Good day and thank you for standing by. Welcome to the Brilliant Earth Third Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After this presentation, there will be a question-and-answer session. [Operator Instructions] And please be advised that today's conference is being recorded. I would now like to turn the call over to Stefanie Layton, Senior Vice President, Investor Relations.

Thank you and good afternoon, everyone. Welcome to Brilliant Earth's third quarter 2023 earnings conference call. Joining me today are Beth Gerstein, our Chief Executive Officer; and Jeff Kuo, our Chief Financial Officer. During the call today, management will make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These 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 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 revisions to these forward-looking statements in light of new information or future events unless required by law. Also during the call, management will refer to certain non-GAAP financial measures. A reconciliation of Brilliant Earth's non-GAAP measures to the comparable GAAP measures is available in the third quarter earnings release, which can be found on the Brilliant Earth's Investor Relations website. I will now turn the call over to Beth.

Good afternoon and thank you for joining us today. Our team is already hard at work with the holiday season that's just kicked off, but this is a good opportunity for us to reflect on the many achievements in the third quarter. Our Q3 results highlight the power of Brilliant Earth's brand to connect with our customers to drive share gains and to deliver sustainable, profitable growth, even in a dynamic environment. Here are just a few of the highlights. Net sales were $114.2 million or an increase of 2.5% year-over-year, a significant outperformance compared to the jewelry industry overall. Adjusted EBITDA was $7.6 million in Q3, which marks our ninth consecutive quarter of positive adjusted EBITDA as a public company, demonstrating our ability to deliver sustainable profitability. Order volume increased 17% year-over-year and we opened five new showrooms, bringing us to a total of 37 showrooms across the United States. During the quarter, we also made good progress on the strategic priorities that have and we believe will continue to drive high-quality results and increase our ability to deliver long-term shareholder value. I'd like to start by noting our continued ability to grow and gain share. While this has been a challenging year for many in the jewelry industry, we have continued to gain substantial market share and deliver profitable growth. Based on industry reports, we estimate our revenue growth has outpaced the jewelry industry by more than a 1,000 basis points in the third quarter. While we estimate the bridal market and other portions of the industry are down double digits and others have pulled back their investments, we continue to lean in and are proud of our growth and market share gains. In the past, this has been a strategy we've used with great success and we…

Thanks, Beth, and good afternoon, everyone. As Beth mentioned, we're pleased to report the quarter that was in line with our expectations and reinforces our ability to continue achieving profitable growth and significant outperformance compared to the industry. Let me take you through the details. Net sales of $114.2 million, represented a 2.5% increase year-over-year and growth of 22% on a four-year CAGR basis. The increase in net sales was driven by a 17% increase in order volume year-over-year, partially offset by a 12% decline in average order value or AOV. The year-over-year change in AOV reflects similar trends to what we have seen this year. As we continue growing fine jewelry, overall company AOV is expected to decrease year-over-year in Q4, particularly given that Q4 is seasonally the largest fine jewelry quarter. Looking at the collections independently, the average selling price for engagement rings has been relatively stable during 2023 and sequentially increased in Q3 compared to Q2. ASP for fine jewelry sequentially increased from Q2 to Q3 this year and is up year-over-year in Q3. As we've mentioned before, our customers tend to shop with a budget in mind and we're able to meet their needs with a curated assortment of jewelry. Q3 gross margin was 58.5%, which is a 380-basis point expansion over Q3 last year. As I mentioned last quarter, the main driver supporting this increase include our premium brand, our price optimization engine, procurement efficiencies and our enhanced extended warranty program. We delivered a Q3 adjusted EBITD1A of $7.6 million or 6.7% adjusted EBITDA margin exceeding our expectations. Our strong gross margin performance, together with prudent management of operating expenses contributed to our strong profitability results this quarter, operating profitably while growing in a disciplined manner sets us apart from many other recent consumer IPOs.…

Thank you. [Operator Instructions] And our first question is going to come from the line of Oliver Chen with TD Cowen. Your line is open. Please go ahead.

