Brilliant Earth Group, Inc. Q2 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Brilliant Earth Second Quarter 2025 Earnings Call. Please be advised today's conference is being recorded. I would now like to turn the conference over to Colin. Please go ahead.

Thank you, and good morning, everyone. Welcome to the Brilliant Earth Second Quarter 2025 Earnings Conference Call. My name is Colin Bourland, Vice President of Strategy, Business Development and Investor Relations. 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 revision to these forward-looking statements in light of new information or future events, unless required by law. Also, during this 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 today's earnings release, which can be found on the Brilliant Earth Investor Relations website. I'll now turn the call over to Beth.

Good morning, everyone, and thank you for being here. We are thrilled to announce a robust quarter, achieving notable year-over-year net sales growth that surpassed our expectations for both net sales and profitability. Our ability to increase our market share and outperform the sector illustrates the effective implementation of our strategic plan and the significant advancements we are making towards our immediate and future objectives. Additionally, I am pleased to share that we are experiencing accelerated business activity in Q3 so far, prompting us to elevate our annual net sales forecast. We are also assessing the recent announcement regarding new tariffs on India, which Jeff will elaborate on. Most importantly, we are confident in our ability to adapt to this environment. Since our inception, our goal has been to establish Brilliant Earth as the most beloved and reputable jewelry brand worldwide. We have consistently communicated our plan to enhance brand visibility, create a seamless omnichannel experience, assert our position as the fine jewelry leader for the next generation, and invest in our people, data analytics, and technology to become the digital leader in the jewelry industry, all aiming for sustainable long-term growth. Our Q2 results affirm that our focused strategy is effective. We achieved our strongest year-over-year top line growth in the last 18 months, with a net sales increase of 3.3% and adjusted EBITDA of $3.2 million, both significantly above our guidance. Furthermore, we continue to generate positive adjusted EBITDA and net cash, which rose 5% year-over-year to $99 million by the end of Q2. Due to this momentum and our optimism about the future, I am proud to share that our Board of Directors has approved a one-time dividend and distribution totaling around $25.3 million. This demonstrates our commitment to rewarding shareholders, our healthy balance sheet, and our belief in our capacity to generate cash while supporting future growth initiatives. We are consistently executing our near- and long-term strategy and generating positive momentum. We are rapidly growing our fine jewelry segment, with bookings increasing by 38% year-over-year in Q2. We are enhancing our brand visibility through notable events, such as designing custom jewelry for Beyoncé and forming our inaugural professional sports partnership with tennis star Madison Keys. We are refining our showroom strategy and achieving significant returns with promising metro uplifts. We are utilizing technology and innovation to optimize marketing effectiveness while continually expanding our capabilities with AI and machine learning to enhance growth and efficiency throughout the organization. Let me highlight some additional achievements for the quarter. Customer interest in Brilliant Earth jewelry remains robust. In Q2, we recorded our highest year-over-year total order growth in the past two years, with total orders increasing by 18% year-over-year and repeat orders rising by 11% year-over-year. We are pleased to see an uptick in new customers discovering Brilliant Earth, including a marked recovery in engagement ring clients. For the quarter, the average order value fell by 13% year-over-year. This decline results from two factors: first, the growth of our fine jewelry segment, which tends to be priced lower than our bridal collection, continues to outpace the business. Second, as mentioned earlier, we are witnessing robust customer demand for engagement rings priced under $5,000, with overall stabilization in engagement ring average selling prices over recent quarters. Lastly, we are excited to report year-over-year unit growth across our product range, with high single-digit unit growth in both engagement rings and wedding and anniversary bands. As noted, fine jewelry is a key growth driver for our business. In Q2, fine jewelry bookings increased by 38% year-over-year, maintaining a similar sales mix to the prior quarter. Mother's Day, a significant gifting occasion, proved exceptionally successful for us, showcasing Brilliant Earth as a leading fine jewelry destination. During our Mother's Day campaign, we collaborated with top influencers to create a limited number of exclusive medallions, achieving success across our signature styles and classic diamond essentials. Regarding showrooms, we continue to broaden our presence with our newest location in Alpharetta, Georgia. Beyond opening new stores, we are constantly innovating our seamless omnichannel experience, exploring different formats like 'main street' and 'outdoor centers', introducing in-store enhancements such as try-on bars, and optimizing our visual merchandising and showroom inventory strategy. Consequently, we have noticed increased foot traffic in our showrooms, with orders from retail customers who did not have appointments surging by 81% year-over-year in Q2, with fine jewelry growing the fastest. Overall, we are optimistic about our continued success in showrooms, with most locations experiencing strong double-digit booking uplifts in the 12 months following their opening. In the digital realm, we continue to focus on enhancing marketing spend efficiency, particularly using AI. As a result, our Q2 marketing expenditure decreased by approximately 4% year-over-year, even while driving year-over-year sales growth, leading to a 180 basis points improvement year-over-year as a percent of net sales. This quarter has been marked by groundbreaking milestones for the brand. We had the honor of creating a unique diamond bolo tie for Beyoncé, signifying a pivotal moment in Brilliant Earth's journey as a cultural leader and innovator. We capitalized on this iconic moment by launching a limited edition bee pendant that sold out in days. Additionally, we announced our first professional sports ambassador, tennis star Madison Keys, who will be featured in our bestsellers during the U.S. Open, along with a special piece we designed with her. We are delighted to have Madison as part of our team and look forward to supporting her at the upcoming U.S. Open. Recently, we were thrilled to create a 20-carat diamond necklace from our Jane Goodall Collection for the birthday celebration of actor, musician, and icon Selena Gomez. These collaborations symbolize more than just celebrity moments; they showcase how Brilliant Earth is recognized as the jewelry choice for today’s most influential cultural figures, reinforcing our status as the premier brand for the next generation. As you can see, it has been an exhilarating quarter, and we look forward to sustaining this momentum and executing our plans through the end of this year and beyond. So far in Q3, we have observed improved trends compared to Q2, with strong overall booking growth, unit increases in engagement rings and wedding and anniversary bands, continued success in fine jewelry, and growth in both new and repeat orders. While we keep an eye on the macro environment, including tariffs and metal prices, we believe we are very well positioned to meet our annual objectives and are confident in raising our annual revenue guidance. I want to extend my gratitude to our exceptional team for their contributions, enabling us to achieve these impressive results. With that, I'll pass it on to Jeff, who will review the financials and share our outlook for the upcoming quarter and year in detail.

