Charles & Colvard Ltd (CTHR) 2009 Q1 法說會逐字稿

Greetings, and welcome to the Charles & Colvard first-quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, IR for Charles & Colvard. Thank you, Ms. Pawlowski. You may begin.

Thank you, Bob, and good afternoon, everyone. We appreciate your interest in Charles & Colvard and your participation in our first-quarter fiscal year 2009 financial results conference call. You should have a copy of the news release detailing the Company's financial results that was distributed earlier this morning. If you do not have the release, it can be obtained from the Company's website at charlesandcolvard.com.

With me today on the call are George Cattermole, Chairman of the Company; Richard Bird, Chief Executive Officer; and Neil Boss, Controller. Richard and Neil will discuss the results of the quarter, the direction of the Company and its strategy to position moissanite as the most brilliant jewel in the world. Following their remarks, we will open the floor for questions.

As you are aware, we may make forward-looking statements both during the call and in the following question-and-answer session. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, as well as other factors that could cause the actual results to differ materially from what we discuss here. These risks and uncertainties are available for you in the press release itself, as well as with the Company's filings with the Securities and Exchange Commission. You may obtain these documents from the Company's website and also at the SEC website, sec.gov.

So with that, let me turn the call over to Neil to begin the review and discussion. Neil?

Thank you, Deborah. Good afternoon everyone and we appreciate your time today. I will discuss the financial results for the first quarter, which ended March 31, 2009.

As you saw in the press release, net sales for the quarter were down 27% to $2.5 million compared with last year's first quarter. Domestic sales decreased 29% to $1.7 million and were 70% of total sales in the quarter. International sales for the first quarter decreased 21% to $0.8 million.

As most of you are aware, the economy has caused significant contraction in revenue in the jewelry market overall. In addition, some retailers of moissanite jewelry have indicated they are experiencing a slower than desired inventory turn on moissanite jewelry, that has been made worse by the economic conditions. These factors resulted in no significant orders from our manufacturing customers to support in-case business at the largest retailers selling moissanite jewelry in the first quarter, as these retailers focused on reducing their inventory levels. As mentioned in the release, we also curtailed many marketing activities as we assessed the effectiveness of our marketing and strategy.

We shipped 13,000 carats during the quarter, a decline of 29% compared to last year's first quarter. US shipments decreased 42%, while international shipments were up 5%. The average selling price per carat decreased 13% when compared with last year's first quarter due to a special pricing promotion we offered to our customers.

Gross profit decreased 38% to $1.4 million compared with $2.2 million in the prior-year period, primarily due to the lower sales. Gross profit margin for the first quarter of 2009 was 56%, down from 66% in the prior year period. The decline in gross profit margin was primarily caused by higher production costs in the first-in, first-out accounting period relieved from inventory, a 13% decrease in our average selling price per carat on loose jewels, and the establishment of a $130,000 lower of cost or market reserve against certain jewelry on consignment. These items were partially offset by activities that took place during the first quarter of 2008 related to the return of damaged jewels to us by K&G Creations.

For the quarter, total operating expenses were down almost $1 million, or 28%, to $2.4 million. The $1.6 million decline in marketing and sales expense and the savings realized through headcount reductions and other efforts to curtail spending were offset by higher legal and professional service fees, including the Bird Capital Group fees. As a percentage of sales, operating expenses were 97% of sales compared with 99% of sales in last year's first quarter. And our operating loss was approximately $1 million in this year's first quarter, a 10% improvement over last year's first quarter.

Our income tax expense for the first quarter of this year was $27,000 compared with an income tax benefit in last year's first quarter of $363,000. In the fourth quarter of last year we recorded a valuation allowance against certain deferred tax assets due to the loss in the year and uncertainty over sufficient future taxable income to fully utilize our deferred tax assets. Until such time that there is no longer uncertainty over whether we can generate sufficient future taxable income to use the deferred tax assets, we will not record a tax benefit for losses incurred.

Net loss for the quarter was just over $1 million, or $0.06 per diluted share compared with net loss of about $700,000, or $0.04 per diluted share in the comparable period of 2008.

We ended the first quarter with an improved cash position from the end of last year. Cash and equivalents were $5.8 million, up from $5.6 million at year end. We generated $240,000 in cash from operations, primarily due to cost controls and cash collections. It should be noted that last week we received our $2.1 million tax refund from the IRS.

