Good day, and thank you for standing by. Welcome to the Brilliant Earth Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Allison Malkin with ICR. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our second quarter 2022 earnings conference call. Joining me today are Beth Gerstein, Chief Executive Officer; and Jeff Kuo, Chief Financial Officer. For this morning's call, Beth will begin with highlights of our second quarter financial and operational performance, and the drivers of our future growth. Jeff will follow with more details on the second quarter financial results and guidance. Following this, the operator will begin the Q&A session, with our presenters, Beth and Jeff available to answer the questions you have for us today. Before we start, I would like to remind you that, management will make certain remarks today that are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These future forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings for a description of the risks that could cause our actual performance and the results to differ materially from those expressed or implied in these forward-looking statements.\ These forward-looking statements reflect our opinion, only as of the date of this call. And we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Also, during this call, we will discuss both GAAP and non-GAAP financial measures. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's earnings release, which is available at the Investor Relations section of our website at investors.brilliantearth.com. A live broadcast of this call is also available at the Investor Relations section of our website. With that, I'll turn the call over to Beth.

Good afternoon, everyone, and thank you for joining us today. As we approach our one-year anniversary as a publicly traded company, we are pleased to report our fourth consecutive quarter of strong profitable growth. It's been an incredible year for our company, one in which we've grown the reach and impact of our mission, to cultivate a more transparent, sustainable, compassionate, and inclusive jewelry industry. We're proud of the progress our outstanding team has made to-date, and we're intently focused on the future. With a clear mission, a proven track record, and significant opportunities for expansion, we are excited about our near and long-term potential. We're pleased with our second quarter results, as they demonstrate our continuing ability to navigate in a rapidly changing macroeconomic environment. By staying focused on nimbly and prudently executing our strategy, while optimizing our asset-light business model to grow the brand, we are in a strong position to continue to take share in a fragmented industry and to prudently manage our costs, so that we continue to deliver profitable growth. A high-level review of our Q2 results demonstrates the effectiveness of this approach. We grew revenue 18% to $108.8 million. We delivered record gross margin of 53.1%, a 460 basis point improvement over the prior year. And we delivered $9.6 million in adjusted EBITDA, representing an adjusted EBITDA margin of 9%. Recent highlights include the continued expansion of our omnichannel strategy, with the opening of showrooms in Bethesda, Columbus, Houston, Minneapolis, Cleveland and Detroit to bring our reach to 21 showrooms in which our customers can experience a personalized joyful shopping experience. With each new showroom opening, we bring more consumers to our brand, while also deepening our relationships with both new and returning customers. Technology is a big part of delivering an exceptional omnichannel…

Thanks, Beth, and good afternoon, everyone. We're pleased to share our second quarter fiscal 2022 results with you today. During the quarter, we continued to execute our mission-driven growth strategy focused on scaling our business and building our brands to be the jeweler for the next-generation consumer while simultaneously delivering strong profitable growth. Our second quarter results demonstrate the disciplined execution of our approach. Revenue grew to $108.8 million, which represents 18% year-over-year growth and up 31% on a three-year CAGR compared to Q2 2019. Gross margin expanded to 53.1%, a 460 basis point increase compared to Q2 2021 and our highest quarterly gross margin percentage on record. And adjusted EBITDA was $9.6 million or 9% of revenue. These results again illustrate and reinforce the power and distinction of our brand, growth across our product lines and our agile highly efficient business model. Q2 revenue grew 18% year-over-year, which was consistent with our expectations in Q2's rapidly changing macroeconomic environment. This was driven by new and repeat customers, reflecting the increasing strength and awareness of Brilliant Earth, which led to growth across our product lines. We continue to see outsized performance within our fine jewelry assortment with growth that far outpaces the business as a whole. Wedding band sales were also particularly strong in Q2 this year, as the strength of our product assortment and historically robust year of the wedding fueled sales. The outperformance of fine jewelry and wedding bands led to a mid-single-digit percentage decline in our total company blended AOV for Q2, as both fine jewelry and wedding bands have a lower average price point than our overall business. As Beth mentioned, we recently opened our 21st showroom reflecting the ongoing successful execution of our omnichannel growth strategy. As we have shared in the past, our showroom…

Thank you. [Operator Instructions] Our first question comes from Thomas Nass with Cowen. Your line is now open.

