Q3 2022 Brilliant Earth Group Inc Earnings Call

November 10, 2022

Yeah.

Hello, and thank you for standing by.

<unk> third quarter 2022 earnings conference call.

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

After the speaker presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one on your telephone.

Now my pleasure to introduce Allison Malkin with ICR.

Thank you good afternoon, everyone. Thank you for joining us for our third quarter 2022 earnings Conference call. Joining me today are best skirting, our Chief Executive Officer, and Jeff <unk>, Our Chief Financial Officer for this afternoon's call Beth will begin with highlights of our third quarter financial and.

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

Slowing that the operator will begin the Q&A session with our presenters bathroom, Jeff available to answer the questions you have for us today.

Before we start I would like to remind you that management will make certain remarks today that are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These future forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer.

And 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 obligation to revise or publicly release the results of any revision to these forward looking statements in light of new information or future events.

Also during this call we will discuss both GAAP and non-GAAP financial measures you will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's earnings release, which is available at the Investor Relations section of our website.

At investors that Ryanair Dot com.

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 that.

Good afternoon, everyone and thank you for joining us today.

We're pleased to share our third quarter results with you, which reflect our fifth consecutive quarter of profitable growth as a public company.

These results are the continuation of the multiyear strategy, we've been executing to transform the jewelry industry.

Transforming industry I know that is a bold and ambitious aim, but I start there because it is core to everything we do.

<unk> to cultivate a more transparent sustainable compassionate and inclusive jewelry industry is unwavering.

Our commitment is to building sustainable long term profitable growth for our company and our shareholders.

We all know that 2022 has been a challenging environment for most companies.

<unk> heard from US every quarter, we believe that as a growth company two of our fundamental unrelated differentiators are our commitment to building and protecting our brands and to driving healthy profitable growth.

And while the macro environment is clearly affecting consumers I'm very proud of our team's ability to stay focused on delivering on that commitment.

And to delivering for our customers and for our company.

I continue to be inspired by their agility and dedication.

This quarter, we delivered revenue growth of 17% to $111 4 million, we delivered another quarter of record gross margin at 54, 7%.

430 basis point improvement over the prior year, and we delivered $10 million and adjusted EBITDA, representing an adjusted EBITDA margin of 9%.

So what drove those results.

First it was the brilliant Earth brand and its continuing residents with millennial and Gen Z consumers, particularly those who share our mission driven values.

And who seek our industry, leading craftsmanship and trend forward unique designs.

We know this because they tell us so.

As a data driven company, we are continuously engaging with consumers and using those insights to enhance every aspect of their experience with our brands.

For example, we note that our millennial and Gen Z shoppers continue to over index on research from word of mouth and social media.

So during the quarter and as we have throughout the years, we highlighted stories and products by scaling new and original video content focused on weddings, both engagement rings and wedding bands as well as fine jewelry across a range of collections.

Last quarter I mentioned that our recent brand study told us that 13% of our customers learned about brilliant earth on tictoc.

Note that during the third quarter, we scaled significantly more content, including Influencer organic and branded content with 50% content growth quarter over quarter and saw a more than 200% increase in viewership.

We also focused on key influencer content for the wedding season with brides shopping in our showrooms showcasing the best wedding day, jewelry and offering Q&A for styling driving millions of views. These.

These efforts expanded our brands reach as we saw growth in both new and repeat customer orders and amplified many product lines that fuels our growth.

We continue to see growth in our business with particularly strong growth in wedding bands driven in part by our growing assortment of unique men's and women's designs and fine jewelry, which is a small but rapidly growing category continues to outpace our overall growth.

Shifting to our showroom strategy.

As you know as a truly omnichannel brand expanding our chevron locations is a critical part of our growth plans.

We have continued our rollout with new showrooms opening in St. Louis Palo Alto, Santa Monica and Baltimore.

Bringing our total to 25 showrooms in key markets across North America.

Consistent with our past experiences showrooms continue to generate uplift within the overall metro areas in which we open.

Our showrooms drive growth in average order value and equally important deliver strong ROI reinforcing our belief in the power of the showroom model.

We anticipate that we will end the year, having approximately doubled our total showroom leases.

Our showroom strategy has been and will continue to be a major catalyst for building our brands and business and we will continue to take a disciplined ROI driven approach as we open new high quality showrooms.

Our ability to create a seamless joyful omnichannel experience is one of brilliant earth distinguishing attributes.

We're continually testing iterating and enhancing features across our platform to ensure that we are providing a best in class experience and service level.

Other enhanced chat features evolving imagery and video to further showcase jewelry in real life or enhancing our appointment scheduling and follow up we are providing the highest quality most personalized and complete experience in the industry.

Our customers give us consistently great feedback on their experience.

And as innovators in the industry, we will continue to evolve and lead as we grow.

While we're pleased that we've continued to drive sustainable profitable growth.

As we look to finish the year macro headwinds and the anticipated promotional environment are more difficult than earlier in the year, causing us to be more cautious about our fourth quarter revenue outlook.

While we are still seeing strong consumer interest demonstrating the resonance of our brands we.

We are seeing a further lengthening of the decision making process given the macroeconomic uncertainty as more customers take a wait and see approach.

Our outlook reflects our continuing focus on driving high quality revenue and prudently, making ROI driven investment decisions to deliver long term profitable growth.

As dynamic as the environment is we've recognized that the key weeks of holiday selling are still ahead of us and we are well prepared to take advantage of the season.

We have a number of trend leading product launches in our plans, including cocktail rings, a new and expanded their mind assortment, our new art Deco inspired bridal collection the expansion of our populace to Cory collection.

And continued expansion of limited edition products to name just a few.

