Q3 2021 Brilliant Earth Group Inc Earnings Call

November 12, 2021

Today's call is scheduled to begin shortly please continue to standby and thank you for your patience.

[music].

Yes.

Ladies and gentlemen, thank you for skinny bye.

And welcome to brilliant Earth third quarter fiscal 2021 earnings call.

At this time all participants are in a listen only mode.

The speaker's 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.

Please go ahead.

Thank you good morning, everyone. Thank you for joining us for our third quarter fiscal year 2021 conference call. Joining me today are Beth Gerstein, our chief Executive Officer and <unk>.

Jeff <unk>, 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 third quarter financial and operational performance and the drivers of our future growth, Jeff will follow with more details on our third.

Quarter financial results and introduce our guidance. Following this the operator will begin the Q&A session with our presenters Bath 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 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.

<unk> 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.

<unk> of our website at investors Dot brilliant Earth Dotcom 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.

Thank you Alison and good morning, everyone and thank you for joining us. This morning, I am delighted to speak with you today and share our record third quarter performance highlighted by strength across our financial metrics and continued progress on our long term growth initiatives.

The quarter also marked an exciting milestone in our history as we completed our IPO.

I want to thank our team for their hard work and dedication I am proud of all that we've accomplished together and I'm excited about the many opportunities that lie ahead of us in the near and long term.

Before I discuss our results for those new to brilliant Earth, Let me first share our vision and approach to modernizing and transforming the jewelry industry.

Brilliant Earth is the next generation fine jeweler for millennial and Gen Z consumers, we offer a personalized joyful omnichannel shopping experience with a leading e-commerce platform and 14 showrooms across the United States and always underlying this are the mission driven values we were founded on.

Our commitment to sustainability transparency, giving back and diversity equity and inclusion.

We are transforming the industry with our approach and are proud to have become a global leader and ethically sourced fine jewelry.

Our unique business is highly profitable and well positioned to deliver sustained growth over the long term.

Let me share why brilliant Earth is both compelling and incredibly hard to replicate.

First the brilliant Earth brand, we've spent over a decade building a globally recognized premium jewelry brand with an authentic ESG focus and mission driven values. We're proud that these are the principles that we founded the company on 16 years ago.

We're always reminding ourselves that this is a journey that we need to continually work towards and that our values are and always will be our north star techs.

Technology.

We are a digital first innovator with a strong mindset for data analysis and technology.

From the beginning we have use data to inform our decisions from product design and merchandising to real estate strategy to a pricing engine that enables us to maintain and grow margins as a digital first leader for over 16 years, we've been testing Iterating and customizing a true omni.

Channel customer experience from our e-commerce platform and digital channels to our showrooms this experience as well aligns with how today's younger consumer prefers to shop are.

High net promoter scores show that our customers love their brilliant earth experience and we're continually striving to make it even better.

Omnichannel, our innovative appointment driven model allows us to curate and personalize our customers' experience in a way that truly modernizes jewelry shopping our showrooms have also driven transformative customer acquisition economics in the metros, where we have opened them, resulting in an average 50.

And conversion across the entire metropolitan area within the first year after opening increasing to an average 90% conversion uplift by year three year three.

Design in jewelry product design is incredibly important 99% of our customers tell us that design is a top priority for them. We are leaders here with new proprietary products being constantly and rapidly introduced by our award winning design teams informed by deep data.

Driven insights about our consumers in their purchasing preferences.

Supply chain, we have developed a network of strategic long term relationships and proprietary a pea is to deliver on demand carefully source and highly customized products navigating the incredibly complex and opaque global jewelry industry is very challenging it has taken us many years of <unk>.

Best thing and people technology processes and relationships to be able to deliver trusted ethically sourced products at our quality standards and in our time frames.

Our business model, our business is asset light and capital efficient our customers can choose from over 150000 natural and lab diamonds on our website and can personalize their jewelry using our create your own digital tools.

And in contrast for traditional jewelers, we do not need to carry most of these products on our balance sheet.

Allowing us to remain capital efficient.

And finally, we're disruptors in a large and growing industry. The jewelry industry is $300 billion globally with more than $60 billion in the U S and growing at 7% per year.

The industry is highly fragmented with 65% of it made up of independents that lack the technology and resources to compete at our level and mall operators that are faced with antiquated inventory heavy store formats, and outdated malls with declining foot traffic.

We believe that all of these competitive advantages will allow us to continue delivering strong revenue growth with robust profit margins, while furthering our mission.

Now turning to third quarter results.

We delivered an outstanding third quarter highlighted by significant growth across our key financial metrics.

Net sales increased 33% above last year's third quarter, driven by our showrooms and website and across our products, including create your own Simon brings wedding gemstone and anniversary ratings and fine jewelry.

Our strong performance highlights brilliant Earth brand residents with millennial and Gen Z consumers as we continue to gain share in the jewelry industry.

Our margins were up significantly versus last year's third quarter gross margin increased to 50.4% from 43, 2% and our adjusted EBITDA margins continue to be strong growing year over year to 14, 2%.

Jeff Our CFO will talk more about the drivers of the strong margin performance in a few minutes.

In addition to strong top and bottom line results, we made great progress in the quarter on many of our long term growth initiatives.

We continued our omni channel leadership opening our new San Francisco flagship and four new showroom locations in Portland, Austin, Dallas and Manhattan are openings include innovative new store formats, such as ground floor retail locations in top tier shopping district.

With other Likeminded premium brands that attract a similar audience. These.

These new store formats offer expanded browsing and retail area for walking while continuing to serve our successful appointments driven model and deliver highly attractive economics.

The early data from these new showrooms is compelling with a rapid acceleration in customer appointments and traffic demonstrating strong latent demand in these markets.

For our 2021 new showroom, we've seen an average year over year metro bookings growth of over 100% in the first month post opening this is better than the historical 80% first gear uplift that we've previously seen with new showroom openings.

In addition, the conversion uplift for digital traffic across these entire metro areas is similar or better than our strong historically demonstrated results.

This consistent powerful synergy between our stores and ecommerce reinforces our conviction in our omni channel strategy.

We also expanded our product offerings, we introduced a record number of collections and create your own diamond rings fine jewelry and other products.

Just a few examples.

Our ensemble design collection re imagines classic bridal trends for engagement race.

On fashion Rings collection builds on our strong foundation and a ring design.

And our fine jewelry collections highlight key trends like yellow Golden pearls and include new products that can be personalized like our zodiac pendants engraver balls and creature on birth stone jewelry.

We're so excited about all of these beautiful collections you can see a few of them highlighted in the presentation materials for today's call.

Consumers are increasingly turning to brilliant earth for design, driven premium fine jewelry with meeting and in Q3, our fine jewelry products continued to experience rapid growth.

While still a relatively small part of our business today, we see long term opportunities to significantly grow our fine jewelry business, which we expect will increase repeat purchase frequency and drive higher customer lifetime value.

Data driven agile product development is a core strength for us and we believe this strength in developing merchandising and selling compelling new design collections as well as our strong customer relationships and brand affinity will drive our continued success in the fine jewelry space.

We are supporting the launch of these new products with enhanced digital experiences to make shopping with us even more seamless engaging and personalized in time for the holidays. We have launched a new digital gifting experience featuring new ways to shop, our assortment of fine jewelry, we also launched our ring stacking visualized.

<unk> tool, which allows customers to mix and match styles and products in various different ways and to see how those styles look together our customers love it and.

And we continually invest in improving what we believe are already best in class digital capabilities and a truly seamless omnichannel customer experience. For example, we recently launched a new virtual showroom, which allows consumers to see the same curated selection of products online, but they saw in there.

Our visit to our showroom along with personalized recommendations based on their specific preferences and shopping history. It's an incredible example of how our Omnichannel model really does deliver an elevated customized shopping experience for our customers wherever and however, they prefer to shop.

Continued ESG leadership E.

ESG has been at our core before the acronym ESG went mainstream.

We strive for continuous improvement in this area in the third quarter, we achieved several milestones that demonstrate our continued commitment to ESG leadership.

We created and funded the brilliant Earth foundation with $1 million to provide long term support for nonprofit organizations aligned with social and environmental causes that we champion.

One organization, we have been proud to support its pure Earth, which provides artist little gold miners with training and Mercury free mining methods. We also introduced our new fair mind jewelry collection as part of our mission to support development efforts at artisan Oak gold mining cooperatives.

We have significantly expanded the number of blockchain enabled diamonds on our site to more than 10000, we continuous to be a leading retailer of blockchain enabled diamonds at scale offering consumers a high level of transparency into the journey of their guidance.

