BRLT - NASDAQ

Good day, and thank you for standing by. Welcome to the Brilliant Earth First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After this presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised this conference is being recorded. I will now turn the call over to your speaker today, Allison Malkin of ICR. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Brilliant Earth's first quarter 2024 earnings conference call. Joining me today are Beth Gerstein, our Chief Executive Officer; and Jeffrey 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 results 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 Brilliant Earth's non-GAAP measures to the comparable GAAP measures is available in today's earnings release, which can be found on the Brilliant Earth Investor Relations website. I'll now turn the call over to Beth.

Good afternoon, and thank you for joining us today. I'm excited to report that we started this fiscal year, driving continued success on our strategic initiatives and delivering our 11th consecutive quarter of profitability as a public company by driving strong order growth, further expanding gross margin, and delivering strong marketing efficiency, we far exceeded our profitability expectations for this quarter. I'm proud of our consistent record of gaining share and delivering profitability through many environments, and this quarter's outperformance is another example of both our focus and our agility. Our results continue to show the increasing resonance of our brand and the success with which we execute and gain share in the still normalizing $300 billion global jewelry industry. We're beginning the year with positive momentum, and we believe we are in a great position to deliver on our goals for the full fiscal year. Here are a few noteworthy performance highlights from Q1. Net sales were approximately flat year-over-year at $97.3 million and within our revenue guidance range. Total orders increased by 13.7% and repeat order volume increased by more than 20% year-over-year. Average selling price, or ASP, grew year-over-year across our product assortment, including engagement rings, wedding bands, and fine jewelry. Gross margin was 59.9% or a 500 basis point increase year-over-year. Q1 adjusted EBITDA of $5.1 million or a 5.2% margin was ahead of our expectations. Our outperformance on profitability serves as another testament to our premium brand positioning and to our ability to manage the business nimbly, including highly disciplined management of our marketing spend. I'm incredibly grateful for and impressed by our team and their execution to deliver consistent and sustainable profitability. I'd like to touch briefly on a few first-quarter success drivers, including brand, product, and our omnichannel experience. As you know, we continually focus on elevating and expanding the Brilliant Earth brand and Q1 was no exception. For the biggest gifting holiday of the quarter, Valentine's Day, we launched our real Love campaign, featuring the love stories of brilliant customers to a resounding response, including strong social and media engagement with prominent spots on Good Morning America and with Gena and Hoda on The Today Show, resulting in over 50 million media impressions. Additionally, following this year's earlier red carpet success, where we were the brand of choice for some of today's brightest young stars, we were thrilled to have Sydney Sweeney dress head to toe in Brilliant Earth jewelry for the 35th Annual Glad Media Awards. The first quarter was also a big moment for us on social media with our strongest ever social engagement. With a combination of organic and influencer-driven content, we saw overall social media engagement grow 100% quarter-over-quarter. On Instagram alone, we saw impressions and video views grow approximately 100% and 258% quarter-over-quarter, respectively. And finally, we had the amazing opportunity to launch our partnership with legendary conservationist, Dr. Jane Goodall, in support of the Jane Goodall Institute. We are honored to partner with Jane to advance our mutual goals of sustainability and social responsibility. As champions of ethical practices and environmentalism, both Brilliant Earth and the Jane Goodall Institute are committed to creating a positive impact on the planet and its inhabitants. Not only is it a tremendous honor to have Jane's support, but also a strong validation of our nearly 20-year mission to transform the jewelry industry. I look forward to sharing more about the partnership, including a fine jewelry collection in the coming months. Our strong brand performance amplified the carefully crafted and distinctive product for which Brillion Earth is known. We have spectacular performance in our fine jewelry assortment with a particularly strong Valentine's Day. In the two weeks leading up to Valentine's Day, fine jewelry grew 45% year-over-year, highlighting our continued momentum in this space. Our customers are coming to us for both timeless styles such as tanis bracelets and diamond stud airings, as well as trend-leading designs. Throughout the quarter, we expanded on the success of our tube collection drop mentioned in our previous call by launching additional trend-leading collections, like our hearts and Clover collections to great success. We saw heart-shaped jewelry sales grow 182% year-over-year in the quarter. We continue to see robust performance in our wedding and anniversary ring assortment, resulting in another