Hi. Thank you. The gross margins were really impressive. Would love your thoughts on pricing optimization opportunities in the back half and what you see there as well as inflation and cost of goods sold and materials, if that's a factor as you think about your own pricing strategies as well as cost of goods sold. Thank you.

I can start that off. We were really pleased by our gross margin expansion. And as a data-driven company, we're always looking at opportunities to be able to maximize the benefit of our premium brand as well as the exclusive and unique product offering that we have. And both of these are important to driving our strong margins. Another thing to consider is we're not a discount-oriented brand. And so, that also I think plays a role in how we're able to take advantage of the premium positioning that we have. In terms of our overall inflationary environment, Jeff maybe you can speak a little bit more to that as well as our optimization engine.

Sure. So, unlike other retailers, we haven't -- we've been fortunate that we haven't seen broad-based inflation pressure. For example, gold and platinum prices have recently come down a bit. And so, that's something that we haven't seen. As you know, we do have our pricing optimization engine as well as a light asset -- an asset-light model that allows us to adapt very nimbly to changing conditions. And so we've been able to manage that. You see that in the results that we've delivered with our strong gross margin and we believe that we continue to have opportunities to optimize as well as take actions like optimize on procurement efficiencies and as we have done in the past. And so, I think that's something that we do see a lot of continued strength for us in our gross margins.

Thank you. This is Oliver Chen by the way from Cowen. On the revenue growth, it's potentially conservative on the guidance. Would love your thoughts on what you're seeing with upside drivers or downside drivers and how that may relate to marketing efficiency. We're seeing different things across the sector where digital marketing efficiency has been volatile. Thank you.

Yes. I would say, kind of starting from the overall revenue growth, we continue to see strong demand and the performance that we have has remained consistent. So while they're going to be some fluctuations, we're confident in our ability to deliver on our full year guidance. As it relates to, how we think about our marketing efforts, the digital environment we do recognize it's very dynamic, it's highly competitive. And as such, our costs have increased in certain areas. That said, our marketing spend remains efficient and we continue to drive profitable growth. We are continuing to also look at opportunities to be able to invest in marketing to support our strategic initiatives. So, investing in brand building for us is incredibly important to be able to drive awareness to continue to take market share. Word of mouth for us is a big sales contributor. So, it's really important for us to invest here and we've seen those investments paying off. We're also continuing to invest in fine jewelry. This is a category that has massive potential and as we're investing, we are also seeing some strong results there as well. So, we'll continue to keep a strong eye towards maximizing ROI. But really thoughtful about our approach to maximizing revenue and profitability.

Very helpful. Best regards. Thank you.

Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Your line is now open.

Good afternoon, everyone and congratulations on the results. Wanted to get some more color on fine jewelry and wedding bands given the strength that you saw there. How you're projecting that going forward, in regards to the AOV? And then I believe last time that you mentioned that the consumer was taking a longer time to make their decisions given the environment. What are you seeing now? Has that changed? And has it changed at all by category? Thank you.

Hi, Dana. Thanks for your questions. Starting with the consumer and the overall behavior there. As I mentioned, the performance is relatively consistent. As it relates to bridal, while bridal has moderated slightly, it does continue to experience strong growth. We continue to gain share. We recognize that an engagement ring is a higher price point a more considered purchase so it's not surprising to us that it's taking a bit longer for them to make these purchases. But overall, I would say that generally, we're seeing consistent performance. As it relates to fine jewelry, we're really excited about our opportunity there. Growth is far outpacing the business and we're really well positioned for the upcoming holiday season. So, see this being a nice growth driver especially as we're entering Q4 being a premium gift, giving occasion, just like we saw with Mother's Day being a real strong performance for us. So, I think that's going to be a nice tailwind for us. We're continuing to invest in marketing, in our assortments, in the digital experience, in creative imagery a lot of I think important investments there that are really helping to drive that category.