We will also continue to make disciplined ROI focused investments that support our long term growth plans, such as continuing to strategically grow our showroom presence.

I am very confident in our ability to navigate in this in any environment, our asset light and agile data driven business model, coupled with our strong balance sheet enables us to be both opportunistic and patient through a changing landscape.

You can expect that we will stay focused on making sound long term investments to drive our future growth, while also managing our costs to deliver sustainable topline growth and bottom line profit.

As I have said in the past.

By Nimbly and prudently executing our strategy, while optimizing our model to grow the brand.

We're well positioned to continue to take share in a fragmented industry.

Prudently manage our costs and to deliver profitable growth.

All while we continue to advance our mission to transform the jewelry industry and.

And now I'll turn it over to Jeff.

Thanks, Beth and good afternoon, everyone.

Thank you for joining us today to discuss our third quarter fiscal 2022 results.

Today, we'll walk you through our detailed financial results and some of the important strategic approach, we've executed to deliver another strong quarter of profitable growth.

Our third quarter results demonstrate the disciplined execution of our ongoing strategy to disrupt and transform the jewelry industry.

Revenue grew to $111 4 million, which represents 17% year over year growth and up 29% on a three year CAGR compared to Q3 2019.

Gross margin expanded to 54, 7%, a 430 basis point increase compared to Q3 2021, and once again, our highest quarterly gross margin percentage on record.

Adjusted EBITDA was $10 million or 9% of revenue.

As Beth said these impressive results were delivered in a challenging and highly dynamic macroeconomic environment.

While we have been experiencing rapidly changing consumer landscape. The results, we delivered again illustrate and reinforce the Powell and distinction of our brand and our.

Agile highly efficient business model.

Q3 revenue grew 17% year over year, driven by strength across our product margins as.

As we've said throughout the year.

Capitalizing on the demand for weddings has been a particular focus for US we were successfully able to do so in Q3 as engagement rings and wedding bands as well as fine jewelry contributed to our growth.

Consistent with our plans, we continue to see outsized performance within our fine jewelry assortment.

With growth that far outpaces the business as a whole.

As expected the outperformance of fine jewelry and wedding bands will drivers of a high single digit percentage decline in our total company blended for.

For Q3.

As a reminder, both fine jewelry and wedding bands have a lower average price points than our overall business.

We have also seen outsized growth in fine jewelry at more accessible price points as our product breadth has expanded.

With the opening of our 25th showroom, we are continuing to extend our successful omnichannel growth strategies are.

Our showrooms drive robust uplift in macro bookings after opening while also generating strong ROI.

We continue to see that new showrooms deliver higher <unk>.

And our overall average further reinforcing our confidence in the power of our showroom strategy.

Turning to gross margin Q3 gross margin expanded to 54, 7%, a 430 basis point improvement versus the prior year and our highest quarterly gross margin on record.

In addition to the overall growing demand for the brilliant Earth brand drivers of this improvement included pricing optimization.

Germany efficiencies.

Positive contribution from product mix as well as the realization of benefits from a warranty program.

In the third quarter SG.

SG&A increased to 49% of net sales compared to 41% of net sales in Q3 2021, an increase of 890 basis points or 960 basis points on an adjusted basis, excluding equity based compensation depreciation new showroom.

The opening costs nonrecurring costs and other expenses, which are added back presentation of adjusted EBITDA.

This 960 basis point increase over the prior year reflects investments we made in marketing people and other G&A to support our growth.

Marketing costs as a percentage of sales grew by approximately 330 basis points year over year.

The initiatives the best talked about are great. Examples of our investments in building the brilliant Earth brand and the impact those efforts continue to have growing awareness and demand for the unique and differentiated brilliant earth experience.

During the quarter employee costs were higher by approximately 350 basis points year over year.

As you know, we consistently taken ROI driven approach to our investments, including our employee costs.

We're focusing on investing in new showroom employees as well as critical corporate talent to support current and future growth.

Other G&A as a percentage of sales increased by approximately 280 basis points driven by increased public company operating costs and other costs to support our growth.

No. We've just begun to anniversary our public company costs in late Q3.

The combination of strong revenue and gross margin growth balanced by strategic investments in the business delivered $10 million and adjusted EBITDA in the third quarter.

Profitability positive free cash flow in a capital efficient operating model continue to differentiate us among direct to consumer companies and we continue to operate the business in an asset light fashion.

We ended the third quarter with $153 million in cash.

Inventory grew to $40 million at quarter end, which reflects the growth and success of our strategic initiatives, such as fine jewelry and showrooms.

As a result, our inventory has grown as planned which we believe is appropriate to support our growth.

Fortunately, we also continue to generate industry, leading turns as of our call. Today, we are six weeks into the quarter with the majority of the holiday season ahead of us.

As we have all seen the macro and consumer environment has shifted significantly over the past several weeks.

As a result of the macro headwinds we have seen we are updating our fiscal year 2022 revenue guidance to $436 million to $446 million or $116 million to $126 million for Q4 2022.

This represents a year over year growth rate of 15% to 17% for the year and negative 5% to positive 3% for Q4.

And the three year CAGR of 29% to 30% for the year and <unk>, 23% to 26% for Q4.

Our updated revenue guidance is consistent with the performance we have seen in Q4, so far and reflects the changing macroeconomic environment and lengthening consumer decision process, but continues to represent a robust three year CAGR for both the fourth quarter and the fiscal year.

For the fourth quarter. It is important to keep in mind that we are comping a strong Q4 in the prior year.

Given our flexible and asset light business model, we have the ability to capture additional demand that may occur during the holiday season. It's still largely lies ahead of us.

We also expect year over year improvements in our gross margin, though not at the rate of recent quarters as we anniversary our highest gross margin quarter of the prior year and given that our guidance anticipates the environment will be more promotional this holiday season.

