Brilliant Earth (NASDAQ:BRLT) is a digitally native jewelry business looking to redefine the shopping experience for engagement rings. But will consumers take to this digital experience? In this episode of Industry Focus, Motley Fool analysts Asit Sharma and Emily Flippen discuss one of the newest jewelry businesses on the market.
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This video was recorded on Dec. 7, 2021.
Emily Flippen: Welcome to Industry Focus. Today is Tuesday, Dec. 7th, and I’m your Consumer Goods host, Emily Flippen. Today, I am joined by Motley Fool Senior Analyst Asit Sharma, and we’re going to be talking about the hottest place to buy an engagement ring this holiday season, and no, it’s not a retail store necessarily, it is Brilliant Earth. Asit, thank you for joining.
Asit Sharma: Thanks, Emily, looking forward to a brilliant 30-odd minutes with you today.
Flippen: [laughs] This is a really interesting business, and if I had to venture I guess, I would say that a lot of our younger listeners, especially those that are active on places like Pinterest or Instagram, will probably recognize the name of this business because they do a ton of advertising, especially toward young women, because the majority of what they sell are actually diamond engagement rings. Brilliant Earth has made the brilliant decision to try to digitize that experience of buying your engagement rings. A lot of their sales come through for the fourth quarter, especially around the holiday season. I thought would be fun to circle around on and talk about whether or not Brilliant Earth is just a brilliant place to buy an engagement ring or if it’s a brilliant investment, too.
Sharma: Well, Emily, I must say this one is really catching my attention. [laughs] I’m going to approach it from a more earthy angle. [laughs] That is to say that I like all parts of this business. Speaking of earth, to get to that earthy angle, this is a company that has its roots in partnership, and ethical partnership, I should say, or one that is seeking to do something ethical in the world that has to do with the way diamonds are extracted. I will let you tell the story of the two co-founders. But I’ll just keep this a bit by saying that the diamond industry has been plagued for the longest time by the concept of blood diamonds or brown diamonds, however you want to term this. These are diamonds that are mined in periods of conflicts in order for one side of a conflict to have some access to quick capital to fund their munitions. The process that the big diamond conglomerates, and this is a fragmented industry, but names that we’re familiar with utilize, requires a lot of heavy mining. But there’s a certain type of mining you can do called alluvial mining, which is essentially, you and I will go in by hands into a river bank and search for gemstones. [laughs] This is something that is really been I think a dink on the industry. There are many people in Africa and places like Sierra Leone in Congo, which have been marked by conflict, in which people with a very low standard of living have to do this for living to this back-breaking work, and often it is in the context of conflict or has been historically. With that little overlay, tell us about this founding team. I should say this is the third founding team where we’ve got one founder who’s got the idea and teams up with another, and thing of Allbirds and the On Group that’s two, running shoe companies we looked at. This is yet the third in short order.
Flippen: Yes, and I love that team. You have the visionary, somebody who is personally impacted by the issue, and then you combine that with the operator. Somebody who has studied the issue and is ready to tackle the problem. This is a company that was founded by Beth Gerstein and Eric Grossberg, and apologies if I pronounced the names incorrectly. But it was in 2005 when Beth had a really challenging experience finding an engagement ring that was able to be sourced ethically and transparently. She was out looking for an engagement ring but didn’t want to support all of those conflicts that you just mentioned, Asit. She partnered up with Eric. Eric was studying the jewelry industry in business school at the time, and they thought, hey, we can do something to fix this problem. They decided to tackle that problem, and to be clear, Brilliant Earth isn’t going out and owning the mines themselves, at least not that I saw their filings. They’re just ensuring that the diamonds and the gemstones that they sell are sourced ethically, and they do that through some really interesting technology, one of which includes the blockchain, which we can talk about. But essentially coming back so you can go online and order yourself a nice ring, a nice piece of jewelry, without having to be worried that you’re supporting conflict or abuse of power in different regions across the world.
Sharma: I really like that angle and I like that this is a diversified business. It’s not just about diamonds. You mentioned in our prep that the company has been focused on engagement rings, but they are branching out into other gemstones and fine jewelry, and they’ve got this in-house design team to bring those designs to life, to conceptualize those. That’s our analog, we often talk in tech-infused companies about expanding with your software into new markets. This is the analog of that. That’s always a plus for me. The other thing which is very interesting is this omnichannel experience. It’s a very sophisticated online experience. Emily, I know when we were prepping for this show, you actually went online to look at some engagement rings and I believe your mom was walking by you because you’re at home and still recording [laughs] through the holidays, and got excited. Can you tell us the story really quick?
