2023-07-02 01:26:18 ET
Summary
- Brilliant Earth Group is a perfect intersection of innovative technology model, new age jewellery and sustainability.
- Despite current macro economic challenges, BRLT has been resilient as demonstrated in its Q1 performance due to its strong brand resonance.
- It has consistently beat consensus and its robust gross margins remain a key moat.
- We believe current valuation provides a favorable risk reward to long term investors. Initiate at Buy.
Investment Thesis
Brilliant Earth Group ( BRLT ) is a perfect intersection of new age jewellery catering to GenZ and millennials, innovative technology with 'virtual try-ons' and sustainability. Its agile, asset light model driven by data analytics enables them to adapt to dynamic market conditions optimising revenue and margins, as evidenced by sustained growth and expanding gross margins. While there is no doubt that the current uncertainty due to a tougher macro backdrop has been a major overhang, we believe from medium to long term perspective, BRLT provides investors a favorable risk reward at current levels (down 60% in last 1 year). Initiate this at Buy.
Earnings Corner
BRLT reported Q1 earnings which beat consensus and its own estimates in a challenging macro environment with sales, a tad down 2% YoY driven by strong brand resonance as evidenced by order growth jumping 10% YoY. AOV declined ~11% YoY on the back of increasing fine jewellery penetration as well as consumers shift to lower price points with demand moderating at $10k price range amidst current inflationary pressures. This also comes against a tough comparable where the bridal and wedding market witnessed an outsized growth last year post pandemic with over 2.6 mn weddings, biggest wedding season in decades.
It continues to benefit from the strong product reception by the consumers along with benefits from price optimisation engine, procurement efficiencies in its supply chain, and its enhanced extended warranty program enabling them to post record gross margins, up 480 bps YoY. Management sees mid-50s target for FY23 as unchanged and we believe with less promotional activity planned it will be able to have stable gross margins at current levels while continue to reap benefits from price optimisation.
SG&A expenses as % of sales deleveraged on the back of higher technology expenses, higher wage growth (although it has consistently improved in last 3 years) and marketing expenses. Robust gross margins along with disciplined opex had led them to surpass its expectations hitting EBITDA margins at 6%.
The company reiterated its guidance of 8% YoY revenue growth at mid-point with adjusted EBITDA margin of ~5.3%. The 8% guidance comes against a tough comp amidst tough macroeconomic backdrop leading to consumers pushing back on discretionary purchases and moderating $10k jewellery demand which is encouraging.
Why are we Bullish on the Stock?
1) BRLT is a fast growing technology driven company that operates an agile data driven model with lighter asset base with a focus on high margin fine jewellery segment which has led to rapid growth in its TAM and revenues with 4-year (FY19-FY23E) revenue CAGR at 25%.
2) Its gross margins have consistently increased as a result of its strength in price optimisation and procurement efficiencies as well as strong brand resonance as a premium product amongst its customers which does not compel them to increase promotional activities.
3) It has consistently beaten consensus estimates and surpassed its own budgets several times, as evidenced during Q1 of this year. This comes on the back of its discipline in Opex, robust gross margins and bringing inventory and designs closer to the consumer's preferences.
4) Balance sheet remains strong with BRLT ending Q1 at $146 mn in cash with ~$62 mn in debt. Inventory position continues to improve with inventory declining 4% QoQ (and has been sequentially down in last 2 quarters) driven by management's prudent approach amidst tough macroeconomic backdrop.
5) Valuation remains cheap at ~11x EV/ 1Y Fwd EBITDA, compared to its peer set, as the street appears increasingly concerned over the near term. We believe given the long term growth prospects would continue to drive shareholder value while its resilience would abate near term risks.
Risks to Rating
Risks to rating include 1) BRLT is heavily exposed to the US market with over 90% of the revenue being derived from the country. The increasing macro economic uncertainty amidst an impending recession, declining consumer confidence and inflationary headwinds could push back discretionary purchases for the consumers and significantly pressure its sales growth 2) BRLT's key moat is in pricing and data driven model which enables them to deliver gross margins of 50% and upwards. Competitive pressures or its inability to rise up to the trending designs and bringing products closer to the consumers would erode its pricing power and bring down profitability 3) any supplier risk could question its sustainable practices which might be a reputational risk for the company.
Final Thoughts
We believe BRLT is challenged by the current macroeconomic challenges, as evidenced by most other retailers amidst declining consumer confidence. However, the consumers tend to be sticky and repeat orders would continue to drive value for the company for their anniversaries and other occasions. While the bridal season would continue to normalize as well as demand among higher price point tags is expected to moderate, we believe its continued penetration, which is still very nascent in a wide US market, and stable and expanding gross margins would enable them to weather the current storm and come stronger as the tide turns. Initiate at Buy.
For further details see:
Brilliant Earth: Resilient Amidst The Storm, Buy