Brilliant Earth Group, Inc. (BRLT) Q1 2022 Earnings Call Transcript

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Brilliant Earth Group, Inc. (BRLT 1.53%)
Q1 2022 Earnings Call
May 12, 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 the Brilliant Earth first quarter 2022 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker for today, Allison Malkin, you may begin.

Allison Malkin -- Investor Relations

Thank you. Good afternoon, everyone. Thank you for joining us for our first-quarter fiscal year 2022 conference call. Joining me today are Beth Gerstein, our chief executive officer; and Jeff Kuo, our chief financial officer.

For today's call, Beth will begin with highlights of our first-quarter financial and operational performance and the drivers of our future growth. Jeff will follow with more details on our first quarter financial results and 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 future forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for a description of the risks that could cause our actual performance and the results to differ materially from those expressed or implied in these forward-looking statements. These forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we will discuss both GAAP and non-GAAP financial measures.

You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's earnings release, which is available at the Investor Relations section of our website at investors.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. We're pleased to share our results for the first quarter of the year, which reflect a strong start to what we believe will represent another record year of revenue for our company. The results we've reported today again demonstrate the tenets of the Brilliant Earth growth story, one that is laser-focused on disrupting, transforming and modernizing the $280 billion global fine jewelry industry. As a young public company, we know that many people are just getting to know our story.

It's a growth story, one that is built on increasing demand and affinity for the Brilliant Earth brand, among millennial and Gen Z consumers and a business model that is powered by data, a committed and talented team and an incredibly efficient and advantageous asset-light operating model. Our first-quarter results showcase our ability to both lead and to execute in a market that is highly fragmented and in an increasingly uncertain and challenging macro environment. For the first quarter, net sales were $100 million, increasing 42% from Q1 last year and up by 102% from Q1 2020. Gross margin expanded 432 basis points over Q1 2022 to 50.1% and adjusted EBITDA was $8.4 million or 8.4% of net sales.

Before Jeff takes you through these results in detail, I want to first share my perspective on the current environment and then highlight a few priorities that you will hear us talk about consistently as they really demonstrate our ability to lead the industry and to execute our long-term growth strategy. It is clear that the recent macro environment is affecting consumer sentiment and behavior. For Brilliant Earth, although we have seen greater variations in recent weeks, we also continue to see strong demand and resonance for our brand. We believe that by staying intensely focused on how we lead, manage, invest and execute against our long-term goals, we will deliver strong revenue and profitability and continue to take market share as we have done every year since we were founded.

Jeff will talk about this in more detail in his remarks. We continue to execute our omnichannel expansion by creating truly seamless and joyful consumer experiences across our digitally native and showroom environments. The metro sales uplift from the opening of new showrooms continues to be the same or better than our historical experience and reinforces our confidence in our omnichannel model. Early in the second quarter, we opened our 16th, 17th and 18th store rooms in Bethesda, Maryland, Columbus, Ohio and Houston, Texas.

Our Bethesda showroom is our second in the greater Washington, D.C. area and establishes deeper reach across this major metropolitan area. One of the other aspects of our showroom openings that I'm incredibly proud of is the way in which our teams choose to put Brilliant Earth values in action. In Houston this week, our teams celebrated by partnering with the Houston Food Bank through the Brilliant Earth Foundation.

Each of our showroom teams partners in the local community to give back, and this is just one great example of how our mission is carried out from day one in the communities in which we operate. Operationally, we use both data and the laser focus on the customer experience to continuously refine the format of our showrooms as well as how we engage with and service our customers at every touch point. Our digital results also remained strong as we continue to optimize how customers browse our trend-driven unique collections, further driving consumers' engagement on our site. We regularly receive feedback from consumers who tell us how different and refreshing their Brilliant Earth experience is, which is reflected in strong word-of-mouth referrals and our high NPS of over 75.

As we mentioned last quarter, with a line of sight to signing 15 new leases this year, we will continue to roll out our showroom strategy over the coming quarters. Our next few locations will bring Brilliant Earth to Cleveland, Detroit and Minneapolis. As you know, successful omnichannel experiences are fueled by the strength and resonance of the brand and by the quality and differentiation of the product. For Brilliant Earth, this is particularly true, and it is what has catalyzed our growth from a young digital disruptor to a leader, an industry transformer for a new generation.