Flippen: Yes. She did not realize that I was prepping for an Industry Focus episode, and there was a period of a little bit of excitement there that I had to let her down. No, I’m not getting engaged quite yet. But I did enjoy browsing the rings. I will say, as somebody who never imagined herself ever getting an engagement ring, nonetheless a diamond engagement ring, I enjoyed the experience. And I think it goes to show about the power of improving the digital experience for digital buying. A lot of skeptics of Brilliant Earth will point out and say, well, look, this is oftentimes when the largest purchases somebody will make in their life, especially when it comes to jewelry, they want to go in and try it on in-person, and that’s very true, but we’ve seen a lot of industries that we never thought would become digital go digital. A bit more of a willingness for people to make that leap and make that purchase. What Brilliant Earth has done, has created a top-notch digital experience that includes things like virtual try-ons, digital appointments.
You can sit down at the tele — that’s what they say at telemedicine. That’s not right. A virtual appointment within a jewelry expert to talk about your needs, you can create your own ring digitally. Use the blockchain to track those diamonds. It’s a great digital experience, but as you mentioned, Asit, they combine that with an omni-channel approach. They have a very limited retail footprint. Mostly in big cities, for instance, I’m working from Texas right now. There’s one in Dallas and what is generally an appointment-only retail experience. I could go online if I was going to get this engagement ring that my mom was so excited about, I could set up, customize that ring myself, then have them send a few options over to their Dallas appointment location, go in, try them on, see how I feel about them and then make that purchase. They combine that with a 30-day-back guarantee. If at any point I would order a ring, and I would decide I didn’t like it, you can always send that back. I like this approach. I think it meets a nice middle ground of being digital-first, while also still allowing those consumers that want to visually see the purchase that they’re making, have somewhat of a limited opportunity to do so.
Sharma: Very much so. This reminds me in some ways of my experience in hearing about Carvana for the first time, where I was chatting with someone who is a little bit younger than me and he was saying, I’m never buying a car again, where I have to go somewhere [laughs] and take a look at it. That’s a big-ticket purchase. Even if you’re buying a used car, let’s say on a platform like Carvana, you could easily spend $5,000, $10,000, $15,000, $20,000. It doesn’t seem so much of a stretch to order your engagement ring online, especially if you can utilize technology that let’s say is a digitally native person, a younger person you are already familiar with. Maybe for older people like me, that may seem like a weird experience, but you know this combines some traditional aspects of engagement ring buying with this cutting-edge technology. I remember when my wife and I were shopping for engagement rings, we were living in New York City, we had to make appointments. We made appointments at some couture, or I should say, boutique-type shops, and we also went and made an appointment with this independent designer, Nathan Levy. For any of you who are into this type of realm. He’s a very noted designer, he’s passed away. But we went to his apartment. This old guy, he was a Sephardic Jew, which is a diminishing ethnic group, and just a fascinating guy. We spent a couple of hours there, and I thought it was such a cool experience, just this whole thing of shopping for something meaningful. This combined that because, yeah, if you really have that emotional attachment, you’ve tried on that experience, use their virtual reality. But you’re not sure you can always schedule that appointment. It’ll feel similar. You have your own special point that you go in, you talk to them. I think this is in some ways really that next-generation expression or something that traditionally has been part of American culture. Of course, we’re going to talk about this. They are still very much a North America-centric model. Emily, can you tell us something though about the unit economics? Are these cheapo rings? Are these super high, $10,000, $15,000 earnings? I’m curious about the average order value they have.
