Brilliant Earth Group, Inc.

Good day and thank you for standing by. Welcome to the Brilliant Earth Third Quarter 2024 Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Colin Borland, Vice President of Strategy, Business Development, and Investor Relations. Please go ahead.

Thank you and good afternoon, everyone. Welcome to Brilliant Earth's Third Quarter 2024 Earnings Conference call. My name is Colin Borland, Vice President of Strategy, Business Development, and Investor Relations. Joining me today are Beth Gerstein, our Chief Executive Officer, and Jeff Kuo, our Chief Financial Officer. During the call today, management will make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These 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 results to differ materially from those expressed or implied in these forward-looking statements. These forward-looking statements reflect our opinion only as of the date of this call, and we undertake no obligation to revise or publicly release the result of any revision to these forward-looking statements in light of new information or future events unless required by law. Also, during this call, management will refer to certain non-GAAP financial measures. A reconciliation of BrilliantEarth's non-GAAP measures through the comparable GAAP measures is available in today's earnings release, which can be found on the BrilliantEarth Investor Relations website. I'll now turn the call over to Beth.

Good afternoon, and thank you for joining us today. I'm happy to report that we continue to drive the progress of our strategic initiatives and delivered another quarter of profitability. This is our 13th consecutive quarter of profitability as a public company, and something I continue to be very proud of. In Q3, we delivered net sales of $99.9 million, which was within our guidance range, and a 13% -over-year decline. We continue to operate nimbly and efficiently, expanding gross margin 230 basis points -over-year to 60.8%, driving marketing efficiency and effectiveness, and exceeded our profitability expectations for the quarter, delivering $3.6 million in adjusted EBITDA or a .6% adjusted EBITDA margin. As you all know, the engagement market continues to normalize, and our competitors are increasingly relying on promotions and discounts to encourage sales. Yet, we've remained steadfast in driving sustainable, profitable results and protecting and strengthening our premium brand in this environment. We believe this balanced approach positions us to seize what we believe is enormous untapped potential for our business. While we have experienced expected softness in engagement ring sales, we've seen strong sales growth outside of engagement rings, including in both wedding and anniversary bands and fine jewelry. We believe the strength and demand is a strong reflection of consumers' desire for our high quality, beautiful products and their affinity for our brand. It was a banner quarter for our brand. Even as we exceeded our profitability guidance, we continued to make long-term strategic investments in our brand. We launched a much anticipated fine jewelry collection with Dr. Jane Goodall, which has been our most successful launch ever for a fine jewelry collection. Our partnership with Dr. Goodall is a reflection of the best of our company, beautiful, unique and exclusive product, an authentic mission aligned partnership, and a fully integrated culturally resonant omni-channel campaign. In conjunction with the release of our Jane Goodall collection, we launched Rethink Everything You Know About Diamonds to share and amplify our industry-defining innovations and leadership in both natural and lab diamonds. This campaign highlights our nearly 20-year legacy of diamond leadership from our groundbreaking diamond collections to our transparent and responsible sourcing practices. Our mission to redefine ethical luxury and to inspire consumers to make impactful choices that reflect their values is resonating strongly with our customers. For the past several years, you've heard me talk about our commitment to investing in and building our premium brands. We're very pleased to see the strong progress we're making. Over the last two years, we've been growing our aided and unaided brand awareness, including outsized growth and awareness in our local markets, where we have invested in expanding our physical footprint during the same period. In addition, over the same time period, we've grown earned media impressions by 38% and counting, and grown impressions from our social media strategy by 375% and counting. We've also continued to expand upon our successful showroom strategy. Our showrooms continue to deliver compelling metro uplift, and we are thrilled to launch three new showrooms in time for the holiday season. During the quarter, we expanded our retail footprint with the opening of our second location in Boston. This new location at Chestnut Hill features a fine jewelry try-on bar with a destination oriented elevated design with an interactive experience. Today, we open our first New York City ground floor location in Nolita, and in the coming weeks, we will open our third Boston location at Seaport Village, bringing our total showroom footprint to 40 by year end. I encourage you to stop by when you are in the area. We are excited for the holiday season ahead of us. We'll be bringing the brand to life in a beautiful way across our digital channels and our showrooms, both of which have joyful holiday elements celebrating the season as part of our upcoming Be Together, Be Brilliant campaign. We continue to offer compelling items for both gifting and self-purchase with a curated, unique, and trend forward assortment. Look out for our gift guides, which will feature some of my favorite pieces, including our sole collection, Diamond Essentials, Zodiac, and of course, the Jane Goodall collection. So far this quarter, we are pleased to see sequential improvement in our bookings growth rate, including in engagement rings. We continue to have strong performance in our fine jewelry sales, including encouraging repeat purchase trends, which we see as a positive indicator going into the most important seasonal quarter for fine jewelry. The bulk of the holiday season still lies ahead of us, and our asset light data-driven model positions us well to capture demand as it emerges. Before turning the call over to Jeff, I wanna thank him and our entire team for their unrelenting commitment. The passion and persistence that our team demonstrates every day not only inspires me, it reinforces my confidence in our path ahead, which will continue to be focused on investing for profitable and sustainable growth in our business and our brand. I look forward to sharing our progress with you in the new year and wish everyone a happy holiday season. Here's Jeff.