Total inventory, which includes long-term and consignment inventory, was $43.3 million at March 31, 2009, up $300,000 from year end. Shipments were offset by a $1.2 million non-cash purchase of inventory we made from Reeves Park as part of the receivable settlement. We did not make any raw material purchases during the quarter. The receivables settlement was also a factor in our decreased accounts receivable, which were $0.8 million at the end of the quarter, down from $3.8 million at the end of last year.

So with that, let me turn the call over to Richard.

Thank you, Neil, and thank all of you for joining us today. Let me clarify first that we do value and want to keep and improve our relationships with our existing customers. We also want to acquire new customers. We value our existing distribution and the retailers who sell moissanite jewelry, and we want our current distribution and retailers to continue with us and to grow with us. We are very appreciative of all the efforts and commitment that have been directed to moissanite and Charles & Colvard over the years. And we thank all of you who have believed in, and continue to believe in, the potential for moissanite and for Charles & Colvard.

We are seeking to make improvements in the Company's operations and in our marketing of moissanite that will provide increasing benefits for our customers, for our shareholders, for manufacturers who incorporate our jewel in their products, for retailers who sell moissanite jewelry and for our employees. We are working to turn around the Company to make certain changes in our operations to make us more effective and efficient in our business and to make changes in our marketing programs that will improve our opportunity for successful growth.

We have made significant progress in addressing some of the Company's legacy cost issues. We have reduced the Company's spending for sales and marketing related programs that did not generate expected sales or consumer demand. We have also tested sales initiatives with limited results as we work to reduce our finished goods inventory.

It is very important to recognize that the Company is currently bearing many consequences from decisions and actions from the past on the part of the Company and its manufacturers and its retail customers. We do not, of course, control the selection of jewelry styles or the amount of orders by our customers or their retailers. Thus, our jewel business is determined by our customers and the retailers' degree of success in matching their understanding of the jewelry retailing market and their commitments in jewelry style selection and inventory levels and in pricing to consumer demand. Our marketing can affect the degree of consumer interest in the jewel, but our jewel demand is still derivative from actions taken, and the degree of success achieved, by manufacturers and retailers in the value chain.

The consumer retail jewelry market has become increasingly difficult, with very soft demand. We are experiencing sharply reduced sales and sales prospects, particularly with some of our larger existing customers, and primarily due to higher than desired inventories of moissanite jewelry at retailers, but also due to bankruptcies and financial challenges facing retailers. These factors are severely constraining our sales opportunities. As noted in our press release, we do not expect significant orders from our manufacturing customers to service the in-case moissanite jewelry business at the largest retailers in the near term. As retailers evaluate their business, we are at risk that some retailers may not be able to achieve acceptable financial performance and may choose not to continue selling moissanite jewelry.

Our immediate priorities include the continued support of our current customers and retailers to attempt to gain more sales opportunities. We have been working with manufacturers and retailers to structure and offer reasonable support programs to help them alleviate their current inventory issues and to improve sell-through, but with limited success to date.

It is in marketing, though, that we can likely provide the most help to the retailers. We are continuing our co-op advertising and marketing program to support manufacturer and retailer marketing programs to increase sales. And we will work to help make our co-op programs more effective.

We intend to market moissanite very broadly, to be desired by everyone for every occasion. We have eliminated previous restrictions in our brand identity guidelines to allow and encourage more expansive marketing of moissanite. We believe there is significant potential market opportunity in segments such as bridal and gift giving, and we believe that more effective communication of our marketing message can increase consumer awareness and help retailers achieve more sales with moissanite jewelry.

We have begun efforts to get expanded market messages into counter marketing materials with retailers. This effort will be retailer-specific, though, as different retailers may have different market segments they want to emphasize. We recognize the currently low consumer awareness of moissanite, despite the Company's past marketing efforts, and we realize the need to communicate moissanite's marketing message to consumers to build more consumer awareness and more consumer interest in seeking and buying moissanite jewelry.

We believe our jewel and moissanite jewelry can be compelling to consumers in many different purchasing circumstances, and we want to encompass all sales opportunities that we can. There is an opportunity to tailor the marketing message for moissanite to fit different segments of the market and become more appealing to each segment than could be achieved by a single universal marketing message. We intend to develop more effective marketing messages that will be more closely aligned with the consumers' interests and values in the particular market segment being targeted.

