Q3 2020 Earnings Call
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This earnings call may contain forward looking statements just to fund and section 27 Am Securities Act like team 33 out cemented including statements regarding among other things commodities business strategy and growth strategy.
Expressions, which identify forward looking statements speak only as of the date. The statement. It's made these forward looking statements are based largely on our company's expectations.
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Future developments that actual results could differ materially and those set forth in contemplate a bar or underlying the forward looking statements.
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Accompany today's call, it's a sporting Powerpoint Powerpoint slide deck, which is available in the Investor Relations section the company's website and I are dr., Charles and Copart Dot Com Sosh events.
Okay, we'll be hosting a jernej session. The conclusion of the prepared remarks.
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I'd now like to certainly confidence.
Okay Suzanne Miglucci.
President and Chief Executive Officer.
Scott.
Thanks, everyone for being with us today.
I'll begin on slide three well weve outlined the agenda for our call I'll begin my remarks by providing an overview of Charles and Colvard response to the cobot 19 pandemic any operational and financial steps, we've taken to navigate through the current business environment.
Then click Pete our Chief Financial Officer, well give you an overview of our fiscal 2023rd quarter financial result.
I'll, then close with a discussion of our short term steps to maintain operational and financial viability and how the company's key attributes are positioning us to reach our longer term plans.
Let's move on to slide four.
In the face of just pandemic, our number one priority is the health and safety of our employees and customers.
At the onset of the virus in the U.S., our management team took swift and appropriate actions designed to hedge against the overall impact of the pandemic prepare for a potential recessionary environment and efficiently manage the business, while maintaining adequate liquidity and maximum flexibility.
Our team has demonstrated strength compassion and leadership and has guided the company to a point of financial stability that we believe will position us to emerge with strength well beyond the cobot 19 crisis.
Here are actions to date.
In March we deployed to work from home policy for all but critical employees due to a mandated stay at home order by the state of North Carolina and local government authorities.
We implemented flexible work arrangements for those stuff, whose positions could be performed remotely and powered our staff with technological resources that aligned with our highly secure corporate standards.
Because we were not deemed an essential organization in North Carolina State mandated work from home order precluded us from manufacturing any new goods. Therefore on April 13th we made the difficult decision to furlough roughly half of our employees with a heavy concentration from our operations and manufacturing Department.
To support these impacted employees were covering the cost of their health care benefits and we've extended additional flexibility through our four one k. plan to help staff with new financial disbursements if needed during this critical time.
We view preservation of cash as Paramount in any crisis and consider all expenses as variable weve responsibly implemented several cost cutting measures first with retained staff.
We implemented temporary salary reductions for all employees, including 25% for myself, 15% for our Chief Financial Officer, and Chief operating Officer and graduated pay cuts throughout the remaining ranks.
And we instituted a 50% reduction in fees paid to our board of directors.
We also implemented significant reductions in non payroll expenses, including a reduction in marketing spend by more than 50%.
Strategically our digitally oriented advertising program does not require a long term or significant upfront commitments, which allowed a seamless pivot in advertising spend.
We've also significantly reduced product development costs overall spending across all functional areas of the business and eliminated all travel investments for the foreseeable future.
Lastly, we worked with advisors to maximize participation and eligible government programs for businesses or employees impacted by the cobot 19 pandemic.
In the third quarter of Charles and Colvard Twentytwenty fiscal year, the cobot 19, pandemic and related government and business responses began to have an adverse effect on the overall economy, because you are buying behaviors and Charles and Colvard business.
Despite the healthy January and February by early March these adverse effects had impacted our supply chain as well as our traditional and online channels revenue segments, which I'll outline for you.
In our supply chain, we experienced instances of suppliers temporarily closing their operations delaying order fulfillment or limiting their production.
Where applicable we utilized alternative supply arrangements with partners, whose business is we're not understood at home orders or whose production came back online. However, we in our suppliers remains subject to ongoing changes to governmental requirements, which may have long term impacts on our supply chain capabilities and deficiencies.
In our traditional segment the pandemic first impacted sales from our international distributors in the Asia Pacific region in January which was already affected by political unrest in the prior quarter.
Other regions, followed suit, culminating in major shutdowns across the U.S. by mid March.
Domestic brick and mortar retailers, including those served by Charles in cohort as well as those service by our distributor partners began closing their stores to foot traffic in March with tentative plans to reopen on a rolling schedule that may lead into the fall timeframe or later.
As a result of these store closures and stay at home orders many of our distributors reduced or close their operations impacting our ability to maintain significant levels of sales through our wholesale customers.
In our online channels segment, our transactional website, Charles and Colvard Dot Com. It remained open we continued to process orders based on product availability and limited fulfillment capacity.
Because of our in stock position, we were also able to serve marketplaces and dropship partner web sites, such as Macy's Dot Com Helzberg Dot com overstock dot com Amazon and more.
We've heard how valuable we bend to these online partners, who are seeking products from trusted source is that they could promote and sell all their own capacities were severely limited.
This ongoing ecommerce presence has been our beacon of light and a testament to our pivot to online commerce over three years ago.
At this time I'd like to turn the call over to Clint Pete our CFO for an overview of our Q3 financials, then I'll return to reflect on the company's plans to manage through our anticipated recovery quick.
Thank you Suzanne good afternoon, everyone and thank you for joining us I hope you all doing well and stain say during these challenging time.
Today I'll summarize the key financial results for Q3 2020 additional detail can be found in our form 10-Q, four the quarter ended March 31, 2020, which we expect to file tomorrow.
We have a lot to cover regarding our Q3 financial performance, including the overall impact the cobot 19 prices had on our U.S sales channels primary during the month to March.
And our Asia Pacific region throughout the entire quarter.
Slide six summarizes net sales for Q3 2020.