Finally, we recently completed an audit of the recycled gold and silver content in our jewelry, which confirm that over 90% of the metal content in our gold and silver jewelry is recycled we're proud of this industry leading accomplishment.

On the corporate side, we successfully completed our IPO in September which will be instrumental in providing future access to capital, attracting and retaining talent and elevating the company's visibility and brand awareness.

Overall, I am extremely proud of our passionate and dedicated team, we accomplished and exceeded many of our ambitious goals for the third quarter and we are well positioned to drive many more successes in the fourth quarter and beyond.

And now I would like to turn the call over to Jeff to review, our financials in more detail and introduce our outlook for 2021.

Yes.

Thanks, Beth and good morning, everyone.

I'm also pleased to speak with you on our first earnings call as a public company.

I'll begin my discussion with an overview of our business and proceed with a review of our third quarter results.

Following this I'll share our outlook for fiscal year 2021.

Our digitally native technology, driven business model has allowed us to grow rapidly profitably and in a capital efficient manner.

I would like to highlight some of the key distinguishing characteristics of our business.

First consistent robust topline growth our revenue has grown at a CAGR of more than 30% since 2016.

Strong gross margins and adjusted EBITDA.

Our businesses had strong consistent and increasing gross margins.

We generated positive net income adjusted EBITDA and operating cash flow in contrast to many other rapidly growing direct to consumer companies.

And inventory light negative working capital model.

One of our business in a capital efficient manner.

We are paid in full in advance of product fulfillment and typically before we pay our vendors. This combined with our inventory turns of more than 10 times allows us to operate with negative working capital and generate strong operating cash flow conversion.

Compelling showroom economics.

Our showrooms also drive transformative customer acquisition economics in the Metros, where we open them as Beth mentioned.

This strong topline uplift is coupled with a very capex and opex efficient model to drive robust showroom economics.

We believe our Omnichannel model gives us the ability to achieve broad coverage of the U S market with a footprint of fewer than 100 showrooms.

Now turning to our results. We're pleased to report strong third quarter performance highlighted by significant growth in sales gross profit margin and adjusted EBITDA compared to the third quarter of fiscal 2020.

I will focus on adjusted non-GAAP measures of profitability and EPS in my remarks.

These adjusted measures that I reference you can find reconciliation tables to the most comparable GAAP figures in our earnings release, which can be found at the Investor relations portion of our website at investors Dot Brilinta, our dot com.

Our net sales for the third quarter increased 33% to $95 2 million.

From $71 4 million in the third quarter of 2020.

We saw growth in both orders and it'll be across our product categories with an overall, 30% increase in total orders compared to the third quarter of fiscal 2020.

We also saw a 3% increase in average order value to $3301 from $3210 in the third quarter of 2020.

Our differentiated premium brand continues to resonate with millennial and Gen Z shoppers and our strategic investments in marketing have amplified our brand awareness and consumer demand during the quarter.

Our omnichannel strategy is working.

Our website and showrooms contributed to our strong third quarter sales growth, we saw outstanding growth across our products and our fine jewelry products, which are an emerging opportunity for us who over 100% year over year for the third quarter in a row.

We expect these products will continue to contribute to top line growth repeat purchases and gross margin accretion for the company in the future.

Fine jewelry in addition to contributing to top line growth brings new customers brilliant Earth, while also providing exciting new repeat shopping occasions for our existing customers.

We have historically seen a high increase in repeat purchase behavior for customers that have either come into a showroom with purchased fine jewelry as we continue to open new showrooms and grow fine jewelry, we expect that they will lead to additional increases in overall repeat purchases.

And we have seen a double digit percentage increase in repeat purchase behavior at the 12 month Mark for our most recent customer cohort compared to recent cohorts.

This shows us the growing affinity of our customers to the brilliant Earth brand.

Moving on to gross margin.

Gross margin expanded by more than 700 basis points to 54% compared to 43, 2% in Q3 2020.

That expansion was across our products and was driven by our strong brand affinity and continuous optimization of our pricing engine.

Our powerful customer affinity and our differentiated product design enable us to continue to improve our margins and command premium prices.

Our pricing engine incorporates proprietary technology enabled algorithms that allow our team to continually test and refine pricing to optimize our revenue and gross margins in a very granular fashion.

Third quarter, we were able to drive better than expected gross margin expansion through these efforts.

Additionally, as we scale, we expect to continue to drive procurement efficiencies across our supply chain, including ongoing optimization of our vendor mix.

And of note our gross margin was not negatively impacted on a year over year basis by increased shipping costs in the third quarter, given that we use airfreight for inventory shipping.

All said, we drove better than expected gross margin in Q3 as everything came together incredibly well.

While we expect gross margin to continue to expand in the future. We believe it is prudent not to plan for the same level of gross margin outperformance in Q4 that we saw in the third quarter given the competitive sales environment that is typical during the holiday season.

Now moving on to SG&A.

SG&A increased to 41% of sales in Q3 2021 compared to 30.1% in Q3 2020.

Approximately 360 basis points of this increase was made up of add backs to adjusted EBITDA from increased other G&A and employment expenses.

This included new show and Preopening expenses.

Donation to fund the brilliant Earth Foundation.

Cody based compensation expenses and costs in preparation for operations as a public company all of which are added back you know presentation of adjusted EBITDA.

The remainder of the increase in SG&A was principally driven by expenses to support the growth of our business.

First increased investments in marketing for brand awareness and to support strategic growth initiatives, such as our expansion into fine jewelry.

Marketing remains efficient and we continually refine our marketing spend across diversified channels. We have also developed sophisticated analytics based on or consumer behavior to optimize our campaigns.

We had higher employment costs to support our operations as a public company show.

Showroom related employment costs also increased due to employment cost per new showrooms, which are still in the earlier stages of their ramp up.

It's worth noting that employment costs were unusually low in the third quarter of 2020 due to temporary COVID-19 related staffing changes.

And finally, we saw increased other G&A costs to support our ongoing operations as a public company.

Our adjusted EBITDA for the third quarter was $13 6 million up 42% from an adjusted EBITDA of $9 5 million in Q3 2020.

Increase of $4 million.

Our adjusted EBITDA margin was 14, 2% in this quarter improving from last year's adjusted EBITDA margin of 13, 3% driven by strong sales and gross margin expansion, which were partially offset by increases in SG&A as I described earlier.

Our adjusted net income was $8 $5 million, representing an adjusted diluted EPS of nine cents per diluted share or $96 6 million diluted weighted average shares of common stock outstanding.

Turning to the balance sheet.

As of September 32021, we had cash and cash equivalents of $161 1 million, which included proceeds from our IPO as.

As compared to $66 $3 million at the end of 2020.

Our operating cash flow for the nine months ended September 32021 was $33 8 million compared to $15 $2 million in the nine months ended September 32020.

Now moving on to our outlook.

For fiscal year 2021, we expect net sales in the range of 366 million to $369 million driven by growth across our products and the continued strength of our brand and omni channel model.

This represents an increase of over 45% compared to fiscal year, 2020 revenue and an increase of more than 80% compared to fiscal year 2019 revenue.

While we recognize the majority of the quarter remains ahead of US we feel that we are strongly positioned for the holiday season.

Our adjusted EBITDA for the year is expected in the range of 45 million to $42 million, which represents an adjusted EBITDA margin of approximately 11%.

This reflects a full quarter run rate of public company operating costs that are part of our ongoing expense structure and therefore are not added back in adjusted EBITDA.

We also plan to continue to invest in marketing to support the growth of our strategic initiatives.

In summary, we're very pleased with our third quarter results and expect the ongoing execution of our strategy to enable us to continue our strong momentum in the final quarter of the year and into the future.

And I will now turn the call back over to Beth.

As we look ahead, we are so excited about our business and expect our positive momentum to continue in the near and long term.

Holidays are an exciting and important time for us and our team has done an incredible job preparing for the upcoming holiday search we.

We have a robust supply chain with significant redundancy. We also have minimal exposure to geographies that are experiencing major supply chain disruptions and with our new product assortment gifting and omnichannel experiences. We believe that we are well poised to succeed and thrive during the holiday quarter.

We're very happy with our financial and operational performance in the third quarter and we believe we can continue to build on our positive momentum in the fourth quarter and beyond.

Now I would like to turn the call over to the operator to begin the Q&A portion of the call.

Thank you.

Ask a question you will need to press star one on your telephone.

Your question press the pound key.

We ask that you. Please limit yourself to one question and one follow up you may re queue for any additional questions.

Our first question comes from Michael Binetti with Credit Suisse. Your line is open.

Hey, guys congrats on a great quarter and very nice to have you on a public call here and look forward to look forward to the story as we go here.