We intend to use a variety of marketing methods to convey our marketing messages to consumers. We understand the power and economy of the Internet, social networking, and guerilla marketing methods to achieve positive impact at low cost. We have a marketing resource in our own website, which we can use more effectively to communicate marketing messages.

Strategically, we recognize the distinctions between the jewel business and the jewelry business. We have no interest in becoming a jewelry manufacturer. Our primary business is the moissanite jewel business in which we have the advantage of being the sole source worldwide. We are seeking to expand moissanite's market reach globally, increase market awareness of our jewel, develop additional marketing channels to the consumer in ways that are complementary to our existing distribution, and help create a more compelling consumer value proposition that will drive increased demand.

We fully recognize the challenges of our current business in the current economy, and our legacy issues do divert resources from our strategic initiatives. It will take time to accomplish the improvements we seek. However, we believe we have a strategic direction that can ultimately improve our business significantly.

I'll now go back to Debbie for the Q&A.

Bob, do you want to open it up for Q&A?

Sure. (Operator instructions.) Anthony Chiarenza; Key Equity Investors.

Good afternoon. Richard, specifically, I guess you've been here now a couple of months and my sense is you sound a little bit more pessimistic, or maybe realistic, obviously having gotten more information over the last several months. I mean, is that a correct assumption? And can you tell us what you've learned?

Well, I think yes, I am more pessimistic in a sense, because of the burden of the economy and the situation at some of our retailers. These are very, very tough times, very tough times. And this company has a lot of legacy issues, as we have discussed before and some of those are quite burdensome. I think we're making progress in working through those, but at the same time I think we have to be realistic about the situation that the Company is in.

And quite honestly, the jewelry business is one which has long lead times. So it's not like some other businesses that you get quick response to. So this could have resulted from decisions made previously as I tried to point out. There is inventory hangover in the channel and that is a significant concern and, as we said, is severely impacting our orders. So that is an issue near term.

On the other hand, I believe that we can work through and correct issues going forward. And I still believe in the market potential for this jewel, although it is challenging to find the correct consumer value proposition and get that properly presented to the customer in a way that will get growing sales.

Are you seeing more -- is it the cyclical issue that's driving this or do you see a secular issue with the category itself?

Well, I think that it's just primarily two things. I think, one, the economy is severe when you see companies like Saks impacted the way they've been. The economy is severe and very severe for jewelry. On the other hand, tough economies expose previous issues and expose weakness. So for companies who go into a recession with high inventories, the recession becomes much more problematic. So I think that is the reality we face.

There are many things going on, of course. There are a lot of consolidation happening in the retailer channels. There's consolidation happening in the jewelry manufacturing area. There's the cross currents of the Internet impacting all retailers, more limited, perhaps, in the jewelry sector. But all these are cross currents that make this a particularly complex and challenging time.

Do we have the resources to weather this thing if it takes us several years?

Well, that's -- I think the answer to that is probably complex. Several years? It'd be a challenge. I can't make forecasts for several years. I would say at this point we just don't know. We just don't know. One strength of the Company is the tremendous inventory that we have of finished jewels that, if we can discover a way to sell those properly, would be able to raise a nice amount of cash. So I think we can't make any forecasts at this time.

Having looked at it, does it make sense to continue to -- rather, consider strategic alliances, possibly selling the Company to someone larger who can market it better or distribute it through existing channels? I mean, is that a consideration?

Oh, I think the Board always considers all possibilities, but I really don't see that as an answer at this point.

Just because you wouldn't be able to get the value?

I think that is the value -- the issue that the Board has struggled with for some time, is believing that we can discover how to market this appropriately and realize a higher value going forward than could be achieved in any kind of a merger or acquisition transaction.

Have you seen any stabilization in the market over the last -- a lot of retails have talked, things aren't getting worse. And have you seen any improvement at all or have things continued to get worse?

We're seeing no improvement. In fact, as we're reporting, it's worse for us because our orders are dropping off.

Yes. Well, good luck. Hopefully we can get it straightened out over the next year.

Thank you very much.

Ernie [Segundo]; Pinion Capital.

Hi, guys. I had a couple questions. Some are just housekeeping. You mentioned IRS refund that was received last week. What was that amount?

$2.1 million.

And that is -- so that would go on top of your $5.8 million cash at the end of the quarter?