Got it. And the impact on gross margin from the increased fine jewelry how do you see that go forward?

Jeff, do you want to take that one?

Sure. You think there's significant gross margin expansion potential in fine jewelry. Fine jewelry is a strong gross margin part of the business and it's growing quickly. So that we see as it becomes a bigger and bigger part of our mix and we gain scale efficiencies in that area of the business we see there's opportunities to grow our margin there, in addition to some of the other initiatives and levers that we've been able to pull historically.

Thank you.

Thank you. Our next question comes from the line of Matthew Boss with JPMorgan. Your line is now open.

Thanks. So Beth, could you expand on the excitement that you cited regarding the second half of the year? Any specific categories or product assortment launches you see as drivers of momentum in the back half? And maybe specifically could you speak to the progression of demand trends that you've seen from the initial moderation in April through early August?

Yes absolutely. Thanks Matt. In terms of the progression of demand, as I mentioned there's some fluctuations. But for the most part it has been consistent for us. Demand continues to be strong. And so, we're excited to be able to capitalize on the resonance that we've had with our customer base. And as it relates to the second half, we have I think a very compelling product offering both in really across our product portfolio. I think you know we take a very data-driven and thoughtful approach to expanding our assortment and that's been very successful. We see success in our personalized offerings. For example in our Zodiac collection. We see strength in the offerings that really reinforce our mission positioning like our Fairmined gold collection. And we're continuing to remind the customer that this is a premium product with collections like our Truly Brilliant collection. And I think we have a lot of success that, we've been demonstrating. And I'm really excited, especially as we're opening new showrooms and reaching more and more customers that we're seeing such strong results.

Great. And then Jeff, could you speak to comfort with your current inventory position exiting the quarter, or just help break down the composition of the build into the back half of the year?

Yes. Thanks Matt. So as you know, we operate the business very facet-efficient way. And I think maybe just maybe providing a little bit of context and how we see that for the latter part of the year. We operate a really technology-enabled and data-driven supply chain with tight integrations with our suppliers that we've worked with for many years. And what that really allows us to do is to closely manage our working capital and inventory levels as we grow. And like if you look at it in ways, such as our inventory that we have on a per showroom level is very efficient relative to the industry as a whole. We also manage our fine jewelry inventory in a very efficient way. So, I think the overall approach that we take is to really have a lot of insight into the trends insight, into our supply chain manage things tightly and we expect that will continue to be the case in the upcoming quarters.

Great. Best of luck.

Thanks, Matt.

Thanks.

Thank you. Our next question comes from the line of Edward Yruma with Piper Sandler. Your line is now open.

Hey, guys. Thanks for taking the question. I guess just on gross margin, obviously, nice continued benefits from pricing optimization. As you think about the go-forward benefit, I know you indicated the comparisons get more difficult, but how should we kind of think about where you are in that evolution with the pricing engine, and how much more incremental benefit is still possible?

Sure. We think that there continues to be room to run with the pricing engine. I think this really starts just to set the context from the premium brand, premium differentiated proprietary products that we have that allow us to have that premium gross margin. That's something that we continue to invest in. With the pricing engine, we've talked through our longer-term target of mid-50s in terms of gross margin. We continue to pull levers as we've talked about with pricing engine procurement efficiency. And as we get more data, we input that into our algorithms and we continue to refine. So it's a living approach to how we continue to optimize margin. So we believe that there continues to be a lot of room to run with that.

Great. And a follow-up if I may. Good to hear the success on fine jewelry. I guess when you're finding a customer that comes into fine jewelry. Are they generally someone that's purchased engagement before and this is a follow-up purchase, or is fine jewelry successful in kind of introducing people to the brand? Thank you.

