Charles & Colvard Ltd (CTHR) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Charles & Colvard third-quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). With that, I would now like to turn the presentation over to your host for today's conference, Mr. Bill Zima of Integrated Corporate Relations. You may proceed.

Good afternoon, everyone. Thank you for participating in the Charles & Colvard third-quarter 2007 conference call. Joining us from management are Bob Thomas, Chairman and Chief Executive Officer; Jim Braun, Chief Financial Officer, and Dennis Reed, President and Chief Marketing Officer.

Before we begin, I would like to remind everyone that except for the historical information presented, the matters disclosed in this conference call include forward-looking statements. These statements represent the Company's current judgment on the future and are subject to risk factors and uncertainties that could cause actual results to differ materially. To the extent that there are any statements that could be construed as forward-looking, they should be considered in the context of all of our previous releases and federal filings.

With that said, I would now like to turn the call over to Bob Thomas. Bob?

Thank you, Bill, and thank you, one and all, for being with us this afternoon.

Revenue for the third quarter was $6.6 million versus $12.1 million in the comparable period of 2006. Gross margins during the quarter were 74.1% versus 68.9% in the year ago period. Net income was $246,000 or $0.01 per diluted share versus $2.2 million or $0.12 per diluted share last year.

The primary reasons for the revenue decline were, number one, there existed a continuation of the higher than ideal levels of inventory at our direct manufacturing customers and at certain retail customers, and that resulted in lower orders. In general, we saw an overall cautious stance by the retail community, which we believe delayed certain orders for inventory needed for Q4 key item sales. There was no significant sell-in associated with new distribution during the period versus $2.2 million of sell-in revenue during the same period of '06.

We encountered the financial restructuring of two key customers, as well as the loss of certain retail doors by a key manufacturing customer, which both had a negative impact on business during the quarter.

I would like to remind you that our sales performance in any specific period, including the most recent quarter, does not equate to actual demand at retail. Based on the available data, we believe that the total retail sales of fine moissanite jewelry actually improved in both Q3 and year-to-date when compared to 2006.

The top four contributors to revenue during the quarter were Reeves Park, Samuel Aaron International, K&G Creations and Stuller Inc. Of the four, only Stuller produced increased revenue over 2006. Combined the top four manufacturers contributed $5 million in revenue versus $9.8 million in the third quarter of 2006.

As of September 30, 2007, the total number of retail locations operated by retailers who are willing to share that information, retailers who offer moissanite jewelry, that number was approximately 2470 compared to approximately 2050 at June 30, 2007.

Concerning sell-in during the period, Samuel Aaron reports that moissanite jewelry will be available at 656 Kohl's locations by the end of the month and in 930 Kohl's locations by year-end. However, the jewelry required to build the initial inventory at the additional 630 doors was or will be largely produced from existing Samuel Aaron inventory. The amount of sell-in revenue from new distribution during Q3 '07 was not significant, while we experienced again approximately $2.2 million of sell-in revenue in Q3 '06.

Regarding sell-through, as I stated, we believe that the actual total retail sales of fine moissanite jewelry that has actually increased in 2007 when compared to 2006. That is based on the combined reporting of the core group of retailers willing to share the data. That group of retailers includes alphabetically, AAFES, Finlay, Helzberg Diamonds, HSN, JCPenney, Kohl's and Zale Outlet.

It is important to highlight that for most of 2007 our focus has been on assisting our direct customers as they work to update and improve the specific ranges and styles of moissanite jewelry sold at the existing moissanite retailers. We have recognized and understood the issues involved when the increase in distribution outpaced consumer awareness and demand, and we have taken the appropriate actions to successfully address those issues.

Inventory build both at retail and at our direct customers has been the primary issue, and we have developed consumer -- excuse me, we have developed customer specific action plans to allow both the manufacturers and the retailers to regain sales momentum and enjoy success with the moissanite category. We are encouraged with the various marketing programs we have implemented over the past two quarters, and we are optimistic about the remainder of 2007 and beyond.

