Q2 2023 Charles & Colvard Ltd Earnings Call
Good afternoon, and welcome to the Charles and Cole Vars limited second quarter fiscal year 2023 earnings conference call all participants.
<unk> 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 there'll be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Alright.
This earnings call may contain forward looking statements as defined in section 27, a of the Securities Act was 1933 as amended including statements regarding among other things the company's business strategy and growth strategy at <unk>.
<unk>, which identify forward looking statements speak only as of the date 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.
Future 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.
Company today's call is a supporting Powerpoint slide deck, which is available in the Investor Relations section of the company's website at IR, Dr. Charles and Cole, Florida Dot 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 email.
Bill C T H R at Lytham partners at Dotcom.
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 over the past few years, our focus has been to build a company that can take advantage of the longer term movement in the marketplace towards responsibly sourced gems and jewelry to capture greater market share are.
A recent Mckinsey report noted that consumer shopping for fine jewelry are increasingly favoring brands that act responsibly value diversity and have a compelling brand presence both online and offline.
In years past when people shop for high end jewelry design would be at the forefront of their mind. However in recent years research shows that consumers now also search for a brand that resonates with them and as socially and ethically responsible which we believe is one of our key differentiators.
Plenty of customers in particular won't even consider a brand that doesn't prioritize sustainability according to mckinsey.
Since the pandemic began the consumer buying journey has fundamentally changed while previously.
Customers would visit a brick and mortar store in order to try on fine jewelry items in person the pandemic moved consumers online.
Research has also shown that sustainability considerations across product categories are growing.
Within high end jewelry to consumer care is much more about ethics than they did before the pandemic.
Mackenzie projects that sustainability influenced purchases will account for 20% to 30% of all fine jewelry sales by 2025.
Perhaps as much as $110 billion, which is more than triple the number of sustainability influenced purchases in 2019.
The lab grown jewelry market, which represents one of the hottest growing categories in the jewelry space.
And as a subset of sustainability influence purchases with.
It's forecasted to exceed $9 billion this year.
We believe that Charles and Cole BARDA is ideally positioned with our made not mined strategy and campaign to benefit from what Mackenzie has dubbed the sustainability search.
As well as our broader direct to consumer initiatives, providing us optimism for growth opportunities for the future of the company.
In order to take advantage of the movement in the market. We are undertaking key initiatives to drive long term value in the company.
This includes focusing on finished jewelry products.
Utilization of one of our longstanding core strengths and their production and capacity of loose gemstones to now include lab grown diamonds.
Diversifying our product offering beyond created more Tonight to include lab grown diamonds and colored gemstones.
Expanding our direct to consumer footprint, which includes our online focus our signature showroom initiatives and some exciting opportunities we will be exploring in the coming quarters.
And building our branded distribution assets of our owned properties to become more self sustaining while allowing us to leverage our infrastructure in the future.
While the macroeconomic environment is certainly providing some near term pressure to the industry right. Now we have begun to take steps to diligently manage our expenses when possible and overall inventory position.
We believe the underlying results of the quarter are an indication that we are executing against our long term initiatives, while maintaining the strength of our balance sheet.
Positioning us well within the growing transformation that is taking place within the jewelry industry.
So when I talk about execution against our key initiatives what does that mean.
First as I mentioned, we are expanding our focus on enhancing our finished jewelry assortment and showcasing our value proposition with its core and original desserts, featuring made not mined gemstones and premium quality.
In fiscal year 2021, approximately 62% of our total revenue was attributed to finished jewelry.
That number was 68% in fiscal 2022 and during the most recent quarter ended December 31, 2022, it comprised 81%.
Why the added focused on finished jewelry versus loose gemstones for several years, we've worked diligently to become a globally recognized fine jewelry destination, rather than simply a single gemstone supplier in the wholesale capacity.
Which we believe limited our future growth opportunities and overall total achievable market or Tam.
Our second key focus area is broadening our footprint to capture a greater share of the lab grown diamonds market.
Data shows the number of engagement rings sold that featured a lab grown diamonds jumped 63% from March 2021 to March of last year.
While the number of engagement rings sold with a mine diamond declined 25% in the same period.
Lab grown diamonds comprised about 3% of the especially diamond jewelry market in 2020.
And that figure grew 7% and.
In 2021.
This is a growing market and we intend to be a major voice within the industry.
In September of 2020.
We launched Arcadia lab grown diamonds, while still a fraction of overall sales. It is clearly the fastest growing product category for us with.
With sales up 19% compared to last year's second quarter and year to date, we are up over 600%.
Compared to the same period in fiscal 2021.
Morris and I will continue to be a huge focus and a key differentiator for us, but we intend to similarly.
Compete in the diamond space, adding to our incredible lineup of made not mined gems and jewelry.
As mentioned another key focus for us is on expanding our direct to consumer focus.
Thereby broadening our footprint and providing the ability for our consumers to experience our products firsthand.
As the report I mentioned at the beginning discussed there is increasing movement towards online and non brick and mortar purchases clearly brick and mortar is not going away. In fact, we recently opened a flagship store in research Triangle Park, North Carolina to expand our reach.
But the growth, especially amongst younger individuals is moving towards online.
