Q2 2022 Charles & Colvard Ltd Earnings Call
Yes.
Good day and welcome to the Charles <unk> second quarter fiscal year, 2021 earnings call.
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This earnings call may contain forward looking statements as defined in section 27, a of the Securities Act of $19 33, as amended including statements regarding among other things the company's business strategy and growth strategy.
<unk>, which identify forward looking statements speak only as of the date of the statement is made.
These forward looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties some of which cannot be predicted or quantified and are beyond our control future developments and actual results could differ materially from those set forth in contemplated by or underlying the forward looking.
<unk> in light of these risks and uncertainties there can be no assurance that the forward looking information will prove to be accurate accompanies 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 <unk> Colvard Com 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 IR at Charles Charles and Colvard Dot Com. Please note. This event is being recorded I would now like to turn the conference over to Don O'connell, President and Chief Executive Officer. Please go ahead.
Good afternoon, everyone welcome to our second quarter fiscal 2022 earnings conference call.
I'm extremely proud to share with you that in Q2, we delivered the highest revenue for a single quarter in the company's almost 27 year history.
At $13 8 million.
This new record as a 13% increase to the year ago quarter and maintains our strong 49% gross margin.
Additionally, we recorded $24 million in revenue for the fiscal year to date, achieving a 20% increase over 2020 for a blended margin of 50% and a 32% increase over 2019.
Our continued momentum represents six sequential quarters of profitability and double digit growth for the company.
This progress was largely fueled by the deployment of additional capital towards our increased brand awareness campaigns and our direct to consumer marketing initiatives.
So what does this mean.
We believe continued investment in paid and social advertising in support of our owned web properties and assets are paying off and are necessary to continue our growth trajectory.
We redefined our ability to offer consumers the choice between forever, one moist Acadia lab grown diamonds enables us the opportunity to capture more of the total achievable market with.
With the lab grown diamond market potential alone estimated to be 49 $9 billion by 2030.
Our product assortment is now becoming all encompassing and more diverse from traditional bridal and anniversary styles to find fashion to unisex bands and we know appeal to a broader audience and have something for every fine jewelry consumer.
The intersection of our price quality and value is making a positive impact on sales and a lasting impression on our customers.
Are made not mined messaging is resonating within the industry and that conscious consumerism is the future.
Here's what we know.
Our online channels revenue grew by 23% over the year ago quarter to $9 3 million versus seven $6 million. This represents 68% of total revenue for the quarter.
Fiscal year to date online channels revenues was up 22% at $14 7 million versus $12 1 million and represents 61% of total revenue.
In particular, Charles <unk>, Colvard Dot com revenue increased 49% over the year ago quarter, and 40% over the fiscal year to date comprised 68% of our online channels revenue for the quarter.
Our website traffic is up 12% and our conversion rate is up 30% versus the year ago quarter. Our signature collection sales are up 89% compared to the year ago quarter.
And our <unk> business continues to grow 35% over the year ago quarter, and 72% quarter over quarter, while our lab grown diamonds sales are up 266% versus the year ago quarter, and 152% quarter over quarter.
Now I'm going to turn the call over to Clint Pete our CFO to unwrap the numbers in more detail.
Thanks Todd.
Today I'll provide a summary of key financials for our second fiscal quarter and six months period ended December 31 2021.
Additional detail can be found in our earnings press release that we issued this afternoon and our Form 10-Q , we expect to file tomorrow.
Please note that all percentages comparisons are to the year ago quarter, unless otherwise specified.
We will begin with revenue.
Total net sales for Q2, 2022 totaled $13 8 million versus $12 1 million.
Or an increase of 13%.
And for the six month period ended December 31, 2021, net sales totaled $24 million versus $20 1 million or an increase of 20% from the year ago period.
Net sales from our online channels segment, which includes Charles cohort Dot Com also not outlet dot com marketplaces drop ship retail and other pure play outlets totaled $9 $3 million for the quarter or an increase of 23%.