Later in the call Dennis Reed, our President and Chief Marketing Officer, will speak to the marketing and sales initiatives we are executing in the current quarter. But now I ask Jim Braun, our CFO, to briefly review the financials. Jim?

Thanks, Bob. Good afternoon and thank you for joining us for today's conference call. As a reminder, share and per share data for all periods presented have been adjusted to reflect the effect of the one share for four share owned stock split effective in the form of a 25% stock dividend distributed on January 30, 2006.

For the three months ended September 30, 2007, net sales decreased 46% to $6.6 million as compared to $12.1 million in the third quarter of 2006. Gross profit decreased 42% to $4.9 million in the third quarter of 2007 from $8.3 million in the comparable quarter of '06. Gross profit margin as a percentage of sales for the third quarter was 74.1%, an increase of 520 basis points when compared to the same quarter in '06. This increase was primarily cause by lower production costs in the period that the jewels were produced.

The average selling price per carat for the third quarter was 5% above the third quarter of 2006. As we have discussed in past calls, we expect that the average selling price per carat will fluctuate based on stone size requirements of our customers. Total operating expenses as a percentage of net sales were 66% for the third quarter compared to 40% for the same quarter in 2006. Marketing and sales expense was down $663,000 in the third quarter versus the prior year, primarily due to decreased co-op advertising expense.

As a percentage of sales, marketing and sales expense increased to 47% compared to 31% in the prior year period. Third-quarter net income was $246,000 or $0.01 per diluted share compared to $2.2 million or $0.12 per diluted share for the third quarter of 2006.

Charles & Colvard's domestic sales in the third quarter decreased 51% to $5.3 million compared to the third quarter of 2006. International sales for the third quarter decreased 5% to $1.2 million with strong results from India, Taiwan and Italy offset by reduced sales in Hong Kong. Total shipments of 40,800 carats for the current period were 47% less than the 77,300 carats shipped in the same period of '06.

Shipments of carats in the US decreased 51%, while international shipments of carats decreased 9%. I would like to point out that the effective tax rate of 63% for the three months ended September 30, 2007 was higher than the 39% rate in the same period of the previous year, primarily due to non-US operating losses being a larger percentage of income before taxes in addition to $42,000 of tax expense associated with FASB Interpretation Number 48. On January 1, 2007, the Company implemented FASB Interpretation 48 accounting for uncertainty in income taxes.

In the third quarter, the Company's tax position decreased to $6.3 million from $9.6 million at June 30, 2007. This $3.3 million decrease was primarily due to the $1.5 million increase in Accounts Receivable and the $2.5 million increase in inventory. Accounts Receivable increased to $12 million compared to $10.5 million at June 30, 2006 -- excuse me, 2007. This was due to the financial restructuring of two key customers and the timing of customer payments being received in the first few weeks of October 2007.

At September 30, 2007, total inventory, including consignment, increased by $2.5 million compared to June 30, 2007, primarily due to the level of raw material purchases. The Company's raw material inventories of silicon carbide crystals are purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restrict the sale of these crystals to only the company, the suppliers negotiate minimal purchase commitments with the Company that may result in periodic levels of raw and in process inventories that are higher than the Company might otherwise maintain.

On August 14, 2007, the Company entered into a letter agreement with Cree Inc. that reduces the Company's commitment for purchase of silicon carbide crystals from Cree during the fourth quarter of 2007 from approximately $3.2 million to approximately $1.7 million. The price per gram paid to Cree during the fourth quarter of 2007 will increase by 8% over the price paid during the first three quarters of 2007.

In April 2007 the Board of Directors authorized the repurchase program for up to 1 million shares of the Company's common stock. This program expires in April 2008. During the three months ended September 30, 2007, no shares were repurchased under the program.

I would now like to turn the call over to Dennis who will review our marketing initiatives.