Thanks, Beth, and good afternoon, everyone. As Beth mentioned, we're pleased to report a quarter where we continue to successfully drive our strategic initiatives, innovate, meet our top line expectations, and far exceed our profitability expectations even in the face of industry headwinds. Let me take you through the details for Q3. Q3 net sales were $99.9 million within our guidance range or a decline of 13% year over year. Total orders were about flat year over year, while we had another strong quarter in repeat orders, which increased by 11% year over year, demonstrating the effectiveness of our customer acquisition and retention efforts and the resonance of our brand and products with consumers. Q3 average order value or AOV declined 12% year over year as we continue to broaden and diversify our overall assortment, including in our fine jewelry collection, which as you know, has lower price points than engagement rings. Q3 average selling price or ASP growth was about flat year over year in engagement rings, while wedding and anniversary bands and fine jewelry ASPs both saw growth year over year, demonstrating our effective strategy of leaning into our compelling brand and not participating in the discounting that is widespread in the industry. Q3 gross margin was 60.8%, which is a 230 basis point expansion over Q3 last year principally driven by our premium brand and proprietary products, our price optimization engine, procurement efficiencies, and our enhanced extended warranty program. This gross margin strength is particularly rewarding as we maintain our focus on our premium brand positioning in an environment where others continue to lean into discounting and gold prices are at all time highs. We delivered a Q3 adjusted EBITDA of $3.6 million or a .6% adjusted EBITDA margin exceeding our guidance range. Our strong gross margin performance, together with prudent management of our marketing spend and other operating expenses, contributed to our strong profitability results this quarter. Q3 SG&A was .9% of net sales compared to .8% of net sales in Q3 2023, as we continue to balance making investments to drive long-term growth with discipline and expense management. Q3 adjusted SG&A was .3% of net sales compared to .9% in Q3 2023. Adjusted SG&A does not include items such as equity-based compensation, depreciation and amortization, showroom pre-opening expenses, and other non-recurring expenses. For Q3 marketing expenses, we maintained our disciplined approach and drove leverage of approximately 10 basis points as a percentage of net sales compared to Q3 last year. We continue to make strategic investments to drive brand awareness and support key initiatives such as growth in fine jewelry, balanced with capturing marketing efficiencies while maintaining overall profitability. As I've pointed out during our last several earnings calls, we are aiming to keep quarterly marketing spend for the year at a similar percentage of net sales compared to the 2023 average. And in Q3, we were approximately in line with that expectation, while still delivering net sales within our guidance and making investments in our brand. Employee costs as a percentage of net sales were higher for the third quarter by approximately 360 basis points as adjusted year over year. This was principally driven by new showroom employees, which includes the annualization of employees in showrooms opened last year. We continue to manage these expenses in a disciplined and responsible manner. Other GNA as a percentage of net sales increased year over year by approximately 200 basis points as adjusted as we continue to prudently invest in our business. This includes investments in technology plus rent and showroom expenses. Our data-driven, capital-efficient and inventory light operating model continues to provide competitive advantages and our inventory turns continue to be significantly higher than the industry average. We were able to leverage this model to limit the increase in our year over year inventory to only 3.4%, even with our significant growth in fine jewelry and a larger showroom footprint. Our lower risk agile inventory model and strong balance sheet continue to differentiate us from the rest of the industry. We ended the third quarter with approximately $153 million in cash, which reflects a year over year increase of approximately $5.5 million, even after reductions in debt principle balance and expansion of our showroom footprint. Our ability to generate cash further differentiates us from many others in the industry and highlights the benefits of our asset light, data-driven business model. In addition, we continue to maintain a strong balance sheet with no net debt. Our financial strength allows us to continue to make prudent investments in the business to drive long-term growth. In Q3, we spent approximately $179,000 repurchasing our common stock. This takes our total spend on stock repurchases to approximately $438,000 in total to date as of the end of Q3. Our strong balance sheet provides the opportunity to strategically seize value creation opportunities, including when we see an opportunity to buy back our common stock. We intend to continue using this program strategically while balancing our overall investment decisions, including consideration of factors, such as trading volumes and our public flow. As we look ahead to the remainder of the year, our perspective on the overall environment is consistent with what we have previously discussed. For the year, we continue to expect that our net sales will be in the range of $410 to $425 million. We are raising our adjusted EBITDA guidance to be in the range of $14 to $16 million as we dynamically manage operating expenses, including marketing spend, to deliver profitability while making strategic investments in the business for the long term. The midpoint of this guidance implies sequential improvement in -over-year net sales growth in Q4 compared to Q3. As Beth mentioned, we continue to have strong performance in our fine jewelry sales, including encouraging repeat purchase trends, which we see as a positive indicator going into the most important seasonal quarter for fine jewelry. As we have discussed previously, we expect that engagements will continue their gradual path to normalization. We also expect other key drivers of Q4 performance will include realizing uplift from our showrooms and our ongoing brand building efforts. In closing, our premium brand and differentiated business model, including our data-driven decision-making, seamless omni-channel platform, and asset-light structure demonstrate our ability to deliver profitability and achieve our strategic and financial objectives in a variety of different environments. Our performance in the third quarter reinforces our ability to execute and capitalize on the opportunities that drive long-term, sustainable, and profitable growth. With that, I will turn the call back over to the operator for questions.

Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will now take the first question. One moment, please. And your first question comes from the line of Oliver Ten from TV Cowan. Please go ahead.

Thanks very much. Hi, Beth and Jeff. As you think about the engagement market and normalization, what's ahead? When might it normalize and turn positive in terms of the trends that you're seeing? And also, Beth, as we think about your comments on second quarter in terms of bridal trends now versus prior, what were the biggest changes? And Jeff, on your side, the margins continue to impress. You've had the optimization engine in place for a while, which has been very helpful. What inning are you in with the optimization engine? And the promotional environment may continue to be pretty intense for a while. What are some plans if promotions get worse from competitors? Thank you.

Thanks, Oliver. So I can start with just the overall trends that we're seeing in the engagement market. As we mentioned earlier, we're encouraged that we are seeing improvement, sequential improvement in engagement ring bookings trends. So we are seeing an improvement in the overall market. And in addition to that, we have a lot of confidence that our strategic priorities are working. And as we're continuing to invest in our brand, we are seeing improvement within bridal as well as outside bridal overall. So while we don't have a crystal ball, we know that we're seeing some nice improvement. We expect Q4 to come in stronger. And we also feel like we're very well positioned as we see increasing demand to be able to react very quickly, very nimbly. As you know, our model is very asset light. We're make to order. So we're very adaptive as a company to be able to drive additional sales as we see that demand materialize. You know, we continue the strategy also of not chasing unprofitable growth and continuing to protect our brands. I think we've done a great job as a lot of the team has done a great job. I think that goes to your question on the promotional environment. Yes, it has been intense. We expect it to continue to be intense, but because we are really attracting customers for the differentiated beautiful product that we offer, our signature collections and the premium brand and that premium omni-channel experience, and we're not leaning into discounts as we really haven't in our history, and that's gonna protect and grow the brand for the future. And we continue to believe that that is the winning strategy in this market and in markets to come. Jeff, maybe you can talk a little bit about margins.

Yeah, thanks Beth. Oliver, regarding the margins and price optimization engine, as you know, that's something that we have been continuing to use for some time, and it's dynamic. It's dynamic in that we refine it as we get new data in from market, from consumers, and we're continually testing and optimizing that to find the right balance of driving top line growth as well as capturing gross margin percentage. And so it's something that we continue to deploy on an ongoing basis, and in times like this, it couples very well with our asset-like model and our overall data-driven approach to allow us to compete effectively, to capture demand as it emerges, and we're excited to continue to refine that with each quarter.