We have expanded our capabilities online over the last number of years to enhance the customer experience. While also looking to improve our advertising and marketing focus to build greater brand awareness.
That said the investment to capture the direct to consumer and online sales do come at a cost.
Digital advertising cost have increased substantially and the ROI fluctuates.
Like many in the industry, we have refocused efforts to find ways to reach the consumer more effectively strategically focusing our marketing efforts to find customers predisposed to are made not mined product assortment.
At a high level online channels comprised 76% of our second quarter sales in fiscal 2023 compared to 66% during Q1 of fiscal 2023.
Just 62% for full fiscal year 2022.
Our strategic focus remains continuing to drive and elevate our direct to consumer presence and brand strategy.
Which we believe will better position us for long term growth and help bolster against the current macroeconomic uncertainty and geopolitical unrest.
We continue to make strategic investments in our direct to consumer initiatives, which we believe will further strengthen our moat and overall position in the market.
Our goal is to leverage our assets in order to make Charles of Cole barred synonymous with responsible made not mined fine jewelry and gemstones.
For the conscious consumer, which we believe is the largest growing category and opportunity in the jewelry space.
We want to own more of our destiny to become a top destination of choice.
Where our customers can satisfy all of their jewelry needs.
Our web properties and flagship stores are examples of this.
With a large portion of our capital investments funded and key personnel added in support of these strategies.
We can now focus on ways to monetize these initiatives in a meaningful way.
This will take some time to bear fruit, but we believe we have strengthen our resources and capabilities building upon our past successes infrastructure and brand equity to take the company to the next level.
Clearly the challenges in the economy or played a part in our results.
Domestic and global inflation and rising interest rates, coupled with the ongoing fears of recession continue to erode consumer confidence and present major challenges for the global retail and jewelry industry.
While American consumers spend more this holiday season to keep up with higher prices, we experienced loss during the calendar year end holiday season and.
And we expect that consumers will continue to feel pressured financially, particularly.
During the second half of fiscal 2023.
This is not unique to Charles and Cole Bard and we are facing similar challenges of retailers in the fine jewelry space.
At the same time. However, these same challenges are providing us the opportunity to continue reevaluating technologies and strategies to better position us in the future.
Some of these ive discussed already on this call, but another important aspect has been our ability to manage our inventory and cash flow.
As you will see in the results our cash position increased during the quarter. Despite the net loss.
Cash increased from $16 6 million last quarter to $17 million this quarter.
Further our cash flows from operations were also positive this quarter.
We expect that our inventory levels, which were down $1 6 million from the most recent quarter should continue to decrease in the quarters to come.
We feel confident that we have taken decisive actions to align our go forward growth and profitability strategies with a near term economic backdrop to help maintain a strong balance sheet going forward.
I would like to highlight again to everyone that we currently have $17 million cash and cash equivalents and inventory valued at $35 million for a combined total of $52 million with only $10 million in total liabilities, including zero debt.
So even if you ignore all the other assets, we have including net fixed assets and equipment intangible assets, such as our intellectual property receivables and excluding any value for our brand equity.
Cetera.
And only account for cash cash equivalents and inventory less all liabilities. It comes to approximately $42 million compared to our current market cap of approximately $29 million. We believe this showcases.
Our demonstrated value.
As I turn it over to Clayton to review our financial statements in more detail, let me just quickly summarize.
Despite the challenges in the industry, we still delivered $10 4 million of revenue a level thats only been achieved a handful of times in the company's history.
We generated positive cash flow from operations. This quarter, we are transitioning the business to focus on areas that create long term value such as focusing on finished jewelry products and allow us to capitalize on key consumer opportunities such as diversifying our offering to include lab grown diamonds and colored gemstones while.
Spanning our direct to consumer footprint.
These key areas of focus outperformed the larger topline number during the quarter, which was largely impacted by non direct consumer sales in our wholesale loose gemstone business.
Mike will expand more on this shortly.
We are building value in our distribution capabilities and brand equity to better control our own destiny meeting the consumer directly where they're shopping.
And finally, our balance sheet remains strong.
Fortinet has the ability to invest in areas to enact these strategic initiatives and take advantage of key opportunities in the marketplace.
At this time I'd like to turn the call over to Clint Pete our CFO for an overview of our Q2 financials I'll return to wrap things up after.
Yeah.
Right.
Thanks, Don.
Hey, I'll provide a summary of key financials for the second quarter ended December 31 2022.
Please note that all percentage comparisons are to the second quarter ended December 31, 2021, unless specified otherwise.
First I will start on slide 11, with comparative analysis of the second quarter of fiscal 2023 compared to the same period one year ago.
<unk> total net sales for Q2, 2023 totaled $10 $4 million versus $13 $8 million a decrease of 25%.
Due primarily to the economic factors Don alluded to.
While revenues were lower in the quarter. The decline was slightly less than what we experienced in the first quarter when compared to the comparable prior year period.
Net sales for our online channels segment, which is primarily direct to consumer and includes Charles and Colvard Dot com most of that outlet dot com marketplaces drop ship retail and other pure play outlets.
Totaled $7 $8 million for the quarter or a decrease of 16% and now representing 76% of total net sales of 68% one year ago.
