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Edited Transcript of CTHR earnings conference call or presentation 6-Feb-20 9:30pm GMT

Q2 2020 Charles & Colvard Ltd Earnings Call

MOORESVILLE Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Charles & Colvard Ltd earnings conference call or presentation Thursday, February 6, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clint J. Pete

Charles & Colvard, Ltd. - CFO & Treasurer

* Suzanne T. Miglucci

Charles & Colvard, Ltd. - CEO, President & Director

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Conference Call Participants

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* Mike Schellinger

MicroCapClub LLC - Partner

* Peter Enderlin

MAZ Capital Advisors, LLC - Portfolio Manager

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Charles & Colvard Q2 Fiscal Year 2020 Earnings Call. (Operator Instructions) Please also note today's event is being recorded.

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 strategy. Expressions, which identify forward-looking statements speak only as of the date the statement is made.

These 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 assurance that the forward-looking information will prove to be accurate. This earnings call does not constitute an offer to purchase any securities nor a solicitation of a proxy, consent, authorization or agent designation with respect to a meeting of the company's shareholders.

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 Q&A session at the conclusion of prepared remarks. Should you have questions you'd like to submit, please e-mail ir@charlesandcolvard.com.

At this time, I would like to turn the conference call over to Ms. Suzanne Miglucci, President and CEO. Ma'am, please go ahead.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [2]

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Good afternoon, and thank you for joining us as we summarize Charles & Colvard's results for the quarter ended December 31, 2019, the second quarter of our fiscal year 2020.

In the second quarter, we delivered our sixth consecutive quarter of profitability. Net sales of $10.7 million, net income of $814,000 or $0.03 earnings per diluted share and a strong blended gross margin of 48%. Our direct-to-consumer channels led our net sales performance with 12% growth over the holiday period. Clint Pete, our CFO, will begin today's call with an overview of our financials. Then I'll return to discuss highlights from the quarter, share insights from our digital marketing and brand expansion efforts and discuss our plans for the quarters ahead. Clint?

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Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [3]

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Thank you, Suzanne. Good afternoon, everyone, and thank you for joining us. Today, I'll highlight the key financial results for Q2 2020. Additional detail can be found in our Form 10-Q for the quarter ended December 31, 2019, which we expect to file tomorrow.

Beginning on Slide 5. We reported net income for Q2 2020 of approximately $814,000 or $0.03 per diluted share compared with net income of approximately $1.2 million or $0.05 per diluted share in the year ago quarter. This was based on 29.2 million diluted weighted average shares compared to 21.7 million in the year ago quarter.

Slide 6 summarizes net sales for Q2 2020, which increased 5% to $10.7 million compared to the year ago quarter. In our Online Channels segment, which consists of e-commerce, outlets including charlesandcolvard.com, third-party online marketplaces, drop-ship retail and other pure-play, exclusively e-commerce outlets. Net sales for the quarter increased 12% versus the year ago quarter, representing 57% of total net sales. Our transactional website, charlesandcolvard.com, increased 12% in net sales versus the year ago quarter. Sales through our cross-border trade platform increased 19% versus the year ago quarter.

In the company's Traditional segment, which consists of wholesale and retail customers, net sales for the quarter decreased 2% to $4.6 million versus the year ago quarter, representing 43% of total net sales. We saw a solid performance in our brick-and-mortar channel, which was offset by softness in our international distributor sales. Finished jewelry net sales increased 24% for the quarter, an indicator that our direct-to-consumer initiatives are continuing to produce results. Finished jewelry sales are up across multiple channels, including our charlesandcolvard.com website, third-party online marketplaces and drop-ship retailers. Loose jewel net sales decreased 15% for the quarter, mainly due to a decline in demand for loose jewels from our international distributors.

International sales decreased 20% versus the year ago quarter, reflecting lower orders from our Asian distributors that we believe are related to the continued impact of the tariff and geopolitical issues.

On Slide 7, our gross margin performance in the quarter was again strong. The Q2 2020 gross margin was 48% compared to 47% in the year ago quarter. Our margins have been consistent due to our healthy Online Channels sales including strong sales of our Forever One product on our transactional website, charlesandcolvard.com. Forever One net sales of finished jewelry and loose jewels represented 84% of total net sales for Q2 2020.

On Slide 8, we show operating expenses as a percentage of net sales at the top of each bar. The dollar level of our operating expenses for each quarter is presented inside each bar. For Q2 2020, operating expense as a percentage of net sales was 41% compared to 35% in the year ago quarter. Overall, operating expenses increased 21% versus the year ago quarter. G&A expenses decreased approximately $46,000, and sales and marketing expenses increased approximately $814,000, primarily due to the increased marketing investments as we expanded our digital marketing spend and brand awareness initiatives for the quarter.

