Brilliant Earth Group, Inc. (BRLT) Q4 2021 Earnings Call Transcript

Brilliant Earth Group, Inc. (BRLT -0.38%)
Q4 2021 Earnings Call
Mar 16, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Brilliant Earth's fourth quarter and fiscal year 2021 earnings call. [Operator instructions] After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Allison Malkin of ICR.

Thank you, and please go ahead.

Allison Malkin -- Investor Relations

Thank you. Good afternoon, everyone. Thank you for joining us for our fourth quarter and fiscal year 2021 conference call. Joining me today are Beth Gerstein, our chief executive officer; and Jeff Kuo, our chief financial officer.

For this morning's call, Beth will begin with an overview of the company, our differentiation and mission, highlights of our fourth quarter and fiscal year financial and operational performance, and the drivers of our future growth. Jeff will follow with more details on our fourth quarter and fiscal year financial results and introduce our guidance. 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 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.brilliantearth.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.

Beth Gerstein -- Chief Executive Officer

Hello, everyone, and thank you for joining us today. The fourth quarter represented an excellent finish to a strong year of growth at Brilliant Earth, highlighted by better-than-expected performance across our key financial metrics, surpassing the outlook we introduced on our third quarter earnings call last November. We believe this reflects the continued resonance and growing embrace of our brand with millennial and Gen Z consumers. It also further reinforces key tenets of our story: that Brilliant Earth is a global leader in jewelry; we're successfully executing our strategy to transform and modernize the jewelry industry; and our data-driven, asset-light business model is a huge, competitive, and financial advantage.

As we look ahead, we see tremendous runway to build upon our competitive advantages in design, supply chain, and technology and grow our digitally native omnichannel presence as the next-generation fine jeweler for millennial and Gen Z consumers. Our confidence is grounded in the increasing strength of our brand, the power of our model to drive growth, and our 16-year track record through various macroenvironments. For today's call, our CFO, Jeff Kuo, and I would like to provide you with highlights of our fourth quarter and fiscal year performance and then review the priorities we have set for the business as we begin 2022. For the fourth quarter, net sales were 121.9 million, representing our highest-ever quarterly sales performance, increasing 38% from Q4 last year and up 93% from Q4 2019.

Gross margin expanded 407 basis points to 51.1%, and adjusted EBITDA was 15.9 million or 13.1% of net sales. For the 2021 year, net sales were 380.2 million, a 51% increase from 2020 and up 89% from 2019. Gross margin expanded 470 basis points to 49.3%, and adjusted EBITDA rose 83.4% to over $50 million, with a margin of 13.3%. Before Jeff dives into the results further, I want to share my perspective on the year and to give you a glimpse into our plans to continue driving strong brand, revenue, and profit growth in the coming year.

2021 was an incredible year for Brilliant Earth. And today's results reflect the talent and commitment of our extraordinary team. I'm very proud of what we accomplished this year. Together, we marked several noteworthy accomplishments.

First, the brand. Our fast-growing revenue through the year reflects market share gains in the $280 billion global jewelry industry. We experienced significant growth across our product assortment in our showrooms and on our website as more consumers both discovered and fell in love with Brilliant Earth. We are continuing to gain share and establish category leadership for a younger audience who increasingly recognizes that the Brilliant Earth brand meets and exceeds their expectations for beauty, quality, and responsibility without compromise.

And they share our commitments to sustainability, transparency, giving back, and inclusion. Second, the experience. We are reinventing retail by creating a joyful, omnichannel, experiential approach that fuels increased demand. We're very pleased that our showroom strategy continues to enhance our already strong results, and during the year, surpassed our high expectations across markets and formats.

We substantially expanded our retail presence with the opening of six showrooms during the year: in Seattle, Portland, Austin, Dallas, New York, and Scottsdale, to end the year with 15 locations. Initial indications of performance in our newly launched showrooms are even stronger than our past. In fact, new showrooms are driving a higher average uplift in bookings growth within the metro market than prior showrooms. As we have executed our strategy, we've experimented with and refined our formats to continuously elevate the customer experience and to drive ROI.

This iterative approach is working and is demonstrated through the strong ROI we are generating across various formats. This continued success, as we have rolled out new locations, reinforces our belief in the power of our showroom model. And as we anticipate consumers looking for more in-person shopping experiences ahead, we are well-positioned to capitalize on this demand. Our digital experience was equally strong as we added hundreds of new industry-leading features, including further optimizing our Create Your Own ring and jewelry experiences, executing our model of continual testing and optimization in a constantly changing e-commerce marketplace.

In the fourth quarter, we continued to focus on driving lifetime value and repeat purchasing across all channels, with our efforts in CRM delivering significant growth. Our focus is to constantly improve the customer experience. And as we do, we create further competitive advantage for our brand, and we support our customers in making the best-informed buying decisions. Much like when we introduced skin tone visualization to enhance customers' digital try-on experience, this quarter, using proprietary technology, we introduced industry-leading tools that provide higher resolution and photorealistic visualization for our on-site imagery, bringing the products to life for our customers.

