Betting Big on Brilliant Earth

TLDR:

Pre-Wedding Prep Weekend

Let’s LVMH-ify Brilliant Earth

The Pre-Wedding Weekend

My In-laws to be landed Thursday night (from Taiwan) and things are starting to get real. Even though we’re a week away from the actual wedding it’s getting very exciting and feels like the party is starting already.

It’s always interesting how smaller events always glom on to larger events. We’ll have the full Wedding events blitz next weekend, but we’ve already had the Meet The parents dinner, The Family dinner this weekend, and brunch. I’m writing this in between meals. Feels like we’ve been eating all weekend.

Barbenheimer is dominating this week, if you saw them this weekend don’t spoil it. I’m an enormous Christopher Nolan fan.

These intros are going to be a little shorter over the next couple of weeks. since we get married next weekend than off to Taiwan for our next wedding.

For the 1,215 amazing people tuning in. Appreciate you. If this one hits a chord forward it along to the team member, friend, group chat that would appreciate it.

Let’s get into what we all came here for. What to do with Brilliant Earth.

Prepping Brilliant Earth for LVMH.

Brilliant Earth is the poster child that growth has a cost and they got punished for it in the market. Trading at $3.89/share with a $374m market cap Down -78% since it’s Sep ‘21 IPO. Such a strong company doesn’t look one. Most of that price decrease we can chalk up to the COVID-boom reversal, but there are some areas Brilliant Earth really needs to step up.

Ecommerce and engagements aren’t growing exponentially month-over-month anymore, and investors are taking their pound of flesh. But this business has solid bones, riding the right trends, and is actually profitable.

The crazy thing is we can scoop this biz up for <$400m. Looking at Annual revenue for other Luxury jewelers: Chow Tai Fook: $12.6B, Tiffany and Co. $11.5B, Cartier $6.2B, Signet $7.8B that feels like a steal.

Real consumer Jewelry brands take time to develop and hit massive scale, but Brilliant Earth has significantly more resources to scale than these hundred year old jewelry houses do.

Here’s how I would get Brilliant Earth into LVMH shape.

The Financial breakdown

The Financial TLDR:

Brilliant Earth is a well-run biz that got hit hard by inflation, and tried to scale too aggressively in a tough market. The brand saw decent Topline growth (+16% YoY), but came at too great a cost:

• COGS +40%

• SG&A +43% YoY.

Jewelry, especially engagement rings, is the perfect example of the DTC business that got squeezed by both sides by inflation. “The Street” is going to see that and punish the price. I see a massive opportunity to bridge Silicon Valley nouveau riche and old money luxury.

The Game plan:

1) Take Brilliant Earth private for < $400m.

2) Go vertical to control the supply chain and its own destiny.

3) Flip it to a luxury brand for a healthy multiple

Here’s my 3 Step plan to make Brilliant Earth LVMH-worthy.

1) Pull Back Acquisition + Focus on Catalog expansion.

SG&A grew +43% YoY. For a retail a business with 37 locations we can assume that the majority of SG&A increase in investing in driving more retail locations. Since the company doesn’t break out Marketing expenses we’ll bucket the majority of this into Growth expenses.

Brilliant Earth is facing multiple short-term headwinds:

• In 2022 we were already in a recession.

• In 2023 we are barreling towards a soft/hard landing.

Premium, Sustainable engagement rings are going to be a tougher pitch. Especially at Brilliant Earth’s scale. Wealthy people who want sustainable jewelry are probably already aware of them. It’s going to take time convincing everyone else outside of the niche to make the switch.

Instead of continuing to batter down new acquisition doors save the marketing dollars until the economy recovers, and make higher margin extraction from existing customers the sole focus. They’re already doing this, but they need to double down here.

Engagement/Wedding rings are an incredible buying signal for future purchases: Anniversaries, Push Presents, Gifts, or usual outfits. Wealthy customers typically aren’t heavily effected in recessions.

Engagement rings are an incredible entry product as it displays the customers taste, preferences. Since people wear these products everyday they’re a foundational item to build a jewelry ‘wardrobe’ around.

Then when the economy recovers and more Zillenials get engaged, turn the jets back on into a better market with new couples who care more about sustainability.

Also take a play out of Tiffany’s recent string of wins and collaborate with culturally relevant partners. How many rappers are dropping Brilliant Earth in their songs? I haven’t heard many.

Product expansion is the backbone of the collab strategy. Align the most influential Zillenials Influencers to build the long term brand halo LVMH will pay a premium for.

Takeaway: Shift Acquisition efforts to extending LTV.

2) Go Vertical. Buy a Diamond Lab.

This one strategy is really what we would need to take them private for.

The price of raw materials, commodities, dictates this business. The entire business model is built on packaging commodities (Gold, Diamonds, etc) into a consumer product. The business is at the whims of commodity prices.

• ‘21 COGS were 39% of Rev. Nice healthy 61% Gross Margin.

• ‘22 COGs jumped to 47%. Bringing GM % to 53%.

53% Gross Margins aren’t bad, but 61% margins are impressive at this scale. Inflation isn’t bad. And Inflation is inflation. But as long as Brilliant Earth is beholden to buy their raw materials from 3rd parties, commodity fluctuations will determine their success.