Slide 9 presents a snapshot of our balance sheet. At December 31, 2019, we had $13.3 million of cash, cash equivalents and restricted cash compared to $12.6 million at September 30, 2019, and $13 million at June 30, 2019. Since we plan to apply the proceeds from our recent equity raise over several years, we have invested the unused funds in short-term investment-grade interest-bearing securities and continue to do so. We recorded $45,000 of interest income in the quarter. We continue to have no long-term debt and have not accessed funds through our credit facility.

Moving on to Slide 10. Inventory at December 31, 2019, totaled $35.8 million compared to $36 million at September 30, 2019, and $33.7 million at June 30, 2019. Loose jewels inventory was $25.3 million compared to $24.3 million at June 30, 2019. Finished jewelry inventory increased to $10.4 million compared to $9.3 million at June 30, 2019. This overall increase reflects our continued investment in consignment inventory to support the growing success in our brick-and-mortar channel. Their current level also reflects the strategic decision to maintain higher in-stock inventory for the recent holiday season and for the upcoming Valentine's season, for channels that require immediate shipping, including our transactional website, charlesandcolvard.com, and for marketplaces and drop-ship retail channels.

As of December 31, 2019, 82% of our inventory is classified as new inventory, leaving only 18% of our inventory classified as legacy inventory.

I would like to conclude by highlighting our upcoming proactive investor outreach efforts. We will be presenting at several events in March and April, including the 32nd Annual ROTH Conference in Orange County, California; the Investor Summit in New York City; and the Planet MicroCap Showcase in Las Vegas. Please see our website for details.

I would now like to turn the call back over to Suzanne.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [4]

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Thank you, Clint. I'll begin with a summary of notable highlights for the quarter on Slide 12.

Starting with our Online Channels segment. We generated 12% growth, a solid performance from the year ago holiday quarter. Online Channels represented 57% of our total revenue and were fueled by new additions to our jewelry assortment and high in-stock rates across all e-commerce channels. These in-stock rates were key to serving the chaotic buying patterns that we and other retailers experienced due to the compressed holiday shopping window. As we're hearing across our customers and peer channels, having 6 fewer days in the selling season caused entirely different shopping behaviors than we've seen in recent years. Through this change in customer behavior and shortened holiday season, we were pleased to see the continued and encouraging trends of interest in lab-created gemstones. This rang true through our selling channels, including our transactional website, charlesandcolvard.com, where we experienced 12% growth. Our website continues to deliver more than 50% of our online sales and the most immersive direct-to-consumer brand experience.

We initiated new and creative top-of-funnel awareness campaigns designed to introduce our branch to new audiences. We expect there to be a lag between this introduction and the customers' first purchase. This will require us to continue to touch these customers over time as we move them into and through our conversion funnel. Through these digital marketing efforts, we drove a double-digit increase in web traffic over the prior year in a competitive environment where the cost of advertising in many of our key traffic-driving outlets increased substantially. New enhancements to our website, such as new payment method and self-service functions that empower the user with visibility into order status and delivery date, enhanced the customer experience, encouraged sales and increased hang time on our web pages.

Throughout the quarter, we experienced new and interesting mobile shopping trends through our e-commerce site, which have helped us learn more about our consumer profile. Mobile traffic, transactions and revenue were up significantly over last year, consistent with overall retail industry trends. Leading into the holiday season, we made improvements to our mobile experience, including mobile navigation optimization, search capability and category presentation. Dovetailing these insights with consumer demographics reveals that for engagement ring shopping, women are using their phones to look at options and they're visiting our site multiple times before making a purchase decision. Men, however, are arriving from desktop sources as often one visit, which we believe tells us she's making the selection and he's making the final purchase. This valuable device and shopping insight will influence our site development road map and digital marketing investments going forward.

Lastly, from our website results is cross-border trade. We saw a 19% increase in sales on our U.S. site from international shoppers for whom we shipped purchases internationally. Our highest-performing regions remain English-speaking countries including Canada, the United Kingdom and Australia. That said, we continue to engage new consumers from around the globe and are enjoying an influx of customers from new countries each quarter.

Moving on to Slide 13. I'll address our other Online Channels. Marketplaces continue to be a strong contributor to our online success with Amazon being our lead performing channel. Our marketplaces' gross merchandise volume roughly doubled from that of the year ago quarter. Average order value is up 80% due to the expansion of Charles & Colvard branded jewelry, and the digital marketing spend we're applying to boost in-marketplace awareness is netting a very attractive return on ad spend. In addition, the groundwork we laid over the course of 2019 to place Charles & Colvard on various marketplaces across the globe, including Italy, France, Germany, Spain, Australia and Japan, has borne fruit. These outcomes contributed to our overall Q2 performance and position us for future marketplace growth.

