Business context and reporting period
Brilliant Earth Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company designs, procures and sells ethically sourced diamonds, gemstones and jewelry online and through U.S. showrooms. It reports one operating segment. Results are consolidated with Brilliant Earth, LLC; continuing equity owners held 87.4% of the LLC at quarter-end.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $114.2 million | $111.4 million | $322.0 million | $320.3 million |
| Gross profit / margin | $66.8 million / 58.5% | $60.9 million / 54.7% | $184.0 million / 57.1% | $168.9 million / 52.7% |
| Operating income / margin | $2.0 million / 1.8% | $6.3 million / 5.7% | $3.3 million / 1.0% | $17.3 million / 5.4% |
| Net income | $2.0 million | $5.7 million | $2.8 million | $12.8 million |
| Net income attributable to Brilliant Earth Group, Inc. | $0.2 million | $0.6 million | $0.3 million | $1.4 million |
| Adjusted EBITDA / margin | $7.6 million / 6.7% | $10.0 million / 8.9% | $20.9 million / 6.5% | $28.0 million / 8.7% |
Q3 diluted EPS was $0.02, versus $0.05; nine-month diluted EPS was $0.02, versus $0.10. Adjusted EBITDA is a non-GAAP measure. Q3 interest expense was $1.3 million and nine-month interest expense was $3.8 million. Other income, primarily interest earned on cash, was $1.4 million for Q3 and $3.4 million for the nine months.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $147.1 million; restricted cash was $0.2 million. Total assets were $265.7 million and total liabilities were $172.2 million.
- Debt principal was $60.9 million ($60.4 million net carrying amount), including $3.7 million current. No borrowings were outstanding on the $40 million revolving facility. The term loan matures in May 2027; its effective interest rate was 8.49% in Q3 2023, versus 4.74% in Q3 2022.
- The company reported compliance with its credit agreement financial covenants at quarter-end. It had $41.9 million of operating lease liabilities.
- For the first nine months, operating cash flow was $15.5 million, investing cash outflow $10.7 million, and financing cash outflow $12.3 million. Cash, cash equivalents and restricted cash declined $7.5 million to $147.3 million.
- Management said it expects available liquidity to meet projected operating, debt-service and tax-distribution needs for at least 12 months after filing. Working capital excluding unrestricted cash was negative $22.0 million.
Changes versus the prior comparable period
- Q3 sales rose 2.5%, but orders increased 16.7% while average order value fell 12.2% to $2,645. For the nine months, sales rose 0.6%, orders grew 16.2%, and average order value declined 13.4% to $2,647. Management attributed lower AOV to more lower-priced fine jewelry sales and moderated growth above $10,000.
- Gross margin improved 3.8 percentage points in Q3 and 4.4 points year to date, supported by product mix and brand positioning, pricing tools, procurement efficiencies and the extended warranty program. Higher precious-metal prices partly offset the improvement.
- SG&A rose 18.7% in Q3 and 19.2% year to date, outpacing sales growth. Higher marketing, employment, technology, showroom opening, rent and depreciation costs contributed. Operating income fell 68.0% in Q3 and 81.0% year to date; net income fell 65.1% and 78.2%, respectively.
- Year-to-date operating cash flow improved from $9.0 million to $15.5 million, while capital spending increased from $6.6 million to $10.7 million, mainly for new facilities. The prior-year period included refinancing activity and a $0.6 million debt-extinguishment loss.
- U.S. sales increased year to date to $305.9 million from $300.2 million; international sales declined to $16.2 million from $20.1 million.
Outlook, commentary and risks
The filing provides no specific revenue or earnings guidance. Management described continued investment in brand awareness, customer acquisition, new products, technology and showroom expansion as priorities. It noted that a larger share of annual revenue and profits traditionally occurs in Q4 due to holiday sales.
Key risks include weaker consumer spending or adverse macroeconomic conditions; customer acquisition and retention costs; showroom expansion and execution; changing order mix and lower AOV; precious-metal and diamond sourcing costs, supply and labor pressures; inventory management; and the ability to sustain profitability while SG&A grows. Variable-rate borrowing increases exposure to interest costs. Management expects TRA payments to be significant over time; the company had recorded a $7.9 million estimated TRA liability at September 30, 2023. The LLC structure also means cash for taxes and other parent-company obligations depends on distributions from Brilliant Earth, LLC, which may be restricted by debt covenants or law.
A California representative action brought by a former employee alleges labor-code violations and seeks unspecified penalties, fees and damages. The company is appealing denial of its motion to compel arbitration; it said any liability was not then probable or reasonably estimable and intends to defend the claims. The company reported no material changes to previously disclosed risk factors, and management concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether order growth can continue and stabilize AOV, especially given the shift toward lower-priced products and softer growth above $10,000.
- Whether gross-margin gains can be sustained while precious-metal costs rise, and whether marketing and showroom investments generate sufficient sales and profitability.
- Cash generation, capital spending and debt service under the variable-rate term loan, including covenant headroom and the availability of the undrawn revolver.
- The timing and cash impact of TRA obligations, member tax distributions and LLC distribution restrictions.
- Developments in the California labor case and any change in the company’s assessment of potential liability.