Charles & Colvard, Ltd. (CTHR), a pioneer in lab-grown gemstones, reported a 21% decrease in revenue for the third quarter of fiscal year 2024 compared to the same period in the previous year. The company's net sales for Q3 2024 were $5.3 million, down from the previous year, with a net loss of $3.6 million, which shows an improvement from the $8.4 million loss in Q3 2023. Despite the revenue decline and a lower gross margin of 23%, down from 32% the previous year, Charles & Colvard remains positive about its future growth prospects. The company is focusing on direct-to-consumer sales, launching new brands and campaigns, and optimizing its inventory management strategies.
Key Takeaways
- Charles & Colvard's Q3 FY 2024 revenue fell by 21% year-over-year, with net sales totaling $5.3 million.
- The company reported a gross profit of $1.2 million and a net loss of $3.6 million, marking an improvement from the previous year's $8.4 million net loss.
- Gross margin decreased to 23% due to rising commodity prices and inventory liquidation.
- Operating expenses rose by 13%, mainly driven by increased sales and marketing investment.
- Lab-grown diamond sales increased by 16% compared to the previous year.
- The company launched For Everbright, a new gem brand, and a wholesale portal, charlesandcolvarddirect.com.
- Charles & Colvard ended the quarter with $9.2 million in cash and a $5 million cash secured credit facility.
Company Outlook
- The company is optimistic about its long-term value and positioning in the market.
- Efforts to increase shareholder value and brand equity are ongoing, with a focus on direct-to-consumer strategy.
- Investments in people resources, web platform, and marketing assets are expected to align better with consumer needs.
Bearish Highlights
- The decline in revenue is attributed to weak consumer confidence and pricing pressures on lab-grown diamonds.
- Gross margin erosion is a result of rising commodity prices and the need to liquidate inventory.
Bullish Highlights
- Sequential improvements in revenue decline indicate recovery potential.
- The company's strategic shift towards direct-to-consumer sales and the launch of new marketing initiatives could drive future growth.
- Success in Valentine's Day sales and the implementation of user-generated content in marketing show positive consumer engagement.
Misses
- The company experienced a significant decrease in gross profit to $1.2 million from $2.1 million in the year-ago quarter.
- Inventory write-downs in Q4 FY 2023 contributed to a year-over-year inventory decrease of $8 million.
Q&A Highlights
- No new partnerships have been announced, but the company is open to opportunities.
- The company's ability to raise additional capital through the sale of finished jewelry and loose gems was discussed.
- Management expressed gratitude for shareholder support and is committed to providing future updates on progress and initiatives.
Charles & Colvard's strategy to navigate the current market challenges includes refining its product assortment, reviewing vendor agreements, and managing advertising spend. The company's launch of For Everbright aims to differentiate its premium moissanite gemstones and capture consumer interest. With investments in its web platform and ethical consumerism campaigns, Charles & Colvard is working to enhance its digital presence and reach a broader audience. The beta testing of the MADE shopping broadcast and streaming initiatives is part of this digital expansion.
The company's financial health is supported by $9.2 million in cash and a $5 million cash secured credit facility. The draw of $500,000 from the credit facility was a strategic move to maintain liquidity. Inventory levels have been carefully managed, with a decrease to $25.3 million from $26.8 million in June 2023, reflecting the company's focus on prudent inventory management.
As Charles & Colvard continues to adapt to the evolving gemstone market, it remains committed to driving revenue, reducing expenses, and achieving sustainable growth for increased shareholder value. The company's initiatives, including Charles & Colvard Direct, are designed to leverage the direct-to-consumer trend and enhance cash flow through the sale of loose jewels and gems. The CEO's acknowledgment of shareholder support underlines the company's dedication to transparency and stakeholder communication.
