Yahoo Finance Brilliant Earth Group, Inc. (NASDAQ:BRLT) Q4 2023 Earnings Call Transcript
Brilliant Earth Group, Inc. (NASDAQ:BRLT) Q4 2023 Earnings Call Transcript March 15, 2024
Brilliant Earth Group, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Brilliant Earth Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After this presentation, there will be a question-and-answer session. [Operator Instructions]. And please be advised that today's conference is being recorded. I would now like to turn the conference over to Stefanie Layton, Senior Vice President, Investor Relations. Please go ahead.
Stefanie Layton: Thank you and good afternoon, everyone. Welcome to Brilliant Earth's fourth quarter and full year 2023 earnings conference call. Joining me today are Beth Gerstein, our Chief Executive Officer; and Jeff Kuo, our Chief Financial Officer. During the call today, management will make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for a description of the risks that could cause our actual performance and results to differ materially from those expressed or implied in these forward-looking statements.
These forward-looking statements reflect our opinion only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events unless required by law. Also, during the call, management will refer to certain non-GAAP financial measures. A reconciliation of Brilliant Earth's non-GAAP measures to the comparable GAAP measures is available in the third quarter earnings release, which can be found on the Brilliant Earth's Investor Relations website. I will now turn the call over to Beth.
Beth Gerstein: Good afternoon and thank you for joining us today. 2023 ended on a high note with our team's exceptional execution throughout the holiday season. Our record revenue in Q4 and the full year caps a strong 2023 performance. I'm pleased that in a year that we anticipated to be transitional and dynamic, we delivered against our strategic priorities, drove another year of healthy profitable growth, and gained significant share in the $300 billion jewelry industry. Here are a few noteworthy highlights from 2023 and Q4. Q4 net sales grew by 4% year-over-year to $124.3 million, which was within our revenue guidance and which represented 97% growth on a four-year stack. Full-year net sales grew 1.5% to $446.4 million, which represented a 122% growth on a four-year stack.
We estimate our full-year revenue growth outperformed the industry by 750 basis points, highlighting the strong resonance of our brand among jewelry purchasers. Our Q4 product bookings growth, excluding engagement rings, increased 28% year-over-year. We also drove record order volumes. Total orders grew to approximately 53,000 for the quarter and 175,000 for the year, representing 18% and 17 year-over-year growth respectively. Q4 gross margin was 58.7% or a 400-basis point increase year-over-year. Full-year gross margin was 57.6%, reflecting a 430-basis point increase year-over-year. Both were the highest gross margins in company history. Our Q4 adjusted EBITDA of $5.3 million or a 4.2% margin was ahead of our expectations, and we delivered $26.2 million in adjusted EBITDA for the full year or a 5.9% margin.
This was our fourth consecutive year and 10th consecutive quarter as a public company delivering positive adjusted EBITDA, reflecting our discipline in operating the business profitably and our ability to manage the business nimbly. I am incredibly grateful for and impressed by our team and their ability to execute and deliver these results in a dynamic environment. Our focus on elevating the Brilliant Earth brand deepened our customer engagement throughout the year, ending with over 250 million organic video views. In addition, online searches for Brilliant Earth reached an all-time high in Q4 and we experienced 30% growth in our email and SMS sign-ups in 2023. The positive momentum we saw across these metrics reinforces our prominence as a leader in social engagement and our unaided brand awareness for both engagement and fine jewelry has more than doubled in less than two years.
Our 2023 campaigns supported by celebrity and influencer partnerships throughout the year and culminating with our soul collection and holiday campaigns earned us over 2 billion media impressions. And our partnership with Emmy nominated actress Camilla Marrone during the Sol Collection launch earned us recognition as one of Us Weekly Magazine's best celebrity brand partnerships of 2023. More recently, we were delighted to see actresses, Ayo Edebiri, Juno Temple, and Zooey Deschanel, each wearing a beautiful assortment of Brilliant Earth jewelry on the red carpet at the Emmy's and Oscars. This visibility and elevation of our brand is incredably exciting and shows our continuing success in driving high-profile awareness of Brilliant Earth. Turning to our Fine Jewelry assortment.
Customers are increasingly seeking Brilliant Earth for their essential jewelry pieces, like tennis bracelets and necklaces, as well as popular styles such as bangles and cocktail rings. In 2023, we introduced curated assortments of distinctive trend-leading pieces with the launch of several new collections, including our Sol Collection. We are very pleased with the results we are seeing from Sol with the collection's productivity far outpacing prior collection launches. And we ended 2023 with record performance across our Fine Jewelry assortment. In December, Fine Jewelry reached an all-time high at 21% of bookings, and we had our biggest Fine Jewelry quarter ever in Q4. We are succeeding in driving both new and repeat Fine Jewelry purchases as well as self-purchase and gifting as we continue distinguishing ourselves as the fine jeweler of choice for today's consumer.