Representing 68% of total net sales.
Sales from our transactional website, Charles <unk>, <unk> dot com increased by 49%.
Online channel net sales for the six months period ended December 31, 2021 increased 22% to $14 7 million or 61% of total net sales.
Net sales from our transactional website, Charles <unk> Dot com increased by 40%.
Net sales for our traditional segment, which consists of wholesale and retail customers totaled $4 $4 million for the quarter a decrease of 3%.
Representing 32% of total net sales.
As we mentioned last quarter in Q1 2022, we saw strong demand from our domestic distributors gearing up for the holidays.
Unlike last year ago quarter, where more of this demand flowed into Q2 2021.
This decrease was offset by continued strong demand from our brick and mortar retail customers.
Net sales for our traditional segment for the six months period ended December 31 increased 16%.
To $9 3 million or 39% of total net sales.
Finished jewelry net sales increased 28% for the quarter as we continued to see strong demand from our premium jewelry and our online direct to consumer channels, along with our brick and motor retail customers.
Finished jewelry net sales for the six month period ended December 31, 2021 increased 29% to $16 2 million or 68% of net sales up from 63% of total net sales in the year ago period.
This jewel net sales decreased 17% for the quarter due to our domestic and international distributors ordering in advance of the holiday as previously noted.
This jewel net sales for the six months period ended December 31, 2021 increased 4% to $7 8 million or 32% of net sales.
International net sales decreased 4% for the quarter.
And were flat to last year for the six months period ended December 31st.
2021, as we continue to see impact from the pandemic.
Moving on we delivered a strong gross margin of 49% for Q2 2022 steady.
Steady to the year ago quarter.
For Q2, 2022 total operating expenses increased 52%.
Representing 38% of total net sales compared to 28% in the year ago quarter.
In support of our brand awareness initiatives sales and marketing expenses increased 64% to $4 $1 million.
And G&A expenses increased 22% to $1 2 million for the quarter.
The main driver in the increase of G&A was increases and performance based stock based compensation.
Net income for Q2, 2022 was $1 2 million or <unk> <unk> per diluted share compared with $2 5 million or <unk> <unk> per diluted share in the yogurt period.
For the six months period ended December 31 2021.
Net income was $2 million or <unk> <unk> per diluted share compared to $3 $4 million 12 per share in the year ago period.
Included in net income for Q2, 2022 as income tax expense of $283000 compared to $500 in the year ago quarter.
For the six month period ended December 31, 2021 income tax expense was $406000 compared to $1000 for the year ago period.
Our weighted average shares outstanding used in the calculation of diluted earnings per share for the quarter were approximately $31 3 million shares at December 31, 2021.
Compared to $29 3 million shares at December 31, 2000 2020.
The increase in our weighted average shares outstanding of approximately 2 million shares was driven by an increase in option exercises by insiders and issuance of stock to executives.
These factors higher income tax expense as well as option exercises and restricted stock directly impacted our earnings per diluted share for the quarter and the fiscal year to date.
Now, let's move onto a snapshot of our balance sheet, our liquidity and capital position remains solid as we ended the quarter with $21 $3 million of total cash.
Paired to $21 $4 million at our last fiscal year ended June 32021, and.
And compared to a $19 $2 million in the previous quarter, increasing our cash position by $2 1 million.
Our cash flow from operations remained strong.
At $2 $3 million for the quarter compared to $3 $1 million for the year ago quarter.
Our working capital increased to $31 3 million at December 31, 2021, compared to $30 1 million at June 32021.
In terms of other sources of liquidity, we have access to our $5 million cash secured credit facility with Jpmorgan Chase Bank.
At December 31, 2021, and through today, we have not accessed funds through the credit facility.
Inventory.
As of December 31, 2021 totaled $31 8 million compared to $29 $2 million as of June 32021.
Finished jewelry inventory was $16 million compared to $12 $3 million as of June 32021.
To maintain healthy stock levels in support of our growing demand requirements.