The first thing that jumps out as a bit of a model question for Jeff, but Jeff the 700 basis points of gross gross margin.

As we look at that as we learned about the company through the IPO process.

We didn't hear about our gross margin with a five handle on it.

Over the planning horizon.

Longer term, but I know you said look let's not get over our skis and we expect some promotions in the fourth quarter. But is is the is the 50 plus gross margin in third quarter.

Something that you feel like we build on going forward into 2022. After you get past that that holiday quarter that you gave and I know.

I know you said I'm sure you rank ordering some of the inputs there, but I think when we talked you thought you know over the next few years Theres about 100 basis points of of opportunity on the gross margin from the pricing optimization. It seems like you've got more than that already here. So maybe just a little bit more thinking on on what drove the 700 and what you think you might get.

Back or was a singer.

Point in time and then.

Aside from aside from the gross margins maybe for for for Beth.

I'm just curious on the fine jewelry I know you're very excited about the category, it's a big opportunity for brand like yours, and it's great to see that up over a 100% maybe a little bit more what's working there sounds like the marketing is working well, but how much of it was from new Skus versus you know excuse you already had in place are just getting better lift for marketing or anything like that would love to hear a little bit.

It seems like a good opportunity for you guys.

Sure. Thanks, Michael So.

You take each of your questions. So in terms of what drove the gross margin strong gross margin performance in Q3.

Describe it as are one the very strong customer affinity that we have that allows us to.

Command premium prices and then as you discussed the pricing engine that we have that incorporates proprietary technology enabled algorithms and is very dynamic and let's our team continually test and refine pricing to optimize both both revenue and gross margin and would say that in in Q3.

So everything really came together ideally and we I would describe it as an outperformance.

Against our expectations in terms of how well how well everything work together on those levers.

We do continue to see long term long term upside in gross margin.

Would say that.

In the going forward period.

Not to expect necessarily the same high level of gross margin outperformance as we saw in Q3 as you don't want to assume the same kind of almost perfect set of circumstances.

That we saw in the quarter, but we do expect to continue.

Delivering strong gross margin and do see long term long term upside there.

And in terms of specifically on 2022.

So you can done not.

Not yet providing guidance on 2022, we do expect to provide an outlook as part of our annual earnings call.

But we do continue to see long term upside potential in gross margin, but Q3 was kind of above.

Really perfect convergence of everything in an outperformance in some way sports.

Thanks, Josh.

Sure.

Oh, Hi, Michael I, just wanted to address your question on fine jewelry and thanks for the question.

We were really excited to see the growth in the fine jewelry category and really the continued growth of the category as Jeff mentioned, it's been growing for many quarters now.

In terms of of what's working I think theirs.

Several factors there you know what.

And I think the fact that we have such strong customer connections.

And that loyalty to the brand I think is really important here, we'd mentioned in the past that the brand really resonates with the giver the receiver with all genders involved at all.

Both of those genders are actually involved in the bridal purchase and I think that really we see that she is really excited to receive a brilliant earth product and that helps to drive repeat overall, so we do see a lift in repeat.

We also see new customers coming to us.

For that experience and I think that that customer connection is just so important.

<unk> also helped to drive that we see increase repeat if you've come into the showroom and I think that as we build out our showrooms that is going to be a bigger contributor. So the second thing I would say is is the product assortment I think is really working across all levels, both new skus and existing Skus I think some of the new.

Skus are pretty early in terms of the released so what we're really excited to see how they perform over holiday.

But I do think that that assortment is key and the fact that we have a data driven design and that we really excel here I think really positions us very well.

And then the third thing I think that's really important is that marketing and that the marketing efforts that we have are showing.

Early promise as it relates to driving new customers as well as that for Pete. So I think we're seeing strength in all areas and the fact that we have that digital experience that we're really improving over time and that new gifting experience. I think is also positions us really well for holiday.

I know that there's a lot of factors, there, but but I think it's really important that we're really checking on all sides.

Alright, Thanks, a lot best.

Yes.

Thank you. Our next question comes from Matthew Boss with Jpmorgan. Your line is open.

Great Thanks, and congrats on a really nice quarter.

So.

So Beth on your 35% revenue growth CAGR this quarter, and I think more than 30% implied guidance for the fourth quarter.

How much would you attribute recent performance to an expanding industry Tam given the accelerated penetration of digital in the fine jewelry market as.

As opposed to company specific execution and market share gains and when I know you've pointed out is a fragmented industry backdrop.

I think thanks for the question.

And if they are stocking up so what I would say is.

That really I think theres a few different factors you mentioned the fact that E. Commerce is experiencing fast growth I think that really plays to our strength as a digital first company here the fact that branded.

It remains a really big opportunity, it's the fastest growing segment within fine jewelry in the jewelry industry. I think is really important for us and the fact that we represent a really strong brand a premium brand that really resonates with that younger consumer.

It's really going to be instrumental to the growth in and has been in the past as well and then I think the fact that we are really small relative to that 300 billion dollar market.

It is really important we're really disruptors here, we continue to gain share within this market given that differentiated business model that we talked about so really I think it's actually all of the factors I think jewelry is also expanding weddings are expected to have the.

Highest levels that they've had in decades and I think that also has contributed to the growth.

Great answer, Jeff and maybe as a follow up on your long term EBITDA margin target, 15% to 20% plus I guess two questions how best to think about linearity multiyear beyond this year on that margin target and then how high is the plus on that 15 to 20.

Plus in your view.

And can I confirm on the first part of your question were you asking about the linearity on the EBITDA target.

Yes or no.

That's it.

EBITDA target just how best to think about it multiyear in terms of it being linear from the exiting exit point of this year to the 15 to 20 and then the 15 to 20 plus.

How do you view the potential of the plant.

Yes, so in.

In terms of linearity.

Maybe well.

Hard to predict you know necessarily on a year over year basis, you know what I can say is that we do expect you know cause that theres upside upside potential both in terms of growing growing gross margin with some of the factors that.

That we've described such as our premium brand positioning the pricing engine and other our other procurement efficiencies.

As well as with S T and SG&A leverage as we grow which we expect to be able to drive leverage in the longer term model in marketing as well as employee costs and other G&A. So so I would say that.

While I can't necessarily speculate.

Very precisely on the exact linearity that there is upside potential in the different layers different layers of our cost structure and we're pleased with our strong performance and continuing to see upside in the different areas of our cost.

And then could you I'm sorry could you repeat the second part of your question one more time.

So your long term EBITDA margin target is 15% to 20% plus how high could the philosophy.

Yeah.

I would say that the.

There is.

I would say that there is some.

Meaningful upside to either to there.

Can't necessarily point to a specific number but I would say that.

Uh huh.

Or stroke approach to modeling has been to be prudent in terms of how we think about our targets and and we think that the.

Engines of margin growth. If you will that we have all have long term legs all have delivered.

Delivered historically and we think that there is you know there is potential as we grow all of our strategic initiatives to to exceed that but I can't point to a specific number.

That's great color best of luck.

Thank you.

Our next question comes from Randy <unk> with Jefferies. Your line is open.

Yeah, great. Good morning, Thanks, a lot I really appreciate it.

That's my question. So couple of things one I guess first Jeff will be really instructive is if you'd give us some perspective on this our pricing optimization engine.

Talk about granularity you talk about the dynamics how dynamic. It is can you give us a little bit more detail on.

How granular that.

As the engine gets how.

How dynamic.

Does the engine get in terms of giving us perspective on how your team utilizes its engine not obviously, we know about it but want to understand.

How often things are changing.

And then.

The learnings from this engine can you can you see more improved permanence and merchandise margin improvement over time because of the early learnings or.

The productivity of the engine getting better and better.

Sure.

Yes so.

In terms of price optimization engine side, maybe just a bit of color. So this is it.

Something that we've developed in house.

Over over many years and its so its proprietary to us it's very it's very data driven.

Relies on kind of continual input of data that we see in terms of product sales consumer behavior and it does cover many of our different products.

In terms of how dynamic and granular it is it can get quite granular down to down to the product level.

In terms of the level of precision that it allows our teams to be making decisions and it's dynamic in terms of its something that the team can look at on a daily basis to see to see different trends in products and how.

How we should be adapting accordingly to be thinking about both our topline and our gross margin. So it is something that is proprietary very data driven continually used by our team and it's also of course not a static tool it's something that as we look at look at performance kind of.

Turning to refine the inputs and the operations of that engine. So it's a it's a very powerful tool for us and really a differentiator for us and we do believe that it has led to a structural structural improvements in our gross margin structure and we'll continue to be able to drive.

Long term accretion to gross margin.

And whatever else.

