Charles & Colvard Ltd. Q3 2023 Earnings Call
[music].
Good day and welcome to the Charles in Khobar Q3 fiscal year 2023 earnings conference call and webcast.
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The earnings call may contain forward looking statements as defined in section 27, a of the Securities Act of 1933.
As amended.
Statements regarding among other things.
Company's business strategy and growth.
Russia identify who's speaking statements are based largely on our co pays and 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.
Let's play it by or underlying the forward looking statements.
In light of the risks and uncertainties there can be no further assurance that the forward looking information will prove to be accurate.
Accompanying today's call is a supporting Powerpoint slide deck, which is available in the Investor Relations section of the company's website at IR Dot Charles and co barred dot com slash events.
The company will be hosting a Q&A session at the conclusion of our prepared remarks.
Should you have any questions you'd like to submit please email C T H R.
Partners Dot com.
Please note this event is being recorded.
Now I'd like to turn the conference over to Don O'connell, President and Chief Executive Officer. Please go ahead.
Afternoon, everyone and welcome to our third quarter fiscal 2023 earnings conference call.
At a high level this quarter, we experienced a continuation of the direction of the last few quarters against the challenging overall macroeconomic backdrop.
This combined with the changing behaviors and dynamics in the jewelry marketplace, particularly related to lab grown diamonds prompted us to refocus our efforts in the short term I'm prudent capital and inventory management, while also shifting some of our core strategies.
We are pleased that the jewelry industry is now experiencing a shift towards responsible practices in response to the increased consumer interest in the origins of the fine jewelry they purchase.
We deemed this to be a long term favorable circumstance for us to Charles and Colbert.
We believe that this shift will allow us to highlight our strength maintain positioning and educate those consumers on the brand equity we have built for nearly three decades.
To become an ideal destination for responsible he made find gems and jewelry.
Lab grown gemstones lab grown diamonds, specifically are gaining significant popularity in the marketplace, becoming more mainstream for price conscious consumers seeking larger carat weights with eco friendly and conflict free options.
Our core engagement and fashion assortment set with our forever, one moist tonight and Kt of lab grown diamonds offered these discerning consumers the ability to acquire more at a far greater value than comparable mind options.
Our forever one moist knight offers an advantage over mind and lab grown diamonds from both a competitive perspective and a value proposition.
Admittedly the most recent downward pricing pressure on lab grown diamonds is being felt throughout the industry.
Look to us to position ourselves aggressively against this backdrop to remain a force delivering the quality consumers see when considering their engagement and passion fine jewelry needs.
We passionately believe that our key strategy to offer the consumer the choice between our forever, one moist tonight and Arcadia lab grown diamonds has positioned us well for future growth.
These product brands and our core values enable us to stay ahead of the curve.
We continue to buy from market share beyond the global economic woes of today.
We also believe the short term pressure facing the lab grown diamonds industry will find its way and settle on a pricing methodology that keeps its credibility while maintaining its intrinsic value at its core.
Forever, one voice and I will continue to be the premium more insight into market.
Reinforced by its warranty and its value proposition and.
It remains essential to our business we.
We will continue to educate the trade and consumers alike to increase our overall positioning against what we believe to be inferior moist tonight, claiming to be comparable in nature and composition to what we have perfected over nearly three decades.
With that being said the increasing demand for lab grown diamonds amplifies the needs to grow Arcadia lab grown diamond product brand that are responsive way.
As we seek to capture consumers predisposed to buying a diamond.
Since introducing lab grown diamonds, we have become more vertical as.
As we continuously seek to be a competitively priced industry leader and the overall lab grown fine jewelry market.
We have recently expanded our cutting your fastening capabilities for lab grown diamonds and support of Arcadia lab grown diamonds growth, enabling us to become more self sufficient while differentiating ourselves from other players in the industry, who simply buy sell and trade to the bottom.
We believe the brands that are aligned with today's consumers that act responsibly and offer an interactive and experiential relationships delivering the quality and design aesthetic. They seek will remain relevant and at the forefront of these times.
