Brilliant Earth Group, Inc. (NASDAQ:BRLT) Q4 2022 Earnings Call Transcript

Brilliant Earth Group, Inc. (NASDAQ:BRLT) Q4 2022 Earnings Call Transcript March 15, 2023

Operator: Good day and thank you for standing by. Welcome to the Brilliant Earth Fourth Quarter and Fiscal Year 2022 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. 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. Please go ahead.

Allison Malkin: Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2022 earnings conference call. Joining me today are Beth Gerstein, Chief Executive Officer; and Jeff Kuo, Chief Financial Officer. For the call today, Beth will begin with highlights of our fourth quarter and fiscal year financial and operational performance and the drivers of future growth. Jeff will follow with more details on the quarter and year 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. 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 non-GAAP to 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. With that, I’ll turn the call over to Beth.

Beth Gerstein: Good afternoon everyone, and thank you for joining us today. We’re pleased to share our fourth quarter and full year results with you. When we began the 2022 fiscal year, I shared with you that our approach would be to prudently and strategically invest to grow the Brilliant Earth brand in business, to expand our showroom and omnichannel footprint and to optimize our significant financial and operating advantage with our asset-light, agile and highly efficient business model, all with an eye on delivering profitable and sustainable near and long-term growth, and on extending our lead as a transformative modern fine jeweler for today’s consumer. While there were certainly unexpected turns in what we all know is a challenging 2022, I’m incredibly proud of our ability to adapt in a changing environment and to gain market share while also staying focused on our dual goals of building and protecting our brand and driving healthy, profitable growth.

I’m pleased to report that today’s results reflect the success of that approach. Full year revenue grew 16% to $440 million, which represents a 31% four-year CAGR and 197% four-year stack. As a note, we’re providing a four-year comparative due to the anomalies of the COVID years, and as we believe the 2019 base provides a more normalized benchmark. As we expected, we delivered Q4 revenue of $120 million as the industry came off its biggest year ever in bridal, and we strategically expanded our focus to prioritize growth in fine jewelry. On a four-year CAGR basis, Q4 grew 28% and 170% on a four-year stack. For both the full year and the fourth quarter, we realized record order levels. Our orders grew to approximately 150,000 for the year and approximately 45,000 for the quarter, representing 27% and 14% year-over-year growth respectively.

Full year gross margin was 53.3%, a 400 basis point expansion and the highest annual gross margin in our history. Q4 gross margin expanded 360 basis points to 54.7%. We delivered $39 million in adjusted EBITDA for the full year, an 8.9% margin. In Q4, we were very pleased to deliver adjusted EBITDA ahead of our expectations at $11 million, a 9.2% margin. As you know, these results were delivered in a rapidly shifting consumer and macro environment and I’m incredibly proud of and grateful for the hard work and dedication our team demonstrated in delivering them. As I said last quarter, we took a more conservative view of the consumer environment and chose not to participate in what we expected to be an aggressive promotional environment. By focusing on quality growth, operational excellence, and building and protecting our premium brand position, we continued to gain share and deliver strong profitability.

This again demonstrates our ability to stay focused on executing against our priorities while managing within a dynamic environment. I want to talk about just a few of those priorities today, both the progress we’ve made over the past year and our focus forward. First, the Brilliant Earth brand, it was a great year for our brand. As a digital-first brand catering to Gen Z and millennial consumers, we know that we have to win in social. We saw our efforts to lead in social payoff in both our brand reach and growing brand awareness. In fact, online searches for Brilliant Earth reached an all-time high and we saw positive momentum across many other metrics, including a 38% growth in our e-mail capture. We know that self-purchase is an important and growing trend in the jewelry category.

And for Brilliant Earth our strong brand resonance across genders has been a major driver of new customer and order growth. The total number of customers we served grew approximately 25% for the year, and we’re excited to see the estimated number of self-purchase orders by females grew by approximately 70% year-over-year, which tells us that they love our brand and product designs. Our investments in building the brand are driving relevance and resonance with our community. During 2022, we made huge strides in deepening our engagements with customers across social channels, ending the year surpassing 100 million video views. This is just one example of where we’ve seen strong growth in our share of voice and overall brand awareness. In fact, in 2022, we saw close to a 70% increase in media impressions year-over-year.

