BRLT - NASDAQ

Good day, and thank you for standing by. Welcome to the Brilliant Earth Second Quarter 2025 Earnings Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to turn the conference over to Colin. Please go ahead.

Thank you, and good morning, everyone. Welcome to the Brilliant Earth Second Quarter 2025 Earnings Conference Call. My name is Colin Bourland, 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 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 morning, everyone, and thank you for joining us. We are excited to report a strong quarter where we drove positive year-over- year net sales growth and far exceeded the high end of our guidance for both net sales and profitability. Our ability to gain share and outperform the industry reflects the successful execution of our strategic vision and the significant progress we're making toward both our near- and long-term goals. Furthermore, I am happy to report that we are seeing an acceleration in the business Q3 to date, and we are raising our annual net sales guidance. Of course, we're also evaluating yesterday's announcement on new tariffs on India, which Jeff will discuss in more detail. Most importantly, we remain confident in our ability to navigate in this environment. Our aim since day 1 has been to build Brilliant Earth into the world's most loved and trusted jewelry brand. We've consistently communicated our strategy to increase brand awareness, provide a seamless omnichannel experience, establish ourselves as the fine jewelry leader for the next generation, and invest in our people, data analytics and technology as the digital leader in the jewelry space, all to drive profitable long-term growth. Our Q2 results prove that our disciplined strategy is working. We delivered our best year-over-year top line growth in the past 18 months with net sales growth of 3.3% and adjusted EBITDA of $3.2 million, both significantly exceeding our guidance. And not only do we continue to drive positive adjusted EBITDA, but we continue to generate net cash, which increased 5% year-over-year to $99 million as of the end of Q2. Given this momentum and our confidence in what lies ahead, I'm proud to announce that our Board of Directors has approved a onetime dividend and distribution of approximately $25.3 million in the aggregate. This reflects our commitment to rewarding shareholders, our strong balance sheet and our confidence in our ability to generate cash while funding future growth initiatives. Quarter after quarter, we're delivering on our near- and long-term strategy and building momentum. We're rapidly expanding fine jewelry, growing bookings 38% year-over-year in Q2. We're accelerating brand momentum with standout moments like designing custom jewelry for the iconic Beyonce, and forging our first professional sports partnership with tennis star, Madison Keys. We're optimizing our showroom strategy and generating strong paybacks with compelling metro uplifts. We're leveraging technology and innovation to drive marketing leverage while continuously expanding our capabilities using the power of AI and machine learning to drive growth and efficiency throughout the business. Let me take you through additional highlights for the quarter. Customer demand for Brilliant Earth jewelry remains encouragingly strong. In Q2, we had our strongest year-over-year total order growth in the last 2 years, with total orders growing 18% year-over-year and repeat orders up 11% year-over-year. We are encouraged as we continue to see an increase in new customers discovering Brilliant Earth, including a notable rebound in engagement ring customers. For the quarter, average order value declined 13% year-over-year. This continues to be driven by two factors: one, our fine jewelry business growth, which tends to be a lower price point than our bridal assortment is continuing to outpace the business. And two, as we stated before, we are continuing to see comparatively strong customer demand in engagement rings under $5,000 with an overall stabilization in engagement ring ASP over the last few quarters. Finally, we're excited to report year-over-year unit growth across our assortment, including high single-digit year-over-year unit growth in both engagement rings and wedding and anniversary bands. As mentioned, fine jewelry continues to be an exciting growth driver for the business. In Q2, fine jewelry bookings grew 38% year-over-year with a similar percentage of bookings mix as last quarter. Mother's Day, a key gifting holiday, proved to be an exceptionally strong holiday for us and a prime example of the growing awareness of Brilliant Earth as the fine jewelry destination. In our Mother's Day campaign for mom -- the forever influencer -- we collaborated with leading tastemakers to create a limited number of special edition medallions, and we saw resounding success across everything from our signature styles to our classic diamond essentials. Turning to showrooms. We continue to expand our fleet with our latest opening in Alpharetta, Georgia. Beyond opening new locations, we are constantly innovating how we deliver the seamless omnichannel experience for which we are known, including different formats such as 'main street' and 'outdoor centers', new in-store enhancements like our try-on bars, and optimization of our visual merchandising and showroom inventory strategy. As a result, we have seen increased walk-in traction in our showrooms and orders from retail customers without scheduled appointments grew 81% year-over-year in Q2, with fine jewelry experiencing the fastest growth. Overall, we're encouraged by our continued success in showrooms with most showrooms delivering strong double- digit metro bookings uplift in the 12 months after we open. On the digital front, we have been focused, as always, on optimizing our marketing spend efficiency, including through the use of AI. As a result, Q2 marketing spend decreased approximately 4% year-over-year, even as we drove year-over-year sales growth, resulting in 180 basis points of year-over-year leverage as a percent of net sales. This quarter was filled with groundbreaking firsts for the brand. We were privileged to craft a one-of-a-kind diamond bolo tie for none other than the queen herself, Beyonce, marking a watershed moment in the growth and evolution of the Brilliant Earth brand as a leader and innovator in today's culture. We then seized on this iconic brand moment by launching a limited edition bee pendant for our customers that sold out in days. In addition, we announced our first professional sports ambassador, tennis superstar Madison Keys. You'll see Madison in many Brilliant Earth bestsellers this U.S. Open, along with the launch of a special piece we designed with her. We are thrilled to have Madison on our team and look forward to cheering her on at the upcoming U.S. Open. Most recently, we were thrilled to be able to help actor musician and all-around icon, Selena Gomez, celebrate her birthday with one of our one-of-a-kind creations, a 20-carat diamond necklace from our Jane Goodall Collection. These partnerships represent more than just celebrity moments. They demonstrate how Brilliant Earth continues to be known as the jeweler of choice for today's most influential cultural icons, reinforcing our position as the premium brand for the next generation. As you can tell, it has been an exciting quarter, and we look forward to driving increased momentum and executing through the end of this year and beyond. Q3 to date, we have seen an improvement in trends compared to Q2 with strong overall bookings growth, unit growth in engagement rings and wedding and anniversary bands, continued outperformance in fine jewelry, and growth of both new and repeat orders. While we continue to monitor the macro environment, including tariffs and metal prices, we believe we are exceptionally well positioned to deliver against our annual goals and are confident to raise our annual top line guidance. I want to thank our amazing team and their contributions that allowed us to deliver these strong results. With that, I will turn it over to Jeff, who will walk through the financials and discuss our outlook for the coming quarter and year in detail.

