ELA - Brilliant Earth Group: Brilliant Growth Translates To Attractive Prospects

Summary

• Brilliant Earth Group has done really well to grow its top line in recent years and that trend looks set to continue.
• Unfortunately, profits and cash flows are showing signs of weakness this year, and the stock has gotten more expensive as a result.
• This pain should come to pass, opening the door to attractive upside moving forward.

Jewelry has long been an important part of the human experience. Across cultures and time, you can find examples of jewelry being used as not only a fashion symbol but also a symbol of status. It is used for religious purposes, celebratory events, and so much more. Although there are some larger players in the market today, one of the more interesting ones worth considering is a bit on the small side. This is a company called Brilliant Earth Group ( BRLT ). Over the past three years, growth for the company has been impressive. Cash flows have been on the rise, though the current fiscal year will be a bit difficult for the enterprise. As management continues to grow the company using its omnichannel strategy, additional value should be created for investors. Having said that, the market seems to recognize the firm's potential, resulting in shares trading at fairly lofty levels on a forward basis. Part of the problem, however, is that profitability this year is taking a step back. But in the long run, that picture should improve. If we assume that the company will eventually see a return to normalcy, then shares don't look all that bad for a company that is growing as rapidly as Brilliant Earth Group is.

A niche jewelry play

The management team at Brilliant Earth Group describes the company as being a digital-first jewelry firm. Initially founded in 2005 as an e-commerce company that had only one physical showroom (located in San Francisco), the firm has gone on to carve out for itself a rather attractive corner of the jewelry market. Management claims that the business focuses on ethically sourcing its fine jewelry and the products that it designs are on the premium quality side. This strategy has resonated with customers, leading the enterprise to selling its products to consumers in over 50 countries today. These products fit a vast array of needs. For instance, the company does cater largely to the bridal market. However, it does also provide bracelets, necklaces, and other similar products.

It's worth noting that Brilliant Earth Group is not just a standard jewelry business. The firm also prides itself in the technology that it's developing. This technology offers dynamic product visualization, augmented reality try-on functionality, blockchain-enabled transparency when it comes to verifying product sourcing, and rapid fulfillment for the customized jewelry offering that management calls Create Your Own. While the company does emphasize its digital initiatives, it is currently building out a national network of physical showrooms that will serve as destinations for customers to look and shop. As of this writing, the company had just opened its 20th location. to better cater to its customers, the company also has a team of jewelry specialists that can chat online, by phone, by e-mail, through virtual appointments, and in its showrooms. For customers who want a concierge-style experience, this is bound to be appealing.

Over the past three years, the fundamental picture for Brilliant Earth Group has been quite impressive. Sales have risen consistently year after year, climbing from $201.3 million in 2019 to $380.2 million in 2021. This significant growth in revenue was, surprisingly, not really impacted by changes in average order value. This number has remained more or less flat at between $3,152 and $3,268 over the past three years. Instead, the company has seen the total orders coming into it rise significantly. This number rose from 61,604 in 2019 to 79,890 in 2020. In 2021, this number increased a further 48% to 118,208. Naturally, one part of this can be chalked up to the increase in showrooms the company has. In 2021 alone, the company added six such locations in the following cities: Seattle, Dallas, New York, Portland, Austin, and Scottsdale. This followed the opening of a new showroom in Atlanta in the final quarter of 2020. Though specifics have not been provided, the company did also say that continued traffic growth to its website had also been a major contributor to increased sales.

Profitability for the company has been far more volatile. In 2019, the company generated a loss of $7.8 million. Profits came in strong at $21.6 million in 2020 before dropping to $1.5 million last year. What has not been volatile, however, has been cash flow. Operating cash flow has risen from $0.6 million in 2019 to $46.1 million last year. A similar trend can be seen when looking at EBITDA. According to management, this number has risen year after year, climbing from negative $4.5 million in 2019 to positive $50.5 million in 2021.

So far, the 2022 fiscal year has been somewhat mixed for the company. Revenue in the first half of the year came in at $208.8 million. That represents an increase of 28.1% over the $163 million generated the same time last year. In addition to benefiting from an increase in the number of showrooms, the company has fueled online sales through continued innovation. Specifically, the business has launched a number of new products on its platform that it makes available for consumers. The most recent example, an example that certainly has not been reflected in the company's latest financial statements, has been the launch of a 21-piece Reflections Collection Bridal and fine jewelry that consists of seven engagement rings, six wedding bands, and eight other fine jewelry pieces. This particular line of products is focused on showcasing the beauty of nature's symmetry, patterns, and curved lines in the way the products are designed.

Although revenue has risen nicely, profitability has been a bit of a problem. Net income in the first half of the year was $7.1 million. That's down from the $10.9 million reported the same time last year. Operating cash flow dropped from $20.2 million to $4.9 million. Though if we adjust for changes in working capital, the decline would have been more modest from $14.7 million to $14.6 million. Meanwhile, EBITDA for the company also took a slight hit, dropping from $21 million to $18 million. The good news about the company's profitability issues this year is that they are being caused by current growth initiatives, particularly those around the company's showroom operations and expanding at corporate. Marketing expenses are included in this, with management making increased investments in marketing and advertising in order to push sales higher. Eventually, management should be able to cut back on these kinds of activities relative to the sales the firm generates.

When it comes to the 2022 fiscal year as a whole, management expects revenue to come in at between $450 million and $470 million. At the midpoint, that would translate to a year-over-year increase of 21%. However, EBITDA is expected to come in at only between $30 million and $40 million. No guidance was given when it came to operating cash flow. But if we assume that it would decrease at the same rate that EBITDA should, then we should anticipate a reading for the year of $32 million. Using these figures, we can see that the company is trading at a forward price to operating cash flow multiple of 23. That's up from the 15.9 reading that we get using 2021’s results. The EV to EBITDA multiple, meanwhile, should be 20.4. That compares unfavorably to the 14.1 reading we get using last year's figures. As part of my analysis, I also compared the company to four similar firms. On a price to operating cash flow basis, only three of the companies had positive results, with their multiples ranging between 7.2 and 23.1. Our prospect was more expensive than two of those firms. Meanwhile, using the EV to EBITDA approach, the four companies ranged between a low of 4.4 and a high of 13.7. In this case, Brilliant Earth Group was the most expensive of the group.

Takeaway

Based on all the data provided, Brilliant Earth Group seems to be a rapidly growing enterprise that should continue to expand at a nice clip for the foreseeable future. If we were seeing profitability climb this year as opposed to last year, I would make the case that the company should be considered a compelling target. But the picture is dampened some by the pain expected this year on the bottom line. Although the firm is trading at the lofty end of the spectrum compared to similar businesses, the rapid growth and an eventual return to normalcy should make it quite attractive. As a result, I've decided to rate it a soft ‘buy’ for now.

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