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spk01: 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.
spk07: 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.
spk11: 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.
spk06: I can start that off. You know, we were really pleased by our gross margin expansion. And as a data-driven company, we're always looking at opportunities to be able to maximize the benefit of our premium brand, as well as the exclusive and unique product offering that we have. And both of these are important to driving our strong margins. Another thing to consider is we're not a discount-oriented brand. And so that also, I think, plays a role in how we're able to take advantage of the premium positioning that we have. In terms of our overall inflationary environment, Jeff, maybe you can speak a little bit more to that, as well as our optimization engine.
spk01: Sure. Unlike other retailers, we haven't been fortunate that we haven't seen broad based inflation pressure. For example, gold and platinum prices have recently come down a bit. And so that's something that we haven't seen. As you know, we do have our pricing optimization engine as well as a light asset and asset light model. that allows us to adapt very nimbly to changing conditions. And so we've been able to manage that. You see that in the results that we've delivered with our strong gross margin. And we believe that we continue to have opportunities to optimize as well as take actions like optimize on procurement efficiencies as we have done in the past. And, you know, so I think that's something that we do see a lot of continued strength for us in our gross margins.
spk11: Thank you. This is Oliver Chen, by the way, from Cowen. On the revenue growth, it's potentially conservative on the guidance. Would love your thoughts on what you're seeing with upside drivers or downside drivers and how that may relate to marketing efficiency. We're seeing different things across the sector where digital marketing efficiency has been volatile. Thank you.
spk06: Yeah, I would say kind of starting from the overall revenue growth, you know, we continue to see strong demand and the performance that we have has remained consistent. So while there's going to be some fluctuations, we're confident in our ability to deliver on our full year guidance. As it relates to how we think about our marketing efforts, You know, the digital environment, we do recognize it's very dynamic. It's highly competitive. And as such, our costs have increased in certain areas. That said, our marketing spend remains efficient and we continue to drive profitable growth. We're continuing to also look at opportunities to be able to invest in marketing to support our strategic initiatives. So investing in brand building for us is incredibly important to be able to drive awareness, to continue to take market share. Word of mouth for us is a big sales contributor. So it's really important for us to invest here. And we've seen those investments paying off. We're also continuing to invest in fine jewelry. This is a category that has massive potential. And as we're investing, we are also consuming seeing some strong results there as well. So we'll continue to keep a strong eye towards maximizing ROI, but really thoughtful about our approach to maximizing revenue and profitability.
spk11: Very helpful. Best regards. Thank you.
spk07: Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Your line is now open.
spk02: Good afternoon, everyone, and congratulations on the results. Wanted to get some more color on fine jewelry and wedding bands, given the strength that you saw there, how you're projecting that going forward in regards to the AOV. And then I believe last time, Beth, you mentioned that the consumer was taking a longer time to make their decisions, given the environment. What are you seeing now? Has that changed, and has it changed at all by category? Thank you.
spk06: Hi, Dana. Thanks for your questions. Starting with the consumer and the overall behavior there, as I mentioned, the performance is relatively consistent as it relates to bridal. While bridal has moderated slightly, it does continue to experience strong growth. We continue to gain share. We recognize that an engagement ring is a higher price point. It's a more considered purchase. So it's not surprising to us that it's taking a bit longer. for them to make these purchases. But overall, I would say that generally we're seeing consistent performance. As it relates to fine jewelry, we're really excited about our opportunity there. Growth is far outpacing the business and we're really well positioned for the upcoming holiday season. So see this being a nice growth driver especially as we're entering Q4 being a premium gift-giving occasion, just like we saw with Mother's Day being a real strong performance for us. So I think that's going to be a nice tailwind for us. We're continuing to invest in marketing, in our assortment, in the digital experience, in creative imagery, a lot of, I think, important investments there that are really helping to drive that category.
spk02: Got it. And the impact on gross margin from the increased fine jewelry, how do you see that go forward?
spk06: Jess, do you want to take that one?