We also saw meaningful performance across our drop-ship partners through high-quality placements in our partners' holiday promotions, the introduction of new products and our ready-to-ship status, outlets such as Overstock and Macy's experienced significant increases in sales over the prior year. Launching just ahead of the holiday season, newcomer Belk also made significant strides introducing and selling, Charles & Colvard jewelry to its loyal customer base.

Turning to Slide 14. There were several contributing factors to online holiday performance, including expanded product selection and website enhancements. We're focused on listening intently to the market demand and delivering a product the consumer is asking for. With that mantra driving our activities, we delivered a broad selection of new finished jewelry leading up to the holiday season, including bridal sets, the introduction of platinum into a full line of fine hypoallergenic jewelry and lab-created ruby and sapphire options into our drop-ship program. We delivered a substantial selection of new products into our marketplace and drop-ship program, which played a meaningful role in our attractive margin rate. We also continue to introduce new options to our Signature Collection, Charles & Colvard's exclusive jewelry line that features our floret logo. This collection represented 8% of charlesandcolvard.com Q2 sales and continues to be a driver of consumer interest.

We believe the continued popularity of Forever One, our flagship moissanite gemstone, solidifies our position as a premium gemstone and jewelry brand. At the same time, we're pleased with growing consumer interest across the entire span of our fashion, bridal and fine jewelry with our finished jewelry sales increasing 24% over the prior year quarter. Prior to the holiday, we performed a significant system upgrade to our charlesandcolvard.com website with the intention of delivering the best possible consumer shopping experience. These enhancements included a store credit program for exchanges, an enhanced mobile experience and new payment methods. After credit cards, Affirm is our most popular payment method and a solution that commands the highest average order value given that approved customers can now pay for their purchase over a 36-month period if, of course, they're qualified.

We're also quite excited about the launch of Afterpay, an innovative online payment method that caters to the millennial audience by allowing installment payments. The traffic we're receiving from Afterpay is creating positive lift to both traffic and revenue. The other aspect we appreciate about these various alternate payment methods is that our partners take on the financing risk.

Now let's transition to Traditional channel. This segment represented 43% of our overall revenue in the second quarter. Revenue from this segment was down 2% compared to the year ago quarter. In brick-and-mortar, we were pleased with our outcomes during the holiday season. In Helzberg Diamonds stores, our expansion to a third foot of case line was complete prior to holiday, and we've entered into a fourth foot in select doors. We continue to value our relationship with retail partners as a place for consumers to become acquainted with our brand and to have the opportunity to touch, feel and try on our expanded assortment.

Across our brick-and-mortar partners, some of our top-selling items have been bridal sets, halo settings and the ever-popular stud earring. These positive outcomes were offset by a decrease in international revenue compared to the year ago quarter. While international sales contributed 10% of our overall revenue, we experienced softness in our international distributor sales, particularly in the Asia Pacific region. Due to continued tariff issues and a strained geopolitical environment, sales through our international distributors were down 36% for the quarter. We're hopeful that recent improvements in trade relations will alleviate some of these challenges. That said, our Hong Kong-based and China-based distributors are currently being impacted by the coronavirus, and we believe this may impact ongoing international distributor relations.

Let's discuss the takeaways from the quarter and the key initiatives that will be our focus for the balance of the fiscal year. I'll turn to Slide 15. As we've been describing for several quarters, we're laser-focused on expanding the reach of our brand. In the September 2019 time frame, we began activating the funds from our 2019 capital raise, leaning in on our digital marketing efforts to drive awareness of Charles & Colvard and sales over the holiday season. Awareness begins at what we call the top of the marketing funnel. These are efforts to impress our brand upon more consumers so they become familiar and comfortable with the brand. Outcomes from these efforts can sometimes be hard to measure as they may simply be an advertisement that doesn't require action. But in the digital world, we do know how many impressions we're making, meaning we know how many consumers saw our ads, whether they were served on a streaming video channel, popular consumer website or social outlet. Over the quarter, we made over 60 million impressions with our top-of-funnel investments.

We also leaned in on the types of advertising that encourage clicks that bring consumers to our website. This gets into the territory of mid-funnel or more conversion-based marketing spend. These efforts come in the form of paid search, social, affiliate and programmatic ads. Success in these mid-funnel investments could be measured by traffic to our website, which had double-digit growth over last year; increases in net new social media followers, which was up 95% over last year; and channel-specific measures such as the increase in YouTube video views, which was up 150% to the prior year quarter. We're particularly pleased with this last measure as video is an excellent way for the consumer to fully understand and embrace the quality and brilliance of our finished jewelry without having to see it in person.