What I would add to that is one of the learnings that we have is because we have unique offering. So you know we'd mentioned in the past that how you know two thirds of our products are proprietary to us in terms of that design and you think about offerings like blockchain for example.

These are unique offerings to us I think that because of that we're able to command that higher prices and that's something that we've learned over time and that we've been able to adjust in a dynamic fashion.

Super helpful and I don't want to kind of go after so we think about the quarter a lot of it seems like the gross margin expansion was driven by this price optimization and you didn't get a lot of benefit from fine jewelry mix coming off but you know it's still early stage. So maybe you can give us some perspective on where is fine jewelry.

Penetration right now where it was at last year.

And where do you think it gets in the next let's say five years from now where can that penetration go and then finally, just remind us the gross margin differential between fine and engage them cool. Thanks guys.

So maybe I can start that yeah, we're not providing that particular metric, but what I can say is that you know it it still remains relatively small.

So we think that it's going to increase certainly as we continue to improve our offering and I think we're it into the journey in that respect Jeff do you want to comment on the second part.

Yeah.

In regards to the gross margin potential so it's it.

It is not something that you plan to break out in terms of like product level gross margins. We can say that it is that's the scoop products is definitely one that's accretive to our gross margins and higher than those for for the business as a whole and if you. If you look at if.

If you look at players in the space that are much more that are much more weighted towards fine jewelry.

There's a lot of there's a lot of gross margin gross margin accretion potential as fine jewelry becomes a larger and larger part of our business.

The other thing I Wouldnt Rich mentioned is what we were really excited to see gross margin improvement across the categories, including fine jewelry. So it'll be increases gross margin increases I think all of that is trending upward.

Thanks, guys.

Thank you.

Our next question comes from Oliver Chen with Cowen Your line is open.

Hi, Thank you that's one of the distinguishing factors as ESG a brilliant earth as you think about the consumer and the younger as well as your broader consumer.

Which factors of sustainability and other efforts that you're making or really.

Demand from the customer which ones are they appreciate most and then Jeff and Beth on the lab grown opportunity.

Do you have any thoughts around how that may impact the <unk> margins over time, and some key things we should monitor as it seems like.

Also a big opportunity, we're brilliant earth is well positioned thank you.

<unk>.

Thanks, Oliver So in terms of ESG you know obviously, it's an integral part of our company. We really founded based on these values and you know it's the DNA of the company in terms of which factors I really think that it's it's the holistic offering I think the fact that our customers understand the <unk>.

Important to us and how integral it is to our company to our offering is the fact that we're continually messaging on it whether it's the recycled content of our metals that new fair mind collection, it's really top of mind for us and I think it just comes across in a really authentic way and our customers just know that we're doing work on there.

Behalf in that we're a trusted E S G.

A retailer friend for them. So I think that that is is really important but I also think that sustainability right. Now is table Stakes I think that really you need to have a complete offering. So sustainability is very important but I think you need to complement it and the fact that we have that design that overall experience both digi.

And in showroom, that's really joyful all of those I think work together in a really seamless way and I think all of that as important as the really the brand to the customer and that's really what we are.

And in terms of your second question on lab.

We don't we don't disclose talk about that specific metric and break down.

Subcategories in that way, but what I can say is that you know overall, we've seen expanding ao vs within engagement rings, and that's really how we think about it is as customers come to us for the engagement ring.

They will start with the design they will balance all of the different characteristics, whether it's lab and natural you know the four c's and frankly, it's a very complex process and where we want to guide them into what they're looking for we're agnostic in terms of which they decide but we.

We have seen that a O V has it has it has increased over time as as we're seeing is just premium brand.

Okay, and then your free cash flow conversion rate is really outstanding as well as you expand and define and maximize LCD as well as some think more holistically about your offering.

What do you think about the inventory management on that side of the business and how you pursue it and anything.

Things, we should think about on a longer term basis with working capital. Thank you.

Jack you want to go with it.

Yeah. So I can talk to that you know what I think.

Our free cash flow conversion and our negative working capital model are definitely differentiators for us.

As the business you know the combined combined a few different factors such as our are getting paid and pull from our customers because we're fulfilling keeping you know keeping them keeping a light inventory typically getting paid before pay or our vendors. So it's definitely a powerful powerful.

Tool for Us and we believe that we will continue to operate in a very.

Working capital at <unk>.

Fishing manner, I would say some some things I would point to is we continue to introduce new products, we're able to do this in a very.

Very data driven way, we don't need to bring on.

Bring on a lot of inventory to stock hundreds or thousands of stores and we.

We're able to test and iterate very very efficiently, we have a very strong online business and then our relationships with our suppliers and our differentiated ability to produce in a quick turnaround fashion. That's a capability that we've developed over many years involves a lot of technical.

Logical integrations.

With with our supply chain and allows us to really develop and produce very agile inventory life fashion. So so I think that going forward. We continue to expect to operate in a very working capital efficient model. As this has been that we think will be continued.

Continue to be a differentiator for us.

Yes.

Thank you best regards.

Thanks.

Our next question from asthma with Keybanc. Your line is open hey, good.

Morning, guys and congrats on the IPO.

First a quick question around inflation I know you guys don't carry the same balance sheet risk that a traditional dealer might have given the.

Hi.

Factoring but.

If gold prices start to move.

And we noted that raw diamond prices started to move inside of the third quarter, what's the implications for margin.

Did you benefit from that in the quarter and how should we think about that if we do see it as inflationary prices longer term and then as a follow up on the fashion jewelry side.

Any any insight into how the marketplace is doing specifically to Corey. Thank you.

Great.

I can take that and maybe I'll start with the second one so in terms of our two core partnership we're really pleased with the performance there.

I think that it it shows that you know we we really are a destination for the younger consumer and I think having a curated offering where we collaborate with other brands and were selective there I think the fact that we had that I feel really increases our visibility and so we're gonna have increased opportunity there but.

That collection has been performing well and we think that there is future opportunity there both with the core as well as all the other partners.

In terms of the the first part I think that as it relates to gold pricing and diamonds, but the real beauty I think of the model as it is just the fact that we're able to adjust.

Dynamically our prices so as we see gold pricing, increasing and decreasing in and keep in mind. We also offer platinum and so there's a lot of dynamics in play there we are able to adjust.

Adjusted dynamically that pricing engine is really powerful and so in the past we have been able to maintain our margins even in the face of increasing costs and I think 'twenty 'twenty.

It was a great example of this are our margins continued to expand even as gold prices increased.

So you know really I think where we're at we're very well positioned regardless of what happens in terms of the input prices.

Great. Thanks, so much.

Yeah.

Thank you. Our next question comes from Erinn Murphy with Piper Sandler Your line is open.

Great. Thank you. Good morning. That's my question is for you around the iOS privacy changes a lot of D. T. C brands have seen challenges over the last six months can you just drill down on that topic. How are you navigating this for brilliant Earth and then have you seen any erosion in advertising metrics, thus far as a result.

Great. So marketing the marketing increase that we had wasn't touched all of us as part of our overall strategy.

And our digital marketing efforts continue to remain efficient and I think there's a few points that are worth mentioning first organic referrals and word of mouth for us are strong contributors to driving new customers.

Two thirds of our customers are influenced by word of mouth. So I think that is an important factor second the approach we have to digital advertising is diversified its multichannel and it's not overly concentrated in any specific channels, such as Facebook and I think that has surfaced wallet in the face of some of the.

<unk> that have happened.

Third we do have a very data driven thematic approach and we're continually refining and optimizing across our digital channels.

Because jewelry is a very considered purchase many years ago, we developed capabilities to be able to optimize across multiple actions along the customer journey. I think this approach has really been robust against the changes in the digital landscape, including some of the recent privacy changes that you mentioned.

With Apple.

And then finally the way we think about it is we really have a strong opportunity to strategically invest in marketing to be able to build brand awareness to support the brand momentum that we've seen as well as support future growth initiatives, including fine jewelry. So the bottom line is I think that.

We have a really robust offering in the face of some of the changes that we've seen.

Great. That's super helpful. Thank you and then maybe just a different take on the gross margin Jeff for you I guess historically, if we look back at the model Q4 has been a higher gross margin quarter on a linear basis versus Q3 is there anything different about this fourth quarter that would prevent that from being the case. Thank you.

Yeah, I would say that.

With respect to Q4, I mean, I think that.

Is it time that are.

There are there competitive holiday dynamics.

In play.

I would probably think about it is that we did have a very strong we did have that very strong outperformance.

In Q3 with schools the convergence of a lot of a lot of factors coming together in an ideal.

Fashion, you know I think going in going into the Q4, and we may not have that same convergence of of the perfect perfect factors.

We do then there are competitive holiday dynamics, we do expect to have a strong gross margin performance.