InvestingPro Insights
In the midst of navigating market fluctuations, Charles & Colvard (CTHR) has shown resilience with a strategy focused on direct-to-consumer sales and brand differentiation. InvestingPro Tips reveal that analysts are expecting sales growth in the current year, which aligns with the company's optimism about its growth prospects. Despite recent challenges, Charles & Colvard holds more cash than debt, providing a buffer against market uncertainties and enabling continued investment in strategic initiatives.
InvestingPro Data further illustrates the company's position with a market capitalization of $9.27 million and a Price / Book multiple of 0.31, indicating that the company's stock may be undervalued relative to its assets. The Revenue Growth metric, however, reflects a decline of 31.88% over the last twelve months as of Q2 2024, underscoring the revenue challenges mentioned in the article.
For investors considering Charles & Colvard as a potential opportunity, it's important to note that the company is trading near its 52-week low, which could be a point of entry for those who believe in the company's long-term strategy and market positioning. Additionally, with analysts not anticipating profitability this year and a valuation implying a poor free cash flow yield, investors should weigh these considerations carefully.
For those looking to delve deeper into Charles & Colvard's financial health and future prospects, InvestingPro offers additional insights and metrics. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, and explore the 11 additional InvestingPro Tips available at https://www.investing.com/pro/CTHR for a comprehensive analysis.
Full transcript - Charles & Colvard (CTHR) Q3 2024:
Operator: Good day, and welcome to the Charles & Colvard Third Quarter Fiscal Year 2024 Earnings Call and Webcast. All participants will be in a listen only mode. [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 other things, the company's business strategy and growth. Expressions that identify forward-looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future developments and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements in light of these risks and uncertainties. There can be no further assurance that these forward-looking information will prove to be accurate. Accompanying today's call is a supporting PowerPoint slide deck, which is available in the Investor Relations section of the company's website at ir.charlesandcolvard.com/events. The company will be hosting a question-and-answer session at the conclusion of the prepared remarks. Should you have any questions if 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 Mr. Don O’Connell, President and Chief Executive Officer. Please go ahead.
Don O'Connell: Good afternoon, everyone and welcome to our third quarter fiscal 2024 financial results conference call. Fashion industry leaders predicted uncertainty for 2024 amid subdued economic growth, weak consumer confidence and persistent inflation. According to a recent McKenzie report and Charles & Colvard continued to experience these challenges during Q3. During the global luxury group buying fashion houses such as Gucci, Alexander, McQueen and others, recently reported downward pressures on their top line citing lingering luxury buying slowdowns and sluggish market conditions. So these trends have impacted us for the last several quarters. We remain optimistic about the Company's long-term value, as we've seen revenue declines shrink across sequential quarters. Overall revenue for Q3 was $5.3 million. And while down 21% compared to Q3 FY 2023, that figure is a 12 basis points improvement over the Q1 FY 2024 decline and a 3 basis points improvement over the Q2 FY 2024 decline. We believe that we continue to close the gap and make progress towards profitability. Margin erosion however, continued during the quarter, due we believe to the significant rise in gold pricing, greater promotional pricing pressure amid a deeply discounted retail environment, driving an increased sale cadence and increased demand for Arcadia lab-grown diamond as a percentage of sales on charlesandcolvard.com, elevated shipping costs, a disposition strategy to liquidate some obsolescence inventory and other inflationary impacts. We are working to mitigate additional margin creep and stabilize product margins by reviewing our vendor agreements and relationships and negotiating when possible to reduce cost of goods sold, evaluating our overall product assortment and mindfully managing our overall advertising and marketing spend. While the current environment, we're encouraged by the opportunities that conscious consumerism and ethical manufacturing awareness create for Charles & Colvard and our forward momentum on our strategic initiatives. Forever One, the company's Cornerstone and Pinnacle lab-grown voice and a gemstone product brand saw revenues increased 5% compared to Q3 FY 2023 while KDL lab-grown diamond sales and Charles & Colvard were up 16% compared to the year ago quarter. We believe, we're well positioned to capitalize on increased consumer awareness of