Also of importance to us is our increase in direct traffic to charlesandcolvard.com. This measure tells us the degree to which consumers are aware of our name and proactively come directly to our site without the aid of an advertisement. Direct traffic on charlesandcolvard.com was up nearly 90% over the year ago quarter, a clear indicator that we're making a lasting impression.

One of the channels that has historically served us well is paid search. This is where we bid on keywords or terms on Google with the intent of winning the bid and having the ability to either have a text ad shown at the top of the consumer's search result or a Google shopping ad presented. These are the visual ads with product pictures and prices that are shown on the search results page, an example of which you can see on Slide 15. This holiday season, we saw increased activity and costs in paid search within the lab-created gemstone space, including bids from moissanite-related terms from jewelry companies that primarily sell either mined or lab-created diamonds but don't carry moissanite products.

In a similar strategy, we also bid for lab-created diamond and gemstone terms, even though we may get customers who click through wanting a lab-created diamond product. Simply stated, during the holiday promotional cyber time frame, it cost us more per click per key terms such as moissanite, and we were able to make fewer impressions on terms that we've previously dominated. We've learned quite a bit about the competitive paid search space over Q2 and have already deployed some key changes in our advertising spend to direct consumers to our brands. In some cases, that means migrating spend to higher-performing channels such as social advertising.

We can be quick and agile in pivoting our paid search strategy to ensure we're maintaining our pole position as the premium moissanite brand while taking advantage of the same keywords our competitors are bidding on to win impression share. These are still very early days as we deploy digital marketing strategies to grow long-term brand awareness while at the same time driving near-term sales and net income. We will keep you apprised of our learnings and tactics as we progress.

Turning to Slide 16, I'll highlight our other areas of focus. We remain optimistic about opportunities for expanding our international sales reach. As mentioned earlier, we're seeing meaningful traction on marketplaces with some of this growth from international regions. We're activating brand awareness dollars globally and adding to our understanding of international consumers by region. We plan to continue utilizing marketplaces as a testing ground for future investments in those regions that perform well. Product evolution is a daily focus at Charles & Colvard. From our new platinum products to our expanded signature collection, a breadth of assortment is key to having something in the mix that will appeal to every consumer and having it ready to ship meets demand of our savvy and often impulse-driven online shopper.

We strive to deliver the most immersive brand experience and frictionless shopping environments to our customers. This means being a proactive technology-oriented company that delivers solutions as the industry's leading edge. We have a team of professionals whose dedication is focused on an exemplary online shopping experience and an exemplary customer service experience.

And lastly is our corporate social responsibility effort. We continue to focus on our goal of using 100% recycled metals in our products and reached 97% over the holiday. Our new platinum and recent tantalum offerings are fully recycled and contribute to this effort. Based on a recent analysis of our carbon footprint and the overall impact of our business on the environment, we believe we now have a baseline from which we can improve on our practices and impact.

All of these initiatives are the focus of a company that is committed to managing its spending prudently, governing its activities with integrity and has shareholders' best interest top of mind. We're pleased to have expanded the reach of Charles & Colvard's brands, made significant strides in our direct-to-consumer business and having delivered our sixth consecutive profitable quarter.

Operator, at this time, we'd like to open the lines for questions from our listening audience.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [2]

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Folks, while you're queuing for live Q&A, we've had a question come in via e-mail. Please feel free to e-mail us at ir@charlesandcolvard.com if you'd like to send in your question. So our first question relates to our digital marketing discussion.

And this was so noted, "In the past, you've spoken about the cost to acquire a customer and I think your numbers were in the $260 range last time. Given your discussion about increased competition, has this gone up? And are your costs still within reason?"

Thanks for writing in and that's a completely fair question. The last time we discussed what we call average ad spend per new customer was in 2019. And we were in the upper $200 range. At the time, we were highly focused on mid-funnel marketing, and we were not yet investing in top-of-funnel awareness activities. And those are the ones that tend to deliver a far lower return on ad spend. So over the holiday season, our average ad spend per new customer was in the upper $300 range. So we've gone up about $100 in a total cost to bring in a new customer.

This number takes into account all of the top-of-funnel awareness investments that we've been applying and all the efforts to gain those 60 million new impressions that I talked about in prepared remarks. This was offset by an increase in our average order value, which is now about $1,100. So average order value is up $100, the cost to acquire the consumer is up about $100. So for a company focused on growing awareness in the top line in a highly competitive space, I believe this is still a reasonable investment. But of course, we're constantly seeking other cost-effective means for acquiring new customers.

And there was a second question that came in, very related, almost the same question but this person also asked, "How do your numbers compare to last year?" As I mentioned, at the top of funnel, it's really about impressions. And I had mentioned, we have 60 million new impressions over the holiday season. That is a number that has more than doubled over last year for some perspective. So thank you very much for the question.