Yes. I would say both actually. We are seeing a lot of success in customers that are already loyal to Brilliant Earth customers perhaps they've come into a showroom, and they already have a really strong connection. And we're also seeing new customers come in which I think is also really exciting that we're expanding our customer base. So really seeing I think strong results also with self-purchasers in addition to gifting. And so I think our efforts are really successful there.

Thanks so much.

Thank you. Our next question comes from Noah Zatzkin with KeyBanc. Your line is now open.

Great quarter, and thanks for taking my question. Just on the showroom rollout. I think you'll be adding about nine more in the second half, if I'm thinking about that correctly. Can you remind us how you think about the timing and the P&L impact from showrooms as they roll out?

I can start that off. We talked a little bit about how we're planning on doubling the number of showrooms. We're really excited about the metros and how well they've been performing, as well as the upcoming ones that are on our road map. There are some timing fluctuations just based on things that are out of our control like permitting for example. So we haven't been very specific about how the rest are going to roll out.

Thank you. And then just quickly on the Truly Brilliant Collection as well as Moissanite, just any color on trends there and how you're thinking about both of those opportunities over time? Thank you.

Yes. So Truly Brilliant is a newer collection for us and we think that this is really nicely targeting for that discerning customer who is looking for premium characteristics both in terms of our blockchain-enabled natural diamonds, it uses renewable energy for a lab created. So a lot of I think really exciting premium sustainability as well as quality characteristics. So we're expecting I think a really strong reception, but I would say, it's early in terms of what we've seen there. And then as it relates to Moissanite want remains a nice alternative for customers in terms of an engagement ring. So continue to see strength in the overall category, but we usually don't get too granular as it relates to subcategories.

Thank you.

Thank you. Our next question comes from the line of Randal Konik with Jefferies. Your line is now open.

Thanks a lot. I just want to go back to the fine jewelry kind of strategy. Can you give us some perspective on how we should be thinking about the SKU count or kind of that you're offering to the consumer, I guess, on the website and in-store and how we should be thinking about how that kind of evolves over the next 12 to 24 months? Like, how is that going to kind of be illustrated, how much of it is the consumer going to see and so on and so forth. Just want to get an understanding there. And then, how do you change -- or how much will this change the inventory kind of needs on the balance sheet if -- probably not in a big way, but just how should we be expecting that to kind of change the inventory model going forward? Thanks, guys.

Great. So in terms of how we think about SKU count we're really looking at productivity across different assortments to make sure that, as we're introducing new products, we're continuing to see that productivity level remain strong. And that's what we've seen so far, as we've been introducing our assortment and increasing the number of SKUs we're seeing very strong performance. So I would say, like, as we think about 12 to 24 months out, we're really taking a very dynamic approach there. We're also taking approach that is more curated. So our approach is not to introduce an incredibly wide selection at all cost, it's really to take a more design-driven tailored approach, which is more curated. And as we see that productivity, we'll continue to be thoughtful about how we drive that increased SKU count. Jeff, do you want to talk a little bit about the inventory hurdle?

Yes, sure. Thanks, Randy. We're well positioned to manage our inventory efficiently. As we expand into fine jewelry, I talked earlier about, how we really take a data and technology-driven approach and integrate tightly with our suppliers. And it's really in our DNA to operate in an asset-light fashion. I think just also the way that we operate is just efficient in that, if you look at a traditional jeweler, they might need to bring in thousands of pieces of a given SKU just to get something started and to have something in every single location. We operate in a different way where we can test and learn, start with limited allocations of inventory, see what's doing well, again, use that data to see where we want to make those investments in inventory. And so, I think, we're well positioned to continue to have an efficient and capital-light model.

I think, one thing I would just add is, we also have the ability to rapidly introduce new products. And I think that's a real competitive advantage for us, as we're seeing strength in the assortment to be able to expand on what we're seeing as trends in the marketplace very quickly.