Thanks, Beth, and good morning, everyone. As Beth mentioned, we're pleased to report Q2 results where we continue to successfully drive our strategic initiatives, innovate, capture operating efficiency, and exceed both our top line and profitability expectations. Let me take you through the details for Q2. Q2 net sales were $108.9 million, up 3.3% year-over-year, exceeding the top end of our guidance range by 330 basis points. Total orders grew 18% year-over-year and repeat orders grew 11% year-over-year in the second quarter, demonstrating the effectiveness of our customer acquisition and retention efforts and the resonance of our brand and products with consumers. Average order value, or AOV, was $2,074 in Q2. This represents a decline of 12.6% year-over-year in Q2, a smaller decline than Q1 as we continue to broaden and diversify our overall assortment, including in our fine jewelry collection, which carries a lower price point than our bridal collection as well as the continued comparatively stronger demand in engagement rings under $5,000 with an overall stabilization in engagement ring ASP over the last few quarters. Q2 gross margin was 58.3%, within our medium-term gross margin target in the high 50s and a 250 basis point decline over Q2 last year. The year-over-year change in gross margin was primarily driven by higher gold costs and the impact of tariffs, which were within our expectations for the quarter, partially offset by continued optimization of our pricing engine, procurement efficiencies, and other efforts to manage our gross margin to target levels. We delivered Q2 adjusted EBITDA of $3.2 million, or a 2.9% adjusted EBITDA margin, far exceeding our guidance range. This marks our 16th consecutive quarter of profitability. We are excited to deliver this level of profitability through our strong gross margin and diligent data-driven management of our marketing spend and other operating expenses, including using AI to capture efficiencies in our operating expenses. Q2 operating expense was 59.4% of net sales compared to 59.7% of net sales in Q2 2024. We were happy to drive 30 basis points of operating expense leverage even while making investments to drive long-term growth. Q2 adjusted operating expense was 55.5% of net sales compared to 55.7% in Q2 2024. Adjusted operating expense does not include items such as equity-based compensation, depreciation and amortization, showroom preopening expenses, and other nonrecurring expenses. Q2 marketing expense was 24.1% of net sales compared to 25.9% of net sales in Q2 2024. This represents approximately 180 basis points of year-over-year leverage. Our marketing spend in Q2 was better than our expectations as we continue to be disciplined in driving efficiency and finding opportunities for higher return on our spend. We continue to expect to drive year-over-year leverage for the full year 2025 as per our medium-term outlook. Employee costs as a percentage of net sales were higher in the second quarter by approximately 120 basis points as adjusted year- over-year. This includes growth in showroom employees, including from newly opened showrooms as we continue to strategically focus on our showroom expansion. Other G&A as a percentage of net sales increased year-over-year by approximately 40 basis points as adjusted for the quarter as we continue to prudently invest in our business. Our year-over-year inventory grew approximately 24%, principally as a result of strategic procurement opportunities in Q2 to purchase diamond and jewelry inventory at advantageous prices in light of the current tariff environment. Our inventory turns continue to be significantly higher than the industry average, and we maintain conviction that our data-driven, capital-efficient, and inventory-light operating model continues to provide competitive advantages. We ended the second quarter with approximately $134 million in cash, a decrease of approximately $18.6 million compared to Q2 2024. The year-over-year decrease in cash was primarily driven by the $20 million we prepaid against our term loan during the quarter. For net cash, we ended the period with approximately $99 million, a year-over-year increase of approximately $5 million even after the inventory purchases I mentioned earlier. In Q2, we spent approximately $200,000 repurchasing