Thanks, Beth, and good morning, everyone. As Beth mentioned, we're pleased to report Q2 results where we continue to successfully drive our strategic initiatives, innovate, capture operating efficiency, and exceed both our top line and profitability expectations. Let me take you through the details for Q2. Q2 net sales were $108.9 million, up 3.3% year-over-year, exceeding the top end of our guidance range by 330 basis points. Total orders grew 18% year-over-year, and repeat orders grew 11% year-over-year in the second quarter, demonstrating the effectiveness of our customer acquisition and retention efforts and the resonance of our brand and products with consumers. Average order value, or AOV, was $2,074 in Q2. This represents a decline of 12.6% year-over-year in Q2, a smaller decline than Q1 as we continue to broaden and diversify our overall assortment, including in our fine jewelry collection, which carries a lower price point than our bridal collection as well as the continued comparatively stronger demand in engagement rings under $5,000 with an overall stabilization in engagement ring ASP over the last few quarters. Q2 gross margin was 58.3%, within our medium-term gross margin target in the high 50s and a 250 basis point decline over Q2 last year. The year-over-year change in gross margin was primarily driven by higher gold costs and the impact of tariffs, which were within our expectations for the quarter, partially offset by continued optimization of our pricing engine, procurement efficiencies, and other efforts to manage our gross margin to target levels. We delivered Q2 adjusted EBITDA of $3.2 million, or a 2.9% adjusted EBITDA margin, far exceeding our guidance range. This marks our 16th consecutive quarter of profitability. We are excited to deliver this level of profitability through our strong gross margin and diligent data-driven management of our marketing spend and other operating expenses, including using AI to capture efficiencies in our operating expenses. Q2 operating expense was 59.4% of net sales compared to 59.7% of net sales in Q2 2024. We were happy to drive 30 basis points of operating expense leverage even while making investments to drive long-term growth. Q2 adjusted operating expense was 55.5% of net sales compared to 55.7% in Q2 2024. Adjusted operating expense does not include items such as equity-based compensation, depreciation and amortization, showroom preopening expenses, and other nonrecurring expenses. Q2 marketing expense was 24.1% of net sales compared to 25.9% of net sales in Q2 2024. This represents approximately 180 basis points of year-over-year leverage. Our marketing spend in Q2 was better than our expectations as we continue to be disciplined in driving efficiency and finding opportunities for higher return on our spend. We continue to expect to drive year-over-year leverage for the full year 2025 as per our medium-term outlook. Employee costs as a percentage of net sales were higher in the second quarter by approximately 120 basis points as adjusted year-over-year. This includes growth in showroom employees, including from newly opened showrooms as we continue to strategically focus on our showroom expansion. Other G&A as a percentage of net sales increased year-over-year by approximately 40 basis points as adjusted for the quarter as we continue to prudently invest in our business. Our year-over-year inventory grew approximately 24%, principally as a result of strategic procurement opportunities in Q2 to purchase diamond and jewelry inventory at advantageous prices in light of the current tariff environment. Our inventory turns continue to be significantly higher than the industry average, and we maintain conviction that our data-driven, capital-efficient, and inventory-light operating model continues to provide competitive advantages. We ended the second quarter with approximately $134 million in cash, a decrease of approximately $18.6 million compared to Q2 2024. The year-over-year decrease in cash was primarily driven by the $20 million we prepaid against our term loan during the quarter. For net cash, we ended the period with approximately $99 million, a year-over-year increase of approximately $5 million even after the inventory purchases I mentioned earlier. In Q2, we spent approximately $200,000 repurchasing