We intend to continue making prudent investments and allocating spend across areas of the business that generate a strong ROI.

In Q4, we anticipate making selected incremental investments in marketing.

<unk> costs and other G&A, but in all cases, we will be disciplined and ROI focused in our approach and the spend will be consistent with our goal to deliver long term sustainable profitable growth.

As a result of our flexible business model and our ongoing disciplined management of investments we are pleased that our adjusted.

Remains within our previously communicated outlook range.

We expect adjusted EBITDA for the year to be $32 million to $37 million or an adjusted EBITDA margin of 7%, 8% and we expect adjusted EBITDA for Q4 to be $4 million to $9 million or an adjusted EBITDA margin of three to seven.

1%.

The ability to adapt and deliver consistent profitability in a dynamic environment is one of the significant advantages of our business model and our management philosophy.

As a growth company, we will continue to focus on optimizing leveraging our asset light business model to build our brand and our business, both near and long term profitable sustainable growth.

This approach informs how we are looking ahead to Q4 and fiscal 2023 and is consistent with our historical approach to building our business.

Both companies, we will prioritize delivering healthy and sustainable revenue growth.

Expanding our premium gross margin, making.

Making prudent strategic ROI, driven investments to build and scale the business and rigorously managing our cost to deliver sustainable profitable growth for our shareholders.

With that we'll be happy to take your questions.

Thank you.

As a reminder, ladies and gentlemen to ask a question you will need to press star one one.

My phone.

And due to time constraints, we ask that you. Please limit yourself to one question and one follow up you may reenter the queue.

Do you.

With additional questions.

One moment please.

And our first question comes from the line of Matthew Boss with JP Morgan.

Thanks, It's Amanda Douglas on for Matt.

To start Beth could you speak to how you saw the cadence of demand trends progress throughout <unk> and specifically on the softer <unk> to date trend could you speak to where by category or price point, you've seen changes relative to <unk>.

Absolutely.

Thanks for the question.

As we mentioned in the call Q3 shaped up much as.

As we expected and what we started to notice in October is the retail environment became more challenging.

As it relates to price point, specifically, we saw increased demand at the mid range of our offerings and that was offset by some of the moderation that we saw in the $10000 price point above the $10000 price range. So keep in mind. This is just.

Observed since October and we do notice that there is some variability from October to October in a holiday season. So we're not ready to call. It a trend just yet but it is something that we're overall watching.

And I think the one other thing I would just want to add is as Jeff had mentioned in his remarks.

We do recognize the majority of the holiday season is in front of US, we're very well prepared with the offerings that we have and so we're able to capture the demand as we see at <unk>.

As we have in the past.

Great. That's helpful and then to follow up for Jeff.

Could you speak to what's driven the magnitude of your gross margin expansion in the third quarter and how should we think about potential pricing optimization opportunity in <unk>. Despite maybe a more promotional holiday and then just multi year are there any changes to your mid fifties gross margin target.

Sure.

So.

To start off with what drove the gross margin improvement in the third quarter.

Driven by similar factors that we've seen in the past underlying it is the strong brand residents the premium proprietary products that we have.

Which allow us to have that premium gross margin, we support that operationally with our pricing optimization engine.

On procurement efficiencies and then bolster seen some benefit from our enhanced extended warranty program, which has seen good.

Good customer demand. So those are those are areas that we've seen.

We've seen.

We're able to drive our gross margin.

In terms of Q4.

As I've mentioned in the remarks, and as you pointed out we do anticipate in our guidance that maybe a more promotional environment said our strategy of continuing to focus on sustainable profitable growth has not changed and will continue to manage these levels in Q4.

As we as we do each quarter.

And then with respect to the longer term model, we our longer term model that we've previously discussed.

Gross margins in the mid 50%.

We expect to continue to manage the levers that we just talked about to optimize both topline and gross margin. So the continuation of the strategies and approach that we've seen in the past in the <unk>.

Spect to continue those going forward.

That's helpful color. Thank you. Thank you.

Yeah.

And our next question comes from the line of Oliver Chen with Cowen.

Thanks, So much hi, Beth and Jeff regarding the guidance on the callout on macro headwinds, which macro headwinds.

Or are you most concerned about or are most relevant to what youre seeing.

Yes on the <unk>.

Marketing efficiency and customer acquisition costs.

Whats the head with that dynamic in terms of.

How efficient it is in the cans and Youre, making lately is its a pretty agile changing dynamic.

And then finally, just as we think about the guidance that you provided your revenue step down but your EBITDA.

The previously established range, what's the main delta in terms of being able to maintain the EBITDA. Thanks, so much.

Hi, Oliver Thanks for the question so in terms of the macro.

We are seeing strong interest nice traffic in our showrooms.

Your line I think we're just seeing a lengthening of the overall decision cycle there.

Of the overall Differentiators that we have is we don't believe that all revenue growth is equal and we don't believe in chasing unprofitable growth. So as we're seeing a more promotional environment, we're not going to be leaning into discounting the same way that others need to in order to sell through their inventory.

Tori.

So we're really thinking about how we can maintain our profitability targets and I think that speaks to the agility of our business model.

And continuing to build our premium and luxury brands. So that's how we're thinking about just how we're managing our performance in a challenging environment. You know marketing is one of the levers that we have but we continue to look for strong ROI as we think about delivering in the marketing.

With our marketing strategy. We're also building a longer term brands and so we're taking I think a pretty managed approach there in terms of making sure that we are healthy and profitable while considering that we are still young and growing brand and a $300 billion fragmented industry.

We will continue to gain share.

And then with regard to your questions about marketing and EBITDA say that.