This is another great example of how we have continued to extend our digital leadership and drive substantial growth in our engagement and digital conversion rates in 2021. Finally, our agile make-to-order manufacturing model allowed us to adapt and capture additional demand during the quarter. Third, product. Our consumers look to Brilliant Earth for beautifully designed, trend-leading, distinctive, personalized products.

And I'm incredibly proud of the products our team delivered this year. We saw across the board sales stream, with significant growth across our product lines, from bridal to fine jewelry. By building on our trend-forward, premium, and inclusive design ethos, we are introducing new categories and releasing new collections that further strengthen our performance and showcase our design leadership. We're optimizing our proven model and using data and consumer insights to drive our assortment.

And customers are responding. The Solstice collection, an aspirational design collection of bridal and fine jewelry that includes price points up to $100,000; expanded assortment of men's rings, including more unique styles and Create Your Own styles. We have particular strength in sales of higher pricepoint items that cater to a higher-income customer. Specifically, orders for items over $10,000 outpaced the growth of the overall business.

This showcases the breadth and appeal of our brand. In fine jewelry, fashion rings and vermeil are just a few great examples of us leading with key trends and demonstrating our early success in these relatively new areas. As we have broadened our assortment, it has allowed us to expand upon our existing fine jewelry pricing architecture and to cater to a more self-purchased, trend-driven customer. As expected, expanding the assortment into trend-forward giftable items and personalized meaningful jewelry drove strong Q4 holiday sales.

We continue to see strong performance in our fine jewelry collection and our compelling assortment serves as a foundation for continued growth this year. Finally, living our mission. During the year, we continued to live our mission and values by expanding our leadership in ESG. We are excited to have just released our inaugural ESG report, A Brilliant Future, which highlights our continued commitments to sustainability, transparency, compassion, and inclusion.

Among a few of the initiatives we completed were our Fairmined Gold Collection, which reinforces our commitment to mission-driven products and our commitment to supporting the development efforts in artisanal gold mining. The collection showcases our leadership in transparency and sustainability. And consumers loved it, making this one of our most successful new releases. We continue to demonstrate our commitment to sustainability and extend our industry leadership and transparency and providing visibility into our supply chain by offering Beyond Conflict Free Diamonds and recycled precious metals.

ESG is more than a series of initiatives. It is embedded in everything we do. It is a founding principle of our company and is important to our culture, our community, and our customers. And it's certainly one of the reasons we attract and retain enormously talented and committed people to our company.

With all of these accomplishments, we again delivered profitable, sustainable growth. We expanded our 2021 gross margin by 470 basis points year over year to 49.3%. And the fourth quarter saw a gross margin of 51.1%. We saw expansion in margin across our product lines, reflecting the strength of our brand and product assortment, the effectiveness of our pricing optimization tools, vendor negotiation and distribution, and favorable mix shifts, including toward buying jewelry.

Jeff will talk more about this. So, I'll simply say that we're pleased that our thoughtful investments to drive both top and bottom-line growth delivered record EBITDA. Fiscal year 2022 priorities. As pleased as we are with our performance in 2021, we're intently focused on continuing our positive momentum into fiscal 2022.

We're off to a strong start, and we are confident that as we continue to execute, we are poised to deliver another year of significant growth. Looking ahead, 2022 will bring US showroom expansion. We will continue our showroom rollout into additional metro areas to broaden our omnichannel reach, with our next showroom scheduled soon in Bethesda, our second showroom in the D.C. metro area.

We have a line of sight to approximately double our number of showroom releases this year. As we do, we will continue to balance our openings in existing and new markets, with a mix of ground floor and upper floor locations, with a sharp focus on delivering ROI across every format. As we expand, our aim is to make it even easier and more enjoyable for customers, both couples and individuals, to shop with us in a seamless, frictionless, omnichannel experience. Enhancing and driving awareness and connection to the Brilliant Earth brand.

We believe there is significant opportunity to continue to elevate the brand by reaching broader audiences through multichannel marketing approaches. In 2022, we will continue to build enhanced digital experiences, to invest in product visualization and imagery, and to drive meaningful partnerships and influencer relationships. Coupling all of this with our continued leadership across organic social platforms, we will continue to drive engagement and loyalty to the Brilliant Earth brand. We will continue to introduce new collections, including with partners, to showcase our design leadership.

Our recent introductions of the Avant Premiere Tacori Collection, an exclusive design collaboration; and the Solstice Collection, are each performing well and reinforce that by leading with design, we are increasingly becoming an aspirational brand offering, distinctively designed styles for younger consumers. We will continue to utilize our test-and-learn process to adapt and refine our assortments, introduce new designs quickly, and to provide a curated offering of highly sought-after products. And we will capitalize on the opportunity in fine jewelry with a trend-forward and relevant product assortment as we leverage existing customer relationships and create new ones, all while continuing to build our brand as the premier jewelry destination. Finally, we will continue to both leverage and optimize our innovative business model to fuel our expanding scale, competitive advantage, and capital efficiency.