lab-grown gems, particularly moissanite and lab-grown diamonds, as more brands and retailers continue to embrace the lab-grown movement. Prada (OTC:PRDSY) joined LVMH brands Fred and TAG Heuer, as one of the first high jewelry houses to adopt lab-grown gems launching a collection featuring lab-grown diamonds and recycled gold last year. We feel that the wider acceptance of lab-grown diamonds and recycled metals further validates that Charles & Colvard made not mind story. Additionally we've re-branded moissanite by Charles & Colvard to our newest gem brand for Everbright to further distinguish our premium moissanite gemstones in the market. For Everbright moissanite will replace moissanite by Charles & Colvard's listings on our drop-ship and marketplace partner sites, including macys.com, belk.com, Kohls.com, fredmeyerjewelers.com, shopmyexchange.com, the Army & Air Force Exchange Services online store and others. The new gemstone brand will also be available for purchase by approved independent jewelers and retailers on charlesandcolvarddirect.com. A downstream solution for value-oriented consumers seeking quality synonymous with Charles & Colvard Moissanite at lower price points to broaden our overall reach. Inventory decreased 24% for the quarter as the company continued to refine its jewelry offerings in response to consumer preferences. On charlesandcolvard.com, the company expanded engagement in fashion and jewelry categories in both Forever One moissanite and Caydia lab-grown diamond product brands during the quarter. To better penetrate the low-cost consumer market and capture additional market share, the company updated its moissaniteoutlet.com website with improved item filters for a better user experience, a fresh look and feel, refreshed assortment and increased frequency of its marketing campaigns and e-mails. The company continued to make significant investments in its people resources, its next-generation web platform and its marketing and advertising assets and capabilities with what we deem to be essential for a lifestyle brand to better align with consumers in a crowded and competitive environment, keeping us top of mind with more concentrated social media campaigns, refreshed evergreen assets across paid media platforms and new brand ambassadorships such as the recently announced strategic partnership with American Actress, Skyler Samuels, Erin Lim of Host of E! The Rundown, Don Caydia lab grown diamonds on the red carpet for the People's Choice Awards in February. And the company's successful Valentine's Day sales comprised 52% of charlesandcolvard.com revenue for the quarter. We strategically incorporated more user-generated content this quarter as we have seen positive results from the company's paid search and paid social campaigns by implementing these new assets. In Q3, the company launched an ethical consumerism campaign across its digital marketing efforts, focusing on Charles & Colvard's MADE online story. We believe our increased digital marketing efforts and e-commerce presence enable us to reach a broader audience and drive more customers online. The more places consumers can reach Charles & Colvard, the stronger the company's brand equity can become, showcasing our quality, craftsmanship and innovation, thereby seeking to capture a greater market share. Bottom line, we believe that our marketing efforts are gaining traction. We continue to beta test our MADE shopping broadcast and streaming initiatives, the leading valuable insights into a new customer base while recognizing a lift in top of funnel brand awareness. We have recently begun to scale back spending while effectively fine-tuning the programming to appeal to optimal markets for our products. We look forward to updating you with further MADE shopping plans in more detail on future calls, as we believe this network will enable us to cross more verticals beyond the jewelry and gemstone industry. As we look to hedge against the pricing pressures that continue to impact the jewelry and gemstone industry, as well as our traditional segment, we believe that the new launch of our charlesandcolvarddirect.com wholesale portal enables the company to be more competitive while incentivizing independent jewels of retailers to buy direct in support of this initiative. We launched the trade campaign announcing Charles & Colvard direct website with biweekly newsletter ads on jck.com, a leading industry website publication. We partnered with JCK to send a dedicated e-mail to more than 30,000 independent jewelers and retailers announcing Charles & Colvard Direct. We revamped the charlesandcolvarddirect.com website with updated marketing assets and simple-to-use account registration, and most recently, we issued a press release announcing the strategic shift with our traditional segment. I firmly believe while we face challenges within our industry, we are confident that our team's agility in the face of adversity will guide us towards success and growth. I will now turn the presentation over to Clint Pete, our CFO, to provide detailed insight into our financial performance during Q3. Clint, please proceed.