In fact, customers whose first Brilliant Earth purchase was from our Fine Jewelry assortment increased 46% in 2023, highlighting the increasing awareness of Brilliant Earth as a Fine Jewelry destination. Another area of strength was in wedding, anniversary and fashion rings, which produced strong double-digits growth in Q4. We believe we made significant bridal share gains in 2023, which was a challenging year for the industry. In Q4, order volume for engagement rings above $10,000 increased year-over-year in a positive contrast to the trend from the past few quarters. Additionally, the average sales price for engagement rings was up 4% year-over-year in Q4, demonstrating the strong resonance of our premium brand with consumers. And we continue to lead in product innovation and design last year, by launching new products, like our capture collection, lab diamonds grown using carbon captured before it can be released into the atmosphere and our a 100% Renewable Collection, featuring lab diamonds manufactured with a 100% renewable energy, both of which have resonated strongly with our customers.
We also continue to elevate our customer experience last year across our showrooms and e-commerce platform. We opened 12 new showrooms, including smaller formats and our first indoor mall locations and we expanded our cluster showroom footprint with multiple locations in a metro area. On the digital front, we have released hundreds of new features as we continue to provide an industry-leading digital shopping experience. We are very pleased with the ongoing evolution of our omnichannel model and the key role our showrooms play in attracting new customers and deepening customer relationships. In 2023, we made great progress towards our goal to transform and modernize the jewelry industry, by leading in transparency, sustainability and compassion.
We just released our third mission report, where we highlight progress towards our multiple long-range goals. Among our contributions last year, we donated over 950 volunteer hours in our communities and sponsored a meal program for approximately a 1000 children in Northern Tanzania. We also expanded our inclusive sizing ranges to our full assortment of rings, improved the energy efficiency in our new showrooms and reached our goal of auditing a 100% of our lab diamond manufacturers for safe working conditions. You can read more about our impact in our Mission Report available on our investor website to better understand our commitment and industry leadership. Turning to our outlook for 2024. We plan to continue making investments towards driving sustainable long-term growth and as always to do so in a disciplined and responsible manner.
Be cognizant of the industry and macroeconomic environment. This includes continued brand amplification, product innovation, elevating our distinctive omnichannel customer experience and continuing to drive operational efficiencies across our business. We are already making great progress towards our 2024 product innovation and brand amplification goals. We continue to lead in product design with our recently launched tube collection, a diamond Micro Pave focusd fine jewelry collection, and Curated limited-edition pieces, such as our recently released Lunar New Year pendant. Turning to our showrooms. Over the past three years, we have executed against our expansion plan by adding 28 showrooms across the country with a range of formats. New showrooms open at least one year have paid back on average within 16 months and have demonstrated strong post-opening metro uplift.
We continue to have strong conviction in showrooms as a key driver of our growth. Our showroom focus for 2024 will be on continuing to amplify the consumer and brand experience in our showrooms, drawing learnings from openings of recent showrooms, across a range of formats and locations and planning for the next phase of our expansion. Understanding that, retail requires constant reinvention and evolution, we believe this is a perfect opportunity to double down on our existing fleet. Customer experience enhancements will include amplified seasonal installations and visual merchandising and design enhancements to provide a richer experience of the Brilliant Earth brand for our showroom customers. As we continue to amplify the customer and brand experience in our existing showrooms, we also plan to open two to four new showrooms in the second half of this year.
We believe that both continuing to enhance the consumer experience in our existing showroom fleet and selectively opening new locations will put us in an excellent position to drive both near and long-term growth. Turning to our financial guidance. In the first quarter, we have continued to experience a dynamic environment similar to recent quarters. In this environment, we anticipate approximately flat net sales in the first quarter, compared to Q1 last year. This reflects continued share gain for Brilliant Earth in the still normalizing bridal and jewelry industry. For the full year, we expect to continue making investments that will set the stage for long-term, sustainable growth, while also driving current and future share gains and profitability.
We do expect 2024 to reflect a profitability turning point with adjusted EBITDA margin increasing each year from 2025 to 2027. Jeff will take you through our outlook in more detail. In closing, we have a compelling opportunity to make outsized share gains in this evolving environment, by capitalizing on our brand strength, product differentiation, elevated consumer experience, agile data driven business model and strong balance sheet. We believe that, our strategy combined with our ability to execute will position us well in both the near and long-term. With that, I'll now turn the call over to Jeff.
