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01 Jun, Thursday
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Bull Trader USA

IPO Report: Brilliant Earth shines with analysts who say a digital and sustainable approach to jewelry appeals to millennials and Gen Z

Brilliant Earth Group Inc. uses blockchain to track the path to ownership of some of its diamonds, one of the ways that the newly public jewelry company is using technology and transparency to appeal to its target millennial and Gen Z customers.

“It’s important to showcase the journey of the diamond to the customer,” Brilliant Earth Chief Executive Beth Gerstein told MarketWatch. “It’s a new level of transparency. Today’s consumer likes to know the origins.”

Brilliant Earth

has 10,000 blockchain-enabled diamonds, according to its prospectus, tracking a diamond’s path from the mine, through the cutting and polishing process and to the customer.

In addition to touting its transparency, the company also emphasizes its sustainability efforts and ethical business practices, distancing the company from the “blood diamond” reputation that the fine jewelry category has previously earned. Brilliant Earth touts its membership in groups that promote ethical practices, carbon offsets and inclusion, uses recycled materials in its packaging and has philanthropic initiatives in countries where gems are mined.

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Shares of Brilliant Earth, which trade on the Nasdaq under the ticker “BRLT,” have risen about 15% in the weeks since the stock made its stellar debut, after the deal priced at $12, below the expected range. The company will report quarterly earnings on Friday for the first time as a public company.

Analysts are bullish about the business and its new approach to fine jewelry sales.

“We have covered the luxury/jewelry space for 13+ years and believe that
we are seeing a shift toward new brands that are specifically relevant to the Gen
Z and Millennial age cohort,” wrote KeyBanc Capital Markets in its initiation of Brilliant Earth coverage.

“Legacy luxury maisons (Cartier – Love, Tiffany – True) are adding more contemporary product, but historically lower price point product has been more commoditized and price driven. We believe that Brilliant Earth’s focus on environmental responsibility and a more personalized experience (67%+ proprietary design) is a significant differentiator in the sub-$15K engagement market.”

KeyBanc rates Brilliant Earth stock at overweight with a $16 price target.

Brilliant Earth was founded in 2005 as an online business with a showroom in San Francisco. There are now 14 showrooms, though Gerstein thinks there’s room for 100.

The jewelry business is a $300 billion global industry and a $61 billion category in the U.S., according to data presented in Brilliant Earth’s prospectus. Online jewelry sales in the U.S. have become a growing portion of sales, reaching 31% in 2020, up from 10% in 2010. Brilliant Earth is beginning its international expansion with localized e-commerce sites in Canada, Australia, and the U.K.

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Brilliant Earth sales in 2020 totaled $251.8 million, up from $201.3 million in 2019. Net income totaled $21.6 million in 2020 after a loss of $7.8 million in 2019.

For the first six months of 2021, sales totaled $163.0 million, up from $91.8 million last year. Net income totaled $10.9 million for the first six months of the year, up from $182,000 last year.

As of June 30, 2021, the company had $65 million outstanding in borrowings under its term loan.

The fourth quarter typically represents 30% of the company’s revenue. A large portion of Brilliant Earth’s business is in bridal. In 2020, the company released a gender-fluid collection.

“(The) Younger consumer wants something more personalized, distinctive, and a unique design,” Gerstein told MarketWatch. A large portion of the company’s revenue is in sales of “Create Your Own” rings.

“Pearls are having a really nice moment right now, and yellow gold has renewed enthusiasm,” Gerstein said. Some 87% of the company’s active customer base are millennials and Gen Z.

JPMorgan analysts noted that more than two-thirds of Brilliant Earth’s designs are proprietary.

“Brilliant Earth has a unique positioning within the fine jewelry sector driven by its exclusive designs and supply chain transparency, delivered to customers through a highly personalized omnichannel experience,” analysts wrote in their initiation of coverage of the stock.

“On the product offering specifically – over two-thirds of designs are proprietary with Brilliant Earth leveraging over 16 years of customer data and insights to constantly test new SKUs given an agile three-month product development cycle.”

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JPMorgan initiated Brilliant Earth at overweight with a $16 price target, writing that the company has “conservative operators with a strong financial model.”

Brilliant Earth runs on an asset-light business model that it says keeps it efficient.

“We are able to offer over 100,000 diamonds—hundreds of millions of dollars’ worth — while keeping our balance sheet inventory low, which has driven our attractive inventory turns of over 10 times every year since 2018, compared to one-to-two times inventory turns that are more typical for even high-performing traditional jewelers,” the prospectus said. Brilliant Earth also offers lab-grown diamonds and recycled precious metals.

“Our limited owned-inventory and rapid cash cycle—where we are typically paid by our customers before we pay our suppliers—allow us to scale with limited capital outlays.”

Brilliant Earth is an emerging growth company, which means it does not have to make the same disclosures required of bigger public companies. A business remains an emerging growth company until it reaches a number of milestones, including annual revenue of more than $1.07 billion.

Brilliant Earth is also a controlled company, offering Class A and Class B shares, each holding one vote per share, and Class C and Class D shares, each holding 10 votes per share. Only Class A shares are listed. The company’s founders and Mainsail, a private-equity firm, have retained most of the voting power.

Gerstein and Eric Grossberg are co-founders of Brilliant Earth. Grossberg is executive chairman of the board. Jeffrey Kuo is chief financial officer and joined the company in 2015. Mainsail’s co-founder and managing partner, Gavin Turner, sits on the board.

Brilliant Earth does not intend to offer a dividend for the foreseeable future, which means investors will have to rely on stock gains for returns.

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“We view Brilliant Earth as an underappreciated story with substantial growth opportunities ahead and its solid fundamentals should drive +25%-to-30% long-term sales growth and high-20% to low-30% bottom-line growth,” wrote Cowen analysts in their initiation.

“We view Brilliant Earth’s key competitive advantage as its connected experience that seamlessly integrates digital and physical, and showrooms play an important role.” Cowen expects Brilliant Earth to have 80 showrooms by fiscal year 2025.

Cowen rates Brilliant Earth stock at outperform with a $17 price target.

The Renaissance IPO ETF

has gained 2.4% in the year to date, while the S&P 500

has gained 23.7%.

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