Q2 2021 Charles & Colvard Ltd Earnings Call
[music].
Good day and welcome to the Charles <unk> Colvard second quarter fiscal year 'twenty 'twenty, One earnings conference call and webcast all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after today's presentation.
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This earnings call may contain forward looking statements as defined in section 27, a of the Securities Act of 1933 as amended including statements regarding among a among other things the company's business strategy and growth strategy.
Expressions, which identify forward looking statements speak only as of the day. 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.
Developments and actual results could differ materially from those set forth and 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.
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 Dot Charles and Colvard Dotcom forward slash 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 I R at Charles <unk> Colvard Dot com.
Please note that this event is being recorded.
I'd now like to turn the conference over to Don O'connell, President and Chief Executive Officer. Please go ahead.
Welcome everyone. Good afternoon today, we are going to report Charles on cohorts fiscal 2021 second quarter results on.
I am pleased to share with you that we had a record breaking quarter delivering our highest revenue and income from operations in company history.
We were able to generate $12 $1 million on revenue and achieve a net income of $2 $5 million.
With strong gross margins of 49% and a positive cash flow of $3 million for the quarter.
This was a 14% increase in revenue versus the year ago quarter with an EPS of nine cents per diluted share, which represents a 200% increase over last year.
For the six months ended December 31, 2020, we recognized a 232% increase in net income and.
And on 300% increase in earnings per diluted share compared to the year ago period.
Additionally, we bolstered our total cash to $16 9 million, which.
Which is a 26% increase from the year ago quarter on.
Our team executed with purpose and precision during the critical holiday quarter.
A possible for us to achieve such positive results.
Now I'll turn the call over to Clint Pete our CFO to unwrap the numbers in more detail.
Thanks, Don.
Today I'll provide a key summary of our key financials for Q2 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 this evening.
Please note that all percentage comparisons are to the year ago quarter.
Unless specified.
We will start with revenue.
In total net sales for Q2, 2021 totaled $12 1 million versus $10 7 million or an increase of 14%.
And our online channel segment.
Which includes Charles on cohort Dot com marketplaces drop ship retail and other pure play outlets net sales for the quarter totaled $7 $6 million or an increase of 25% representing 62% of total net sales net.
Sales from our transactional website, Charles on cohort Dot com increased 16%.
And the company's traditional segment, which consists of wholesale and brick and mortar customers.
Net sales for the quarter was $4 $6 million or flat to the year ago quarter.
Representing 38% of total sales.
Finished jewelry net sales increased 28% for the quarter.
This was primarily due to the strong demand for our premium jewelry on our online direct to consumer channels.
And with our brick and mortar retail customers.
Loose jewel net sales decreased 8% for the quarter as there continued to be a lower demand from our international distributors during the entire quarter related to COVID-19.
Overall international net sales decreased 25% due to limited orders amazing distributors.
Bind with lower cross border trade sales on our transactional website.
Yeah.
Moving on we continue to maintain a strong gross margin of 49% compared to 48 per cent in the year ago quarter.
Yeah.
For Q2, 2021 total operating expenses decreased 21%, representing 28% of total notes net net sales compared to <unk> 41 per cent and the year ago quarter.
Sales and marketing expenses decreased 22%.
The $2 5 million and G&A expenses decreased 19%.
$978000 per quarter.
Next we reported net income for Q2, 2021, a $2 $5 million or nine cents per diluted share.
Impaired two with net income of approximately $814000 or <unk> <unk> per diluted share in the year ago period.
Now, let's move on to a snapshot of our balance sheet.
Our liquidity and capital position remains strong as we ended the quarter with $16 $9 billion of total cash.
Compared to $14 $6 million.
At our last fiscal year ended June 32020.
Our cash flow from operations was $3 million per the quarter.
Compared to $985000 in the year ago quarter.
In terms of other sources of liquidity.
Continue to have access to a $5 million asset based credit facility with white Oak commercial finance.
As of December 31, 2020, we have not excess funds to this credit facility.
Inventory as of December 31, 2020 totaled $28 $7 million per.
Paired with $36 million as of June 32020.