Okay, and just a couple of follow-ups. The environment's pretty dynamic with the prospect of different tariffs scenarios. Just as you think about those, what are some of your ideas or frameworks in terms of those uncertainties? And then the holiday period, there's five fewer days, but any thoughts that you have to help us frame holiday strategies this year, which may be different versus last year? Thank you.

Sure thing. So as it relates to tariffs scenarios, because we have a very diversified supply chain, I feel very comfortable that we're able to adapt quickly depending on what we see as it relates to tariffs, and this is something that we saw during COVID as different geographies experienced different shutdowns. We were exceptionally well-positioned relative to our competitors, so that I think is gonna give us an advantage as well as just the very data-driven nature of our company overall. We also, given the price optimization engine, I think can react very dynamically in terms of optimizing margin and adapting our pricing relative to our costs, and we've been in very dynamic costs environments, even with gold prices at all-time highs. So something that our company is very adept at managing. As it relates to the holiday season, you know, we've been doing this now for almost 20 years, and I think we've seen every version of the holiday season. We have a great assortment. I think the fact that we have three new showrooms opening and ending the year with 40 showrooms makes us very well-positioned for that last-minute shopper, even better than we've been positioned in the past, and we're just incredibly, as I said, agile. We're continuing to monitor the overall environment, drive marketing efficiency, and so as we see demand, wherever it ends up being, we're gonna be able to capture it and be very dynamic in how we think about promoting our products, both online and in our stores.

Thank you. Best regards.

Thank you. As a reminder, if you would like to ask a question, please press star 1 and 1 on your telephone keypad. We will now take the next question. And your next question comes from the line of Ashley Orange from KeyBank Capital Markets. Please go ahead.

Hi. Good afternoon, and thanks for taking our questions. So, first, I just wanted to touch on some of the buyer metrics here. Total orders were about flat in the quarter, but repeat orders were up 11%. I wanted to unpack the differences and trends you're seeing between potential customers coming into showrooms versus those who have already made a purchase with you. Are you seeing a slowdown in new customer acquisition at all? And then I have a follow-up.

So, I would say that the difference in terms of new versus repeat orders is really driven by that softer bridal demand. And we see great performance as it relates outside of bridal within our wedding and anniversary bands, within our fine jewelry assortment as well. But it's really about that bridal customer overall, which, as we know, is experiencing some headwinds as it relates to higher inflationary costs. It's a more considered purchase. This is a younger consumer. And so, that's really the main difference. In terms of the showrooms, we feel really great about the performance overall. I think showrooms have held up nicely. The digital environment remains very competitive and promotional, and that's why we've taken the strategy that we have. But overall, we really think about the omni-channel purchase in totality, given this is a multi-step process for many of our customers. So, that's probably the difference there.

And I would just add that, as Beth mentioned, we've been seeing sequential improvement in the bookings growth rate, including in engagement rings, and we're glad to see that progression as we're starting off Q4, and we think we're well positioned for the holidays.

Got it. So, switching to marketing really quick, leveraging the corridor while making some of those brand-building investments, could you just parse through where you saw opportunity to pull back this quarter, and then any pockets of focus you're leading into or examining for investments in 2025 to help fuel a return to growth? I know media and social media showrooms have been strong call-outs for you.

Yeah, I would say that we continue to be very dynamic in how we operate in marketing. We're driving marketing efficiency and effectiveness, and social media remains very important to the company, and we're really leaders here. We've driven very strong engagement. The numbers that I said in my earlier remarks was that overall impressions have grown over 375% relative to two years ago. So, I think the investments that we're making there continue to pay off. The strategic priorities that we've set all along, we continue to have conviction in. So, if you think about brand awareness, we're continuing to lean into brand investments. We continue to drive fine jewellery growth, and a lot of that is driven through very successful marketing initiatives. We're coming off our most successful launch ever in fine jewellery with our Jane Goodall collection, so that's something we're really pleased to see and see a lot of opportunity with going forward. And then, continue to see growth through showrooms, the fact that we're opening three new ground floor showrooms, including today opening in Nolita in New York. We're very excited about, and I think all of these are going to position us very well for the long term.

Appreciate the call, I think so much,

guys. Thank you. Thank you. I will now hand the call back to Beth Gersie for closing remarks.

Thank you, everybody, for joining us today. I hope you all have a very happy holiday season and look forward to sharing our holiday results next quarter.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.