According to Deloitte insights the majority of consumers are focused on saving compared to spending during these turbulent economic times, we believe that we must continue to execute upon our core strategies to Bury jar selves.
As the global economic uncertainty, while responsibly managing our business.
The past few years, we spent a considerable amount of time and capital to position our company and a more diversified posture to take advantage of this shift by consumers in the fine jewelry marketplace towards responsibly sourced lab grown jams, and fine jewelry that provide quality price and value.
Our prudent effort to reinvest in our business meaningfully to elevate our technology and expand our infrastructure in support of new revenue streams that we intend to monetize in the quarters and years to come continued in fiscal 2023.
Additionally, we believe our expanded product portfolio inclusive of a proprietary signature collection designs along with several new sales initiatives will enable us to reach a broader customer base that seeks what we have to offer.
We believe these deliberate investments will create greater shareholder value over time.
Despite the challenging market conditions consumers are still purchasing high end jewelry.
While becoming more aware of their practices their resources used in the creation of their fine jewelry, we were pleased with the pace by which the lab grown market continues to grow.
<unk> to be a compound annual growth rate of nine 8% by 2031, and we believe our continued focus on responsibly sourced jams and our commitment to recycled precious metals will position us well for future growth.
Fundamentally our goal is to find ways to reach that consumer more effectively while strengthening our moat and overall position in the market.
Segment, the world's largest retailer of diamond jewelry has predicted a surge of engagements in 2024 and 2025 showed that proved to be the case, we believe that Charles <unk> Colvard is poised to capture a greater share of this market opportunity.
The eco and ethical movement has disrupted the traditional jewelry industry in various ways with 85% of people, saying they have shifted to more sustainable purchase habits. According to a study published by Simon Kutcher and partners of consulting firm <unk>.
Stablish brands are facing pressure to adjust their practices or risk, losing market share to new entrants that could respond to ethical concerns Charles <unk> Colvard has always been a lab grown gemstone company and we are committed to utilizing 100% recycled precious metals in the fine jewelry, we create.
The sustainability shift in the jewelry industry appears to be not just a passing fad, but rather a lasting movement set to gain even more traction.
With consumers, becoming more informed and discerning the industry needs to be able to adapt to the changing landscape to meet customers' needs by embracing responsible and ethical practices jewelry brands can stay competitive and appeal to the growing demand for earth friendly and conflict free jewelry. According to Forbes millennials are.
Driving brands to practice, social responsibility by emphasizing buying ethical and eco friendly companies like ours.
In addition to responsible practices. The jewelry industry is also responding to changing consumer preferences in terms of brand values design aesthetic and convenience of our recent quarters. Another key movement that driven the retail jewelry industry.
There's been a shift in consumer buying habits towards more experiential purchases with an emphasis on interactive shop about commerce.
For Us this includes our own properties, Charles and Colvard, Dotcom and moist night outlet dotcom.
Our virtual consultations that enable us to showcase our quality price and value in a real time.
Our retail signature showroom located at our headquarters campus, which allows customers to experience our premium jewelry selection firsthand and our most recent expansion into developing a long form shovel streaming capability.
Charles and cobalt is becoming well positioned to take advantage of these key drivers by continuing to diligently focus on and invest in our mission and values. We remain confident in our ability to drive growth and provide value in the years to come.
Q3 fiscal 2023 was a time marked by continued strategic investments, which I highlighted earlier to resonate with a broader segment of the total achievable market.
These investments are we believe setting the Charles <unk> Colvard up for long term success by positioning us to enhance our brand experience and meet the discerning consumer demands Ulf.
Ultimately our business decisions continue to be made with a focus on long term growth and stability of our product brands by elevating our brand presence and direct to consumer relationships, which we anticipate will capture a greater share of wallet.
To support our business, we offer a broad range of assorted fine jewelry to meet discerning consumer demands most notably during Q3, we launched 55, new designs of our patented signature collection and engagement rings and wedding bands. We continue to expand Arcadia lab grown Diamond couture collection to include.
Additional rig necklaces earrings, and bracelets styles, we expanded our created colored line of products featuring TD lab grown diamonds.
