Q1 2022 Charles & Colvard Ltd Earnings Call
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Good day and welcome to the Charles and Cobalt is Q1 fiscal year 2022 earnings call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
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Including statements regarding them are among other things the companys business strategy and growth strategy expressions, which identify forward looking statements may speak only as of the date. The statement is made.
Forward looking statements are based on largely on our company's expectations and are subject to a number of risks and uncertainties some of which cannot be predicted or quantified and are beyond our control future developments and actual results could differ materially from those set forth in contemplated by or underlying the forward looking.
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Our company accompanying today's call is a supporting Powerpoint slide deck, which is available on the Investor Relations section of the company's website.
I R Dot Charles and cohort Dot com slash events the.
The company will be hosting a Q&A session at the conclusion of our prepared remarks.
Should you have questions you'd like to submit please E mail I are at Charleston cohort Dot Com. Please note. This event is being recorded I would now.
I'd like to turn the conference over to Don O'connell, President and Chief Executive Officer. Please go ahead.
Welcome everyone. Good afternoon today, we're going to report Charles and Cold barge first fiscal 2022 results.
I'm excited to share with you that the company delivered another quarter of double digit growth in net sales in both our traditional and online channels segment.
As well as in both finished jewelry and loose gemstone product.
Our net sales for the quarter were $10 3 million.
Which is a 30% increase over the year ago quarter.
We delivered a strong gross margin of 51% for the quarter compared to 47% for the prior year's quarter.
Income from operations for Q1 was $949000 and we had 827000 of net income or <unk> <unk> earnings per share.
Our cash remains strong at the end of Q1 at $19 2 million and our working capital remained a robust $29 5 million.
In addition to the year over year improvements, we're continuing to see in our numbers Q1 was a key period for us from an operational standpoint.
I'm proud to say do we have proactively managed our inventory in order to be well positioned for our critical holiday season. Despite.
Despite the significant supply chain constraints that many industries are experiencing we anticipate a potential disruption and planned accordingly, with our vendors positioning ourselves to have the necessary product to satisfy our holiday demand.
I'll dive into the execution of our strategic initiatives initiatives later in the call for now I'd like to turn the call over to Clint Pete our CFO to discuss the numbers.
Thanks, Don.
I will provide a summary of key financials for the first quarter ended September 32021.
Additional detail can be found in our earnings release that we issued this afternoon and for them.
<unk> Form 10-Q, which we expect to file tomorrow.
Please note that all percentage comparisons are to the year ago quarter unless specified otherwise.
We will start with Q1 2022 revenues.
In total net sales for Q1, 2022 totaled $10 3 million versus $7 $9 million.
An increase of 30%.
Net sales through our online channels segment, which includes Charles and Colvard Dot com most of that outlet dot com marketplaces drop ship retail and other pure play outlets totaled $5 $4 million for the quarter or an increase of 20%.
Representing 52% of total net sales.
Net sales from our transactional website, Charles and Colvard Dot com increased by 25%.
Net sales for our traditional segment, which gets us consists of wholesale and retail customers.
The $4 $9 million for the quarter or an increase of 42%.
Presenting 48% of total net sales.
The increase was due to our domestic distributors gearing up for the holidays.
As well as strong demand from our brick and motor retail customers.
Finished jewelry net sales increased 31% for the quarter as we continued to see strong demand for our premium jewelry and our online direct to consumer channels and with our brick and motor retail customers.
Those jewels net sales increased 28% for the quarter.
This is due to the increased demand from our domestic distributors.
International net sales increased 7%.
Moving on we delivered a strong gross margin of 51% versus 47% in the year ago quarter.
Which increased due to strong signature collection orders in the quarter, which are not discounted and carry a higher margin and continued growth in our online channels segment.
For Q1, 2022 total operating expenses increased 51%, representing 42% of total net sales compared to 36% in the year ago quarter.