Loose jewels inventory was $17 $6 million.
Compared to $28 million as of June 32020.
Finished jewelry inventory was $11 million compared to $9 7 million as of June 32020 to support the upcoming Valentine's day selling season.
And maintain stock levels for our direct to consumer channels.
In summary, we had a record setting Q2 from both a net sales and operating income perspective.
Even in the pandemic impacted environment.
We will build on this progress in the remainder of fiscal 2021.
As we positioned Charles on cohort for long term growth.
Generating value for all of our stakeholders.
With that I.
I will turn the call back over to dawn.
Thanks Glenn.
These positive financial results are reflective of the transformational changes made across the business to become more data driven enhanced operational efficiencies attract new customers and improve the customer experience. This renewed approach along with our diversified product lines positioned us to capitalize on the holiday season.
We believe business intelligence was a key factor in our success since we invested a significant amount of time and energy into building out analytics tools.
These tools allow us to pull data in real time.
To better understand our business and make informed decisions.
Clinton addressed our current inventory levels and I'd like to take the opportunity to elaborate on these numbers.
We were able to make meaningful progress on the balance and concentration of our inventory supportive of our current business needs.
Our inventory totaled $28 $7 million at the end of the quarter, which represents a 6% decrease from June 32020.
I'd like to help break this down and.
And add some clarity you can visualize our inventory in two major buckets, 48% of our inventory falls into the bucket number one which consist of our raw material.
Loose gems and jewelry components that are in process or what we call internal or external web or our work in progress.
These goods are in the process of being cut faceted graded engraved or manufactured.
Naturally a large portion of the percentage or this percentage appears on our long term inventory classification because of longer cycle times.
The remaining 52% of our inventory is in the second bucket, which consist of in stock finished goods that are ready to pick pack and ship.
And a small portion of this bucket is in consignment inventory located in our retail partners' brick and mortar stores.
Operationally, we were well positioned to meet the holiday demand we.
We're able to effectively overcome supply chain challenges and logistical constraints due to the global pandemic.
We shipped a record number of packages for the company, resulting in a 9% increase versus a year ago quarter.
All the while decreasing our operating expenses by 21%.
Merchandising and product development, where additional key factors in our success during the quarter.
We were able to bring to market on elegant and aesthetically pleasing product mix that resonated well with our growing audience.
I am pleased to say that our traditional channel segment performed better than expected with brick and mortar sales offsetting our continued challenges faced by international distributors due to COVID-19.
Our forever, one voice Tonight and are more Tonight by Charles on Cobalt product brands remain in high demand with our retail and distribution partners.
Our overall revenue growth was fueled by our online segment, which experienced a 25% increase year over year.
With Charles <unk>, Colvard Dot com, representing nearly 60% of online sales this quarter.
Our third party online sellers also recognize growing demand for.
For our Forever, one mine site and our Charles on cobalt products with several customers experiencing double growth with our products year over year.
Contributing to our online growth.
It was our first quarter offer Acadia lab grown diamonds in our product brand.
Which is currently only sold and marketed on our direct to consumer website.
Here's what we learned from this product launch.
Brand equity matters consumers trust, the Charles <unk>, Colvard name and adopted Arcadia lab grown diamond product brand with confidence recognizing us as a premium destination from lab created diamond fine jewelry.
Product selection is also critical that careful considerations made to launch classic bottle styles and fashion pieces, featuring our patented signature collection.
Was meaningful and appeal to our greater audience.
We learned that we needed to expand our product assortment to meet the growing demand for Katy lab grown diamonds. So we continue to capture and can capture greater market share to tap into that multibillion dollar opportunity.
Arcadia lab grown diamond brand attracted a new broader customer base, allowing us to educate consumers on the broader lab grown movement.
This movement also elevated forever, one voice net awareness and sales in a meaningful and measurable way.
Our newly integrated sales and marketing teams worked together to develop and execute successful holiday campaign that resonated with our target audience and.
And help to ensure on optimal customer experience throughout the buying journey.
