Brilliant Earth Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company designs, procures and sells jewelry online and through U.S. showrooms; it reported 20 showrooms at quarter-end. More than 90% of sales were to U.S. customers.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $108.8m | $92.3m | $208.8m | $163.0m |
| Gross profit / margin | $57.8m / 53.1% | $44.8m / 48.5% | $107.9m / 51.7% | $77.1m / 47.3% |
| Operating income / margin | $5.7m / 5.2% | $12.4m / 13.4% | $11.0m / 5.3% | $17.3m / 10.6% |
| Consolidated net income / margin | $3.8m / 3.4% | $8.5m / 9.2% | $7.1m / 3.4% | $10.9m / 6.7% |
| Adjusted EBITDA / margin (non-GAAP) | $9.6m / 8.8% | $14.5m / 15.7% | $18.0m / 8.6% | $21.0m / 12.9% |
- Sales increased 17.8% in Q2 and 28.1% for the first half. Orders grew 24.9% and 35.8%, respectively, while average order value declined 5.6% and 5.7%, reflecting greater sales of lower-priced jewelry and wedding bands.
- Gross margin improved 460 basis points in Q2 and 440 basis points year to date, which management attributed to product mix and brand positioning, pricing-engine improvements, procurement efficiencies and lower platinum prices.
- Profitability weakened despite sales growth: SG&A rose 60.9% in Q2 and 62.1% in the first half, outpacing revenue growth. Higher staffing, marketing, equity compensation, public-company costs and showroom expenses contributed.
- Net income attributable to Brilliant Earth Group, Inc. was $0.4m in Q2 and $0.8m for the first half; most consolidated earnings were attributable to non-controlling LLC owners, who held an 88.6% economic interest at June 30. Diluted EPS was $0.03 for Q2 and $0.06 for the first half.
Cash, debt and liquidity
- Cash and cash equivalents were $155.5m at June 30, 2022, down from $172.9m at December 31, 2021. Current assets were $200.8m and current liabilities $74.8m; management separately reported working capital excluding cash of negative $29.5m.
- First-half operating cash flow was $4.9m, down from $20.2m a year earlier. Inventory and other asset growth used cash. Investing cash outflow was $4.1m, mainly for property and equipment; financing cash outflow was $18.1m, including member tax distributions and debt refinancing. Cash, cash equivalents and restricted cash decreased $17.3m.
- Gross term debt was $65.0m at quarter-end. In May, the company refinanced its Runway loan with a $65.0m Silicon Valley Bank term loan and obtained an undrawn revolving facility of up to $40.0m. The facilities mature in May 2027, are secured by substantially all LLC assets, carry floating rates, and include financial covenants. The reported rate at June 30 was 4.15%; the company said it was in compliance with covenants. Debt extinguishment resulted in a $0.6m Q2 loss.
- The company stated that cash and expected operating cash flow should cover projected operating, debt-service and tax-distribution needs for at least 12 months. The term loan requires scheduled amortization, with $43.9m of principal scheduled for 2027. Member tax distributions totaled $15.0m in the first half.
- Operating lease liabilities totaled $24.4m. Subsequent to quarter-end, the company entered seven additional showroom lease agreements with approximately $10.4m of future minimum rent payments.
Management commentary, outlook and risks
- No quantified financial guidance for future periods is provided in the filing. Management plans to continue investing in brand awareness, new products, technology and showroom expansion; five showrooms opened during the first half. The business is seasonal, with the fourth quarter historically contributing about 30% of annual sales and a high share of annual net income.
- Management cited customer acquisition and conversion, omnichannel performance, product releases and showroom openings as growth drivers. It said AOV was pressured by a shift toward lower-price-point products.
- Key risks include inflation and fluctuations in diamond, gemstone and precious-metal costs; consumer spending and recession risk; customer acquisition and retention costs; competition; inventory management; showroom expansion execution; and ongoing COVID-19 uncertainty. The company does not hedge commodity-price exposure with financial derivatives.
- The Tax Receivable Agreement generally requires payments to continuing equity owners equal to 85% of realized or deemed tax benefits. The recorded TRA liability was $7.1m at June 30; management expects future payments to be significant and notes they could reduce available cash.
- 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. Management reported no material change to the risk factors in its 2021 Form 10-K and stated disclosure controls were effective.
Important facts for investors to verify
- Whether order growth and improved gross margins can persist while AOV declines and SG&A grows faster than sales.
- How inventory growth and lower operating cash flow affect cash conversion, particularly through seasonal sales periods.
- Floating-rate debt exposure, covenant headroom, scheduled repayments and availability under the $40m revolving facility.
- The cash impact and timing of member tax distributions, future TRA payments, showroom commitments and the seven subsequent lease agreements.
- The development and potential financial exposure of the call-recording litigation, as well as execution and returns from showroom expansion.