers out there a Happy Mother’s Day.

Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.