Brilliant Earth Group, Inc.

we will continue to do so with a sharp focus on delivering strong ROI. Consistent with the plans we shared since our public offering almost one year ago, we see tremendous opportunities for our business to grow and for our brand to lead in the highly fragmented jewelry industry. Our showroom rollout and further expansion into fine jewelry both show encouraging results in driving financial performance, customer loyalty, and lifetime value. Turning to gross margin, Q2 gross margin expanded to 53.1%, which is up 460 basis points versus the prior year. Growing demand for the Brilliant Earth brand, our premium and differentiated product offerings, pricing engine optimization, and procurement efficiencies once again drove strong gross margin expansion across our product assortment. As I said last quarter, What we hope will become a well-understood refrain from us is that these results illustrate how our asset-light, data-driven business model is a competitive and financial advantage. It enables us to nimbly adapt our supply chain and product pricing to changing market conditions to optimize both margin and revenue. This is particularly evident for us in Q2, a period that, as we all know, saw significant macroeconomic volatility. Our strong gross margin performance is a testament to the strength of our model and our brand. And this quarter, it afforded us the flexibility to continue to invest in prudently scaling the business. In the second quarter, SG&A increased to 47.9% of net sales compared to 35.1% of net sales in Q2 2021, an increase of 1,280 basis points. Approximately 130 basis points of this increase was related to net changes in add-backs to adjusted EBITDA, including equity-based compensation and new showroom pre-opening expenses, which are added back in our presentation of adjusted EBITDA. The remaining approximately 1,150 basis point increase over the prior year reflects investments we made to support our growth. Marketing costs as a percentage of sales grew by approximately 400 basis points year over year. Our investments in building the Brilliant Earth brand continue to drive growing awareness of the unique and differentiated Brilliant Earth experience and expand market share. In addition, we are continuing to invest in our fine jewelry assortment, which we see as a significant growth opportunity. During the quarter, employee costs were higher by approximately 390 basis points year over year. Consistent with the drivers from last quarter, Q2 2021 again represented a low comp for employee costs as we were coming out of the initial months of the COVID pandemic with employee costs at a comparatively low run rate in Q2 2021. In Q2 2022, we continued to build our team to support our strategic initiatives new showrooms, and operations as a public company. Other G&A as a percentage of sales increased by approximately 360 bps, with one of the largest drivers being increased public company operating costs, which as you know, we will not anniversary until late Q3 and Q4 2022. As a growth company, we are also strategically investing in scaling Brilliant Earth for the long term. The combination of strong revenue and gross margin growth balanced by strategic investments in the business delivered $9.6 million in adjusted EBITDA in the second quarter. Profitability, positive free cash flow, and a capital-efficient operating model continue to differentiate us among direct-to-consumer companies, and we continue to operate the business in an asset-light fashion. We ended the second quarter with $155.5 million in cash. As we look ahead to the balance of the year, we remain confident in our long-term growth goals. As you may recall, our aim over the long term is to see revenue growth in the high 20s to low 30% range, with growth across our product lines and our omnichannel model. Our long-term gross margin target is in the mid 50% range driven by our premium products and brand, our price optimization engine, procurement efficiencies, and growth of higher margin fine jewelry. Our long-term marketing spend target is in the mid to high teens as a percentage of revenue as we continue to grow our brand awareness and to roll out our showroom experiences to drive conversion and repeat customer behavior. and we are targeting a 15 to 20% plus long-term adjusted EBITDA margin driven by several factors, gross margin expansion, improved effectiveness of our marketing spend, and leverage in our G&A expenses. As I said last quarter, these long-term targets guide our approach as we also navigate the ebbs and flows of a dynamic market. For the balance of the year, we remain confident in our ability to deliver on the full year 2022 outlook we established last quarter. We continue to expect net sales in a projected range of $450 to $470 million. This represents 18 to 24% growth versus fiscal year 2021 and a three-year CAGR of 31 to 33%. We also expect continuing year over year improvements in our gross margin. However, the rate of year over year gross margin growth is expected to moderate from the first half of the year as we begin to anniversary improved gross margins from last year. We also anticipate continuing to make prudent investments and allocating spending across areas of the business that generate a strong ROI consistent with our goal to deliver long-term sustainable, profitable growth. As a result, we continue to expect adjusted EBITDA for the year to be $30 to $40 million, or an approximately 7% to 9% adjusted EBITDA margin. Historically, we have seen slightly higher year-over-year growth rates in Q4 than in Q3, and we expect a similar pattern this year. An important contributor is a strong outperformance we've seen in fine jewelry and that historically fine jewelry sales are the highest in Q4. Additionally, we will have a greater number of showrooms open in Q4 as we continue our successful rollout of new showrooms. In closing, we are pleased with our results this quarter. We remain focused on executing our initiatives to build and scale our business and brand and to deliver long-term, sustainable, profitable growth for our shareholders. With that, we'll be happy to take your questions.

Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your telephone. We ask that you limit yourself to one question and one follow-up. You may recue for any additional questions. Please stand by while we compile the Q&A roster. Our first question comes from Thomas Nass with Cowan. Your line is now open.

Hi, thank you. The gross margins were really impressive. Would love your thoughts on pricing optimization opportunities in the back half and what you see there, as well as inflation and cost of goods sold and materials if that's a factor as you think about your own pricing strategies as well as cost of goods sold. Thank you.