Key influencer led campaigns have been one aspect of this success and we intend to build on them. You can expect that we will continue to lead in social as we scale, emphasize our mission-driven storytelling and amplify our unique product offerings. And speaking of product, 2022 was an incredible year for us. We made major progress in curating our design led product offerings, particularly in fine jewelry. We successfully launched new collections and collaborations including men’s fine jewelry and cocktail rings. In Q4, fashion rings including our new cocktail ring assortment generated strong results as did key on trend items such as tennis bracelets and necklaces. The success of these launches drove strong growth in our fine jewelry business.

As I said upfront, we enjoyed record orders for the year and we know that our fine jewelry is also attracting new customers to our brand. In Q4, more than one-third of our new customers purchase fine jewelry and fine jewelry was a record 16% of total company bookings in December. We intend to build on this momentum in 2023 and beyond as we will make further investments to drive growth and become known as the fine jewelry destination for the next generation consumer. During the year, we saw continued strength in wedding bands and as we look ahead, we will also continue to focus on and grow our core bridal business. As I said at the outset, 2021 was an unprecedented year of growth in bridal for our industry. And while we anticipate some normalization over the course of this year, we expect to continue to drive share gains as we introduce new collections including in the coming weeks.

Equally important bridal is a resilient category. We continue to drive strong bridal growth relative to 2019 on a four-year stack basis and are excited about the year ahead. During the quarter, we launched three showrooms, Palo Alto, Santa Monica, and Baltimore, adding 10 new showrooms during the year and bringing our year-end total showroom count to 25. Our showrooms continue to generate strong results in increased metro bookings as well as overall uplift over time, further reinforcing our confidence in our omni-channel model. As we have grown our showroom footprint, we’ve continued to test and evolve various formats and the many attributes that enhance and elevate the overall experience for customers. As we begin 2023, we are expanding our showroom rollout and expect to open at least 10 new showrooms this year.

In Q1, we have just opened in Charlotte, North Carolina, and in the near future we’ll be adding Brooklyn, Tampa and Pasadena. This year, we will continue to test and evolve our showroom concepts and execution, including new formats such as mall based showrooms and evolving the overall customer experience from brand and product storytelling to enhance service levels including personalization, customization, and other premium services. I think it’s important to point out our ability to elevate our customer experience and to drive growth has been fueled by the investments we have made in technology this year, including a new CRM system and a workforce platform for managing our multi-channel customer facing teams. With 2022 in the books, we’re looking ahead to this year with a keen focus on continuing to execute against our mission and our growth priorities in order to deliver healthy, sustainable, profitable revenue growth.

We recognize that we are operating in an ever-changing dynamic macro environment and I believe 2022 demonstrated our ability to adapt as appropriate and to deliver. We intend to build on that experience in 2023. You can expect we will continue to advance our mission of transforming and modernizing the jewelry industry by leading in transparency, sustainability and inclusivity. In fact, we’ve just released our second mission report in which we highlight our progress across a number of areas. Among the many results we highlight, you’ll find that 98% of gold and 97% of silver in our jewelry is from recycled sources. Within our diamond supply chain, over 90% of our diamond manufacturers have been audited for safe and healthy working conditions.

Last year, we donated over half a million dollars through the Brilliant Earth Foundation to causes that align with our mission and values. These are just a few of the results of our ongoing efforts. I encourage you to read our report on our website to better understand both our progress and our commitment to extending our industry leadership. Looking ahead for the year, our priorities 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.

We will execute against these priorities with a keen eye on the consumer and a sustained focus on managing with agility in any environment. We feel great about the strength of our brand and the resilience of this category, and we are balancing that with some degree of caution given the current environment and recognizing that we are coming off our biggest year in weddings. We are confident that we are well-positioned to continue to take share and to deliver another year of healthy profitable growth. Jeff will take you through our outlook for the year. So I’ll conclude by again complimenting our great team for their dedication and commitment to delivering for our customers and shareholders. Thank you. And here’s Jeff.