Operator, anything in the queue for us?

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Operator [3]

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We do. We have a question from Dave King from Roth Capital Partners.

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Unidentified Analyst, [4]

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This is [Gus] stepping on for Dave. So I'm trying to unpack the deceleration in online. How much of a drag was the shortened holiday season? And if you could kind of help us think about the split between average order values and volume?

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [5]

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Split between average order value and volume. Okay. So thanks for calling in, [Gus]. We do appreciate it. I do believe that the compressed holiday season impacted us, and it certainly impacted other retailers. We are hearing exactly that from our channel partners. All of us kind of did the same thing. We started our sales early. What we saw from the consumer is that they did not buy early. So they bought in a compressed time frame. It did drive up traffic. So we saw more people coming in a compressed time period. But I do believe that, that absolutely had an impact on our overall revenue achievement in our online channels.

I will also say this. We are doing an excellent job, Gus , of getting the brand out there, the overall Charles & Colvard brand. We have ultimately more omnichannel places where we are selling online. And so what we're doing now is we are sharing our traffic and we're sharing our awareness across many of our channel partners. And you could actually see some of the outcomes of that, I believe it was Slide 15 in the deck where we show some of our partners and their promotion of our brand on their site. And so what we've done is we've shared that across the others.

So the other thing that we're pleased about here is that this is a very high-margin business for us, as we're selling online. While the number is a deceleration over last year, we're pleased with the increase in traffic. We believe this is an indicator of future transactions to come. We're very early days in our top-of-funnel work to ultimately get those new eyeballs to us. But I will say this, we are still figuring out when that conversion of that net new customers could happen. As I mentioned, we believe there'll be a lag. We've not completely put our arms around what the time line for that lag is. It's something that we study each and every day.

You did ask a question about average order value, which right now is running about $1,100 compared to volume. Clint, is that something that you can answer for Gus ?

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Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [6]

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Yes, sure. So the higher-order value is probably keeping some higher ticket items being purchased. It was just a plan. So as we continue to expand our curation of goods, particularly in the fine jewelry side of it and in some of the -- offering platinum and other jewelry selections like that, it has popped up slightly our average order value.

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Unidentified Analyst, [7]

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Okay. That's helpful. And I had a couple on the sales and marketing piece. How much of the increase year-over-year was spent on digital versus other marketing? Was all that increase like earmarked for the top of the funnel? And when should we expect that to start moving towards the bottom of the funnel? And -- yes. And if you could -- you mentioned that you had kind of a time line to conversion now. Could you share how you guys are thinking about that?

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [8]

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Yes. So we actually do not know a definitive time to conversion. I think we saw early signs of that specifically from a traffic standpoint, less so from a conversion standpoint within the quarter. We really began deploying those funds in the September time frame. To answer the question about how were they deployed, it's a blend across mid and top funnel. So we want to make sure we remain spending dollars in the mid-funnel range. This is conversion specific ad spend. But we want to make sure that we're not just talking to people already predisposed to brand. And so that's where top-of-funnel remains very important for us.

If we're going to play in this highly competitive space that is lab-created, we may need to make sure that we're gaining significant eyeballs and that we're just as visible to the consumer. In order to do that, we need to be in many new places where she will discover us. And so for that reason, it was a blend from top to middle. But I will say the increase in sales and marketing was materially toward digital ad spend. It was really about helping us build the brand and to convert the consumer. But back to the very first question here, we do not yet know the full time line to convert, [Gus]. So I can tell you, it is not wholly within 1 quarter because that was the time frame that we're working in here. We believe it will take longer than 1 quarter. And as we learn and we go into the Valentine's Day season, we'll learn far more about the people that began their journey with us in our Q2 and then continued their journey with us into Q3. Hopefully, that answers your question.

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Unidentified Analyst, [9]

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Yes. And if you could kind of give us an idea, so how are -- since the last time you disclosed or discussed the ROIs for top-of-funnel versus bottom-funnel? How are those doing now?

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [10]

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So because we're doing more spend at top-of-funnel, we have more people converting in that 2x return on ad spend range. It blends with our mid-funnel. But we're pleased to say that we're still in the 4 to 5x return on ad spend blended. So we do look at the blend as the overall sort of benchmark to make sure that we still are seeing returns for the dollars that we're putting in. That's still very healthy, but leaving us enough room to continue to put those dollars at top-of-funnel in order to get more eyeballs in.

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Unidentified Analyst, [11]

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Okay. And one last question. On the international distributor, just trying to quantify it a bit more. If you can't share like the size, can you kind of clarify what brick-and-mortar would have been up excluding that distribution customer? And related to that, what has changed, I guess, in the turbulent trade environment right now that's causing this? And is that something that we should be considering/baking into the current quarter?