To address the issue of increasing awareness and demand by consumers, we began implementing a fall push expanded marketing campaign in the third quarter. As I mentioned during the second-quarter call, this campaign comprised of six key components.

Number one, a new national print ad campaign launched with our November publications. Number two, the production of two 30 second TV broadcasts. Number three, the expansion of the [outer cove], which is outdoor and mall-centric advertising. Number four, expansion of Charles & Colvard's web presence with the development of two micro sites. Number five, a targeted direct-mail program. And number six, the Oprah Milestone Moments Contest and multi-leg PR initiative.

As we have discussed in previous calls, Charles & Colvard's marketing and sales support has a direct correlation to a retailer's success with moissanite. We continue these retailer support initiatives for JCPenney, Finlay, Belk, Helzberg, Kohl's, and others. Local newspaper advertising and PR placements continued for approximately 400 trunk shows that occurred in the quarter with retailers such as AAFES, Alvin's, Belk's, [Day's], Helzberg's, JCPenney, Macy's, Rogers, (inaudible), Zale Canada and Zale Outlet. These activities were jointly funded by participating retailers, their manufactures and Charles & Colvard.

The sales and marketing expenses for the quarter were $3.1 million or approximately 47% of revenue. The significant expense allocations were various direct retailer support programs totaling $1.5 million and sales expenses consisting of sales, training and trunk show activity totaling $867,000.

In early October we conducted a consumer awareness survey d using the same approach as we have used previously with our annual January tracking survey. This October research provides us with a benchmark that will allow us to evaluate the lift in awareness resulting from the fall marketing campaign. Although the original purpose of benchmarking still stands, the results of this October tracking showed very positive movement in key measurements.

Compared to the January 2007 data, the October results showed gains in the areas of awareness, interest, shopping behavior and ownership. All key tracking elements grew by more than 70% since January. We are very pleased internally with the gains, and we're excited to measure the additional impact that we believe our fall campaign will have on improving awareness.

I will now review in more detail the initiatives that we are deploying to continue to increase awareness, consumer interests and sales this fall.

The first initiative is the moissanite jewelry-oriented ad campaign that debuted in the November issues of Oprah and InStyle, which are on newsstands now. With this jewelry-focused ad, the retailer tagging, the tighter copy and with a media buy that includes a good portion allocated to mass appealing titles such as People and US Weekly, we believe we're delivering our message more clearly and to a broader audience.

The second component is broadcast media development. We are in production on a 30-second television commercial for Boscov that will air regionally in their home markets in late November. The markets reached in this campaign comprise the third-largest TV market in the US. We decided to delay the DRTV activity this fall with the Duchess Sarah Ferguson. Instead we are going to run a commercial designed as a news in the know news flash type format. We will have two 30-second spots running in December during the Oprah on air broadcast in our top 11 markets nationally.

Lastly we will launch a Spot Runner 30-second commercial designed to be available to Stuller's retailers through the Stuller website. This customized on-demand commercial will be available in time for holiday 2007 for moissanite jewelry promotions. C&C and Stuller will provide the Stuller retailers with co-op to encourage usage.

The third key component is out of home. The retailers that participated in the third-quarter launch have reported increased traffic and sales linked to this activity. As a result, we are continuing the out of home commitment through the end of the year and have expanded to include a mall-based advertising in another top moissanite market.

Online, the fourth component, we're creating two micro sites. One is an expanded educational site designed to be either a standalone or possibly a link to e-tailers. This micro site will include for example, history, comparison charts, educational video and technical facts about moissanite. The second micro site will also live on moissanite.com with a focus on women. This site will include testimonials, showcase of women who love moissanite, a monthly newsletter and a section featuring an awards program that is being developed to honor noted women of achievement. Charles & Colvard owns the urls ilovemoissanite.com and brillianceofme.com which we utilize with this micro site.