You will see us continue to invest in data and technology, as we always have, to enhance the efficiency of our operations, deepen integrations with our suppliers, and enable additional analytical insights. These investments will be made using our test-and-learn approach and with a disciplined ROI focus. Before I conclude my remarks, I would also like to comment on the recent events in Ukraine. Like so many, we are distressed and concerned for the people of Ukraine and are supporting relief efforts through the Brilliant Earth Foundation.

Earlier this quarter, ahead of our peers, we removed all Russian origin stones from our website. Given our extensive, diverse supply chain, as of today, we have not had any material impact on our financial performance as a result of this change, and we do not expect it to have a material impact on our performance for the full year. Our hearts go out to all of those who have been so deeply affected in Ukraine, and we are hoping for a swift resolution to the conflict. I conclude my remarks by reiterating how extremely pleased we are with our fourth quarter and fiscal year performance and how confident we are that the best is yet to come for Brilliant Earth.

Going forward, our success will continue to be built on our ability to maximize the many advantages we believe we possess. We're competing in a highly fragmented and growing global category, and the Brilliant Earth brand is growing in awareness and resonance as the leading jeweler for today's consumer. We are an agile business and are able to swiftly adapt to changing trends, having spent more than a decade developing and perfecting our data-driven test-and-learn approach to premium jewelry. We operate an asset-light model that is not burdened by holding excess inventory and instead allows data to inform our sourcing, buying, and pricing decisions to optimize margins.

An omnichannel model that provides a seamless shopping experience for consumers. We believe one of these attributes alone is highly differentiated, but their combination gives us a powerful operating platform from which to continue to execute our vision. I want to thank my team at Brilliant Earth for their contributions to our outstanding year. I am very proud of your commitment and dedication to our mission.

And now, I would like to turn over the call to Jeff Kuo, our chief financial officer.

Jeff Kuo -- Chief Financial Officer

Thanks, Beth, and good afternoon, everyone. We're pleased to report our record fourth quarter and full year results as a public company. As Beth mentioned, 2021 was an outstanding year for Brilliant Earth. Among our many accomplishments for the year, our financial performance contained numerous milestones, including our first $100 million revenue quarter, record gross profit margin, and record adjusted EBITDA.

I would like to take you through the highlights of our Q4 and full year results. I will discuss certain adjusted non-GAAP measures of profitability in my remarks. For these adjusted measures, you can find reconciliation tables to the most comparable GAAP figures in our press release. This can be found at the IR portion of our website at investors.brilliantearth.com.

We had fourth quarter revenue growth of 38% to $121.9 million, which demonstrates the power of our brand awareness; growth across our product lines; and our agile, highly efficient business model. We saw growth in average order value across our product lines on a year-over-year basis. Our continued outperformance in fine jewelry, which has a lower price point than our overall business, brings our blended Q4 AOV for the entire company slightly downward. But this is overall favorable for the business as I will describe later in my remarks.

For the year, we delivered full year revenue of $380.2 million, which was a 51% increase over the prior year and an 89% increase compared to 2019. I'd like to highlight some business metrics where we saw a very strong performance that helped to drive our top-line growth and provide us with momentum into the future. First, we saw continued success across our omnichannel platforms. We continue to see encouraging early results from 2021 new showrooms where we have seen an uplift in initial metro bookings, which is even stronger than our historical showroom opening experience.

This continues to validate our compelling showroom economics as we increase our showroom coverage across the country. Fine jewelry also continued to be a strong performer. We saw strong fine jewelry growth, far outpacing the business as a whole. Fine jewelry is an important strategic initiative for our business as it deepens our customer relationships to include additional purchase occasions, including self-purchase.

The ongoing success of our showroom and fine jewelry strategy is showing encouraging results in driving financial performance, customer loyalty, and lifetime value. Over the past two years, we have seen increasing customer cohort repeat purchase behavior, which we believe provides validation of these initiatives' success. While both of these initiatives are still in their earlier stages, we believe that early indications are very promising. Moving on to our gross margin performance, Q4 and the year again demonstrated our abilities to optimize our business model to expand gross margins.

Q4 gross margin expanded to 51.1%, which is up 407 basis points versus the prior year; and full year gross margin grew to 49.3%, which is a 470-basis-point improvement over the prior year. Growing demand for the Brilliant Earth brand, our premium and differentiated product offerings, pricing engine optimization, and procurement efficiencies once again drove strong gross margin expansion across our product lines. These results also illustrate how our asset-light, data-driven business model is a huge competitive and financial advantage as it enables us to nimbly adapt our supply chain and product pricing to changing market conditions to optimize both margin and revenue. As a result, during Q4, we were again able to capture better-than-expected gross margin improvement.

Our SG&A for both the quarter and the year reflected our ongoing investments in building the brand and scaling the business. Our Q4 SG&A dynamics were similar to what we saw in Q3. In total, SG&A increased to 40.5% of sales in Q4 2021, compared to 30.4% in Q4 2020. Approximately, 200 basis points of this increase was made up of add-backs to adjusted EBITDA from increased employment expenses and other G&A.