From a brand perspective, we recently completed an updated brand awareness study, and we're pleased to see our aided awareness has grown over the past year from 54% to 62%. This growing awareness reflects our execution across every dimension of the brand. For Valentine's Day, we executed successful brand awareness campaigns across diversified advertising channels, including streaming video. We're also delighted to have celebrities showcasing Brilliant Earth for our exclusive designs and master craftsmanship.

In recent months, we're proud to have Lana Condor, Mindy Kaling and MJ Rodriguez, all choose Brilliant Earth for their red carpet and other major moments. These moments have highlighted customized premium luxury products for which Brilliant Earth is done. They have also amplified our ability to showcase the breadth and depth of our product offering from $100 to $100,000 and higher. If you haven't seen the custom diamond necklace we made for MJ Rodriguez for her to wear when she was honored at the time of Woman of the Year event, we really hope you look it up, it's spectacular.

Leaning into the strong demand and our capability to rapidly introduce trend-driven styles, during the quarter, we launched a number of new collections that have performed very well. To name a few: the Wildflower Collection, a unique design collection that is inspired by a walk through a field of wildflowers; the Greenland Ruby collection, the stunning and ethically mined rubies from Greenland adhere to sustainable practices and are traceable from mine to market; Virtu Gems, a new line that supports local economies and fair trade markets and extends our blockchain technology into gemstones; and the Tacori Exclusive Collection, which we launched in January, has been very strongly received and is outperforming our expectations. Each of these collections reflect a curated and unique assortment in bridal, gemstones and fine jewelry. As pleased as we are with consumers' responses to our new beautiful products, we're equally gratified that Brilliant Earth's uncompromising industry-leading ESG values are consistently recognized and treasured by our customers.

As a data-driven company, you know that our ongoing investments in data and technology are critical contributors to our current and future growth. This quarter was no different as we launched enhancements to our digital shopping experience for fine jewelry, improving customer engagement and driving significant improvement in conversion. We also executed initiatives to enhance our client selling experiences, which enhanced our ability to personalize our service and support our customers through their shopping experience. Our ability to optimize data to refine and deepen insights to better serve our customers is a key driver to building our brand and growing lifetime value.

As pleased as we are with our start to the year, our focus is forward. And as I said upfront, we understand the importance of staying focused on what we can control in an uncertain global environment. While we have experienced more geopolitical and macroeconomic headwinds in recent weeks than we could have predicted causing us to moderate our near-term growth outlook. you can expect that we will continue to prudently and strategically invest to grow the Brilliant Earth brand and business to expand our showroom and omnichannel footprint and to optimize our huge financial and operating advantage with our asset-light, agile and highly efficient business model, all with an eye on delivering profitable and sustainable near- and long-term growth and on extending our lead as a transformative, modern fine jeweler for today's consumer.

We look forward to sharing our journey with you. Thank you. Here's Jeff.

Jeff Kuo -- Chief Financial Officer

Thanks, Beth, and good afternoon, everyone. We're pleased to share our first-quarter fiscal 2022 results, which reflect a strong start to the year. During the quarter, the disciplined execution of our expansion plans drove strong revenue growth and continuing profit growth. Briefly touching on some key metrics for the first quarter.

Revenue grew to $100 million, which represents 42% year-over-year growth and is up 102% compared to the first quarter of 2020. Gross margin expanded to 50.1%, a 432 basis point increase compared to Q1 2021. And adjusted EBITDA was $8.4 million, up 29% from Q1 last year even as we invest in our growth and incurred public company operating costs. We believe our performance demonstrates the power and distinction of our brand, growth across our product lines and our agile, highly efficient business model.

Consistent with our prior quarter's results and as anticipated, we saw growth in average order value across our product lines on a year-over-year basis. We continue to see outsized growth within our newer category of fine jewelry, which, as you know, has a lower average price point, but higher gross margins than our overall business. As such, our blended Q1 AOV for the entire company was down year over year in the mid-single-digit percentage range. As Beth said, our first quarter results also reflect the continued successful execution of our omnichannel growth strategy.