Which decreased 18% to $6.5 million compared to the year ago quarter.
And our online channels segment, which consist of ecommerce outlets, including Charles and Colvard Dotcom third party online marketplaces, dropship retail and other pure play exclusively E commerce outlets net sales for the quarter do keys decreased 8%.
$3.8 million versus the year ago quarter, representing 59% of total net sales, our transactional website, Charles and Colvard Dot com decreased 12% and that sales versus the year ago quarter.
Sales through our cross border trade platform decreased 15% versus a year ago quarter.
These declines in revenue primarily resulted from the significant.
Effect of the Cobot 19 crisis.
This included the economic setback experienced by consumers around the world the surgeon unemployment.
The business shutdowns.
Including the closure of our corporate headquarter due to the mandated North Carolina stay at home work order.
And the company's traditional segment, which consists of wholesale and retail customers net sales for the quarter decreased 29% to $2.7 million versus a year ago quarter, representing 41% of total net sales.
Cobot 19 impacted this segment in both our domestic and international distributor sales.
Finished jewelry net sales decreased 12% for the quarter.
We saw declines in our direct to consumer sales as noted a moment ago as well as with our brick and motor partners, whose retail locations closed in March.
Loose jewel net sales decreased 24% for the quarter, mainly due to a decline in demand from our international distributors during the entire quarter related to cobot 19.
And then from our domestic distributors in March as the impact spirit spread across the world in the us.
Forever, one net sales of finished jewelry and loose jewels represented 82% a total net sales for Q3 2020.
International sales decreased 63% versus a year ago quarter, reflecting significantly lower orders from Asian distributors and cross border sales on our transactional website due to the global closures put into effect.
Moving on to slide seven.
We reported a net loss for Q3 2020 of approximately $6.2 million.
Or negative 21 cents per diluted share compared with net income of approximately $814000 or four cents per diluted share and year ago quarter.
This was based on 28.7 million fully diluted weighted average shares compared to 21.7 million in the year ago quarter.
The net loss in Q3 was significantly impacted by legacy inventory write off.
In Q3, 2020, we wrote off approximately $5.3 million of legacy material inventory.
This non cash expense was included in our cost of goods so for the quarter.
The decision was made to take this action as part of our overall standard quarterly inventory valuations.
The write off was recorded in Q3 2020, primarily due to the impact on the global outbreak of Cobot 19.
Coupled with the impact from the political unrest in Hong Kong.
These factors impeded business with our distributor network, which is the primary sales channel or legacy inventory.
As a result of the loss of demand in these Asia Pacific sales channels, we determined that in Q3 2020.
That this inventory had no value and thus recorded the related balance sheet write off.
As summarized on slide eight our gross margin for Q3, 2020 was a negative 41% compared to 47% in the year ago quarter.
Primarily due to the inventory write off.
We maintained regional segment gross margin levels.
And our online channels segment, which includes sales of our forever one product on our transactional website.
Charles and Colvard Dot com.
Gross margin was 56%.
And our traditional segment, our gross margin was 47%.
On slide nine 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 Q3, 2020 operating expense as a percentage of net sales with 54% compared to 37% in a year ago quarter.
Overall operating expenses increased 19% versus a year ago quarter.
Sales and marketing expenses increased approximately $606000 primary related to digital marketing spending.
Brand awareness initiatives and agency fees in the quarter.
Gionee expenses decreased approximately $48000.
I will speak to certain actions, we are undertaking on expense management in my closing remarks.
Slide 10 presents a snapshot of our balance sheet.
Our liquidity remained strong as we ended the quarter with $11.9 million, a cash cash equivalents and we stood to cash compared to $30 million at our last fiscal year end June Thirtyth 2019.
In terms of other sources of liquidity.
In April 2020, we applied for and SB eight alone do the payroll protection program under the cares Act.
Should we be granted this loan our proceeds will be used to fund salaries rent and other bissett specified expenses that can be likely forgiven under the loans current guidelines.
There is a very low 1% interest rate for the borrowed funds that are not forgiven.
We also applied for an economic injury disaster loan and await word on both applications.
We currently have a 5 million asset based credit facility with White Oak commercial finance, which provides further liquidity for general corporate purposes should the needs arise.
However, the credit line is secured by accounts receivable and inventory asset levels. So there are limits and constraints did use during these times.
As of March 30, Onest 2020, we have not excess funds to this credit facility.
Moving on to Slide 11 inventory at March 31, 2020 totaled $31.7 million.
Compared to $35.8 million at December 30, Onest 2019.
And $33.7 million at June Thirtyth 2019.
Loose jewel inventory was $21.5 million compared to $24.3 million at June 32019.
Finished jewelry in inventory increased to $10 million.
Compared to $9.3 million at June 32019.
As of March 30, Onest 2000, 2100% of our inventory was classified as new inventory.
Our cash flow from continuing operations was negative $1.3 million for the quarter.
Given the uncertainty around the duration and trajectory cobot 19 related disruptions, we are aggressively managing costs and cash outlays to current trends.
Well aiming to ensure readiness to resume operations as soon as conditions permit.
As noted on slide 12, we are taking proactive financial actions. In addition to the one Suzanne mentioned in her opening remarks.
These include.
Renegotiating contracts with certain vendors and suppliers to men commitments to sort of plot to size our supply with the current demand during these times.
We expect that our key partners will be willing to flex along with us to adjust changing needs of the business.
We are working with certain vendors and suppliers to reduce our cost of goods and or services.
We are negotiating the extension of payment terms with select partners.
And.
We are lining variable expenses to match current sales trends, including temporary reductions in digital advertising spending.
With that I'd like now to turn the call back over to Suzanne.
Thank you Clint.