Net sales for our traditional segment, which consists of wholesale and brick and motor customers totaled $2.5 million for the quarter or a decrease of 43%.
Representing now approximately 24% of total net sales.
Finished jewelry net sales decreased 20% for the quarter.
But represented 81% of total sales in the quarter up from 77% of sales in the second quarter one year ago.
Finished jewelry net sales decreased 40% for the quarter as we mentioned above.
In part to our shift towards finished jewelry and direct to consumer strategies, while many domestic and international distributors reduced third calendar year.
Forecast and overall inventories due to the softer economic environment.
International net sales decreased 49% at certain of our distribution partners continue to face ongoing COVID-19 restrictions and closures.
As well as lower calendar year end holiday demand due to consumer inflation and recessionary concerns.
The global geopolitical unrest.
As you can see at the high levels, our areas of strategic focus, including direct to consumer and finished jewelry or somewhat less impacted.
I want to point out changes in our online channels segment as well as in finished jewelry as they relate to the percentage increases.
<unk> to total revenue.
We have seen increases not only in the current quarters as discussed above compared to the year ago quarter.
But also comparable to the trends we saw in Q1 of fiscal 2023 that had similar increases when compared to the prior year period.
We are also seeing these same increases when comparing Q2 2023 eight to Q1 2023.
Accordingly, we are becoming less dependent on the distribution network and our traditional segment.
As we continue to shift to a more of a direct to consumer focus.
And which John alluded to earlier.
And it is by design.
Moving to slide 12 to discuss gross margin and profit.
We delivered a gross margin of 41% versus 49% in the year ago quarter.
Delivering $4 $3 million in gross profit versus $6 $7 million a year ago quarter.
Most notably the decrease in gross margin during the quarter was related to an approximately seven percentage point impact due to on applied labor costs that are capitalized to inventory.
With an additional approximately three percentage point impact due to the shift in our product mix towards lab grown diamonds.
Accordingly, most of the decrease in our gross margin was due to the adverse change in applied labor costs and.
And not the result of any large scale discounting during the period.
For Q2 2023.
Operating expenses increased 5%.
Representing 53% of total net sales compared to 38% in the year ago quarter.
Sales and marketing expenses increased 6% to four $3 million in support of our growth and brand awareness initiatives.
And G&A expenses remained flat at $1 $2 million for the quarter.
We explored alternative marketing efforts to reach a broader audience with some initiatives admittedly volume flat of expectations.
We reported a net loss for Q2, 2023 and $1 million or <unk>.
Loss per diluted share compared with a net income of $1 $2 million or <unk> <unk> earnings per diluted share in the year ago period.
Included in our net loss for Q2 2023 is an income tax benefit of $132000.
Compared to an income tax expense of $283000 in the year ago period.
Our weighted average diluted shares outstanding used in the calculation of diluted loss per share for the quarter were approximately 33 million shares for the period ended.
31 2022.
Compared to 31 3 million shares for the period ended December 31 2021.
The decrease in shares outstanding is partially driven by the impact of the company share repurchase program.
Now, let's move onto a snapshot of our balance sheet.
As Don alluded to our liquidity and capital position remains strong as we ended the quarter with $17 million of total cash.
Compared to $16 $6 million at the end of the first quarter that ended September 32022.
Working capital was also strong ending at $26 3 million up from approximately $25 million at the end of the first quarter of fiscal 2023.
In addition, the company continues to be debt free.
We believe our capital structure remains strong and able to weather inflationary and geopolitical factors in the near term.
Our cash flow provided by operations was $617000 during the quarter compared to $3 $1 million used in operating activities. During the first six months of fiscal 2023.
And the $121000 provided by operations in the year ago period.
The improvement in the current quarter, primarily reflects our continued inventory management efforts.
In terms of other sources of liquidity, we have access to our $5 million cash secured credit facility with JP Morgan Chase Bank, which we renewed on July 29, 2022 for one year.
As of December 31, 2022, and through today, we have not asset funds through our credit facility agreement.
As Don discussed inventory as of December 31, 2022 totaled $35 million.
Paired with $36 $6 million as of September 32022, a reduction of $1 $6 million.
So as Joe said inventory was $15 $9 million as of December 31, 2022, and compared to $16 $6 million as of September 32022.
A reduction of approximately $700000.
Finished jewelry inventory was $18 $8 million compared to $19 $9 million as of September 32022.
A reduction of $1 $1 million.
Demonstrating a solid sell through of our finished jewelry and the direct to consumer online channels, while still maintaining a high percentage of in stock rates to meet our SLA.
As Don discussed we plan to remain focused on prudent inventory management strategies to all four.
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 Don.
Thanks Kurt.
To wrap things up the jewelry industry is undergoing an incredible transformation one that I believe we're in a strong position to capitalize on in the years to come the.
The results of the quarter. Despite the macroeconomic backdrop show that we are executing on our key initiatives that we believe are driving long term value in the company.
Initiatives that we believe allow us to take advantage of our branding and distribution capabilities to enable customers to find engage and transact with us on a greater scale.
And finally, I'm appreciative of the hard work and dedication of our employees and the continued support from our shareholders.
With that I would be happy to now take any questions you might have.