In Q4.

And then I think our dynamic engine will allow us to continue to adapt to that environment that we see in the holiday and so we expect to maintain our premium pricing.

But there's less potential for margin expansion in the holiday season.

Okay. So still looking for expansion year on year, but potentially not them to the level that would get it towards that 50% plus is that am I interpreting your kind of thought process correctly.

Yeah, I I think that we would expect to be delivered.

Similar better gross margin than we have historically in the fourth quarter, but like you said not necessarily the same level of outperformance as we saw in Q3. Thank.

Thank you.

Thank you our last question comes from Telsey with Telsey Advisory Group. Your line is open.

Good morning, everyone and congratulations on the nice results.

Do you think about some of the partnerships that you've engaged with recently liked to Corey how is how is that performing should we see more partnerships like that as you move forward and then on the new showrooms that have been opening.

Any difference in the results that you've seen from prior showrooms and given availability of real estate does anything change in terms of number of new showrooms and expect it to open. Thank you.

Great well I'll start with the first part of the question in terms of the partnerships with the Cory you know as I mentioned I think that it has performed really well I think it's it's proven itself that it's it's a nice aspect to our model and we do think that there is room to add additional partnership.

As well as to expand that to Cory partnership so look for for more in the future there.

In terms of the showrooms you know as we mentioned on the call. We continue to have strong conviction in our Omnichannel model. We are really encouraged by the recent performance with our newest watches and certainly excited to have those new team members in those locations as well.

Jeff has mentioned.

In his remarks that we expect to reach under 100 showrooms that provides really nice U S coverage and we do expect to read out over the next several years.

So nothing has really changed there in the near term, we really feel confident about the robust pipeline that we've developed across many different metro markets and I think the strength of the brand. The increased brand visibility that we've had has really been beneficial and influencing some of the compelling real estate opportunities.

Is that we're seeing that's increasingly available to us. So we really have an attractive demographic for for some of these centers and as we continue to look at a variety of different retail formats. I think that also helps to complement the offering so really I think feeling very positive about.

Put that Omnichannel strategy, and we'll continue to add and complement the digital experience and I think that the omnichannel.

Experience that we're developing is really going to be key in this category and I think that's what we're building towards and we're we're definitely on the path.

Thank you.

Thank you and I'm currently showing no questions at this time I'd like to turn the call back over to Beth Gerstein for closing remarks.

Great.

So thank you everyone for taking the time to speak with US. We are very excited to have completed such a successful quarter. Our first as a newly public company and we're excited about the elevated platform. We have now to continue modernizing and transforming the jewelry industry pursuing our mission.

And to being the fine jeweler of choice for millennial and Gen Z jewelry consumers' I wish each of you a happy holiday and new year and look forward to speaking with many of you at upcoming investor meetings, including the J P. M Conference on November 15th.

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

[music].

Hum.

[music].

Yeah.

[music].

Okay.

[music].

Ladies and gentlemen, thank you for standing by.

And welcome to borrowing at our third quarter fiscal 2021 earnings call.

At this time all participants are in a listen only mode.

After the Speakers' presentation, there'll 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.

Please go ahead.

Thank you good morning, everyone. Thank you for joining us for our third quarter fiscal year 2021 conference call. Joining me today are best Gerstein, our Chief Executive Officer and.

Quarter financial results and introduce our guidance.

Following this the operator will begin the Q&A session with our presenters that then Jeff available to answer the questions you have for us today.

Asian 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 that brilliant Earth dotcom.

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.

Thank you Alison and good morning, everyone and thank you for joining us. This morning, I'm delighted to speak with you today and share our record third quarter performance highlighted by strength across our financial metrics and continued progress on our long term growth initiatives.

The quarter also marked an exciting milestone in our history as we completed our IPO I want to thank our team for their hard work and dedication I am proud of all that we've accomplished together and I'm excited about the many opportunities that lie ahead of us in the near and long term.

Before I discuss our results for those new to brilliant art, let me first share our vision and approach to modernizing and transforming the jewelry industry.

Brilliant Earth is the next generation fine jewelry for millennial and Gen Z consumers, we offer a personalized joyful omnichannel shopping experience with a leading e-commerce platform and 14 showrooms across the United States and always underlying this are the mission driven values we were founded on.

Our commitment to sustainability transparency, giving back and diversity equity and inclusion we are transforming the industry with our approach and are proud to have become a global leader and ethically sourced fine jewelry.

Our unique business is highly profitable and well positioned to deliver sustained growth over the long term.

Let me share why brilliant Earth is both compelling and incredibly hard to replicate.

First the brilliant Earth brand, we have spent over a decade building a globally recognized premium jewelry brand with an authentic ESG focus and mission driven values. We're proud that these are the principles that we founded the company on 16 years ago.

We're always reminding ourselves that this is a journey that we need to continually work towards and that our values are and always will be our north star technology.

Technology.

We are a digital first innovator with a strong mindset for data analysis and technology from.

From the beginning we've used data to inform our decisions from product design and merchandising to a real estate strategy to a pricing engine that enables us to maintain and grow margins as a digital first leader for over 16 years, we've been testing Iterating and customizing a true omni.

Channel customer experience from our e-commerce platform and digital channels to our chevron's. This experience is well aligned with how today's younger consumer prefers to shop.

Our high net promoter scores show that our customers love their brilliant earth experience and we're continually striving to make it even better.

The channel our innovative appointment driven model allows us to curate and personalize our customers' experience in a way that truly modernize as jewelry shopping our showrooms have also driven transformative customer acquisition economics in the metros, where we have open them, resulting in an average $50.

Government and conversion across the entire metropolitan area within the first year after opening increasing to an average 90% conversion uplift by year three year three.

And insights about our consumers and their purchasing preferences.

And people technology processes and relationships to be able to deliver trusted ethically sourced products at our quality standards and in our Timeframes.

Our business model, our business is asset light and capital efficient our customers can choose from over 150000 natural a lab diamonds on our website and can personalize their jewelry using our create your own digital tools.

And in contrast, your traditional jewelers, we do not need to carry most of these products and our balance sheet.

Allowing us to remain capital efficient.

And finally, we are disruptors in a large and growing industry. The jewelry industry is $300 billion globally with more than $60 billion in the U S and growing at 7% per year.

We believe that all of these competitive advantages will allow us to continue delivering strong revenue growth with robust profit margins, while furthering our mission.

Now turning to third quarter results.

We delivered an outstanding third quarter highlighted by significant growth across our key financial metrics.

Net sales increased 33% above last year's third quarter, driven by our showrooms and website and across our products, including create your own diamond bearings wedding, gemstone and anniversary ratings and fine jewelry.

Our strong performance highlights brilliant Earth brand residents with millennial and Gen Z consumers as we continue to gain share in the jewelry industry.

Our margins were up significantly versus last year's third quarter gross margin increased to 54% from 43, 2% and our adjusted EBITDA margins continued to be strong growing year over year to 14, 2%.

Jeff Our CFO will talk more about the drivers of this strong margin performance in a few minutes.

In addition to strong top and bottom line results, we made great progress in the quarter on many of our long term growth initiatives.

We continued our omni channel leadership.

Our new San Francisco flagship and four new showroom locations in Portland, Austin, Dallas and Manhattan.

Our openings include innovative new store formats, such as ground floor retail locations in top tier shopping districts with other likeminded premium brands that attract a similar audience.

These new store formats offer expanded browsing and retail area for walking while continuing to serve our successful appointment driven model and deliver highly attractive economics.

The early data from these new showrooms is compelling with a rapid acceleration in customer appointments and traffic demonstrating strong latent demand in these markets.

For our 2021 new showroom, we have seen an average year over year metro bookings growth of over 100% in the first month post opening this is better than the historical 80% first gear uplift that we had previously seen with new showroom openings.

In addition, the conversion uplift for digital traffic across seas entire metro areas is similar or better than our strong historically demonstrated results.

This consistent powerful synergy between our stores and ecommerce reinforces our conviction in our Omnichannel strategy.

We also expanded our product offerings, we introduced a record number of collections and create your own diamond rings fine jewelry and other products.

As just a few examples.

Our ensemble design collection re imagined classic bridal trends for engagement race.

Our fashion rings collection builds on our strong foundation in ring design.

We're so excited about all of these beautiful collections you can see a few of them highlighted in the presentation materials for today's call.

Consumers are increasingly turning to brilliant earth for design, driven premium fine jewelry with meeting and in Q3, our fine jewelry products continued to experience rapid growth.

<unk> tool, which allows customers to mix and match styles and products in various different ways and to see how those styles walk together our customers love it.

