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spk02: Hello, and thank you for standing by. Welcome to Brilliant Earth's third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. It is now my pleasure to introduce Allison Malkin with ICR.
spk03: Thank you. Good afternoon, everyone. Thank you for joining us for our third quarter 2022 earnings conference call. Joining me today are Beth Gerstein, our Chief Executive Officer, and Jeff Kuo, our Chief Financial Officer. For this afternoon's call, Beth will begin with highlights of our third quarter financial and operational performance and the drivers of future growth. 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. 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.brillionaire.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.
spk05: Good afternoon, everyone, and thank you for joining us today. We are pleased to share our third quarter results with you, which reflect our fifth consecutive quarter of profitable growth as a public company. These results are the continuation of the multi-year strategy we've been executing to transform the jewelry industry. Transform an industry. I know that is a bold and ambitious aim, But I start there because it is core to everything we do. Our mission to cultivate a more transparent, sustainable, compassionate, and inclusive jewelry industry is unwavering. This is our commitment is to building sustainable long-term profitable growth for our company and our shareholders. We all know that 2022 has been a challenging environment for most companies. As you've heard from us every quarter, We believe that as a growth company, two of our fundamental and related differentiators are our commitment to building and protecting our brand and to driving healthy, profitable growth. And while the macro environment is clearly affecting consumers, I'm very proud of our team's ability to stay focused on delivering on that commitment and delivering for our customers and for our company. I continue to be inspired by their agility and dedication. This quarter, we delivered revenue growth of 17% to $111.4 million. We delivered another quarter of record gross margin at 54.7%, a 430 basis point improvement over the prior year. And we delivered $10 million in adjusted EBITDA. representing an adjusted EBITDA margin of 9%. So what drove those results? First, it was the Brilliant Earth brand and its continuing resonance with millennial and Gen Z consumers, particularly those who share our mission-driven values and who seek our industry-leading craftsmanship and trend-forward unique designs. We know this because they tell us so. As a data-driven company, we are continuously engaging with consumers and using those insights to enhance every aspect of their experience with our brand. For example, we know that our millennial and Gen Z shoppers continue to over-index on research from word of mouth and social media. So during the quarter, and as we have throughout the years, we highlighted stories and products by scaling new and original video content focused on weddings, both engagement rings and wedding bands, as well as fine jewelry across a range of collections. Last quarter, I mentioned that a recent brand study told us that 13% of our customers learned about Brilliant Earth on TikTok. Knowing that, during the third quarter, we scaled significantly more content, including influencer, organic, and branded content, with 50% content growth quarter over quarter, and saw a more than 200% increase in viewership. We also focused on key influencer content for the wedding season with brides shopping in our showrooms, showcasing the best wedding day jewelry, and offering Q&A for styling, driving millions of views. These efforts expanded our brand's reach as we saw growth in both new and repeat customer orders and amplified many product lines that fueled our growth. We continue to see growth in our business with particularly strong growth in wedding bands, driven in part by our growing assortment of unique men's and women's designs, and fine jewelry, which as a small but rapidly growing category continues to outpace our overall growth. Shifting to our showroom strategy, as you know, as a truly omnichannel brand, expanding our showroom locations is a critical part of our growth plans. We've continued our rollout with new showrooms opening in St. Louis, Palo Alto, Santa Monica, and Baltimore, bringing our total to 25 showrooms in key markets across North America. Consistent with our past experiences, showrooms continue to generate uplift within the overall metro areas in which we open. Our showrooms drive growth in average order value and, equally important, deliver strong ROI, reinforcing our belief in the power of the showroom model. We anticipate that we will end the year having approximately doubled our total showroom leases. Our showroom strategy has been and will continue to be a major catalyst for building our brand and business, and we will continue to take a disciplined, ROI-driven approach as we open new, high-quality showrooms. Our ability to create a seamless, joyful omnichannel experience is one of Brilliant Earth's distinguishing attributes. We are continually testing, iterating, and enhancing features across our