Hi, thank you very much. On the guidance, as you fine-tune the guidance to the low end on the EBITDA, what was driving that change? That would be very helpful. Also second, in terms of normalization of bridal demand, it sounds like it happened a little bit slower than you would have expected, but would love your thoughts on what's happening, acknowledging that there have been lots of macro challenges that have been worse than expected? Thank you.

Hi, Oliver. I can start with just talking about the bridal demand. So as you mentioned, we are seeing some headwinds in the bridal market with fewer engagements overall than we were anticipating. That said, I'm really pleased with the outperformance that we have versus the industry. The fact that we have outpaced the industry by 1,000 basis points, I think says a lot to how we are continuing to increase our market share overall. And it's due to a lot of the investments that we've been making. So I would say, overall, while we're not immune to what's happening in the industry, the growth that we have is still robust in this environment. So we're pleased by that. Jeff, do you want to talk through guidance and the first part of Oliver's question?

Sure. Our guidance for Q4 really reflects continuing to drive significant outperformance versus the industry share gains with strong order growth and making the investments in a sustainable long-term growth. We do recognize that there are current headwinds from bridal demand that's lower than historical averages and the current macro backdrop and we factor that into our guidance. But we're leaning into making investments even as others are pulling back. And as Beth mentioned, that's something that's been a successful strategy for us in the past and really positions us well for the long-term. And with all that in mind, we're still applying a discipline as we always have towards looking at the ROI of investments being thoughtful about the returns that we're seeing and able to still deliver a Q4 outlook that is for profitable growth.

Thank you. And congrats as well on the Sol Collection. To that point, how should we think about jewelry penetration over times and AOV normalizations? And also any key learnings from that launch as well?

Sure. Maybe I can just start with the overall collection. This was -- as I mentioned in my remarks, our biggest national brand campaign and it's a product collection that we're also incredibly proud of. So just wanted to point that out because there's a lot of hard work on our side to make that happen. In terms of how we're thinking about it, we do think of it as supporting jewelry as a category, as well as our brand overall and just increasingly being known as a fine jewelry destination for that next generation. And as we're continuing to invest in fine jewelry, we do see continued performance, very strong performance there. And that's based on the marketing efforts. It's based on our assortment, which continues to be more differentiated, more curated, trend-leading overall. And so that's something we're continuing to just see a lot of upside and a lot of potential in going forward. We haven't put down the line in terms of the specific jewelry penetration, but given we're talking about a $300 billion market, we see a ton of upside there and we're still very, very low penetration, relative to where we think we could be.

Thanks, Beth and Jeff. Appreciate it. Best regards. Happy holidays as well.

Thank you, Oliver.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Rick Patel with Raymond James. Your line is open. Please go ahead.

Thank you. Good afternoon, everyone. I'm hoping you can talk about the slowdown that you've seen that prompts the guidance revision. So I'm curious did it happen early in the fourth quarter? Did you start to see it in the third quarter? And can you also provide color on whether these softer trends are concentrated towards certain categories or price points?

Yeah, I would say -- so in terms of what drove some of the revisions for the guidance, it's not actually a slowdown. If you look at the growth, the growth has actually been accelerating and you can see that throughout the year. I think our expectations were that the bridal demand would return faster. And obviously, there's been more disruption over the past few years. So we are seeing increased momentum and increased growth overall, but it's just not quite as high as we were anticipating. In terms of what's driving the trends, it's really about the number of engagements that are happening. So if you look across our assortment, we're doing really well. We're driving very strong order growth, 17% and that's showing you that the products we have are resonating, the brand is resonating with our customers. But at the end of the day, the fact that there are less engagements does have an impact.

And how should we think about the cadence of showroom openings in light of uncertain macro and engagement trends? I'm assuming that you've already had to make some commitments for next year. So I'm just curious how many stores may be in the pipeline.