And our direct to consumer and brick and motor business over the holidays and in preparation for the upcoming Valentine's day season.
Loose jewels inventory was $15 8 million compared to $16 $8 million as of June 32021.
In summary, we remain confident in our financial strength and our continued efforts towards our long term growth.
With that I'll turn the call back over to Don.
Thanks Glenn.
Now I'd like to point out some key drivers that proved to be impactful. This quarter, we distributed 14% more packages this holiday quarter compared to last year, we optimize our internal systems and processes to support the ever growing demand, including strategic investments to enhance our ERP and warehouse management systems Maxim.
<unk>, our efficiency, we diversified our product offerings to reach broader audiences.
We launched new collections and expanded assortment featuring both forever, one voice and I think TD lab grown diamonds.
Of the 2021 holiday season.
Including flexible bangles tenants necklaces men's rings, and zodiac payments, we proactively scaled our sales and operations pipeline forecasting ample inventory in capacity ahead of the busy holiday demand.
We stepped outside the traditional sales method to create more visibility for the brand as their official jewelry partner, we designed and produced rings for the 2015 and 2019 U S Women's Soccer World Cup Championship teams.
We enhanced our customer engagement by investing in our digital infrastructure.
We made significant improvements to overall site performance and load times, and we launched streaming shopper Bowl events on Charles <unk> <unk> Dot com.
We flexed, our digital marketing approach and product segmentation strategy to meet real time consumer demand and users online shopping behaviors, increasing our website traffic and conversion rates.
We also boosted our digital marketing initiatives to keep the Charles <unk> Colvard brand top of mind, even against our competitive set and lastly, we expanded our in house video production capabilities, enabling us to utilize the content across multiple platforms, including out of home advertising in key markets.
As a pioneer in the lab grown space, Charles and Colborne has been growing gemstones for almost 27 years, while we believe that many other brands are just beginning to integrate sustainable solutions that collections into their repertoire. We can confidently say that our entire product offering began with a conflict.
And responsibly sourced mindset.
2022 is the year, we expect to see the intersection of our forward thinking product aligning with consumer values.
We know the consumer values have evolved many customers demand more than just quality. They also want to understand the origin of the product and for it to align with their personal values.
The significant increase in the demand for lab grown diamonds in the fine jewelry market is indicative of this new consumer ethos.
To be ready for the growth that continues with increased consumer demand and lab grown industry. We continue to make investments in our operations infrastructure and technology to capture a larger market share as we expand our messaging to reach today's conscious consumer we also evolve to adapt to the new customer this means making the brand accessible beyond the traditional.
Our platforms and meeting the customer where they wish to shop, whether it be via live streaming TV e-commerce or virtual and brick and mortar showrooms. While 2021 was about solidifying our place as a direct to consumer brand 2022 is about amplifying, what we stand for and illuminating.
<unk> path forward for the brand and for the industry.
With that I'd like to turn it back over to the operator to open the lines for your questions.
Thank you 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. Please limit yourself to one question and one follow up.
If you have further questions you may reenter the question queue to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Matt Koranda from Roth Capital. Please go ahead.
Hey, guys good afternoon.
Just wanted to start off with the step up in sales and marketing.
Where are the incremental dollars being spent if you could just sort of unpack a little bit more detail about sort of where we see opportunity where we've been spending incremental dollars in that line item and then maybe just if you could speak a little bit more granularly with.
With respect to the results from the campaigns that you're running and are there any headwinds to call out in terms of marketing efficiency.
And then lastly on this topic.
I'm wondering if there was any spillover benefit from the ramp that we've seen in this quarter that may result in better growth heading into the back half of the year.
Yeah, Hey, Matt so.
All pointed questions.
Great.
Questions as it relates to the spend it's totally by design. We started speaking to last quarter to the fact that we wanted to build a little bit more top of funnel also as we start to become a significant player in the lab grown diamonds space the costs associated with being in that space is much greater cost per clicks.