Our redefined real campaign brought awareness to our forever, one voice Tonight, and Katy lab grown diamonds by emphasizing that we now offer our customers a choice and premium lab grown John.
This ongoing campaign challenges the idea that the origin of a gym is what defines its authenticity.
Additionally, we were keenly focused on our digital marketing spend carefully targeting specific audiences debt drove greater conversions.
Going forward, we will continue to build upon this momentum we gained in Q2, we believe in the future of our omni channel strategy with an emphasis on new digital commerce opportunities and capabilities.
We will remain focused on engaging customers and new cutting edge ways, we will continue to expand and educate the Charles <unk> Colvard product brands, we will seek to expand product distribution across all new channels, and we will strive to increase our brand equity and shareholder value by private prioritizing disciplined growth.
With that I'd like to turn it back over to the operator, let's open the lines for your questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star and then two please.
Please limit yourself to one question and one follow up.
If you have further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Matt <unk> with Roth Capital. Please go ahead.
Hey, guys good evening and thanks.
Just wanted to start off with Acadia.
The performance since the launch so what metrics can you guys provide on revenue contribution during the quarter.
Can you help us in terms of Ao vs Acadia and how they might compare to kind of the core.
Charles on cohort <unk> database that you guys have disclosed before.
Sure so.
So Matt we don't we don't disclose product brands or performance in individual product brands, but what I can tell you is that it was absolutely additive to the business it was accretive to the business.
It also helps to kind of bring awareness and put us in the conversation and by being in that conversation. Those customers also we're exposed to our moist tonight for everyone right. So with that being said, we started to see a lift in net too as well.
But we can just say right now at this time that it was meaningful within the quarter and we're very pleased with those results as it relates to the <unk>.
We did learn some things with the Katy lab grown diamonds throughout the quarter.
As we started to kind of introduce more and more through our social campaigns and everything we had a very large consumer base gravitating to our fashion or <unk>.
Let's just say our smaller accented stones on what that did for US was it leveled out or does.
It actually maintained consistent <unk>, where our moist tonight.
Which is anywhere from 1000 to $200. So in our in our Diamond Kt is not to say that we didn't experience.
Some nice movement in our bridal on the bridal categories with the larger centers, but we're pleased at.
That's made the business more well rounded for us.
Okay, great to hear.
Thanks, Tom and then.
In terms of the channels for Acadia I know you guys mentioned, obviously its proprietary to your own website the DTC website.
But how should we think about the plans for that over the next 12 months. If you will just in terms of Ah I would assume you guys may get some requests from some of your traditional channels for the product. What are you. What's your thought process on how you roll that out to additional channels or do you keep it sort of proprietary to us.
The Charles <unk> Colvard on website.
Yeah, Great question. So we're always open to listening to what the consumer with the retail.
Is.
Is pretty much dictating, what they want and what their request star. So we have gotten a lot of responses from our channel partners that they want to go ahead and explore Katy lab grown diamonds.
For the most part right now what we want to do is we want to learn more we want to better understand that consumer and better understand what that consumer wants.
And basically right now it is proprietary to our Charles on cobalt Dot Com channel and we'll probably keep that a little bit for right now.
But we're constantly kind of open to exploring whats next and how we can kind of grow and tap into debt multibillion dollar opportunity across the board between our retail partners, where our drop ship partners or it really depends but the Acadia is generally a premium right now we came to market with a premium lab grown diamonds.
So that would have certain limitations on where we would go with the channel as far as the Katy lab grown diamonds, but as we learn more on it's not to say that we won't explore other product brands within the space that may not be Acadia, but.
Maybe something else in that nature.
Great great.
And then just if I could sneak one more in on the on.
Online channel the Reacceleration and growth is really encouraging there. So I just wanted to see if you guys could speak for a moment on what youre seeing in terms of performance marketing return on that spend.
I mean, it looks like sales and marketing line item overall decreased year over year.
So that would imply you guys are getting a lot of efficiency, but I guess, there probably are some moving pieces within that sales and marketing line.
On kind of bottom of funnel performance marketing expense. So if you could talk about the puts and takes there and just what that's done to your customer acquisition costs that would be very helpful.