The way that we think about management of our Opex, including marketing is to focus on running the business to sustainable profitable growth.

Our marketing and the way that we look at our marketing spend is dynamic very data driven and ROI focused and that is an approach that we've always taken and continue to follow following this environment that ties into the second part of your question regarding the profitability and we're pleased that we're able to in this environment.

<unk> maintained our profitability guidance in the same range that we've.

Discussed earlier on in the year and I think that speaks to how.

Cross the business and across our Opex, we've been disciplined in our focus of how we deploy funds.

Portfolio, ROI and managing the business to profitability and how the business model is also dynamic and flexible and allows us to manage based on different differences in demand that may occur and so I think that all comes together in how we we're continuing to guide to a similar.

EBITDA ranges that we have previously.

Yeah.

Thank you best regards happy holidays.

And so.

Thank you Andrew.

Our next question comes from the line of Michael Binetti with Credit Suisse.

Hey, guys. Thanks for thanks for answering my questions here so.

Jeff.

You laid out the revenue path your potential.

Potential guy down down five three in the fourth quarter, some very different scenarios, there, but you know.

Relative to the 17% growth in the last quarter can you speak a little bit about the kpis that you do release to us to us and which ones you're anticipating to slow I think you mentioned traffic a little bit before but.

Should we think about any of these compressing a bit should we think about orders slowing I know you don't report active customers are seeing changing dynamics with any customers traffic in the site.

And then I guess.

Is there is there.

And show that.

Early you had a moment earlier this year when consumer process lengthened as well you seem to pull levers to adjust pretty pretty well.

Steady the ship pretty quickly is there a chance that some of the some of the negativity in the scenarios for fourth quarter extends into early next year.

Sure maybe I can begin that and Jeff feel free to add on it. So I think the one kpis as I called out earlier on was on <unk> at the high price point at that $10000 plus keep in mind, it's highly considered.

It's a younger target demographic.

So we are seeing more moderation there I think one of the benefits of our offering as we have a wide variety of different price points. So regardless of the budget that you are coming to us with we have a really compelling offer in for Ya.

As it relates to kind of the overall consideration.

Lane setting.

I think that one thing to keep in mind is oftentimes in October we do see people that are demonstrating interest but tend to be waiting a little bit closer to the holiday season, I think last year. In October there are a lot of consumers that were afraid that the inventory was going to disappear and so I think you saw earlier purchase.

<unk>.

So I think part of this is just how can we quickly convert people, especially as the holiday season is approaching and as we're coming close to that special December 25th date. So that's why we are I think being a little bit more cautious, but definitely recognize that we have a lot of opportunity that lies ahead.

Todd.

And we have a compelling offering we have our showrooms we have our digital experience. So we are really firing in all cylinders in terms of being able to close that customer, but we are seeing them I think be more hesitant and we had in the past.

Got it and then if I could follow that as you look to next year.

Maybe we're just.

Self fulfilling prophecy.

Making a recession happened but.

If we do go into a tougher macro you guys have longer term growth targets in the <unk>.

You've got these showrooms that you sound very happy with consistently call to call. What do you. What do you think about it as part of the levers you want to call to try to keep your business on track towards your longer term growth algorithm that we do stay in a consumer macro.

The way that we're thinking about managing the company and the pillars that we're going to operate with is one we're not going to compromise. The brand. We're really thinking about this to build long term value to we're going to continue to invest in the business to ensure that we can take advantage of any acceleration that we see and then three.

We're going to simultaneously deliver profitability with a rigorous ROI focused management of cost structure. So that's how we're thinking about managing really in any environment I mean keep in mind. We're originally a bootstrap company. We've been doing this for many years, we've seen many cycles. We think there's a lot of potential in terms of the <unk>.

Brand that we built being very resident with that younger consumer we think the Omnichannel strategy is absolutely the right one for our industry.

And for our business.

And overall I think the fact that we're able to maintain profitability in a challenging environment speaks to how nimble we are as a company and the discipline that we overall have.

Yeah.

That's great best of luck in the holiday. Thanks.

Thank you.

And our next question comes from the line of Noah that skin with Keybanc capital markets.

Alright, Thanks for taking my questions. Just first are there any differences in behavior you'd call out between customers shopping for fine jewelry and engagement.

And then second just in terms of showrooms you added about I think 10 year to date that brings you to 25 any update on the number you would expect to end the year with an just progress there generally.

<unk>.

Sure. So I wouldn't say, there's a meaningful difference in terms of fine jewelry and engagement, we've seen kind of similar trends that have been impacting impacting them fine jewelry continues to outpace the overall.

Company, but we've seen more moderation just as our customers have taken a little bit more of a wait and see approach.

As it relates to our showrooms.

I think that.

We may end the year with another one or two.

With several more planned for 2023 some of that timing is.

Based on permitting and other kind of variable timeframes that we work with them, but it's about what we envisioned when we talked about almost doubling the number of leases, but the majority opening this year.

Thank you.

As a reminder to ask a question you will need to press star one one on your telephone.

Again to ask a question. Please press star one one.

Our next question comes.

Mhm, along with William Blair.

Hi, Brian .

Just kind of curious this idea of lengthening the purchase decision would imply that the sales ultimately do kind of flow through.

And you sort of speak to having to operate this business now through several cycles. I mean are there periods that are similar to this in your history, where you've kind of seen that lengthening and can you just give us a sense of duration.

When those sales you would expect those deals to happen.

I guess that would be my first question.

Yeah I think.

We've seen a variety of different cycles and.

I think that where we are in a unique point in time right now.

That.

We're adapting to I think overall, we do expect to be able to convert this customer.

As we have in the past and I think we have that compelling offering so feel really have.