Clint Pete: Thanks, Don. Today, I'll provide a summary of key financials for the third quarter ended March 31, 2024. Additional details can be found in our earnings press release that we issued this afternoon and on Form 10-Q, which we expect to file early next week. Please note that all percentage comparisons are to the third quarter ended March 31st, 2023 unless specified otherwise. First, we'll start on Slide 8 with a comparative analysis of the third quarter of fiscal 2024 compared to same period one year ago. In total, net sales for Q3 2024 totaled $5.3 million versus $6.6 million, a decrease of 21% due primarily to the continued weak consumer confidence, continued pricing pressures on the lab grown diamond market, and the expected decline in the company's wholesale revenue as we continue to build a more robust direct-to-consumer business. And as our independent dealer and retailer initiative of charlesandcolvarddirect.com continues to mature. Net sales for our online channels segment which is primarily direct to consumer and includes charlesandcolvard.com, merchandiseoutlet.com, charlesandcolvarddirect.com, madeshopping.com, Marketplaces, Drop Ship Retail, and other pure-play outlets totaled $4.1 million for the quarter now representing 77% of total net sales, up 7% from a year ago. Net sales for our traditional segment, which consists of wholesale and brick-and-mortar customers, totaled $1.2 million for the quarter, representing now 22% of total net sales compared to 30% of sales in the year ago quarter. Finished jewelry net sales represent 93% of total sales in the quarter up from 80% of sales in the third quarter one year ago. As previously mentioned due to the company's strategic shift in its traditional segment strategies, finished net sales decreased 71% for the quarter. Domestic sales of charlesandcolvard.com represented 98% of all sales in the third quarter with international sales totaling 2%. Moving to Slide 9 to discuss gross margin. We reported a gross margin at 23% versus 32% gross margin in the year-ago quarter or a gross profit of $1.2 million versus $2.1 million in gross profit in the year-ago quarter due in large part to rising commodity prices, the company's sale cadence, and a disposition strategy to liquidate some obsolescence inventory. For Q3 2024, operating expenses increased 13% from the year-ago quarter. Sales and marketing expenses increased 13% to $3.7 million. This increase reflects our continuing investments in people resources, top of funnel and influencer marketing, campaigns and brand awareness initiatives that we believe allow us to elevate our brands position. General and administrative expenses were $1.2 million for the quarter compared to $1.1 million in the year-ago quarter, a 14% increase. The increase in G&A for Q3 2024 was due in large part to increased legal fees compared to the prior year quarter. We reported a net loss for Q3 2024 of $3.6 million or $0.12 loss per diluted share compared with a net loss of $8.4 million or $0.28 loss per diluted share in the year-ago period. The main driver for our decreased net loss was $6.3 million tax expense in the year-ago quarter, driven by the establishment of a deferred tax asset valuation allowance on our debt deferred tax assets. Our weighted average shares outstanding on a diluted basis used in the calculation of loss per share for the quarter were approximately 30.3 million shares for the period ended March 31st, 2024, same as in the year ago period. Now, let's move on to a snapshot of our balance sheet. Our liquidity and capital position remained strong as we ended the quarter with $9.2 million of total cash compared to $11.1 million at the end of Q2. Working capital remained strong at $12.7 million. As of March 31st, 2024, the company had $500,000 in short-term outstanding debt. Our cash flow used in operations was $2.1 million during the quarter compared to $800,000 of cash flow used in operations in the same quarter a year ago. In terms of other liquidity, we have access to our $5 million cash secured credit facility with JPMorgan Chase (NYSE:JPM) Bank. As of March 31st, 2024, the company had $500,000 outstanding on the credit facility. Inventory as of March 31st, 2024 totaled $25.3 million compared to June 30, 2023, when it totaled $26.8 million compared to $33.3 million at March 31st, 2023, a year-over-year decrease of $8 million due to the inventory write-down in Q4 FY 2023. Boost jewels inventory was $8.2 million as of March 31st, 2024, compared to $9.1 million as of June 30, 2023, and compared to $15.6 million as of March 31st, 2023. The year-over-year decrease, again, due to the inventory write-down referred to above. Finished jewelry inventory was $16.9 million, as of March 31st, 2024, compared to $17.3 million as of June 30, 2023, and compared to $17.4 million as of March 31st, 2023.The company remains focused on prudent inventory management strategies in support of our in-stock requirements with select drop-ship marketplace partners. Book value per share at the end of the third quarter was $1.01 per share, trading well below market. In summary, we remain confident in our continued efforts to increase shareholder value and brand equity. With that, I'll turn it back over to Don.
