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Edited Transcript of CTHR.OQ earnings conference call or presentation 5-Nov-20 9:30pm GMT

·23 min read

Q1 2021 Charles & Colvard Ltd Earnings Call MOORESVILLE Nov 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Charles & Colvard Ltd earnings conference call or presentation Thursday, November 5, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Clint J. Pete Charles & Colvard, Ltd. - CFO & Treasurer * Don O'Connell Charles & Colvard, Ltd. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Matthew Butler Koranda ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Charles & Colvard First Quarter Fiscal Year 2021 earnings call. (Operator Instructions) 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 things, the company's business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date that 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. Please note, this event is being recorded. I would now like to turn the conference over to Don O'Connell, President and Chief Executive Officer. Please go ahead. -------------------------------------------------------------------------------- Don O'Connell, Charles & Colvard, Ltd. - President, CEO & Director [2] -------------------------------------------------------------------------------- Welcome, everyone. Good afternoon. Today, we're going to report Charles and Colvard's fiscal 2021 first quarter results. This was my first full quarter as CEO, and I'm extremely proud of the work my team has done to effectively transform the organization. This enabled us to deliver $7.9 million in revenue, maintain excellent gross margins of 47% and achieve a net income of $874,000. This profit represented a 322% increase over Q1 2020, with an EPS of $0.03 per diluted share or a 327% increase, despite the continuing global economic uncertainties. Now I'll turn the call over to Clint Pete, our CFO, to unwrap the numbers in more detail. Clint? -------------------------------------------------------------------------------- Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [3] -------------------------------------------------------------------------------- Thank you, Don. Today, I'll provide a summary of key financials for our Q1 2021. Additional detail can be found in our earnings press release that we issued this afternoon and our Form 10-Q, which we expect to file tomorrow. Please note that all percentage comparisons are to the year ago first quarter, unless otherwise specified. We will start with revenue. In total, net sales for Q1 2021 totaled $7.9 million versus $7.6 million, or an increase of 4%. In our online channels segment, which includes charlesandcolvard.com, marketplaces, drop ship retail and other pure-play outlets, net sales for the quarter totaled $4.5 million, or an increase of 21%, representing 56% of total net sales. Net sales from our transactional website, charlesandcolvard.com, increased 24%. In the company's traditional segment, which consists of wholesale and brick-and-mortar customers, net sales for the quarter were $3.5 million, or a decrease of 11%, representing 44% of total net sales. Finished jewelry net sales increased 12% for the quarter. This was primarily due to increases from our online direct-to-consumer channels and our brick-and-mortar retail customers reopening their doors. Loose jewel net sales decreased 4% for the quarter mainly due to a decline in demand from our international distributors during the entire quarter related to COVID-19. International net sales decreased 49%, as we continue to have limited orders from agent distributors, combined with flat cross-border sales on our transactional website compared to the year ago quarter. Moving on, we maintained a strong gross margin of 47% compared to the 49% in the year ago quarter. For Q1 2021, total operating expenses decreased 20%, representing 36% of the total net sales, compared to 47% in the year ago quarter. Sales and marketing expenses decreased 26% to $1.7 million for the quarter primarily related to the shift in our overall digital marketing strategy, reduced partner marketing requirements and from a reduction in force enacted in Q4 2020. G&A expenses decreased 10% to $1.2 million for the quarter primarily related to the reduction in spend for professional services, to the cost cutting actions from our reduction in force initiated in Q4 2020. Next, we reported a net income for Q1 2020 of $874,000 or $0.03 per diluted share compared with net income of approximately $207,000 or $0.01 per diluted share in the year ago period. Now let's move on to a snapshot of our balance sheet. Our liquidity remained strong, as we ended the quarter with $13.9 million of total cash compared with $14.6 million at our last fiscal year ended June 30, 2020. We generated net income for Q1 2021 totaling $874,000. As we prepare for the holiday season, our cash used in continuing operations decreased by $640,000 for the quarter, which is roughly half of the $1.2 million of cash used in the continuing operations in the year ago quarter. In terms of other sources of liquidity, we currently have access to a $5 million asset-based credit facility with White Oak Commercial