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [12]

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So yes. We've been talking about sort of the turbulence in the Asia Pacific market for a few quarters now. And so we have been experiencing it and it continues here. There are certainly issues in Hong Kong, especially now with the coronavirus. I do absolutely believe that, that will continue along with the ongoing unrest that we're seeing there. And so we are calculating for it and expect that could potentially have an impact going forward. Clint, how would you like to answer for [Gus] the question specifically around the dollar figures for brick-and-mortar versus distributor, which we don't typically break out?

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Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [13]

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We don't. But you do have the fact that we have -- 10% of our revenues is international. And the reason -- from a standpoint of providing that other detail, I mean we've kind of mentioned the decline in distributors, international distributors that was offset by the good news of the increase in cross-border trade. But as far as give you the actual dollars, I'll just close with that.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [14]

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Operator, do we have some other folks in the queue?

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Operator [15]

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We do. We have a question from Pete Enderlin from MAZ Partners.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [16]

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Very interesting discussion. I recently visited a nearby Helzberg store and a couple of observations. You had a very nice display, 4 feet, but I noticed it was essentially almost all engagement rings. So is that typical of your brick-and-mortar business generally?

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [17]

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That's a great question, Pete. Absolutely, it is. So Helzberg Diamonds stores in general really cater to a bridal customer. And what we do each and every quarter with this partner is we go back and we look at what's sold and what is the assortment. Is it matching what is selling? And then we adjust the curation that's in the case line to match the demand of the customer. I would say, in general, 50%, 60% of our business is bridal across the board, whether it's in a brick-and-mortar store or on our dot-com site, charlesandcolvard.com. But as I've talked about some time here on this call, we want to make sure that we don't have just one chance to sell for a product, right? Hopefully, you only get married once. If you're me, you got married twice. That's still only twice that we get a chance to sell you a product. And so what we're doing is we're expanding the assortments. And if you go back to that Helzberg store, what you'll find is some stud earrings, you'll find some stacker rings, you'll find some anniversary bands. And what this starts to do, Pete, is it builds out a lifetime value that we can create with this customer. Not only do we want her as a bridal consumer, but we want to make sure that for every commemorative moment, she or her husband is coming back for anniversary gifts, birthday gifts, push presents for having their first child and so on.

And so the assortment is very heavy bridal because that's where we sort of meet that customer in those Helzberg stores, but the rest of the assortment is balanced and really very closely aligned with the breakout in the revenue that we generate there. Is there a follow-on question there, Pete?

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [18]

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Yes. Well, right next to that, there was about double the shelf space for lab-grown diamonds, and the store manager said that over the Christmas -- this was after Christmas. But he said during the Christmas season, his perception was that lab-grown had more momentum than moissanite. Now the question is, is that a sort of a general phenomenon? You positioned lab-grown as sort of an umbrella over the whole lab-grown gem category. But do you think that had more momentum than you guys did? Or were they as affected as you might have been by some of these factors we just talked about?

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [19]

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Right. So I think let's start with the umbrella term here, Pete. Absolutely, lab-created is a movement. We have a consumer today, especially the millennial consumer, that is not interested in taking things out of the ground. And so there's very much a groundswell in lab-created in general. And as I reflected on our -- how we were competing for eyeballs over the holiday, we found it far more busy and buzzy. There were other people bidding on even the moissanite term in order to bring eyeballs over to their lab-created products, many of them being lab-created diamonds. So it's a movement, which is great news for us. We think it's a, "rising tide lifts all boats". Everyone has some benefit or advantage to this movement. That said lab-created diamond and the industry is doing a terrific job of doing education out to the market and creating business and sort of interest around lab-created diamond. So absolutely, it's competing for eyeballs with us. It is right alongside us in Helzberg Diamonds case lines. And what we found they've done very craftily is if you walk the full case line, you'll find their mined diamonds, their lab-created diamonds and their moissanite. And so for this Helzberg customer, she has 3 entire choices that she can make as she's in those stores. And that allows Helzberg to not walk the customer, meaning she's going to buy something because all of the choices are under one roof. It's an exciting and interesting space to be in. We listen really carefully to the consumer and make sure we're bringing together the product mix that she wants, and that's actually what's reflected in that case line that we have there.

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Peter Enderlin, MAZ Capital Advisors, LLC - Portfolio Manager [20]

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Okay. And then I have a follow-up on inventories. It looks like the legacy inventory was about [go] down a little bit. I would have thought that it would go down faster?