Charles and Colvard planned response to a crisis event such as Koby 19 is to remain focused on our long term growth strategies entered tailor. Our response. So we can remain nimble and preserve liquidity. We also believe it's important to take stock of our assets and competencies. So we can proactively identify and plan for new opportunities that play.
Okay to our core strength on slide 14, we highlight several key attributes worth noting about our business and how we intend to leverage them to position us for the post cobot 19 market number one.
As a direct to consumer facing brand, we're focused intently on market trends consumer demand and buying trends, we actively listen to the market to understand what products, we need to develop can meet customer demand.
Despite a tough close to Q3, we believe our Valentine's day performance across Charles and Colvard Dot Com marketplaces, and dropship channels confirms for us that new offerings, such as our platinum products color gemstone options and our expanded signature collection are hitting the Mark. In addition, our ongoing efforts to create awareness from.
And I are being impactful according to the notch recent engagement trends survey waste and I is now the second most common centerstone after diamond it's chosen by 19% of brides and is doubling in popularity since 2017.
While we update our offering as customer taste evolve it's important to note that our jewelry is not seasonally trendy. Unlike other retailers, who are grappling with unsold spring merchandise, our jewelry designer classic and timeless.
I will trend may lead us to bring forward more yellow gold and platinum metals, we plan to always carry goods that transcends seasons and time.
Our merchandising team is attuned to market demands our marketing team is deeply engaged with our millennial audience and we believe Charles and Colvard agile product development strategy is poised to deliver.
Number two.
As an ecommerce driven business was 59% of our sales coming from online channels. In Q3 remaining ahead of technology and distribution trends as a cornerstone of our strategy and we expect to continue to push the boundaries are the industry to remain relevant and forward looking while many of our retail peers are making a hard pivot toward an online channel strategy.
We have over three years of significant online presence and progressively advanced technology deployments that place US ahead of this retail shift.
During these challenging economic times offerings, such as are many pain pay over time and credit payment options, well placed the Charles and Cobar jewel repurchase within reach.
With a keen focus on consumer demand and a healthy roadmap of enhanced features functions and upgrades were positioned for new levels of online engagement.
Number three we built and efficient Omnichannel distribution network, including a direct to consumer E Commerce website, and a strong presence on leading global marketplaces and partner websites.
This model and its underlying infrastructure empowers us to be nimble and opportunistic since we're not burdened with physical stores or multiple long term lease commitments.
Market disruptions, such as Cobot 19, generally bring with them new channel opportunities and we imagine new online retailers will come to market, we'll be evaluating these potential channels as they arise and plan to remain poised to expand our network as compelling prospects unfold in fact last week, we announced the launch of our Moissanite by Charles and all of our jewelry.
On line on the Hudson's Bay online retail store in Canada visit us on their website at the Bay Dot Com.
Number four.
We have an agile supply chain and partnering model that's built on redundancy and diversification by way of example, Charles and Colvard began to experience market disruption in the Asia Pacific region in the December quarter, which impacted both our distribution channels and supply chain partners strategically our supply chain is built in such a way that production one.
Earmarked for Asia Pacific could be readily shifted to other parts of the globe. This diverse partner network has served us well during cobot 19, empowering us to support our online customers through shipping and distribution capabilities from partners worldwide. We're pleased with the flexibility of our supply chain and believe we're well positioned for future contingencies.
And finally number five were built to serve a digitally native consumer we speak often of the millennial consumer and their propensity to buy online as an outcome of cobot 19, we believe our customer demographics may expand as more consumers turned online online sources with a new found level of trust.
We administer a very flexible digital marketing program with no long term advertising commitments to burden us. This allows us to adapt our marketing focus to engage the consumer wherever they may be for example, we recently ramped up our online experiences with posting such as Instagram stories.
Our customers are requesting a higher level of online interaction and they're seeking creative ways to experience our product social media channels offer a multitude of ways to create an engaging environment.
In addition, we recently announced the availability of our virtual consultation service, which enables customers to request an individualized online shopping session with one of our bridal jewelry experts as we emerge from this current crisis consumer behaviors will likely go through more transitions and we intend to engage them throughout this evolution.
As we wrap up on slide 15, we recognize that full extent to which the cobot 19 pandemic will impact Charleston Boulevard will depend on numerous evolving factors in future developments that are uncertain to us at this time.
Economic factors affecting consumer confidence spending or buying habits could materially and adversely affect demand for our products.
We believe that we are well positioned and prepared to navigate these unchartered waters by staying focused on our mission to lead a revolution in the jewelry industry by delivering a brilliant product at an extraordinary value balanced with environmental and social responsibilities.
Well our response strategies are in their early stages and we believe the recovery will be dynamic we're prepared for a phased approach to ramping up our business Here's what we plan going forward first and foremost will be following North Carolina state and local regulations as their disseminated for the foreseeable future, we expect to maintain a remote workforce wherever up.
A couple and significantly modify operations at our corporate headquarters to ensure employee and visitor health and safety, including the use of protective gear, social distancing and stringent cleansing measures.
We plan to adopt a phased approach to re entering furloughed staff into the business consumer confidence in spending and the reopening of our brick and mortar and distributor partners will be critical gateway factors, we need these channel partners to reopen and in turn drive demand as demand increases will have the need and the funding to support staff returning to work.
Lastly.
We will continue to closely manage our cash burn we're focused on emerging from this crisis as a strong growth oriented company and plan to reinvigorate the direct to consumer brand awareness strategies, we began last year, but in alignment with market demand.
We'll continue to monitor the pandemic remain dynamic in our response to the rapidly challenging business and economic environment and adjust our position as more information and guidance become available to address the evolving situation.
I'd like to take a moment to thank the Charles and all of our board of directors for their high level of engagement guidance and oversight. During this crisis, you've been invaluable advisors and partners. During this challenging time into our Charles and Colvard staff. Thank you for the many commitments you make to the company and for believing in the future of our brand, it's your tenacity and dedication.