With the recent openings of our 16th, 17th and 18th showrooms in Bethesda, Maryland, Columbus, Ohio and Houston, Texas, the positive impact of our showroom strategy continues to prove out across the brand and the business. Our showrooms have outperformed our initial expectations and are generating continued uplift in initial metro bookings. In Q1, we saw broad-based growth across our product assortment from our core bridal products to wedding bands to fine jewelry. We were pleased to see that fine jewelry remains a strong performer with growth far outpacing the business as a whole.

While it remains a small percentage of our total business, we know that customers are seeking out our trend forward fine jewelry and that it represents tremendous growth and differentiation for our brand. The ongoing success of our Shoreman fine jewelry strategy is showing encouraging results in driving financial performance, customer loyalty and lifetime value. Both showroom and fine jewelry customers demonstrate higher repeat purchase behavior than our overall customer mix, and we have seen continued strong growth in repeat purchases. While both showrooms and fine jewelry are still in their early stages, we are optimistic about their contribution and future potential, and we'll continue to prioritize them as part of our near- and long-term growth plans.

Turning to gross margin. Q1 gross margin expanded to 50.1%, which is up 432 basis points versus the prior year. Growing demand for the Brilliant Earth brand are premium and differentiated product offerings, pricing engine optimization and procurement efficiencies once again drove strong gross margin expansion across our product assortment. What we hope will become a well-understood refrain from us is that these results illustrate how our asset-light data-driven business model is a competitive and financial advantage.

It enables us to nimbly adapt our supply chain and product pricing to changing market conditions to optimize both margin and revenue. We believe our model is particularly advantageous in all economic environments, including in times of market and macroeconomic uncertainty. As we said on our year-end call, we intend to prudently and strategically invest in building and scaling Brilliant Earth for the near and long-term, while allowing the ability to adapt to varying market conditions. In the first quarter, our SG&A increased to 44.8% of net sales, compared to 38.8% of net sales in Q1 2021, an increase of 600 basis points.

Approximately 90 basis points of this increase was made up of net changes in add-backs to adjusted EBITDA, including equity-based compensation and new showroom preopening expenses, which are added back in our presentation of adjusted EBITDA. The remaining approximately 510 basis point increase over the prior year was composed of the following. Consistent with last quarter, these investments were made to support our growth. Approximately 290 basis points of this increase was due to higher employee costs.

As a reminder, Q1 2021 represented a low comp for employee costs as we are coming out of the initial months of the COVID pandemic with employee costs at a comparatively low run rate in Q1 2021. In Q1 2022, we continue to build our team to support our strategic initiatives, new showrooms and operations as a public company. Other G&A as a percentage of sales increased by approximately 260 basis points with the largest driver being increased public company operating costs, which, as you know, we will not anniversary until late Q3 and Q4 2022. As a growth company, we are also strategically investing in scaling Brilliant Earth for the long term.

Our marketing costs as a percentage of sales declined on a year-over-year basis by about 40 basis points. Finally, our strong revenue and gross margin growth, balanced by our strategic investments in the business delivered $8.4 million in adjusted EBITDA in the first quarter, a 29% increase over the prior year. Our profitability, positive cash flow and capital-efficient operating model continue to differentiate us among direct-to-consumer companies. We ended the first quarter with $165 million in cash.

We continue to operate the business in an asset-light fashion with efficient inventory turns and negative working capital. Additionally, we adopted the ASC 842 leasing standard on January 1, 2022, and you will see this reflected in an increase in our balance sheet of approximately $20 million of both right-of-use assets and operating lease liabilities. On our last quarterly earnings call, we set out our long-term goals that we use to guide our growth plans. They remain unchanged, and I will reiterate them here.

Over the long term, we see revenue growth in the high-20s to low 30% range with growth across our product lines and our own channel model. Our long-term gross margin target is in the mid-50% 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 our showroom experiences to drive conversion and repeat customer 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.

As we look ahead to the balance of the year, we know that the environment in which we're operating today has changed significantly from when we reported our full year just two months ago. Numerous factors such as the conflict in Ukraine and inflationary pressure have introduced greater uncertainty in the macroeconomic outlook. We have incorporated these geopolitical and macroeconomic factors into our outlook for Q2 and for the full year 2022. And while we continue to see strong overall demand, we have seen a more moderated rate of growth, which is most notable in e-commerce.

