Charles & Colvard - Q3 2024

Executive Summary

• Q3 FY2024 revenue was $5.3M, down 21% year over year and 33% sequential; gross margin fell to 23% as gold price inflation, promotional cadence, elevated shipping and obsolescence disposition pressured margins.
• Operating expenses rose 13% to $4.9M and operating loss widened to $(3.7)M; diluted EPS was $(0.12) vs $(0.28) a year ago (prior-year EPS impacted by $6.3M tax expense).
• Mix shifted further to Direct/Online: Online Channels represented 77% of sales; Traditional wholesale declined to 23% as the company advances a direct-to-consumer strategy and launches charlesandcolvarddirect.com.
• No formal numeric guidance provided; near-term focus is on liquidity management (cash and restricted cash: $9.2M; $0.5M credit facility draw) and margin stabilization through vendor renegotiations and assortment optimization.
• Potential stock reaction catalysts: further margin stabilization, progress on Charles & Colvard Direct adoption by independent jewelers, and traction from brand ambassador/marketing investments; downside risks if pricing pressure in lab-grown diamonds and gold inflation persist.

What Went Well and What Went Wrong

What Went Well

• Online penetration increased: Online Channels were 77% of sales (up from 70% YoY), indicating progress in DTC pivot; finished jewelry represented 93% of sales (up from 80% YoY).
• Brand and marketing initiatives gaining traction: successful Valentine’s Day sale drove 52% of charlesandcolvard.com revenue; new brand ambassador Skyler Samuels to enhance awareness and relatability.
• Strategic wholesale shift: launch of charlesandcolvarddirect.com aimed at thousands of independent jewelers to monetize $8.2M of loose jewels and improve liquidity; management is “confident” agility will guide toward growth.

What Went Wrong

• Revenue decline and margin erosion: sales fell 21% YoY to $5.3M and gross margin compressed to 23% due to gold inflation, promotional pricing, shipping costs, inventory disposition, and lab-grown diamond mix.
• Operating spend remained elevated: operating expenses increased 13% to $4.9M, with marketing at $3.7M and higher legal fees driving G&A up 14%.
• Traditional segment weakness: wholesale/brick-and-mortar fell to $1.2M (23% of sales) as the company transitions away from distributors; loose jewel sales decreased 71%.

Transcript

Operator (participant)

Good day, and welcome to the Charles & Colvard Q3 fiscal year 2024 earnings call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. This earnings call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended, including statements regarding, among other things, the company's business strategy and growth. Expressions that identify forward-looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future developments and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.

In light of these risks and uncertainties, there can be no further assurance that the forward-looking information will prove to be accurate. Accompanying today's call is a supporting PowerPoint slide deck, which is available in the Investor Relations section of the company's website at ir.charlesandcolvard.com/events. The company will be hosting a question-and-answer session at the conclusion of the prepared remarks. Should you have any questions you would like to submit, please email [email protected]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Don O'Connell, President and Chief Executive Officer. Please go ahead.

Don O'Connell (President and CEO)

Good afternoon, everyone, and welcome to our Q3 fiscal 2024 financial results conference call. Fashion industry leaders predicted uncertainty for 2024 amid subdued economic growth, weak consumer confidence, and a persistent inflation, according to a recent McKinsey report. Charles & Colvard continued to experience these challenges during Q3. Herein, the global luxury group behind fashion houses such as Gucci, Alexander McQueen, and others, recently reported downward pressures on their top line, citing lingering luxury buying slowdowns and sluggish market conditions. Though these trends have impacted us for the last several quarters, we remain optimistic about the company's long-term value as we've seen revenue declines shrink across sequential quarters.

Overall revenue for Q3 was $5.3 million, and while down 21% compared to Q3 FY 2023, that figure is a 12 basis points improvement over the Q1 FY 2024 decline and a 3 basis points improvement over the Q2 FY 2024 decline. We believe that we continue to close the gap and make progress towards profitability. Margin erosion, however, continued during the quarter, due, we believe, to the significant rise in gold pricing, greater promotional pricing pressure amid a deeply discounted retail environment, driving an increased sale cadence, an increased demand for Caydia lab-grown diamonds as a percentage of sales on charlesandcolvard.com, elevated shipping costs, a disposition strategy to liquidate some obsolescence inventory, and other inflationary impacts.