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.
To withdraw your question. Please press Star then two.
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.
Our first question is from Matt Koranda with Roth Capital. Please go ahead.
Okay.
Hey, guys good afternoon.
Just starting out with the online channel I guess I was just a little bit surprised with a bit of a deceleration there if I look at it sequentially on a year over year basis.
Just wondering if you could break out the puts and takes of the different underlying channels and online maybe at the very latest if you could just kind of call out sort of how your own site performed during the quarter relative to some of the other items like marketplace and whatnot.
Yeah, Hey, Matt appreciate.
I appreciate the question as usual.
We had some headwinds within our online segment too as well we attributed those to a lot of various reasons.
Certainly the the macro you know as we stated.
Multiple times within.
Kind of are.
Our script.
The advertising spend and campaigns that we ran did not generate the ROE as it traditionally did so if you're if you're you are based on the historical ROA.
ROE is that we had cost per clicks plus the competitive landscape plus the economy, plus the higher interest rates too.
Purchase or finance jewelry and gemstones, we believe it just contributed to.
A softer holiday much softer.
It began in October for US and then we started to increase velocity towards November and December .
But to answer your question, our direct to consumer presence, CDC, and Charles and cobalt and owned properties performed well.
We had in the marketplaces, we had a couple of individual.
Good.
Direct distributors that were very weak.
Really participated in a heavy sales cadence or unfurl cadence within kind.
Kind of shifted and where they had a nice steady.
Cadence of product and sales over last year.
They ran towards the end of the season in a very very heavy strong sale cadence. So it reduced the overall revenue in those categories too as well so.
It's a combination of multiple things within that sector, but really the wholesale piece of the business is what really kind of shifted for us most but I do get your question.
Yeah Okay.
Yes, I want to address wholesale in just a moment, but the spending back to your ROE as called out there Don just curious how you think about sort of I guess, if youre not seeing the efficacy from that adds back.
Yeah, that's understandable I guess, just given where the economy sets and.
To your client cost of financing and higher ticket items and stuff like that might be seeing some more pressure on that consumer discretionary front, but how do you think about the AD spend on a go forward basis, and the lean out of that a little bit while we go through a softer patch.
Or do you just redeploy the marketing dollars in a different way to try to boost that realize again.
Well, we started to see the softness and the conversion rates decline in the October timeframe right. When the interest rates started climbing up right.
Really the tail end of discretionary started to go away and then we said okay. What do we need to do what do we need to kind of.
Kind of refocus our AD dollars are on and we tried some some alternative types of marketing campaigns.
More top of funnel, which did not bear fruit.
The results were satisfactory as we were so that's why we've got such a an increased spend with less revenue. There. So we did try to branch out just because you know.
Basically the.
The average cost per click was rising.
Between even our own search terms and key words and phrases we were definitely digging into the analytics into the analysis and trying to pivot the company to find other alternative ways to drive traffic certainly organic is really important to us certainly we need to do a better job on the marketing side, but the competitive landscape for.
Our own keywords phrases, we've even had certain top leading customers that would.
You know really go heavy handed on our own named.
Namesake and so forth. So it's always a challenge in that category, but we've seen the pricing go up six fold.
And specifically to some of our key search words. So we have to pivot we have to do better and we just need to figure it out.
Okay, Alright, that's helpful color.
And then just on the traditional channel you mention sort of the distribution side of things being the real culprit here. It has been I guess for.
The better part of the last year, plus maybe a lucky maybe even longer at this point.
How how small of a piece of the traditional channel is that distro in international.
At this point it seems like it just should be a lot less meaningful on a go forward basis, but if you can just help us out.
Understand how to quantify that and how it how it moves on a go forward basis would be helpful.
Yes, sure so right now we're looking at.
Almost three quarters of our business is online so that's really important and that's by design that's literally.
At the base of all our initiatives moving forward Thats, where our spend is going that's where our investments are going because we believe that generates the long dollar and the highest value proposition for us as a company and our brand. So that is most critical.
Going back to your question was specific to traditional which is now a quarter of the business and then you would breakout the brick and mortar part of that so the wholesale business was much smaller a representation of our overall revenue.
And then <unk>.
Going forward, we speak about other initiatives that we have in place at other areas like our signature showroom, which.
If I could report on the signature showroom was incredibly.
Exciting category and a channel for US this holiday season, and it's taking shape just right now and it really performing better than expectations. So we're pretty excited about that so anywhere we can control our own destiny.
Really important to us so.
We all know that the wholesale business.
It has different challenges right. So are our distribution partners are managing their inventories differently. They are trying to practice just in time. They don't have the capital or do I don't want to make the capital investments to hold inventory, especially given the economy and what's happening in the environment. So in doing so they are reducing their overall positions in <unk>.
<unk>. So we understand that so that's why early on we started this shift as.
We stated over the last couple of years.
To be able to go more direct to consumer to look for more channels to create our own owned properties multiple owned properties and then really reach that consumer digitally and virtual whenever we can.
We talked about live streaming we talked about shopping direct response more of a linear comment that's going to actually be monetize in the future.