Sure.
So we have a different approach.
Different as we spoke about and we alluded to in Q2 kind of we were we were learning and during Q1 and Q1, sorry in Q1, we were learning what that consumer wanted we were learning where that consumer was shopping we were learning.
Basically what was the click through that was driving that consumer to convert on our website.
Also what we did there was we.
We basically also just changed our.
Paid social campaigns to reflect those conversion based.
Customers or consumers.
By doing that we were able to also flex our spend which allows us to open up.
The market a little bit more and be there when that consumer was there resonating with our products and then clicking through to our products and that we were able to capture more market share. We will continue to look at that we'll continue to learn from that but really it's more of a focused approach to mid to lower funnel conversion based.
It's really we did a bottoms up analysis on all key words phrases. We had some efficiencies also one thing Thats really really critical is we built out some incredible bi tools with our team and we put together some tremendous.
Analytics that helped us make real time decisions that really dictate a lot of what we did to drive the growth. So that's something that we want.
We needed to do a better job before it's something that we are doing a great job with now and we'll continue to look at and do better in the future, but certainly data driven decisions that are very specific to key questions that drive the traffic is really critical to the really the next chapter and Charles and co part of where we're going on where we are growing besides the product brands that we offer.
Great very helpful. I'll jump back in queue guys. Thank you.
Yes.
The next question comes from Jason <unk> with Bumbershoot Holdings. Please go ahead.
Congratulations on that.
Really appreciate all the details and specifics you walk through what's actually.
I found it very helpful. In terms of understanding where you want to be headed in terms of.
The growth in the quarter could you maybe talk just.
At a high level qualitatively, how many the COVID-19.
Impact.
That's kind of a benefit or negative obviously this focus on the bottom funnel spend.
Sure Adam the tick Tock movement, what kind of drove some of the growth rate in the quarter and how do you think about that growth rate as you kind of go from holiday season to holiday season with Valentine's day.
From a seasonality.
Yes, so I mean, I'm, probably won't elaborate on any individual.
You know Influencer Influencer campaign, that's outside our own doing that drives the traffic, but certainly more awareness more brand awareness more of what we're doing socially is driving more awareness to the overall brand.
And basically being in that conversation to wear that consumers purchasing our moist tonight loving our moist and I know forever, one understanding its quality, making that choice to go with that and then literally posting it organically throughout the web.
As it relates to tick tock or <unk>.
<unk> or Instagram or Facebook outside of what we publish.
We are not going to comment on that and any new movement related to those.
Mediums are fairly new and werent reflective in the quarter. So all of the benefits of what we've done here internally driving the business is all what drove the growth of the business.
Mostly online most of the business was online.
Theres probably some.
Some credence to.
More people being at home more people seeing the brand for the first time understanding what we offer and purchasing but we're also.
Please on the traditional side of it too as well between our traditional brick and mortar retail, which we were very pleased to be flat, which we had anticipated debt we'd have some.
[noise] retraction from that aspect of the business due to COVID-19.
But overall.
I would say that the international piece is probably the biggest pain for US right now on the business side and we're pleased that the traditional brick and mortar and our online was able to fill those gaps.
We see we've seen a constant growth with the organic movement in our on.
Online traffic over the entire quarter.
Even coming off of Q1 straightforward.
Okay, and I guess, just following up on that I'm, not I guess I'm not trying to ask about any.
It would be campaigns, if you can't give details but are they do they tend to be normal.
Ongoing arrangements or are they more one off day.
Look I'm not I'm not trying to hint that I watched the bachelorette hub on a public earnings call.
Surprised when it came up.
Well.
Like that it was an amazing product placement I thought and and really resonated with the brand or are these things that are like.
Like formalized.
<unk> or do they tend to kind of just emerge and then kind of be a one off type of thing so.
So specifically related to the bachelorette that was internal.
Campaign within our marketing teams to push out goods and that was totally.
On alignment between Charles on Cobalt, and who we would align ourselves with so to answer your point blank with that specifically that was a specific marketing.
Project with our teams together working together and coordination.