Jeff Kuo: Thanks, Beth, and good afternoon, everyone. As Beth highlighted, we finished the year delivering record quarter and full year net sales, strong market share gains and Q4 profitability that exceeded our expectations despite the challenging external environment. Let me take you through some highlights from my end. In the fourth quarter, net sales of $124.3 million, represented a 4% increase year-over-year and was within our guidance range. Full-year 2023 net sales grew 1.5% over the prior year to $446.4 million, which represented 122% growth on a four-year stack. Q4 order volume increased 18% year-over-year and full year 2023 order volume increased 17%, compared to 2022. Total orders for 2023 reached approximately 175,000, another new record for us.
In addition, we have realized 22% year-over-year order growth from repeat customers in 2023, illustrating the success we are having in driving repeat customer engagement. For Q4, average order value or AOV was down 12% year-over-year and for the full year, AOV was down 13%. For Q4, the year-over-year changes in AOV were principally driven by growth in Fine Jewelry, which we are thrilled to see. As Fine Jewelry becomes a larger and larger part of our product mix, we expect overall AOV will continue to moderate. Looking at the collections independently, the average selling price or ASP for engagement rings increased 4% year-over-year in Q4 and ASP for Fine Jewelry increased 3% year-over-year in Q4. These ASP gains illustrate the strength of our premium brand and proprietary product assortment.
Q4 gross margin was 58.7%, which is a 400-basis point expansion over the prior year, and a slight sequential increase over Q3 2023. Full-year 2023 gross margin was 57.6%, a 430-basis point increase year-over-year. The sustained strength of our gross margin demonstrates the competitive advantage of our premium brand proprietary products, price optimization engine, procurement efficiencies, and our enhanced extended warranty program. Our strong gross margin together with disciplined cost management contributed to us exceeding our adjusted EBITDA expectations for the fourth quarter, delivering 5.3 million in adjusted EBITDA or a 4.2% adjusted EBITDA margin. This brought our full year 2023 adjusted EBITDA to $26.2 million or a 5.9% adjusted EBITDA margin.
SG&A for the quarter, and the year continued to reflect our investments in growing the Brilliant Earth brand, expanding our omnichannel reach and scaling the business. SG&A was 57.8% of net sales for the quarter, and 56.6% of net sales for the year. Adjusted SG&A, which nets out items that are added back in our presentation of adjusted EBITDA, such as equity-based compensation expense, showroom, pre-opening, expense, depreciation and amortization and non-recurring charges was 54.5% of net sales for Q4, representing approximately 900 basis points of deleverage year-over-year from investments in marketing our team and other G&A. Marketing costs as a percentage of net sales grew by approximately 570 basis points year-over-year for the quarter.
Our ongoing investments in building the Brilliant Earth brand continue to pay off in terms of growing awareness and demand for Brilliant Earth, as we have seen in our strong order growth, market share gains, and higher brand awareness. While we saw de-leverage on a year-over- year basis due to the headwinds in the bridal industry and the investments made in the largest brand campaign in our company's history, we believe that these investments will drive continuing growth of brand awareness and support long-term profitable growth. During the quarter, adjusted employee costs were higher as a percentage of net sales by approximately 80 basis points year-over-year. As we discussed previously, we are focusing on investing in a disciplined fashion in both new showroom employees as well as key corporate talent to support our current and future growth.
Adjusted other G&A as a percentage of net sales increased by approximately 250 basis points year-over-year during the quarter, including higher showroom operating costs such as rent. Our balanced approach in 2023 allowed us to realize significant market share gains, while making investments for long-term growth and delivering in year profitability. Our business model has also delivered working capital efficiency. Our inventory turns in 2023, significantly exceeded the industry average. In addition, we ended 2023 with a $1.5 million decrease in inventory ending the year at $37.8 million compared to $39.3 million in 2022, even with our growth in Fine Jewelry and the opening of 12 new showrooms, highlighting the benefits of our asset-light model and our ability to use data to efficiently and dynamically manage working capital.
We finished the year once again with no net debt and a strong balance sheet. Our cash balance increased year-over-year ending at $156 million as of December 31st, 2023, even with the investments we made to expand our showroom footprint and after paying down over $3 million of debt. Our ability to decrease inventory, increase cash, pay down debt and operate with negative working capital in 2023, while accounting for substantial expansion, speaks to the exceptional execution by our team, our agile business model and our discipline in cost management. All of this was accomplished during a year with a challenging consumer backdrop. Our strong balance sheet puts us in a position to continue to make strategic investments in this environment. I would also like to highlight that as we continue to manage the business in an agile fashion to maximize our ability to capture opportunities as they arise, we have recently amended our debt facility to suspend the testing of our consolidated fixed charge coverage ratio covenant through Q2 2024 and added a liquidity covenant over the same period.