Have a good conviction there of our ability generally to be able to meet the demand where we see it now keep in mind also jewelry has long term value that consumers are interested in meaningful purchases and I think we have a really compelling offering overall to be able to cater to that so the category itself.

It has shown to be resistant, especially as you think about bridal and people continuing to be engaged I think you just youre going to see puts and takes from quarter to quarter.

And ultimately I think that the long term growth prospects remain the same.

Okay, and then I'm just kind of curious when we can anticipate.

More leverage on the marketing line now that you've come.

The larger store fleet.

Thanks.

Yes, so I can I can speak to that how how we're thinking about and this is also how we think about our opex in general is that we are continuing to make disciplined ROI focused investments, including in marketing to drive that.

Sustainable profitable growth.

Spoken about.

Our long term long term growth algorithm for marketing and how we are working towards that target in the mid to high teens as a percentage of revenue as we continue to grow our brand awareness and rollout our showrooms.

Which are which are beneficial as you point out in terms of.

Driving driving uplift in the metros. So we continue to work work towards that.

And we will continue also to us.

We look at the upcoming <unk>.

Periods to manage to profitability as we've been guiding to for the year in the quarter.

Oh, okay.

Thank you.

Sure.

With that I'll hand, the call back over to CEO Beth Gerstein for any closing remarks.

Thank you everyone for listening we are very proud of our team's efforts given how challenging the environment.

We're very excited for what we have planned this holiday season, we look forward to giving you an update in our next earnings call.

Yeah.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating.

Good day.

Yeah.

[music].

Hello, and thank you for standing by and welcome to brilliant Earth third quarter 2022 earnings conference call at.

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

After the speaker presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one one on your telephone.

Now my pleasure to introduce Allison Malkin with ICR.

Thank you good afternoon, everyone. Thank you for joining us for our third quarter 2022 earnings Conference call. Joining me today are best Gerstein, Our Chief Executive Officer, and Jeff <unk>, Our Chief Financial Officer for this afternoon's call Beth will begin with highlights of our third quarter financial and.

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

Knowing that the operator will begin the Q&A session with our presenters passenger available to answer the questions you have for us today.

And 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 obligation to revise or pub.

We released the results of any revision to these forward looking statements in light of new information or future events.

At Investor Dot Dot com.

A live broadcast of this call is also available at the Investor Relations section of our website with that I'll turn the call over to Beth good.

Good afternoon, everyone and thank you for joining US today, we're pleased to share our third quarter results with you, which reflect our fifth consecutive quarter of profitable growth as a public company.

These results are the continuation of the multiyear strategy, we've been executing to transform the jewelry industry.

Transforming industry I know that is a bold and ambitious aim, but I start there because it is core to everything we do our mission to cultivate a more transparent sustainable compassionate and inclusive jewelry industry is unwavering. This is our commitment is to building sustainable long term.

<unk> profitable growth for our company and our shareholders.

We all know that 2022 has been a challenging environment for most companies as you've heard from US every quarter, we believe that as a growth company two of our fundamental and related differentiators are our commitment to building and protecting our brand and to driving healthy profitable growth.

And while the macro environment is clearly affecting consumers.

Very proud of our team's ability to stay focused on delivering on that commitment.

And delivering for our customers and for our company.

I continue to be inspired by their agility and dedication.

This quarter, we delivered revenue growth of 17% to $111 4 million, we delivered another quarter of record gross margin at 54, 7%.

430 basis point improvement over the prior year, and we delivered $10 million and adjusted EBITDA, representing an adjusted EBITDA margin of 9%.

So what drove those results.

First it was the brilliant Earth brand and is continuing residents with millennial and Gen Z consumers, particularly those who share our mission driven values.

And who seek our industry, leading craftsmanship and trend forward unique designs.

We know this because they tell us so.

As a data driven company, we are continuously engaging with consumers and using those insights to enhance every aspect of their experience with our brands.

For example, we know that our millennial and Gen Z shoppers continue to over index on research from word of mouth and social media.

During the quarter and as we have throughout the years, we highlighted stories and products by scaling new and original video content focused on weddings, both engagement rings and wedding bands as well as fine jewelry across a range of collections.

Last quarter I mentioned that our recent brand study told us the 13% of our customers learned about brilliant earth on Tictoc.

Knowing that during the third quarter, we scaled significantly more content, including Influencer organic and branded content with 50% content growth quarter over quarter and saw a more than 200% increase in viewership.

We also focused on key influencer content for the wedding season with brides shopping in our showrooms showcasing the best wedding day jewelry and offer in Q&A for styling driving millions of views. These.

These efforts expanded our brands reach as we saw growth in both new and repeat customer orders and amplified many product lines that fuels our growth we continue to see growth in our business with particularly strong growth in wedding bands driven in part by our growing assortment of unique men's and women's designs and fine.

Hillary, which as a small but rapidly growing category continues to outpace our overall growth.

Shifting to our showroom strategy.

As you know as a truly omnichannel brand expanding our chevron locations is a critical part of our growth plans.

We've continued our rollout with new showrooms opening in St. Louis Palo Alto, Santa Monica and Baltimore.

Bringing our total to 25 showrooms in key markets across North America.

Consistent with our past experiences showrooms continue to generate uplift within the overall metro areas in which we open.

Our showrooms drive growth in average order value.

Equally important deliver strong ROI reinforcing our belief in the power of the showroom model.

We anticipate that we will end the year, having approximately doubled our total showroom leases are.

Our ability to create a seamless joyful omnichannel experience is one of brilliant are distinguishing attributes we are continually testing iterating and enhancing features across our platform to ensure that we are providing a best in class experience and service level.

Whether in enhanced chat features evolving imagery and video to further showcase jewelry in real life.