Flippen: Well, I can tell you this. When I was enjoying browsing through these rings, I thought to myself, one of my favorite things about doing the consumer goods show is that these are consumer goods, so I could buy one. I thought to myself, well, let me just get a cheap ring off of Brilliant Earth. See what that experience is like, see if I can talk to somebody. That did not happen, because the cheapest ring I was able to find and make on Brilliant Earth, was over $500, which was a little frothy for my desire for this Industry Focus episode. That goes to show the really high average order value that this product has as expected. Their average order value is over $3,200. That’s up 6 percent year over year in the most recent quarter, so that is growing with time and they’ve had nearly 50,000 orders so far in 2021, up pretty significantly in comparison to last year, although admittedly, last year was a little bit of a strange year with the pandemic. We’re seeing a bit of a comeback here in terms of the wedding industry, especially as it applies to things like engagement rings. But these are very high price point products and its type of purchase that I think somebody who is going to shop on Brilliant Earth has been planning out for a very long period of time. In preparation for this show, I had a debate with one of my good friend who’s been married and has a very beautiful engagement and wedding ring, and she said, man, I would’ve never been organized enough to go online, pick out the ring, pick out the gemstone, get it tweaked, going for an appointment, and then pick it up weeks, oftentimes and months later. It was much more of an immediate gratification. A couple was excited to decide that they’re going to get engaged, and they want that engagement ring now. They want to take a photo of it and put it on [Meta Platforms‘] Facebook or Instagram. I will say, that is the challenge that Brilliant Earth is going up against. This is not the type of place where you go and where you get an engagement ring the next day.
Sharma: Yeah, there is something to be said for serendipity, I think, though, that exists less and less in an increasingly virtual world. There will always be people who have the human thrill of doing something that is spontaneous and outside digital window that we’re experiencing reality through now. There’s something to be said for that. But the other side of it too is the market is very big. It’s growing at a 7 percent compounded annual growth rate. This company itself has a growth rate of about 32 percent over the last few years, compounded annual growth rate their revenue, that is. I’m curious about the scale that they are achieving because it means that some of these factors that we’re going to continue to talk about in this show, they could be just blips in the road. There are some other trends to some demographic trends that could hit this industry, but once in a while you get a fast-growing company in an industry that itself is expanding, so it can absorb those little shocks to its business model. Having said that, fast-growing market, let’s talk about this market is huge, $300 billion globally, $61 billion, or about a fifth of that is in the United States where the business models so far is concentrated. Emily, you pointed out to me that this is such a fragmented market, it reminds me of the used car market. There’s no global player with more than a 4 percent market share.
Flippen: If I have to be honest here, this was something that I thought was missing from Brilliant Earth’s S-1. I really do believe in the size of the global jewelry market, which is what they define here. We’re not just talking engagement rings, we are talking all fine jewelry, but a lot of the demographic information they pointed out wasn’t really the information that I was looking for. They noted that millennials, especially younger consumers, are more likely to care about things like where their gems are sourced from, which is wonderful. However, they didn’t point out how that has changed over time in terms of demand and I’ve seen a few independent reports not provided by Brilliant Earth that have suggested demand for things like diamond engagement rings have actually gone down in favor of other investments, whether it’d be other types of jewelry. Oftentimes, vacations, bigger honeymoon in lieu of a fancy engagement ring. That’s one thing that I think is leaves me scratching my head a little bit about the size of this market. Jewelry is growing, but when people think of Brilliant Earth they think engagement rings, and I’m not sure about how the trends for engagement rings will continue to change over time.
Sharma: This is something else that we didn’t get from the S-1. What about the stickiness of the customer? I love my engagement ring, and then five to seven years later, or even 10 years later, of course this company hasn’t been around so long would be interesting in the next decade to track this. What about that next ring where you have a small anniversary and then you do go in for the $500 range to buy not the person who chose engagement ring, but the partner. The partner says that I want to surprise my beloved with a really cool ring and so they have this repeat experience. It’s a long-term thing to track. I can understand why you wouldn’t get those, that along with the extension into other gemstones, maybe one of these offsets, but I think in talking about the market, this is something important they left out. Maybe it’s because we’re used to seeing companies just try to put their best foot forward and walk a fine line between disclosing the necessary risks that the SEC requires them to disclose, and then talking up the advantages without giving the completest picture on where the industry might be going. But I think this is something to definitely keep in mind, Emily, for anyone who makes investments, try to think through those risk factors over the next, 10 years or so.
Flippen: I will say while they didn’t provide that trend information over time, they did say that 83 percent of engagements in the U.S. do involve exchanging diamond engagement rings. While I might be skeptical about that 83 percent of falling over time, even if we talked about a significant contraction, there is still a significant amount of demand for engagement rings, especially diamond ones in the U.S., so I should really withhold my own skepticism here. I think I may be extrapolating my own opinions on the population at whole, while they didn’t provide how that 83 percent has changed. That 83 percent is still obviously very high.
Sharma: Emily, so now, we’ve got to turn to finances. What stood out to you, and I will tell you what stood out for me.