In order to be the player in that space in order to be a leader in that space, we're going to have to kind of spend a little bit more as.
As well as that on a voice nine outlet, we spoke that we'd start deploying capital towards that.
Word association phrases all of these important things performance based marketing strategies that we have to put in place to be kind of a leader in that too as well. So we believe that we're very efficient and as we believe that the ROE has is real strong we believe that our direct to consumer business.
Really performing well, especially on there Charles in Khobar Dot com at a 49% increase we believe that significant and we believe that the deployment of capital towards that particular channel is performing quite well.
Certainly.
We want to continue to push that envelope, we started pushing the envelope in Q1 were pushing the envelope further into Q2, and we'll continue to do so as long as we're getting the rollout that we kind of set forth as a benchmark for us too.
Really grow the business I mean, it's time now to grow the business six sequential quarters of profitability, we know how to run our business. We know the ebb and flows of the business now.
Now, it's time to kind of drive more traffic and more sales the conversion rate is increasing too as well. So we're very pleased by that and we believe that we are.
Putting the right put forward to grow the business properly.
Great. Thanks, Tom and then on the gross margins just curious if you could sort of level set expectations for.
How gross margins sort of trend.
Over the next several quarters. It does seem like it took a little bit of a step down quarter over quarter.
So maybe first you could just speak to sort of some of the drivers of gross margin this quarter.
The sort of inbound freight product costs or mix that sort of drove it down quarter over quarter. Despite the higher revenue.
Just on a go forward basis any commentary you can provide.
Sort of help us understand sort of where those trends.
It'd be helpful. Yes, So industrywide, 49% gross margin is very strong in my opinion. So sure we went from 51% to 49%, but certainly as we.
You don't have a sales cadence throughout the holiday season.
We've pretty much kind of forgo some margin points or margin accretive creep happens in that regard but.
We continue to kind of look at all of the blended margin certainly.
Signature collection, which is our number one.
Critical category that we want to kind of grow into business because that increases the margin for the overall business. So with 89% increase on the signature side. It actually keeps healthy margins up so as you look forward into the quarters Youll look to us leaning more on signature more on the higher margin items.
Lifting our margin percentage, but make no mistake at 49% to 51%. We're very pleased with that margin. We believe that we can consistently drive that margin through the next couple of quarters for sure.
Great.
Thanks for that as well and then just last one for me if I could squeeze on that.
On the wholesale channel.
Just wondered if you could maybe unpack that a bit more in terms of the trends you saw this quarter.
In particular, I'm, just interested in sort of the international distributor revenue versus sort of some of the domestic retail.
And sort of how those trended that'd be really helpful.
So on the domestic retail front.
Still remains very strong.
So a lot of consumers are buying their jewelry at the retail stores and that's beneficial to us to as well because we certainly have that offering an option for the consumer on the international side, we definitely are still facing headwinds there between the pandemic between.
Kind of our overall distributors, having difficulty within the region.
Youll see us kind of continue to face some headwinds in that particular regard our domestic distributors actually pulled forward in Q1.
If you recall in Q1, we had a 43% or 42% clean can correct me on increase in our domestic distributor side.
That was primarily due to really responsible thinking you're forecasting with our sales and operations team to be able to get with those distributors that have been playing ahead early enough for holiday and that allowed us kind of the increased capacity to be able to grow and ship more for our made to order and our direct to consumer.
<unk> businesses.
That increase there.
No.
It was quite nice, but we did.
Pretty much drop off a little bit on the traditional side just because they proactively bought ahead of schedule in Q1, but I would look at the full half of the year or the first half of the year as kind of a basis for the business and the overall health of the business I mean, we certainly at $24 million in revenue.
<unk> for the first half of the year, which is very significant for Charles <unk> Colbert significant for me.
And it's definitely moving in the right direction.
Great. Thanks, Don I'll jump back in queue here.
Okay.
Again, if you have a question. Please press Star then one.
There are no more questions in the queue. This concludes our question and answer session.