Got it. Very helpful. And then lastly, you've done a great job with the gross margin and part of that is due to the fine jewelry penetration. Any kind of color you can kind of give us on just where we are with fine jewelry penetration today, where we might think it might be two years from now and where you might want to be five years from now, just to give people some kind of thought process on how that penetration kind of grows long term, because it's obviously a nicely margin accretive opportunity for you guys. Just curious there, any color numerically or just qualitatively you can provide us would be great. Thanks, guys.

I think, just on a qualitative standpoint, it's still quite small for us. And if you look at most jewelers and jewelry representing the majority of their sales, that's really I think what we're targeting in the future. So while we're not providing specific numbers, we do have I think a lot of investment in this area and are trying to accelerate to the extent that we're able to do it in a profitable way.

Understood. Thanks, guys

Our next question comes from the line of Rick Patel with Raymond James. Your line is now open.

Good afternoon and congrats on the strong results. Can you help us understand what you're seeing in the industry in terms of independent jewelers closing doors? I think typically when the economy hit a soft patch the number of mom-and-pop jewelers tends to shrink. I'm hoping you could frame what you're seeing and to what extent you see that as a revenue and market share opportunity in the back half and beyond.

Yes. I think, the recent numbers that I have seen do indicate that there's an acceleration there in terms of independents closing doors. Typically, there is a bit of a lag, so I think that's what we've seen in previous more challenging times and I think that you're right on to think of the fact that we're probably going to see increased consolidation more generally. As it relates to the opportunity, we continue to see this highly fragmented industry as ripe for disruption. And we think we offer tremendous value, relative to the independent jeweler. We have strong supplier relationships, our mission-driven values and the resonance that our brand has, I think is very compelling. So we think we're definitely poised to be leaders here and really take advantage of some of the dynamics that we see in the industry.

Thank you, very much.

Thank you. Our next question comes from the line of Oliver Chen with Cowen. Your line is now open.

Hi, thanks for taking my question. Your positioning Brilliant Earth with being premium and branded and mission focus is quite differentiated. Would love to hear your thoughts as the industry consolidates a little bit and your positioning relative to other competitors such as Blue Nile, how would you say about merit [ph], are you most different? Thank you.

Well, while we're not going to comment specifically on one particular competitor, we think that we are very differentiated in the industry. As you mentioned, our premium positioning, we don't have a discount orientation. We really invest in providing a luxury distinguished experience for the customer overall. The mission behind really everything that we do is really important for us as a company. The same way is that, it's important for our customers. I think that the products that we offer are also very distinctive. We're constantly introducing new trend-driven collections and those resonate, as well with our customer base. So, we're really very focused on our own strategy and how we can resonate with the millennial and Gen Z audience and are seeing great success there.

Thanks, Beth. Lastly, it's Oliver Chen from Cowen and Company. The supply chain, what are your thoughts on vertical integration or the future and what may evolve especially as you continue to make such encouraging progress in fine? I would love your thoughts.

We don't have any immediate plans there. I think, we have a really attractive model, as it relates to our inventory light capital-efficient, a more agile flexible model. That's not to say, we won't be opportunistic as we see opportunities to continue to drive an improved customer experience and to lower costs, but do recognize that there are trade-offs as it relates to inventory there. So, I think we're comfortable with our current model and feel really good about the supply chain partners that we've had. They're very long term. And I think we see a lot of benefit in terms of those long-term relationships.

Okay. And last question. On the consumer, the consumer has become much more considered and kind of disappointed in some ways. What are your thoughts about what's happening going forward with the health of the consumer, given the cross currents of low unemployment, yet the obvious pressures of high inflation?

Well, I don't think we necessarily have the crystal ball there. What we can say is that, bridal is typically quite recession resilient overall as a category. The consumer continues to drive strong demand for our products as it relates to fine jewelry and other categories. So overall, I think even though there have been some macroeconomic headwinds there, we're continuing to perform really well.

Thank you. Best regards.

Thanks, Oliver.

Thank you. This concludes the question-and-answer session. I would now like to turn the call back over to Beth Gerstein for closing remarks.

Great. I appreciate everyone's participation and we look forward to talking --

This concludes today's conference call. Thank you for participating. You may now disconnect.