quarter of double-digit growth year-over-year. Furthermore, we're driving outsized growth in our men's wedding ring collection, including strong demand for our textured and accented rings. We also see more and more customers purchase our rings for occasions outside of weddings. For example, we believe that more and more of our eternity ring sales are self-purchases. We also see impressive performance in our fashion rig assortment with 75% growth year-over-year in Q1. And finally, in engagement rings, we believe we had strong performance despite ongoing industry challenges and a heavy discount-oriented promotional environment, which we chose not to follow. Our premium brand and curated proprietary assortments continue to resonate with engagement ring consumers. And we saw another quarter of year-over-year ASP growth in Engage earnings with particular strength in areas such as our signature collections that are exclusive to us. We also continue to assert our leadership in offering transparency into the origin of our natural diamonds through blockchain with more than 10,000 blockchain-enabled diamonds on our site today. We believe we are on a multiyear path to recovery and engagements starting this year, and we are confident in our ability to continue to grow market share as we are increasingly recognized as the go-to brand for premium distinctive bridal jewelry. As you know, over the last two years, we've been expanding our showroom density within existing metros, including San Francisco, Los Angeles, and Washington, D.C. and we continue to see positive incremental growth as we add multiple showrooms in metros. I'm incredibly proud of this result, which shows the impact of our prudent and measured approach to new showroom launches. With that said, we continue to build our pipeline for future showroom locations and remain on track to achieve our goal of two to four new locations this year. We will be opening three premium outdoor locations with two showrooms in Boston in Seaport and Chester Hill as well as our first street-level location in New York City in New Lira. In March, I told you that this year, we expect to continue making investments that will set the stage for long-term sustainable growth. As a technology-driven company, our teams have been hard at work over the last few months, deploying and improving new platforms and systems to improve both customer satisfaction and operational efficiencies. One great example is the significant enhancements to our CRM platform to improve our ability to manage the customer journey and drive improved customer economics. As jewelry is a highly considered high-value purchase, our continued innovation and customer engagement further differentiate us from the industry. As you saw in our release, we have reiterated our full-year guidance, and Jeff will walk you through our Q2 expectations in more detail. In Q2 to date, we continue to drive strong order growth and repeat purchase behavior and have strong momentum in wedding bands and fine jewelry, offset with a softer start to engagement rings. As I have previously mentioned, we do expect that this year will be the beginning of a multiyear path to normalization and engagements. We recognize that there are puts and takes in any given quarter, but I am confident that we are well positioned to gain share and drive profitability as we nimbly adapt in this environment. In closing, I'd like to note how pleased we are with the start of the year, especially with our outperformance and profitability amidst headwinds in the industry and macro environment. I have high confidence that we will continue to gain share with our premium approachable brand, elevated omnichannel customer experience, our differentiated product, and excellence in execution. Finally, I'd like to introduce a member of our team. Colin Borland is our VP of Strategy and Business Development and will be taking on a larger role, including Investor Relations. Colin has been with Brilliant Earth since 2020 and brings a wealth of knowledge about our strategy, operations, and financials. We are thrilled to have him take on a broader role and we're looking forward to you getting to know him in the coming months. With that, I'll now turn the call over to 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, gain market share, meet our top-line growth expectations, and far exceed our profitability expectations even in the face of industry headwinds. Let me take you through the details. Q1 net sales were $97.3 million, approximately flat year-over-year, which was within our guidance range and reflected strong market share gains. We drove a 13.7% increase in total orders year-over-year. Additionally, we drove over 20% growth in repeat orders year-over-year. This performance demonstrates the effectiveness of our customer acquisition and retention efforts, including the resonance of our brand with consumers as well as strong performance across our products. Average order value, or AOV, declined 12.4% year-over-year as we continue to drive outperformance in our fine jewelry collection, which, as you know, has lower price points than engagement rings. We saw strength in average selling price, or ASP, across our product collections, the ASP for our engagement rings, wedding rings, and fine jewelry increased year-over-year in Q1. Q1 gross margin was 59.9%, which is a 500 basis point expansion over Q1 last year. The ongoing strength in our gross margin continues to be driven by our premium brand and proprietary products, our price optimization engine, procurement efficiencies, and our enhanced extended warranty program. This strength in our gross margin is particularly rewarding as we maintain our focus on our premium brand positioning in an environment where others lean into discounting. We delivered a Q1 adjusted EBITDA of $5.1 million or a 5.2% adjusted EBITDA margin significantly exceeding our expectations. 