2023-10-19 05:40:37 ET
Summary
- Jeweller Brilliant Earth's share price has declined by 45% since February, as sales have slowed down, margins have shrunk and its market multiples were elevated.
- While its sales growth was healthy in 2022, H1 2023 has been disappointing. But it's still encouraging that the company maintains its growth targets for the full year.
- Adjusted EBITDA has also declined, but the upgraded projections support BRLT's prospects. If it surprises on the upside, BRLT stock could start looking attractive again. But we don't know that yet.
Since I last wrote about the jeweller Brilliant Earth ( BRLT ) in February, its share price has declined by an eye-popping 45%. Even taking the slowing consumer economy into account, the fall is jarring. For context, consider the S&P 500 Consumer Discretionary Index is actually up by 27% year-to-date [YTD]. And the S&P Global Luxury Index is up by 3% .
Some weakening in the stock was possible even at that time. The company had flagged caution on a challenging macroeconomy and its market multiples were also elevated. Still, I had gone with a Hold on the Brilliant Earth stock considering the likelihood of healthy sales growth for the full year 2022 and softening inflation suggested the potential for expanding operating margins.
Ahead of its Q3 2023 results due on November 9, here I look at how the story has developed since and what to expect for the stock after its upcoming financial release.
The story so far
2022 ends in a whimper
While the company’s net sales indeed showed healthy sales growth of 15.7% in 2022, Q4 2022 did indeed see a correction of 1.9% year-on-year [YoY]. The latter numbers were of course disappointing. But they weren’t quite as bad as the company’s projected range had indicated they might be, a contraction of 4.8%. The adjusted EBITDA margin for 2022 disappointed too, as it fell to 8.9% from 13.3% in 2021.
2023 outlook
However, Brilliant Earth was optimistic at least about 2023 revenues , with expectations of 8% net sales growth at the midpoint of the projected range. Not so much as far as profits go, though. Adjusted EBITDA was expected to decline by 37%, again at the midpoint of the expected range, with the adjusted EBITDA margin seen at 5.2%, down from 8.9% in 2022.
Disappointing as this is considering slowing inflation, but it’s still a positive that potentially stems from the company’s expansion plans. As its CEO, Beth Gerstein points out “We expect to broaden our consumer reach…with…high impact marketing, expansion in fine jewelry and the opening of new showrooms..”.
H2 2023 could be better than H1
Sales growth slows
The net sales so far this year have been disappointing in comparison with the expectations, however. Even though the figures in Q1 2023 came in higher than target, they did decline in YoY terms and grew by a small 1.3% in Q2 2023. This resulted in a 0.5% correction in net sales for the first half of the year (H1 2023).
Still, these numbers are at 43.5% of the midpoint of the guidance range for sales, which isn’t significantly lower than the trends seen last year, when sales were at 47.5% of the total sales for the year.
It’s entirely possible that sales growth will be higher in H2 2023, considering a weak base and the fact that Brilliant Earth has maintained its revenue targets. This means that we can expect better sales growth of 15.6% in H2 2023. Assuming that sales are equally divided in Q3 and Q4, Q3 sales growth would come in at 19.9%.
Adjusted EBITDA target raised
Further, the company has actually upgraded the lower end of its expected adjusted EBITDA range to USD 22 million now from USD 17 million earlier. At the midpoint now, this indicates an adjusted EBITDA margin of 5.7%. This is still smaller than the 8.9% seen in 2022 and even the 6.4% seen in H1 2023 but it is marginally encouraging.
I say marginally because adjusted EBITDA figures are still expected to be 30% lower at the midpoint than last year anyway. And this is already evident in the fact that the number is already smaller by 26.2% YoY in H1 2023. This isn’t entirely surprising though, considering the company’s expansion drive, with four showrooms opened in Q2 2023 alone and the launch of its first collection of lab-grown diamonds.
What the market multiples say
The adjusted EBITDA is really the key metric to note when assessing the stock’s market multiples since it's the input to determine net income. Two estimates are made here to get to the potential adjusted net income for 2023. The first assumes that the ratio of adjusted net income to adjusted EBITDA stays at 63% as seen in 2022. This yields a 16x non-GAAP forward price-to-earnings (P/E) ratio.
The second estimate is based on the assumption that adjusted net income is at 48% of adjusted EBITDA, as seen in H1 2023. In this case, the forward P/E rises to 21x. Whichever way we look at it though, the ratio is higher than the 14.2x for the consumer discretionary sector.
In fact, its P/E is higher even on a trailing twelve months [TTM] basis and on a GAAP basis (see table below). Further, it also remains higher than for peers like Signet Jewelers ( SIG ), which has a forward non-GAAP P/E of just 7.6x .
What next?
The key takeaway then is that even after the sharp decline through much of 2023, Brilliant Earth still isn’t an attractive stock right now on continued earnings weakness. However, there’s a potential for an upside surprise here.
H2 2023 offers an opportunity for redemption, as sales can grow on a weak base, and we could see some fruits of its recent investments in stores and the new collections, especially as we head into the festive season in the final quarter.
If it has upgraded its adjusted EBITDA target once, which is a positive. If it does come in at the upper end of the projected range, the forward P/E can look more attractive though. But that’s a wait-and-watch.
If it weren't for its sustained projections, I'd give it a Sell rating now. But it appears that Brilliant Earth could be at the cusp in terms of its financials for 2023. For this reason, I’m retaining a Hold rating, but it would be a Sell if it underperforms compared to expectations in Q3 2023.
For further details see:
Brilliant Earth: On The Cusp Of A Potential Turnaround