Jeff Kuo: Thanks, Beth, and good afternoon, everyone. Thank you for joining us today to discuss our fourth quarter and 2022 full year results. As Beth mentioned, we are very pleased with the results we recorded today. We delivered strong revenue growth and adjusted EBITDA for the year in the face of a rapidly changing macro environment. These results are a testament to the strength and resonance of Brilliant Earth brand, the agility of our team and the adaptability of our unique asset light business model. We are particularly gratified to again demonstrate our ability to navigate in any environment and to prudently and strategically execute our growth priorities. To expand the reach and resonance of our brand, while also delivering healthy, sustainable, profitable growth.

Today’s results reflect those efforts. In the fourth quarter, we delivered revenue of $119.6 million, a 2% decline year-over-year and growth of 28% on a four-year CAGR basis. This result was near the midpoint of the expected range we communicated on our Q3 earnings call. Full year revenue grew 16% over the prior year to $440 million, which represents 31% growth on a four-year CAGR basis. Beth mentioned the record level of orders we realized in 2022, which contributed to this growth. Equally important, it is a strong barometer of the growing demand for and resonance of the Brilliant Earth brand. As we’ve mentioned before, with continued growth in fine jewelry and expansion of our assortment, we do expect AOVs will decline on a year-over-year basis and in Q4 that decline was 14%.

This was driven by increased aggregate demand for our offerings below the $10,000 price point, as well as strong performance in fine jewelry and the fact that Q4 is the largest fine jewelry quarter for us. I’m pleased to report that we also continued to deliver robust gross margins. Q4 gross margin expanded 360 basis points year-over-year to 54.7%. As you will recall, the combination of a significant shift in macro and consumer sentiment that we saw early in Q4 and an increasingly aggressive promotional environment in which we chose not to participate caused us to intentionally plan our business toward a focus on quality revenue, preserving our brand integrity. This discipline resulted in full year gross margin, expanding 400 basis points to a record annual gross margin of 53.3%.

Consistent with prior quarters, the sustained strength of our gross margin illustrates how our asset light data-driven business model is a huge competitive and financial advantage and allows us to nimbly adapt to dynamic market conditions to optimize both margin and revenue. During Q4, we were again able to capture better than expected gross margin improvement through our strong brand resonance, differentiated product offerings, price optimization engine, driving procurement efficiencies in our supply chain and benefits from our enhanced extended warranty program. SG&A for the quarter and the year continued to reflect our investments in growing the Brilliant Earth brand, expanding our omnichannel reach, particularly through our showroom rollouts and in scaling the business.

Full year SG&A was 48% of revenue compared to 38.7% of revenue in 2021. For the fourth quarter, SG&A was 49.6% of revenue compared to 40.5% of revenue in Q4 2021 with 160 basis points of the deleverage driven by expenses that are added back in our presentation of adjusted EBITDA such as showroom pre-opening expenses, equity-based compensation and depreciation and amortization. The remaining approximately 750 basis points of Q4 SG&A deleverage are as follows. Marketing costs as a percentage of sales grew by approximately 310 basis points year-over-year for the quarter. Our ongoing investments in building the Brilliant Earth brand continue to pay off in terms of growing awareness and demand for Brilliant Earth. As we have seen in our strong order growth and unaided brand awareness.

During the quarter, employee costs were higher by approximately 270 basis points year-over-year. As we discussed previously, we are focusing on investing in a disciplined fashion in both new showroom employees as well as key corporate talent to support our current and future growth. As a data-driven company, we have the ability to dynamically manage our customer facing workforce to meet the demand that we are seeing from consumers. Other G&A as a percentage of sales increased by approximately 170 basis points during the quarter, driven by increased public company operating costs and other costs to support our growth. As we’ve previously noted, in Q4, we did anniversary our first full quarter of public company operating costs and we’re pleased with the reduction in year-over-year deleverage, in other G&A as a percentage of sales compared to prior quarters.