Continuing to work with the Nielsen Group and their database of household profiles, we are expanding the fifth key component, targeted direct-mail, to support additional retailers such as Belk's, Alvin's and [Day's] with holiday promotions.

Another direct-mail initiative is available to retailers through a co-op program created by Stuller. This targeted direct-mail campaign is designed to offer their retailers the ability to reach potential customers year-round with moissanite jewelry promotions customized specifically to the retailer and to the promotional event.

Lastly, our sixth key component is the Oprah Milestones Moments campaign launched on October 9 as a multi-leg PR contest in partnership with Oprah.com, which has 5 million unique visitors each month and Oprah Magazine, which has 15.6 million monthly readers. Promoted in the November, December and January issues of Oprah and in 767 JCPenney stores nationwide, visitors and readers are encouraged to enter the contest by sharing significant moments in their lives.

True to Oprah's platform of empowering women to live their best, the winner of the contest will be selected by a judging panel of Oprah editorial staff and awarded in February with a significant piece of moissanite jewelry. JCPenney has reported enthusiasm from the sales associates across the country, and they are benefiting from all the exposure, advertising and in-store promotion.

We believe that these dedicated sales and marketing efforts, along with our continued retailer support elements, will continue to raise consumer awareness and demand for our jewel. I would now like to turn the call back over to Bob who will discuss our initiatives and outlet for the remainder of fiscal '07. Bob?

Thank you. The management of this Company fully understands that what you as investors want to know is how and when management can increase sales, draw down the inventory, strengthen the balance sheet and provide measurable evidence that our marketing initiatives are accomplishing our goals. Dennis has provided you with the specific actions we're taking to build awareness in sales in the current quarter and beyond. He also spoke of the recently completed marketing research that we are using as a benchmark in order to better evaluate the effectiveness of our advertising campaign and our public relations efforts.

I would call to your attention again to his description of the results of that research. To quote, all key tracking elements grew by more than 70% since January. Additionally that research provided confirmation that the positioning of moissanite as a unique jewel is being adopted and embraced by our target customer, the self purchasing woman. I submit that this is very good news and sustains and reinforces my optimism for our jewel and our Company. We believe that the activities outlined by Dennis will generate over 170 million consumer impressions in the current quarter. That is an increase of over 50 million impressions over -- generated in the same period last year. This does not include the impressions generated by our participation in the very important activity of broadcast selling at the Home Shopping Network.

As I described in the call at the end of Q2, we will be aggressive in the execution of our sales and marketing activities to cleanse the supply chain of excess inventory and to prepare for more favorable results in future periods.

The retailers who are working with us in those efforts enjoy healthy moissanite businesses. They currently enjoy healthy moissanite businesses, and they believe that the category can grow. We share that view, and we will work to make it happen. As part of that effort, we will be introducing two new cuts or shapes of our jewel in the current quarter or in early 2008. Initially they will be an exclusive distribution, one in Helzberg and one on the Home Shopping Network.

As you look to the possible results for the current quarter, we now estimate that revenue for the full-year 2007 will be between 30 and $33 million. Full-year gross margins are expected to be in the 70% to 75% range. We raise the bottom of the range of this guidance to reflect the lower cost to production of the inventory that is being sold in the period.

Marketing and sales expense is expected to be approximately 49% to 53% of total net sales. The expectation for marketing and sales expense for 2007 has increased on a percentage basis due to lower sales expectations for 2007, as well as the Company's commitment to support revenue initiatives at a higher level than last year. I submit that the sales and marketing commitment is a very aggressive expression of our confidence in the activities that Dennis has described.

2007 to date certainly has been a challenging period. But we have identified the issues and we have taken the appropriate measures to overcome the obstacles to put our Company back on track for renewed growth in future periods.

