Thank you for standing by, and welcome to the Brilliant Earth Second Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Colin Borland. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Brilliant Earth second quarter 2024 earnings conference call. Joining me today are Beth Gerstein, our Chief Executive Officer; and Jeffrey 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 could differ materially. Please refer to our SEC filings for a description of the risks that could cause our actual performance and results could 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 unless required by law. Also, during this call, management will refer to certain non-GAAP financial measures. A reconciliation of Brilliant Earth's non-GAAP measures to comparable GAAP measures is available in today's earnings release, which can be found on the Brilliant Earth's Investor Relations website. I'll now turn the call over to Beth.

Good afternoon, and thank you for joining us today. I'm pleased to report that we continue to drive the progress of our strategic initiatives and deliver another quarter of profitability. This is our 12th consecutive quarter of profitability as a public company and something I'm very proud of. It's a testament to the talent and hard work of our incredible team, and I want to thank them for their dedication. As we are all seeing, we continue to observe challenges within the $300 billion jewelry industry, particularly highlighted by ongoing and increased promotional activity. Our ability to manage with both agility and discipline within this environment is reflected in our results that were within our net sales guidance and exceeded our profitability guidance for the quarter. I'll start with some highlights of our Q2 performance and update you on the progress we're making on our key priorities. Net sales declined 4% year-over-year to $105.4 million and were within our net sales guidance range for the quarter. Total orders increased by 4% year-over-year, while we had another strong quarter in repeat orders, which increased by 17% year-over-year. Average selling price grew year-over-year across our product assortment, including engagement rings, wedding bands and fine jewelry in Q2 as they did in Q1. Gross margin was 60.8% or a 320 basis point increase year-over-year, reflecting our continued position as a premium brand within the jewelry industry. Jeff will provide additional commentary on our gross margin expansion. Q2 adjusted EBITDA of $5.5 million or a 5.2% margin was ahead of expectations. Our exceptional profitability continues to demonstrate our strategic approach in balancing profitability while setting the stage for long-term growth. While the overall industry remains challenged, particularly in bridal and in e-commerce, we still maintain our expectations around a multiyear path to normalization. I…

Thanks, Beth, and good afternoon, everyone. As Beth mentioned, we're pleased to report a quarter where we continue to successfully drive our strategic initiatives, innovate, meet our top line expectations and far exceed our profitability expectations even in the face of industry headwinds. Let me take you through the details. Q2 net sales were $105.4 million, a decline of 4% year-over-year, which was within our guidance range. We drove a 4% increase in total orders year-over-year. We also had another quarter of strong repeat order growth, driving 17% growth in repeat orders year-over-year. This performance demonstrates the effectiveness of our customer acquisition and retention efforts, including the resonance of our brand with consumers as well as strong performance across our products. Average order value, or AOV, declined 8% year-over-year as we continue to broaden and diversify our overall assortment including in our fine jewelry collection, which, as you know, has lower price points than engagement rings. We saw strength in average selling price, or ASP, across our product collections. The ASP for our engagement rings, wedding rings and fine jewelry increased year-over-year in Q2 as they did in Q1, highlighting our success in maintaining our premium brand positioning. Q2 gross margin was 60.8%, which is a 320 basis point expansion over Q2 last year, principally driven by our premium brand and proprietary products, our price optimization engine, procurement efficiencies and our enhanced extended warranty program. This gross margin strength is particularly rewarding as we maintain our focus on our premium brand positioning in an environment where others continue to lean into discounting. We delivered a Q2 adjusted EBITDA of $5.5 million or a 5.2% adjusted EBITDA margin exceeding our guidance range. Our strong gross margin performance together with prudent management of our marketing spend and other operating expenses contributed to…

[Operator Instructions] And our first question comes from the line Oliver Chen from TD Cowen. Your question, please.

Hi Beth and Jeff. This is Tom on for Oliver. Would be great if you could talk about the nature of bridal compares ahead and any opportunities for share growth. Just curious as to what gives you confidence in this multiyear recovery path?

Great. Tom, thanks for the question. So just to provide a little bit more context in bridal. In Q2, what we saw was that bridal was down in the low double digits, and we have seen that slightly worsen since then. And we do have some really nice positive indicators. One of the metrics that I mentioned was around our signature collection. We just had a really great campaign promoting the distinctive design that has really been a pillar of our brand for the majority of our existence. And that has had really nice growth. We saw 6% year-over-year growth in signature. We've also seen nice growth within our showroom, so that plus 9% for engagement rings for customers who have visited our showroom, just gives us a lot of conviction in the omnichannel model that we have. What we've seen recently is as the demand has become more soft, we've seen one of the most promotional environments that we've experienced. And our approach is to not chase unprofitable growth. We want to make sure we're growing in a healthy and sustainable way. So we're really thinking about how do we drive marketing leverage and how do we invest outside of bridal, where we've been incredibly strong with our fine jewelry, our wedding -- our anniversary band collection as well. So it's really taking a more diversified approach as we've been doing really since we've started these calls and seeing a lot of success there in attracting new and repeat customers.

Great. Thanks. And then a follow-up on the strength you're seeing across income cohorts and how that informs your approach to price in the future? And then additionally, curious as to how Brilliant is leveraging its customer data platform to create new styles and proprietary designs that resonate well in this environment?