Don O'Connell: Thank you, Clint. As we approach our fiscal year-end, our focus remains steadfast on launching key initiatives while diligently working to navigate the challenge of reducing expenses while driving revenue. By leveraging our resources more efficiently and better maximizing our efforts, we are committed to achieving sustainable growth and delivering value to our stakeholders. With a collective dedication to innovation and operational excellence, we believe we are poised to capitalize on the opportunities we've created and to overcome challenges as we chart a successful path forward. Thank you for your unwavering support as we continue this journey together. With that, I'll turn the call back over to the operator, who will open the lines for any questions.
Operator: Thank you. We would now begin the question-and-answer session [Operator instructions] And your first question will come from Bruce Lindenman, Investor. Please go ahead, sir.
Bruce Lindenman: Hi. Do you still have your stock buyback in place? And are you still the management buying stock back -- buying stock personally?
Don O'Connell: Yeah. Hi, Bruce. Yeah. If you look at the last historical purchases when we had the ability to purchase and it wasn't a quiet period, you'll look at the directors inclusive of myself that bought significant amount of shares recently.
Bruce Lindenman: Do you think you'll continue that?
Don O'Connell: Certainly, we believe that this is an opportunity at these prices. That is the first part of it. The second part is in relation to the stock buyback repurchase program, we currently have, I believe, $4.5 million left within the repurchase program to be able to buy.
Bruce Lindenman: Are you gentlemen going to buy back stock at a-third of book value here?
Don O'Connell: No, that's an executive decision that is always contemplated on a daily basis. So, we certainly believe that, we're trading way below book and we believe that it's a wise move in capital. One thing just to be very clear, we want to make sure that we maintain liquidity. We want to make sure that we have the cash to be able to operate the business. We want to make sure that we complete a lot of these initiatives that we had initiated and we're funding. So, we weigh all these things on a daily basis.
Bruce Lindenman: At what point, do you think the company could at least turn cash flow positive in terms of your business?
Don O'Connell: Yeah. I mean, we don't give forward-looking statements, but I will tell you that, we're completing a lot of the goals and initiatives that we put forth in the last few quarters, kind of building out capabilities, content capabilities, marketing strategy. A lot of the spend as of late has been on performance marketing and so forth. So that really is something that we need to look at and we need to do a better job and kind of getting a return on our ad spend. So we're looking at that diligently. But look to us to wind down and start to really, we look for the path to profitability now. So as we were in the last couple of quarters, we've been kind of building and making these investments to be able to build out what we believe is the future state of the company and what we believe is necessary to be able to build a next generation company in the long run. So we made strategic investments in our web property. We're building out a new. What we call the next-gen website has unbelievable functionality, a lot better than what we have today, literally a single point for the consumer to be able to click and buy any shape, any size, any configuration between the actual piece of jewelry they're buying. That's really important. They can pick whatever color they want. So we believe that that investment was very, very strategic and very critical. It's taken us a little bit longer than we anticipated to be able to launch that. But we stated on the last call that we'd be launching in Q4. So that still is the target, so once we get that launch we get it up and running, the spend will level out a little bit there. And then we believe that's probably the most significant driver for future growth for us. And then that will get us really to the path to profitability because we'll start to save dollars there and economies of scale. So the new next-gen property will enable us to peel off a lot of these. And for all intents and purposes API.s or third-party resources and partnerships that we have that we will need once we launch the next-gen platform. So that will help us also to become more profitable in the long run. So we're pretty excited about getting this thing up and running and feeling the benefits in the cost savings.