Or enhancing our appointment scheduling and follow up we are providing the highest quality most personalized and complete experience in the industry.

Our customers give us consistently great feedback on their experience and as innovators in the industry, we will continue to evolve and lead as we grow.

While we're pleased that we've continued to drive sustainable profitable growth.

While we are still seeing strong consumer interest demonstrating the resonance of our brands. We are seeing a further lengthening of the decision making process given the macroeconomic uncertainty as more customers take a wait and see approach.

Our outlook reflects our continuing focus on driving high quality revenue and prudently, making our ROI driven investment decisions to deliver long term profitable growth.

As dynamic as the environment is we recognize that the key weeks of holiday selling are still ahead of us and we are well prepared to take advantage of the season.

We have a number of trend leading product launches in our plans, including cocktail rings.

New and expanded their mind assortment, our new art Deco inspired bridal collection.

Expansion of our popular to core collection and continued expansion of limited edition products to name just a few.

We'll also continue to make disciplined ROI focused investments that support our long term growth plans, such as continuing to strategically grow our showroom presence.

I am very confident in our ability to navigate in this in any environment, our asset light and agile data driven business model, coupled with our strong balance sheet.

Tables us to be both opportunistic and patient through a changing landscape.

You can expect that we will stay focused on making sound long term investments to drive our future growth, while also managing our costs to deliver sustainable topline growth and bottom line profit.

As I have said in the past.

By Nimbly and prudently executing our strategy, while optimizing our model to grow the brand we are well positioned to continue to take share in a fragmented industry to prudently manage our costs.

To deliver profitable growth.

While we continue to advance our mission to transform the jewelry industry.

And now I'll turn it over to Jeff.

Thanks, Beth and good afternoon, everyone.

Thank you for joining us today to discuss <unk> third quarter fiscal 2022 results.

Today, we'll walk you through our detailed financial results and some of the important strategic efforts we've executed.

Another strong quarter of profitable growth.

Our third quarter results demonstrate the disciplined execution of our ongoing strategy to disrupt and transform the jewelry industry.

Revenue grew to $111 4 million.

Which represents 17% year over year growth and up 29% on a three year CAGR compared to Q3 2019.

Gross margin expanded to 54, 7%, a 430 basis point increase compared to Q3 2021, and once again, our highest quarterly gross margin percentage on record.

And adjusted EBITDA was $10 million.

9% of revenue.

As Beth said these impressive results were delivered in a challenging and highly dynamic macroeconomic environment.

While we have been experiencing rapidly changing consumer landscape. The results, we've delivered again illustrate and reinforce the power and distinction of our brand and our agile highly efficient business model.

Q3 revenue grew 17% year over year, driven by strength across our product lines.

As we've said throughout the year.

Capitalizing on the demand for weddings has been a particular focus for us.

We were successfully able to do so in Q3 as engagement rings and wedding bands as well as fine jewelry contributed to our growth.

Consistent with our plans, we continue to see outsized performance within our fine jewelry assortment.

With growth that far outpaces the business as a whole.

As expected the outperformance of fine jewelry and wedding bands will drivers of a high single digit percentage decline in our total company blended.

For Q3.

As a reminder, both fine jewelry and wedding bands have a lower average price point than our overall business.

We've also seen outsized growth in fine jewelry at more accessible price points as our product breadth has expanded.

With the opening of our 25th showroom, we are continuing to extend our successful omnichannel growth strategies are.

Our showrooms drive robust cup lifting macro bookings after opening while also generating strong ROI.

We continue to see that new showrooms deliver higher.

And our overall average further reinforcing our confidence in the power of our showroom strategy.

Turning to gross margin Q3 gross margin expanded to 54, 7%, a 430 basis point improvement versus the prior year and our highest quarterly gross margin on record.

In addition to the overall growing demand for the brilliant Earth brand drivers of this improvement included pricing optimization.

Chairman efficiencies.

Positive contribution from product mix as well as the realization of benefits from our warranty program.

In the third quarter SG.

Opening costs nonrecurring costs and other expenses, which are added back presentation of adjusted EBITDA.

This 960 basis point increase over the prior year reflects investments we made in marketing people and other G&A to support our growth.

Marketing costs as a percentage of sales grew by approximately 330 basis points year over year.

During the quarter employee costs were higher by approximately 350 basis points year over year.

As you know, we consistently taken ROI driven approach toward investments, including our employee costs.

We're focusing on investing in new showroom employees as well as critical corporate talent to support current and future growth.

Other G&A as a percentage of sales increased by approximately 280 basis points driven by increased public company operating costs and other costs to support our growth.

As you know, we've just begun to anniversary our public company costs in late Q3.

The combination of strong revenue and gross margin growth.

And by strategic investments in the business delivered $10 million and adjusted EBITDA in the third quarter.

We ended the third quarter with $153 million in cash.

Inventory crude of $40 million at quarter end, which reflects the growth and success of our strategic initiatives such as fine jewelry and showrooms as a result, our inventory has grown as planned which we believe is appropriate to support our growth.

Importantly, we also continue to generate industry, leading turns as of our call today.

We're six weeks into the quarter with the majority of the holiday season ahead of us.

As we have all seen the macro and consumer environment has shifted significantly over the past several weeks.

As a result of the macro headwinds we have seen we are updating our fiscal year 2022 revenue guidance to $436 million to $446 million.

<unk> $116 million to $126 million for Q4 2022.

This represents a year over year growth rate of 15% to 17% for the year and negative 5% to positive 3% for Q4.

And the three year CAGR of 29% to 30% for the year and 23% to 26% for Q4.

For the fourth quarter. It is important to keep in mind that we are comping a strong Q4 in the prior year.