And as we become less dependent on the wholesale or the pricing pressure right now between the race to the bottom of lab grown diamonds is putting downward pressure to the wholesale are on our <unk> business too as well. So that's why the more we can do direct to consumer we can still realize and capitalize on the higher margins and continue.
To do so moving forward, so we've been making it very clear.
I understand that when we say this particular section or segment is down by 49% you know I don't want everyone to get hung up on that because ultimately as that becomes a smaller and smaller piece of the business certainly that percentage is going to climb and rise.
But the thought is that the online business and our direct to consumer business will grow exponentially higher as.
As these investments start to come in and take shape.
Great if I could sneak in two mark.
Just one since you mentioned the signature show or just any any metrics for success you can share on that product just really curious how thats going and then what would be the sort of.
I guess, the gating items for looking to open additional showrooms.
Yes, so right now we're still in.
Yes for all intensive purposes, the beta scenario related to the signature showroom, we're testing out a lot of different things specific to the store to the other.
Consumer that's coming to the store, we're doing things that are non traditional like we're doing special events, we're doing corporate alliance programs, we're doing a collaborative type engagements.
Engagements with the local community.
It's there's just a lot of moving parts, there and we can't.
We're not giving any guidance or forward numbers specific to that but we can just tell you that it is performing better than anticipated and we believe that there is definitely a future. There we believe that in some shape or form we can take this model and we can position. This model in key strategic areas and demographics that are performing quite.
Well for us within different regions domestically at this point so the timing for that.
Still remains open for discussion and we're still you know basically we just launched in October on the signature showroom. So we've got a few months under our belt right. Now we do have some holiday traffic Valentine's day has been pretty exciting a matter of fact, we have a big event scheduled for Saturday here too as well and these events come between.
Uh huh.
50 to 100 different guests come at a given moment. So I mean, it's been pretty exciting we're pretty pleased with with kind of the performance. There. So I believe in the coming quarters, we'll be able to make a more concrete statement as to.
What that looks like in the future.
Okay fair enough.
And just one last one on that margin.
The gross margins if I could.
Glenn you referenced.
Is that a big portion of the year over year headwind I think it sounded like 700 basis points of that was a difference in how you're applying labor costs to capitalized inventory can you just explain that a little bit more detail for us so we understand it.
And on a go forward basis is this are you going to be applying the same methodologies. So that we should assume.
All things being equal.
We should be assuming somewhere in that kind of high single digit 100 basis points.
Headwind on a year over year basis.
Yes, so Matt sorry, but let me just address that and try to simplify that just a little bit of alumina.
Take that from clip, but as we start to transition our business into more of a direct to consumer as opposed to the wholesale distribution company that we were in the past or a loose gemstone, we're reducing the amount of what.
What we call web for work in progress related to the cutting and fastening of our gem stones. So in the past so we literally had.
X number of gemstones, we're cutting on a quarterly basis on a monthly basis, and therefore that was spread out over the course of month over month within the quarter.
And it would be spread out across the board over the inventory now that we're being mindful of that inventory, we're not actually producing as much raw material and we have finished goods and we have inventory in stock. We don't have the advantage of that applied labor as much.
In <unk> you could elaborate a little more if you want to on that but that's pretty much where we're at and I just wanted to clarify Matt. It wasn't a change I think it was just.
The amount of the jobs that that process as Don mentioned related to the fabrication of the motion night and the raw material.
Yes, yes, okay I got it so we should just assume that on a go forward basis inventory made you maybe able to flush more inventory just because youre not youre.
Youre producing to demand not just to a certain set level every quarter.
Youre absolutely correct. One other factor that we should consider is that as lab grown diamond pricing becomes.
<unk>.
It's trying to find a bottom its trying to stabilize so because there is a race to the bottom when we first got in and we first introduced lab grown diamonds inventory was at X price. So.
And basically there was a cost associated with those particular goods that we had in stock at the time now the pricing is literally drop and come down, but we still have the costs associated with those original goods that original inventory. So we had some margin pressure specific to that we believe we have rectified that and we've remedied that and we're in a good place.
Now as we continue to go more vertical.
We basically are becoming more and more competitive and we're pricing.
Our goods in line with the market if not were actually below.
Most of the retailers that we're more competitive but initially to get into this space. We made a capital investment of that inventory was valued at <unk>. So we did feel some margin pressure. There. We believe that we sold through almost all of those goods and now we're pretty much stabilized. So we we will be in a much better place moving for.
<unk>.
Okay that makes a lot of sense I'll leave the rest others I appreciate the time.
Okay, great. Thank you.
The next question is from Peter Jackson, a private Investor. Please go ahead.
Yeah. So.
In the prepared comments I think it might have been something that Clint said.
You said you guys were expecting sort of a continued softness, especially in the second half.
Can you elaborate on that are you, making sort of a larger macro call here about the economy and interest rates or are you, saying specifically.
That youre seeing continued softness or.
Rollouts doesn't make sense.
I just spent a lot of money on marketing therefore, the cells will be soft because it doesn't make sense to spend the dollars.
I believe there is a lot of truth in what you said and how you framed it.
Across the board I think it's a little bit of everything I personally feel that the.
The global economy, although I'm, not an economist and I can't predict what's happening.
And we don't give forward.
Forward looking statements specific to that but.