Charles and Boulevard, the amazing authentic desirable brand that it is.
This concludes our prepared remarks, and I'll turn the call back over to the operator to open the phones for your question.
We will now begin the question answer session. Please ask your question in the press Star then one when you're Touchtone phone, if you're using a speakerphone. Please pick up your heads up before pressing achieved.
Withdraw your question. Please press Star then too.
At this time, we'll pause momentarily to assemble our roster.
Thanks.
All right while were waiting for you to queue up with your question. There has been one that's come in through our Investor Relations email.
The question is what will your sales trends during the quarter leading up to.
Kobe and have you started to see shifts in the markets. Since then.
Lets a pretty broad question, let's start with a let's start broadly with the general market.
So the cobot pandemic as I think many of you probably know has had a very significant impact on the retail environment.
Just last week, a retail sales numbers were published for April they showed a 16.4% decline compared to the prior year and Im sure Youve seen the news JC Penney in J crew have filed for bankruptcy and pier. One imports noted just a yesterday that they're going to permanently close all their doors.
For Charles Uncle, Bard, we opened to the quarter with headwinds in Asia Pacific and that came from some of the unrest that what's happening in Hong Kong.
That happened mainly to our distributor segment.
That was followed by the impact of co bid in the United States and ultimately what happened is in it was really mid March or so where we really started to see a decline in traffic on our website.
And and a and thereafter about leading up to Valentine's day, we were relatively strong we saw sales of again, our signature collection, our platinum product. It was all it was all doing incredibly well.
What we have seen this downturn in traffic since March as everything went into locked down in and it was a pretty abrupt downturn from where we had been performing and trending prior to that.
We're seeing what I would call nascent signs of improvement so as we're in the quarter current quarter that were in our fourth quarter, we're seeing a little little bit of improvement more from our online channels and on our traditional segments online we began to see improving traffic patterns in some early signs of increased consumer spending.
But that's compared to the first few weeks of the downturn in March which was again, a a fairly pretty precipitous downturn.
By late April we began to hear from our Asia Pacific Partners are primarily distributors that they were beginning to return to work. This doesn't necessarily mean that we've seen a return to the revenue stream that that we are accustomed to with them, but we do know they're beginning to opened their doors and return.
And then earlier this month in the month of May I, we started to hear from our brick and mortar partners such as Helzberg diamonds that they're beginning to open doors. They did a few stores and Texas mid month and by the ended the month. They expect to open another 22 doors and we anticipate this will be sort of a slow at turn on of the market and I think.
The ones going to be watching it very carefully and seeing what the response is.
I will say that while these these trends are encouraging we remain incredibly cautious.
Retail recovery requires the return of consumer confidence and once consumer confidence returns luxury retail sales such as Charles and Billboards goods, they lag behind purchases for essential that maybe have gone unchecked during the locked down so.
To set expectations here.
We still expect that sales for the fourth quarter ending in June may be down substantially from the ergo quarter. We are very much in the middle of.
This pandemic and working our way through it. So it's very uncertain I think that we're all going to keep our eye on the ball and see how the market response, but that's about as much insight as we can share at the time.
So over to the operator do we have any questions in the Q.
Yes first question will come from Matt Koranda with Roth Capital. Please go ahead.
Hey, Suzanne and Clint.
Glad to hear you guys are doing well.
And just wanted to start off with a clarifying point on the online channel that you're talking about to them.
What is man exactly by improvement and the online channel and I guess and the recent months would you call that essentially down year over year. It sounds like you met down year over year still but just the the declines are getting Europe or year less intense. So we're seeing sort of sequential growth on a week over week basis again help us on.
Sam.
Yeah, It's a it's a fair question, Matt and thanks for dialing in and asking so worse, if I were comparing kind of where we are in the month of on late April and into May we have improved traffic over where we were when we first had the significant downturn from the pandemic.
I would not say that it is on anywhere near the performance of where we were last year at the same time.
Got it okay.
And then anything to call out in terms of mix shifts and the online channel between your own website.
Amazon and other online channels for you guys them in anything noteworthy during the quarter or in recent weeks in terms of a mix shift it sounds like online your direct website has still been holding up okay.
Yeah, it on the mix shift.
It has the mix shift is its holding pretty steady to where it generally lands. We remain very much a bridal play I still more than 50% of what we sell is on the bridal side of the house, which is good news even during the downturn people are still getting married so so there is still there still certainly a demand for our product.
And we will we're finding on marketplaces actually and our dropship partners.
Our margins have improved and I would say that that's a testament to the rollout of waste Tonight by Charles and Colvard on a year ago, We still had a fair amount of legacy goods that we were selling through those channels, the moissanite by Charles and coal BARDA product.
He has a higher margins, though so those overall margins are looking strong with a mix of product is generally the same is still very much of a bridal play on Charles <unk> Colvard Dot com, we see a bit more fine jewelry that we sell through an Amazon end to drop ship partners and so on.
But we are and I would say the one last piece I'll add to that.
Our average order values.
No I think we quote about $1200 last time, we did earnings were probably more like $1100 right now.
We have been offering some sale prices in order to encourage folks to calm and transact with us.
So that is bringing down our average order value ever so slightly but I think it's really helping drive the demand for sales on a site.
Okay, that's very helpful color.
And I guess in that regard when when you mentioned there will be the I guess, we have to ask about customer acquisition cost as well and sort of the trend. This quarter I mean, I guess, there a lot of puts and takes but could you maybe cover.
It seems like digital marketing at least overall Cpms may have gone down a touch toward the latter part of the quarter.
But you still need to spend to convert third to bring traffic to the site. So maybe talk just about CAC and how it trended.
Sure happy to do that Matt.
