Brilliant Earth Group, Inc. — FY2023 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2023; it is not a standalone Q4 report. Brilliant Earth is a digitally native, omnichannel retailer of diamond, gemstone and fine jewelry, selling online and through 37 U.S. showrooms. More than 90% of sales were to U.S. customers. The company reports one operating segment.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $446.4 million | $439.9 million |
| Gross profit / margin | $257.0 million / 57.6% | $234.3 million / 53.3% |
| SG&A | $252.5 million / 56.6% of sales | $211.0 million / 48.0% of sales |
| Operating income / margin | $4.5 million / 1.0% | $23.3 million / 5.3% |
| Net income / margin | $4.7 million / 1.1% | $19.0 million / 4.3% |
| Net income attributable to Brilliant Earth Group, Inc. | $0.6 million | $2.1 million |
| Adjusted EBITDA / margin (non-GAAP) | $26.2 million / 5.9% | $39.0 million / 8.9% |
| Net cash from operating activities | $26.2 million | $14.5 million |
Sales drivers and margins. Sales increased 1.5%, while total orders rose 16.7% to 174,576. Average order value fell 13.0% to $2,557, reflecting more lower-priced fine jewelry orders and slower growth in products above $10,000. Gross margin expanded 430 basis points, attributed to pricing, procurement efficiencies and product mix; however, SG&A rose 19.7%, including a $22.0 million increase in marketing expense. The resulting operating income declined 80.8% and net income declined 75.1% year over year.
Cash, liquidity and debt. At year-end, cash and cash equivalents were $155.8 million; cash, cash equivalents and restricted cash totaled $156.0 million. The company reported negative working capital excluding unrestricted cash of $27.9 million, which management attributes to its inventory and payment cycle. Operating cash flow was $26.2 million; investing cash outflow was $11.9 million, primarily for property and equipment; financing cash outflow was $13.1 million, including $9.9 million of tax distributions. Outstanding term-loan principal was $60.1 million, with no revolver borrowings; the loan matures in May 2027 and bears variable-rate interest. The company reported compliance with debt covenants at December 31, 2023. Scheduled future lease payments totaled $49.8 million, and future principal payments on debt totaled $60.1 million.
Material changes, outlook and risks
- Order growth did not translate into comparable sales growth because average order value declined. Gross margin improved, but higher marketing, employment and other overhead costs substantially reduced profitability.
- Management said current projections support sufficient liquidity for operating needs, debt service and tax distributions for at least 12 months after filing. The filing provides no specific revenue, earnings or margin guidance.
- On February 21, 2024, lenders amended the credit agreement to suspend the fixed-charge-coverage covenant for the quarters ending December 31, 2023, March 31, 2024 and June 30, 2024. During the amendment period, the company must maintain specified balance-sheet cash exceeding outstanding term and revolving borrowings. This is an important post-year-end financing development.
- Key risks include discretionary consumer spending and economic conditions; diamond, gemstone and precious-metal price and supply volatility; supplier concentration and limited long-term supply contracts; competition; showroom expansion and execution; and customer acquisition and inventory management. Two jewelry suppliers represented 21% of 2023 inventory purchases.
- Other material considerations include cybersecurity and privacy exposure, ESG and sourcing-related reputation risks, and the Tax Receivable Agreement, under which the company owes continuing equity owners 85% of certain realized or deemed-realized tax benefits. The year-end recorded TRA liability was $8.2 million; future payments could be significant.
- A California representative labor action remains pending, with unspecified damages and penalties sought. The company said liability was not probable or reasonably estimable at the filing date and is appealing denial of its motion to compel arbitration.
- Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end because of a material weakness in IT general controls, including change management, user access and segregation of duties. No financial-statement misstatement was identified; remediation is ongoing. The auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether order growth can be sustained and average order value stabilizes, particularly as product mix shifts toward fine jewelry.
- Whether SG&A growth moderates enough to restore operating and net margins, and how much of reported Adjusted EBITDA depends on excluded items.
- Current liquidity, variable-rate debt service, covenant compliance and the effect of the February 2024 amendment after its temporary terms expire.
- Progress and independent testing of remediation for the IT-controls material weakness.
- Cash timing and amount of TRA payments, member tax distributions, and any limits on distributions from Brilliant Earth, LLC.
- Developments in the California labor case, supplier concentration and sourcing availability, and execution and returns from showroom expansion.