Brilliant Earth Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative period is Q1 2021. Results are unaudited. The company designs, procures and sells fine jewelry through e-commerce and showrooms; it reported 15 showrooms and one operating segment.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $100.0 million | $70.7 million | +41.5% |
| Gross profit / margin | $50.1 million / 50.1% | $32.4 million / 45.8% | Margin +4.32 percentage points |
| SG&A | $44.8 million / 44.8% of sales | $27.4 million / 38.8% of sales | +63.5%; share of sales +6.03 points |
| Operating income / margin | $5.3 million / 5.3% | $5.0 million / 7.0% | Income +7.0%; margin declined |
| Net income / margin | $3.4 million / 3.4% | $2.4 million / 3.4% | +39.9% |
| Adjusted EBITDA / margin (non-GAAP) | $8.4 million / 8.4% | $6.5 million / 9.2% | +28.8%; margin declined |
| Operating cash flow | $0.2 million | $6.9 million | Down $6.7 million |
Orders increased 50.2% to 32,372, while average order value fell 5.8% to $3,090. Total consolidated net income was $3.4 million, of which $3.0 million was attributable to non-controlling interests; $0.4 million was attributable to Brilliant Earth Group, Inc. Basic and diluted EPS were $0.04 and $0.03, respectively.
Cash, debt and liquidity
- Cash and cash equivalents were $164.9 million at March 31, 2022, down from $172.9 million at year-end 2021. Including restricted cash, quarter-end cash was $165.1 million.
- Operating cash flow was nearly flat as working-capital changes absorbed cash, including inventory growth and lower accounts payable/accruals; investing outflow was $1.3 million, primarily for property and equipment. Financing outflow was $6.9 million of tax distributions to LLC members.
- Term-loan principal was $65.0 million, net carrying value $63.9 million. The loan is secured by substantially all company assets, bears interest at LIBOR plus 7.75% subject to a 0.50% floor, and matures October 15, 2023. The filing reports covenant compliance at quarter-end. It identifies $41.1 million of principal due in 2022 and $23.9 million in 2023, plus a final payment due in 2023.
- Working capital excluding cash was negative $68.1 million. Management said available cash and expected operating cash flow should meet projected operating, debt-service and tax-distribution needs for at least 12 months.
- Operating lease liabilities totaled $22.7 million following adoption of the lease accounting standard on January 1, 2022. Future minimum lease payments were $26.7 million.
Changes and management commentary
Sales growth was attributed to higher order volume, customer acquisition and conversion, omnichannel performance, product launches and showrooms opened in 2021. Lower AOV reflected increased sales of lower-priced fine jewelry. Gross-margin expansion was attributed to product mix/brand positioning, pricing and procurement improvements, and lower platinum prices, partly offset by higher gold prices.
SG&A rose $17.4 million, driven by employment costs (+$7.4 million), marketing (+$5.6 million) and other G&A (+$4.4 million). Marketing and advertising expense was $20.0 million versus $14.4 million. Higher expenses outpaced sales growth and reduced operating and Adjusted EBITDA margins.
No specific numerical forward guidance was provided. Management described further showroom, product and international expansion as growth opportunities, and said the company expects to fund planned operations, debt service and member tax distributions from existing liquidity and operating cash flow. Fourth-quarter sales historically represent approximately 30% of annual sales, so results are seasonal.
Risks, contingencies and unusual items
- Management highlighted inflation and wage, energy, precious-metal and gemstone cost/supply volatility; consumer-spending weakness; competition; customer acquisition and retention; inventory management; execution of showroom expansion; and ongoing COVID-19 uncertainty.
- The $6.6 million Tax Receivable Agreement liability reflects an agreement to pay continuing equity owners 85% of certain realized or deemed tax benefits. Management expects future payments could be significant; $0.1 million was expected within 12 months.
- A putative California class action alleges customer-service calls were recorded without consent. The company disputes the claims and intends to defend them; as of the filing, any liability was not considered probable or reasonably estimable.
- Capital commitments for new locations totaled $3.2 million. Subsequent to quarter-end, the company entered three additional showroom leases with aggregate future rent of approximately $3.9 million.
- Equity-based compensation was $2.1 million versus $0.1 million in Q1 2021. Lease accounting adoption added recognized lease assets and liabilities; management reported no cumulative-effect adjustment.
Key facts for investors to verify
- Whether order growth and gross-margin gains persist while AOV declines and SG&A grows faster than sales.
- Whether operating cash flow improves after its sharp year-over-year decline, and how working capital evolves.
- The timing and funding of substantial 2022 loan amortization, the 2023 maturity/final payment and compliance with liquidity covenants.
- The realized cash cost and timing of TRA payments, member tax distributions and showroom expansion commitments.
- The outcome and potential exposure from the call-recording lawsuit, which the filing says cannot yet be reasonably estimated.