our common stock. This takes our total spend on stock repurchases to date to approximately $1 million as of the end of Q2. Finally, as Beth mentioned, we are happy to announce a onetime cash dividend and distribution of $0.25 per share to Brilliant Earth shareholders and per unit to common unitholders, representing aggregate payments of approximately $25.3 million. This dividend reflects our commitment to providing returns to our shareholders, our strong cash position, and our confidence in our ability to generate cash while funding future growth initiatives. Payment of the dividend will be made on September 8, 2025, to holders of record of the company's Class A common stock as of the close of business on August 22, 2025. In addition, as of August 4, we have paid off the remaining outstanding balance of our term loan, approximately $34.8 million. The facility is now completely paid off, leaving no outstanding debt on our balance sheet. Even after this dividend payment and the closing of our debt facility, we will maintain a robust cash position, preserving our financial flexibility to continue investing in strategic growth initiatives, including showroom expansion, technology, and AI enhancements, and brand-building efforts. We believe these actions illustrate how we look to build shareholder value, both in the near and long-term. Turning to our outlook for Q3 and 2025. For the quarter, we expect net sales to grow 8% to 10% year-over-year, an acceleration compared to Q2. We expect adjusted EBITDA to be between $3 million and $4.5 million. For the year, we are raising our net sales guidance to 2.5% to 4% growth year-over-year. Drivers of H2 growth include improvements in engagement ring year-over-year performance compared with H1, the growth and annualization of our showrooms, a more favorable comp from Q3 2024, and strong fine jewelry performance, and the fact that Q4 is a seasonally important fine jewelry quarter. We are reiterating our adjusted EBITDA margin guidance in the range of approximately 3% to 4% as we continue to effectively manage for strong gross margins and balance making investments with driving near-term profitability. For gross margin, we do expect some downward impact from gold and platinum spot prices and tariffs in H2. We have been successful in optimizing our marketing strategy, leveraging AI and machine learning capabilities year-to-date, and expect to drive year-over-year leverage in marketing spend for the year. We expect to continue to make near- and longer-term investments in H2 2025, including in employee costs and other G&A while managing the business for profitability. Our guidance reflects metal prices and tariffs as of August 5, and does not reflect the unforeseen consequences from subsequent tariff announcements, metal price fluctuations or related changes to the consumer environment. Yesterday, the United States announced an additional 25% tariff on all imports from India effective August 27. We have not yet fully determined the financial impact of this development on our business, and we are actively analyzing how this informs our operating plan. Importantly, this is an industry-wide impact, and we believe Brilliant Earth is better positioned to navigate this environment over traditional jewelry retailers given several competitive advantages. Our geographic supply chain diversity provides flexibility. Our nimble technology-enabled operating model allows us to rapidly adjust sourcing strategies. And our dynamic pricing model and procurement optimization capabilities enable us to respond quickly to cost structure changes to optimize our pricing and gross margin. Most of Q3 will be complete by the time this new tariff takes effect on August 27, and we are continuing to assess the impact for the rest of the year. We maintain confidence in our ability to execute our strategic plan through this evolving tariff environment. Looking forward, our data-driven approach, disciplined expense management, and asset-light business model position us to outperform the industry while delivering profitable growth. This quarter's strong execution illustrates our ability to identify and capture opportunities to drive sustainable, profitable growth and create value for shareholders. With that, I will turn the call over to the operator for questions.