platform to ensure that we are providing a best-in-class experience and service level. Whether in enhanced chat features, evolving imagery and video to further showcase jewelry in real life, or enhancing our appointment scheduling and follow-up, we are providing the highest quality, most personalized, and complete experience in the industry. Our customers give us consistently great feedback on their experience, and as innovators in the industry, we will continue to evolve and lead as we grow. While we're pleased that we have continued to drive sustainable, profitable growth, as we look to finish the year, macro headwinds and the anticipated promotional environment are more difficult than earlier in the year. causing us to be more cautious about our fourth quarter revenue outlook. While we are still seeing strong consumer interest demonstrating the resonance of our brand, we are seeing a further lengthening of the decision-making process given the macroeconomic uncertainty as more customers take a wait-and-see approach. Our outlook reflects our continuing focus on driving high-quality revenue, and prudently making ROI-driven investment decisions to deliver long-term profitable growth. As dynamic as the environment is, we recognize that the key weeks of holiday selling are still ahead of us, and we are well prepared to take advantage of the season. We have a number of trend-leading product launches in our plans, including cocktail rings, a new and expanded Fairmind assortment, a new Art Deco-inspired bridal collection, the expansion of our popular Takori collection, and continued expansion of limited edition products, to name just a few. We will also continue to make disciplined ROI-focused investments that support our long-term growth plans, such as continuing to strategically grow our showroom presence. I am very confident in our ability to navigate in this and any environment. Our asset-light and agile data-driven business model, coupled with our strong balance sheet, enables us to be both opportunistic and patient through a changing landscape. You can expect that we will stay focused on making sound, long-term investments to drive our future growth, while also managing our costs to deliver sustainable top-line growth and bottom-line profit. As I have said in the past, By nimbly and prudently executing our strategy while optimizing our model to grow the brand, we are well positioned to continue to take share in a fragmented industry, to prudently manage our costs, and to deliver profitable growth, all while we continue to advance our mission to transform the jewelry industry. And now, I'll turn it over to Jeff.
spk01: Thanks, Beth, and good afternoon, everyone. Thank you for joining us today to discuss our third quarter fiscal 2022 results. Today, we'll walk you through our detailed financial results and some of the important strategic efforts we've executed to deliver another strong quarter of profitable growth. Our third quarter results demonstrate the disciplined execution of our ongoing strategy to disrupt and transform the jewelry industry. Revenue grew to $111.4 million, which represents 17% year-over-year growth and up 29% on a three-year CAGR compared to Q3 2019. Gross margin expanded to 54.7%, a 430 basis point increase compared to Q3 2021, and once again, our highest quarterly gross margin percentage on record. An adjusted EBITDA was $10 million, or 9% of revenue. As Beth said, these impressive results were delivered in a challenging and highly dynamic macroeconomic environment. While we have been experiencing a rapidly changing consumer landscape, the results we've delivered again illustrate and reinforce the power and distinction of our brand and our agile, highly efficient business model. Q3 revenue grew 17% year over year, driven by strength across our product lines. As we've said throughout the year, capitalizing on the demand for weddings has been a particular focus for us. We were successfully able to do so in Q3 as engagement rings and wedding bands, as well as fine jewelry, contributed to our growth. Consistent with our plans, we continue to see outsized performance within our fine jewelry assortment, with growth that far outpaces the business as a whole. As expected, the outperformance of fine jewelry and wedding bands were drivers of a high single-digit percentage decline in our total company blended AOV for Q3. As a reminder, both fine jewelry and wedding bands have a lower average price point than our overall business. We've also seen outsized growth in fine jewelry at more accessible price points as our product breadth has expanded. With the opening of our 25th showroom, we are continuing to extend our successful omnichannel growth strategy. Our showrooms drive robust uplist in Metro bookings after opening, while also generating strong ROI. We continue to see that new showrooms deliver higher AOV than our overall average, further reinforcing our confidence in the power of our showroom strategy. Turning to gross margin, Q3 gross margin expanded to 54.7%, a 430 basis point improvement versus the prior year, and our highest quarterly gross margin on record. In addition to the overall growing demand for the Brilliant Earth brand, drivers of this improvement included