That's correct.

Okay. The other question that's housekeeping -- the purpose of the R&D spend that was $200,000-something in the quarter, big increase over a year ago?

Right. We have a six-month R&D contract that we signed, that the terms of that are being kept confidential. It's a six-month contract that requires us to pay $50,000 a month. The payments began in January 2009. But at this point that's all we can say about that.

And is it presumably to develop something new?

I really can't comment beyond that.

Okay. And that started January '09?

That's right.

Okay.

The expense actually started in December, but the payment started in January.

Got you. Got you. And I was of the understanding that a second strategic study is being conducted. I was wondering what the status of that is and if there's been any more -- we haven't really heard much from the first strategic study that we paid for last year. I was wondering -- tell your thoughts on those.

Yes. Bird Capital Group did deliver a strategy report to the Board April 15th.. And George Cattermole is on the call and we'll let George comment further, if he'd like.

Yes. The Bird Group's done a very good job of going through and looking at our work processes and getting our operations, day-to-day operations and contracts in order. And on top of that they have submitted a strategy plan. And we really can't talk about the strategy plan in depth, but -- because we haven't even presented it entirely to the Board. We will have a Board meeting when we have the shareholder meeting. I mean, we've discussed it at Board level. But we do have a plan in place with a structure and we're now testing some of the assumptions in that strategy. So as we become confident that we're in the right direction, we'll start to let you know more detail.

But in general, Richard, wouldn't you say that some of the things you've talked about are the components? It's not the detailed components, but --

Yes.

-- it describes the strategy.

Sure. I can say some highlights. There's some highlights. And, in fact, to answer you fully, Ernie, I think there are some overlaps in some conclusions from the two separate studies, the Kanter one that was done before and the Bird Capital Group. But we've looked at structure of the industry, business definition, the issue of jewel versus jewelry, issues of backward integration, forward integration, those kind of issues.

I think both studies really concluded that the Company has suffered tremendously from a push strategy in the past, of trying to push the product into the marketplace with a value proposition that was attractive to a distributor, or attractive to a retailer, and unfortunately had not really done enough to develop a viable position with the consumer for a continuing consumer knowledge and interest in the jewel. And that's, of course, evidenced by our awareness statistics, which the latest study showed was around 10% or so and perhaps down from previous levels. So the good news is 90% of the people out there still haven't heard about moissanite, so that's an opportunity if we can do the proper marketing.

In broad terms, the advantage of the jewel being as it is, good for everyone on every occasion, is really kind of similar and parallel to the diamond, where the diamond focused on producing diamonds and getting them into distribution and then letting them flow wherever they could, into all possibilities. They were very smart to create the "diamonds are forever" campaign, which really worked and still works today. And unfortunately, we still haven't managed to accomplish something like that.

So I think one of our conclusions was to try to get more clarity in focusing on the jewel and avoiding some of the complications of the close alliance with the jewelry. But more importantly, to structure marketing efforts to try to appeal to the customer with a broader message, a broader value proposition, going beyond the self-purchasing woman, which had been extremely limiting in the past, and opening the positioning of the jewel to embrace the diamond alternative. Which I understand in the past had been avoided to get into distribution, but I think it's important to recognize that virtually every consumer focus group we've done and every person we've interviewed sees this jewel as a diamond alternative. So why not openly admit that and market that more openly?

Now that doesn't mean we have to put that in the [face] of Helzberg, so I think part of the marketing is not to choose one message to take everywhere, but to attempt to market to different segments and have the flexibility to market in different ways. So at a Helzberg, for example, this jewel could be -- instead of being instead of diamonds, it could be positioned as in addition to, or in case you're not ready for diamonds. And I think we've evidenced that we have a lot of flexibility in marketing and I think the studies suggest more, even to the point of openly embracing some private label possibilities. And if you look at Helzberg, Helzberg is virtually a private label anyway, since they have a particular form of the jewel, the Helzberg Imperial cut.

So I think with that broad positioning, it then says let's open the applications of the jewel to wherever it makes sense, wherever jewelers can work with it. And let's open the marketing and even be open to more channels to the extent that we can open more channels to the marketplace, to give the consumer more options to go and find this. Because obviously, if we embrace marketing campaigns, we could send everybody to current retailers or we could market that more openly and hope that they would have more channel opportunities to find fulfillment.