We are working to mitigate additional margin creep and stabilize product margins by reviewing our vendor agreements and relationships and negotiating, when possible, to reduce cost of goods sold, evaluating our overall product assortment, and mindfully managing our overall advertising and marketing spend. Despite the current environment, we're encouraged by the opportunities that conscious consumerism and ethical manufacturing awareness create for Charles & Colvard and our forward momentum on our strategic initiatives. Forever One, the company's cornerstone in pinnacle lab-grown moissanite gemstone product brand, saw revenues increase 5% compared to Q3 FY 2023, while Caydia lab-grown diamond sales on Charles & Colvard were up 16% compared to the year-ago quarter. We believe we're well positioned to capitalize on increased consumer awareness of lab-grown gems, particularly moissanite and lab-grown diamonds, as more brands and retailers continue to embrace the lab-grown movement.

Prada joined LVMH brands, Fred and TAG Heuer, as one of the first high jewelry houses to adopt lab-grown gems, launching a collection featuring lab-grown diamonds and recycled gold last year. We feel that the wider acceptance of lab-grown diamonds and recycled metals further validates the Charles & Colvard made-not-mined story. Additionally, we've rebranded Moissanite by Charles & Colvard to our newest gem brand, Forever Bright, to further distinguish our premium moissanite gemstones in the market. Forever Bright moissanite will replace Moissanite by Charles & Colvard's listings on our drop ship and marketplace partner sites, including macys.com, belk.com, kohls.com, fredmeyerjewelers.com, shopmyexchange.com, the Army and Air Force Exchange Service online store, and others.

The new gemstone brand will also be available for purchase by approved independent jewelers and retailers on charlesandcolvarddirect.com, a downstream solution for value-oriented consumers seeking quality synonymous with Charles & Colvard moissanite at lower price points to broaden our overall reach. Inventory decreased 24% for the quarter as the company continued to refine its jewelry offerings in response to consumer preferences. On charlesandcolvard.com, the company expanded engagement in fashion jewelry categories in both Forever One moissanite and Caydia lab-grown diamond product brands during the quarter. To better penetrate the low-cost consumer market and capture additional market share. The company updated its moissaniteoutlet.com website with improved item filters for a better user experience, a fresh look and feel, refreshed assortment, and increased frequency of its marketing campaigns and emails.

The company continued to make significant investments in its people resources, its next-generation web platform, and its marketing and advertising assets and capabilities with what we deem to be essential for a lifestyle brand to better align with consumers in a crowded and competitive environment, keeping us top of mind with more concentrated social media campaigns, refreshed evergreen assets across paid media platforms, and new brand ambassadorships, such as the recently announced strategic partnership with American actress Skyler Samuels. Erin Lim, host of E! The Rundown, donned Caydia lab-grown diamonds on the red carpet for the People's Choice Awards in February, and the company's successful Valentine's Day sale comprised 52% of charlesandcolvard.com's revenue for the quarter. We strategically incorporated more user-generated content this quarter, as we have seen positive results from the company's paid search and paid social campaigns by implementing these new assets.

In Q3, the company launched an ethical consumerism campaign across its digital marketing efforts, focusing on Charles & Colvard's Made Not Mined story. We believe our increased digital marketing efforts and e-commerce presence enable us to reach a broader audience and drive more customers online. The more places consumers can reach Charles & Colvard, the stronger the company's brand equity can become, showcasing our quality, craftsmanship and innovation, thereby seeking to capture a greater market share. Bottom line, we believe that our marketing efforts are gaining traction. We continue to beta test our MADE Shopping broadcast and streaming initiatives, gleaning valuable insights into a new customer base while recognizing a lift in top-of-funnel brand awareness. We have recently begun to scale back spending while effectively fine-tuning the programming to appeal to optimal markets for our products.

We look forward to updating you with further MADE Shopping plans in more detail on future calls, as we believe this network will enable us to cross more verticals beyond the jewelry and gemstone industry. As we look to hedge against the pricing pressures that continue to impact the jewelry and gemstone industry, as well as our traditional segment, we believe that the new launch of our charlesandcolvarddirect.com wholesale portal enables the company to be more competitive while incentivizing independent jewelers and retailers to buy direct in support of this initiative. We launched a trade campaign announcing Charles & Colvard Direct website with biweekly newsletter ads on jck.com, a leading industry website publication. We partnered with JCK to send a dedicated email to more than 30,000 independent jewelers and retailers announcing Charles & Colvard Direct.