Certainly we believe that I mean, I guess in <unk>.
<unk> indication, it's up today and things are up today and optimism is up and things are moving in a positive direction, but I still believe that the consumer has.
On issues specific to higher interest rates specific to financing terms related to jewelry.
Whether they're going to purchase that particular item.
Or they're going to pay their rent or mortgage where their increased mortgage whether they're on.
Fluctuating rates I mean, we just don't know so I guess, it's more of a macro scenarios, but certainly I will tell you specifically youre, 100% correct as it relates to marketing dollars. If you look across the board look at some of the other technology.
Companies look at the marketing spend and the dollars and the revenue associated with the spend we're no different.
We're looking at that if we're not getting the ROE as are their return, we're basically going to dial back in those particular areas. So.
We want to strive to be profitable, we want to do things right. We're just not out for purely top line growth. The numbers, we're trying to build a real solid company and we believe we've got some really great initiatives that we can deploy capital that will bring value to the company and also later on will.
Able to monetize those channels and a much greater way than perhaps burning through cash in some of these.
Paid and social campaigns that were run previously.
Right well that also connects to you know.
What you do with that cash and invest.
Investing that cash isn't attractive on advertising because of the poor low loss.
Are you better off buying shares I think you I think I saw in the release that you bought about 450000 shares back which seems like a lot, but you know what the dollar level that it's at it's it's it's not a lot of money relative to the $17 million.
You know at some point.
And by the way I know you know in the past people like <unk> and others were really buying in a big way its a little discouraging just not to see really any meaningful buying lately is that between that and perhaps not buying the shares back at a higher level. What can we infer that you guys think this is going to be softer for a longer period.
Yeah.
So.
Let me answer the first part of your question certainly we made the case for why we believe that we're an incredible value and we believe that we're trading way below book and the opportunities. There. We certainly believe in the long term.
The outlook for Charles and Cole Bart and what we've kind of built in the initiatives. We have in place. Some we've discussed some we are still to come to fruition in the coming quarters. So.
There is this thing called quiet period, so, you'll certainly insiders myself or whatever.
<unk>.
No.
Can't purchase within these timeframes, where we have material nonpublic information certainly we did lean in and buy a half a million dollars worth of stock because we believe that that was really important and we believe that the value is there we absolutely will consider given the situation in downward pressure on the stock should it be.
It's something that is meaningful to us given what we know to come in the future and where our investments need to go and where we believe that we're going to monetize.
Exponentially.
It is not at risk we will certainly consider.
More buybacks.
Just in December Clint right here he did.
[noise] purchased some shares so.
Sure.
We're constantly looking to see open windows, when we can actually invest in ourselves and our people so right now.
We did come off.
No.
Two years' worth of incredible growth and upward trajectory and profitability. We said that now we've built up a lot of cash upwards of $20 million. Then and then we were going to deploy that cash make investments in infrastructure make investments in our distribution capabilities make investments in our our enterprise.
Resource management system make investments in our web properties, we did that moving forward, we want to continue to be the best of breed in the E Commerce space for all things made not mined. So we'll want to have the best in place as far as our web properties and that cost money. So we'll continue to make those investments we have some incur.
Credible things coming up.
We believe that are really critical to this direct to consumer.
Business model that we're creating.
Rather than as I said in my opening comments, a single threaded voice and a distribution company. So.
We like to believe that we made those announcements we know the triggers that we need to.
Press that are going to kind of exponentially move us to another level, but we did level set that we're going to make those investments so.
Again times are changing it's a different environment.
You know what I'm, saying so.
We will certainly look at every opportunity that comes to.
Increase the value of our shareholders positions.
AMA.
A stakeholder in this company too as well and I have a significant portion of shares and investment in this company myself. So.
In my best interest to be able to drive growth and drive value within the stock and that's what I do every day and that's what we all do here so.
What we will do we will do what we believe is the right thing for the company.
Okay fair enough.
And on the direct to consumer business.
What do you think that we can.
Model N in terms of gross margins going forward.
Again, we've had some margin pressure.
Given two things so number one.
Sure.
Pricing related specifically as I spoke before about the initial investment in the diamond goods or lab grown diamond goods. The original cost for those goods and then now the.
Kind of the reduced cost and the pressure there to be competitive in cell.
Sell off those goods.
Other thing that will happen is as the race to the bottom goes on lab grown diamonds, we basically have to kind of see where that goes and we want to still make sure that we're competitive we still want to make sure that we're in the conversation and our goal is to be one of the top destinations order to do that we need to be competitive we need to build the story of why that consumers should buy.
From us a compelling story with the design and the aesthetic of what we're bringing into market, but certainly there may be some pressure there. So the answer specifically I've said this a million times that 40% margin is a very very strong business in the jewelry space. That's just my personal opinion and I believe that strong we always.
Strive to be north of 50%, So I would say somewhere between the 40% to 50% would be a model that I could absolutely get behind so.
Again.
It really depends on some key factors that may come and those key factors or do we want to spend money and deploy capital and additional marketing areas.
We haven't done in the past, whereas if the paid and social spend is not bearing the results that we want then maybe we try some other type of avenues that may definitely increase the expense, but not get the return so we're.