Flippen: Well, maybe this is a co- out answer to that question, but what’s stood out to me was this is a profitable business. I have to be honest, I wasn’t expecting it, especially when you talk about businesses that are headed toward public markets, but this company had a 7 percent net income margin so far in 2021, 47 percent gross margins, which I guess I shouldn’t be surprised given that the upselling and the up-marking that happens with things like diamond rings. But I was really impressed with their financial performance. The type of business that doesn’t necessarily need to go to public markets to stay afloat and I liked seeing that off the bat.
Sharma: Yes, I think that’s so attractive about this company. In this day and age essentially, if you see a company with profitability and let’s say it does have a 7-10 percent net income margin. I can tell you sight unseen, that it’s going to be trading at a really paltry multiple. Nobody’s interested in this. You can almost say in advance, so it’s going to be trading at 20-30 times forward earnings. Bet you money, Bet you big money. Why am I always right? Because despite getting knocked about this year, everyone is still paying for that revenue multiple in the high-tech companies. We’ve been trained by this explosion of IPOs and direct listings and SPACs to look for that explosive growth. What happens if you get a company like this that’s already profitable, but it’s growing at a fast rate? You’re essentially getting a discount. The discount manifests itself about three years later once we go through potentially a bad interest rate cycle, and the whole market gradually, this big machine that just creeks and turns its focus. Imagine this huge telescope on top of a mountain observatory. It turns and the focus goes from this outer space comet that it’s tracking to revenue growth to the moon right in front of it and it’s looking at earnings. You’re getting a company today, which is going to be valued maybe at a higher multiple of, you get 10-15 percent multiple expansion in the intervening years, potentially you get more earnings growth. There’s something about these small companies that are consumer-facing now aren’t as popular, could have a payoff, a nice payoff in the future. I will say to it, it does stump my typical sight unseen metrics for companies that either manufacture or handle inventory. I always tell people look for that 50 percent gross margin, at least. They’re right under that at 47 percent, but the overhead is low, so they manage to have that 7 percent profit that you mentioned. These were all persuasive and it looks like from a chart in their S-1, the first six months also, as you mentioned, Emily, probably with the weird comparison from last year, that growth looks very strong in the first six months of this year.
Flippen: There’s two other notes I will say about their financial performance. One is obviously having a 30-plus percent CAGR over the past five years in terms of sales, really impressive. They do have a bit of long-term debt. Just over $40 million in long-term debt, lead to some pretty lofty interest expense that’s maybe worth keeping your eye on. Not always a bad thing, but just something to be aware of as that interest rate environment changes. Something to keep your eye on. Then the other thing that really, in terms of their financial performance, that stood out to me as, as a glaring omission was any light on their value of their customers over the course of their life or the customer acquisition cost. To the best of my knowledge, the only thing I saw in that S-1, was this statement which I will read out loud. “We have historically had attractive customer acquisition economics, including substantial first order profitability.” Now, that would say to me that immediately when they acquire that customer coming in, the thing that stands out is, hey, we were immediately profitable to the moment that first customer makes that first purchase, again, probably because of the very high order value. That’s a high level of profitability off the bat. But why didn’t they break that out? I’m chomping at the bit to get more information about that first order. After you buy that engagement ring, do you go back for the anniversary ring? Do you go back for a nice necklace or is that a one-time purchase? They just never provided any of that color.
Sharma: Many times when you have a great experience in a company, which has spent time infusing the tech on their website with really fun things, you’ll go back for an ancillary purchase. It might not be a $500 ring, but in this case, and I didn’t see much in the way of accessories on the site, there is something that they could do, in my opinion, in some type of fun accessories, necklaces, small earrings, etc. Expand out those types of offerings, potentially, they could have better measurements or better data to give those metrics because I do agree it’s a cliff after you buy that big engagement ring, what are you going to do for the next few years? Probably nothing. Maybe they are just not bothering to track that. Couple of things that I wanted your opinion on, Emily. No. 1 is the inventory turnovers, this company cycles through inventory fast, which I see as a positive, and then maybe some big-picture risks that you see.