To take control of their business they’d need to own the supply of materials.

Today, Lab Grown Diamonds are the best sales pitch for a sustainable Luxury brand.

• Eco-conscious customers want sustainable options a friend isn’t going to call them out for.

• Buyers don’t want to break their bank, but need to invest. The bigger the rock for the relative least amount of money.

The cultural, and market, shift is just beginning with 10% of diamond sales coming from Lab grown diamonds. 5x’ing from 2% in 2018. Brilliant Earth currently is one of the largest Retails in this space. The manufacturing level will eventually scale this new commodity to the same scale as natural diamonds today.

This is Brilliant Earth’s chance to go vertical and reinvent their business.

Owning their own supply would:

1. Better control their raw materials supply

2. Unlock additional margin by consolidating the supply chain

3. Provide more control on new product introduction

Today most labs are focusing on producing diamonds as that has the greatest demand, but what’s to stop a Brilliant Earth from producing other gems/raw materials in their supply chain if they own the manufacturing.

Takeaway: Own the Supply. Own their destiny.

3) Invest in the Ring “Guide Shop”

This might seem antithetical to everything else I’ve said, but step #3 is actually invest more in Retail. Brilliant Earth currently has 37 Retail locations. Could it expand to 100?

For everyone who’s gone engagement ring shopping, you know that the in-store experience is great for trying on, but you don’t buy on the first try. There’s always more customization that needs to be done.

There’s also so much research online and in-store for such a considered purchase. Today that entire experience is helter skelter to say the least. As someone who went through it a year ago it was a stressful, time-consuming experience that required hours of online research going to stores to figure out all the moving parts.

Brilliant Earth is building out a great omni-channel experience.

• The site provides deep customization options for an incredible level of research.

• You can also schedule in-store appointments to speak with a specialist.

The foundation here is building the components for something much more. Bring the Bonobos “Guide Shops” concept to Brilliant Earth.

A quick refresher on the Bonobos Guide Shop: You can only try-on in-store inventory. If you want to buy they ship it to you. They don’t hold sellable inventory in store.

This strategy is still TBD on how successful it is since Walmart just divested Bonobos and other brands like Casper that tested it imploded. But Brilliant Earth is its the perfect business model for it.

• It’s a major considered purchase with healthy margins.

• The try in-store, research online model is a well established consumer behavior.

• Shipping jewelry is significantly more cost effective.

• Consumers want delivery and in-store pickup options.

The real brilliance behind the original guide shop model is a major reduction in operating capital. One of the cardinal sins of traditional retail is the considerable inventory capital investments that sit in a retail location. Guide Shops allow a brand to stay operationally lean with centralized inventory, but maintain the distribution of retail footprints in high traffic locations.

Extending their product catalog to convince customers to come back to the store when they need more jewelry, would turn a heavy investment for a one-off high value purchases into a smart investment to build a customer retention platform.

Once they dial in this strategy the next move is obvious. Today the company operates 37 locations only in the US. Wealthy customers across the world want Sustainable Luxury jewelry. By comparison, Tiffany’s has 300 across world.

This strategy doesn’t happen in a quarter, year or potentially even a decade. It requires real patience, diligence, and belief in the long term brand. But the payout is pretty well defined for the companies that can execute it.

Takeaway: Expand retail Guide Shops internationally for sustainable growth.

Final Thoughts

Long term I’m bullish on Brilliant Earth. They had a tough 2022 but remained Net Income Profitable. That’s a lot more than most Brands can say for 2022. This play isn’t because I don’t have faith in the management team or the direction of the company. Actually it’s the opposite. I don’t have faith the street to properly understand this business.

It’s going to be a bumpy road for them in the public markets. Growth is slowing, profit is contracting and the economic outlook doesn’t scream “splurging on expensive engagement rings”. Apparently it’s even seeing a decline because fewer people dated and started relationships during the Pandemic.

The plays that I listed above require more patience and long-term belief then daily mark-to-market investors looking for high-growth or cash-flowing stocks today. They require a partner with deep pockets who understands the long term opportunity and bigger picture.

There are some significant investments this company should make. And it won’t always be sexy. But if they can mature to become the Sustainable Chanel, Tiffany, Cartier. They’re looking at (on the low side) $6B+/yr in sales.

That scale plus cultural relevance would give it a spot in the famed Luxury House estate under the LVMH umbrella.

🧠 The Takeaways

Brilliant Earth got pinched from both sides. Tried to grow through it and saw their profits shrink.

1. Tried to grow too much in a tough year with too many economic and cultural headwinds.

2. Over-Reliance on commodities puts control of your business in other’s hands.

3. Retail requires an equally unique approach similar as DTC does.

👷 What can you do about this?

1. Not all growth is worth it. What’s the value of every incremental sale to your business?

2. Can you go Vertical? It requires more capital, but if your margins are subject to suppliers/raw materials whims you can unlock new opportunities to make it worth it.

3. For the right business, Guide Shops could change the financial equation for Retail.

The best ideas in business are usually approaching your same problems with a different approach.

Aspiring Acquirer

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