I want to take this opportunity to remind you of the strengths we enjoy as a Company and that our business model provides. I believe that Charles & Colvard is a compelling story that is well-positioned for growth in 2008 and beyond for the following reasons. We are the sole source and the only supplier of moissanite worldwide. Moissanite delivers a strong value proposition for retailers and consumers alike. Moissanite jewelry offers attractive pricing. It is truly affordable luxury. Moissanite jewelry does not cannibalize sales of other jewelry categories, and moissanite generates attractive gross margins for retailers.

We have a highly scalable operating structure. We outsource most of our manufacturing. Our inventory is not perishable and is relatively stable in value. Our business utilizes little equipment and operating facilities. We require very little capital to grow. Our model provides very high leverage to earnings as revenue grows.

As we establish a new baseline for revenue and earnings in 2007, I believe that we can successfully build upon these strengths and from the lessons learned in recent years to build this business into a much larger and more important supplier of an affordable luxury jewel to women worldwide. We appreciate your support as we work to make that happen.

We will now respond to your questions and comments.

(OPERATOR INSTRUCTIONS). Eric Wold.

Do you mind characterizing the inventories currently at retail? I know there were some issues earlier in the year with some of the products being returned for better selling products. Characterize how the inventory looks at retail now, the product mix in terms of better selling items and poorer selling items and if that might need to be refreshed again towards year end. And if you can kind of put a number in terms of maybe weeks of inventory or months of inventory currently at retail.

Every retailer, of course, has a different circumstance with one notable exception, and I don't want to name names. But the inventory is in much, much better shape than it was at June 30 or certainly at March 31 at retail, and the one notable exception is still an issue. It has improved, but it is still an issue. But again, each retailer is different.

We think that as a normal course of business there will be some rebalancing that goes on in early '08. A lot of that depends on just how strong a season these retailers have. I did not address it in my comments maybe as strong as I could have, but retailers certainly are cautious, and others in the jewelry industry tell us that things are not necessarily as good or robust as they would like to see.

So putting a number on it by retailer is something we have not done, although we do have a good handle or where the various components of it are. As I indicated, Samuel Aaron and Kohl's have already address some of the issues there and are reworking some not slower selling sales to restock and stock the new distribution. So we think that our manufacturing partners have a much, much better handle on the situation than they did certainly at year end or at the end of the last two quarters.

Okay. Maybe not by specific retailer, but on aggregate do you know about how much inventory there is in the channel in terms of weeks of inventory?

Dennis, do you want to take a step at that?

It is kind of a difficult question to answer because what you're asking us to give you is what we anticipate the sell-through rate at retail is going to be over the holiday period. While we are optimistic, it is just -- it is really refined guesswork really to understand what the impact at retail is going to be.

We feel that we have fully deployed the appropriate marketing support. We know that there has been a lot of rework of inventory so that key item, key price points, key styling has been addressed. But ultimately we all are relying -- retailers, manufactures and us included -- relying upon the consumer to come in and purchase the merchandise. So I don't want to sound evasive, but it is a relatively difficult question to pin down.

Yes, another way to address it is, each one of these retailers has a different standard on their yearly churn. Typically a retail mall jeweler that had a onetime inventory turn per year would be very, very pleased. Some of the department stores have a different expectation, and some of the mass merchants certainly have different expectations, along with Internet retailers and catalog people. So some of the people are hitting their targeted turn, and one notable exception is still not.

Okay. Fair enough. And the last question on the renewed agreement with Cree for the lower acquired purchases starting in Q4. There obviously was an increase in the ASP or the purchase price for those. At what point is that increased purchase price from Cree likely to start impacting margins as you kind of work through your current inventory, and what could the impact be?

We think it will be about a 3%, 3.25% hit to gross margins, maybe a little less. But that impact will not be felt before mid '09 at the earliest unless our sales are a multiple of what they are going to be this year, next year.

I would also take into consideration that we would not raise prices like we did about a year and a half ago. That will offset part of this increase. (multiple speakers)

Assuming that we don't change our pricing.

Perfect.

2.5% to 3% comp to gross margin.

[Anthony Turenza].