Flippen: I love the fact that they have a very quick inventory turnover, especially in comparison to other jewelers. What this means is that we’re doing a great job of ensuring the inventory of the diamonds, the gems, that they have on hand are churning through really quickly. They’re doing a great job of holding only the inventory that sells quickly as opposed to the jewelers where you go in and maybe they have that ring that they’ve been sitting on for a while or that gem that they just cannot sell. Brilliant Earth does a good job so far in acquiring that supply that they know moves pretty quickly. I still think in terms of the biggest risks that there is a huge fragmentation in the market. Local jewelers, I think, still win in this space, they have that personal touch, that aspect that makes a purchase feel really special as opposed to say, ordering an engagement ring online. But also just that trend for people wanting to experience putting that ring on their finger for the first time. Seeing if it feels the right, I guess you get the right feeling from it. Like buying a wedding dress, a lot of people don’t like to order their wedding dresses online because they like to put dress on and they can see it, they can feel it when they put it on for the first time. You have to trust the process, if you’re going to buy your engagement ring digitally. Given the fact that they only have 13 showrooms across the U.S. Especially when they start expanding internationally, they’re going to have to have people willing to make that leap, and purchase that ring digitally. Which I think is not impossible, again, but very challenging.
Sharma: Something that occurred to me as a big-picture risk with this company is the unique business model is easily replicable by larger competitors. I was thinking about this this weekend, Emily, I almost Slacked you on Sunday. I was out with my wife and we rarely go into shopping malls, but we were in a local mall called Northville Mall, an outdoor mall-type environment. She needed a pair and I needed a pair of glasses. We walked into Warby Parker, great customer experience and we covered this on the show. It was hopping. Only quibble I had was Warby Parker, I loved the literary aspect of the names, but maybe an idea for future expansion, get some global names in there, how about the Rebendronov in addition to all those cool, cozy English-sounding names that were representing the glasses on the shelves. But I was impressed. Then walked by another eye company in the same mall, and they were doing the same things almost like slowly replicating Warby Parker’s model. By the way, the Lululemon, Emily was also hopping.
Sharma: Two great customer experiences there. Then it got me to thinking this morning that the competitors in this fragmented market, once they understand the approach to the technology can themselves then invest in VR, can themselves then invest in a transparent custody of asset blockchain technology to show customers, “Yeah, this is not a blood diamond, this was ethically mined, ethically brought to you without issue.” That’s something to think about in terms of that really impressive growth rate they have for a jewelry company. I still like their chances as a disruptor in this space and a very under-the-radar company as well, this didn’t get a lot of excitement in the press; it is a small-capitalization company, so many intriguing parts and pieces here.
Flippen: I think that’s a greater risk, and it’s something to keep our eye on. I will say you mentioned competitors investing in technology, and while local jewelers are less likely to offer this, I will say some of the bigger competitors, Zales being a particularly important example it’s picking up on this, they have these create your own rings, they have to virtual try-ons, they’re not doing everything that Brilliant Earth is doing, they are certainly catering to maybe that slightly more price-conscious customer that isn’t willing to pay nearly 50 percent more to get an ethically sourced ring as opposed to one where they can just have it conveniently and cheaply deliver to them. I think it’s important to keep in mind. I will say, I like this business a lot. I think it’s maybe being underrated a bit by the market here. But to your point, a very unproven business model. As we wrap up here, another thing worth noting, a very complicated organizational structure as well. Very similar to Chobani, which you talked about last week, that we didn’t get the chance to talk about the organizational structure. Some practices that may not be the most shareholder friendly that investors can also dig into and keep in mind, but this is certainly one that I’m putting on my own radar.
Sharma: Sounds good, and my last word on this, it’s still 2021, we promised that we would talk about brand a lot. One thing that occurred to me as you’re talking to the risk I brought up, Emily, is that this is a growing brand popular with younger people. Zales just seems so stodgy, that’s like this old mall-based, apologies, Zales, [laughs] I could be totally off on how the general public views these two brands, but the brand strength is interesting, too. They’re building on something which has some power.
Flippen: I know we have to wrap up here, we’re out of time, but you reminded me of something that I think is worth noting is if you’re evaluating this business based off the quality of the rings, while it is important, maybe we’re missing the bigger picture, which is the advertising and the marketing that this business has done. I think that’s where they have truly excelled. They’ve managed to find that core younger consumer in their digitally native atmosphere, and this is a brand that I, again, when you know it, you know it well, if you don’t know what, you probably aren’t on social media, to be frank. [laughs] Well, with that, Asit, thank you so much for joining, it’s always a pleasure to have you on the show.
Sharma: So much fun as always. Thank you, Emily.
Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out to say hey, you can always shoot us an email at [email protected] or tweet at us @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Asit Sharma, I’m Emily Flippen. Thanks for listening and Fool on.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.