We're in a complex scenario that if we lean into much.
It basically affects the bottom line and it affects the margin almost immediately so we're trying to build the company that we're trying to grow at the same time, but it's kind of a catch 22.
So.
To answer your question I believe somewhere around a 45% to 47% would be the ultimate area, but there is the profitability of some pricing pressure between the lab grown diamonds, which is representing a larger portion of our online direct to consumer business and Charles and Colvard right now.
Okay and last question just staying on the DTC.
So.
If it doesn't make sense to spend money on on the on.
Right now because of the incredibly tough rollout.
How long are we going to keep the DTC from falling I mean with all the investments and actually increased investments, it's hard to see it dropped by 16% in the quarter I mean, that's and again totally understand.
The macro issues, but you know I just looked at segment, which I know is not a great comparable but my.
That's public in their sales for the quarter ending December or based on your guidance. What's your updated and increased is gonna be down like 5% and we dropped 25% so.
Obviously again not a perfect comparable on much smaller company, but the bigger question is how do you how do you get those DTC sales back up, especially given the tough environment, especially given that it doesn't make sense to spend a lot of money in advertising right now.
Yes, so all pointed great question right. So let's talk about the commentary on signet rate Dara conglomerate their monopoly there pretty much own all four quarters of the Earth as it relates to jewelry. So a lot of their growth has come through acquisition. So certainly their latest acquisition of <unk>.
Now that revenue is starting to trigger.
Diamond's direct they bought so all of that is coming into play.
Also over the years prior they were literally.
Just beaten down so their growth trajectory and their success in my view has been a little bit skewed by that and skewed by kind of the acquisitions, they pretty much own the marketing universe as it relates to Google and Facebook and everything because they can deploy pretty much unlimited capital to be in the top rankings.
And to be top of mind for most consumers. So the comparison and I. Appreciate you, saying it may not be a direct comparison, but what we need to do is we need to figure out where is that point of diminishing returns. We're certainly going to continue to spend in paid advertising and it's still go there.
There, but we need to find that really that threshold, where we have to stop the spend redeploy those dollars in other areas. We also spend money with our co op partners in brick and mortar and they are requesting more brand assets and collateral and co ops, so we need to support them because brick and mortars.
Still a strong piece of our business. So we're doing that and then I guess to answer your question, we need more channels to be able to distribute our product we need more drop ship partners that we believe can.
Ken just broadened our footprint, we said footprint, maybe five times within the prepared remarks, and we certainly believe that that's how we're going to do it.
Is that.
Much more affordable way to kind of drive revenue into the online segment, because basically it to a percentage of play and it's not a direct spend if that makes sense. So we as a company are looking for more strategic partners that we have and the online business, where we can represent.
Direct to consumer presence control the message patrol our designs in that category.
And then lastly.
There are other channels out there besides.
Online digitally that we can utilize a lot of these assets that we built up a lot of the infrastructure that we've put in place.
Where we can reach that consumer streaming and more of a direct response or a linear approach, where we control. The the medium we control the messaging that we control for all intensive purposes. The airtime. So the goal would be there is to build that out stronger where we can control our destiny.
There is a cost associated with that we just need to manage through that and see where the returns are greater so we believe we've got a plan moving forward.
Shortly.
The complexity of the environment in the universe.
Is there so well.
We'll see what we can do in the next.
A couple of quarters do you work with Influencers much.
So we do right. So I mean recently it was with J Lo and not J Lo but.
One of the Jersey shore folks J, while sorry about that.
We worked with a couple of other influencers to as well, but the goal is to be able to really understand what the value is of those influencers. We believe right now the inflows that we've approached it kind of that direction is pretty much one and done we did the bachelorette. We've done a lot of campaigns. There. So that was successful for us will.
You need to do that.
We're better off with those type of.
Influencer pass right.
Certainly we have affiliate programs that have an influencer base too as well those affiliates to where we're actually growing the affiliate universe right now, but we believe that kind of coordinating with designers and other types of.
Influence so.
No.
Type folks within our industry is more meaningful for the future. So we'll do a little bit.
A little bit of both but if we lean in on one big Influencer in that costs associated with engagement is.
X number of dollars like a Super Bowl commercial then where are we going to be with that so that's the unknown right. We don't know if a single AD or a single in fluids or is going to give us.
That catalyst to move it to another level or is it going to fizzle out it's just going to be a one time spend and therefore, just destroy us financially. So we're trying to be prudent and responsible and fiscally responsible with our shareholders' money.
And with our initiatives moving forward.
Alright. Thank you thank.
Thank you.
Again, if you have a question. Please press Star then one.
Okay.
Yes.
Hi, Dominic when it's Adam low with standard Lytham partners got a couple of questions here from.
Investor Emailed us.
As most of that it becomes a smaller portion of overall sales and perhaps declines in sales is there a risk to the green and with the supplier Cree regarding minimum orders over time, I mean, along those lines what is being done to secure better pricing on supplies of lab grown diamonds.
Okay, great. Thanks, Adam for that so also a great question.
Certainly you know if you.
If you kind of look at our filings, which will come out tomorrow.
You might take note of.
Kind of the consumption of raw material, which is.