Finance. As of September 30, 2020, we have not accessed funds through this credit facility. Inventory as of September 30, 2020, totaled $29.7 million compared to $30.6 million as of June 30, 2020. Loose jewels inventory was $18.4 million compared to $20.8 million as of June 30, 2020. Finished jewelry inventory was $11.2 million compared to $9.7 million as of June 30, 2020, reflecting our buildup of inventory in preparation for the upcoming holiday season. In summary, we remain confident in our financial strength and our ability to navigate the current environment. With that, I'll turn the call back over to Don. -------------------------------------------------------------------------------- Don O'Connell, Charles & Colvard, Ltd. - President, CEO & Director [4] -------------------------------------------------------------------------------- Thanks, Clint. Last quarter, we spoke about the actions taken to stabilize the business and increase our shareholder value, and those efforts are what helped us deliver the most profitable quarter for the same 3-month period in over a decade. Our revenue growth was driven by the continued upward momentum of our online channels, as we scaled our digital presence to meet the consumer where they're currently shopping. Our online channel net sales increased 21% over the same quarter last year, with Charles & Colvard representing over 60% of the online sales this quarter. Our traditional segment sales were down 11% from a year ago quarter, as the international distributors were slow to rebound, but we able to deliver a 142% increase over Q4 2020 as we began to get some of our brick-and-mortar stores slowly reopened. We were able to deliver these results by executing on key initiatives that I outlined for you in the last earnings call. Here's what we did. We focused on elevating the Forever One moissanite brand through awareness campaigns on social media to further educate that consumer and the jewelry industry as a whole on the quality and value of our Forever One moissanite. We expanded our product line with the launch of Caydia lab grown diamond, a specially curated assortment of lab diamonds set in incredibly fine jewelry. With this addition, we believe we are now able to offer our customers a choice, a choice in premium created gems to capture greater market share and be a part of the greater lab grown $5.2 billion diamond movement. This product line expansion is a natural progression for our business because we can utilize our existing resources, components and infrastructure to enable us to reach a broader variety of consumers. We believe this propels us further on our journey to become that globally recognized fine jewelry company. Along with this product launch, we rolled out an enhanced website experience that provides more functionality, eliminates the complexity and delivers a new look and feel for our brand. We unveiled new custom packaging, in line for that new look and feel, which elevates the brand and provides a luxurious unboxing experience for our consumers. We believe that this refresh of the brand is more appealing to the expanded audience that we now reach. We also grew our omnichannel retail footprint with the launch of our Moissanite by Charles & Colvard fine jewelry in 50 Macy's retail stores, including flagships Herald Square in New York City, Union Square in San Francisco and State Street in Chicago. This retail expansion was based on the continued success of our Macy's online program. With all that said, we feel we're well positioned to capitalize on the holiday season. Our Q1 results and our ability to successfully execute on several key initiatives are good indicators that our strategies are bearing fruit. So what's next? We plan to continue on this path by remaining agile across all the functional areas of the business and executing further on those key initiatives for 2021, which are: further expanding on our digital presence; launching new products and designs; increasing the customer engagement through virtual interactions, all the while focusing on our disciplined growth. We're encouraged by our trajectory given the current environment, and we will continue to strive to increase our brand equity, all the while creating additional shareholder value. With that said, I'd like to turn it back over to the operator to open the lines for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from Matt Koranda with ROTH Capital. -------------------------------------------------------------------------------- Matthew Butler Koranda, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- Just wanted to start off with holiday and how we're thinking about the period as we head into sort of November, December and a key time frame here. Wanted to see how you're planning for sort of product mix, how you feel about inventory levels to meet demands and also maybe if you could discuss fulfillment and shipping capacity, and if we feel like we have enough booked to get product out to customers on time. -------------------------------------------------------------------------------- Don O'Connell, Charles & Colvard, Ltd. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. So great question, Matt. So -- and we appreciate that. Let me just go as far as the fulfillment side of the equation. We have a really robust distribution and fulfillment center. We're totally prepped and poised to deliver on the holiday season. We believe we're positioned well, we believe we're staffed right. And we believe that, that is a real strength that we have within the organization, built up over the last few years, and it hasn't changed. Also as far as the inventory levels, so we prepared in Q1 within this quarter for our holidays and inventory levels, so we primarily are in a great position to be able to kind of deliver on those expectations for holiday. As most folks within e-commerce space are aware, that inventory must be in stock, and it must be in all the feeds related to that -- to those customers in those channels. So the more we have in the feeds, the greater exposure we get, and we believe that we've done a great job of kind of positioning our forecasting. I've got a tremendous sales and operations team and forecasting team that did a great job in kind of letting the analytics do the job, making data-driven decisions on what's working and what effectively worked in the prior time frame. So we believe we're poised and we're positioned well from an inventory perspective too as well. As it relates to the product mix, let's talk a little bit about that. As it relates to our moat, or Forever One moissanite product, we believe that we are certainly in a great position for that. We've done a great job in building that up, building the inventory up. We also have the positions with our retail partners and our brick-and-mortar partners in consignment with those goods in advance, so those consignment levels are out there within that community, and those channels will be fully supportive for the holiday season, so we can benefit on that. So we feel we're good there. As it relates to our lab grown diamond positioning, that is a little bit different than our normal moissanite positioning, where the moissanite, we -- we were a little bit more closer to vertically integrated, where we actually cut and faceted gemstones. It's a little bit more time to market. We have to put a little bit more gems into whip and jewelry into whip. As it relates to the diamonds, all we do is use those components. And then when a lab grown diamond order comes in, we basically just order when that demand is there. It doesn't require additional inventory for us because we have strategic alliances and partnerships with some great people that I've built over the last 3 decades to where it's not capital-intensive to be in that space. And I don't -- and just to kind of go a little bit further on that, that's one of the delineations between us and other lab grown diamond companies that are coming to market. They have all that capitalization, capital expenses to be able to drive traffic. We've already created that destination for that consumer to buy the lab grown. And over the time, we've built a destination in our Charles & Colvard brand. So we believe that we're really in a good place there, and our really path to market is relatively easy for us to go into that space. So hope I answered those questions. -------------------------------------------------------------------------------- Matthew Butler Koranda, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4] -------------------------------------------------------------------------------- Yes, very detailed. And then my follow-up would be on Caydia and just wondering if you might be able to share a few preliminary metrics to help us understand the traction you're seeing there. But perhaps, maybe you could call out either revenue contribution on the quarter or expectations for the next several quarters. And then also just how are you kind of -- can you quantify or characterize consumer interest and what you're seeing on that front as it's been rolled out, maybe speak to AOVs or other metrics that might be helpful to give us a sense for how that's tracking? -------------------------------------------------------------------------------- Don O'Connell, Charles & Colvard, Ltd. - President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. So in the quarter, we launched about 15 days prior to the end of the quarter, so we didn't have lot of information that we can share with you right now. But I can kind of tell you that the progression has been very, very nice within those particular couple of weeks where we had immediate response. We were able to roll out the new web experience and gain some really nice traction. As it relates to the Caydia side, let me just talk a little bit about the AOV. What we saw and what we've seen early on in the indicators are that there is a tremendous desire for fashion and the fashion elements within the lab grown diamond space. So with that being said, perhaps, the smaller [meli] stones, what we call meli , which is the lower, let's say, 3.5 millimeter gemstones and below, maybe moissanite and lab grown diamonds are very close in proximity as far as price comparisons. So we haven't been bringing forward a tremendous amount of fashion. We primarily stay with the moissanite in the larger 