And then the sort of related question is, Clint, what can you do to reduce the inventory? Because they still seem too high to me. And then related to that is another question, which is, is your product line too broad? I mean do you have -- if you're doing 60% in engagement rings, why do you need so many other different things? And wouldn't it be easier to reduce your inventories if you didn't have so many SKU? That's a lot, all wrapped into one follow-up question, I know.

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Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [21]

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Right. Thanks, Pete. That's fine. From a standpoint of the inventory, I feel like we have made -- you got to realize that also we've made some significant investments in our -- in what you saw, the consignment inventory out of Helzberg. If you look at where we're at 18 months ago of about $600,000. Right now, we're back to about $2.2 million related to consignment inventory with them. And we also have loose gemstones that we introduced as well. So our total consignment inventory for both of our retail partners is about $2.8 million. We also plan to have some increase in our in-stock. We made a strategic decision to continue to provide additional inventory for our in-stock orders because the requirement of the need that our transactional website as well as our drop-ship partners in marketplaces, need that -- we have to immediately ship it within a day or 2. So we want to be able to get to close those sales and those customers during the holiday season.

Then your question about reduction of legacy inventory. We did reduce some. It kind of depends on the timing of the quarter, we're kind of focused on the holiday season more on the Forever One product in our Moissanite by Charles & Colvard product, so that we could focus on that. So we will continue to -- if we look at it every day from a standpoint of trying to understand, making sure we got the right inventory. And then -- and that may include -- if we feel good on the legacy inventory that now it's about 18% or $6.4 million compared to December 31, 2017, it was probably in that 30% range of our total inventory.

And then on the product line, as far as being too -- your question, is it too broad? But we continue to analyze the inventory, what sells. If something is not selling, we continue to kind of discontinue those SKUs. So we feel, like Suzanne said in her prepared remarks, we continue to expand our Signature Collection, which is our premier line of jewelry on Forever One. We then introduced platinum. So some of those are made to order, but we continue to kind of carry some of those good in-stocks that are the best sellers.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [22]

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Steve, thank you for dialing in for your question. We had another e-mail question come in. How do your customers tell their friends about the brand and product?

I love this question. Thank you. We really appreciate this millennial consumer because she absolutely knows how to share. She passed kindergarten and she shared everything, and she does so primarily on social media. So what we love about our consumers is they become very much brand ambassadors. In fact, we don't mind selling -- spending our digital ad dollars on her because she will very vocally turn around and share with her network of friends her satisfaction with the product, the quality of the product and why she is choosing this lab-created gemstone moissanite over any other choices that she has in the industry. Those voices and that customer content, we believe, weigh far more heavily than Charles & Colvard telling its own story. We love it when the consumer is validating us.

So social media is a really big place where she does that. The other place where this message is sometimes proliferated is through influencer marketing. So if we are engaging an influencer, and that's just paying someone to tell our story. But truly finding influencers that love what we're doing in an ethically sourced product and love what we're doing because we are not a mine gemstone. We have that alignment and then we can work with that influencer to tell their audience what it is we're doing. Very recently, we did a promotion through an organization called BabbleBoxx, and they brought us into, I think, it's approximately 20 different influencers. Each of these influencers can be what's called micro-influencers. They may have 15,000, 20,000 people in their network. But when you have 20 of them and you add up, then it becomes a meaningful thing. And so we work through organizations like BabbleBoxx that do the heavy lifting of bringing the right influencers to us. And then sometimes, there's just the organic one that happens. I think last time we were in our earnings call, we talked about JWoww, who is Jenni Farley, one of the housewives from New Jersey. She had reached out a few quarters ago. We worked together with her on a beautiful hoop earring. She loved them so much, she came back and we did further work with her. She has a network of over 7 million followers. So this type of proliferation of message is really well handled through influencer marketing and social media. So you will see us continuing certainly to do more of that and leaning in on customers who are happy to share their story.

Thank you for that. Operator, do we have any other calls in the queue?

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Operator [23]

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We do have an additional question from Mike Schellinger from MicroCapClub.

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Mike Schellinger, MicroCapClub LLC - Partner [24]

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Yes. I have a question related to the drop in loose jewelry sales, which were mostly attributed to Asia. I'm kind of interested in more color. I guess, was there a change in tariffs or was it related to the tariff -- just related to the tariff negotiation? And I guess sort of furthermore, I don't think there's -- my understanding is there's not a lot of sources of moissanite. So I'm kind of -- it isn't like -- I don't think it's like there's a lot of sources they could have gone through in China, but maybe I'm wrong.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [25]

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Clint, do you want me to take that or do you have it? Okay. I'll go. First of all, Mike, thank you for dialing in and thank you for the question. We appreciate it. We went off-patent here at Charles & Colvard. We had at one time been the global resource for taking silicon carbide, shaping it into gemstones and bringing it to market. We had a worldwide patent for that. We went off-patent about 3 years ago here in the U.S., 2 years ago in Greater China. Since that time, we absolutely have been seeing Chinese moissanite coming to market. And there's a few other sources around the globe that are trickling some in. So we're not the only source anymore. We are still -- we consider ourselves -- we believe we're the premium source. Certainly, as we buy other materials off the market, which our supplier contract allows us to do, we're viewing and testing and evaluating what is coming to market.