The power of our omnichannel model is demonstrated in the strong performance of our showrooms. And as we continue to open new showrooms, they will be increasingly additive to our growth in the near and long-term. As a result, for the full year 2022, we are adjusting our outlook for net sales to a projected range of $450 million to $470 million. This represents 18% to 24% growth versus fiscal year 2021 in an incredibly challenging macro environment and a three-year CAGR of 31% to 33%.

Based on the continuing strength of our gross margin, where we expect modest year-over-year improvements for the balance of the year and our prudent management of investments in spending, but reflecting some of the global macroeconomic uncertainty, we are revising our outlook for full year adjusted EBITDA to $30 million to $40 million or an approximately 7% to 9% adjusted EBITDA margin. For the second quarter, we anticipate revenue in the range of $103 million to $109 million or a range of 12% to 18% growth versus fiscal year 2021 and a three-year CAGR of 29% to 31%, reflecting the moderating conditions I just mentioned as well as a higher comparison in Q2 last year. Given the sustained strength of our gross margin, the timing and execution of our new showroom openings and the continued growth in our brand reach, we anticipate delivering Q2 adjusted EBITDA of $5 million to $8 million or an approximately 5% to 7% adjusted EBITDA margin. As I said last quarter, we anticipated fluctuations along our path to our long-term targets as we know there are always puts and takes to manage.

While there are geopolitical and macroeconomic conditions affecting our current business, our confidence in and commitment to the initiatives we've laid out remains unchanged. We remain focused on executing our initiatives to build and scale our business and brand. We believe that our agile, asset-light business model, combined with our ability to dynamically manage within a changing environment is a tremendous financial and competitive advantage, and we are confident in both our long-term growth opportunity as well as our collective ability to realize it. With that, we'll be happy to take your questions.

[Operator instructions] Our first question comes from the line of Oliver Chen with Cowen.

Oliver Chen -- Cowen and Company -- Analyst

Regarding your new guidance, it does assume lower flow-through versus prior guidance. Could you help us understand some of the deltas between your current and prior guidance? Also, would love your thoughts as a follow-up on categories and categories relative to where you're seeing more muted demand versus others? That would be helpful.

Beth Gerstein -- Chief Executive Officer

Great. I can start with the latter part of your question. What we've seen is, generally speaking, as the macroeconomic challenges have become a little bit more certain, we do see more moderated growth more generally, I would say, and still expecting very strong growth, but that uncertainty has, I think, created a little bit more moderation. And as it relates to us, specifically, keep in mind, we do have higher price points.

And so, as a more considered purchase, it does end up taking a little bit longer in time of uncertainty for customers to actually make their decisions. And that ends up extending the overall sales cycle, which has created a little bit of a slower ramp in terms of the overall revenue growth. So category specifically, I would say, it's more general across the different categories, but still seeing very strong growth between 18% to 24% over the year. And then, Jeff, do you want to take the beginning part about the flow through?

Jeff Kuo -- Chief Financial Officer

Sure, be glad to. So while there is some recent consumer uncertainty, given the macroeconomic and geopolitical conditions, there aren't any changes to the fundamentals of our business. And given the success that we've had with our strategic initiatives such as driving brand awareness, the success of our showrooms and how they're outperforming our expectations and the strength of fine jewelry, we see a unique opportunity to invest and gain share even in this environment. And the strength of our business gives us the confidence to continue to invest to grow and gain share.

And then, we do continue, as I described earlier, to work toward our long-term EBITDA target of 15% to 20% plus as our long-term EBITDA target. But we do have opportunities to invest in a really strong position to invest from.

Beth Gerstein -- Chief Executive Officer

I would just add to that, like we're looking at the longer term here. We are positioning ourselves to be the category leader. And as we've seen success with our brand-building efforts through our showrooms or jewelry, I think really capitalizing on our momentum is important.

Questions & Answers:

Operator

Next question comes from the line of Dana Telsey with Telsey Advisory Group.

Dana Telsey -- Telsey Advisory Group -- Analyst

OK. And Jeff, I want to hear a little bit about -- more about what you saw in terms of a change in consumer patterns, whether it's on fine jewelry that you saw and how you see the planning of events differing in consumer spending patterns going forward? And then also, as you think about expenses, any adjustments to expenses that you're making as we go through this time period?