Sales and marketing expenses increased 66% to $2 7 million and G&A expenses increased 31% to $1 $6 million for the quarter.
These increases are primarily due to our increased investment in our marketing strategy in preparation for the upcoming holiday season.
Tenants at the JC K Las Vegas jewelry trade show.
An increase in stock based compensation and bonus expense associated with our operating results performance all within the quarter.
We reported net income for Q1, 2022 of $827000 or <unk> <unk> per diluted share.
Compared with $874000 or <unk> <unk> per diluted share in the year ago period.
And net income as income tax expense of $122000.
We are recording income tax expense going forward now as.
As we reduced our deferred tax valuation allowance as reported previously in Q4 2021.
Although an expansion of our income statement, we will not be required to outlay any cash for income taxes due to our net operating loss carryforward position.
Our weighted average shares outstanding used in the calculation of diluted earnings per share for the quarter were approximately $31 1 million shares at September 32021.
Compared to $28 8 million shares at September 32020, 2020.
The increase in our weighted average shares outstanding was driven by an increase in option exercises by insiders.
And restricted stock that vested during the period.
Now, let's move on to a snapshot of our balance sheet.
Liquidity and capital position remains strong as we ended the quarter with $19 $2 million of total cash compared to $21 $4 million at our last fiscal year ended.
June 32021.
Our cash flow used in operations was $2 1 million for the quarter compared to $642000 in the year ago quarter.
Our cash used during the quarter was primarily due to the investment in building finished jewelry inventory.
Preparation.
Upcoming holiday season.
Our working capital of $29 $5 million at September 30th was consistent with our working capital at June 32021.
In terms of other sources of liquidity, we have access to our $5 million cash secured credit facility with JP Morgan Chase Bank.
As of September 32021, and through today.
We have not accessed tons through the credit facility.
Inventory as of September 32021 totaled $31 $6 million compared to $29 $2 million as of June 32021.
Finished jewelry was $15 $8 million compared to $12 $3 million as of June 32021.
To maintain stock levels for our growing demand requirements and in preparation for the upcoming holiday season.
Loose jewels inventory was $15 7 million compared to $16 $8 million as of June 32021.
In summary, we remain confident in our financial strength and our continued efforts to increase shareholder value.
With that I'll turn the call back over to dawn.
These positive results underscore our commitment to responsibly, managing our business, while executing on our strategic initiatives for fiscal 2022.
During Q1, FY 2022, we expanded our brand presence by further elevating our Charles with Cobalt House brand.
Everyone moist product brand through our participation in the industry, leading J T K Las Vegas jewelry show.
Distinguishing ourselves as an authority.
And a premier provider of more Tonight jet. Additionally, our recent grand opening of Charles and Cobalt wholesale distribution center in <unk>, China underscores the importance of nurturing our brand presence internationally.
We worked with our strategic partners and industry leaders that JC K to broaden our product offering launching new KD allowed ROE and diamond fashion jewelry, and expanding our forever, one more fine and fashion jewelry all in support of the upcoming holiday season.
We focused on bringing forward innovative product choices to our customers. We recently hosted an intimate press review in New York City, introducing these products.
<unk>, our new Zodiac medallion collection, that's exclusive event gave editors and Influencers a preview.
Of the collection and some other new lab grown diamonds and fashion pieces, which include flexible tenants bracelets.
And flexible necklaces available in both more Tonight and lab grown diamonds.
And some fatigue fashion rins available in lab grown diamonds as well.
While we continue to broaden our assortment we remain rooted in our bridal business as we seek to position ourselves as the premium source for made not mined gemstones featured in fine jewelry.
We believe these product diversification position, Charles and cobalt as a strong competitor in the lab grown diamonds space.
With a broader assortment of premium lab grown diamonds and jewelry comprised of nearly 100% recycled precious metals.
As we continue to expand our Omnichannel strategy, we remain focused on delivering an optimal experience for our customers evidenced shows that online shopping continues to gain traction at 57% of consumers plan to do the majority of their holiday shopping online and that customers seek livestream.