These include equity-based compensation and new showroom pre-opening expenses, which are added back in our presentation of adjusted EBITDA. The remainder of the increase in SG&A was again largely driven by expenses to support the growth of our business; invest in marketing to continue growing our strong brand awareness and support strategic growth initiatives; and higher employee costs to support our operations as a public company, our strategic initiatives, and new showrooms. Also, Q4 2020 represented a lower comparative for employee costs as Q4 2020 reflected a lower staffing baseline coming after the initial months of the COVID pandemic. And we saw increased other G&A costs to support our ongoing operations as a public company, which, as you know, we will not anniversary until late Q3 and Q4 of 2022.

Our strong revenue and gross margin performance and strategic cost management resulted in us delivering record EBITDA in the fourth quarter. Q4 adjusted EBITDA was $15.9 million or 13.1% of net sales. And for the 2021 year, adjusted EBITDA rose 83.4% to over $50 million in adjusted EBITDA, with an adjusted EBITDA margin of 13.3%. Our profitability, positive cash flow, and capital-efficient operating model continue to differentiate us among direct-to-consumer companies.

We ended 2021 with $173 million in cash, versus 66 million at the end of 2020. Sources of cash included both proceeds from our IPO, as well as positive cash flow from operations. We continue to operate the business in an asset-light fashion, with high inventory turns, and negative working capital. And finally, we prudently managed our capital expenditures, with capex for 2021 being approximately 1.5% of net sales.

All of these factors contribute to our strong cash flow for the year. As Beth said, as thrilled as we are about our fourth quarter and full year results, we're looking ahead to fiscal 2022 and beyond, focused on the continued execution and growth of our brand and our business. Based on our performance and our plans, we've established long-term growth goals toward which we aim. We set these goals over a multiyear period and use them to guide our planning.

And I would like to walk you through these long-term targets. These targets are consistent with or better than the targets we established at our IPO. We see revenue growth in the high 20s to low 30s percent range, with growth across our product lines and our omnichannel model. Our long-term gross margin target is in the mid-50s percent range, driven by our premium products and brand, our price optimization engine, procurement efficiencies, and growth of higher-margin fine jewelry.

Our long-term marketing spend target is in the mid to high teens as a percentage of revenue as we continue to grow our brand awareness and continue the rollout of unique, joyful, digital, and showroom experiences to drive conversion and repeat behavior. And we are targeting a 15% to 20%-plus long-term adjusted EBITDA margin, driven by several factors: gross margin expansion, improved effectiveness of our marketing spend, and leverage in our G&A expenses. We may have fluctuations along our path to these targets in a given quarter, as there are always puts and takes that we will manage. However, we have a firm belief that consistent management of the business to achieve these long-term targets is the correct approach to achieve sustainable, profitable growth.

For the first quarter of 2022, we're pleased that the strong finish of last year did not subside as we've enjoyed positive business momentum quarter to date. As a result, we anticipate that Q1 '22 net sales will be between $96 million to $98 million, which represents 36% to 39% growth versus Q1 2021. We anticipate our adjusted EBITDA in the first quarter will be in the range of $7 million to $7.5 million, which represents an adjusted EBITDA margin of approximately 7.3% to 7.7%. This reflects that the first quarter is typically the smallest revenue quarter of the year and the investments we are making in building the brand and scaling our business.

For the full year 2022, we project net sales in the range of $485 million to $500 million, which represents 28% to 32% growth versus fiscal year 2021. We are projecting adjusted EBITDA in the range of $51 million to $55 million, which represents an adjusted EBITDA margin of approximately 10.5% to 11%. In closing, on behalf of Beth, myself, and our entire team, we're very pleased to deliver these results, and we're looking forward to realizing another great year ahead. With that, we'll be happy to take your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Matthew Boss with J.P. Morgan. You may proceed with your question.

Matt Boss -- J.P. Morgan -- Analyst

Great. Thanks, and congrats on a really nice quarter and new long-term target. So --

Beth Gerstein -- Chief Executive Officer

Thank you.

Matt Boss -- J.P. Morgan -- Analyst

So, maybe to start, Beth, can you speak to drivers of the business acceleration that you saw in the fourth quarter? I think trends accelerated both on a one and two-year basis. Maybe just elaborate on some of the trends that you've seen post-holiday. And then on that long-term revenue target, which you raised on the call, I guess, how best to think about drivers of the underlying business that's giving you confidence to raise the long-term revenue target today?

Beth Gerstein -- Chief Executive Officer

Great. And thanks. Nice to talk to you, Matt. So, in terms of the drivers of the acceleration in Q4, I think it's really that we are executing on the plan that we've articulated.

We are continuing to drive awareness for our brand, really elevating the brand. So, that's the -- it is the premier jewelry destination for the younger consumer. We really invested in increasing our product assortments, and really having a trend-forward, differentiated design is incredibly important to our customer base. I think the omnichannel model that we've articulated in the past has really been executing and working really well.