Beth Gerstein -- Chief Executive Officer

Yes. In terms of overall changes, I think what I mentioned before is really, I think, the biggest component is just that sales cycle has just been a little bit more extended. Overall, in more uncertain times, we continue to see engagements and weddings. People do tend to invest more in personal relationships, and we are continuing to see that strong growth.

I think, the omnichannel strategy we have, I think, sets us up very well in terms of different patterns because we're really catering to how and when consumers want to shop. So it's that synergy between digital and showroom that I think is really powerful and why we think omnichannel is such an effective strategy when you have changing patterns with consumer over time. Jeff, do you want to take the second part?

Jeff Kuo -- Chief Financial Officer

Sure. Would be glad to. So regarding expenses and how we're thinking about that, I think I would go back to how we are really continuing to invest to be that for long-term leadership in the industry and building on the strength that we've seen and the strength of our strategic initiatives like showrooms, brand awareness, fine jewelry. And we think that this really is a unique opportunity to invest and to continue to drive our growth.

As always, we will be prudent and strategic in terms of how we are making those investments and always keep a lens of working toward our long-term profitability targets of that 15% to 20% plus EBITDA.

Operator

[Operator instructions] Our next question comes from the line of Matthew Boss with J.P. Morgan.

Matthew Boss -- J.P. Morgan -- Analyst

Great. So, Beth, maybe as we think about the more muted top line demand that you've seen more recently, how are you thinking about the potential duration or just any shocks to compare what you're seeing today if we look back historically or how resilient do you think the fine jewelry category is in more dynamic backdrops?

Beth Gerstein -- Chief Executive Officer

Yes. Well, I would say -- answer that with a few different comments. One is, I think, the guidance that we have just assumes that the current outlook continues for the rest of the year. And part of that is, we're trying to be prudent and conservative in how we're thinking about the business.

Two, what I'd say is that as we see increasing demand because of our asset-light model, we're able to respond very quickly, which I think just gives us a competitive advantage. As it relates to the overall category, we do find that in more uncertain times that the fine jewelry category does remain quite strong. In times of inflation, consumers see it as a physical goods, it's more tangible, it has inherent value, also love persist. So engagements and weddings continue to happen in times of recession.

So we do find it to be much more resilient in times of uncertainty, and that's what we've seen in previous times. I think also, it gives us the ability just to continue to gain market share, which we've done every year since we were founded.

Matthew Boss -- J.P. Morgan -- Analyst

Great. And then, maybe, Jeff, on the bottom line, could you help us break down the first quarter gross margin beat. I think it was over 400 basis points as we think about procurement pricing, shipping and then just any puts and takes to consider on a gross margin for the remainder of the year?

Jeff Kuo -- Chief Financial Officer

Sure. So for gross margin, the drivers of the performance in Q1 were similar to those that we've seen in prior quarters. So it starts with the premium nature of our brand. The strong resonance that, that has with consumers, the premium nature of our products, which allows us to have healthy and strong gross margins.

We continue, as we have in past quarters, to rely on our price optimization engine and to refine that and build that to drive both top line as well as the gross margin targets that we're working toward as well as procurement efficiencies as we look at our supply chain and how do we purchase and look for optimization opportunities there. Something that is a growing part as we look more toward the longer term is that fine jewelry will be an increasing contributor as it becomes a bigger and bigger part of our business, and that is a higher-margin part of the business. So we're excited to see that, that continues to be a strong outperformer to drive healthy gross margin. As I mentioned, for the balance of the year, we are projecting modest gross margin improvements as we continue to pull some of these same levers.

Matthew Boss -- J.P. Morgan -- Analyst

Great. Best of luck.

Operator

Thank you. At this time, I would now like to turn the call back over to Beth for closing remarks.

Beth Gerstein -- Chief Executive Officer

Thank you, everyone. We appreciate all of your time and are really pleased with our Q1 results, and we look forward to talking to you in the next quarter.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Allison Malkin -- Investor Relations

Beth Gerstein -- Chief Executive Officer

Jeff Kuo -- Chief Financial Officer

Oliver Chen -- Cowen and Company -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Matthew Boss -- J.P. Morgan -- Analyst

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