Brilliant Earth Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Brilliant Earth designs, procures, and sells ethically sourced jewelry online and through 28 U.S. showrooms. Comparisons are with Q1 2022 unless stated otherwise.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Net sales | $97.7 million | $100.0 million; down 2.3% |
| Gross profit / margin | $53.7 million / 54.9% | $50.1 million / 50.1%; margin up 480 basis points |
| Operating income (loss) | $(0.1) million | $5.3 million |
| Net income (loss) | $(0.4) million; margin (0.5)% | $3.4 million; margin 3.4% |
| Net income (loss) attributable to Brilliant Earth Group, Inc. | $(0.1) million | $0.4 million |
| Adjusted EBITDA and margin | $5.5 million; 5.7% | $8.4 million; 8.4% |
| Operating cash flow | $(2.0) million | $0.2 million |
| Capital expenditures / investing cash flow | $4.4 million / $(4.4) million | $1.3 million / $(1.3) million |
At March 31, 2023, cash and cash equivalents were $146.0 million, inventory was $37.9 million, and total assets were $262.3 million. Working capital excluding cash was $(19.0) million. Debt principal was $62.6 million, with $3.3 million current and $59.3 million long-term net of issuance costs; no borrowings were outstanding on the $40 million revolving facility. Operating lease liabilities totaled $39.1 million. The company reported compliance with its debt covenants.
Material changes and operating drivers
- Orders increased 10.1% to 35,631, while average order value fell 11.3% to $2,742. Management attributed the lower AOV to greater sales of lower-priced fine jewelry and moderation in growth of products above $10,000. Higher order volume partly offset the AOV decline.
- Gross margin rose to 54.9%, which management attributed to product and brand mix, pricing, procurement efficiencies, extended warranty program benefits, and lower average platinum prices, partly offset by higher gold prices.
- Selling, general and administrative expense rose 20.0% to $53.8 million, driven by increases in employment costs ($3.0 million), marketing ($2.8 million), and other G&A ($3.2 million), including technology, showroom pre-opening costs, rent, and depreciation. The increase in expenses outweighed gross profit improvement.
- Cash, cash equivalents, and restricted cash declined by $8.7 million during the quarter. Operating cash use included a $10.5 million outflow from accounts payable, accrued expenses, and other current liabilities, partly offset by working-capital movements including lower inventory.
Outlook, risks, and notable items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects cash, operating cash flows, and other current liquidity sources to meet projected operating, debt-service, and tax-distribution needs for at least 12 months after filing.
- Management identifies consumer spending and macroeconomic conditions, customer acquisition and retention costs, sourcing and commodity-price changes, inventory management, competition, brand and marketing effectiveness, showroom expansion, and maintaining profitability as key risks. Results are seasonal, with a larger share of annual revenue and profits typically in Q4.
- The SVB lender was closed in March 2023; the FDIC subsequently announced that First-Citizens assumed SVB’s deposits and loans. The company expected First-Citizens to continue servicing its credit facilities. The term loan is secured, matures in 2027, and bears floating-rate interest.
- The company records a Tax Receivable Agreement liability of $7.8 million and is obligated to pay Continuing Equity Owners 85% of certain realized tax benefits. Management expects future TRA payments to be significant; amounts and timing depend on taxable income and other factors.
- A putative class action concerning the Virtual Try On feature was dismissed on April 21, 2023. A California labor-related representative action remained unresolved; the company appealed the denial of its motion to compel arbitration. The company stated that any related liability was not then probable or reasonably estimable.
- Management reported effective disclosure controls as of March 31, 2023 and no material changes in internal control over financial reporting during the quarter. The filing states there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether order growth and improved gross margin can persist while AOV is declining and SG&A rises.
- The drivers and sustainability of negative operating cash flow, and the effect of supplier payments, deferred revenue, and other working-capital movements.
- Debt interest-rate exposure, covenant headroom, repayment requirements, and servicing arrangements following the SVB transition.
- The timing and potential cash impact of TRA payments, member tax distributions, and new showroom commitments, including $7.1 million of future payments for signed leases not yet commenced.
- Developments in the California labor action and any resulting exposure; the Virtual Try On case was dismissed after quarter-end.
- Adjusted EBITDA is a non-GAAP measure; review its reconciliation to GAAP net loss and the exclusions used by management.