In each of these SG&A areas, we have driven sequential improvement in the year-over-year deleverage as a percentage of sales from Q2 to Q4 2022. And this shows the results of our ongoing focus on operating cost management in a dynamic environment. Our strong gross margin performance together with discipline management OpEx in Q4 contributed to us exceeding our adjusted EBITDA expectations for the fourth quarter to deliver Q4 adjusted EBITDA of $11 million or a 9.2% adjusted EBITDA margin and bringing our full year adjusted EBITDA to $39 million or an 8.9% adjusted EBITDA margin. Our profitability and capital efficient operating model continue to differentiate us among direct-to-consumer companies. We ended 2022 with $155 million in cash. We have a strong balance sheet with no net debt.

We have historically diversified and expect to continue maintaining our cash holdings across multiple financial institutions. We continue to operate the business in an asset light fashion with higher than average inventory turns and negative working capital. Over time, as we successfully expand fine jewelry to be a larger percentage of our business and grow our showroom footprint, we do anticipate our inventory model will evolve to accommodate those needs. That said, we expect to continue to drive high inventory turns with strong working capital efficiency. And finally, our focused capital expenditures increased slightly due to investments in showrooms and technology. CapEx for 2022 was approximately 2.1% of net sales. Underpinning all of these results is our unrelenting focus on realizing the unique opportunity we see for Brilliant Earth to become the premier global jeweler for today’s consumer.

As a growth company, we will continue to invest in the critical drivers, our brand, our product offerings, and our omnichannel experience that will enable us to expand our reach and grow market share. Beth has talked about the success we are experiencing with our brand investments, which we will continue to build upon. You can also expect that we will extend our omnichannel presence with a specific focus on our showroom expansion. As we have expanded our showroom footprint to 25 total locations at year end, the results our showrooms deliver further reinforce our confidence in our approach. For Brilliant Earth showrooms that have been opened 12 months or more, we have seen an approximately 100% metro bookings uplift within the first year post opening.

This reflects the growing strength of our brand and continues to validate our compelling showroom economics as we increase our showroom coverage across the country. As our omnichannel footprint grows, refinement of our product assortment. In addition to growing our core bridal business, we see significant opportunity to grow in fine jewelry. In the past year, we have brought many new fine jewelry customers to our brand in addition to growing our repeat purchases. In the fourth quarter, we saw a year-over-year increase of over 20% in repeat orders. As Beth said, as pleased as we are about our fourth quarter and full year results. We’re looking ahead to fiscal 2023 and beyond, focused on continued sustainable profitable growth of our brand and our business.

As I’ve shared with you before, we have established long-term growth goals toward which we aim and they remain unchanged. As you know, we set these goals over a multi-year period and use them to guide our planning. You can see our long-term targets in our presentation on our investor relations website. As we have developed our plans for 2023, we are staying intently focused on executing our growth plans in a way that balances pursuing the highest return opportunities, while also keeping a cautious and measured eye on the uncertainties in the macro and consumer environment. We view 2023 as a year in which we are planning for continued profitable growth after record years for the industry. As you know, 2021 and 2022 represented record years for the bridal and jewelry industries above historical trend lines and we’ll be looking to four-year CAGRs as we plan for 2023.

As a result, for the full year 2023, we project 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%. While our 2023 growth range is below our long-term target, it reflects our unwavering approach to focus on quality sustainable revenue growth in a somewhat uncertain market environment and it reflects our confidence that building and protecting our brand will fuel our growth. As we’ve mentioned before, we believe that we are strongly positioned to continue to gain market share and the four-year CAGR reflects the share gains and reinforces our confidence in our growth path. We are pleased with the strong gross margins of the business and expect to continue managing 2023 towards our long-term gross margin targets in the mid 50% range.