our common stock. This takes our total spend on stock repurchases to date to approximately $1 million as of the end of Q2. Finally, as Beth mentioned, we are happy to announce a one-time cash dividend and distribution of $0.25 per share to Brilliant Earth shareholders and per unit to common unitholders, representing aggregate payments of approximately $25.3 million. This dividend reflects our commitment to providing returns to our shareholders, our strong cash position, and our confidence in our ability to generate cash while funding future growth initiatives. Payment of the dividend will be made on September 8, 2025, to holders of record of the company's Class A common stock as of the close of business on August 22, 2025. In addition, as of August 4, we have paid off the remaining outstanding balance of our term loan, approximately $34.8 million. The facility is now completely paid off, leaving no outstanding debt on our balance sheet. Even after this dividend payment and the closing of our debt facility, we will maintain a robust cash position, preserving our financial flexibility to continue investing in strategic growth initiatives, including showroom expansion, technology, and AI enhancements, and brand-building efforts. We believe these actions illustrate how we look to build shareholder value, both in the near and long-term. Turning to our outlook for Q3 and 2025. For the quarter, we expect net sales to grow 8% to 10% year-over-year, an acceleration compared to Q2. We expect adjusted EBITDA to be between $3 million and $4.5 million. For the year, we are raising our net sales guidance to 2.5% to 4% growth year-over-year. Drivers of H2 growth include improvements in engagement ring year-over-year performance compared with H1, the growth and annualization of our showrooms, a more favorable comp from Q3 2024, and strong fine jewelry performance, and the fact that Q4 is a seasonally important fine jewelry quarter. We are reiterating our adjusted EBITDA margin guidance in the range of approximately 3% to 4% as we continue to effectively manage for strong gross margins and balance making investments with driving near-term profitability. For gross margin, we do expect some downward impact from gold and platinum spot prices and tariffs in H2. We have been successful in optimizing our marketing strategy, leveraging AI and machine learning capabilities year-to-date, and expect to drive year-over-year leverage in marketing spend for the year. We expect to continue to make near- and longer-term investments in H2 2025, including in employee costs and other G&A while managing the business for profitability. Our guidance reflects metal prices and tariffs as of August 5, and does not reflect the unforeseen consequences from subsequent tariff announcements, metal price fluctuations or related changes to the consumer environment. Yesterday, the United States announced an additional 25% tariff on all imports from India effective August 27. We have not yet fully determined the financial impact of this development on our business, and we are actively analyzing how this informs our operating plan. Importantly, this is an industry-wide impact, and we believe Brilliant Earth is better positioned to navigate this environment over traditional jewelry retailers given several competitive advantages. Our geographic supply chain diversity provides flexibility. Our nimble technology-enabled operating model allows us to rapidly adjust sourcing strategies. And our dynamic pricing model and procurement optimization capabilities enable us to respond quickly to cost structure changes to optimize our pricing and gross margin. Most of Q3 will be complete by the time this new tariff takes effect on August 27, and we are continuing to assess the impact for the rest of the year. We maintain confidence in our ability to execute our strategic plan through this evolving tariff environment. Looking forward, our data-driven approach, disciplined expense management, and asset-light business model position us to outperform the industry while delivering profitable growth. This quarter's strong execution illustrates our ability to identify and capture opportunities to drive sustainable, profitable growth and create value for shareholders. With that, I will turn the call over to the operator for questions.