We continually invest in improving what we believe are already best in class digital capabilities and a truly seamless omnichannel customer experience. For example, we recently launched a new virtual showroom, which allows consumers to see the same curated selection of products online that they saw in there.

Visit to our showroom along with personalized recommendations based on their specific preferences and shopping history. It's an incredible example of how our Omnichannel model really does deliver an elevated customized shopping experience for our customers wherever and however, they prefer to shop.

Continued ESG leadership.

ESG has been at our core before the acronym ESG went mainstream and we strive for continuous improvement in this area in the third quarter, we achieved several milestones that demonstrate our continued commitment to ESG leadership.

We created and funded the brilliant foundation with $1 million to provide long term support for nonprofit organizations aligned with social and environmental causes that we champion.

One organization, we have been proud to support its pure Earth, which provides artists no gold miners with training and Mercury free mining methods. We also introduced our new fair mind jewelry collection as part of our mission to support development efforts in our testimony gold mining cooperatives.

We have significantly expanded the number of blockchain enabled diamonds on our site to more than 10000, we continue to be a leading retailer of blockchain enabled diamonds at scale offering consumers a high level of transparency into the journey of their guidance.

Overall, I am extremely proud of our passionate and dedicated team we.

We accomplished and exceeded many of our ambitious goals for the third quarter and we are well positioned to drive many more successes in the fourth quarter and beyond.

And now I would like to turn the call over to Jeff to review, our financials in more detail and introduce our outlook for 2021.

Yes.

Thanks, Beth and good morning, everyone.

I'm also pleased to speak with you on our first earnings call as a public company.

I'll begin my discussion with an overview of our business and proceed with a review of our third quarter results.

Following this I'll share our outlook for fiscal year 2021.

Our digitally native technology, driven business model has allowed us to grow rapidly profitably and in a capital efficient manner.

I would like to highlight some of the key distinguishing characteristics of our business.

First consistent robust topline growth our revenue has grown at a CAGR of more than 30% since 2016.

Strong gross margins and adjusted EBITDA.

Our business has had strong consistent and increasing gross margins.

Generate positive net income adjusted EBITDA and operating cash flow in contrast to many other rapidly growing direct to consumer companies.

And inventory light negative working capital model.

We've run our business in a capital efficient manner.

We're paid in full in advance of product fulfillment and typically before we pay our vendors. This combined with our inventory turns of more than 10 times allows us to operate with negative working capital and generate strong operating cash flow conversion.

Compelling showroom economics.

Our showrooms also drive transformative customer acquisition economics in the Metros, where we open them as Beth mentioned this.

This strong topline uplift is coupled with a very capex and opex efficient model to drive robust showroom economics.

We believe our Omnichannel model gives us the ability to achieve broad coverage of the U S market with a footprint of fewer than 100 showrooms.

I will focus on adjusted non-GAAP measures of profitability and EPS in my remarks.

Our net sales for the third quarter increased 33% to $95 2 million.

$71 4 million in the third quarter of 2020.

We saw growth in both orders and <unk> across our product categories with an overall, 30% increase in total orders compared to the third quarter of fiscal 2020.

We also saw a 3% increase in average order value to $3301 from $3210 in the third quarter of 2020.

Our omnichannel strategy is working.

We expect these products will continue to contribute to top line growth repeat purchases and gross margin accretion for the company in the future.

Fine jewelry in addition to contributing to top line growth brings new customers really in Earth, while also providing exciting new repeat shopping occasions for our existing customers.

We have historically seen a high increase in repeat purchase behavior for customers that have either come into a showroom or purchased fine jewelry as we continue to open new showrooms and grow fine jewelry, we expect that they will lead to additional increases in overall repeat purchases.

And we have seen a double digit percentage increase in repeat purchase behavior at the 12 month Mark for our most recent customer cohort compared to recent cohorts.

This shows us the growing affinity of our customers to the brilliant Earth brand.

Moving on to gross margin.

Gross margin expanded by more than 700 basis points to 54% compared to 43, 2% in Q3 2020.

That expansion was across our products and was driven by our strong brand affinity and continuous optimization of our pricing engine.

Our powerful customer affinity and our differentiated product design enable us to continue to improve our margins and command premium prices.

Our pricing engine incorporates proprietary technology enabled algorithms that allow our team to continually test and refine pricing to optimize our revenue and gross margin and in theory, creating their passion.

Third quarter, we were able to drive better than expected gross margin expansion through these efforts.

Additionally, as we scale, we expect to continue to drive procurement efficiencies across our supply chain, including ongoing optimization of our vendor mix.

And of note our gross margin was not negatively impacted on a year over year basis by increased shipping costs in the third quarter, given that we use airfreight for inventory shipping.

All said, we drove better than expected gross margin in Q3 as everything came together incredibly well.

Now moving on to SG&A.

SG&A increased to 41% of sales in Q3 2021 compared to 31% in Q3 2020.

Approximately 360 basis points of this increase was made up of add backs to adjusted EBITDA from increased other G&A and employment expenses.

Including new show and Preopening expenses.

Donation to fund the brilliant Earth Foundation.

<unk> based compensation expenses and costs in preparation for operations as a public company all of which are added back in our presentation of adjusted EBITDA.

The remainder of the increase in SG&A was principally driven by expenses to support the growth of our business.

First increased investments in marketing for brand awareness and to support strategic growth initiatives, such as our expansion in the fine jewelry.

Marketing remains efficient and we continually refine our marketing spend across diversified channels we.

We have also developed sophisticated analytics based on her coat consumer behavior to optimize our campaigns.

We had higher employment costs to support our operations as a public company.

<unk> related employment costs also increased due to employment cost per new showrooms, which are still in the earlier stages of their ramp up.

It's worth noting that employment costs were unusually low in the third quarter of 2020 due to temporary COVID-19 related staffing changes.

And finally, we saw increased other G&A costs to support our ongoing operations as a public company.

Our adjusted EBITDA for the third quarter was $13 6 million up 42% from an adjusted EBITDA of $9 5 million in Q3, 2020, an increase of $4 million.

Our adjusted net income was $8 $5 million, representing an adjusted diluted EPS of nine cents per diluted share or $96 6 million diluted weighted average shares of common stock outstanding.

Turning to the balance sheet.

As of September 32021, we had cash and cash equivalents of $161 1 million, which included proceeds from our IPO.

As compared to $66 3 million at the end of 2020.

Our operating cash flow for the nine months ended September 32021 was $33 8 million compared to $15 2 million in the nine months ended September 32020.

Now moving on to our outlook.

For fiscal year 2021, we expect net sales in the range of 366 million to $369 million driven by growth across our products and the continued strength of our brand and omni channel model.

This represents an increase of over 45% compared to fiscal year, 2020 revenue and an increase of more than 80% compared to fiscal year 2019 revenue.

While we recognize the majority of the quarter remains ahead of US we feel that we are strongly positioned for the holiday season.

Our adjusted EBITDA for the year is expected in the range of 45 million to $42 million, which represents an adjusted EBITDA margin of approximately 11%.

This reflects a full quarter run rate of public company operating costs that are part of our ongoing expense structure and therefore are not added back in adjusted EBITDA.

We also plan to continue to invest in marketing to support the growth of our strategic initiatives.

And I will now turn the call back over to Beth.

As we look ahead, we are so excited about our business and expect our positive momentum to continue in the near and long term.

Holidays are an exciting and important time for us and our team has done an incredible job preparing for the upcoming holiday search.

We are very happy with our financial and operational performance in the third quarter and we believe we can continue to build on our positive momentum in the fourth quarter and beyond.

Now I would like to turn the call over to the operator to begin the Q&A portion of the call.

Yeah.

Thank you.

I ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

We ask that you. Please limit yourself to one question and one follow up you may re queue for any additional questions.

Our first question comes from Michael Binetti with Credit Suisse. Your line is open.

Hey, guys congrats on a great quarter and very nice to have you on a public call here look forward to look forward to the story as we go here.

The first thing that jumps out as a bit of a model question for Jeff, but Jeff the 700 basis points of gross gross margin.

As we look at that as we learned about the company through the IPO process.

We didn't hear about our gross margin with a five handle on it.

Over the planning horizon.

Maybe longer term, but I know you said look let's not get over our skis.

We expect some promotions in the fourth quarter, but is the is the is the 50 plus gross margin in third quarter.

Something that you feel like we build on going forward into 2022. After you get past that that holiday quarter that you gave and I know.

I know you said im sure Youre rank ordering some of the inputs there, but I think when we talked you thought over the next few years, there's about 100 basis points of of opportunity on the gross margin from the pricing optimization. It seems like you've got more than that already here. So maybe just a little bit more thinking on on what drove the 700 and what you think you might get.