pricing optimization, procurement efficiencies, the positive contribution from product mix, as well as the realization of benefits from our warranty program. In the third quarter, SG&A increased to 49% of net sales compared to 40.1% of net sales in Q3 2021, an increase of 890 basis points or 960 basis points on an adjusted basis, excluding equity-based compensation, depreciation, new showroom pre-opening costs, non-recurring costs. and other expenses, which are added back in our presentation of adjusted EBITDA. This 960 basis point increase over the prior year reflects investments we made in marketing, people, and other GNA to support our growth. Marketing costs as a percentage of sales grew by approximately 330 basis points year over year. The initiatives that Beth talked about are great examples of our investments in building the Brilliant Earth brand and the impact those efforts continue to have in growing awareness and demand for the unique and differentiated Brilliant Earth experience. During the quarter, employee costs were higher by approximately 350 basis points year over year. As you know, we consistently take an ROI-driven approach to our investments, including in our employee costs. We are focusing on investing in new showroom employees as well as critical corporate talent to support current and future growth. Other G&A as a percentage of sales increased by approximately 280 basis points driven by increased public company operating costs and other costs to support our growth. As you know, we have just begun to anniversary our public company costs in late Q3. The combination of strong revenue and gross margin growth, balanced by strategic investments in the business, delivered $10 million in adjusted EBITDA in the third 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 third quarter with $153 million in cash. Inventory grew to $40 million at quarter end, which reflects the growth and success of our strategic initiatives, such as fine jewelry and showrooms. As a result, our inventory has grown as planned, which we believe is appropriate to support our growth. Importantly, we also continue to generate industry-leading turns. As of our call today, we are six weeks into the quarter with the majority of the holiday season ahead of us. As we have all seen, the macro and consumer environment has shifted significantly over the past several weeks. As a result of the macro headwinds we've seen, we are updating our fiscal year 2022 revenue guidance to $436 to $446 million, or $116 to $126 million for Q4 2022. This represents a year-over-year growth rate of 15 to 17% for the year and negative 5% to positive 3% for Q4. And a three-year CAGR of 29 to 30% for the year and 23 to 26% for Q4. Our updated revenue guidance is consistent with the performance we have seen in Q4 so far and reflects the changing macroeconomic environment and lengthening consumer decision process, but continues to represent a robust three-year CAGR for both the fourth quarter and the fiscal year. For the fourth quarter, it is important to keep in mind that we are comping a strong Q4 in the prior year. Given our flexible and asset-light business model, we have the ability to capture additional demand that may occur during the holiday season, which still largely lies ahead of us. We also expect year-over-year improvements in our gross margin, though not at the rate of recent quarters, as we anniversary our highest gross margin quarter of the prior year, and given that our guidance anticipates the environment will be more promotional this holiday season. We intend to continue making prudent investments and allocating spend across areas of the business that generate a strong ROI. In Q4, we anticipate making selected incremental investments in marketing, employee costs, and other G&A, but in all cases, we will be disciplined and ROI-focused in our approach, and this spend will be consistent with our goal to deliver long-term, sustainable, profitable growth. As a result of our flexible business model and our ongoing disciplined management of investments, we are pleased that our adjusted EBITDA remains within our previously communicated outlook range. We expect adjusted EBITDA for the year to be $32 to $37 million, or an adjusted EBITDA margin of 7 to 8%. And we expect adjusted EBITDA for Q4 to be $4 to $9 million, or an adjusted EBITDA margin of 3 to 7%. The ability to adapt and deliver consistent profitability in a dynamic environment is one of the significant advantages of our business model and our management philosophy. As a growth company, we will continue to focus on optimizing and leveraging our asset-light business model to build our brand and our business for both near and long-term profitable, sustainable growth. This approach informs how we are looking ahead to Q4 and fiscal 2023 and is consistent with our historical approach to building our business. As a growth company, we will prioritize delivering healthy and sustainable revenue growth, expanding our premium gross margin, making prudent, strategic, ROI-driven investments to build and scale the business, and rigorously managing our costs to deliver sustainable, profitable growth for our shareholders. With that, we'll be happy to take your questions.