Given our flexible and asset light business model, we have the ability to capture additional demand that may occur during the holiday season, which still largely lies ahead of us.

We also expect year over year improvements in our gross margin.

Not at the rate of recent quarters as we anniversary our highest gross margin quarter of the prior year and given that our guidance anticipates the environment will be more promotional this holiday season.

We intend to continue making prudent investments and allocating spend across areas of the business that generate a strong ROI.

In Q4, we anticipate making selected incremental investments in marketing employee costs and other G&A, but in all cases, we will be disciplined and ROI focused in our approach and this spend will be consistent with our goal to deliver long term sustainable profitable growth.

As a result of our flexible business model and our ongoing disciplined management of investments we are pleased that our adjusted.

Remains within our previously communicated outlook range.

We expect adjusted EBITDA for the year to be $32 million to $37 million for an adjusted EBITDA margin of 7%, 8% and we expect adjusted EBITDA for Q4 to be $4 million to $9 million or.

For an adjusted EBITDA margin of 3% to 7%.

The ability to adapt and deliver consistent profitability in a dynamic environment is one of the significant advantages of our business model and our management philosophy.

As a growth company, we will continue to focus on optimizing and leveraging our asset light business model to build our brand and our business, both near and long term profitable sustainable growth.

This approach informs how we are looking ahead to Q4 and fiscal 2023 and is consistent with our historical approach to building our business as a growth company, we will prioritize delivering healthy and sustainable revenue growth.

Spanning our premium gross margin, making.

Making prudent strategic ROI, driven investments to build and scale the business and rigorously managing our cost to deliver sustainable profitable growth for our shareholders.

With that we'll be happy to take your questions.

Thank you.

As a reminder, ladies and gentlemen to ask a question you will need to press star one one.

My phone.

And due to time constraints, we ask that you. Please limit yourself to one question and one follow up you may reenter the queue.

With additional questions.

One moment please.

And our first question comes from the line of Matthew Boss with JP Morgan.

Thanks, It's Amanda Douglas on for Matt.

Absolutely.

Thanks for the question.

As we mentioned in the call Q3 shaped up as.

As we expected and what we started to notice in October is the retail environment became more challenging.

And I think the one other thing I would just want to add is as Jeff had mentioned in his remarks.

We do recognize the majority of the holiday season is in front of US, we're very well prepared with the offerings that we have and so we're able to capture the demand as we see at <unk>.

As we have in the past.

Great. That's helpful and then to follow up for Jeff.

Could you speak to what's driven the magnitude of your gross margin expansion in the third quarter and how should we think about potential pricing optimization opportunity in <unk>. Despite maybe a more promotional holiday and then just multiyear are there any changes to your mid <unk> gross margin target.

Sure.

So.

To start off with what drove the gross margin improvement in the third quarter.

Driven by similar factors that we've seen in the past underlying it is the strong brand residents and the premium proprietary products that we have.

Which allow us to have that premium gross margin, we support that operationally with our pricing optimization engine.

On procurement efficiencies and then we've also seen some benefit from our enhanced extended warranty program, which has seen good.

Good customer demand. So those those are areas that we've seen.

That we've seen.

That's we're able to drive our gross margin.

In terms of Q4.

As I've mentioned in the remarks, and as you pointed out we do anticipate guidance that maybe a more promotional environment said our strategy of continuing to focus on sustainable profitable growth has not changed and we will continue to manage these levels in Q4.

As we as we do each quarter.

And then with respect to the longer term model.

Our longer term model that we previously discussed.

Gross margins in the mid 50% and we expect to continue to manage the levers that we just talked about to optimize both topline and gross margin. So the.

<unk> of the strategies and approach that we've seen in the past and we.

Expect to continue those going forward.

That's helpful color. Thank you. Thank you.

And our next question comes from the line of Oliver Chen with Cowen.

Thanks, So much hi, Beth and Jeff regarding the guidance on the call out.

Macro headwinds, which macro headwinds.

Where are you most concerned about or are.

Relevant to what you are seeing also Jeff on the marketing efficiency and customer acquisition cost.

Whats the head with that dynamic in terms of.

Politicians.

Constant.

We're making lately is its a pretty agile changing dynamic.

And then finally, just as we think about the guidance that you provided your revenue step down but your ebitdas.

Previously established range, what's the main delta in terms of being able to maintain the EBITDA. Thanks, so much.

Hi, Oliver Thanks for the question so in terms of the macro.

We are seeing strong interest nice traffic in our showrooms.

Online I think we're just seeing a lengthening of the overall decision cycle there.

One of the overall Differentiators that we have is we don't believe that all revenue growth is equal and we don't believe in chasing unprofitable growth. So as we're seeing a more promotional environment.

We're not going to be leaning into discounting the same way that others need to in order to sell through their inventory.

We're really thinking about how we can maintain our profitability targets and I think that speaks to the agility of our business model.

And continuing to build our premium and luxury brands. So that's how we're thinking about just how we are managing our performance in a challenging environment and marketing is one of the levers that we have we continue to look for strong ROI as we think about delivering in the marketing with.

Our marketing strategy. We're also building a longer term brands and so we're taking I think a pretty managed approach there in terms of making sure that we are healthy and profitable while considering that we are still young and growing brand and a $300 billion fragmented industry, where.

We will continue to gain share.

And then with regard to your question about marketing and EBITDA say that the way that we think about management of our opex, including marketing is to focus on running the business to sustainable profitable growth.

Ties into the second part of your question regarding the profitability and we're pleased that we're able to in this environment to maintain our profitability guidance in the same range that we've.

Discussed earlier on in the year and I think that speaks to how across the business and across our Opex. We've been disciplined in our focus of how we deploy funds.