I would like to turn the conference back over to Don O'connell for any closing remarks.
Yes, I believe we do have one more question.
Yes, Erika Eric Landry from BMO capital. Please go ahead.
Alright. Thanks.
Sure.
Hi, Don.
I'm.
The $4 million in sales and marketing is that is that sort of the new level that we should expect here going forward.
Or how are you thinking about that.
Well certainly we want to continued topline growth we still delivered.
And a half in income from.
Operations, and $1 2 million and net income so.
Our bottom line is still remaining strong we're still comfortable cash flow is really strong so that gives us an opportunity to keep pushing and pushing the envelope. So I would anticipate that we're going to continue to spend and grow but certainly maybe not at the level of this quarter. This was the holiday quarter. So there was a lot of players in the sandbox that we're buying for.
<unk> search terms and key words and.
And as we start to kind of move the business and grow the business and the lab grown diamonds space, it's not a crowded space at this point, but it's getting.
More and more crowded.
As the kind of the month and quarter to buy so I would anticipate that that cost per click and that spend is going to continue to be pretty much steady if not increase.
But to your point with the $4 million, we believe that that will come down a little bit within this quarter, because it's not the holiday quarter for us.
So if I hear you correctly, you are indicating that it's taking more investment now to drive the business.
And then it did does that is that the correct assumption or are we or is this something like.
Back to the strategy that the old CEO head of.
Different parts of the funnel, if I remember correctly.
Yes, so I wouldn't I wouldn't compare myself to anyone else. This is a specific strategy.
We've actually started to do out of home marketing campaigns, we've done some different campaigns that we've done in the path to be able to kind of test the envelope to see what's performing also prior to the company was not in the lab grown diamonds space and didn't offer the other product offerings.
Certainly driving the highest revenue in a single quarter history of the company.
Is pretty strong so we're getting the top line growth, we're getting the revenue.
Whereas in the past the spend was there without the revenue and without the profitability. So two fundamental differences there.
Spending.
We're getting the result, and where we're getting the rollout.
Where we see the opportunity for growth in the business also we didn't have lab grown diamonds in the past we do now so that means we can get additive revenue or accretive revenue to the business in that product category and we want to go after that category. So we're leaning in on it just to kind of see where we're going but.
Certainly I wouldn't compare myself to the past I believe that the company and because of the fundamentals over the last six quarters of what we'll call kind of a change management with a new way is a completely different way and solid performing.
Growth, along the way and profitability all the way forward to as well.
Okay.
That's great I appreciate that but.
I guess.
Is it.
How to just sort of frame this but it appears to me that the company now going forward at least for the next few quarters is going to be a little bit less profitable than perhaps.
And maybe others assumed going into the quarter.
Which is I guess, a little bit alarming, but.
Hopefully most of the decrease in profitability because of the.
The pullback in the traditional segment in.
Hopefully the the online segment keeps chugging along as it was even look to talk about that a little bit so to the value investor.
What do they look forward right. They look for stability to look for cash we're very strong in cash right. So we have $21 3 million in cash we know how to grow cash we're growing cash.
So that itself is a really important factor for stability in the business, we're still producing $1 million or close to $1 million a quarter and profitability. So that's also strong how do we get this company from where it was in the past.
Twentyish million to $39 million just the last.
Fiscal year <unk>.
Now into the 50 plus million, we're going to have to deploy capital to get this company to increase that value to that growth investor too as well, so somewhere somewhere between value and growth is where Charles and cohort is going to be and thats not going to happen unless we start to spend money to be able to drive growth.
So I mean.
Will we continue to spend absolutely at these levels. It really just depends on the products in the offering and then how much return on AD spend we get from a different channel or or specific channel.
Top of funnel type advertising specifically for us.
Is conversion based so we'll do top of funnel, but it's still converting will do mid to lower but it's still converting well do some new and inventive advertising campaigns like.