spk02: Thank you. As a reminder, ladies and gentlemen, to ask a question, you will need to press star 11 on the phone. And due to time constraints, we ask that you please limit yourself to one question and one follow-up. You may re-enter the queue with additional questions.
spk07: One moment, please.
spk02: And our first question comes from the line of Matthew Boss with JP Morgan.
spk04: Thanks. It's Amanda Douglas on for Matt. To start, Beth, could you speak to how you saw the cadence of demand trends progress throughout 3Q? And specifically on the softer 4Q to date trend, could you speak to where by category or price point you've seen changes relative to 3Q?
spk05: Absolutely. Hi, Amanda. Thanks for the question. So as we mentioned in the call, Q3 shaped up much as we expected. And what we started to notice in October is the retail environment became more challenging. As it relates to price points specifically, we saw increased demand at the mid-range of our offerings, and that was offset by some of the moderation that we saw in the $10,000 price point, above the $10,000 price range. So keep in mind, this is just observed since October. And we do notice that there's some variability from October to October in a holiday season. So we're not ready to call it a trend just yet, but it is something that we're overall watching. And I think the one other thing I would just wanna add is, as Jeff had mentioned in his remarks, We do recognize the majority of the holiday season is in front of us. We're very well prepared with the offerings that we have. And so we're able to capture the demand as we see it, as we have in the past.
spk04: Great, that's helpful. And then to follow up for Jeff, could you speak to what's driven the magnitude of your gross margin expansion in the third quarter? And how should we think about potential pricing optimization opportunity in 4Q, despite maybe a more promotional holiday? And then just multi-year, are there any changes to your mid-50s gross margin target?
spk01: Sure. To start off with what drove the gross margin improvement in the third quarter is driven by similar factors that we've seen in the past. Underlying it is the strong brand resonance and the premium proprietary products that we have, which allow us to have that premium gross margin. We support that operationally with our pricing optimization engine and procurement efficiencies. And then we've also seen some benefit from our enhanced extended warranty program, which has seen good customer demand. So those are areas that we've seen that are able to drive our gross margin. In terms of Q4, as I mentioned in the remarks and as you pointed out, we do anticipate in our guidance that maybe a more promotional environment said our strategy of continuing to focus on sustainable, profitable growth has not changed, and we continue to manage these levers in Q4 as we do in each quarter. And then with respect to the longer-term model, you know, our longer-term model that we previously discussed has gross margins in the mid-50s percent, and we expect to continue to manage the levers that we just talked about to optimize both top-line, and gross margins. So, the continuation of the strategies and approach that we've seen in the past, and we expect to continue those going forward.
spk04: That's helpful, Collar. Thank you.
spk01: Thank you.
spk02: And our next question comes from the line of Oliver Chen with Gowen.
spk09: Thanks so much. Hi, Beth and Jeff. Regarding the guidance and the call-out on macro headwinds, Which macro headwinds are you most concerned about or are most relevant to what you're seeing? Also, Jeff, on the marketing efficiency and customer acquisition cost, what's ahead with that dynamic in terms of how efficient it is and the kinds of decisions you're making lately as it's a pretty agile changing dynamic? And then finally, just as we think about the guidance that you provided, Your revenue stepped down by your EBITDAs in the previously established range. What's the main delta in terms of being able to maintain the EBITDA? Thanks so much.
spk05: Hi, Oliver. Thanks for the question. So in terms of the macro, we are seeing strong interest, nice traffic in our showrooms, online. I think we're just seeing a lengthening of the overall decision cycle there. One of the overall differentiators that we have is we don't believe that all revenue growth is equal, and we don't believe in chasing unprofitable growth. So as we're seeing a more promotional environment, we're not going to be leaning into discounting the same way that others need to in order to sell through their inventory. So we're really thinking about how we can maintain our profitability targets, and I think that speaks to the agility of our business model, and continuing to build a premium and luxury brand. So that's how we're thinking about just how we're managing our performance in a challenging environment. Marketing is one of the levers that we have. We continue to look for strong ROI as we think about delivering in the marketing, with our marketing strategy, we're also building a longer term brand. And so we're taking, I think, a pretty managed approach there in terms of making sure that we are healthy and profitable, while considering that we are still a young and growing brand in a $300 billion fragmented industry where we will continue to gain share.