Yes, absolutely. So maybe I can start a little bit with our -- how we think about price. And I think you've heard us mention in the past that we have a pretty sophisticated pricing engine, which is quite dynamic across different parts of the assortment. We're constantly optimizing for margin, and that allows us to capture demand as we see it across different price points. So I would just say that, that's ongoing activity and something we're continuing to invest in. And as we see parts of the assortment perform even better, then we're able to introduce new designs very quickly. So part of our competitive advantage is that product design and differentiation and the ability to launch products really quickly, leverage the customer data that we have and make sure that across different price points that we have a very productive collection. We're not aiming to have an endless collection. We really want to make sure it's curated its trend forward. And I think that's part of how we've been able to be so successful in fine jewelry is marrying that with our brand initiatives to appeal to our customer base.

Thank you very much.

Thank you. [Operator Instructions] And our next question comes from the line of Ashley Owens from KeyBanc Capital Markets. Your question, please.

Hi. Good afternoon. So just want to start, you mentioned the highly considered purchases of some of the rationale contributing to ongoing softness in the jewelry industry. Bridal is obviously still in a period of normalization. I guess with that, just curious if you're seeing people elongating their decision time for making these purchases or also anything that you can maybe update or share on engagement trends that you're seeing?

Yes, absolutely. So what I would say is we're still seeing really nice traffic across all of our channels. I think we are seeing, though, overall, that customers are just being a little bit more hesitant and that decision time is being elongated. So I think that is something that we're seeing and the consumer environment has slowed down a little bit, has been more uncertainty and the way that that's materializing is across that more considered purchase.

Okay. Got you. And then just quickly, rate of gross margin, obviously, another solid quarter progress here. Starting to hover around that 60% range now in 2Q, did come above that, which is one of the range you highlighted for the medium term, long term. Just curious if your thoughts have changed there at all? Or should we still be thinking of kind of that high, high 50s kind of level going forward?

Sure. I can speak to that. So as you point out, in our midterm -- medium-term outlook, we have highlighted that high 50s percent is our gross margin target. And I think as you know, that's -- there's always a dynamic balancing of how we're thinking about things with the price optimization engine to drive that right combination of top line growth and capturing gross margin percentage with the ultimate goal to drive as many gross profit dollars as we can. We were pleased to see an outperformance in the 60s this past quarter. I think our medium-term outlook still does point to a gross margin expectation in that high 50s as a percentage of sales. And we're always going to be dynamically balancing and looking at the data that we're seeing from consumer preferences, input costs, market conditions and things like that to drive that right combination. So the medium term hasn't changed. We're glad to see the performance that we did in Q2 and we'll continue as we always have been, to be agile and dynamic.

Great, I'll pass it over. Thanks.

Thank you. And our next question comes from the line Dylan Carden from William Blair. Your question, please.

Thank you. I'm just wondering if you have a read on kind of the engagement origination, I guess people getting engaged broadly, how that's trending now and as related your business. And then one question we get a lot increasingly and some of that you just see constant headlines about or just diamond prices, both lab and natural. Is that kind of code to what you mean by promotional? Or how does that show up in your business? I guess prices might be more in line with historical rates, but they certainly come in dramatically over the last two years. And I just -- I know you have dynamic just-in-time inventory model, but how that might play into your business, if you're holding price in the industry is collapsing around you. Anything -- any color there would be very helpful. Thank you.

Sure. So I can start with just our read on engagement. And we've talked about this multiyear path to normalization coming off of these elevated peaks over '21, '22. So I still think we're in a normalizing situation. I think that's exacerbated by just some of the consumer headwinds in terms of the overall environment for highly considered purchases. And I think that is just causing more consumers to hold off and be a little bit more cautious overall as they're thinking about the engagement occasion. So that's probably the most that I can say about that. As it relates to how we think about pricing, the -- what's important to note is, in Q2, we're coming off of our second consecutive quarter or second quarter of ASP increases. So we're continuing to see prices for consumers increased in the bridal selection that we have. And in addition to that, we're making sure that we are reinforcing the premium brand positioning. We think that we are leaders in the space as it relates to sustainability and innovation just generally. And we are, I think, as a result, making sure that we're optimizing in terms of margin. So we do have a dynamic pricing algorithm. We're constantly making sure that we are adjusting to market conditions, but we're also considering our overall brand position, and that's across both lab and natural. And it's important to us that as customers are shopping for a budget that they shop for brand first, and that's really what we're leading with.

So I guess that's kind of the underlying question. I'm just trying to unpack the term promotional. I mean as you're seeing prices come in and you maintain margin and ASP, do you think that, that's hurting you in the consideration? And maybe we'll hold with that in the short term. But is that part of this right now?

I mean when we talk about promotion, we're also talking about just heavy discounting. So you're seeing 10%, 20%, 30% off, that's the type of discounting that we're seeing, which is much heavier than what we're typically -- what we've typically observed in the past. So for us, it's really about how do we use pricing as a lever to make sure we're maintaining margin, but also considering that we're a premium brand.

Okay. Thank you.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Beth Gerstein, CEO for any further remarks.

Great. Well, thank you all for joining us for our Q2 call, our earnings call. Look forward to talking to you all in the next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.