We revamped the charlesandcolvarddirect.com website with updated marketing assets and simple-to-use account registration, and most recently, we issued a press release announcing the strategic shift with our traditional segment. I firmly believe, while we face challenges within our industry, we are confident that our team's agility in the face of adversity will guide us toward success and growth. I will now turn the presentation over to Clint Pete, our CFO, to provide detailed insight into our financial performance during Q3. Clint, please proceed.

Clint J. Pete (CFO)

Thanks, Don. Today, I'll provide a summary of key financials for the Q3 ended March 31st, 2024. Additional details can be found in our earnings press release that we issued this afternoon and our Form 10-Q, which we expect to file early next week. Please note that all percentage comparisons are to the Q3 ended March 31st, 2023, unless specified otherwise. First, we'll start on slide eight with a comparative analysis of Q3 of fiscal 2024 compared to the same period one year-ago.

In total, net sales for Q3 2024 totaled $5.3 million versus $6.6 million, a decrease of 21%, due primarily to the continued weak consumer confidence, continued pricing pressures on the lab-grown diamond market, and the expected decline in the company's wholesale revenue as we continue to build a more robust direct-to-consumer business and as our independent jeweler and retailer initiative on charlesandcolvarddirect.com continues to mature. Net sales for our online channel segment, which is primarily direct-to-consumer and includes charlesandcolvard.com, moissaniteoutlet.com, charlesandcolvarddirect.com, madeshopping.com, marketplaces, drop ship, retail, and other pure-play outlets, totaled $4.1 million for the quarter, now representing 77% of total net sales, up 7% from a year-ago.

Net sales for our traditional segment, which consists of wholesale and brick-and-mortar customers, totaled $1.2 million for the quarter, representing now 23% of total net sales, compared to 30% of sales in the year-ago quarter. Finished jewelry net sales represented 93% of total sales in the quarter, up from 80% of sales in the Q3 one year-ago. As previously mentioned, due to the company's strategic shift in its traditional segment strategies, loose jewel net sales decreased 71% for the quarter.

Domestic sales on charlesandcolvard.com represented 98% of all sales in the Q3, with international sales totaling 2%. Moving to Slide nine, to discuss gross margin, we reported a gross margin of 23% versus 32% gross margin in the year-ago quarter, or a gross profit of $1.2 million versus $2.1 million in gross profit in the year-ago quarter, due in large part to rising commodity prices, the company's sale cadence, and a disposition strategy to liquidate some obsolescence inventory. For Q3, 2024, operating expenses increased 13% from the year-ago quarter, though the marketing expenses increased 13% to $3.7 million. This increase reflects our continuing investments in people, resources, top-of-funnel and influencer marketing campaigns, and brand awareness initiatives that we believe allow us to elevate our brand's positioning.

General and administrative expenses were $1.2 million for the quarter, compared to $1.1 million in the year-ago quarter, for a 14% increase. The increase in G&A for Q3, 2024, was due in large part to increased legal fees compared to the prior year quarter. We reported a net loss for Q3, 2024 of $3.6 million, or $0.12 loss per diluted share, compared with a net loss of $8.4 million, or $0.28 loss per diluted share in the year-ago period. The main driver for our decreased net loss was the $6.3 million tax expense in the year-ago quarter, driven by the establishment of a deferred tax asset valuation allowance on our net deferred tax assets.

Our weighted average shares outstanding on a diluted basis used in the calculation of loss per share for the quarter were approximately 30.3 million shares for the period ended March 31st, 2024, same as in the year-ago period. Now, let's move on to a snapshot of our balance sheet. Our liquidity and capital position remained strong as we ended the quarter with $9.2 million of total cash, compared to $11.1 million at the end of Q2. Working capital remained strong at $12.7 million. As of March 31st, 2024, the company had $500,000 in short-term outstanding debt. Our cash flow used in operations was $2.1 million during the quarter, compared to $800,000 in cash flow used in operations during the same quarter a year-ago.