This will provide additional flexibility in making appropriate investments in the first half of the year. We also announced a share repurchase program in which the Board authorized the repurchase of up to $20 million of our Class A common stock through December 8th, 2026. As a growth company, we are keenly focused on seizing value creation opportunities, including when we see an opportunity to strategically buyback our common stock. Our strong balance sheet provides the ability to execute this share repurchase program and to realize the significant opportunity we see ahead. While we did not make any repurchases in 2023, given that we adopted the share repurchase program late in the year, we intend to use this program strategically while balancing our overall investment decisions, including consideration of factors such as trading volumes and our public float.
Turning to our outlook for 2024 and beyond. We expect to continue making investments that will set the stage for long-term sustainable growth, while also driving in year growth, share gains and profitability in the context of a still normalizing industry. Our outlook includes the assumption that, the path towards a more normalized bridal market continues over the next few years and that the broader economic environment remains relatively unchanged. For Q1, we expect net sales between $96.5 million and $98.5 million. This represents approximately negative 1% to positive 1% growth over Q1, 2023. This also reflects continued share gain for Brilliant Earth through this transitional period for the bridal and jewelry industry. We expect Q1 adjusted EBITDA of $1 million to $2.5 million.
This includes an expectation of similar gross margins as we saw in the second half of last year, annualization of investments made during 2023 as well as the fact that seasonally, the first quarter is our lowest net sales quarter of the year. Our expenses such as rent and employee expenses do not have a significant degree of seasonality. Therefore, seasonally lower Q1 revenue contributes to lower Q1 adjusted EBITDA. For 2024, our current expectation is for net sales between $455 million and $469 million, which is approximately 2% to 5% year-over-year growth with acceleration as we progress through the year. This represents positive momentum in the context of the still normalizing bridal and jewelry industry. As Beth mentioned, we believe there are compelling opportunities to invest in this environment to drive long-term growth.
These include investments to amplify brand awareness, enhance the showroom, consumer experience and technology investments, including in AI and machine learning to drive operational efficiencies. We are also annualizing certain costs such as showroom staff and rent expenses from investments made last year. As a result of these investments, we expect adjusted EBITDA for the year between $14 million and $22 million. We expect some modest sequential increase in adjusted EBITDA from Q1 to Q2 with a significant majority of adjusted EBITDA in the second half of the year. Similar to our previously mentioned comments on Q1. We expect gross margin for the year to be at a similar level as H2 of last year. We expect quarterly marketing expense as a percentage of net sales to be similar to the 2023 average and to drive leverage in marketing expense as a percentage of sales in Q4.
This reflects disciplines continued investment in the business as we believe that there are compelling investment opportunities in this environment that will deliver long-term profitable growth and shareholder value while still delivering in year profitability. As we look beyond 2024, we would also like to introduce a medium-term growth outlook, which will provide visibility into how we plan to manage the business as the bridal and jewelry industry gradually normalize over the next few years. For net sales, we expect net sales growth accelerating from low to mid-single digit growth this year to a low teens growth rate in 2027. We expect this to be driven by the gradual normalization of engagements over the next few years. Growth from existing showrooms, a measured acceleration of new showroom openings compared to 2024, continued outperformance in fine jewelry and other non-engagement assortments, as well as growth of our brand awareness.
We expect our gross margin to remain in the high 50% through 2027, while we do not expect the same pace of annual expansion that we achieved in recent years, as we strike a balance between driving top line growth and margin expansion. We do see further opportunities to increase gross margin through our premium brand, proprietary product collections, price optimization engine, procurement efficiencies, and our warranty program. On the expense side from 2025 to 2027, we expect to increasingly drive leverage in marketing costs compared to 2024. We expect that growing brand awareness increased conversion from our showrooms and continued success in fine jewelry will all contribute to driving increasing leverage in marketing costs from 2025 to 2027.
We anticipate that 2024 will represent the peak of our investment growth as a percentage of net sales and expect profitability to increase sequentially beginning in 2025 through 2027, with adjusted EBITDA margin reaching double-digits in 2027. In closing, our performance for the quarter the year reinforces the ability of our brand, seamless omnichannel experience, unique asset-light business model and exceptional team to deliver profitable growth and share gains in a capital efficient manner. We believe our continued discipline and balanced approach this year and over the next few years positions us well to deliver strong shareholder value. With that, I'll turn the call back over to the operator for questions.
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