2023-09-01 17:48:29 ET
Summary
- Brilliant Earth continues to drive sustained earnings growth and its recent Q2 results underline its improved track record.
- It reaffirmed its sales guidance and raised its profitability guidance, expecting continued growth and investments in marketing campaigns.
- We continue to remain positive on the company due to its strong brand resonance and sustainability focus. Reiterate Buy.
Investment Thesis
In continuing with our coverage on Brilliant Earth ( BRLT ), we had assigned a buy rating on the back of its data driven model with focus on high margin fine jewelry, improving robust gross margins, and sustained operational outperformance, strong balance sheet along with relative undervaluation. Its recent results and raising of its profitability guidance underlines the continued track record of its operational performance amidst challenging times for the jewelry market. We reiterate Buy as a result of its continued and sustained earnings growth along with relative undervaluation.
Robust Earnings
BR LT reported in-line Q2 August 9th w ith sales growth of 1.3% YoY to $110 mn. The sales growth was driven by a robust 21% growth in orderbook while AOV declined 16% YoY as a result of deferral of big ticket purchases. The record orderbook comes against a tough compare in Q2 2022 where the orderbook had grown by ~25% YoY. This also comes against the overall challenging times for the jewellery industry where in players have been reporting softness.
The current trend reflects the impact of increasing macro pressure on discretionary categories, including the jewelry industry… Additionally, we began to see softening at higher price points, which previously had been relatively insulated.
- Joan Hilson, CFO, Signet Jewellers (Sour ce: Earnings Call )
Gross margins improved 490 bps YoY to 57.6% and also improved 270 bps sequentially driven by the benefits it reaps from its continued brand building efforts, efficiencies in procurement along with benefits from its extended warranty program. Adjusted EBITDA declined 180 bps YoY, still strong at 7.0%, as it continues to invest in brand building to create awareness through targeted marketing campaigns.
It reported adj. Diluted EPS of $0.04 coming ahead of consensus expectation of $0.03.
Balance sheet position continue to remain strong with the company ending with cash balance of $150 mn vs $155 mn at the end of the year. Total debt outstanding remained at $61 mn compared to $63 mn at the end of Q4 2022 and the company remains in a net cash position. Inventory position remains stable at $39 mn as it continue to drive higher inventory turns while improving gross margins.
BRLT reaffirmed its sales guidance for the year of $475 mn at midpoint (implying an 8% revenue growth) while it raised its profitability guidance and now expects EBITDA of $28.5 mn (compared to $24.5 mn previously) implying a 6% EBITDA margin (5.3% previously) driven by robust gross margins which it expects to continue over H2 2023 along with continued investments in marketing campaigns to create brand awareness.
Valuation
BRLT trades at 1.1x EV/ Fwd EBITDA compared to Signet Jewelers ( SIG ) which has been trading at 4.3x. While the scale and track record of performance for SIG has been much higher, we still believe that BRLT is quite undervalued at just 1.1x Forward EBITDA. We continue to like the story being at an intersection of new age jewelry and sustainability. We value BRLT assigning a modest 1.5x EV/ EBITDA multiple, not having any outlandish targets and factoring in the risks of a smaller scale, implying a target price of $4.5. Reiterate Buy.
We would continue to monitor the average order value which may be nearing bottom given the pace of decline has reduced sequentially (down 6% for the quarter) along its robust order growth which has been one of the testament to its brand resonance and its ability to stem the declining AOV and post sales growth. Another important metric to watch closely is the gross margins given the firm has delivered robust margin expansion in recent quarters and it would be a key for them to sustain it/ expand it further.
Risks to Rating
Risks to rating include
1) It is significantly exposed to the US market which has been facing a tough macro backdrop and the firm has reported steady decline in AOV over the quarters. In case the macro pressures continue to linger, AOV may continue to decline which may not be offset by order growth
2) Its core is sustainability and any unethical or harmful practices by either of its supplier can lead to severe damage to its reputation
3) Competition from other smaller private players as well as from larger players such as Signet's Blue Nile who have a larger scale and are well capitalized can lead to a squeeze in gross margins
4) BRLT focuses on trendy fine jewelry and its inability to adapt to changing consumer tastes can lead to a significant impact to its operations
Final Thoughts
BRLT has been able to manage and sustain its topline and gross margins despite challenging macroeconomic conditions driven by its strong brand resonance driving sustained order growth. We believe the bridal and engagement industry would continue to witness some pressure over the near term post its outsized growth last year, it is likely to recover strongly in the near to medium term as echoed by other industry players.
We remain positive on the company to improve its market share in the fast growing fine jewelry given the relative nascent penetration currently. Reiterate Buy.
For further details see:
Brilliant Earth Q2: Diamond In The Making, Reiterate Buy