spk01: Sure. You think there's significant gross margin expansion potential in fine jewelry. Fine jewelry is a strong gross margin part of the business and it's growing quickly. So that we see as it becomes a bigger and bigger part of our mix and we gain scale efficiencies in that area of the business, we see there's opportunities to grow our margin there in addition to some of the other initiatives and levers that we've been able to pull historically.
spk02: Thank you.
spk07: Thank you. Our next question comes from the line of Matthew Boss with JP Morgan. Your line is now open.
spk08: Great, thanks. So Beth, could you expand on the excitement that you cited regarding the second half of the year? Any specific categories or product assortment launches you see as drivers of momentum in the back half? And maybe specifically, could you speak to the progression of demand trends that you've seen from the initial moderation in April through early August?
spk06: Yeah, absolutely. Thanks, Matt. In terms of the progression of demand, as I mentioned, there's some fluctuations, but for the most part, it has been consistent for us. demand continues to be strong. And so we're excited to be able to capitalize on the resonance that we've had with our customer base. And as it relates to the second half, we have, I think, a very compelling product offering, both really across our product portfolio. I think you know we take a very data-driven and thoughtful approach to expanding our assortment, and that's been very successful. We see success in our personalized offerings. For example, in our Zodiac collection, we see strength in the offerings that really reinforce our mission positioning, like our Fairmind Gold collection. And we're continuing to remind the customer that this is a premium product with collections like our Truly Brilliant collection. And I think we have a lot of success that we've been demonstrating, and I'm really excited especially as we're opening new showrooms and reaching more and more customers that we're seeing such strong results.
spk08: Great. And then, Jeff, could you speak to comfort with your current inventory position exiting the quarter or just help break down the composition of the build into the back half of the year?
spk01: Yes. Thanks, Matt. So, as you know, we operate the business in a very asset efficient way. And I think maybe just, you know, maybe providing a little bit of context and then how we see that for the latter part of the year, you know, we operate a really technology-enabled and data-driven supply chain. We have tight integrations with our suppliers that we've worked with for many years. And what that really allows us to do is to closely manage our working capital and inventory levels as we grow. And if you look at it in ways such as our inventory that we have on a per showroom level, it's very efficient relative to the industry as a whole. We also manage our fine jewelry inventory in a very efficient way. So I think the overall approach that we take, you know, is to really have a lot of insight into the trends, insight into our supply chains, manage things tightly, and we expect, you know, that will continue to be the case in the upcoming quarters.
spk08: Great. Best of luck.
spk01: Thanks, Matt. Thanks.
spk07: Thank you. Our next question comes from the line of Edward Yerma with Piper Sandler. Your line is now open.
spk12: Hey, guys.
spk05: Thanks for taking the question. I guess just on gross margin, obviously nice continued benefits from pricing optimization. As you think about the go-forward benefit, I know you indicated the comparisons get more difficult, but how should we kind of think about where you are in that evolution with the pricing engine and how much more incremental benefit is still possible?
spk01: Sure. So we think that there continues to be room to run with the pricing engine. I think this really starts, just to set the context, from the premium brand, premium differentiated proprietary products that we have that allow us to have that premium gross margin. That's something that we continue to invest in. With the pricing engine, we've talked through our longer-term target of mid-50s in terms of gross margin. We continue to pull levers, as we've talked about, with the pricing engine, procurement efficiency. And as we get more data, we input that into our into our algorithms and we continue to refine. So it's a living approach to how we continue to optimize margin. So we believe that there continues to be a lot of room to run with that.
spk05: Great. And a follow-up, if I may, good to hear the success on Fine Jewelry. I guess when you're finding a customer that comes into Fine Jewelry, are they generally someone that's purchased engagement before and this is a follow-up purchase or is Fine Jewelry successful in kind of introducing people to the brand? Thank you.
spk06: Yeah, I would say both, actually. We are seeing a lot of success in customers that are already loyal, brilliant customers. Perhaps they've come into a showroom and they already have a really strong connection. And we're also seeing new customers come in, which I think is also really exciting that we're expanding our customer base. So really seeing, I think, strong results. Also with the self-purchasers, in addition to gifting, and so I think our efforts are really successful there.