<unk> shopping and video consultations with personal shoppers with that in mind, we are scaling our virtual consultation services and planning exclusive streaming event can be ready for holiday, but also to enhance and personalize the buying experience.
The digital experience, we believe that fine jewelry customers wanted to touch and feel the products before they bought this led us to break ground on our first signature showroom retail location.
So that customers can experience the brilliance of our products firsthand.
This quarter, we deployed more capital resources, and digital AD spend and Influencer marketing campaigns to build brand awareness and reach broader audiences.
We believe this is critical to achieving the global recognition, we seek in the fine jewelry and lateral movement.
We believe successful execution of these strategic initiatives will drive topline growth and continued shareholder value.
Experts are predicting that ecommerce sales this holiday will reach over $200 billion and we believe that we are well positioned to deliver in response to that consumer demand.
With that I'd like to turn it back over to the operator to 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 telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
These limit yourself to one question and one follow up.
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Our first question comes from Matt Koranda with Roth Capital You May go ahead.
Hey, guys. Thanks for taking the question.
First off I guess I wanted to see if you could cover.
The performance of the lab grown product category versus my site finished jewelry I know you don't typically call. It out specifically quantify it but maybe qualitatively you could speak to growth between those two product lines and sort of how they trended and if they were similar.
Or differed from sort of the corporate average growth for the quarter.
Yeah, Hi, Matt Thanks, I appreciate that.
So again, we don't break out the product percentages at all so we.
We are experiencing are accretive and additive growth in lab grown diamonds business. We are very pleased with that business. That's why you'll see us expanding those product categories out quite significantly here heading into holiday. That's why we've been featuring a lot more.
Sure.
Kind of event.
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Advertising around that too as well because I looked at what we are seeing Matt is it's also increasing our merchandise business and our overall percentage of the merchandise business as we start to be part of that conversation I've been talking about it for a quarter over quarter now for us could be in that conversation.
Certainly with the Katy lab grown diamonds, and now with the kind.
The coverage that we're getting in that category, it's actually lifting overall business, hence the additional $2 million revenue for the quarter.
I know, it's the basis there but.
Basically that's as much as I can give you right there, but I appreciate the question.
Okay fair enough to have to try to hold on the positioning.
Positioning for holiday.
Wanted to get your latest thoughts on how you guys are feeling I mean, it looks like build inventory pretty steadily during this quarter. So it looks like plenty of inventory to sell into both your online and traditional channels, but wanted to see if you could just comment on expectations for the holiday season.
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What sort of the level of promotion now it looks like and the general environments, and how youre positioned with inventory going into the holiday season here.
Yes, so sure. So we believe we're in a really really good position from an inventory perspective, we actually started.
We call it Christmas in July where we started to prep for holiday anticipation that there will be constraints in the supply chain and we wanted to make sure that we can push as much domestic as we could so that we don't have.
International dependencies, or or kind of hindrances for us to deliver on the holiday season, and then as far as the spend side of the equation you look that could have on our opex and our sales and marketing spend we did have an.
An increase in spend even though we got the additional revenue from it.
Started to spend a little bit earlier anticipating that it was going to be an earlier holiday season. This year. So we believe holiday essentially begins now.
Fortunately for us.
We're able to achieve in this quarter, 51% margin, which is a significantly the highest margin that we've experienced since 2018.
<unk> can correct me, maybe with even longer than that but.
We were pleased with that and we're certainly pleased with the fact that our signature collection.
It remains to be very very strong and growing as our.
Overall portion of our business and that helps us elevate our overall margin so with that being said I mean, there is going to be some sales cadence that we're going to get into for the holiday season, which we're going to basically start now and head into holiday, but we believe that with our margin blend we're still gonna remained strong as well.
We're going to be incredibly competitive in the market and you will for holiday.
