Brilliant Earth Group, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 10, 2024. Brilliant Earth designs, procures and sells jewelry online and through U.S. showrooms. The company reports one operating segment.
Financial and operating results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $97.3 million | $97.7 million | Down 0.4% |
| Gross profit / margin | $58.3 million / 59.9% | $53.7 million / 54.9% | Margin up 5.0 percentage points |
| SG&A | $57.4 million | $53.8 million | Up 6.8% |
| Operating income (loss) | $0.9 million | $(0.1) million | Improved |
| Net income (loss), consolidated | $1.1 million | $(0.4) million | Improved |
| Net income (loss) attributable to Brilliant Earth Group, Inc. | $0.1 million | $(0.1) million | Improved |
| Adjusted EBITDA and margin (non-GAAP) | $5.1 million / 5.2% | $5.5 million / 5.7% | EBITDA down 8.3%; margin down 0.5 percentage points |
| Operating cash flow | $(5.8) million | $(2.0) million | Cash use increased |
| Cash, cash equivalents and restricted cash at period end | $147.7 million | $146.2 million | — |
Order volume rose 13.7% to 40,525, while average order value fell 12.4% to $2,402. Management attributed the AOV decline to a greater mix of lower-priced items, including fine jewelry; higher order volume was linked to omnichannel performance, customer acquisition and retention, product releases, and new showrooms. U.S. sales were $93.7 million, up from $92.6 million; international sales were $3.7 million, down from $5.1 million.
Gross margin improved primarily due to product mix and brand positioning, pricing tools, procurement efficiencies, and the extended warranty program. Lower average platinum prices also helped; higher average gold prices were a partial offset. SG&A growth reflected employment, general and administrative, and marketing costs. Other income increased mainly because of interest earned on cash balances.
Balance sheet, liquidity and debt
At March 31, 2024, total assets were $268.2 million and total stockholders’ equity was $99.9 million. Inventory was $38.9 million. Current liabilities were $68.7 million; the company reported negative working capital of $18.4 million using its stated definition (current assets less cash minus current liabilities).
Term-loan principal was $59.3 million ($58.8 million net of debt issuance costs); $4.5 million was classified as current and $54.8 million as long-term. The effective interest rate was 8.10% for the quarter. No revolving-facility borrowings were outstanding. The company paid $0.8 million of term-loan principal during the quarter.
Cash, cash equivalents and restricted cash declined $8.4 million in the quarter. Investing cash use was $0.6 million, primarily for property and equipment; financing cash use was $2.0 million, including $1.0 million of member tax distributions. Management said it expects available liquidity to cover projected operating, debt-service and tax-distribution needs for at least the next 12 months. It expects future Tax Receivable Agreement (TRA) payments to be significant; the recorded TRA liability was $8.0 million. The company paid $1.0 million in member tax distributions during the quarter.
Material changes, outlook and risks
- On February 21, 2024, lenders amended the SVB credit agreement, suspending the fixed-charge coverage covenant for the quarters ended December 31, 2023, March 31, 2024 and June 30, 2024. Through June 30, 2024, the company must maintain defined balance-sheet cash above outstanding revolving and term-loan principal. The filing says the company was in compliance with applicable covenants at March 31, 2024.
- The filing provides no specific numerical revenue or earnings guidance. Management discusses continued investment in brand marketing, product assortment, technology, and showroom expansion, as well as early-stage international expansion. Q4 is typically the largest revenue and profit period because of holiday sales.
- Key disclosed risks include consumer-spending weakness and inflation; diamond, gemstone, precious-metal, labor and energy costs; customer acquisition and retention; inventory management; competition; showroom and international expansion; supply constraints; and reliance on IT systems and third-party providers.
- Disclosure controls and procedures were not effective at March 31, 2024 because of a previously reported material weakness in IT general controls, including change management, user access and segregation of duties. The company reported no identified financial-statement misstatements and said remediation is ongoing; the weakness is not considered remediated until controls operate effectively for a sufficient period and are tested.
- A California representative action by a former employee alleges labor-code violations. The company is appealing denial of its petition to compel arbitration and intends to defend the claims. It said any liability was not currently probable or reasonably estimable and did not believe the matter would have a material impact.
- The company repurchased 32,371 Class A shares for approximately $0.1 million in March under its $20 million repurchase program. The program does not obligate the company to repurchase shares and may be changed or terminated.
Important facts for investors to verify
- Whether higher order volumes can be sustained and offset lower AOV, and whether the sales mix continues to support gross margin.
- Drivers of operating cash use and the effect of working-capital movements on liquidity.
- Debt repayment capacity, covenant requirements after the temporary suspension ends, and the scheduled principal-payment profile.
- Potential timing and amount of TRA payments, and the company’s ability to fund them alongside taxes and other obligations.
- Progress and testing of IT-control remediation, including whether management later concludes controls are effective.
- Developments in the California labor case and any change in the company’s assessment of potential exposure.