So I think in broad terms that's what we're about. But all of that clearly sees a more expansive footprint for the Company, much broader marketing and much broader participation in the marketplace and going away from definitive decisions that would box one into a particular corner of the market.

Well, that all makes sense, gentlemen. I would also comment that one of your points was you said something about making a more compelling consumer offer. And my observation has been, despite the fact that the jewel's got advantages vis a vis the diamond in terms of its brilliance and hardness and all this stuff, the reality seems to be at retail, like you say, people still compare it to a diamond and the price out there at retail, granted for an equal quality diamond, but versus a diamond, which has decades and decades of hundreds of millions of dollars of marketing spend on it and it's in the consumer awareness. Is part of your plan to consider at least making it at a price point that's somewhere more -- instead of being as close as it is to a diamond, somewhere more that splits the difference between a diamond and a CZ?

Well, that's a very interesting comment. And you're right. And this is, again, why we need to broaden the position and have flexibility in marketing. Because it is very clear, very clear that there are people in the market who are driven by this as a less expensive diamond alternative.

And, in fact, I had one lady in tears crying who had just bought a $35,000 diamond ring and when I showed her one of our rings from our Estrella collection, she said, "How much is it?" Because she'd probably been trying to clean her diamond to look as good as our moissanite, and ours looked better. And so when we said it was $2,800 she said, "Oh, you mean I could have bought a used Porsche with the difference?"

Exactly.

Because there is that piece of the market. On the other hand, I have other experiences, as I did a few days ago, showing it to a young lady who looked at it and said, "God, it's really beautiful, but I buy CZ at Erwin Pearl, which looks almost as good as that to me. Why would I pay so much more?" So we clearly have those two pieces of the market. And I would like us to embrace the agility to be able to capture both of those.

And that's why we talk about our work on segmentation and being able to go to different distributors, different channels, with different consumer value propositions.

Well, I applaud your strategic direction and turning over a lot of rocks and looking in a lot of different segments. I just entreat you, as perhaps the last caller did, that I'd sure like to see you simultaneously pursuing with equal vigor some sort of strategic partnership or other strategic alternatives that can capture the huge gap between the value of the inventory and the present value of the Company in the stock market. Because I think you all have to acknowledge that your resources are relatively limited to pull off this massive change of broadening of direction and scope.

Right. Well, thank you very much. I appreciate that.

Okay. Thank you.

(Operator instructions.) David Ratliff; Doucet Asset Management.

Hey, good afternoon, gentlemen. Thanks for taking my question. You've discussed it before definitely in press releases, but could you kind of refresh my recall of your -- you've had a reduction in the minimum amount of inventory you have to -- or raw material inventory you have to take on annually. Can you discuss basically the particulars there and your strategy for taking on additional inventory?

Yes, I can do that. Our current commitment for this year is to purchase $710,000 of material from Cree, which is a carryover from the last year's commitment. And the 2009 figure has not been determined yet. We are working on talking with Cree to evolve at a number, but we have not yet. And then of course we have another agreement with Norstel that if we were to buy the $910,000 --

700.

$710,000, sorry, thanks -- would trigger the requirement that 40% of our sales would be from Norstel. So that would be a combined agree- -- total that would be higher. We hope to negotiate to the lowest point possible, given our current sales and cash situation. But we don't know yet now that will evolve.

Okay, that helps. You mentioned -- well, I applaud -- like the other caller said, you're basically looking at the market from a different standpoint of more of a segments and versus the single approach with the self-purchasing woman. I -- today was one of the first times that you've talked about some of the other kind of approaches with maybe bridal and gift giving. Is there any additional color you can -- or any more information you can talk about those ideas?

About those ideas?

Correct.

About the color.

I don't think so at this -- I'm sorry? About -- ?

You're talking specifically about the color?

Specifically about like what you really mean by gift giving or like maybe the aspect of the bridal kind of focus?

Oh, okay, sure. Be happy to. Be happy to. Well, in the past I think -- well, a couple things. In the past by focusing on the self-purchasing woman, we really had not given, I think, enough attention to the gift giving opportunity. So our understanding and some limited market research work is that there are several areas that could be very interesting gift giving opportunities. And some even outside women, like men's cufflinks, might not be a huge market, but every time I show the moissanite cufflinks to women they seem to want to buy them for their husbands. So I think that's a market that would not -- and the men in those instances might not be so sensitive to that old question of, "Is it real or not?" So that's one example.

