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C&

CHARLES & COLVARD LTD (CTHR)·Q3 2024 Earnings Summary

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% .

Financial Results

MetricQ1 FY2024 (Sep 30, 2023)Q2 FY2024 (Dec 31, 2023)Q3 FY2024 (Mar 31, 2024)
Revenue ($USD)$4.953M $7.906M $5.262M
Gross Profit ($USD)$1.945M $2.856M $1.186M
Gross Margin %39% 36% 23%
Operating Expenses ($USD)$4.576M (S&M+G&A) $5.793M $4.884M
Operating Income (Loss) ($USD)$(2.632)M $(2.938)M $(3.698)M
Net Income (Loss) ($USD)$(2.539)M $(2.866)M $(3.633)M
Diluted EPS ($)$(0.08) $(0.09) $(0.12)
Segment/CategoryQ1 FY2024Q2 FY2024Q3 FY2024
Online Channels Sales ($USD)$3.9M; 79% $6.7M; 84% $4.1M; 77%
Traditional Sales ($USD)$1.0M; 21% $1.3M; 16% $1.2M; 23%
Finished Jewelry Sales ($USD)$4.3M $7.4M $4.9M
Loose Jewel Sales ($USD)$0.7M $0.5M $0.4M
KPIs & Balance SheetQ1 FY2024Q2 FY2024Q3 FY2024
Cash & Restricted Cash ($USD)$12.7M $11.1M $9.24M total; cash $3.69M, restricted $5.55M
Inventory ($USD)$27.33M $25.76M $25.31M
Short-term Debt ($USD)$0 $0 $0.5M line of credit outstanding
Weighted Avg Diluted Shares (MM)30.345 30.345 30.345
Actuals vs Estimates (S&P Global)Q3 FY2024 ActualConsensusSurprise
Revenue ($USD)$5.262M Unavailable (S&P Global data access error)N/A
Diluted EPS ($)$(0.12) Unavailable (S&P Global data access error)N/A
Note: Wall Street consensus data from S&P Global was unavailable due to access limitations at the time of query; comparisons to estimates could not be performed.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY2024/Q4None providedNone providedMaintained (no formal guidance)
Gross MarginFY2024/Q4None providedNone provided; management aiming to “stabilize product margins” via cost reductions and assortment managementQualitative only
OpExFY2024/Q4None provided“Reducing expenses while driving revenue” as focus; no numeric targetsQualitative only
Liquidity/LeverageFY2024/Q4N/A$5M secured credit facility; $0.5M drawn; focus on monetizing loose jewels via DirectInformational update

Earnings Call Themes & Trends

TopicQ1 FY2024 (Nov-2023)Q2 FY2024 (Feb-2024)Q3 FY2024 (May-2024)Trend
DTC/Online strategyBuilding NextGen e-comm, expanding assortment; holiday optimism Online 84% of sales; NextGen launches in Q4; MADE Shopping pilot Online 77% of sales; repeat customers growth; scaling marketing content Sustained push to DTC platforms and content commerce
Wholesale/Traditional shiftDistributor model de-emphasis Prepare for charlesandcolvarddirect.com; expected decline in wholesale Launched charlesandcolvarddirect.com; targeting thousands of jewelers Transition progressing from distributors to Direct
Pricing/marginsGM 39%; pressure from macro GM 36%; pressure from commodities; legal costs up GM 23%; gold inflation, promos, shipping, obsolescence liquidation Margin compression intensified in Q3
Lab-grown diamond dynamicsPortfolio support for moissanite & lab-grown Lab-grown sales up 15% YoY online; broader retailer adoption Lab-grown diamond demand up as share; validation by luxury brands Growing lab-grown adoption; mix impact on margins
Marketing/brandContent commerce plans; assortment expansion MADE Shopping pilot; new partnerships (Fred Meyer, Exchange) Brand ambassador Skyler Samuels; Valentine’s Day success; ethical consumerism campaign Increasing brand investment and partnerships
Liquidity/capitalCash $12.7M; no debt Cash $11.1M; no debt; $5M facility available Cash & restricted $9.2M; $0.5M facility drawn; inventory $25.3M Liquidity monitored; facility used modestly
Inventory managementInventory $27.3M; finish-heavy Inventory $25.8M; focus on prudence Inventory $25.3M; plan to monetize loose jewels via Direct Lower inventory; shift to finished jewelry and monetization of loose

Management Commentary

  • CEO on Q3 softness and brand strategy: “We remain committed to growth despite a challenging third quarter... pleased by our growth in repeat customers... evolution of our product portfolio... speaks to the strength and longevity of our brand.”
  • CEO on lab-grown validation: “We feel that the wider acceptance of lab grown diamonds and recycled metals further validates the Charles & Colvard made not mined story.”
  • CFO on margin drivers: “We reported a gross margin of 23%... due in large part to rising commodity prices, the company sales cadence and a disposition strategy to liquidate some obsolescence inventory.”
  • CFO on liquidity: “We ended the quarter with $9.2 million of total cash... $500,000 in short-term outstanding debt... Working capital remained strong at $12.7 million.”
  • CEO on execution focus: “Our focus remains steadfast on launching key initiatives while diligently working to navigate the challenge of reducing expenses while driving revenue.”

Q&A Highlights

  • Liquidity runway concern: Analyst pressed on cash burn; CFO emphasized $9.2M cash, finished jewelry inventory containing gold as highly “liquidable,” and monetization of $8.2M loose jewels via Direct to raise cash if needed .
  • Credit facility usage: Question on drawing $0.5M despite high cash; CEO said the draw was to ensure operational readiness of the facility, with minimal cost and flexibility benefits .
  • Partnerships/strategic investments: Inquiry about external partners; CEO noted ongoing industry conversations but nothing to disclose; reiterated current spend is investment-focused and beginning to taper .

Estimates Context

  • S&P Global/Capital IQ consensus for Q3 FY2024 EPS and revenue was unavailable due to access limitations at query time; therefore, beat/miss analysis vs Street could not be performed. Any future updates should anchor on S&P Global consensus for comparability.
  • Given reported gross margin compression and revenue decline, Street models may need to adjust near-term margins and OpEx intensity unless management demonstrates concrete cost reductions and vendor renegotiation impacts in Q4 .

Key Takeaways for Investors

  • Execution priority: Near-term performance hinges on stabilizing gross margins (gold/vendor renegotiations, assortment discipline) and demonstrating operating expense leverage as marketing investments normalize .
  • DTC pivot: Continued shift to Online Channels (77% of sales) is structurally positive for control and brand equity; watch NextGen platform metrics (traffic, conversion, CAC) and MADE Shopping ROI .
  • Monetizing inventory: The new Direct wholesale portal could unlock cash via loose jewels while growing trade relationships; track independent jeweler adoption and order cadence as leading indicators .
  • Lab-grown exposure: As lab-grown diamond mix increases, monitor margin impact and pricing dynamics; brand positioning around ethical, “Made, not Mined” could help sustain differentiation .
  • Liquidity: With $9.2M cash/restricted and modest credit facility draw, liquidity is adequate near term; however, sustained losses require rapid progress on margin and revenue initiatives to preserve cash .
  • No guidance: Absence of formal guidance increases uncertainty; watch for Q4 commentary on margin stabilization and OpEx trajectory to recalibrate expectations .
  • Catalysts/Risks: Positive—Direct adoption, marketing ambassador traction, margin improvements. Negative—continued gold inflation, promotional environment, and lab-grown diamond pricing pressure .