The digital experiences that we have invested in, from our visualization to really making a seamless omnichannel model, has been, I think, very powerful for our customers as well. And the showroom model, I think, is working incredibly well also. All of the showrooms, as I mentioned earlier, in 2021, are exceeding our expectations. So, really, I think we're performing incredibly well and continue to just operate as we've been planning all along.

As it relates to our trends post-holiday, I think you can tell by our Q1 guidance that we continue to see the business perform very well, and we're seeing strong customer demand and have a lot of confidence in the plan that we've articulated.

Matt Boss -- J.P. Morgan -- Analyst

Great. And --

Jeff Kuo -- Chief Financial Officer

I can speak to the -- 

Matt Boss -- J.P. Morgan -- Analyst

Go ahead, Jeff.

Jeff Kuo -- Chief Financial Officer

I was going to say I can speak to the longer-term guidance question that you asked. And I think that really is a continuation of the execution along those different areas that Beth mentioned, including the strong customer resonance for the brand, the joyful omnichannel experience, and just continuing that execution, rolling out of additional showrooms with their accretive economic effects, and just continuing to deliver on the strategy that we've delivered on so far.

Matt Boss -- J.P. Morgan -- Analyst

Great. And then maybe just a follow-up probably for you, Jeff, on gross margin. So, I guess maybe could you just help break down the drivers of upside relative to plan in the fourth quarter that you saw, just any puts and takes to consider for gross margin in 2022? And then similarly, the raise of the long-term gross margin target, just anything to help bridge the old target relative to the new.

Jeff Kuo -- Chief Financial Officer

So, our gross margin, say, the drivers of the performance in Q4, as well as the drivers of our future performance in 2022, really can be thought of as a few different things. One is just the strong resonance of the premium Brilliant Earth brand, which allows us to have those premium gross margins, and then the continued, well-functioning execution along our -- of our pricing engine and optimizing that dynamically to drive revenue and strong gross margin. And then procurement efficiencies have also been an important part of our Q4 and historical performance. Then, as we continue growing in fine jewelry, fine jewelry is an area that is a higher gross margin than for our business overall.

So, if that business continues to grow and outpace the business, we expect that that will also be an increasing contributor to gross margin accretion as we go in the future.

Matt Boss -- J.P. Morgan -- Analyst

It's great color. Thanks again and congrats.

Jeff Kuo -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Michael Binetti with Credit Suisse. You may proceed with your question.

Michael Binetti -- Credit Suisse -- Analyst

Hey, guys. I'll add my congrats on a great quarter. Really happy to see it. Nice execution through the holiday.

I guess, Jeff, can I ask you to go through maybe a little more granularity on your thoughts on the margin next year? As we sit here and look at the guidance, I'm having trouble envisioning a scenario at the low end of the range you gave us where you grow the revenues in the 30% range with EBITDA almost flat for the year, or I guess -- in dollar terms. I guess, separately, I know some of the cost drivers this year. You're going to add a lot of stores or showrooms. That was the plan for the year.

But it doesn't look like the overall growth rate in showrooms is different than prior years. And -- but the -- I guess, the incremental margins you're baking in this year are a lot lower. I'm just wondering if there's some change in the unit economics of opening a store or something like that that would explain the change in how you're looking at profitability in '22 as you grow.

Jeff Kuo -- Chief Financial Officer

Sure. Thanks, Michael. I'll start first with your question on gross margin for the year. We are incorporating into our model some modest improvement in gross margin for 2022.

We do recognize that we're in an inflationary environment, and we have incorporated that into our model and planning. We do have that dynamic and agile business model pricing engine that we continue to adapt to different market environments, including this one and others we've seen in the past. And so, the net result of that is we do think that we will be able to drive modest gross margin improvement for the year. In terms of the margin outlook for 2022, I would say that we are planning and managing the business to another record year in terms of revenue dollars and EBITDA dollars.

And then we are also being thoughtful about investments that we're making in the growth of the business, including growing the brand, making investments in strategic initiatives, as well as annualizing public company operating costs. So, I don't think there's any fundamental change. You know, it's just that's how we're managing the business, and we're excited that it will be another record year for our revenue and EBITDA based on our plan.

Michael Binetti -- Credit Suisse -- Analyst

That's great. So then I think -- as we talked about -- as we learned about the business a bit through the IPO process, you spoke to maybe 300 basis points of gross margin over time from a couple of discrete items that were the big call-outs in pricing. I think it was about 100 procurement, about 100 fine jewelry mix added [Inaudible] and there was a few more. But has the ceiling moved up on any of the -- the gross margin outperformance here in your first two quarters has been, you know, a notable call-out here.

I just wonder if the ceiling has moved up on any of those discrete items to help us think about the trend forward here.

Jeff Kuo -- Chief Financial Officer

Yeah. We're not planning to provide a breakout of some of the specific drivers, but what I can say is that those drivers, the price optimization engine, procurement efficiencies, fine jewelry, and underpinned by our premium brand, they're all performing well, and we -- have been a source of our recent performance, and we also continue to believe in the room to run with those into the future.