It's a good question it kinda it kind of harken back to the discussion about our dramatically reduced AD spend so during these times when we don't see at higher demand rate.
We tend to shift where the dollars are being played so when we last reported earnings were talking about the holiday quarter and how we're going very much to.
To an awareness play, which is what we would call top of marketing funnel activity and that's where we're really trying to acquire net new eyeballs, we want new people to come to the brand and it costs money to do that and when we do the general cost of acquisition on a goes up because the conversion is last its people work trying to cover people.
I don't know the brand. So last time, we spoke we were about $400 or so in the cost of acquisition and the way that we calculate that is how much AD spend does it take in order to get a new customer in the door in this quarter, we made a pretty dramatic shifts to lower marketing funnel spend because we wanted to talk to the people that are already.
Predisposed to the brand and our asking for engagement with us and those would be the people that are searching for the term Charles Boulevard on say, Google. So they go to a search engine.
They they plug in the term Charles and Colvard, we want them to find us.
So we're bidding for those kinds of key words bidding for the term waste Tonight for specifically those people that are probably pretty far down in the product selection a phase of of purchasing something we were bringing in those eyeballs, they're much easier to acquire and much less expensive to acquire than a top of funnel investment that we.
Would make so where we were $400 on average cost to bringing a new customer in holiday quarter. Today, if I were looking at it in in the recent weeks are probably just under $200, but that's again more a function of where we're putting the dollars and how much we're putting in a as opposed to you know.
Other factors, so hopefully that answers the question.
Yes, very very helpful.
And definitely pretty dramatic shift downward there okay.
And then on the traditional channel.
Domestically I know you kind of reference said, a moment ago and some of the responses to the first question but.
What percentage of your retail customers are open currently I guess in terms of maybe total store base.
And what what do you expect to be open by the end of June essentially and how are those retailers communicating sort of their their ability to reorder because there I would assume there's a decent amount of inventory the channel there.
Help us understand sort of how that ramps back up in the next couple of months right. What we're hearing that from our traditional brick and mortar partners as that.
Our strategy is not unlike hours I, it's very phased and at the state by state local government by local government driven decision. So everyone is under a different order right. Now we know all 50 states have opened to some degree but the rules for opening are vastly different from one state to the next and even one jurisdiction to another so.
So each one of our channel partners than is looking at when do they could open.
And so it's a it's a mixed bag again, we've heard from Helzberg that they opened a handful of stores I think it was three and.
Made it may in Texas, because Texas opened early on and then that was followed by another 22 that they had identified that they intend to have opened by the end of this month, we've not heard much more from them beyond that but we've been in regular contact about when we will be placing orders with them in order to help them with this ramp up so we're prepared and we can show.
Yes on these orders now North Carolina as of Tomorrow afternoon.
Well open to a greater degree or moving into our phase two which allows us a little more flexibility of what it as we can do from from our headquarters in our distribution capability is fully up and running so if the orders come in we are ready to respond to those customers and then there's the distributors Matt that we have to think about distinctive distributors as the middle men between us and.
The independent jeweler those independent jewelers have to open once there's consumer confidence and they have the ability to opened their doors only then well they place orders with the distributors and only then we'll distributors placed orders with us. So we believe that the the ramp up through the distribution network will probably even longer than it would be three.
Our traditional brick and mortar partners.
Okay very helpful.
And on the supply fronts, I think you guys sort of alluded to it and the prepared remarks, but.
Can you give us a little bit of color or an update on sort of some of the purchasing minimums that you had with your partner.
Player partner for Silicon Carbide, and are you able to sort of defer some of those larger volume guarantee is that are based on.
Given year until later in the contract period is there any way to kind of renegotiate that way that it's favorable allows you guys to kind of adjust down the inventory levels to demand to meet demand and got a very short term here.
Yes, I'm going to have Clint stepping in and address that question for you Matt. Thanks is that Hey, Matt.
At this stage is very critical for us to be flexible with the in these unprecedented and unpredictable times I mean, the one the one thing as I mentioned on the stated remarks, who are working with all our vendors.
Suppliers to level set.
It's our goal to adjust the cost services and commitments that.
Based on matching our supply and expense base that we are currently seeing with the current demand.
Okay. Okay got it all right I'll take the rest of that offline and then.
Just one or two more here you don't mind.
I did want to cover.
The legacy inventory write down just as some clear on it it sounds like you wrote down essentially all of the legacy inventory of $5 million.
But it does look like you guys did move some inventory from short term into long term help us understand kind of the puts and takes or around that and.
I guess I would've expected the inventory write down to come out of long term inventory, but help us understand.
And there.
Yes, so the the positioning that we have in our balance sheet between short term and long term is basically based on.
The amount of goods that we're going to consume.
Base over the next 12 months. So that's that's more of an accounting.
Hey State policy that we've had for well so.
Naturally with.
You saw the trend this past quarter compared to the is a year ago quarters, So with with the estimates of the impact of the pandemic, we adjusted the calculation based on.
That forecast internal forecast.
Thats why we from the standpoint is.
On slide in the earnings call presentation, we do have.
One to represent as well that now it's off the forever one product that's the value that sit on our balance sheet now so that it's all of the high premium forever one product thats been.
Reaching our demand.
Out there that we're seeing based on what we wanted to turn around this and Matt I'll add some color that you know.
It's a it's a fairly complicated process to bring our goods to market. You know we have we go from raw material.
We take that raw material and we we form it into what we call preformed that gets then fascinated by a specialty facet or that that creates the jam itself. It gets Polish tickets perfected it gets graded it gets inscribed so that we're sure everyone knows that it's a it's a moissanite gem it gets married together with.
A very beautiful setting that was meant for that particular gemstone their joined together they go through quality assurance exercises.