We are energized by the positive customer response to this product condition.
And our finished fine jewelry products have been featured in multiple local and national electronic and print publications, including the knot AC magazine inside a dotcom Yahoo, Birdie Dotcom and Brides magazine.
Charles and colvard strategy of focusing on our customer centric initiatives, expanding our product offerings and leveraging our unique brand position will we believe drive growth in the upcoming quarters. We are confident in our plans to continue optimizing technology and infrastructure operations and brand Mark.
Getting initiatives to help ensure that we can meet customer demands in a more efficient yet conscious way.
So what does this mean.
This means we will expand our lab grown diamond offerings.
Including larger karat total waste in response to the consumer demands.
We will continue to shift our moist night assortment that bolster our value proposition there.
Well continue to elevate the competitive landscape and the value proposition between voice side of lab grown diamonds and its overall impact to our business and responsibly positioned ourselves accordingly.
We will continue to make calculated investments in our direct to consumer web properties and video streaming and broadcast capabilities in order to better reach consumers and will seek to form new alliances and strategic partnerships as the industry.
<unk>.
With the online segments, representing 70% of revenue in fiscal Q3 2023, we believe that this continues to present a long term opportunity. We believe the investments, we're making will put us in a solid position to capture market share.
We continued strategic investments exec.
Executive management as optimistic about our future position in the industry and our ability to capitalize on customer expectations.
I will now turn the presentation over to Clint Pete our CFO to provide more detailed insight into Q3's financial performance claim.
Thanks, Todd today, I'll provide a summary of key financials for the third quarter ended March 31st 2023.
Additional detail can be found in our earnings press release that we issued this afternoon and our Form 10-Q, which we expect to file tomorrow.
Please note that all percentage comparisons are to the third quarter ended March 31st 2022.
That's fine otherwise.
First we will start on slide 10, with a comparative analysis of the third quarter of fiscal 2023 compared to the same period one year ago.
In total net sales for Q3, 2023 totaled $6 $6 million versus $9 $8 million a decrease of 32%.
Due primary to the economic factors Don discussed.
Net sales for online channels segment, which is primarily direct to consumer and cause it's Charles and Colvard dotcom motion that outlet dot com marketplaces drop ship retail and other pure play outlets totaled $4 $6 million for the quarter or a decrease of 27%.
But now representing 70% of total net sales.
65% one year ago.
Net sales from our traditional segment, which consists of wholesale and brick and mortar customers totaled $2 million for the quarter or a decrease of 40%.
Representing now approximately 30% of total net sales down from 35% of sales in the same quarter a year ago.
Finished jewelry net sales decreased 28% for the quarter.
Represented 80% of total sales in the quarter.
Up from 76% of sales in the third quarter, one year ago.
We're still net sellers do page, 43% for the quarter as we mentioned in prior calls due in part to our shift towards finished jewelry and direct to consumer strategies, while many domestic and international distributors reduced their forecast and overall inventories due to software economic environment.
Looking at sales by geography, nearly all sales in the third quarter were derived in the U S. While.
International net sales reported in a quarter were only $100000.
As we discussed in recent quarters as certain of our international distribution partners containing facing the ongoing COVID-19 restrictions and closures.
Demand has slowed due to overall consumer inflation recessionary concerns and 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 as evidenced by the lesser decline in online channels in finished jewelry net sales.
Our traditional segment at least Joe's net sales.
Moving onto slide 11 to discuss gross margin and profit we delivered a gross margin of 32%.
This is 46% in the year ago quarter.
And $2 $1 million in gross profit versus $4 $5 million in year ago quarter.
Most notably the decrease in our gross margin in the quarter was principally because we took advantage of an opportunity to monetize certain nonperforming jewelry items, along with continued sales promotions.
For Q3, 2023 total operating expenses increased 7%.
Representing 65% of total net sales compared to 41% in the year ago quarter.
Sales and marketing expenses increased 11% to $3 $3 million in support of our growth and brand awareness initiatives and G&A expenses were $1.05 million for the quarter compared to $1 $1 million in year ago quarter for a 5% decrease.