Michael Binetti -- Credit Suisse -- Analyst

Thanks a lot for all the help, guys.

Jeff Kuo -- Chief Financial Officer

Thank you.

Operator

Thank you. [Operator instructions] Our next question comes from Oliver Chen with Cowen. You may proceed with your question.

Oliver Chen -- Cowen and Company -- Analyst

All right. Thanks. Congrats on a great quarter. So, the new showroom execution was impressive and better than you expected.

What are your thoughts on what's right in terms of the optimal number? Could you grow faster? And what are some details on why it was better? Also, as you articulated, a lot of helpful information on ESG. What would you say separates you most apart from competition from an ESG perspective? And as you do conduct consumer research, which ESG factors might consumers, you know, prioritize in their own thinking? Thank you.

Beth Gerstein -- Chief Executive Officer

Thanks, Oliver. In terms of the new showrooms, as I said earlier, I was really pleased to see how well that they've been performing. And I think that in terms of why they're performing so well, it's -- part of it is just that brand resonance in terms of really being able to capture that younger consumer. It's really an omnichannel strategy.

And I think that the two, both digital and showroom, work really synergistically. And as we've mentioned before, every time we enter into a new market, we see this major lift in the overall market. So, it's a really powerful model. I think that part of that is we're growing local awareness.

Word of mouth and referral is such an important part of how we drive our brand awareness and how we bring customers into the Brilliant Earth brand. And that's been really powerful for us. So, really excited that we're able to use our customer data to make sure we're making informed real estate decisions. And those showrooms are, I think, just really exceeding our expectations.

In terms of your ESG question, you know, obviously, this is a really important aspect to the company. It's why we were founded. And I think consumers just can see the authenticity of that. They understand that we are really doing a lot of work on their behalf.

Transparency, sustainability, responsibility, being compassionate, and inclusive, all of those factors, I think, are just very key, especially as we're talking about the Gen Z and millennial audience. So, you know, hopefully, you'll get a chance to look at our sustainability report. We're incredibly proud of it, A Brilliant Future. And you can just see, I think, a lot of the heavy lifting that we've been doing for many years and the aggressive goals that we're setting, and we're just continuing to get better and better.

Oliver Chen -- Cowen and Company -- Analyst

Thank you. And a follow-up, fine jewelry was impressive. As we think about fine jewelry going forward, what are some hurdles you're looking at? And that AOV dynamic may continue, I assume, as fine jewelry continues to be so successful. And you've also been a leader in blockchain.

So, would love any extra thoughts there as that becomes increasingly in the forefront, as well as [Inaudible]. Thanks.

Beth Gerstein -- Chief Executive Officer

Yeah, maybe I can start on blockchain because this is an effort that we have really been leaders and innovators on. We introduced our blockchain-enabled diamonds several years ago, and we've been expanding the collection ever since. And what it does is it really enables an unparalleled level of transparency to the customer. So, they're really able to understand the journey of their diamond.

I think even more today, that is incredibly important. And I think that they really value the extra steps that we're taking in terms of our supply chain diligence. As it relates to fine jewelry, I think we were, you know, incredibly excited by the performance that we had. I think that that's really driven by our product assortment, a lot of our marketing efforts, the digital experience, really strong customer loyalty that we continued to market to.

And I think that the AOV dynamics are only positive. You know, we're really focused on how we can drive AOV across different collections. So, the blended AOV, I think, is not something that we are concerned about.

Oliver Chen -- Cowen and Company -- Analyst

Thank you. Best regards.

Beth Gerstein -- Chief Executive Officer

Thanks, Oliver.

Operator

Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. You may proceed with your question.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good afternoon, everyone. And, Beth, you hit exactly what I wanted to talk about a little bit is AOV. As you think about the AOV across collections and, obviously, an uptick in weddings this year, return to more gatherings and events, anything in terms of what your expectation is for AOV, either differing by store or by channel or by the partnerships and what you're expecting there. Thank you.

Beth Gerstein -- Chief Executive Officer

Sure. Hi, Dana. Thanks for your question. In terms of, you know, this being a really exciting year for weddings, I think that's something that we are really energized by.

We're expecting the most weddings in 2022 than we have in decades, about 2.5 million weddings. And that's something that we are preparing internally for. And I think that because we have a very agile model, and we're able to capture additional demand, I think we're very well prepared for it. In terms of -- let me see, your second question is around -- can you just remind me?

Dana Telsey -- Telsey Advisory Group -- Analyst

By channels. I mean, just in the showrooms versus the online channel.

Beth Gerstein -- Chief Executive Officer

Absolutely. So, I think one of the exciting parts of our showroom strategy is it actually does drive increased AOV. It also drives increased repeat rate and customer loyalty. And I think that that is a great driver.

I think we're expecting AOV to continue to increase across our different collections, and that's also reflective of our premium brand, as well as the product offerings that we continue to introduce.

Dana Telsey -- Telsey Advisory Group -- Analyst

Got it.