Our next question will be coming from the line of Oliver Chen of TD Securities.

This is Chris on for Ashley. Congrats on the quarter. So just to start, I was wondering if you could touch on the bridge in higher fine growth relative to margins. I think the comments before I alluded to this being a higher-margin side of the business. So could you maybe triangulate what you're seeing in terms of like purchase habits and if the consumers are gravitating towards lower AOV fine items? And within fine, like what pricing habits are and what you're seeing compared to bridal and engagement customers as bookings have returned to growth. So just anything different relative to 3 months ago?

Chris, this is Beth. I wouldn't say that there's a huge difference in terms of what we've been seeing. I think that consumers continue to be very discerning in terms of fine jewelry and what they're looking for, for high-quality, high-value jewelry that they're going to wear for many years. And as we have been performing exceptionally strong into fine jewelry, we're just continuing to see increased traction, and that's going to have an impact overall in terms of AOV, but that's something that we're strategically investing in. So something we're happy to see. So I wouldn't say we’re seeing a huge difference in terms of pricing and AOV for either bridal or fine jewelry now versus what we've been seeing over the past several months.

Great. And then I guess, next, just to maybe drill down on the debt payment in the quarter. Could you maybe just expand thoughts on like further investments in the business and how you're thinking about redeploying the capital, whether it goes to you'd like to maybe accelerating showrooms or other opportunities you see in the market?

Jeff, maybe I can start with just the very high level. I think that we have been very consistent in terms of how we've been communicating our strategic vision, and we're continuing to see great results. So I see that the levers that we see for our strategy with showroom growth, leaning in as the digital leader with becoming the world's most trusted and loved jewelry brand, all of that will continue. I think we have a very strong cash balance sheet to be able to execute on that strategic vision. So I feel like we've been executing well. We're going to continue to lean into these areas to drive our overall awareness and to drive fine jewelry as well. Jeff, do you want to kind of expand on that?

Yes. I think Beth captured a lot of the key points well. Really, both the dividend and distribution and the debt payoff stem from our strong balance sheet and cash position, our ability to generate cash as a business. As Beth mentioned, we believe that we are well positioned to continue to make those strategic investments in areas like brand, showrooms, and fine jewelry even with these announcements. And with respect to the debt payment, there's also some net interest savings that will result from the debt payoff. So I think this really illustrates a lot of the strengths of the business and how we think about optimizing the business and the capital structure.

Beth and Jeff, this is Julia on for Oliver Chen. I would love to hear about the strength above and below the $1,000 price point and general comments you have on the health of the consumer that you've been seeing with respect to discretionary purchases. Two, where consumers spending more versus saving more in their rent decisions? And three, any commentary around uplift related to new showrooms and how the maturation of showrooms later this year may help sales?

Thanks, Julia. So in terms of how we're seeing the health of consumer, we are seeing a nice consumer that, as I mentioned, they are discerning, but I think we have been very attuned to the customer trends and what they want. And so we're able to deliver on that high-quality, high-value jewelry piece that they've been looking for. We also believe that we've been outperforming the market. And as we have been leaning into these brand initiatives, introducing new products like our limited edition collections, we have been performing exceptionally well. So we feel good about the health of the consumer related to the offerings specifically that we have. We've also seen, as we mentioned in the call, high single-digit growth for units in both engagement rings and wedding and anniversary bands. And I think this is a testament to a lot of the hard work we've been doing. We have a really nice diamond assortment with hundreds of thousands of diamonds. Our signature styles have been performing exceptionally well as we're seeing with engagement rings as trend leaders. And we are seeing those market improvements. But as I mentioned, I think we are outperforming in terms of the overall market. For that showroom overall, we've been really pleased with how the showrooms are doing. As we are known increasingly as a fine jewelry destination, we were really happy to see that fine jewelry growth in the showrooms. And just seeing that walk-in traffic, seeing the 80-plus percent growth with those retail type of consumers, I think, just shows you that we are doing a great job offering the right product for what the customers are looking for at an exceptional price point. Thank you so much for joining our Q2 conference call, and we look forward to talking to you in the next quarter.

Thank you so much for joining today's conference. You may all disconnect.