And then it gets packaged up in its ready for sale that process takes some period of time and then the product goes perhaps into a helzberg diamond store, where we generally see a onetime turn over the course of a year. So the ability to sell a good all the way from raw to finished may very well take more than 12 months and that's what moves that item into what we would.
Call longer term its just that this is a very long sales cycle and so that's how we wind up with those numbers sitting on what were you would call that long term bucket.
Okay that makes sense.
And then maybe just lastly.
Yes, I mean, you guys still have a very healthy cash balance.
I notice that you guys did mention you have a priority not to.
Not to burn cash in the coming quarters. So I'm curious women are there opportunities for you guys. In this environment I mean, there's a lot of dislocation and there's probably a lot of smaller competitors.
That a bit out there that may not be doing quite as well or may not have quite the same sort of balance sheets that you guys have are there opportunities or strategic moves that you could make to take advantage of.
The environment and potentially either through an acquisition or other capital allocation decisions you could make.
Take advantage of having very strong cash flow.
Yeah, It's a great question and absolutely something that the management team and the board to speak about on a on a regular basis. You know these challenging times do create opportunities and with the Charles and Colvard business model, There's many places where we could augment the business.
And then and then sort of leapfrog our way in the market it could be it could be eight a. jewelry provider it could be a gemstone provider it could be an ecommerce technology.
Maybe a distressed but could very well be.
An added assets to our business and our ability to take the business forward. So those are absolutely things that we're thinking about while we're balancing you know what it is we're burning and cash to make sure that we're keeping the business viable as a as a going as it going source. So we're we're waiting things, but we're very open and looking at the opportunities.
Presenting themselves through.
Through this this crisis, but it's it's a practice we have on a general basis.
Okay got it I'll leave it there and thanks for all the detailed answers guys. Appreciate you you got it Matt. Thank you back over to our operator grant is there anyone else in the queue.
Our next question will come from centered Diamond or Diamondx equity research. Please go ahead.
Hi, Thanks for taking my question. So I just have one question a lot of them were answered previously it relates really to the advertising I know you on the one hand, you're trying to conserve your cash balance, but then on the other hands you don't want to go to low on sort of the topline growth and I know you mention.
You are doing Instagram stories, so you're paying Facebook for you're not continued ads. So wondering what are you thinking of sort of the balance of one using the payroll prevention conserving cash but at the same time utilizing everyone's at home they're looking at their screens you can maybe reach millennials more and build the brands. So what sort of how are you thinking about that.
Sort of you know.
Decision.
It's a great question and thanks for dialing in Hunter and we Ah we use return on AD spend at sort of a benchmark for us to understand.
When the investments stops being productive and so on we're super careful about leaning in where we're putting the dollars you know we mentioned Instagram stories, we absolutely are.
Making investments on advertising in social media, both Facebook and Instagram and and some others as I mentioned, we do a a fair amount of search engine marketing, that's very important to us as well, but that's right now very low funnel work and right now we're seeing return on AD spend in the six to eight X range, which is great numbers for us and were.
Comfortable there right now we still have to spend that money, but for every dollar that we're putting in we're still getting six to $8 back out which is a good place to be before we hit. This crisis. We were very much top of funnel trying to bring in his new eyeballs and convert them and we were sitting at a two to three X a return on AD spend so somewhere.
Hunter honestly between the two to three and the six to eight where we are is the answer but we really have to balance out with how much cash goes out these customers take a while to convert so you know we we're putting the dollars and it takes some times a month for people to convert over so at a time when consumer confidence maybe low or at a time when people.
Yes, maybe surfing and we want to be in front of them. It we still have to be a bit conservative on our ability to continue to convert these people over and make the dollars within a quarter. So that weekend or you know we can we can balance out the books here. So a it's a it's a delicate dance that we do each and every day. The good thing about digital marketing as you can dial it up and Dilo.
Down on a daily basis based on performance. So we measure twice and we got one says we say.
Sure I know that makes perfect sense is that something you guys do internally or do you have someone that use like a marketing company. That's sort of handles that is there like internal person that does the ad budget.
Right there our internal people that manage an AD buy budget. There are terminal internal folks that are very close to FCO and the key words that sort of make a difference in our important and then we tie that with work with our digital AD agency, who work off of a platform that helps us.
Aggregate thinking from across many different retail customers and so we have the advantage of the performance of other peers in our industry and how they're performing as well on it gives us visibility into things like impressions that are hard for us to do ourselves without a very robust inexpensive marketing platform internally and so we.
Do balance that work with our add a partner, but we do have a fairly educated and robust team in house that manage it and then the third party as they are really to help us with the AD placements and to measure very carefully those performances.
Right now it makes perfect sense and it'll be interesting to see this quarter, how it turns out because maybe if you have maybe a balance sheet, that's better than your mom and pop pure as you can pay figures.
You may find that the AD words budgets go down right in that the money you're getting more value because the consumer sort of plays though you would be competing with them getting up to the AD budgets may not be spending as much so who knows maybe the good for you.
You may get more yeah. It may be I, you know what we're seeing right now is that our cost to buy our near branch terms like Moissanite is actually going up and I will say hunter that it's a testament to the work that we've done to create awareness for moissanite and and to say sort of has been going in the market.
Because we've created this presence.
We have competitors that don't offer moissanite that actually bid on the term and they do so because they realize that there are eyeballs searching for us and coming here and so it's it's funny over holiday and we've had we had some unusual ones like you know car T. A and Tiffany we're bidding on the Moissanite term, which is interesting they don't carry the product in their stores, but they know that there's a car.
From are coming here for us when it does it's a good thing in an unfortunate thing a great to that we're bringing in the eyeballs, but then it brings the attention in that bid up the cost of owning those near terms. So.
Well, we'll work our way through but this is that's a very good problem to have an I'll take that any day the week.