Bruce Lindenman: Do -- have you discussed or tried to form any partnerships in terms of companies that you sell-through invest in the company or to help you with any of this stuff in terms of finance?
Don O'Connell: Yeah. I mean that’s always…
Bruce Lindenman: So much cash every quarter.
Don O'Connell: No, I mean that's no question, right. So for us these are investments. That's the way we look at it right now. I mean, we knew the horizon for us to peel back these investments and we knew what we wanted to be focused on and strategically spending the dollars where we needed to spend them. So that actually is starting to come down, but -- every day we have a lot of conversations between partners out there. I mean, we've been in the jewelry industry for a long time. There's certainly a lot of viable partnerships, alliances or things that could be -- could come to fruition. But at this point there's nothing to be spoken about in that.
Bruce Lindenman: I just like to see something happen or good or before you guys run out of money?
Don O'Connell: Right. So let's talk about that. You want to talk about the liquidity. So given the fact that we have, and thank you for bringing that up. So we have $9.2 million in cash at the end of the quarter. We certainly had the credit line capability and have the capabilities drawn that. We believe that our inventory in finished jewelry is comprised of really valuable inventory. So that means active inventory. That means finished jewelry inventory that means a large portion of that inventory contains the commodity in the metals gold, right. So I don't mean to say to anybody right now but gold is really rising and climbing. And as you know, it has an adverse effect on new orders that are priced at a prior gold price and then has a benefit when the inventory that we have that's been on the shelf, the valuation of that inventory increases to the current market. So we know that if you just said, we wanted to raise capital or we wanted to get more liquid, we would sell off the finished jewelry first. Then the other thing I want to point out is on Charles & Colvard Direct is a real new initiative for us to be able to control our destiny. We started moving more toward direct to consumer but as of late we realized the fact that we've got over $8.2 million in loose jewels and loose gems. So that's another avenue for us to raise capital or generate some more cash. So look to us to kind of build out and lean in on that and going after the trade for loose jewels, I know it's been my messaging quarter-over-quarter to go more direct to consumer. That hasn't wavered and that hasn't changed at all. The difference is now we're going to go Charles & Colvard Direct with this portal and be able to tap thousands of independent retailers. So and those retailers will buy the loose jewels and therefore, we'll be able to convert it to cash.
Operator: The next question will come from Ben Franklin with Riverstyx Capital. Please go ahead.
Ben Franklin: Hey, guys. I just have one question. Why draw on the credit facility considering the high cash balance?
Don O'Connell: Yes that's a good question. So we're making I mean we only drew just a $0.5 million. We felt that we wanted to draw down. I mean we haven't used the credit facility since we've been in operation here for several years. So we want to make sure that the credit facility should we want to draw on is available and everything flows in and out the way it does. Certainly, the money factor there is very fractional, so to preserve cash sometimes it's in and out. It really depends. So we just we just wanted to go ahead and draw on it. So we thought it was a good thing for us to do at the time.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Don O'Connell, President and Chief Executive Officer for any closing remarks. Please go ahead.
Don O'Connell: Thank you, Chuck. I just want to thank you for your support of Charles & Colvard. We look forward to continuing updates for our shareholders in future quarters. I want to thank everyone support and we'll talk to you next quarter and we look forward to telling you some great things that are coming forward.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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