<unk> was a single point in time.

And then.

Aside from aside from the gross margins maybe for for for Beth.

I'm just curious on the client jewelry I know you're very excited about the category. It's a big opportunity for brand like yours is great to see that up over a 100% maybe a little bit more what what's working there sounds like the marketing is working well, but how much of it was from new skus versus.

Excuse you already had in place are just getting better lift for marketing or anything like that would love to hear a little bit more is it seems like a good opportunity for you guys.

Sure. Thanks, Michael So.

Taking each of your questions. So in terms of what drove the gross margin strong gross margin performance in Q3.

Describe it as our one the very strong customer affinity that we have that allows us to.

Command premium prices and then as you discussed the pricing engine that we have that incorporates proprietary technology enabled algorithms and is very dynamic and led to our team continually test and refine pricing to optimize both both revenue and gross margin and would say that.

In Q3, so everything really came together ideally and we I would describe it as an outperformance.

Against our expectations in terms of how well how well everything work together on those levers.

We do continue to see long term long term upside in gross margin.

We would say that.

In the going forward period.

I'm not to expect necessarily the same high level of gross margin outperformance as we saw in Q3 as you don't want to assume the same kind of almost perfect set of circumstances.

We saw in the quarter, but we do expect to continue continued delivering strong gross margin and do see long term long term upside there.

In terms of specifically on 2022.

Not not.

Not yet providing guidance on 2022, we do expect to.

The outlook as part of our annual earnings call.

But we do continue to see long term upside potential in gross margin, but Q3 was kind of.

A really perfect convergence of everything in an outperformance of wastewater.

Sure.

Hi, Michael I, just wanted to address your question on fine jewelry and thanks for the question.

We were really excited to see the growth in the fine jewelry category and really the continued growth of the category as Jeff mentioned, it's been growing for many quarters now in terms of of what's working I think there's several factors there.

One I think the fact that we have such strong customer connections and that loyalty to the brand I think it is really important here, we'd mentioned in the past that the brand really resonates with the giver the receiver with all genders involved at and both of those genders.

Actually involved in the bridal purchase and I think that really we see that she is really excited to receive a brilliant earth product then that helps to drive repeat overall, so we do see a lift in repeat.

We also see new customers coming to us.

Or that experience and I think that that customer connection is just so important the showrooms also help to drive that we see increase repeat if you've come into the showroom and I think that as we build out our showrooms that is going to be a bigger contributor. So the second thing I would say as is the product assortment I think is really working.

Across all levels, both new Skus and existing Skus I think some of the new Skus are pretty early in terms of the released so what we're really excited to see how they perform over holiday.

But I do think that that assortment is key and the fact that we have a data driven design and that we really excel here I think really positions us very well.

And then the third thing I think that's really important is is that marketing and that the marketing efforts that we have are showing.

Early promise as it relates to driving new customers as well as that repeat so I think we're seeing strength in all areas and the fact that we have that digital experience that we're really improving over time and that new gifting experience. I think is also positions us really well for holiday.

I know that there's a lot of factors there, but I think it's really important that we're really checking on all sides.

Alright, Thanks, a lot best.

Yes.

Thank you. Our next question comes from Matthew Boss with Jpmorgan. Your line is open.

Great Thanks, and congrats on a really nice quarter.

So no bet. So Beth on your 35% revenue growth CAGR this quarter, and I think more than 30% implied guidance for the fourth quarter.

How much would you attribute recent performance to an expanding industry Tam given the accelerated penetration of digital in the fine jewelry market.

As opposed to company specific execution and market share gains and when I know you've pointed out is a fragmented industry backdrop.

I think thanks for the question.

And if they are stocking up so what I would say is.

That really I think theres a few different factors you mentioned the fact that E. Commerce is experiencing SaaS growth I think that really plays to our strength as a digital first company here the fact that branded.

It's really going to be instrumental to the growth in and has been in the past as well and then I think the fact that we are really small relative to that 300 billion dollar market.

Is really important we're really disruptors here, we continue to gain share within this market given that differentiated business model that we talked about so really I think it is actually all the factors I think jewelry is also expanding weddings are expected to have the.

Highest levels that they've had in decades and I think that also has contributed to the growth.

Plus in your view.

Okay and can I confirm on the first part of your question were you asking about the linearity on the EBITDA target.

Yes or no.

Got it.

EBITDA target just how best to think about it multiyear in terms of it being linear from the exiting exit point of this year to the 15 to 20 and then the 15 to 20, plus you know what how do you view the potential of the plant.

Yes so.

And in terms of linearity.

Maybe.

It's hard to project necessarily on a year over year basis, what I can say is that we do expect you know cause that theres upside upside potential both in terms of growing growing gross margin with some of the factors that.

That we've described such as our premium brand positioning the pricing engine and other other procurement efficiencies.

As well as with SG&A SG&A leverage as we grow which we expect to be able to drive leverage in the longer term model in marketing as well as the employee costs and other G&A. So so I would say that.

While I can't necessarily speculate.

You know very precisely on the exact linearity that there is upside potential in the different layers different layers of our cost structure and we're pleased with our strong performance and continuing to see upside in the different areas of our cost.

And then could you I'm sorry can you repeat the second part of your question one more time.

So your long term EBITDA margin target is 15% to 20% plus how high could the philosophy.

Yeah.

Yes.

I'd say that.

There is.

I would say that there is some.

Meaningful upside either two there.

Can necessarily point to a specific number but I would say that no.

R. R spoke approach to modeling has been to be prudent in terms of how we think about our targets and and we think that the.

Engines of margin growth. If you will that we have all have long term legs all have delivered.

<unk> delivered historically and we think that there is there is potential as we grow all of our strategic initiatives to to exceed that but I can't point to a specific number.

That's great color best of luck.

Thank you.

Our next question comes from Randy <unk> with Jefferies. Your line is open.

Yeah, great. Good morning, Thanks, a lot I really appreciate it.

That's my question. So a couple of things one I guess first Jeff would be really instructive is if you'd give us some perspective on this pricing optimization engine.

Talk about granularity you talk about the dynamic how dynamic. It is can you give us a little bit more detail on.

How granular that.

The engine gets how.

How dynamic.

Does the engine get in terms of giving us perspective on how your team utilizes its engine not obviously, we know about it but want to understand how often things are changing.

And then if you the learnings from this engine can you can you see more improved permanence and merchandize margin improvement over time because of the early learnings or the.

Productivity of the engine getting better and better.

Sure.

Yes, so in terms of price optimization engine side, maybe just a bit of color. So this is it.

Something that we've developed in <unk>.

House over over many years and its so its proprietary to US is very is very data driven.

<unk> relies on kind of continual input of data that we see in terms of product sales consumer behavior and it does cover many of our different products.

In terms of how dynamic and granular it is it can get quite granular down to down to the product level.

How we should be adapting accordingly to be thinking about both our topline and our gross margin. So it is something that is proprietary very data driven continually used by our team and it is also of course not a static tool it's something that as we look at look at performance kind of continuing to refine the inputs.

The operations of that engine so it's.

It's a very powerful tool for us and really a differentiator for us and we do believe that it has led to.

Structural structural improvements in our gross margin structure, and we'll continue to be able to drive long term accretion to gross margin.

And what.

What I would add to that is one of the learnings that we have is because we have unique.

Offering so you know we'd mentioned in the past that how.

Two thirds of our our products are proprietary to us in terms of that design and you think about offerings like blockchain for example.

Super helpful. And then they don't want to kind of go after it. So we think about the quarter a lot of it seems like the gross margin expansion was driven by this price optimization and you didn't get a lot of benefit from fine jewelry mix coming up with something that we're still early stage. So maybe give us some perspective on where is fine jewelry.

<unk> penetration right now where it was last year.

And where do you think it sticks in the next let's say five years from now where can that penetration go and then finally, just remind us the gross margin differential between fine and engagement sure. Thanks Scott.

So maybe I can start that.

We're not providing that particular metric, but what I can say is that it it still remains relatively small.

But we think that it's going to increase certainly as we continue to improve our offering and I think we're it into the journey in that respect.

Jeff do you want to comment on the second part.

Yeah.

Regards to the gross margin potential so it's.

It is not something that you plan to break out in terms of good product level gross margins. We can say that it is that's the.

Scoop products is definitely one that's accretive to our gross margins and higher than those for for the business as a whole and if you. If you look at if you look at players in the space that are much more better much more weighted towards fine jewelry.

There's a lot of there's a lot of gross margin gross margin accretion potential as fine jewelry becomes a larger and larger part of our business.