Definitely present, there, we're definitely being responsible and prudent with our inventory certainly you see the decline in the inventory.
Quarter over quarter of sequential quarters.
We anticipate that one would assume that we're going to make responsible decisions related to Wil, which is wolf speed now.
Certainly there are incredible partner and a strategic partner and they've been with us for over 27 years or around 27 years. So we're all aware of the business climate, we are aware of.
The overall <unk>.
Requirements and the demand.
So as we progress forward, we'll make executive decisions to manage through that.
We believe that we have the type of relationship.
We did that at the onset of Covid when it first started.
Certainly that'll be a continued conversation with our partners and we will continue to be mindful respectful.
Of that relationship, but certainly take a look at the consumption.
Kind of navigate through that.
As it relates to how do we secure better pricing in lab grown diamonds.
I alluded to it a little bit within this conversation our goal is to become more vertical in this space and become an active player.
Whether we become the grower and then go from grown to market.
<unk>.
Much bigger conversation.
That may come in time, whether there is a partnership like a wolf speed scenario that could come to fruition, where we could literally procure the rough I can tell you that right now were ongoing.
Yes.
R&D and test and we're cutting in fasting our own rough so.
That is provided by a strategic growing partnership that we have so that's going to get us more vertical we believe that thats going to hedge against any pricing pressure. We believe that that's going to get us more competitive and we believe will become a bigger player much like we are in the <unk> world, where we basically facet and cut.
More emotionally gemstones at anywhere in the world. So we.
We anticipate one day that will be a factor in that space.
So I hope that answers those questions on that.
The next question is on inventory as a percentage of inventory mix changing and he's talking about the increase in finished jewelry and the decrease in loose jewels.
Yes, so certainly the goal is to provide more value to our shareholders right.
No.
In the past.
What I've learned is.
It's a very simple exercise right you want to be able to maximize the value of your inventory. We're fortunate that we're dealing in commodities in the commodities.
Get somebody to say the Fiat money system people say different things, but gold is gold.
Platinum is platinum so the market dictates the value of that so when you see our inventory and you look at finished jewelry and finished goods.
The valuation of that inventory is exponentially higher because it has at high gold concentration or intrinsic value. That's very easily calculated on our balance sheet. So look to us to continuously build out finished jewelry, because thats where were going more direct to consumer.
That's where we believe is the best path forward for us as a company also keep in mind as we build out our drop ship programs in our partnerships. There are certain SLA that are in place, which are service level agreements that are in place that we need to maintain inventory stock and everything so we need to maintain those.
Centaury.
Thresholds to be able to support them.
And also as we start to see the shrinking pie of wholesale distributors.
Or the distribution of loose gemstones, because basically they are experiencing other pressures, we actually did a consolidation between our partners and our distribution partners. So there's less of them were actually pushing our goods into more individual pieces than selling 501000 of our number so look to.
US to decrease our loose jewel inventory too as well so.
And we believe that Thats a good thing.
Okay.
Gary I think we have one more caller.
And the next question is from Jack straw, but private Investor. Please go ahead.
Hi, John just a quick question on potential acquisitions have you guys been approached by any larger company to be acquired just based on you guys traded have book value I didn't know if there was any conversations and many other companies.
Towards your guidance. Thank you.
Hey, Jack Great question, I mean, it's a loaded question and obviously I can't answer that question specifically.
We don't discuss any matters specific to that but I can tell you that we've got a tremendous opportunity ahead of US. We believe there is a roadmap ahead of us whether we become the acquirer of others to be able to grow our footprint or to grow our brand where they grow our strategy that remains to be seen where looking at every <unk>.
So.
Currently.
I have an obligation in the chair that I sit in to be able to review and discuss in.
And.
Take into consideration any opportunity that would present itself. So we think we're a great company. We think we're a great value we have.
You know a good position in the market so.
We believe there is plenty of growth for us to grow our business.
Stand alone so I.
I don't know if that.
Answer as well.
So are you completely ruling that out then.
Pete did approach you a thought it brought superior value than the current share price you would considered how youre not completely shooting down that just based on where you think you can grow the company three years.
Absolutely not so we would take any consideration anyone that comes forward with a legitimate bonafide offer we take that to the board of directors, we've talked about it all the time should an opportunity present itself and it makes sense for the shareholders and myself included across the board absolutely I mean why wouldn't we.
So given.
<unk>.
And opportunity.
That could or will present itself.
We'll kind of visit that at the time.
<unk>.
Great. Thank you.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Dan O'connor for any closing remarks.
Okay.
So first of all I want to thank everybody for today and on behalf of everybody at Charles <unk> Colvard. We appreciate your time and I want to thank you all for your continued support and we look forward to things that come in the future for Charles or cohort.
The conference call will be archived for review on the company's website at http. Colon slash slash www dot Charles and Cole, our dot Com Slash Investor Hyphen relations slash events.
To access the digital replay of this conference you May dial one 870 734475 to nine or 141 to 3170088, beginning approximately one hour from now you will be prompted to enter a conference number which will be.
For two for 1796.
These record your name and company when joining.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
Yeah.
[music].
Okay.
[music].
Okay.
Yeah.
[music].
Yes.
Okay.
[music].