Brilliant Earth Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The company designs, procures, and sells jewelry online and through 22 U.S. showrooms. It reports one retail segment; more than 90% of sales were to U.S. customers.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $111.4 million | $95.2 million | $320.3 million | $258.3 million |
| Gross profit / margin | $60.9 million / 54.7% | $48.0 million / 50.4% | $168.9 million / 52.7% | $125.1 million / 48.4% |
| Operating income / margin | $6.3 million / 5.7% | $9.9 million / 10.4% | $17.3 million / 5.4% | $27.2 million / 10.5% |
| Consolidated net income / margin | $5.7 million / 5.1% | $4.0 million / 4.2% | $12.8 million / 4.0% | $14.8 million / 5.7% |
| Adjusted EBITDA / margin | $10.0 million / 8.9% | $13.6 million / 14.2% | $28.0 million / 8.7% | $34.6 million / 13.4% |
Net income attributable to Brilliant Earth Group, Inc. was $0.6 million for Q3 and $1.4 million for the nine-month period; most consolidated earnings were attributable to non-controlling owners of Brilliant Earth, LLC. Diluted EPS was $0.05 for Q3 and $0.10 for the nine months.
Cash flow and liquidity: Operating cash flow was $9.0 million for the first nine months, down from $33.8 million. Investing cash outflow was $6.6 million, primarily for property and equipment; financing cash outflow was $22.4 million. Cash and cash equivalents were $152.9 million at September 30 ($153.1 million including restricted cash). Management reported working capital excluding cash of negative $27.3 million and said existing liquidity should cover operating, debt-service, and tax-distribution needs for at least 12 months.
Debt and commitments: Principal outstanding on the SVB term loan was $64.2 million; $60.9 million was classified as long-term before debt issuance costs. The $40 million revolving facility had no borrowings. The facilities mature in May 2027, are secured by substantially all LLC assets, and include financial covenants; the company reported compliance at quarter-end. Future lease payments totaled $31.2 million. The company also reported $3.8 million of showroom capital commitments and $5.6 million of longer-term service, software, and marketing commitments.
Changes versus comparable periods
- Q3 sales grew 17.0%; nine-month sales grew 24.0%. Order volume rose 28.1% in Q3 and 33.0% year to date, while average order value fell 8.7% and 6.8%, respectively, partly due to greater sales of lower-priced fine jewelry and wedding bands.
- Gross margin improved 430 basis points in both comparisons. Management cited product positioning, pricing, procurement efficiencies, the extended warranty program, and lower platinum prices as contributors.
- SG&A rose 43.2% in Q3 and 54.7% year to date, outpacing sales growth. Higher staffing, marketing, equity compensation, public-company costs, and other growth-related expenses weighed on operating income and Adjusted EBITDA.
- Consolidated net income increased 44.3% in Q3, helped in part by lower interest expense and the absence of the prior-year warrant fair-value expense. For the first nine months, net income fell 13.5%; operating income and Adjusted EBITDA also declined.
- In May 2022, the company refinanced the Runway loan with SVB facilities. It repaid the Runway loan and recorded a $0.6 million loss on extinguishment of debt during the nine-month period.
Outlook, risks, and unusual items
- The filing provides no specific revenue, earnings, or margin guidance. Management described ongoing showroom expansion, product launches, customer acquisition and retention, and omnichannel development as growth priorities. The fourth quarter is typically the strongest sales period, historically representing about 30% of annual sales.
- Management cited inflation, consumer-spending weakness, recession risk, commodity prices and availability, labor costs, marketing effectiveness, competition, inventory management, and execution of U.S. and international expansion as risks. The filing also notes continuing uncertainty from COVID-19.
- The company recorded $6.6 million of equity-based compensation for the nine months. Cash generation was affected by a $15.6 million increase in inventory on the cash flow statement.
- The company has a tax receivable agreement requiring payment to continuing equity owners of 85% of certain realized or deemed tax benefits. The recorded obligation was $7.4 million at quarter-end; management expects future payments to be significant.
- A putative California class action alleges customer-service calls were recorded without consent. The company disputes the claims; liability was not considered probable or reasonably estimable at filing.
- After quarter-end, the company entered nine additional showroom leases, with aggregate future minimum rent of approximately $17.5 million. Management reported disclosure controls were effective and no material changes to internal control during the quarter.
Important facts for investors to verify
- Whether order growth can continue while average order value declines, and whether the product mix supports sustained gross margins.
- Whether marketing, staffing, showroom expansion, and public-company costs can scale without further pressure on operating income and Adjusted EBITDA margins.
- How inventory investment and other working-capital movements affect operating cash flow, especially through the holiday season.
- SVB debt terms, variable-rate exposure, scheduled repayments, covenant headroom, and availability of the undrawn revolver.
- The timing and cash impact of the tax receivable agreement, member tax distributions, and additional showroom lease commitments.
- Developments in the California call-recording litigation and any change in the company’s assessment of potential exposure.