[Operator Instructions] The first question that I have today is coming from the line of Ashley Owens of KeyBanc Capital Markets.

This is Chris on for Ashley. Congrats on the quarter. So just to start, I was wondering if you could touch on the bridge in higher fine growth relative to margins. I think the comments before I alluded to this being a higher-margin side of the business. So could you maybe triangulate what you're seeing in terms of like purchase habits and if the consumers are gravitating towards lower AOV fine items? And within fine, like what pricing habits are and what you're seeing compared to bridal and engagement customers as bookings have returned to growth. So just anything different relative to 3 months ago?

Chris, this is Beth. I wouldn't say that there's a huge difference in terms of what we've been seeing. I think that consumers continue to be very discerning in terms of fine jewelry and what they're looking for, for high-quality, high-value jewelry that they're going to wear for many years. And as we have been performing exceptionally strong into fine jewelry, we're just continuing to see increased traction, and that's going to have an impact overall in terms of AOV, but that's something that we're strategically investing in. So something we're happy to see. So I wouldn't say, we're seeing a huge difference in terms of pricing and AOV for either bridal or fine jewelry now versus what we've been seeing over the past several months.

Great. And then I guess, next, just to maybe drill down on the debt payment in the quarter. Could you maybe just expand thoughts on like further investments in the business and how you're thinking about redeploying the capital, whether it goes to you'd like to maybe accelerating showrooms or other opportunities you see in the market?

Jeff, maybe I can start with just the very high level. I think that we have been very consistent in terms of how we've been communicating our strategic vision, and we're continuing to see great results. So I see that the levers that we see for our strategy with showroom growth, leaning in as the digital leader with becoming the world's most trusted and loved jewelry brand, all of that will continue. I think we have a very strong cash balance sheet to be able to execute on that strategic vision. So I feel like we've been executing well. We're going to continue to lean into these areas to drive our overall awareness and to drive fine jewelry as well. Jeff, do you want to kind of expand on that?

Yes. I think Beth captured a lot of the key points well. Really, both the dividend and distribution and the debt payoff stem from our strong balance sheet and cash position, our ability to generate cash as a business. As Beth mentioned, we believe that we are well positioned to continue to make those strategic investments in areas like brand, showrooms and fine jewelry even with these announcements. And with respect to the debt payment, there's also some net interest savings that will result from the debt payoff. So I think this really illustrates a lot of the strengths of the business and how we think about optimizing the business and the capital structure.

[Operator Instructions] Our next question will be coming from the line of Oliver Chen of TD Securities.

Beth and Jeff, this is Julia on for Oliver Chen. I would love to hear about the strength above and below the $1,000 price point and general comments you have on the health of the consumer that you've been seeing with respect to discretionary purchases. Two, where consumers spending more versus saving more in their rent decisions? And three, any commentary around uplift related to new showrooms and how the maturation of showrooms later this year may help sales?

Thanks, Julia. So in terms of how we're seeing the health of consumer, we are seeing a nice consumer that, as I mentioned, they are discerning, but I think we have been very attuned to the customer trends and what they want. And so we're able to deliver on that high- quality, high-value jewelry piece that they've been looking for. We also believe that we've been outperforming the market. And as we have been leaning into these brand initiatives, introducing new products like our limited edition collections, we have been performing exceptionally well. So we feel good about the health of the consumer related to the offerings specifically that we have. We've also seen, as we mentioned in the call, high single-digit growth for units in both engagement rings and wedding and anniversary bands. And I think this is a testament to a lot of the hard work we've been doing. We have a really nice diamond assortment with hundreds of thousands of diamonds. Our signature styles have been performing exceptionally well as we're seeing with engagement rings as trend leaders. And we are seeing those market improvements. But as I mentioned, I think we are outperforming in terms of the overall market. For that showroom overall, we've been really pleased with how the showrooms are doing. As we are known increasingly as a fine jewelry destination, we were really happy to see that fine jewelry growth in the showrooms. And just seeing that walk-in traffic, seeing the 80-plus percent growth with those retail type of consumers, I think, just shows you that we are doing a great job offering the right product for what the customers are looking for at an exceptional price point.

I would now like to turn the call back over to Beth for closing remarks.

Thank you so much for joining our Q2 conference call, and we look forward to talking to you in the next quarter.