spk01: And then with regard to your questions about marketing and EBITDA, say that the way that we think about management of our OpEx, including marketing, is to focus on running the business to sustainable, profitable growth. The way that we look at our marketing is dynamic, very data-driven, and ROI-focused, and that is an approach that we've always taken and continue to follow in this environment. That ties into the second part of your question regarding the profitability, and we're pleased that we're able to, in this environment, maintain our profitability guidance in the same range that we've discussed earlier on in the year. And I think that speaks to how across the business and across our OpEx, we've been disciplined in our focus of how we deploy funds, think thoughtful of ROI and managing the business to profitability and how the business model is also designed dynamic and flexible and allows us to manage based on differences in demand that may occur. And so I think that all comes together in how we are continuing to guide to a similar EBITDA range that we have previously.
spk09: Thank you. Best regards. Happy holidays.
spk02: Thanks, Oliver. Thank you. And our next question comes from the line of Michael Benetti with Credit Suisse.
spk08: Hey, guys, thanks for answering our questions here. So, Jeff, you laid out the revenue path here, you know, potential guy down five to up three in the fourth quarter, some very different scenarios there. But, you know, relative to the 17% growth in the last quarter, can you speak a little bit about the KPIs that you do release to us and which ones, you know, you're anticipating to slow? I think you mentioned traffic a little bit before, but, you know, should we think about AOVs compressing a bit? Should we think about orders slowing? I know you don't report active customers, but are you seeing changes in dynamics with the new customers trafficking the site? And then I guess, you know, is there a potential that early, you had a moment earlier this year when the consumer process lengthened as well. You seem to pull levers to adjust pretty well and steady the ship pretty quickly. Is there a chance that Some of the, some of the negativity in the scenarios for fourth quarter stands into early next year.
spk05: Sure, maybe I can begin that and just feel free to add on. So, I think the, the 1 KPI, as I called out earlier on was on at the high price point at that 10,000 dollar plus. Keep in mind, it's highly considered. It's a younger target demographic. And so we are seeing more moderation there. I think one of the benefits of our offering is we have a wide variety of different price points. So regardless of the budget that you're coming to us with, we have a really compelling offering for you. As it relates to kind of the overall consideration lengthening, I think that one thing to keep in mind is oftentimes in October, We do see people that are demonstrating interest, but tend to be waiting a little bit closer to the holiday season. I think last year in October, there were a lot of consumers that were afraid that the inventory was going to disappear. And so I think you saw earlier purchasing. So I think part of this is just how can we quickly convert people, especially as the holiday season is approaching and as we're coming close to that special December 25th date. So that's why we're, I think, being a little bit more cautious, but definitely recognize that we have a lot of opportunity that lies ahead and we have a compelling offering. We have our showrooms, we have our digital experience. So we're really firing at all cylinders in terms of being able to close that customer, but we are seeing them, I think, be more hesitant than we had in the past.
spk08: Got it. And then if I could follow that as you look to next year, Maybe we're just self-fulfilling prophecy on making a recession happen, but if we do go into a tougher macro, you guys have longer-term growth targets in the high 20s and low 30s. You've got these showrooms that you sound very happy with consistently call to call. What do you think about as far as levers you want to pull to try to keep your business on track towards your longer-term growth algorithms if we do stay in a subdued consumer macro?