spk12: Thanks so much. Thank you.
spk07: Our next question comes from Noah Zachskin with KeyBank. Your line is now open.
spk10: I've had a great quarter, and thanks for taking my question. Just on the showroom rollout, I think you'll be adding about nine more in the second half, if I'm thinking about that correctly. Can you remind us how you think about the timing and the P&L impact from showrooms as they roll out?
spk06: I can start that off. You know, we talked a little bit about how we're planning on doubling the number of showrooms. We're really excited about the metros and how well they've been performing in as well as the upcoming ones that are on our roadmap. There are some timing fluctuations just based on things that are out of our control, like permitting, for example. So we haven't been very specific about how the rest are going to roll out.
spk10: Thank you. And then just quickly on the Truly Brilliant collection, as well as Moissanite, just any color on trends there and how you're thinking about both of those opportunities over time? Thank you.
spk06: Yeah, so Truly Brilliant is a newer collection for us. And we think that this is really nicely targeting for that discerning customer who's looking for premium characteristics, both in terms of our blockchain enabled natural diamonds. It uses renewable energy for a lab created. So a lot of, I think, really exciting premium sustainability, as well as quality characteristics. So we're expecting, I think, a really strong reception, but I would say it's early in terms of what we've seen there. And then as it relates to Moistenite, Moistenite remains a nice alternative for customers in terms of an engagement ring. So continue to see strength in the overall category, but we usually don't get too granular as it relates to subcategories.
spk10: Thank you.
spk07: Thank you. Our next question comes from the line of Randall Connick with Jefferies. Your line is now open.
spk09: Thanks a lot. I just want to go back to the fine jewelry kind of strategy. Can you give us some perspective on how we should be thinking about the skew count or kind of that you're offering to the consumer, I guess, on the website and in-store and how we should be thinking about how that you know, kind of evolves over the next 12 to 24 months? Like, you know, how is that going to kind of be illustrated? How much of it is the consumer going to see? And so on and so forth. Just want to get an understanding there. And then how do you change or how much will this change the inventory kind of needs on the balance sheet if, you know, probably not in a big way, but just how should we be expecting that to kind of change the inventory model going forward? Thanks, guys.
spk06: Great. So, in terms of how we think about SKU account, we're really looking at productivity across different assortments to make sure that as we're introducing new products, we're continuing to see that productivity level remain strong. And that's what we've seen so far as we've been introducing our assortment and increasing the number of SKUs, we're seeing very strong performance. So I would say like, as we think about 12 to 24 months out, we're really taking a very dynamic approach there. We're also taking approach that is more curated. So our approach is not to introduce, you know, an incredibly wide selection at all costs. It's really to take a more design-driven approach tailored approach, which is more curated, and as we see that productivity, we'll continue to be thoughtful about how we drive that increased SKU count. Jeff, do you want to talk a little bit about the inventory model?
spk01: Sure. Thanks, Randy. We're well positioned to manage our inventory efficiently as we expand into fine jewelry. I talked earlier about how we really take a data and technology driven approach and integrate tightly with our suppliers. And it's really in our DNA to operate in an asset like fashion. I think just also the way that we operate. is just efficient in that if you look at a traditional jeweler, they might need to bring in thousands of pieces of a given SKU just to get something started and to have something in every single location. We operate in a different way where we can test and learn, start with limited allocations of inventory, see what's doing well, again, use that data to see where we wanna make those investments in inventory. And so I think we're well positioned to continue to have an efficient and capital light model.
spk06: I think one thing I would just add is we also have the ability to rapidly introduce new products, and I think that's a real competitive advantage for us as we're seeing strength in the assortment to be able to expand on what we're seeing as trends in the marketplace very quickly.