A question about the Christmas season here. Are the events that are impacting the moissanite line also similar events that are impacting all of the jewelry industry and more generally even retail? Or are you seeing more specific things that are making your retailers cautious relative to moissanite versus other categories?

I do not think we're being singled out in that respect, Anthony, if that is the question. I think the retail environment and the jewelry retail environment is a difficult environment right now, and retailers are just being cautious about pipe fill, about the reorder points, about how aggressive they are going to be on fall planning in terms of purchases. And given current trend, I think it is prudent on their part, and we have to live with that element.

And with that said though, Dennis and our marketing staff has done a very good job of planning out the promotional calendar and the advertising events with these retailers very specifically during the fourth quarter. So we also know that they are not -- they don't want their shelves to go dry in the middle of one of these promotions or big advertising pushes. So we can see the fourth quarter fairly clearly at this point, but again we are dependent on the retailer and the consumer to walk in the store, and that is what this advertising is meant to encourage.

Should that allow us to outperform to some extent during the fourth quarter just general jewelry category?

It is very possible we could outperform the entire -- the other parts of the category, but I'm not willing to take that on as an assignment today.

Understood. A question about the repurchase program. You did not purchase any shares during the last quarter. Given where the stock price is, is that something that the board will reconsider in terms of trying to execute some purchases?

Yes, the board looks at that on a very regular basis, and we meet very frequently either in person or on the telephone, and it is a topic at every meeting.

Because it looks like a good use of some funds at this point given where we are now.

We appreciate your comment. (multiple speakers)

(OPERATOR INSTRUCTIONS). Daniel Moore.

Two questions. One, have any of your retailers stopped carrying moissanite in the last several months?

None of the national retailers. We did lose a couple of regional chains, and one of our manufacturing partners has lost some doors on some regional chains. We are hopeful that those can be resurrected. But there are some -- there has been some shrinkage on the regional chains.

The overall door count because of the rollout to Kohl's really has not been impacted. But to Bob's point, some of the regional jewelry mall doors we have seen some shrinkage in that particular sector. And Landau, a notable retailer, went out of our category earlier in the year. They have not really come back in in any significant way, but they are coming back in a little bit. So those are the notable areas where we have seen some shrink.

Okay. You obviously talked at length about a number of marketing initiatives, promotion, advertising. What are you doing or what can you do at the retail level to drive growth and awareness really at the consumer level as opposed to sort of advertising driven?

Right. I think one of the elements that we have been doing all year that I attribute some of the awareness gains that we talked about to as well is this trunk show event activity. As I mentioned in my comments, we had over 400 events nationally in Q3 alone. Those will continue into Q4. I think they are very powerful at the counter activity that really gets the store associates involved and really gives an added incentive for the consumer to walk in the door. So that is an ongoing best practice we're not intending to back off on at all.

Okay. And then finally, just looking at the balance sheet, obviously share repurchases, the last caller, the last question was, would you be buying back more stock here? Your cash levels are about half what they were at the beginning of the year. What cash levels are you comfortable with? Are you comfortable with being in a net debt position? What is your tolerance for a) further increasing your advertising spend, but b) buying back stock in terms of how much cash you would want to have on the balance sheet?

Well, certainly we're comfortable with where we are today, and we were very comfortable when we had $20 million in the bank two years ago. And we're working to rebuild the cash balance, and again the board looks at each of those opportunities to use that cash on a regular basis. I think we have been very aggressive in our planning and in our execution on the marketing promotion side both for the full year and for the fourth quarter, and we will continue that push to drive revenue to our levels. But the board does look at all the best uses on a regular basis, and we appreciate your comment as well.

Chris Krueger.

Back in I think May you announced that the KGK Group or KGK or whatever they are called had become a new manufacturer/distributor. Could you give us an update on that and some of their initiatives or anything on that?