Okay that makes sense.
Since you mentioned margins I will ask a couple of questions around that.
I did note gross margins look super strong and I guess typically when mix skews more towards the traditional channel that would typically be dilutive to your margins and yet you improved quarter over quarter and year over year.
So is there just a big benefit from product mix was pricing exceptionally strong full price sales exceptionally strong maybe you can just call out a couple of other trends that kind of drove that.
The gross margin performance in the quarter.
Yes, so on the online side, we know that we experienced very nice high margins in that categories will lead that further when.
On the traditional side of the equation, certainly we're getting more and more efficient, we're bringing goods to market.
Better price were negotiating because the volumes are increasing and we're becoming more of a factor with our factories and we're strategically putting ourselves in a better position to be able to negotiate so that helps we're becoming more and more efficient in what we do and how we do and how we operate that's really critical to the business and the margins.
Also in this particular quarter, we had the benefit.
Our wholesale distribution partners, starting a little bit early this year to be.
Totally positioned for holiday two as well.
So.
Very nice.
<unk>.
Demand on the moist tonight side of their business too as well. So they are really starting earlier in there would it be in a position to be able to capitalize on the holiday as well. So our forever one might say are doing quite well for all of our distribution partners and that business is growing.
On all fronts, including their side.
Okay, great to hear.
And then just last one on margins for me and then I'll jump back in queue here, but sales and marketing.
De Levered.
About 600 basis points year over year, and I know, we're in a different sort of environment. This year versus last in terms of.
Marketing costs and whatnot, but can you just give us a little bit more color on ad spend.
And the in the quarter, maybe just breakout at all if you could at the very least qualitatively performance marketing versus kind of brand spend and then just anything that you can share on sort of your ROE as on performance.
Performance marketing and just efficiencies in the quarter or any impact to call out from the Apple idea pay changes.
Sure so.
I'm not going to break out and we don't break out as far as what the rollout, but we do have.
A very strict ROE as a target that we've tried to achieve when it's mid to lower funnel I've been speaking about it quarter over quarter that we primarily focus on conversion base mid to lower funnel as we've been profitable over a quarter over quarter, we had the opportunity to be able to redeploy some of the capital to be able to test that top of funnel.
Certainly we want to make sure that we're heading into the holiday season, and we pushed more capital into the top of funnel. We've also done some other.
Deployment of capital towards our Merchandised outlet brand too as well to be able to kind of run campaigns in that category and see where that consumer is shopping. So we're starting to see the benefit of that and we're starting to see what that consumer wants and certainly we'll continue to test that envelope as we get closer and closer into the holiday.
Into Christmas.
But we believe that now is the time.
To kind of deploy additional capital towards that top of funnel advertising and it's effectively working in as we start to build.
Topline growth and look for topline revenue will look to do that in proportion to the business, but again we've been.
We've been constantly vigilant on making sure that that rollout is nice and tight and it's beneficial to the business. So.
We did have an anomaly of the spend this quarter between some of the kind.
Kind of expenses I quit alluded to.
Profitability factor and things like that but overall, we're very comfortable with our spend and we'll do more campaigns, we're doing more like a storewide event that we did in New York City. This quarter. So those are the type of sales and marketing initiatives that we're doing that actually caused some money on the brand awareness and we wouldn't be able to build that brand into that.
All global brand that we see great.
Okay, Great I appreciate all the answers dawn and I'll jump back in queue here.
Again, if you have a question. Please press Star then one on.
Our next question comes from Paul Johnson private Investor.
Go ahead.
Yes, good afternoon, congrats on the great results.
Just a couple of questions first of all what is the size of the net operating loss carryforward at this point roughly.
Yes, sure Clint you want go ahead and take that yes, roughly it's about $20 million right. At this stage. If you look at our when we file our Q you can see that both the state.
The federal and state Nols.
But that's about what the value of that right now.
Okay.
Secondly, with regard to the.