We continue to invest in marketing and brand awareness initiatives that we believe will allow us to build upon our brands and have direct access to the consumer.
We reported a net loss for Q3 2023 of $8 $4 million or 28 cents loss per diluted share compared with a net income of $339000 or one cent earnings per diluted share in the year ago period.
Included in our net loss for Q3 2023 is an income tax expense of $6 $3 million compared to an income tax expense of $78000 in the year ago period.
$6 3 million tax expense was primarily driven by the establishment of a deferred tax asset valuation allowance on our net deferred tax assets.
As we determined that our expectation of future taxable income and the upcoming tax years may not be sufficient to result in full utilization of available net operating loss carryforwards and other deferred tax assets.
Our weighted average shares outstanding on a diluted basis used in the calculation of loss per share for the quarter were approximately 33 million shares for the period ended March 31 2023.
Fair to 31 3 million shares for the period ended March 31 2022.
Decrease in shares outstanding is partially driven by the impact of the company's share repurchase program.
Now, let's move onto a snapshot of our balance sheet.
Our liquidity and capital position remains strong as we ended the quarter with $16 million of total cash compared to $17 million at the end of the second quarter ended December 31 2022.
Working capital remained strong any of that 25 man.
In addition, the company continues to be debt free.
We believe our capital structure remains strong and able to weather the inflationary of geopolitical factors in the near term.
Our cash flow used in operations was $800000 during the quarter compared to $1 million of cash flow provided from operations in the same quarter a year ago.
Parents of other sources of liquidity, we have access to our $5 million cash secured credit facility with Jpmorgan Chase Bank.
As of March 31, 2023, and do today.
We have not accessed funds through our credit facility agreement.
Inventory as of March 31, 2023 totaled $33 $3 million compared to $35 million as of December 31, 2022.
A reduction of nearly $1 $7 million.
Loose jewels inventory was $15 $6 million as of March 31, 2023, and compares to $16 million as of the same quarter a year ago.
Finished jewelry inventory was $17 $4 million as of March 31, 2023, when compared to $18 $8 million as of December 31, 2022.
A reduction of $1 $4 million.
Demonstrating the solid sell through of our finished jewelry and the direct to consumer online channels.
While still maintaining a higher percentage of in stock rates to meet our service level agreements.
Well I have to remain focused on prudent inventory management strategies going forward.
Book value per share was $1 60 per share, but sequentially lower to the Q2 2023 due to the establishment of a deferred tax asset valuation allowance on our net deferred tax assets of $6 three man as I previously mentioned.
In summary, we remain confident in our financial strength and our continued efforts to increase shareholder value.
As we continue to focus on the fundamentals of the business during the current macroeconomic environment.
Which actions include diligent management of our cash inventory and expenses.
All while making necessary investments to grow the business.
With that I'll turn it back over to dawn.
Thank you.
Charles a cobalt our goal is to become a premium direct to consumer destination.
That's an e-commerce driven.
Interactive brand that resonates with today's complex consumer that's aligned with customers' core values and aesthetic and that focuses on quality first.
A leader in voice and either lab grown diamonds and fine jewelry through a prudent strategic investments, we strive to offer the highest quality products available at a meaningful value continue to utilize ethical and responsible sourcing practices and further advance our technology to stay ahead of the curve as we move into the future we will continue to position ourselves risk.
Possibly to take advantage of the shifts that are happening in the jewelry industry. We remain committed to meeting the customer needs through continued innovation and consumer education as the jewelry industry continues to evolve we will continue to refine our strategies to remain successful in the competitive market.
Over the last few quarters, we have implemented strategic initiatives to help ensure that Charles and colvard remains innovative reliable and current as we move into fiscal Q4 2023, we remain confident that our long term growth plan is on the right path for success.
Last but certainly not least we would like to thank our employees, who continue to go above and beyond during these difficult times and our shareholders for their continued support at this time I will turn the call back over to the operator, who will open up the lines for any questions.
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Hi, Scott This is Adam Logan Steiner.
The management team a few questions.