2 carats and up, and more so in the bridal, in the fashion and engagement sector. What this does for us now is it opens up a tremendous avenue for us to go into more into the fashion space, even the lighter-weight anniversary bands, where that consumer is predisposed to buy the diamonds or the lab grown diamonds, and she's gravitating to that. As far as the engagement sector and the bridal sector, we're gaining traction in that, too, as well. And again, that's a much higher AOV and the average ticket value on those items or AOV is right around $3,300 plus on that side. So it doesn't take very many of those to go ahead and kind of drive the numbers. So where -- I have to be reluctant about kind of giving any forward guidance. We don't do that, but we believe that we're positioned and poised well to capitalize on this new expansion. One of the other things that it's done for us that we're seeing immediately, and the effect that it has, is it's driving more traffic. It's driving more awareness to our brand. It's driving more awareness to us being the destination, putting us in the conversation, okay, where that consumer now comes to us, they learn a little bit more, and they've never really kind of experienced Forever One moissanite in the past, and now they're getting more educated. And they're able to see the price comparison between the lab grown diamond, or Caydia lab grown diamonds, as opposed to our Forever One moissanite, and they're gravitating also into lifting our moissanite, too, as well. And what we're seeing early on indication in Q1 was that it actually is lifting our AOV on the moissanite side, too, as well. We anticipate that we'll maintain strong AOVs, and we'll get a slight lift to that a little bit as well. -------------------------------------------------------------------------------- Matthew Butler Koranda, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6] -------------------------------------------------------------------------------- Very interesting and helpful commentary. Just one other thing, maybe if I can follow-up on the AOV side of things. Could you give us -- could you quantify for us AOVs in the moissanite side of the business and just maybe how that's tracked relative to last quarter or the last couple of quarters would be very helpful? -------------------------------------------------------------------------------- Don O'Connell, Charles & Colvard, Ltd. - President, CEO & Director [7] -------------------------------------------------------------------------------- Yes, I'm going to go ahead and let Clint go ahead and talk to that a little bit. -------------------------------------------------------------------------------- Clint J. Pete, Charles & Colvard, Ltd. - CFO & Treasurer [8] -------------------------------------------------------------------------------- Yes. Thank you, Don. Related to the AOV of moissanite, probably this quarter, we averaged about $1,100, and that's been pretty consistent. I think one -- it's hovered between $1,000, got up to $12 -- got it to $1,200 in one quarter. So we've kind of seen that kind of level that area. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- (Operator Instructions) -------------------------------------------------------------------------------- Don O'Connell, Charles & Colvard, Ltd. - President, CEO & Director [10] -------------------------------------------------------------------------------- So I have an e-mail question that I'm going to try to elaborate on. So it's a good question and I appreciate it. So one of our shareholders wants to know if we believe that the lab grown diamond launch of Caydia will cannibalize the moissanite business. It's a great question. We pontificated before launching Caydia lab grown diamonds, we have a 25-year history in the moissanite business. And there was a lot of back and forth related to the subject matter. But the reality of it is, in today's world, in our quest to kind of deliver a solution for all consumers that are looking for responsible, ethically sourced jewelry, obviously, the recycled metals are recycled metals. We've kind of mentioned that over the course of time that the metals are the metals. It's 14 carats, it's 18 carats, it's platinum, so they all carry the same intrinsic value, whether it's set, whether encrusted with a moissanite or encrusted with a diamond, it has that same intrinsic value, as I said. So that's one aspect of it. And I alluded to that in the prior question, we are seeing the lift as it relates to our moissanite business. We're also seeing an incredible amount of visibility and awareness and traction to Charles & Colvard the brand. If you've kind of been following Charles & Colvard for a little bit here, you've kind of seen our PR and communication efforts also starting to perform well. We're getting a lot of coverage between Forbes Magazine, between Jewelers Circular Keystone, National Jeweler magazine, Brides.com, et cetera, et cetera. Maybe in the past, perhaps, moissanite didn't carry the weight or perhaps, maybe being around 25 years, some investors or shareholders, they had fatigue with the brand or so forth. I can't come up with those answers, but we're certainly