Distribution center in China can you tell us more about <unk>.
Why China as as the best sort of hub for <unk>.
For us to choose at this point in terms of location.
Yes, so a lot of people.
I've been asking that question since we kind of made the announcements. So the reality is we've always had a very strong Asia Pac business with our distribution partners there.
Since China got impacted by Covid, a little bit earlier than the United States, we started to get.
Yeah.
To a point where that particular business was.
It was really suffering so from a from an international perspective, our international business had significant headwinds from China, and our distribution partners as well as that there is a proliferation of you know.
We signed into the market into the Chinese market too as well and we wanted to make sure that we can hedge that and we can actually bring our brand back to China and actually build that brand straight back to where it was originally.
And a tremendous amount of counterfeiting that's going on between some other big brand names too as well and we want to make sure that that consumer has.
Understanding that.
Charles and Cole barred does promote China does support China market and they can have the ability to go and get the authentic product right. There in China. So we already have a very strong managing partner a strategic partner there.
The question is we wanted at more branded and more.
Charles and Colbert focused with the look and feel of Charles <unk> Colvard.
That makes it makes sense, but yeah, I mean, I understand that in one sense. Although there are a ton of knock offs and theres a ton of cheap most of that coming out of that area. I am just wondering why you wouldn't have chosen Europe for example for a distribution center instead of China.
Yes, so I don't want to give a forward looking comment, but look to Charles and Colbert to look for these type of centers throughout.
The universe.
Asia Pac was Asia Pac was just a given for US right there and it's specific to Asia in the Chinese market right now and its with a partner that it's been a long standing partner with us for a long time. The only difference is we're allowing that partnership to be able to utilize the brand and actually use the signage trademark and and and really.
Convey our awareness throughout.
In Japan.
Jewelry district, which is really really strong and we wanted to be a major presence there.
So.
Very low cost of entry for us and basically it's just business as usual the only differences.
Anywhere that consumer wants to transact with a little bit different.
It gives our reach a little bit broader reach.
But overall, we're very pleased by what Theyre doing and actually.
We believe that we're aligned a lot with them.
Excellent and then just one more question I'll jump back in the queue can you just address an ongoing issue probably since you first came on board there there's been a concern I think among shareholders that that nice fat.
Our balance sheet with $20 million in cash is going to be spent on some crazy acquisition can you give people an assurance that.
If if one exists that you're gonna instead spend the money, perhaps incrementally on distribution centers worldwide or whatever it might be and not go hog wild on some acquisition that perhaps may not add value because what you guys are doing is great, but it would be really ashamed to see headed in a different.
We've been a shareholder for a long time, and we've seen a lot of [laughter] for directions in the past we'd love to have you just stay on the current path without spending a lot of money to do so.
Yeah. So the way I'll try to comment on that is a few parts. So number one is when I transition into the CEO role.
Q1, all the way through four quarters throughout the year. The goal was to build cash build the capital stabilize the business.
We did that we did it at a really really nice fashion, we build shareholder value.
From my perspective, I look to build the wealth wealth effect not only for my internal and external stakeholders I'm not looking to dilute myself or anybody else for that matter unless there is an opportunity that presents itself for the value investor community will continue to build this value and build a business. That's really strong that can stand alone, but I will tell you that.
We'll also look for opportunities and if you look at my pedigree in the past you know I do come from Berkshire Hathaway World. It is.
World that growth through acquisition as well as organic growth.
But we don't you don't.
Take that lately. So what we do is if theres someone or something that's aligned with our long term strategic view.
I mean anything to corner the supply of the lab grown diamonds.
Hum.
You did very well with the inventory going into this quarter is there anything that you guys are planning to corner the supply going forward.
Hey, Pat how are you doing so.
Certainly certainly a loaded question.
What I can tell you is we're constantly looking to secure supply. We're currently looking to be prime into supply, we're constantly looking to be as vertical as possible in that supply chain.