So on the gross margin was lowered to past trends can you repeat again the reasons behind the shortfall is this new normal going forward or should we be able to regain 45% to 50% levels.
Yeah, Hey, Adam how are you doing certainly.
This is what we believe to be a short term situation that was primarily driven by a couple of business decisions that we elected to do so number. One is this is the time, where we want to kind of.
Preserve cash raise additional cats cash and we sought out some opportunities to move through some what we call obsolescence or nonperforming inventories. So we took advantage of that and that was a good thing. So we're able to kind of maintain our cash position. The other situation is really important and we need to keep an eye on as the commodities market right now if you look at <unk>.
Right now the gold is trading upwards of you know.
$2060 $2080, an ounce so everyone within the industry is starting to kind of take note of that situation against the economic environment. So.
Look to us to kind of.
Hedge against that as best we can but certainly you know for inventory that we have on the shelf, which we have ample inventory of finished jewelry. Thank goodness for that that's a really good thing because that inventory is appreciating day by day as the commodity market.
You know kind of increases as well with it however, when we do a made to order. We don't have the piece in stock we've got to go into the market and we need to procure those goods. So we get some margin compression on that and then lastly, just let's talk a little bit about lab grown diamonds and the impact that lab grown diamonds have had to every business within our industry.
In the last few quarters more so in the last quarter.
Merrily with a downward pressure in pricing on the lab grown diamonds.
The entire sector lab grown diamonds.
Trying to find where that normalization is a lot of inventory.
And a lot of areas was purchased at the higher end of the market.
Lucid with US we had some inventory on the shelf that was at the higher price we've seen a significant drop in price. So in the first part. It was good that we were able to convert that inventory into cash by selling off that inventory at a discounted price also it enables us to get and procure new goods at the current price and the current level where it's at.
So.
I said in my opening remarks, we believe there'll be a normalization there and will believe we believe that we're taking the necessary steps to kind of manage through.
These will be call it three main pressures.
Of the business and we believe we've got a good answer to it and we're making executive decisions every day.
To try to make sure we position ourselves properly moving forward. So I think there'll be some compression.
In the short term, but certainly we're.
Mystic in the long term for what we're planning on.
You discussed the pivot towards the lab grown diamonds and their trends can modulate compete if so how.
What happens then to mind gyms.
You know I mean, I believe its my belief that mined diamonds in mind gems will always be here I mean, there are always showed strength in the market. Because there are those consumers that are predisposed to having a diamond.
And Thats just the way it is I will tell you that the lab grown movement is very much here very strong and it's prevalent in every single retailer in the country and those who haven't.
You know kind of adopted that strategy had been left behind it or trying to play catch up.
The the problem that we have is this downward pressure that I just alluded to is putting some additional pressure between the moist <unk> gemstones that we carry and really it's kind of the pinnacle of what we offer.
Against the pricing of the lab grown diamonds so.
Whereas we had an incredible delta between the two with the you know kind of the valuation proposition that proposition is tightening so look to us to make prudent decisions to be able to kind of.
You know maintain that gap and maintain that pricing competitiveness with mortgage night offering that choice to the consumer that has a really nice delta between the two so we believe we have an answer to that it's going to take a little bit of time to kind of navigate also one other consideration Adam is us transitioning our entire assortment.
A products to be able to.
Kind of accentuate why mortgage Knight has a greater value in larger care weights that lab grown diamonds still is not competitive with so whereas before we had a one carrier voice night, and we had a one carat diamond and you'd be able to see the difference very clearly now lab grown diamonds in voice neither one character.
Pretty much.
Getting closer and closer even though there is still a big difference.
Probably a two exited three acts.
We're leaning more toward the consumer where they're going and larger carat weights to 234 and five carats. So.
We will also take a look at all of our inventory and take a look at our supply take a look at a lot of different variables that we believe are necessary to continue to be more competitive against anything that comes at us and again, we believe that we're well positioned we believe that our forever. One is the premium in the market.
And I'll take it another step here if I may.