Bridal we have in the past steered away from because the issue of the woman thinking, "Does he love me enough?" But I think among several points -- one, we have more advantage in larger jewels. So we would very much like to move our sales into larger average carat jewels. And bridal is an opportunity to perhaps do that. So that's one appeal.

The second is that in these times there may be more people more willing to consider a lower priced alternative in a bridal situation. That's the second thing.

Thirdly, with younger people we believe there is less commitment to the diamond marketing and more, perhaps more openness to our jewel in a bridal setting as an engagement ring if both couples discuss it ahead of time. And our early indications are that there are quite a few couples who would rather put the money into a house or savings or something else rather than into diamonds. So we think that's interesting.

There's also some evidence that the younger people, as a segment, may connect more with our socially responsible aspect of not being a mined jewel. So that's another supporting point.

And the final point is looking at bridal as a market, it goes beyond, of course, the rings that the bride will wear. There are bridal gifts, in which we think some of our earrings or pendants and other jewels in earrings and pendants could be very appropriate positioned. So we may very well be able to penetrate bridal, through marketers and sellers to bridal, in a way that we may not sell engagement rings but we may sell bridal gifts.

So I think that's the kind of thinking that we're trying to do to maybe get a little broader opportunity to market the jewels.

Okay. I thought when you first mentioned bridal, immediately what sprung to mind was the, like the headpiece that a lot of the brides wear are decorative and things like that. So, yes, I like the way you guys are thinking.

Well, if we could push tiaras we'd do real well.

I wish you much luck.

Rodney Baber; Morgan Keegan.

Richard, I'm not coming out of this call yet with a real understanding of a definitive plan that we're moving forward on. You've got some, I'll just call them, generic things that you've talked about, which is -- I'm looking your announcement. Expand moissanite's market reach globally. Increase awareness. Develop additional marketing channels. Help create more compelling consumer value proposition. But I'm not understanding exactly -- with it being May now and this really is kind of the end of the time to be ready for Christmas -- I'm not understanding exactly what we've decided to do. How much marketing money are we going to spend? If we're not doing the self-purchasing woman, which many people have thought has been a bad marketing plan for years -- if we're going to come up with something else, what exactly is that? Because we really need to have it in place right now.

And it sounds like we're looking more at categories than having a specific plan. I mean, as a stockholder in the Company I'd like to know more specifics and how much money is going to be spent to develop these ideas and that kind of thing. And if you can give me some clarity on that I really would appreciate it.

Well, I don't think I can today, Rodney. I think we're working on that and we're revising the Company's budgets internally to look at that and lay out that exact, a more exact marketing plan. I think the principal point is that we don't see a magic bullet, if you will. Some people may have expected there would be some magic bullet. But in many businesses, particularly in situations like we find ourselves in where we are accomplishing a turnaround, it's doing a lot of little things a whole lot better.

And let me just say that many times when you go through these turnarounds, you can look across a company's businesses and find one particular area that's doing really well, or one or two, and another area that's not doing so well. And you can make some fairly quick changes of dropping the ones that aren't so good and emphasizing the one that are good.

I think a valid conclusion is that we don't have any particular area of strength immediately to press on. We have a lot of opportunities. We have some opportunities internationally that we think are interesting. And we have several things that we could do to bring some of these marketing ideas through to our existing points of sale, gradually, as we can.

But I hear your point. And we are very conscious internally of the need to be positioned well for the fourth-quarter business. So we are intent on doing that. We also are in the midst of looking for more marketing people to hire. So that's a factor in this as well. So I don't think we can today give you the kind of precise resolution that you'd like.

Well, I appreciate that. I know that we've had success in the past with this product with a lot of people really liking the product. It seems like we're in a better position now from a standpoint of what this products represents to people who might be trying to save money, that might have issues with conflict diamonds, some of those kind of things.

But it seems like the past success -- I remember when we got the JC Penney Product of the Year and then the next year we got the Jewelry Product of the Year so they could give us the award two years in a row. And they absolutely loved the product and the stuff was doing really well. And I'm trying to understand how those kind of things have gone away over time. Has it just been pure poor execution? Or has something changed that people don't recognize the value of this product anymore?