So we haven't committed to -- we haven't provided the specific numbers in terms of the commitments that we have for the future, that's something that we'll plan to talk about when we talk through our 2024 plans. What I will say is that we continue to have conviction in omnichannel as a model for us. We know that this is a category where customers really like to come in person. We think that we have an industry-leading, very personalized curated experience overall. And so the showrooms continue to drive strong performance, that metro uplift that we've been talking about really produces nice paybacks, as well as strong four walls. So overall, I think we're pleased with how the showrooms are doing. And overall, see a lot of opportunity there. I talked about clusters earlier and just how we're able to see strong performance, even having multiple showrooms in the specific metro. We've seen great performance in ground. So overall, we still remain very optimistic relating to the omnichannel experience that we've created. But we'll talk through cadence in upcoming earnings calls.

Thank you very much. And all the best this holiday.

Sure.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Ashley Owens with KeyBanc Capital Markets. Your line is open. Please go ahead.

Hi, good afternoon. Thanks for taking the question. Just an update on the showrooms. You've added a few mall-based locations to your footprint now. Is there anything to highlight in terms of differences in demographics or trends compared to your more traditional fleet? And then in general, has this shifted your overall approach to the location of showroom openings in the future?

Yeah. I would say that it's still pretty early as it relates to the data that we're gathering from mall base. We're pleased to see the early results, the fact that we're getting nice walk-in traffic, the fact that we're also able to serve those very highly personalized appointments. So that's an important part of the model that we continue to see in malls, but I think it's still a little early to call and so it's something we're going to be watching over the holiday season and the upcoming quarters.

Okay, great. And then just quickly on bridal. You mentioned some softness in during the quarter, but momentum kind of entering that holiday period. Do you think for the customers that are making the purchase maybe they're kind of elongating that decision time due to the macro? Or what are you seeing there?

I think that we saw that elongation starting last October, I would say we're seeing similar types of behaviors overall in terms of the overall macro. I think what's more of a driver is just that we've experienced more of a disruption over the last few years of the pandemic and we're still normalizing -- still have a lot of confidence in bridal as being very resilient for the long-term, but it's just going to take a little longer to normalize based on what we've seen.

Understood. Thanks so much.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Dana Telsey with Telsey Advisory Group. Your line is open. Please go ahead.

Hi, good afternoon, everyone. As you think of the fine jewelry category and obviously the launch that you had this quarter, the new introduction, how do you think about the overall AOV? And what's your updated sense of where fine jewelry can go as a percentage of the mix, given the managing of going through bridal with the normalization that's occurring there right now? And then lastly, on the gross margin, just raw materials, what are you seeing in prices of raw materials? And are you experiencing or planning to adjust any prices also? Thank you.

Great. Thanks, Dana. As it relates to fine jewelry, I think we had mentioned in our remarks that overall ASP has actually increased, which is something that we're really proud of. And we do see ourselves as a premium offering highly curated. So the fact that we're driving higher ASPs I think just shows that a lot of our efforts are working there. As it relates to the overall AOV, we do expect it to decrease that. But I think that is actually still very accretive, it drives higher repeat rates. We see a lot more affinity in terms of the brand and the overall website experience as it relates to fine jewelry. So I think that's really a positive. In terms of how we think about the mix, if you look at most jewelers, fine jewelry as the majority of the sales, so the fact that we are well under that just shows you all the upside that we have there and why we've been investing in it as a category. Jeff, do you want to talk through the gross margin and pricing?

So in terms of gross margin, as we've talked about in some of our past calls, we do take a really dynamic approach towards how we price and our pricing engine really allows us to act in a much more agile fashion than most others in that we're able to take our light inventory, we're able to see conditions that are evolving in the market, including prices of raw materials and price for that right mix of revenue and gross margin percentage. And it's something that's dynamic, that there's a feedback loop and really provides us a lot of flexibility in adjusting to market conditions and being able to perform well in a variety of different environments. And I think this -- this environment is no different in that regard and then our agility serve as a competitive advantage.

And I would just add to that, that we are a premium brand. So we are thinking about how we can price based on the premium nature both in terms of the quality that we're offering, our sustainability, the overall experience. And so the brand differentiation that we have, the product differentiation that we have also is, I think, a source of value and helps to drive our gross margins.

Thank you.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Edward Yruma with Piper Sandler. Your line is open. Please go ahead.