<unk> moist night as railroad then a diamond I mean thats a fact, so the bottom line is as lab grown diamonds become prevalent and they're everywhere and it becomes more commercialized. We believe that we can elevate forever one elevate the brand and put some more energy in and find the catalyst to be able to claim.
That voice and it is actually rare therefore, the intrinsic value should be higher however, we will maintain.
Our cost of valuation proposition to the customer even though it is of greater value in our minds. So of course, that's subjective to what I believe were Charles <unk> Colvard Thats what were you know.
<unk> built on our foundation, but the choice to go into lab grown diamonds was the right choice.
And we believe we're expanding that.
Within all of our channels in the organization and we believe it's going to be a tremendous growth factor for us.
Once we start to.
Get it more.
The mainstream of our channels.
I don't know if that answered the question, but I think pretty much where there.
Thank you.
John You mentioned also making certain investments for the future. Some on the technology side can you elaborate or add some color to those initiatives, how how long will it take to implement these initiatives when can we start hearing some clarity on them and also what type of costs should we expect these investments to be just wanted to get a gauge on your cash runway given the.
Investments during a difficult macroeconomic environment.
Yes. Another great question. So we've really really focused on preserving cash so at $16 million in cash we feel good about the cash.
We feel that Thats really critical we feel good about know that that's really important we feel that as we're continuing to you know.
Kind of position the company for the future in these hard times, we have to make strategic investments to stay ahead of the curve to stay ahead of the competition.
So what does that mean that means we have to kind of re face and.
Look at all the functionality of our web properties, Charles a cohort dot Com voice night outlet dotcom make sure that where we have best practices. So we're having to make investments there and we have been doing so well.
Without drawing down cash is using regular cash flow, that's coming in and out and doing what we need to do.
Look to us for SMS.
Strategically.
The re targeting consumers that like our products that are in.
Kind of the ether that.
Have shown interest in what we offer targeting those consumers getting them to opt in looking to third party best in practices best of breed companies to partner with to do that without being specific so we're going in that route email marketing re targeting it's something that we've done before we need to enhance that we need to do a better job.
So we're continuing to make investments in that in that capability.
Influencer marketing too as well.
Partnerships and platforms to be able to reach out and touch influencers that want to.
Endorse our product become ambassadors with our product.
And then.
Telephony systems to be able to upgrade.
Really at the cutting edge of.
Our CRM systems and make sure on the cutting edge that we.
That we really can capture all the data we need to make informed decisions on that consumer unmet consumer journey, where that consumer started and where that consumer finished from first touch the last touch those are really really important ingredient to success and we've had and will continue to make investments there.
And then lastly, we we've been talking for quarters and quarters now about our streaming capability. We believe that the future is in video we believe that the future is really important to convert that video into the ability to simulcast live interactive chapel commerce in multiple ways and I know you know.
The past few quarters have been talking to talk or we're getting better and better we're making more and more investments in doing so so one would imagine that we could do a live.
Interactive shopping.
Opportunity and we could simulcast at anywhere in the world.
<unk> <unk>.
Domestic and international should we choose and then we believe that is going to be a long term play for us and it's going to be great more to come on now we really can't disclose too much but that's an exciting opportunity for us and we can't wait to.
Kind of shot what that looks like.
Operator next question.
I'm sorry, that's all the question I'm sorry.
Again, if you have a question. Please press Star then one.
Okay.
This concludes our question and answer session I would like to turn the call conference back over to Don O'connell, President and Chief Executive Officer for any closing remarks.
Yeah. Thanks, Scott. So these are challenging times Theres no question, but we believe that we've got plenty of cash we have no debt like I said inventory levels are at $33 $3 million we.
We believe that we have a mix of inventory, we believe that we need to kind of take a look and make strategic prudent decisions on how we operate the business the products that we bring forward and the customers that we target.
Certainly the consumer is under some pressure right now so we will navigate through that we will do some creative things to be able to grow the business and maintain the business where we're at.
And we're confident that we'll continue to strive forward and just want to thank our investors for supporting us and certainly again the employees that have worked very very hard for for everyone.
To get some incredible beautiful jewelry. So thank you appreciate it.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.