And I'll end that question by telling you I do know people that are selling the product that are having record years, because they've got a good approach to what they're doing. And they're telling me people love the product still. So seems to be a difference between what we're accomplishing right now and the value that the product has. I'm just trying to understand what that might be.

Well, I think -- my perception, Rodney, is that the answer is a complicated one. I think there's certainly something, and the Kanter report highlighted this, that the early focus, the inevitable sell-in that happened to fill all those JC Penney stores provided a big boost to volume. And then apparently when the sell-through didn't match those levels it produces a typical kind of curve, something that you see very often. So I think that's part of the effect. And certainly the inventory turn problem in retail now is a reflection of that. It's an inevitable result. And Kanter made that observation. So that's part of it.

The consumer value proposition, though, becomes one of great interest because it is the emotional response of the purchaser in the ambience of the point of sale reflecting on not just our jewel and its beauty, but how it is set in the kind of setting and the appeal of that jewelry to her, and then also the price. So that's very interesting. As we've tried to track the history and understand what went on, we are told by our own people that in the early stage with Penney's, since they were the only place available, that they were in fact -- Penney's was a draw. The other customers who wanted to buy it would go there. And so it would reach not just the normal Penney's shopper, but others who went there to shop for moissanite. So then as retail became more involved and with different places to buy, that distributed itself out some.

We do hear, I do hear myself as I look -- am at retail counters in various places, when I ask is there a price problem with the jewel, I invariably get a question -- an answer, that says, "Well, no, not for these that sold. And yes, for these that didn't sell." So there is unmistakably an issue, as there is through all jewelry, of the issue of the style selection and the appeal of that to the customer. And this is one point that I particularly individually feel is maybe not fully appreciated in all retailing circles to the extent it should be, is the way the economics of gross margin and inventory work. So that we could, in fact, have the results of getting a better consumer value proposition to the customer in terms of price if the retailers could turn it faster and take advantage of that to work to lower price points.

Although the jewel does sell -- I mean, we see in some of our trunk shows and in other data that many consumers happily buy this at price points of $900, $1,000, even $2,000. So it is a curiosity of those various factors.

But I think you have to conclude, as Kanter did also, that after the marketing that's been done to expose the jewel, the fact that we have such a limited total market is something of a reflection on how that is embraced by the consumer and that not enough people love it the way you and I and some others do.

Well, there's a difference between people liking the product or not and awareness. And I've always understood that awareness at 10% was telling me that whatever we were doing to get the story out was not reaching the consumer. You may be saying that the consumer was hearing it and just didn't like the message. But it does seem after all these years we could have a much higher awareness than 10%. I'd be really interested in how you're going to solve that problem, because that could have a big effect on what happens.

Mm hmm. Well, that's a very interesting one. It's a very interesting one, because -- and one to be thoughtful about. Because what we find in some of our work -- and admittedly this is on a one-to-one or small group level -- is that what really counts with this product is the experience of putting it on and seeing it and touching and feeling it. And that's no excuse for not doing broader marketing or not doing broad advertising, because that's certainly proper and we intend to do that. But if the marketing can result in ways that bring the customer in contact with the product, we believe that that is a much better way to get awareness that will lead to sales. And we have some ideas about how we might work to do that.

We are certainly constrained, of course, as we go about marketing, because to put on a huge national advertising campaign may be beyond our budget structure in our current situation. So we're going to have to work toward efficiencies and also testing. I think we're going to do some testing to try to evolve more evidence of efficiencies than the Company may have been able to do in the past. That would guide us.

We also are hampered, of course, by, as you all know, that most women when they are wearing our jewels and get a compliment and someone says, "God, those are fabulous diamonds," the woman simply says, "Thank you." And so the word of mouth is, we believe, less than it is with other products. And so that is a serious constraint. But, again, there may be ways to work with that in a positive way that help.

So, in addition to some of the traditional ways of heavy advertising we believe there may be some other ways to do some more grass roots, more guerilla marketing kind of efforts that would increase awareness in ways that would [experiencially] help us and motivate more people to buy. But we'll have to prove that.

Okay. Well, thanks and good luck.

There are no further questions at this time. I would now like to turn the floor back over to Management for closing comments.

Well, thank you all very much for your time and for your interest. I hope to see all of you at our upcoming Shareholders Meeting on May 18th at 10:00 a.m. Thanks again, and good day.

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.