Hey, good afternoon, guys. Thanks for taking the question. I guess, first, just not to harp on bridal, but are you seeing any kind of ASP shift? Are you seeing evidence that consumer is trading down within bridal or is it simply just fewer engagements? And then as a follow-up, we're starting to hear rumblings of tighter consumer credit. I know you guys have a multitude of different partners, but trying to understand if you see any changes in penetration financing or ability to get your consumers financed? Thank you.

Sure. As it relates to ASP, I can start with that as it relates to bridal. We're seeing ASPs be pretty stable. We talked about how this is a category where customers really shop with the budget and that's something that's borne out this year. We also have actually seen ASP in Q3 be somewhat higher than in Q2. So I would say relatively stable. We're not really seeing more trade down or anything like that versus what we have seen over the -- really from the beginning of the year. Jeff, do you want to talk to credit?

Yeah. And as it relates to consumer credit, as you pointed out, Ed, we're pleased to be able to offer a selection of different financing options for our customers, so they can pay in a way that suits them. And we haven't seen any material changes in terms of that part of the business. It's an important part of how some of our customers pay for their orders and we're glad to be able to offer a range of different options.

Great. And then just maybe one other follow-up. What kind of finance penetration are you seeing on fine jewelry? I understand that it has a lower ASP. Does the consumer normally pay that themselves? Or is that something that they're financing as well? Thank you.

We haven't broken out the finance penetration by different types of products. I would say, just related to my previous response and say, overall, we -- important for us to be able to offer a variety of choices for customers to be able to pay for their orders and we see financing as well as other payment options to continue to be an important part of the mix.

Thanks so much. Happy holidays. Thanks.

Thank you. And one moment as we move on to our next question. And our next question is a follow-up question from Oliver Chen with TD Cowen. Your line is open. Please go ahead.

Thanks a lot, Beth and Jeff. Just a question on the longer-term growth algorithm. In earlier innings, it was in the low-20s, just what are your thoughts on that resuming and/or the catalyst or the pieces to reaccelerate likely it has a lot to do with like the structural trends you're seeing in the market. And then as you quoted mid-single-digit revenue growth and looking forward to that, how does that roughly break out? Were you speaking more to a number of transactions and volume? Thanks a lot.

I can maybe kick that off. As it relates to long-term growth algorithm, we still have a lot of confidence in the overall long-term growth aspects and that's part of the reason that we've been leaning in and really gaining share even as others have been pulling back. So really, as we think about the bridal industry normalizing, you'll start to see that acceleration just based on the gains that we've had to date and the fact that we've been so successful in terms of growing our overall brand awareness. Jeff, do you want to expand on that?

Yeah. And then as regards -- with regards to the 2024 outlook and the mid-single digit year-over-year growth rate, that's a revenue growth rate that we're describing with accelerating growth throughout the year as we anticipate we see bridal demand beginning to normalize. And so I think that the investments that we've been making and having significant success in combined with the anticipated normalization or beginning the normalization of bridal growth will provide us with significant tailwinds to continue our path toward growing, continuing to gain market share, drive significant order growth and that's what leads us to that mid-single-digit year-over-year revenue growth rate, a preliminary projection for 2024.

Okay. That's very helpful. And one follow-up on, you're very agile in understanding ROIC on digital marketing. The environment has been fairly volatile with IDFA and first-party zero party data. Just what are you seeing with your marketing efficiency and how you're thinking about mix in this environment? And Q4 can be also a unique time where it can be pretty competitive. Thanks.

Sure. I would just say that we manage the business in a very agile way here. We've been doing digital marketing since really for 20 years and we recognize that and you have to be very responsive based on what you're seeing in terms of performance. And we take a balanced approach towards upper funnel, mid funnel, bottom funnel, also recognizing that we're seeing more and more changes in the overall landscape. So it's something that we continue to make sure that we're driving efficiencies, that we're driving strong ROAs and that we're taking a balanced approach across the channels.

Thanks a lot. Best regards.

Thank you. And I'm showing no further questions at this time and I'd like to hand the conference back over to Beth Gerstein for closing remarks.

Great. Well, thanks, everyone, for joining our Q3, 2023 earnings call. We are looking forward to a great holiday season and look forward to talking to you on the next call.

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