We are projecting full year adjusted EBITDA in the range of $17 million to $32 million, which represents an adjusted EBITDA margin of approximately 4% to 7%. While this is a more conservative EBITDA margin than our long-term targets, it reflects our confidence in our proven ability to adapt quickly and opportunistically to changing conditions while making appropriate disciplined investments in our brand and operations. 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. We do anticipate Q1 will be the lowest year-over-year growth rate for the year as we are comping record revenue from Q1 2022 where we grew 41.5% year-over-year. As a result, we anticipate that Q1 2023 net sales will be between $94 million and $96 million, which is a one year growth of negative 6% to negative 4% or a four-year CAGR of approximately 26%.

And a four-year stacked growth of 150% to 155%. We anticipate our adjusted EBITDA in the first quarter will be in the range of $2.5 million to $3.5 million, representing an adjusted EBITDA margin of 3% to 4%. This includes the annualization and prudent continuation of investments made in 2022, as well as the fact that seasonally the first quarter is our lowest revenue quarter of the year. In closing, on behalf of Beth, myself and our entire team, we thank you for your support and look forward to the year ahead. With that, we’ll be happy to take your questions.

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Q&A Session

Operator: Our first question comes from the line of Dana Telsey from Telsey Advisory Group. Your line is open.

Dana Telsey: Thank you. Good afternoon, Beth and Jeff and nice to see the progress. As you think over the long term about the opportunity on product on channel, how big do you think fine jewelry can get? What does it mean to the AOV? And it sounds like the showroom ability to uplift revenues continues to be substantial. Any other thoughts €“ I think you had long-term targeted 80 to 100 any other thoughts on how you’re thinking about that rollout? And lastly, I remember you’d always talked about the resilience of the category. In today’s times, is there anything the same or different in the 17 years of history that you’ve seen that would make this particular timeframe different in anyways in how you’re operating the business? Thank you.

Beth Gerstein: Hi, Dana. It’s nice to hear your voice. I think there are a number of questions there. So maybe I can just start off with just talking about our conviction in the overall category. And the way that we’ve been looking at the category overall is we’re really coming off of some very strong growth over the past few years, and this year is more in terms of normalizing. But over this multi-year period, it’s still quite strong and we see a lot of ability for Brilliant Earth specifically to be able to gain share as we have really from the beginning. I think a lot of the initiatives that we’ve been investing in have really nice momentum right now in terms of the products and the assortment that we’re offering. In terms of the showroom strategy, we still have a lot of conviction about an efficient showroom strategy, which is really, I think, synergistic with the digital experience that we continue to invest in.

So I wouldn’t say that our long-term goals as it relates to showrooms has changed at all. We still have a lot of conviction there. In terms of fine jewelry, I think we’ve seen a lot of the success in Q4 based on the investments that we made in our assortment as well as in the marketing efforts that we have. So seeing strong repeat, seeing strong self-purchase, all of those I think are really great results from the initiatives that we have. And overall, if you look at this $300 billion category, I think that we’ve only really scratched the surface and really being the premium brand for the Millennial and Gen Z audience.

Dana Telsey: Thank you. And just to follow up on the AOV decline that you had mentioned, Jeff, is that due to fine jewelry? What are you seeing in terms of the customer? I think you had mentioned a while ago they were elongating their purchases. What are you seeing today? Thank you.

Jeff Kuo: So I think in terms of the AOV, we’re seeing there’s a number of factors there. I think I mentioned that we have seen increased aggregate demand for offerings below the $10,000 price point, some moderation above the $10,000 price point with the strong performance that we’ve seen in fine jewelry as it continued to grow faster than the rest of the business. And also the fact that we have Q4 as the largest fine jewelry quarter for us. And so I think we’re very excited about the growth and success that we’re having in fine jewelry. It will €“ we do expect it’ll lead to declines on a year-over-year basis in AOV, but we see that as reflective of the success of the strategic priority that we’re putting in growing and expanding in FJ, fine jewelry.

Dana Telsey: Thank you.

Jeff Kuo: Thank you.

Operator: One moment for our next question. Our next question comes from the line of Edward Yruma from Piper Sandler. Your line is open.