Okay, and then I loved hearing you say brand equity matters, when you think about.
Kind of growth in the moist sector area, and then kind of becoming the brand within that is there.
There.
A way to accelerate some of the debt.
Turning to kind of capture that first mover advantage and all the things you've done in the brand in terms of maybe willing to forego a little bit of profit in the short term.
You know I mean, you have 25 per cent of your market cap still on cash in your cash generative. So.
Is there any risk to you.
Going forward, a little bit in terms of spending more to try to capture some of that growth.
Transcend into really D brand in the space.
Yes, so all great questions. So let's talk about the growth in this sector and let's talk about the sector in general as it relates to moist night, we pretty much.
From the opinion that we owned the market and we have the greatest market share. We're also the innovators into creators of voice Tonight I will also say that with a lot of people don't know is that almost tonight.
Well I shouldn't say, all more tonight, but a lot of the moist night through our distribution.
From partners.
Or also in white label or they could be forever one.
But basically those service all of our independent retailers those 40000 independent retailers out there that buy that product through distributors that you may not even know that it's Charles <unk> colvard product. So that helps lift our traditional segment or really the foundation of the business was built on as far as our <unk>.
Building the foundation and all the loose gems being out there building more awareness to moist tonight. So on that awareness continues and keeps driving where it is it is going to lift us up too as well.
So we're really pleased with the growth that's happening right now being in the conversation on the lab grown space as it relates to moist night and even now the elevation of voice Tonight, and what it has to offer but.
No mistake, our moist night is not limited to just Charles <unk> Colvard on which Kia, It's moistening in general overall.
As far as the foregoing profit for more awareness.
Certainly right now we're early into this where about two quarters interest. If you look at the kind of the revised.
Transition between Q1 and Q2. This is indicative of the leadership here, it's indicative of how we want to run and operate the business.
We look at top and bottom line. So we're constantly looking how can we drive.
Top line growth, but we also want to be mindful of the fact that we have a very profitable business right now and we're making responsible decisions with the money that's not to say that we will look for something in the future that could catapult us to the next level and get over this.
Idea that we're just limited to where we are here and grow the business exponentially. Further so certainly we will be open and we are listening and we are looking at.
Other opportunities whether.
I guess youre influences, whether it could be through a celebrity endorsement or something like that or even pushing more money into the marketing kind of awareness campaign, and giving us more exposure.
Without a doubt we're looking at those options and opportunities right now, but I will tell you that we wanted to get the house in order and I believe that we've proven that the house is absolutely an order and it's performing quite well right now.
Okay Fantastic and then I apologize just one more I just want to clarify in terms of I think you had said Charles and Cologuard, bringing people to <unk>.
Or is it the other way around I guess my interpretation was it <unk> kind of helping with this education process.
I think you've kind of called it like a gym is the gym.
And then maybe that leading people even more towards.
On the moist Tonight.
Again.
So you are correct, but let me just so Charles <unk> Colvard is the house of brand under that brand consist of our product brands, which is forever one and it's currently Acadia lab grown diamonds. So those are our two product brands and also fortunate by Charles on cohort as well.
So basically we're pushing at Charles <unk> Colvard as the brand of choice for all your lab grown gemstones and we want Charles on coal bar to be the pinnacle, we want Charles <unk> colvard to represent that kind of a taste of quality price and value.
And then from there we want to build as much awareness as we can but to be quite Frank.
Lot of people just were predisposed to the diamond market are predisposed to diamonds and day. They basically just didn't want to hear about moistening and even when we tried to push on some cases to educate that consumer so with our product brand Acadia lab grown diamonds. We're now in that conversation, we're getting press from Forbes magazine to <unk> Dot com.
Tom to refinery 29.
To the not some great publications.
We're able to actually speak about Charles <unk> Colvard, the brand and then educate more on those product brands, which is now resonating more which we believe that it is going to lift us entirely.
Moving forward within the quarters. So I guess, it's a combination of both it's it's just the overall conversation of lab grown diamonds that people are listening to hey, who are the players in that space and now Charles on cohort, which is associated with all of the quality of our jewelry and craftsmanship ship and recycle bill.