Sure. They continue to be very active in our category during the what I would call the business development mode. They are really going after a segment of the business that we are excited about expanding, and that is the better market whether that be in the department store channel or in chain jewelry store. They really have a focus there. They have developed their collections, and we're really in presentation mode. We would love to be telling you about specific placements at this point, but ultimately that is not -- we're not at point where we can discuss that. But things seem to be moving forward very positively with them. We're excited about our association. We sat with them at the Hong Kong Fair this September with the principles in Hong Kong, and they are motivated and excited about the category.

And then do you have a timeframe? I mean is every distributor different? Is this something you think in a couple of quarters you will start to see --

Yes, that is probably a fair evaluation. If you recall, even when we started bringing on new manufacturers, specifically Samuel Aaron and Alarama when we first started talking about them, their progression into the category was not overnight. It was several quarters or longer, and it is just the way the business develops. We have yet to build a collection. They have to get comfortable with the category, and then they have to convince a retailer with our help candidly that they are the right manufacturer for a moissanite collection to go into that retail outlet. So it is relatively long lead, and we are in the process.

Okay. Last question. Are the retail chains you are talking to mostly domestic? Are they international, or is it a pretty good mix of both? If you can get that detailed.

With KGK specifically or in general?

Well, who KGK is potentially working with to sell moissanite into.

It is domestic focused. They have international reach, but you have to walk before you run, and that has really been our approach with them. We're trying to land in the better market with them and then develop the business from that point forward.

(OPERATOR INSTRUCTIONS). [Dennis Robosey].

I have got a question I think is going to be directed to Dennis and Bob primarily, and it is from the assumption that the more stores you have selling moissanite the more revenue you get. So here's my question. If I wrote it down correctly, you said that you logged 2470 stores that were selling locations versus the previous at 2050. Is that correct?

That is as of September 30 and June 30, yes.

Okay. Bob, can you tell me or do you have any idea as to what the market potential is for selling locations? I mean are we talking 5000 total selling locations or 50,000 total selling locations?

The independent jewelry channel just alone has roughly 22 to 25,000 active shops in the US. Chain jewelry stores -- and this is not -- don't hold me to a specific number here -- but it is going to range between 10 to 15,000 doors. So there's a lot of market penetration still out there from a distribution standpoint that we see. We are currently not penetrated in the top two in-line mall jewelry store chains in the US, the Signet Group and Zale Corporation. Those two chains alone could provide -- (multiple speakers)

3000 doors.

About it. More than our current distribution that we're talking about. So there is still a lot of distribution gains to be had for sure.

Okay. So if I understand you correctly, there's a lot of selling location opportunities out there that we have not yet tapped. So the question I then have is, what kind of growth rate could we expect for penetration?

It is a good question. We're managing that, because the other thing you have once you have pipe fill is you have to have sell-through at a turn rate that the retailer is happy with. So if we expand distribution in a very dramatic way and we don't properly manage the sell-through that the retailers are expecting, we could have distribution shrink. And that is something we're not interested in. We want to grow in a mindful way. We won't make sure the retailers that come to our category get the sell-throughs that they expect and then in turn that the category can build from there.

Do you have a feel for what that might be in terms of a growth rate, Dennis?

Well, we're learning that right now. I think one of the lessons we probably have learned over the past year and a half is that we have had very dramatic expansion in a very short period of time. And that has -- our awareness has had to catch up with that distribution gain. So we're in that process I think right now of learning what that growth rate from new distribution can be vis-a-vis the organic sales that should happen with our installed businesses.

Excellent. Thank you. I appreciate your answers.

It appears there are no further questions at this time. I would like to turn the conference back over to management for any additional or closing remarks.

Thank you very much again, everyone, for being with us this afternoon. We are as optimistic or more optimistic than we have ever been. Very encouraged by the new marketing campaign, the advertising campaign, as well as some of the other initiatives that Dennis has described. We look forward to reporting improved results in coming quarters. Thank you and good night.

Thank you for your participation. That concludes today's conference. You may now disconnect.