Brilliant Earth Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The company designs, procures and sells jewelry online and through 32 U.S. showrooms. Results are unaudited; the company reports one operating segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $110.2 million | $108.8 million | $207.9 million | $208.8 million |
| Gross profit / margin | $63.5 million / 57.6% | $57.8 million / 53.1% | $117.2 million / 56.4% | $107.9 million / 51.7% |
| Operating income / margin | $1.4 million / 1.2% | $5.7 million / 5.2% | $1.3 million / 0.6% | $11.0 million / 5.3% |
| Net income | $1.2 million | $3.8 million | $0.8 million | $7.1 million |
| Adjusted EBITDA / margin | $7.7 million / 7.0% | $9.6 million / 8.8% | $13.3 million / 6.4% | $18.0 million / 8.6% |
Net income attributable to Brilliant Earth Group, Inc. was $148,000 in Q2 and $96,000 for the six-month period, compared with $424,000 and $780,000, respectively, in 2022. Diluted EPS was $0.01 in both 2023 periods, versus $0.03 for Q2 2022 and $0.06 for the first half of 2022.
Q2 orders increased 21.2% to 42,849, while average order value (AOV) fell 16.4% to $2,571. For the first half, orders rose 15.9% to 78,480 and AOV declined 14.1% to $2,649. U.S. sales were $104.9 million in Q2; international sales were $5.3 million.
Cash, debt and liquidity
- Cash and cash equivalents were $149.6 million at June 30, 2023, down from $154.6 million at year-end 2022. Six-month operating cash flow was $10.9 million; capital expenditures were $9.2 million; cash used in financing was $6.8 million. Cash, cash equivalents and restricted cash decreased by $5.0 million.
- Total debt principal was $61.8 million ($61.2 million net of issuance costs), including $3.3 million current. No balance was drawn on the $40 million revolving facility. The term loan matures in May 2027; the company reported compliance with its financial covenants.
- Working capital, excluding cash, was negative $23.6 million. The company said projected liquidity was sufficient for operating, debt-service and tax-distribution needs for at least 12 months after filing.
- Operating lease liabilities totaled $44.7 million. The company paid $5.1 million in member tax distributions in the first half.
Changes, outlook and risks
- Q2 sales grew 1.3%, but first-half sales declined 0.5%. Higher order volume was offset by lower AOV, reflecting slower growth in products above $10,000 and more lower-priced fine jewelry sales.
- Gross margin improved 450 basis points in Q2 and 470 basis points in the first half, attributed to product mix, pricing, procurement efficiencies and extended warranty benefits. However, SG&A rose 19.1% in Q2 and 19.5% in the first half, driven by marketing, staffing, showroom openings and other growth-related costs. Operating income and net income fell materially.
- Management gave no specific numerical revenue or earnings guidance in the supplied filing text. It cited brand investment, customer acquisition, showroom expansion, product development and international growth as business priorities. It noted that sales and profits are traditionally weighted toward the fourth quarter.
- Key stated risks include weaker consumer spending, inflation and precious-metal costs, competition, customer-acquisition economics, inventory management, supply constraints, showroom expansion and the ability to sustain profitability. The company’s 85% Tax Receivable Agreement obligation may reduce future cash available to the business; the recorded TRA liability was $7.9 million.
- Other income in 2023 benefited from interest earned on cash balances. A former employee’s California representative labor action remains pending; the company appealed denial of its motion to compel arbitration and said any liability was not then probable or reasonably estimable. Management reported no material change to previously disclosed risk factors and said disclosure controls were effective.
Investor facts to verify
- Whether order growth can offset continued AOV declines, especially in higher-priced products.
- Whether higher gross margins can be maintained while marketing, staffing and showroom costs rise.
- Cash conversion and capital spending as new showrooms and lease obligations expand.
- Debt covenant compliance, variable-rate borrowing costs, and the effect of TRA payments and member tax distributions on liquidity.
- Developments in the California labor case and any change in the company’s assessment of potential exposure.