Metals and stuff like that comes into play and now the difference is they have the choice.
Understood I appreciate that thanks for taking my questions and again congratulations on on the results.
We really appreciate it.
As a reminder, if you have a question. Please press star and then one to be joined into the queue.
Our next question comes from Pulse Zimny ski with Peasy D Day. Please go ahead.
Hey, guys. Thanks for taking the question congrats on the strong performance I guess they are more of a general question. How are you finding the end consumer responding to the option of noisy night versus Bob Diamond when it comes to engagement ring in particular.
For the consumers that are choosing a dime and are you getting any feedback as to why they're choosing the diamond over the moist tonight or vice versa.
Actually that's a great question.
It's kind of early on for us a little bit to kind of give you a definitive answer on that.
I can tell you.
My team did a fantastic job and kind of laying out.
Both channels on our direct to consumer website. So really we're just having that consumer that consumer is actually making that choice when they are clicking so.
If I could just.
Put that aside for right now on maybe will answer that a little bit future. You would not you will get on a call I think it's a great question I need to better understand what the consumer is doing related to that and then look at some type of a heat map and going through that but I can tell you vocally that consumer is not.
Saying anything to consumers either choosing either the lab grown.
Diamond and Acadia or their chosen forever, one voice Tonight I do think debt, we are getting a tremendous amount of calls within our customer service group, that's actually probably walking through and educating the consumer telling them what the choices whether they are choosing you know unfortunate because its the value proposition or whether its diamond.
Because they are predisposed to a diamond.
I don't have enough information on that and I'd like to get that get back to you on that.
Fair enough wish squishy guidance, the best going forward.
What's your best guess for the rest of the year.
Sure we appreciate it thanks.
This concludes our question and answer session Oh actually pardon me.
The next question comes from Eric Landry with BMO capital. Please go ahead.
Hi, Thanks for taking the question.
Have you had any feedback about what's going on with your PPP loans.
Yes, So I'll, let you go ahead and answer that he'll walk you through that sure Hey, Eric how are you doing great.
Great.
Listen we have not filed our forgiveness application to date.
Our lenders basically told us that we should we should expect the valor forgiveness application no sooner than April one of this year 2021.
So we hope to file at some time in fiscal year <unk>.
Quarter Q4 2021.
Okay.
Can I sneak one more in here and you probably can't answer this but I'll give I'll give it a shot anyway.
Okay.
Neither one of you mentioned, which of the two product categories grew faster in the quarter, whether it was a lab grown or the moist tonight.
That's a great question.
I can't really answer it, but we had very nice steady growth on both fronts I mean, thats as specific as I can get.
<unk>.
We're very pleased with our forever, one voice sight into the growth trajectory of our moist Tonight and we're also very pleased of our Katy lab grown diamond growth.
So we we basically don't disclose that Mccann at this time zone.
Okay.
How about this what did you did you sense that there was any type of cannibalization in the quarter.
No. It actually was the reverse it actually elevated our forever one voice on a moist night sales.
The board.
Also we.
We really really are merchandising and product development team did a great job of making sure that there's a clear delineation between the two products for example, two carats and below is.
Is really catered to the diamond business or the lab grown diamond price points, whereas the moist and on benefits are two carat and above also in the moist tonight, we only offer I mean, we offer.
Many many shapes and sizes debt would be cost prohibitive in the diamond World of lab grown diamonds space.
So it's really a clear delineation from the two we did a really good job on coming to market.
We are not experiencing cannibalization by any means so both are growing very nicely the business is growing very nicely.
It is reflected in our in our earnings.
You guys are doing a great job fantastic work. Thank you for taking my question.
Sure Eric Thanks, Eric.
This concludes our question and answer session.
I would now like to turn the conference back over to Don O'connell, President and Chief Executive Officer for any closing remarks.
So all I can say is I'm very proud of our team and what we've accomplished through the quarter and we appreciate all your time and consider continued interest in Charles <unk> Colvard, we look forward to delivering more results like this in the future quarters to come will be safe and be well.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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