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. Q1 SG&A was 59% of net sales compared to 55% of net sales in Q1 2023 as we continue to balance making investments to drive long-term growth with discipline in expense management to deliver profitability. Q1 adjusted SG&A was 54.7% of net sales compared to 49.3% of net sales in Q1 2023. Adjusted SG&A does not include items such as equity-based compensation, depreciation and amortization, showroom preopening expenses, and other nonrecurring expenses. We maintained a disciplined approach to our first quarter marketing spend as a percentage of net sales, with a slight deleverage of approximately 60 basis points compared to Q1 last year as we continue to make strategic investments in driving brand awareness and supporting key initiatives such as growth in fine jewelry. As I pointed out during our last earnings call, we aim to keep quarterly marketing spend for the year at a similar percentage of net sales compared to the 2023 average and Q1 outperformed that expectation while still driving robust market share gains. As a growth company, we believe building brand awareness is one of our largest areas of opportunity, and we are leaning into this with a well-designed and intentional marketing strategy that supports both near-term opportunities and long-term goals, all while maintaining overall profitability. For the first quarter, employee costs as a percentage of net sales were higher by approximately 290 basis points as adjusted year-over-year, principally driven by the annualization and addition of both showroom and corporate employees to support our growth. These employee investments have contributed to the strong uplift that we see in showroom metros and our outperformance compared to the overall jewelry industry. We continue to manage these expenses in a disciplined and responsible manner. Other G&A as a percentage of net sales increased by approximately 200 basis points as adjusted year-over-year as we continue to prudently invest in our business. This includes increased rent and other costs to support our growth as well as investments in technology. Our data-driven, capital-efficient, and inventory-light operating model continues to provide competitive advantages. We have been able to leverage this model to keep our year-over-year inventory increase to less than 3% despite the expansion of our showroom footprint and our significant growth in fine jewelry. Our lower risk, agile inventory model, and strong balance sheet continue to differentiate us from the rest of the industry. We ended the first quarter with approximately $147.5 million in cash, which reflects a year-over-year increase of approximately $1.5 million, even after expanding our showroom footprint by over 30% and paying down over $3 million in principal balance on our term loan. Our ability to generate cash 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 Q1, we repurchased $100,000 of our common stock. As I mentioned in our last earnings call, our strong balance sheet provides the ability 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 float. As we look ahead to the rest of the year, we are reiterating the annual guidance that we provided in March as we continue to be well-positioned to drive share gains, maintain strong gross margins, and manage operating expenses in a disciplined fashion. For Q2, as Beth mentioned, we continue to drive robust order growth and have strong momentum in fine jewelry and wedding and anniversary bands, offset with a softer start in engagement range as the industry continues to face some headwinds along the gradual path to normalization. For Q2, we expect net sales to be down in the low to mid-single-digit percent year-over-year. We expect to continue making investments in Q2 to set the stage for long-term growth while still delivering profitability and sequential revenue growth. We expect Q2 adjusted EBITDA margin to be in the low single-digit range as a percentage of net sales as we dynamically manage operating expenses, including marketing spend to deliver profitability while making strategic investments in the business. We expect our growth rate to increase as we progress through the year as we anticipate that engagements will continue to normalize. We also expect other key drivers will include realizing an uplift from the opening and growth in new showrooms, the continued strong performance of fine jewelry, and the fact that seasonally, Q4 is the biggest quarter for fine jewelry sales. For the second half, we expect that growth will be Q4 weighted with a low single-digit percent net sales year-over-year growth rate in Q3 and a higher year-over-year growth rate in Q4. In closing, our premium brand and differentiated business model, including our data-driven decision-making, seamless omnichannel platform, and asset-light structure demonstrate our ability to gain share, deliver profitability, and achieve our strategic and financial objectives in a variety of different environments. Our performance in the first 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.