spk09: Got it. Very helpful. And then lastly, you know, you've done a great job with the gross margin, and part of that is due to the fine jewelry penetration. any kind of color you can kind of give us on just where we are with fine jewelry penetration today where we might think it might be two years from now and where you two years from now and where you might want to be five years from now just to give people some kind of thought process on how that penetration
spk06: know kind of grows long term because it's obviously a nicely margin accretive uh opportunity for you guys just curious there on any color uh numerically or just uh qualitatively you can provide us would be great thanks guys i think just on a qualitative standpoint you know it's it's still quite small for us um and if you look at most jewelers and jewelry representing the majority of their sales that's really i think what we're targeting in the future So while we're not providing specific numbers, we do have, I think, a lot of investment in this area and are trying to accelerate to the extent that we're able to do it in a profitable way.
spk09: Understood. Thanks, guys.
spk07: Great. Thank you. Our next question comes from the line of Rick Patel with Raymond James. Your line is now open.
spk04: Good afternoon and congrats on the strong results. Can you help us understand what you're seeing in the industry in terms of independent jewelers closing doors? I think typically when the economy hits a soft patch, the number of mom and pop jewelers tends to shrink. I'm hoping you could frame what you're seeing and to what extent you see that as a revenue and market share opportunity in the back half and beyond.
spk06: Yeah, I think the recent numbers that I have seen do indicate that there's an acceleration there in terms of independence closing doors. You know, typically there is a bit of a lag. So, you know, I think that's what we've seen in previous more challenging times. And I think that you're right on to think of the fact that we're probably going to see increased consolidation more generally. You know, as it relates to the opportunity, you know, we continue to see this highly fragmented industry as ripe for disruption. And we think we offer tremendous value relative to the independent jeweler. We have strong supplier relationships. Our mission-driven values and the resonance that our brand has, I think, is very compelling. So we think we're definitely poised to be leaders here and really take advantage of some of the dynamics that we see in the industry.
spk04: Thank you very much.
spk07: Thank you. Our next question comes from the line of Oliver Chen with Cowen. Your line is now open.
spk12: Hey, thanks for taking my question.
spk11: Your positioning at Brilliant and Earth with being premium and branded and mission-focused is quite differentiated. We'd love to hear your thoughts as the industry consolidates a little bit and and your positioning relative to other competitors such as Blue Nile, how would you say, Beth and Eric, are you most different? Thank you.
spk06: Well, you know, while we're not going to comment specifically on one particular competitor, you know, we think that we are very differentiated in the industry. You mentioned our premium positioning. We don't have a discount orientation. We really invest in providing a luxury, distinguished experience for the customer overall. The mission behind really everything that we do is really important for us as a company, the same way that it's important for our customers. I think that the products that we offer are also very distinctive and we're constantly introducing new trend-driven collections, and those resonate as well with our customer base. So, you know, we're really very focused on our own strategy and how we can resonate with the millennial and Gen Z audience and are seeing great success there.
spk11: Thanks, Beth. Lastly, it's Oliver Chen from Cowan & Company. The supply chain, what are your thoughts on vertical integration or the future and what may evolve, especially as you continue to make such encouraging progress and find. I would love your thoughts.
spk06: We don't have any immediate plans there. I think we have a really attractive model as it relates to our inventory light, capital efficient, and more agile, flexible model. That's not to say we won't be opportunistic as we see opportunities to continue to drive an improved customer experience. and to lower costs, but do recognize that there are trade-offs as it relates to inventory there. So I think we're comfortable with our current model and feel really good about the supply chain partners that we've had. They're very long-term, and I think we see a lot of benefit in terms of those long-term relationships.
spk11: Okay, and last question. On the consumer, the consumer has become much more considered and disappointed in some ways. What are your thoughts about what's happening going forward with the health of the consumer, given the cross-currents of low unemployment, yet the obvious pressures of high inflation?
spk06: Well, I don't think we necessarily have the crystal ball there. What we can say is that bridal is typically quite recession-resilient overall as a category. The consumer continues to drive strong demand you know, for our products as it relates to fine jewelry and other categories. So, you know, overall, I think even though there have been some macroeconomic headwinds there, we're continuing to perform really well.
spk11: Thank you. Best regards.
spk06: Thanks, Oliver.
spk07: Thank you. This concludes the question and answer session. Oh, and now I turn the call back over to Beth Gerstein for closing remarks.
spk06: Great. I appreciate it. everyone's participation and we look forward to talking to you all.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
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