Thoughtful of ROI and managing the business to profitability and how the business model is also dynamic and flexible and allows us to manage based on differences differences in demand that may occur and so I think that all comes together.

In how we we're continuing to guide to a similar EBITDA range that we have previously.

Thank you best regards happy holidays.

And so.

Thank you.

And our next question comes from the line of Michael Binetti with Credit Suisse.

Hey, guys. Thanks for thanks for answering my questions here so.

Jeff.

You laid out the revenue path here.

Potential guy down down five up 3% in the fourth quarter, some very different scenarios there but.

Should we think about any of these compressing a bit should we think about orders slowing I know you don't report active customers, but are you seeing changing dynamics with the new crushers traffic in the site.

And then I guess.

Is there is there.

10 show that.

Early you had a moment earlier this year when consumer process.

And as well you seem to pull levers to adjust pretty pretty well steady the ship pretty quickly is there a chance that some of the some of the negativity in the scenarios for fourth quarter extends into early next year.

It's a younger target demographic.

And so we are seeing more moderation there I think one of the benefits of our offering as we have a wide variety of different price points. So regardless of the budget that you are coming to us with we have a really compelling offering for ya.

As it relates to kind of the overall consideration lengthening.

Thing.

So I think part of this is just how can we quickly convert people, especially as the holiday season is approaching and as we're coming close to that special December 25th date. So.

That's why we are I think being a little bit more cautious, but definitely recognize that we have a lot of opportunity that lies ahead and we have a compelling offering we have our showrooms we have our digital experience. So we're really firing on all cylinders in terms of being able to close that customer, but we are seeing I think be more hesitant.

And we had in the past.

Got it and then if I could follow that as you look to next year.

We were just self fulfilling prophecy.

Making a recession happened, but if.

If we do go into a tougher macro.

Guys have longer term growth targets in the high <unk> low <unk>.

You've got the showrooms that you sound very happy with consistently call to call. What do you. What do you think about as far as levers you want to pull to try to keep your business on track towards your longer term growth algorithm is if we do stay in the consumer.

Consumer macro.

The way that we're thinking about managing the company and the pillars that we're going to operate with is one we're not going to compromise the brand we're really thinking about this to build long term value.

Two we're going to continue to invest in the business to ensure that we can take advantage of any acceleration that we see and then three we're going to simultaneously deliver profitability with a rigorous ROI focused management of cost structure. So that's how we're thinking about managing really in any environment I mean keep in mind. We're originally.

Bootstrap company, we've been doing this for many years, we've seen many cycles. We think there is a lot of potential in terms of the brand that we built being very resident with that younger consumer we think the Omnichannel strategy is absolutely the right one for our industry and for our business.

And overall I think the fact that we're able to maintain profitability in a challenging environment speaks to how nimble we are as a company and the discipline that we overall have.

That's great best of luck in the holiday. Thanks.

Thank you.

And our next question comes from the line of Noah is that skin with Keybanc capital markets.

Hi, Thanks for taking my questions just first.

Are there any differences in behavior, you would call out between customers shopping for fine jewelry and engagement.

<unk>.

Sure. So I wouldn't say there is a meaningful difference in terms of fine jewelry and engagement, we've seen kind of similar trends that have been impacting impacting them fine jewelry continues to outpace the overall.

Company, but we've seen more moderation just as our customers have taken a little bit more of a wait and see approach.

As it relates to our showrooms.

I think that.

We may end the year with another one or two.

With several more planned for 2023 some of that timing is.

Based on permitting and other kind of variable timeframes that we work with them, but it's about what we envisioned when we talked about almost doubling the number of leases with the majority opening this year.

Thank you.

As a reminder to ask a question you will need to press star one one on your telephone.

Once again to ask a question. Please press star one one.

Our next question comes.

On the line with William Blair.

Hi, Thanks, a lot.

Just kind of curious this idea of lengthening the purchase decision would imply that the sales ultimately do kind of flow through and you sort of speak to having to operate this business now through several cycles. I mean other periods that are similar to this in your history, where you've kind of seen that lengthening and can you just give us a sense of duration as to sort of when those sales.

As you would expect those sales to happen.

I guess that would be my first question.

Yeah I think.

We've seen a variety of different cycles and.

I think that where we are in a unique point in time right now.

That.

We're adapting to I think overall, we do expect to be able to convert this customer.

As we have in the past and I think we have that compelling offerings, so feel really.

<unk> has shown to be resistant, especially as you think about bridal and people continuing to be engaged I think you just youre going to see puts and takes from quarter to quarter and ultimately I think that the long term growth prospects remain the same.

Okay, and then I'm just kind of curious when we can anticipate.

More leverage on the marketing line now that you've kind of.

With the largest store fleet.

Yes, so I can I can speak to that how how we're thinking about and this is also just how we think about our opex in general is that we are continuing to make disciplined.

<unk> focused investments, including in marketing to drive that.

Sustainable profitable growth, we've spoken about our long term long term growth algorithm for marketing and how we are working towards that target in the mid to high teens as a percentage of revenue as we continue to grow our brand awareness and rollout our showrooms which are.

Which are beneficial as you point out in terms of.

Driving driving uplift in the metros. So we continue to work work towards that.

Target and we will continue also to as we look at the upcoming.

Periods to manage to profitability as we've been guiding to for the year in the quarter.

Okay.

Thank you.

Sure.

With that I'll hand, the call back over to CEO Beth Gerstein for any closing remarks.

Thank you everyone for listening we are very proud of our team's efforts given how challenging the environment.

We are very excited for what we have planned this holiday season, we look forward to giving you an update in our next earnings call.

Yeah.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating.

Disconnect.

Q3 2022 Brilliant Earth Group Inc Earnings Call

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