Jeff Kuo -- Chief Financial Officer

And then I think one thing -- oh, sorry. Go ahead, Dana.

Dana Telsey -- Telsey Advisory Group -- Analyst

Go on. I'm sorry. Go on, Jeff.

Jeff Kuo -- Chief Financial Officer

I was going to say and then also just, you know, one of the things that is strong about our omnichannel approach is that, you know, it does just continue to drive a strong marketing, you know, strong marketing efficiencies. You know, we see this -- you know, we saw that our marketing costs for the year, about $74 million, about 19.6% of net sales. And in Q1, we've continued to really draw -- drive strong marketing efficiency. And so, I think that really synergistic omnichannel approach has really benefited the business.

Dana Telsey -- Telsey Advisory Group -- Analyst

Anything we should take away on CRM with the uptick in expected weddings, your ability to get the engagement, the wedding sales, engagement rings, and then get their anniversary, their birthday, their -- all the other events? Anything in how you're thinking about new customer additions.

Beth Gerstein -- Chief Executive Officer

Yeah, I think we are focused on both new and existing customers, and we've seen success in expanding both of those categories. So, as it relates to CRM, we were really pleased with the outperformance in the last quarter. And that just reflects our continued efforts toward segmentation and personalization. And just the fact that we have this unified customer dataset allows us to really, I think, be much more granular and much more efficient in our marketing.

And that helps as we're able to acquire those engagement ring customers, which are really the entry point into this category, for us to continue to drive additional repeat, whether it's wedding or anniversary. And as Jeff mentioned in his remarks, we're really excited by the repeat rate and how that has just continued to grow over time.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you. Congratulations.

Beth Gerstein -- Chief Executive Officer

Thank you.

Jeff Kuo -- Chief Financial Officer

Thank you.

Operator

Thank you. [Operator instructions] Our next question comes from Dylan Carden with William Blair. You may proceed with your question.

Dylan Carden -- William Blair and Company -- Analyst

Thanks a lot. Just on that last point that the fine jewelry category, would you consider that mostly at this point to be a repeat customer, sort of a follow-on purchase from a legacy engagement customer? And then, Jeff, for you, as some of these input prices get whipsawed around, you know, you consistently call out the pricing algorithm as a benefit to gross margin. You know, are you relatively indifferent which way prices are going and that you're allowed to sort of maintain strong margins regardless of price of gold, silver, etc.? Thanks.

Beth Gerstein -- Chief Executive Officer

Great. I can start on the first question. In terms of the fine jewelry category, what we're excited by is that we're seeing strong new customers and repeat customers. And we've really developed a strong assortment for both self-purchase, as well as more giftable special occasion purchasing.

So, I think we're -- that's something that we'll continue to execute in terms of driving repeat, as well as driving new customers into our Brilliant Earth brand. Jeff, do you want to comment on gross margin?

Jeff Kuo -- Chief Financial Officer

Sure. Hi, Dylan. The question about gross margin and the inflation impact, we do recognize we're in an inflationary environment, and we have incorporated this into our modeling and our guidance. And we are projecting some modest gross margin improvement for 2022.

The reason that we feel confident about that is we do have this unique business model, which is asset-light, very nimble, and we're also able to adapt and -- adapt dynamically to conditions using our pricing engine, as well as optimizing our procurement footprint. And so, we think that by pulling all of these levers, we will be able to still manage to a modest gross margin improvement for the year. I would say, as a proof point of this, including in the recent past and longer term, we've been able to increase margin in the face of increasing cost pressure, differing inflationary environments. And so, that really gives us confidence that the model works, and we have a dialed-in approach to manage through inflation.

Dylan Carden -- William Blair and Company -- Analyst

Excellent.

Beth Gerstein -- Chief Executive Officer

And I would just add to that real quick on the customer side that, keep in mind, as it relates to bridal, that customers typically will shop with a budget, and then they'll make trade-offs across different metals and diamond characteristics. This is obviously a much more considered purchase. Typically, it's planned over a longer period of time. And I think that relative to some traditional jewelers, that our prices and our products overall offer tremendous value, which I think is really important to the customer.

Dylan Carden -- William Blair and Company -- Analyst

Sure. And on this sort of theme of flexibility, maneuverability, you know, Russia -- Russian diamonds made up a good chunk of listed diamonds, particularly on, you know, the more curated side of the business. How were you able -- you know -- so that doesn't impact at all the removal of those diamonds, and I guess how are you kind of backfilled some of that supply moving through the year? I know there are still a lot of diamonds from other regions, but just kind of curious how you're thinking about that and reaffirming that there can be no real major impact? You know, people are focused on. Thanks.

Beth Gerstein -- Chief Executive Officer

Yeah. So, what I would say to that is in terms of Russian diamonds, we have built a robust supply chain, and we still have a very extensive diamond inventory to be able to meet a broad range of consumer preferences. So, you know, we -- we're constantly growing and thinking of ways to deepen our supplier relationships, add new supplier relationships to the extent that they're able to meet our Beyond Conflict Free Diamond standards. But as I mentioned, we haven't experienced any material impact.