excited about what we're seeing here just by announcing the Caydia lab grown diamonds. And proof of that is, obviously, we're driving traffic to the website. We're driving traffic to all channels. What people don't understand, too, as well is that we have a traditional segment of the business that's also real important and real critical, and that's comprised of brick and mortar and our distribution partners. So I know we had some -- a downward trend only on the international piece, but that's given the circumstances. And we focus more on the domestic push in the domestic market, and we've been able to fill that gap through the quarter and drive the revenue and beat last year's revenue over the same period of time. And we're very pleased with that. Now mind you, all that was done, and we've only had 15 days within the quarter, introducing this new product line. So now we're going into our second quarter, which is our holiday season, totally prepared and ready with this new product line, and we believe it's only accretive and additive to the business. And furthermore, it increases our row as it allows us additional visibility. It brings awareness to the brand and exposure to the brand. It opens up a market opportunity that's over $5.2 billion, whereas the moissanite opportunity maybe a little bit slightly different than that. There's an argument over whether it's $30 million to $100 million, but we deem it to be far more than where we are today and will continue to grow further. We believe that having both options for that consumer allows us to kind of -- that -- allows us to bring that choice to that consumer. There's a lot of people out there that are predisposed to the diamond market, and they want to be in the kind of a diamond engagement ring, and that's what they've been taught over the years. And now we have that offering for them, whereas before, we didn't. So again, it's all about us redefining real. You'll see our tagline coming forward, Charles & Colvard redefining real, the idea of choice, fine jewelry redefined. What does that mean? That we're changing the perception that a naturally mined diamond is real or it's something that you have to have. In today's society, we're seeing the consumer gravitate to lab grown. We're also seeing tremendous amount of investments in the lab grown diamond space. And the reality of it is we're allowing these folks to do all the heavy lifting. They're spending millions and millions of dollars in capital to be able to get into this space. We're already here. We already have the destination. So -- and again, with our Caydia lab grown diamond product, we're going premium. So it will not cannibalize the business because we did a really good job merchandising and delineating between the 2 products. So with that being said, let me kind of point that out to you and kind of explain that a little bit further. So as it relates to Caydia lab grown diamond product brand, we have 2-carat diamonds and up. We've made it very, very specific to a certain grade and quality, removing the complexity to the consumer, and that quality is in E, F and G color. And we also bring very slightly imperfect or VS1 diamonds in that category. Our moissanite brand are DEF and GHI. Our DEF and GHI in our Forever One premium brand is a higher grade equivalent and has more fire and brilliance than a diamond, and it has a greater value of 2 carats and up. So we're concentrating, and we're seeing that consumer understand that value in moissanite. But again, we're also seeing this consumer and understanding the value and the fashion on the lab grown diamonds in such a short period of time. How much that's going to be to the business? We know that it's going to be accretive. We know it's going to be additive. We just can't speculate at this point in time or convey how that's going to be. But we certainly believe that this is the growth trajectory that we're looking for, and it's going to be additive, while building awareness at the same time. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- There are no further questions. I would like to turn the conference back over to Mr. O'Connell for any closing remarks. -------------------------------------------------------------------------------- Don O'Connell, Charles & Colvard, Ltd. - President, CEO & Director [12] -------------------------------------------------------------------------------- Okay. Great. Thank you. So we appreciate the time today and your continued interest in Charles & Colvard, and we look forward to what the future brings. On behalf of the company, we hope you and your family have a healthy and happy holiday season, and we look forward to speaking again. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- The conference call will be archived for review on the company's website at http// www.charlesandcolvard.com/investor-relations/events. To access the digital replay of this conference, you may call 1 (877) 344-7529 or 1 (412) 317-0088 beginning approximately one hour from now. You will be prompted to enter a conference number, which will be 10148971. Please record your name and company when joining. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.