The soccer championships. So those are the types of things that are probably nuances that didn't occur to the prior quarter, we will not occur in the next quarter, but there is a cost associated with those type of awareness campaigns and we intend to play in that space, all the while being fiscally responsible with our shareholders' money and growing the business along the way.
Alright, I appreciate that I appreciate that thank you I just wanted to make sure that we're getting return on these AD dollars were spending absolutely.
Again, if you have a question. Please press Star then one.
Our next question comes from Jason <unk> from Bumbershoot Holdings. Please go ahead.
Good afternoon, congrats on the continued profitable growth I.
I guess, just you sort of answered it on the last call, but I wanted to follow up.
You're kind of in the first question you remark you've had I think six quarters of profitability and the growth and now it's time to grow the business.
Good question last one is this seizing the opportunity.
And how much can you see.
In terms of competition. This is kind of a greenfield space to grow in this at the time to do it and how what's kind of a feedback mechanism you get on that spend and how quickly can you tell if something's working versus not.
And kind of keep putting money towards the things that are working on those lines.
So.
Thanks, Jason I appreciate the question so and I also appreciate seizing the moment so that exactly is probably the correct.
Nomenclature for what's happening lab grown diamond industry is very very strong right now the whole lab grown diamonds space is very strong the momentum is moving in this space. It's our time and it's our time to kind of get a foothold to become one of the leaders in the industry.
Not the lead in made not mined gemstone jewelry, which is really kind of our forte and what we've been doing for a long time and what we do better than most.
So.
We believe that we have real time data, we're making data driven decisions basically were able to see the moment, we deploy a campaign if it.
Whatever whatever campaign. It is we can actually visually see their performance almost in real time.
And we're able to kind of react to that we were able to spend more in that campaign, but certainly.
We will continue to seize those moments when they arise and we have to.
Okay and can you maybe just talk about the difference in brand between more Tonight versus Diamond, where the question that you had the I guess supply advantage versus with lab grown diamonds, it feels a little different.
So just competitively.
Yes.
Path to building our brand the same.
What makes it different.
In the lab grown diamonds space, specifically versus historically.
Historically, you guys have built the brand and what's not.
Yes, certainly in the voice Tonight space, we're the leader we've been the leader for.
For a couple more.
Three decades now couple of decades for sure we certainly do it better than anyone in my opinion, we believe that we bring the best of breed silicon carbide jumped the market as well as beautifully crafted jewelry, that's the quality of that.
Literally mean.
Being in the industry for over three decades.
I'm proud of as it relates to lab grown diamonds, it's a kind of a different mix. So it's different shapes and sizes doesn't have all the shape and size of opportunities that the voice mail.
Pieces do so that's kind of a new leg for us, but certainly the jewelry aspect of it we have that down and we believe that we're best of breed and kind of style design and quality in that regard.
We're not as vertical of course, because were basically taking.
Those particular gemstones are already faceted, but what we did do early on as we identified the fact that over the last couple of quarters that there is a fashion consumer there and that consumer is.
Looking for a beautifully crafted product with multiple small what we call Meli stones, and we're bringing that to market and it's actually resonating quite well with our consumers and Thats why.
We talk about our increase in lab grown diamonds sales versus a year ago quarter, 266%.
That's significant for us and we will continue to build upon that and we believe we can be the lead in that category. Because we basically went to market knowing that we had to position ourselves. If you look at some of the increased inventory that's due to us kind of securing our position of being prime and those goods.
And the larger center in the larger center stones, we specialize in a quality standard that is above the rest.
And that standard is what we focus on were letting the others play in that sandbox with a low margin.
Qualities for now until we kind of get a little bit more.
Learnings under our belt related to lab grown space and the opportunity.
Okay, Great I appreciate all the commentary.
Again I'm sorry.
Again, if you have a question. Please press Star then one.
Okay. There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Don O'connell for any closing remarks.
Yeah. Thanks, Jason So we appreciate your time today. Thank you for your continued support and Charles <unk> Colvard.
With that have a great weekend and until next time.
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