Oh, no definitely them. It makes a lot of sense and also be interesting to see what the budget I mean, I know a lot of people getting married there's an inclination to go for diamonds, but now people may be more hesitant to spend 10 Grand on a wedding ring that may well know as maybe they'll be more open to moissanite right because there's been a record onemain.
Volume in and budgets are tighter so we'll see it could be.
From a it's going to be like you said during the call. Some negatives in some positives the next few quarters. So.
Right and you know you're spot on it we generally do pretty well in a downturn time.
In past Recessionary time Chronicle bar has fared pretty well because of exactly what you. Just described we wind up with a customer who is value oriented may not be able to exactly afford the ultimate a product that they want at that time, but then they find moissanite realized in their study.
Hang of it that it had better optical properties than than even diamond and.
You know here here, we are ready to give them a product that we will guarantee for the rest of their lives. So and you know we're here to the the entire world, they're starting to figure out without a you know as I think you probably know we went global with our marketing effort over the past year, where we began a amazon presence in Italy, Spain.
France, Germany, Australia other countries on and we're beginning to get the world out there as well so as the entire globe is impacted by this pandemic, where here with product that we think can fit the wallet.
That makes sense makes sense.
Okay. That's it for me in a stay safe and I. Thank you very much for the answers.
That's our pleasure thanks for dialing in Hunter.
Are there any other questions any Q.
Yes on this question will come from William also with.
Paulson Wesley Please go ahead.
Yeah. Thank you very much for taking my question could you give us some more color on what portion of your AD budget, you're now spending on performance based ads on social media. Thank you.
Hey, Thanks for dialing in William it's it's really nearly a 100% in performance based advertising. So we have brought everything down to the low funnel and within that low funnel work. It's it's it's probably close to a 50 50 split between work that we're doing on social and work that we're doing in and keyword buying so again.
Very grass roots work that we're doing it. This time, we have abandoned at the moment anything that is a very top of funnel and you know.
Impression based and the reason for that as a horse to get the very high return on AD spend that we are requiring at the moment.
Thank you.
It's my pleasure.
We take the next question.
Our next question will come from Pete Enderlin Whats Amazing partners. Please go ahead.
Hi, this is and Glenn.
Thanks for taking my questions.
I have another year on the.
Write down of the legacy inventory.
Which was 100%.
But the question is did you consider.
Writing off lesson on because you know for years when a loan notes. So good is still good still good.
And now you know obviously triggered by the.
Covert.
Pandemic, you wrote off the whole.
Remaining carrying value that but did you think about maybe just cut in half or something like that.
Good Hey tape is quite good question I think from standpoint of the valuation that we went due from the from looking at all the components of that legacy inventory.
At this stage with the with what we're seeing in that particularly in the international.
The market.
Impact it had related to.
Both the with the coal that 19, the political unrest in Hong Kong and those those.
Where that where some of that legacy inventories being sold.
Is this thing the dry up and at this stage you know, there's really no demand in the market for right now.
For that type of legacy product. It we've been you're right now we're not in print marketing dollars on that stuff right. Now, we're just trying to sell it so the everything's up forever one story for US now and that's that's now kind of ice true with will sit in that.
Okay fair enough.
I think you said that that the.
Your chosen Collaguard dotcom sales declined more than overall online sales. So what does that tell me, what's the significance of that is that.
You cut back so im on the digital advertising, but you did say you know more down.
Bottom part of the football is with all the noise of people searching for things on online that they had a hard time getting to your website or how do you how do you rationalize that.
It's a great question and I'll take that one you know we were Ah well first and foremost we were we were closed for a significant period of time and had put up some messaging on our website that we were happy to take their orders, but I'm unable to ship and that was during the phase. The first total lock down from in the state of North.
Carolina, but at that time, we had online partners such as Overstock and other partners that were able to keep those products up and live and of course, they tend to purchase and then sell the lesser expensive a product we tend to be a premium products and Charles and Colvard Dotcom Overstocks tends to like a four as 1100 dollar.
Average order value there more like a six or $700 average order value and during a time. This early time, when we really saw the downturn the lesser expensive products were selling that we're selling on Amazon because that was one of the few places that could deliver and they were selling on some of these online channel partners that were able to ship within out you know within a very short period of time and thanks.
Before our distribution network, we had distribution partners that could ship on our behalf. While we were unable to do certain shipping here from Charles and all of our headquarters. So we were able to serve those channels a bit better in the first few weeks of the downturn and the the stay at home orders than we were our own site. We're now.
Now back up fully functional were taking returns were doing repairs and we're doing our typical immediate turnaround for customer demand and that's why we're seeing a the traffic and the demand on improving on Charles and Colvard dotcom as well.
And Susan you mentioned that you have a big seasonal.
Push coming in.
June basically for engagement.
Weddings, and graduations and those kinds of.
People have already made the point that you.
You could benefit from affected.
Your cost value proposition is clearly better but can you get more specific about.
How that may play out in the different parts of that seasonal.
Both.
The next most in Africa.
Yeah, if you know.
We are just not sure how it's all going unfold from day to day it shifts in a differ than we are watching every trend every day, but if you are honor mailing list I'm not necessarily our investor relations mailing list, but our customer mailing list, which you can sign up for on Charles and Colvard Dotcom, you'll you'll actually see how our men.
Messaging and are sort of you know few times a week emails are really a tuning to what's happening in the market. So right now on the messages that we've had over the past couple of days are very heavy on graduation.
And were selling well into graduation products as study earrings tend to do really well during graduation times pendant on these are things that you don't have to know the size, maybe if someone's finger. So we do a little bit more right now at hearings and pendant than we do necessarily of rings. So you know a it depends.