[Operator Instructions] Our first question comes from Oliver Chen with TD Cowen.

Regarding engagement and what you're seeing there, it sounded like it was a bit of a softer start, but you do foresee a recovery. Just would love your take on what you're seeing in the environment and what's embedded in your forecast. Also, you had really robust gross margins, but the environment in terms of competitors in the industry has been fairly promotional. What's happening in terms of what you're seeing in your ability to compete there? And lastly, on fine jewelry, you've made a lot of great progress. Just what's ahead in terms of what you think you need to do to continue to drive momentum there as you think about platforms and branding and inventory management as well.

Oliver, thanks for the question. I can start with just what we're seeing in the overall environment. So we had mentioned that we're really proud of the positive indicators that we've seen at the overall business. The brand has a lot of momentum overall outside of bridal. And within bridal, we are seeing industry headwinds overall, but we do expect that will continue to normalize, and we've been talking about that normalization. So I don't think that would be a big surprise for you. As it relates to the promotional environment, we are seeing, especially within the engagement ring segment that it is heavily promotional. And as we've kind of done in the past, we really choose not to participate in these very discount-heavy promotions that we see from our competitors. I think that's part of the reason that our brand continues to be seen as a premium brand and why we're seeing great results like our ASPs continue to increase within the engagement ring assortment. Overall, we take a very balanced approach when it comes to gross margin. I'm sure Jeff can talk to that more specifically. But the idea that we're really investing in quality revenue and not chasing unprofitable growth is something that is, I think, important for the long term of the company. As it relates to fine jewelry and Jeff feel free at the end, maybe to talk about gross margin. We're really excited that we are increasingly seen as the destination for our millennial-dense consumer for fine jewelry. And we've invested a lot in our branding efforts, on social where we're seeing record-high engagement. We're seeing really great response to the product drops that we have, and we continue to invest in the assortment overall. And I think part of the reason we are so successful is we're seen as a trend-leading option as well as really the key wardrobe staple where you need to go to get your diamonds and your tennis bracelet. And so balancing that diamond essentials with the trend, I think, is something we've been really successful at and just making sure we're continuing to invest in the brand. And I think it's working really well. We're seeing great success with repeat. We're seeing great success with self-purchase. And all of that, I think, is a testament to all of the efforts that we're doing within fine jewelry. So Jeff, I don't know if you're more on the gross margin side.

Sure. So just to recap on some of the points on gross margin, Oliver, as we've talked about before, it really starts from the strength of our brand and the premium nature of the brand, our proprietary products. We amplify that operationally with our price optimization engine, procurement efficiencies, and warranty program. And then maybe just to double-click a little bit more into the price optimization engine that involves really continual price testing to optimize the right mix of top-line growth and gross margin percent with the idea to maximize gross profit dollars. And I think we've been able to manage those levers very nimbly and agily in this environment to really drive that optimization to preserve the premium positioning that we have, and we're glad to be able to deliver the results that we did for Q1.

Our next question comes from Ashley Owens with KeyBanc Capital Markets.

I just wanted to focus on the New Street location. First, I guess, has anything evolved in your approach to showrooms and how you'll be formatting that store in terms of inventory on hand or just security given it is the street location? And then also, I think this is the third NYC story of counting with the Brooklyn one and your expansion plans have focused kind of on density in existing metros. So just curious on thoughts and wondering where you find the right number of stores to meet demand in some of these bigger, highly populated cities without risking cannibalization.

Yes. Great question. And really the way we think about our stores is all about incrementality, which is why we're really pleased to see the fact that we're driving incremental growth in the clusters that we're operating in. In terms of how we think about the right number of stores, we're taking a very ROI-driven approach as we're launching new showrooms. And we have a lot of data at this point in terms of what we're seeing for incrementality for four-wall overall. And we are seeing a lot of success there. So I think as we continue to get more data and iterate on that approach, you can expect to see that we will take a measured approach. But at this point, we do have a number of different formats, a number of different geographies, and we are seeing widespread success across all of this variety. As it relates to street locations, we have a number of ground-floor locations. A lot of them are in outdoor centers. I think we have over 10 at this point. So we're pretty experienced at this point at how we balance, A, the appointment-driven approach that we are really known for in driving that more curated personalized experience with really making sure that we are catering to a more Bakken browsing type of customer. And our inventory approach is also very test and learn, making sure that we're driving very strong sell-through, and the fact that we've launched a number of ground floor locations, and we've only increased our inventory 3%, just shows you it's a very disciplined approach within the company.

Okay. Great. And then just in terms of kind of the -- it was really high impressive gross margins this quarter, right? And so I'm just wondering in terms of the cadence moving throughout the year, do you expect this to be relatively consistent moving from here?

Yes, I can speak to that. So for gross margin performance, we're pleased to see in Q1. And then in terms of our medium-term gross margin target, that does remain in that high 50s percent range through 2027. And the price optimization that I spoke of in the previous question, really does involve us looking continually at what's that right mix to capture either top-line growth or gross margin percentage, and there are going to be puts and takes and ebbs and flows, and that's part of our dynamic model that couples well with our inventory-light model, where we can adapt and capture demand, capture margin and that, coupled with our premium positioning and not being discount-oriented give us confidence in that medium-term gross margin target, and we're glad to see the performance that we did in Q1 there.

[Operator Instructions] I'm not showing any further questions at this time. I'd like to turn the call back over to Beth for any closing remarks.

Thank you, everyone, for joining us on our Q1 2024 earnings call, and we look forward to talking to you next quarter.