In terms of other liquidity, we have access to our $5 million cash secured credit facility with JPMorgan Chase Bank. As of March 31st, 2024, the company had $500,000 outstanding on the credit facility. Inventory as of March 31st, 2024, totaled $25.3 million, compared to June 30th, 2023, when it totaled $26.8 million, and compared to $33.3 million at March 31st, 2023, a year-over-year decrease of $8 million due to the inventory write-down in Q4, FY 2023. Loose jewels inventory was $8.2 million as of March 31st, 2024, compared to $9.1 million as of June 30th, 2023, and compared to $15.6 million as of March 31st, 2023. A year-over-year decrease, again, due to the inventory write-down referred to above.

Finished jewelry inventory was $16.9 million as of March 31st, 2024, compared to $17.3 million as of June 30th, 2023, and compared to $17.4 million as of March 31st, 2023. The company remains focused on prudent inventory management strategies in support of our in-stock requirements with select drop ship marketplace partners. Book value per share at the end of the Q3 was $1.01 per share, trading well below market. In summary, we remain confident in our continued efforts to increase shareholder value and brand equity. With that, I'll turn it back over to Don.

Don O'Connell (President and CEO)

Thank you, Clint. As we approach our fiscal year-end, our focus remains steadfast on launching key initiatives while diligently working to navigate the challenge of reducing expenses while driving revenue. By leveraging our resources more efficiently and better maximizing our efforts, we are committed to achieving sustainable growth and delivering value to our stakeholders. With a collective dedication to innovation and operational excellence, we believe we are poised to capitalize on the opportunities we've created and to overcome challenges as we chart a successful path forward. Thank you for your unwavering support as we continue this journey together. With that, I'll turn the call back over to the operator, who will open the lines for any questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up, and if you have further questions, you may reenter the question queue. At this time, we'll pause momentarily to assemble our roster. Any first question will come from Bruce Lindemann, investor. Please go ahead, sir.

Bruce Lindemann (Business Analyst)

Hi. Do you still have your stock buyback in place, and are you still, the management buying stock back, you know, buying stock personally?

Don O'Connell (President and CEO)

Hi, Bruce. Yeah, if you look at the last historical purchases, right, when we were, you know, had the ability to purchase and it wasn't a quiet period, you'll look at the directors, inclusive of myself, that bought significant amount of shares recently.

Bruce Lindemann (Business Analyst)

Do you think you'll continue that?

Don O'Connell (President and CEO)

Certainly, we believe that this is an opportunity at these prices. You know, that is the first part of it. The second part is in relation to the stock buyback repurchase program. We currently have, I believe, 4.5 million left within the repurchase program to be able to buy.

Bruce Lindemann (Business Analyst)

Are you gentlemen gonna buy back stock at a third of book value here?

Don O'Connell (President and CEO)

Well, that's a, you know, an executive decision that is always contemplated on a daily basis. So we certainly believe that we're trading way below book, and we believe that it's a wise move in capital. You know, one thing, just to be very clear, you know, we wanna make sure that we maintain liquidity. We wanna make sure that we have, you know, the cash to be able to operate the business. We wanna make sure that, you know, we, you know, complete a lot of these initiatives that we had initiated and we're funding. So, you know, we weigh all these things on a daily basis.

Bruce Lindemann (Business Analyst)

At what point do you think the company could at least turn cash flow positive in terms of your business?

Don O'Connell (President and CEO)

Yeah, I mean, I, you know, we don't give forward-looking statements, but I will tell you that, you know, we're, we're completing a lot of the goals and initiatives that we put forth in the last few quarters, kind of building out, capabilities, content capabilities, marketing strategy. A lot of the spend, though, as of late, has been on performance marketing and so forth. So, that really is something that we need to kinda look at, and we need to do a better job in kinda getting a return on our ad spend. So we're looking at that diligently, but, look to us to wind down and start to, really, you know, look for the path of profitability now.

So as we were in the last couple of quarters, we've been kind of building and making these investments to be able to build out what we believe is the future state of the company and what we believe is necessary to be able to build a next generation company in the long run. So we've made strategic investments in our web property. We're building out a new, what we call, the next gen website. It has unbelievable functionality, a lot better than what we have today. Literally a single point for the consumer to be able to click and buy any shape, any size, any configuration between the actual piece of jewelry they're buying, so that's really important. They can pick whatever color they want. So we believe that that investment was very, very strategic and very critical.