Certainly on the moistened shortly on the web.
And forever, one and everything like that where we're very prime and we have an incredible position and we have an incredible market share related to that on the lab grown diamonds front under Acadia lab grown diamonds. The goal there was to build out the business case to drive that business forward to make sure. There was a consumer there that consumer was shopping with us that consumer valued what we <unk>.
To bring to market, we believe that that consumer is absolutely. There. We believe now that there are certain sweet spots that we can control and corners certain things.
In the future state so as we continue to build our kind of overall market share.
Look to us.
Really create ways to become more vertical I really don't want to elaborate more than that but the goal would be to kind of utilize the resources utilize the subject matter expertise that I bring over three decades in the diamond business and the jewelry world and become as a vertical and prime as possible. So that we can have a significant advantage.
In the future state of what Charles <unk> Colvard represents.
Okay, great keep up the good work and I expect him up on another great quarter. Thank you.
Thanks.
Our existing infrastructure it allows us to kind of build that out it allows us to build the case for what are the types of products that consumers shopping also in Morrisville, North Carolina, where we're at it's in the.
And the Raleigh centre in the Mecca for all of these big companies and corporate alliances that we will open up too that will be able to shop and literally purchase from us as well.
And we get actual walkup customers every single day to our facilities and we have to turn them away.
So there is very very large entities all around us we have strategic holiday programs with them, where they can get discounts to buy that can do different things like that so we feel that that's a great place to kind of get the learnings there.
To answer your question about when that particular showroom is gonna be opened and operating right now we're not giving that.
Information, but we anticipated within our end of our fiscal year.
And the way I want people to look at these showrooms in the signature showrooms once we build out the case as these showrooms support the Omnichannel strategy there'll be part virtual there'll be part.
Regular retail boutique.
Showrooms given that consumer the ability to kind of touch and feel the jewelry. We're also taking the data that we have in the demographics of where that consumer shopping our products and where we're planning.
Forward to try to think about where these particular showrooms could be also inclusive in the showrooms could be potential distribution points for Charles and called bar for that consumer to be able to pick their products up lives from that center also the inventory in these particular showrooms could also be able to.
To support the business, where we could pick pack and ship. So I come from an operational world supply chain World and we'll look to kind of maximize any efficiencies wherever it is for us.
And that consumer can also go to each one of these locations potentially and get service or designed their own pieces or kind of work them.
They have a ring size or need something it'll actually ease a lot of the overall business and we believe theres tremendous growth for us there in this type of environment and one last thing these will be signature designers' showrooms. So if you look at Charles <unk> Colvard as a whole we have our traditional wing of our online business segment multiple multiple different product categories.
Improving that we're constantly you know wanting the best of breed for what we're trying to build out and that'll be inclusive of P. O S software to support the signature showrooms and that'll be warehouse management to be able to handle pick pack and ship you know wherever we are in the world and certain other investments that will continue to do as we need to grow this business.
Okay, Great and then just one housekeeping one for me as well, which I may have missed earlier you may have already reference that but what was the driver of the the large restricted cash balance in the corner.
Clinton you Wanna go ahead, and take one yeah sure Yeah, Hey, Matt How're you doing that.
That was all related today, if you just say it fully disclosed R and R. R R K and accused.
Release tall, but that's all related to the J P. Morgan Chase cash sure guys credit facility.
Instead of covering all our assets basically we just set aside a 5 million dollar.
Plus.
His deposit with them to secure that 5 million dollar credit facility.
Okay got it very clear I'll leave it there thanks again yeah.
Yeah.
Thanks Man.
[noise], let's see here.
This concludes our question and answer session I'd like to turn the conference back over to Dawn O'connell for any closing remarks [noise].
Thanks I appreciate that so we appreciate your time today on behalf of the entire team here at trolls and cole or are we wish you and your families are healthy and happy holiday season looking forward to our next call in the coming quarter that'd be well.
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