Today, we lean into it as we see the trends, that's where we get really smart about what's happening on social media and what our customers are telling us and then we ah than we react to that market and we're able to be nimble and how we promote on to the trend. So stay tuned on that and we are well give you more color as as we learn more about what the consumer is asking for.
Yes, good even.
Our next question will come from Chris largely with.
Do you micro please go ahead.
Thank you guys for the call too I just had a quick question about.
Promotional pricing do you think you'll still be any change even with kogan could you. Please thank you again.
Hey, Chris Nice to hear from you Ah Boy. It's a great question, we are seeing deep deep discounting with a lot of the retailers that are as I think I'd said in prepared remarks, you know stuck with a lot of spring merchandise that they're trying to get rid of and I think as retailers come out of lock down they're looking for any way to make revenue.
And so I think we're going to see a trend over the next couple of even quarters of deeply reducing discounted faces in retail I will say trolling Kosovar you know we do have sales that go along we got were on sale right. Now we had a mother's day sale. We're currently on sale on our website, we're going to encourage the same kind of activity with a modicum of.
Discount on our product, but we don't want to.
Bring down the entire value on our product line and so we're very cautious about how frequent and it how deeply go with our discounting on and we never discount our our signature collection or you know, it's really a premium product and so we're trying to really build this premium branding and so for that reason, we're a bit careful about ourselves going deeply.
Discounted even though the market is trending that way.
Grant do we have another question in the Q.
Our next question will come from Walter Smith with I May see partners. Please go ahead.
Sorry to be slightly redundant with people who are working from home the legacy inventory.
Bill has economic value I suspect.
Economic value three months ago by writing it off.
On cash for book purposes.
Does this mean you will be able to be or what is your plan to be more aggressive in converting that inventory to cash overtime.
Thank you Walter.
Like we said at the statement that we said that it pretty much as little value now because of those channels drying up we will you know from the standpoint, we're going to be focusing on the forever one product line.
And making sure that were.
Using that you know.
The new inventory to make the goods and promote that piece of it them from our standpoint so.
But.
Yes.
At this stage.
I really don't see truly see much demand for that and in the market right. Now you know Walter I'll add some color to that you will see.
Forever classic and brilliant products still out in the market you know we've sold them for almost 25 years now and an IND through our channel partners and they'll continue to be out there on marketplaces in some of these outlets and so there will be a a trickle of it out there for Charles and Colvard, a we really believe in the engineering breakthrough that we had in in 2000.
As in 16, our 15, when we went from our legacy material into our new product and forever. One has been an amazing product and very well received in the market and then when we brought moissanite by Charles and Colvard forward almost well go on two years ago now it really is it is the because they did.
The discount a sister to forever. One it is a far more superior product to then the classics and the brilliance that are out there and it almost competes on price with what we would get for a classic or a brilliant and we're delivering a better product to market and it's better for our overall brand on it has better clarity it has better.
Color on its just a better performing product and so it is important that as we have very minimal marketing dollars, we place them, where the best bet is which is on the premium brand and we want to attach that premium brand to Charles and Cobar than the house brand. So we're really focused there should you know I should the sale happen online.
Line with some goods that had been sitting out there that's great for everyone, but that will not be our focus going forward.
Okay. Thank you.
It's a pleasure thanks for dialing in.
Great I think we have some more to come from Chris Trotsky Who's a private investor. Please go ahead.
Hello, Good afternoon, Thats were picking my question.
Sure.
So I guess Oh too.
Oh this is probably a bit more detailed the news or give book.
Just to kind of gauge good acceptance of losses.
You know kind of a little drug for sure the flow through bolt is that's kept funding.
Okay gums, a worker year over year growth was for January and February only the United States. So this we can see what's happening aside from the great. The insurance cover 19.
Okay. So let me, let me see that back over to claim because they've been asking to answer. Your question. So you're interested in looking at January and February of this year versus January and February of last and what I will say and taking picking March out of the the calculation because that's when cobot kinda started to impact us I will say, it's still won't.
Be a fair sort of apples to apples comparison in the holiday quarter in a in November December timeframe that we just passed we were beginning to see downward pressure.
In the greater Asia Pacific market, and so our traditional channels already began to decline.
In that December and into January February timeframe, because of the unrest that what's happening in China, and and Hong Kong. So we still won't get a super clean comparison, but let me turn it over to clients to reflect a bet on the January February this year versus last what we did have a we did have a strong let's say stone I mean.
We did have a well performing valentine season.
From that standpoint compared to year ago.
That you'll go period, which which valentines is typically January do you know it starts in January and goes into all the way up to.
The Valentine's day, So we did see Charles and Colvard dotcom, the because we are pouring at that point in time, we will also.
And activating our funds from the.
From the capital raise was in order to drive some more.
The drive some more.
You know advertising and people impressions and people to our web site. So we did sees a good performance.
And that that way as well.
You know as Suzanne mentioned the margin that bye.
And on a dropship retailers is really was really.
That we saw some Jones performance there as well yeah, I would say as we continue to see very nice other than what's happened with cobot very nice response from Dropship partners that would include folks like Helzberg Dot com Belk Dot com, we're very excited to have the bay in Canada, Canada has been a growing.
On a region for us.
We are doing pretty well with a Canadian consumers coming across the border and buying from US here and we're excited to have a I'd actual presence with a retailer in greater Canada. So to claims point on online comparisons were quite good again traditional was down.
But online channels performed very well and in the January and February timeframe and we're just excited for all of this to to pass by and for us to get back to whatever the new normal is gonna be I do think we have time for one more question. If we could and then we'll call it a day.
I'm showing no questions at this time I'd like to turn it back to us as Suzanne Miglucci for any closing remarks.
Super Okay, well, thanks to all of these who joined US today. We appreciate your continued interest in and support of Charles and Colvard very much. Please stay safe and stay tuned as we navigate the coming months. Thank you and good evening.
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