The other thing I would just mention is what we we were really excited to see gross margin improvement across the categories, including fine jewelry. So it would be increases gross margin increases I think all of that is trending upward.

Thanks, guys.

Thank you.

Our next question comes from Oliver Chen with Cowen Your line is open.

Hi, Thank you and that's one of the distinguishing factors as ESG a brilliant earth as you think about the consumer and the younger as well as your broader consumer.

Which factors of sustainability and other efforts that you're making are really in demand from the customer which ones are they appreciate most and then Jeff on the lab grown opportunity.

Do you have any thoughts around how that may impact it would be <unk> margins over time, and some key things we should monitor as it seems like.

Also a big opportunity, we're brilliant earth is well position. Thank you.

Thanks, Oliver So in terms of ESG you know obviously, it's an integral part of our company. We really founded based on these values and you know that's the DNA of the company in terms of which factors.

I really think that it's it's the holistic offering I think the fact that our customers understand the importance to us and how integral it is to our company to our offering is the fact that we're continually messaging on it whether it's the recycled content of our metals that new fair mind collection, it's really top of mind for us and I.

Think it just comes across in a really authentic way and our customers just know that we're doing work on their behalf and that we're a trusted E. S. J.

Retailer for them. So I think that that is is really important but I also think that sustainability right. Now is table Stakes I think that really you need to have a complete offering. So sustainability is very important but I think you need to complement it and the fact that we have that design that overall experience both digi.

In terms of your second question on lab, you know, we don't we don't disclose talk about that specific metric and breakdown subcategories in that way, but what I can say is that overall, we've seen expanding a oh these within engagement rings and that's really.

How do we think about it is as customers come to us for the engagement ring. They you know we'll start with the design they will balance all of the different characteristics, whether it's lab and natural you know the four c's and frankly, it's a very complex process and where we want to guide them into what they're looking for we're agnostic.

In terms of which they decide but we.

We have seen that ABB has it has it has increased over time as as we're seeing is just a premium brand.

Okay, and then your free cash flow conversion rate is really outstanding as well as you expand and define maximize LTV as well as some think more.

Particularly about your offering.

What do you think about the inventory management on that side of the business and how you pursue it.

Things, we should think about on a longer term basis with working capital. Thank you.

Jack you want to go with it.

Yes, so I can talk to that I think our free cash flow conversion and our negative working capital model are definitely differentiators for us.

Has the business you know the combined combined a few different factors, such as our or getting paid and pull from our customers because we're fulfilling keeping keeping them keeping a light inventory typically getting paid before they are our vendors. So it is definitely a powerful powerful.

Tool for Us and we believe that we will continue to operate in a very in a very working capital.

Fishing manner I would say some things that are going to just like as we continue to introduce new products, we're able to do do this in a very.

You know very data driven way, we don't need to bring on.

Bring on a lot of inventory to stock hundreds or thousands of stores and we were able to test and iterate very very efficiently. We have a very strong online business and then our relationships with our suppliers and our differentiated ability to.

<unk> in a quick turnaround fashion, that's a capability that we've developed over many years involves a lot of technological integrations with with our supply chain and allows us to really develop and produce in a very agile inventory light fashion. So so I think that going forward, we continue to <unk>.

To operate in a very working capital efficient model. As this has been that we think will be continue.

Continue to be a differentiator for us.

Yes.

Thank you best regards.

Thanks.

Our next question from asthma with Keybanc. Your line is open hey, good.

Guys and congrats on the IPO.

First a quick question around inflation I know you guys don't carry the same balance sheet risk that a traditional jewelry might have given the just in time.

<unk>.

Think about if gold prices start to move and we noted that raw diamond prices started to move inside of the third quarter, what's the implications for margin did.

Did you benefit from that in the quarter and how do we think about that if we do see it as inflationary prices longer term and then as a follow up on the fashion jewelry side.

Any any insight into how the marketplace is doing physically to Corey. Thank you.

Great.

I can take that and maybe I'll start with the second one so in terms of our two core partnership we're really pleased with our performance there.

I think that it it shows that you know we we really are a destination for the younger consumer and I think having a curated offering where we collaborate with other brands and we're selective there I think the fact that we had that I feel really increases our visibility and so we're gonna have increased opportunity there but.

That that collection has been performing well and we think that there is future opportunity there both with the core as well as all the other partners in.

In terms of the the first part I think that as it relates to gold pricing.

And diamonds, but the real beauty I think of the model as it is just the fact that we're able to adjust that.

<unk> our prices, so as we see gold pricing, increasing or decreasing in and keep in mind. We also offer platinum and so there's a lot of dynamics in play there we are able to adjust.

Adjusted dynamically that pricing engine is really powerful and so in the past we have been able to maintain our margins even in the face of increasing costs and I think 2020.

It was a great example of this are our margins continued to expand even as gold prices increased.

So you know really I think where we're at we're very well positioned regardless of what happens in terms of the input prices.

Great. Thanks, so much.

Thank you. Our next question comes from Erinn Murphy with Piper Sandler Your line is open.

Great. Thank you. Good morning. My question is for you around the iOS privacy changes a lot of D. T. P brands have seen challenges over the last six months can you just drill down on that topic. How are you navigating this for brilliant Earth and then have you seen any erosion in advertising metrics, thus far as a result.

Great. So marketing the marketing increase that we had wasn't touched all of us as part of our overall strategy.

<unk> that have happened.

Third we do have a very data driven thematic approach and we're continually refining and optimizing across our digital channels.

With Apple.

We have a really robust offering in the face of some of the changes that we've seen.

Great. That's super helpful. Thank you and then maybe just a different take on the gross margin Jeff for you I guess historically, if we look back at the model Q4 has been a higher gross margin quarter on a linear basis versus Q3 is there anything different about the fourth quarter that would prevent that from being the case. Thank you.

Yeah, I would say that.

With respect with respect to the Q4 I mean, I think that is is it time that.

There are there are competitive holiday dynamics.

In play I would say.

I'd, probably think about it that we did have a very strong we didn't have that very strong outperformance.

In Q3 with schools the convergence of a lot of a lot of factors coming together in an ideal.

Ideal fashion, you know I think going in going into the Q4, and we may not have that same convergence.

Perfect perfect factors.

We do then there are competitive holiday dynamics, we do expect to have a strong gross margin performance.

In Q4.

And then I think our dynamic engine will allow us to continue to adapt to that environment that we see in the holiday and so we expect to maintain our premium pricing.

But there's less potential for margin expansion in the holiday season.

Okay. So still looking for expansion year on year, but potentially not to the level that would get it towards that 50% plus is that am I interpreting your kind of thought process correctly.

Yeah, I think that you know we would expect to be delivered.

Similar better gross margin than we have historically in the fourth quarter, but like I said not necessarily the same level of outperformance as we saw in Q3. Thank.

Thank you.

Thank you our last question comes from Telsey with Telsey Advisory Group. Your line is open.

Good morning, everyone and congratulations on the nice results.

Do you think about some of the partnerships that you've engaged with recently like Corey tell us how is that performing should we see more partnerships like that as you move forward and then on the new showrooms that have been opening.

Any difference in the results that you've seen from prior showrooms and given availability of real estate does anything change in terms of number of new showrooms and expect it to open. Thank you.

Great well I'll I'll start with the first part of the question in terms of the partnerships with the Korea as I mentioned I think that it if it's performed really well I think it's it's proven itself that it's it's a nice aspect to our model and we do think that there is room to add additional partnership.

As well as to expand that to Cory partnership so look for for more in the future there and in terms of the showrooms here as we mentioned on the call. We continue to have strong conviction in our Omnichannel model. We are really encouraged by the recent performance with our newest watches and.

Certainly excited to have those new team members in those locations as well.

Jeff has mentioned in his remarks that we expect to reach under 100 showrooms that provides really nice U S coverage and we do expect to read out over the next several years.

Is that we're seeing that's increasingly available to US now we really have an attractive demographic for for some of these centers and as we continue to look at a variety of different retail formats. I think that also helps to complement the offering so really I think feeling very positive.

That omnichannel strategy, and we'll continue to add and complement the digital experience and I think that the omnichannel.

Experience that we're developing is really going to be key and in this category and I think that's what we're building towards and we're we're definitely on the path.

Thank you.

Thank you and I'm currently showing no questions at this time I'd like to turn the call back over to Beth Gerstein for closing remarks.

Great.

Yeah.

July of choice for millennial and Gen Z jewelry consumers' I wish each of you a happy holiday and new year and look forward to speaking with many of you at upcoming investor meetings, including the J P. M Conference on November 15th.

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

Q3 2021 Brilliant Earth Group Inc Earnings Call

Request a DemoDemo

BRLT

Brilliant Earth

Earnings