To date, we've not seen very high-quality Forever One equivalent products coming to market, but what is coming to market, Mike, is lower quality product at a lower price. So if you search from moissanite, and then you find it on the Internet, whether it's on Amazon, eBay or otherwise, you'll find a variety of choices. Some is from us, some is from our resellers, and there's absolutely a collection out there that is from other third parties coming out of China. That said, the question about why is our loose gem numbers down in general, it is because loose gems are sold primarily through distributors. Those are third parties in the jewelry space that then sell those goods into independent jewelers. And the independent jewelers will take the gemstone, put it into a finished jewelry piece and sell it to a consumer. The overall distributor business is down and the area of the world that is most down is in Greater Asia Pacific. We reported it last quarter. This is the second quarter in a row where we're seeing those numbers down. And so that's driving down the sales of loose gems in general. It's simply an outcome of our overall traditional channels experiencing some headwinds.

All right. I think that we have another question here. Let me go to -- let me see here. This lister asked, "What type of joint advertising and promotional agreements do you have with your partners?"

This is a great question. And if you go to -- back to Slide 13 in the accompanying deck, you'll see some examples of that. In these specific examples, Charles & Colvard is featured prominently on our partner's website during the holiday season. And these are the types of opportunities that are typically co-funded and we put together with co-op dollars. So every one of our partners will sort of set aside a marketing investment, knowing that we will be afforded opportunities to have great placement on website or to co-promote into our partner's network. And that's very much a network that might be new to us. You see example of Macy's that you have here. Macy's is just a little over a year old with us. It's a customer that is still very new to us. We love the opportunity to get in front of her. So we have these dollars set aside, these co-op dollars per account so that when these opportunities arise, we can take advantage of them.

Another example we just talked about, social media. There are social media activities we can do, e-mail activities we can do, even direct mail campaigns. Direct mail is still a thing. We have certain partners that will create a brochure at holiday time. We get the chance to be featured in that brochure, it goes in the mail. We don't get to see that mailing list, but our partner then mails us out and we create an exposure opportunity. And that's when the partner will feature us, and we get, again, introduced to the network. But these are not always monetary investments. What we can do at times is co-marketing with our partners. Very often, we'll have a partner that will come forward. We had an example last year where we did some trunk shows. When we were promoting those trunk shows, we actually went out to our social media channel in that region to promote that we would be in a store. Our partner promoted into their existing customer base that we would be in the store. Collectively, we both marketed to an end that brought people into the trunk show in order to create traffic. So there's lots and lots of ways that we're leveraging our partner networks in order to create better exposure for Charles & Colvard.

Let's see, another question here. I think we have time for a few more. What have you learned with the introduction of lab-created ruby and sapphire? This is a great question. And has it been successful?

Two quarters ago, we talked a little bit about beginning to introduce color into a very select collection of our channel partners. We put this in our drop-ship program. So it goes to very specific places. What we have found is that there's absolutely a customer for lab-created rubies and sapphires. These gemstones are exactly the same chemically as the ones that come out of the ground. They just happen to be made in a laboratory. So they are synthesized or called a synthetic. Much like moissanite is a very rare mineral. There's not enough of it in the ground. So we create it in a laboratory and our stone is a synthetic. We began to sell-through this product in our online drop-ship channels over the holiday to a level of success where we are actually ready to expand that program. We will expand not only the styles because we went out in a very careful test. She said, yes, with the products sold, and we are now introducing that into additional channel partners as well. So expanded products and expanded channels. This to us is just yet another validation that lab-created is now a very accepted thing and that we're certainly on the right track to introduce a breadth of products to our customers.

Do we have time for one more? Operator, do we have anybody else in the queue?

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Operator [26]

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Ma'am, at this time, I'm showing no questions through the telephone lines.

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Suzanne T. Miglucci, Charles & Colvard, Ltd. - CEO, President & Director [27]

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Okay. Well, then let's go to final remarks here. We want to thank everyone for being with us this afternoon. We greatly appreciate your interest and your investment in Charles & Colvard. And we look forward to updating you on our progress next quarter. Thank you, and have a good afternoon.

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Operator [28]

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Ladies and gentlemen, that does conclude today's conference call. We thank you for joining today's presentation. You may now disconnect your lines.