spk05: The way that we're thinking about are managing the company and the pillars that we're gonna operate with is one, we're not gonna compromise the brand. We're really thinking about this to build long-term value. Two, we're gonna continue to invest in the business to ensure that we can take advantage of any acceleration that we see. And then three, we're gonna simultaneously deliver profitability with a rigorous ROI-focused management of cost structure. So that's how we're thinking about managing really in any environment. I mean, keep in mind, We're originally a bootstrap company. We've been doing this for many years. We've seen many cycles. We think there's a lot of potential in terms of the brand that we've built being very resonant with that younger consumer. We think the omni-channel strategy is absolutely the right one for our industry and for our business. And overall, I think the fact that we're able to maintain profitability in a challenging environment speaks to how nimble we are as a company. and the disciplines that we overall have.
spk08: Sounds good. Best of luck in the holiday, Beth. Thanks.
spk02: Thank you. And our next question comes from the line of Noah Zatskin with KeyBank Capital Markets.
spk10: Hi. Thanks for taking my questions. Just first, are there any differences in behavior you'd call out between customers shopping for fine jewelry and engagement? And then second, just in terms of showrooms, you added about, I think, 10 year-to-days. That brings you to 25. Any update on the number you'd expect to end the year with and just progress there generally? Thank you.
spk05: Sure. So I wouldn't say there's a meaningful difference, you know, in terms of fine jewelry and engagement. We've seen kind of similar trends that have been impacting them. Fine jewelry, you know, continues to outpace the overall company, but we've seen more moderation just as customers have taken a little bit more of a wait and see approach. As it relates to our showrooms, I think that we may end the year with another one or two. We have several more planned for 2023. Some of that timing is based on permitting and other kind of variable timeframes that we work within, but it's about what we envisioned when we talked about almost doubling the number of leases with the majority opening this year.
spk07: Thank you.
spk02: Thank you. And as a reminder, to ask a question, you will need to press star 1 1 on your telephone. Once again, to ask a question, please press star 1 1. Our next question comes I'm on the line with William Blair.
spk06: Hi, thanks a lot. Just kind of curious, this idea of lengthening the purchase decision would imply that the sales ultimately do kind of flow through, and you sort of speak to having operated this business now through several cycles. I mean, are there periods that are similar to this in your history where you've kind of seen that lengthening, and can you just give us that sense of duration as to sort of when those sales, you know, you would expect those sales to happen? I guess that'd be my first question.
spk05: Yeah, I think, you know, we've seen a variety of different cycles and, you know, I think that we're, we are in a unique point in time right now, um, that, you know, we're, we're adapting to, I think overall, you know, we do expect to be able to convert this customer, um, as we have in the past. And I think we have that compelling offering. So feel really, uh, have a good conviction there. of our ability generally to be able to meet the demand where we see it. Keep in mind also jewelry has long term value that consumers are interested in meaningful purchases. And I think we have a really compelling offering overall to be able to cater to that. So the category itself has shown to be resistant, especially as you think about bridal and people continuing to be engaged. I think you just are going to see puts and takes from quarter to quarter. And, you know, ultimately, I think that the long-term growth prospects remain the same.
spk06: Okay. And then I'm just kind of curious when we can anticipate more leverage on the marketing line now that you've kind of, you know, with the larger store fleet thing.
spk01: Yeah, so I can speak to that. How we're thinking about, and this is also just how we're thinking about our OPEX in general, is that we are continuing to make disciplined ROI-focused investments, including in marketing, to drive that growth. sustainable, profitable growth. We've spoken about our long-term growth algorithm for marketing and how we are working towards that target in the mid to high teens as a percentage of revenue as we continue to grow our brand awareness and roll out our showrooms, which are which are beneficial, as you point out, in terms of driving uplift in the metros. So we continue to work towards that target, and we'll continue also to, as we look at the upcoming periods, to manage to profitability as we've been guiding to for the year and the quarter.
spk07: Oh, okay. Nice. Thank you.
spk02: With that, I'll hand the call back over to CEO Beth Gerstein for any closing remarks.
spk05: Thank you, everyone, for listening. We are very proud of our team's efforts, given how challenging the environment has been, and we are very excited for what we have planned this holiday season. We look forward to giving you an update in our next earnings call.
spk02: Ladies and gentlemen, this concludes today's conference call. Thank you for participating in Animal Disconnect.
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