And we are really proud of the decision that we made to remove Russian diamonds for our -- from our website. We think this was the right decision for our company, for our customers and community, and for the Ukraine. So, overall, I'm really proud of that decision.

Dylan Carden -- William Blair and Company -- Analyst

Absolutely. Thanks.

Operator

Thank you. [Operator instruction] Our next question comes from Oliver Chen with Cowen. You may proceed with your question.

Oliver Chen -- Cowen and Company -- Analyst

Hi. Thank you again. The free cash flow conversion has always been really impressive in the business. You know, as you think about the fine jewelry expansion and as you engage in the showroom growth, are there any things we should know, Jeff, about modeling that going forward? Thanks a lot.

Jeff Kuo -- Chief Financial Officer

Sure. As we continue to grow in fine jewelry, we think that we're very well-positioned relative to the rest of the industry. First, we have a really asset-light model that we don't need thousands of pieces to launch a given SKU. If you compare that to maybe a traditional jeweler, that maybe even to launch one SKU might need to buy a thousand pieces to stock up their stores before they even have much of a sense of whether or not something will perform.

We're able to take a much more dynamic test-and-learn approach, potentially launch something just digitally first, and just have a lot more nimble footprint than most of the industry. I would say, also, we have this agile and nimble supply chain that allows us to have very fast turnaround and tight integration with our suppliers compared to traditional jewelers. So, we think that we are very well-positioned from an inventory management perspective even as we expand into fine jewelry.

Oliver Chen -- Cowen and Company -- Analyst

OK. And the vendor negotiations has been impressive in terms of benefiting your financials. What's been happening with supply chain and volatility? And also, as you think about commodity costs, how might that interplay with what will you experience in your COGS, as well as customers? On the other side of this, as, you know, pricing leverage in the face of what the inflation customers are seeing, although I know you participate at a very premium level. Thank you.

Beth Gerstein -- Chief Executive Officer

I can start that off. In terms of our vendor relationships, these are very long-term relationships that we've developed over many years. And as we've grown, we've also really ensured that we have a very agile and nimble supply chain. And this, I think, helps to drive procurement efficiencies because we're able to be very nimble in terms of how we allocate our vendor mix, and we're constantly optimizing across quality and cost considerations.

Jeff, do you want to talk about pricing leverage?

Jeff Kuo -- Chief Financial Officer

Yeah. So, with respect to pricing leverage, similar to some of my other comments about inflation, we're able to adapt dynamically. And I think we've proven that ability historically with our ability with changing prices in -- during the COVID -- you know, earlier parts of the COVID pandemic and even in the recent quarter to continue to adapt with the pricing engine, with our optimization of our supplier footprint to manage to growing margins even in volatile and dynamic environments. And I think that gives us a lot of confidence, and we built that into our model and our guidance.

So, I think we -- of course, we'll continue to monitor the situation as it evolves. But we have experience dealing with this. We've built it into our model, and we are looking forward to continuing to execute in 2022.

Oliver Chen -- Cowen and Company -- Analyst

OK. And, Beth, last. With fine jewelry, a brand question, what will your brand stand for in fine jewelry and/or how are you thinking about the right level of curation in fine jewelry and also the nature of competition and your thoughts on some -- how that may evolve from a lifestyle perspective and the kinds of items you'll feature and grow? Thanks.

Beth Gerstein -- Chief Executive Officer

Sure. So, as it relates to fine jewelry, I think a lot of the tenets that we have for our brand are -- that we've already been executing on are very relevant. We're a mission-driven brand. We are really looking at high quality, very thoughtfully designed products.

We're continuing to use data-driven insights in order to curate our product assortment. We're looking at trend-forward innovation and constantly introducing newness and freshness to make sure that we're really on the cutting edge in terms of what we're offering to that younger generation. And, you know, our Fairmined collection, I think, is a really great synergy of all of these factors. It has storytelling.

It has real meaning behind it. It's enduring. It also is really beautifully designed, very personalized, and meaningful to the customer. And I think that the meaning that our brand has in jewelry is, I think, very similar to what it already exists in engagement.

And moreover, we have that customer. We've really strong loyalty from our customer who's already bought an engagement ring. They've already told their friends about us. And now, they have further opportunities to continue to buy for future occasions.

And I think that they're responding incredibly well.

Oliver Chen -- Cowen and Company -- Analyst

Thank you. Very helpful. Best regards.

Beth Gerstein -- Chief Executive Officer

Thank you.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Beth Gerstein for any further remarks.

Beth Gerstein -- Chief Executive Officer

Great. Well, thank you, everyone. In closing, I want to thank you for your interest in Brilliant Earth. We look forward to speaking with you when we report first quarter results.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Allison Malkin -- Investor Relations

Beth Gerstein -- Chief Executive Officer

Jeff Kuo -- Chief Financial Officer

Matt Boss -- J.P. Morgan -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

Oliver Chen -- Cowen and Company -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Dylan Carden -- William Blair and Company -- Analyst

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