It's taken us a little bit longer than we anticipated to be able to kinda launch that, but we stated on the last call that we'd be launching in Q4, so that still is the target. So once we get that launched, we get it up and running, the spend will level out a little bit there. And then we believe that's probably the most significant driver for future growth for us, and then that'll get us really to the path of profitability because we'll start to save dollars there and economies of scale. So the new next gen property will enable us to peel off a lot of these, for all intents and purposes, APIs or third-party resources and partnerships that we have that we won't need once we launch the next gen platform.

So that'll help us also become more, you know, profitable in the long run. So we're pretty excited about getting this thing up and running and, you know, feeling the benefits and the cost savings.

Bruce Lindemann (Business Analyst)

Have you discussed or tried to form any partnerships in terms of companies that you sell through to invest in the company or to help you with any of this stuff in terms of finance?

Don O'Connell (President and CEO)

Yeah, I mean, that's always a concern.

Bruce Lindemann (Business Analyst)

So much cash every quarter.

Don O'Connell (President and CEO)

No, I mean, that's no question, right? So, you know, for us, these are investments. That's the way we look at it right now. I mean, we knew the horizon for us to peel back these investments, and we knew what we wanted to be kind of focused on and strategically spending the dollars where we needed to spend them. So that actually is starting to come down, and, you know, but certainly every day-

Bruce Lindemann (Business Analyst)

Down a lot.

Don O'Connell (President and CEO)

Certainly every day, we have a lot of, you know, conversations between, you know, partners out there. I mean, we've been in the jewelry industry for a long time. There's certainly a lot of viable partnerships, alliances, or things that could be, could come to fruition, but at this point, you know, there's nothing to be spoken about on that regard.

Bruce Lindemann (Business Analyst)

Right. No. So, because it—I just like to see something happen or good or before you guys run out of money.

Don O'Connell (President and CEO)

Right. So let's talk about that. You wanna talk about the liquidity. So, you know, given the fact that we have, and thank you for bringing that up. So, you know, we have $9.2 million in cash at the end of the quarter. We certainly have the credit line capability, and have the capability to draw on that. We, we believe that our inventory in finished jewelry is comprised of really valuable inventory. So that means active inventory, that means finished jewelry inventory. That means a large portion of that inventory contains a commodity in the metals gold, right? So I don't need to say to anybody right now, but gold is really rising and climbing.

It has, you know, an adverse effect on new orders that are priced at a prior gold price, and then it has a benefit when the inventory that we have that's been on the shelf, the valuation of that inventory increases to the current market. So we know that if you just said, you know, we wanted to raise capital or we wanted to get more liquid, we would sell off the finished jewelry first. Then the other thing I want to point out is, Charles & Colvard Direct is a real new initiative for us to be able to control our destiny.

We started moving more toward direct-to-consumer, but as of late, we realized the fact that we've got over $8.2 million in loose jewels and loose gems, so that's another avenue for us to raise capital or generate some more cash. So look to us to kind of build out and lean in on that and going after the trade for the loose jewels. I know it's been my messaging quarter over quarter to go more direct-to-consumer. That hasn't wavered, and that hasn't changed at all. The difference is now we're going to go Charles & Colvard Direct with this portal and be able to tap thousands of independent retailers. So, and those retailers will buy the loose jewels, and therefore, we'll be able to convert it to cash.

Operator (participant)

The next question will come from Ben Franklin with Riverstyx Capital. Please go ahead.

Ben Franklin (Founder and Portfolio Manager)

Hey, guys, I just have one question. Why draw on the credit facility considering the high cash balance?

Don O'Connell (President and CEO)

Yeah, that's a good question. So we're making, you know—I mean, we only drew $500,000. We felt that, you know, we wanted to, you know, draw down. I mean, you know, we haven't used a credit facility since we've been in operation here and for, you know, several years. So we want to make sure that the credit facility, should we want to draw on it, is available and that everything flows in and out the way it does. Certainly, the money factor there is very fractional. So to preserve cash, sometimes it's in and out. It really depends. So we just wanted to go ahead and draw on it. So we thought it was a good thing for us to do at the time.

Operator (participant)

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Don O'Connell, President and Chief Executive Officer, for any closing remarks. Please go ahead.

Don O'Connell (President and CEO)

Thank you, Chuck. I just want to thank you for your support with Charles & Colvard. We look forward to continuing updates for our shareholders in future quarters. I want to thank everyone's support, and we'll talk to you next quarter, and we look forward to telling you some great things that are coming up.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.