Charles & Colvard Ltd (CTHR) 2014 Q2 法說會逐字稿

Good morning and welcome to the Charles & Colvard Limited second-quarter 2014 conference call. (Operator Instructions)

This webcast may contain forward-looking statements as defined in Section 27-1 of the Securities Act of 1933 as amended, including statements regarding among other things the Company's business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date that this statement is made. These forward-looking statements are based largely on our Company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. These developments and actual results could differ materially from those set forth and contemplated by or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. This webcast does not constitute an offer to purchase any securities nor a solicitation of proxy, consent authorization or agent designation with respect to a meeting of the Company's stockholders.

After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I now would like to turn the conference over to Randy McCullough. Mr. McCullough, please go ahead.

Thank you, Keith. Good morning and thank you for joining us this morning.

I'm very pleased to report our 20% increase in revenue growth this quarter. We believe our second-quarter 2014 revenue growth is an indication that our strategies of growing our core business with key jewelry distributors and retailers, developing leading jewelry brands featuring moissanite and increasing consumer awareness are beginning to take hold.

We also reduced our inventory and increased our cash position this quarter. As we continue to execute our strategies to manage our expenses, we believe the results will propel Charles & Colvard to revenue growth and long-term profitability.

Let's take a minute and have Kyle Macemore, our CFO, review these numbers.

Thank you, Randy. Good morning, everyone, and thank you for joining us today.

As announced in today's press release, net sales for the second quarter of 2014 increased 20% to $7.8 million compared with $6.5 million in net sales during the same period of 2013. US net sales for the second quarter were $7.3 million, an increase of 35% over the same period in 2013. International net sales for the second quarter of 2014 were $574,000, a decrease of 50% compared to $1.1 million in net sales in the second quarter of 2013.

Wholesale net sales increased 16% this quarter compared to the second quarter of 2013 to $6.8 million and comprised 87% of net sales. The Company's direct-to-consumer businesses increased 59% in the second quarter to $1 million or 13% of net sales.

Net sales of loose jewels decreased approximately 2% to $4 million in the second quarter and comprised 51% of sales this quarter compared with $4.1 million or 63% of sales in last year's second quarter.

Net sales of Forever Brilliant loose jewels in the second quarter of 2014 were approximately $2.4 million or 60% of our loose jewel sales. Finished jewelry net sales during the second quarter of 2014 were $3.8 million, an increase of 57% as compared to the same quarter in 2013.

Gross margins for the second quarter of 2014 were 32% compared to gross margins for the second quarter of 2013 of 48%. The decrease in gross margin percentage was due to a higher portion of sales in the second quarter of 2014 coming from finished jewelry and the sale at lower gross margins of slower moving inventory. Operating expenses totaled $4.6 million in the second quarter of 2014 compared with $4 million for the same period in 2013.

Operating expenses increased in the second quarter of 2014, in part due to an increase in bad debt expense of $683,000 associated with the Company's allowance for doubtful accounts reserve policy. The increase this quarter was due primarily to one long-standing customer who is behind on payment. We continue to pursue all measures to collect on this outstanding balance.

The Company recorded a net loss from operations of $2 million compared with a net loss from operations of $852,000 in the year ago quarter. The Company recorded a net loss for the second quarter of 2014 of $6.2 million or $0.31 per share compared with a net loss of $492,000 or $0.02 per share in the second quarter of 2013.

Included in the net loss for the second quarter of 2014 was income tax expense of $4.2 million, resulting from a valuation allowance on certain deferred tax assets based on the Company's cumulative negative taxable income over the last three years and the uncertainty of sufficient future taxable income to utilize its deferred tax assets. This compared with an income tax benefit of $360,000 in the year ago second quarter. The valuation adjustment does not impact the Company's payment of cash taxes, which was zero through the first six months of 2014.

The Company ended the second quarter with $3.4 million of cash and cash equivalents on the balance sheet compared to $2.5 million of cash and cash equivalents at the end of the first quarter of 2014.

Inventory at the end of the second quarter of 2014 was $41.5 million, which was a decrease of $2.3 million from March 31, 2014. Loose jewel inventory was $33.4 million, and finished jewelry inventory was $8 million. As we discussed previously, we expect inventory to decrease throughout 2014 and be a positive source of cash flow. The Company has no long-term debt and has not utilized the credit facility entered into with Wells Fargo at the end of June.

I'd now like to turn the call back over to Randy.

Thanks, Kyle. While we are pleased to have achieved several financial initiatives this quarter, including the 20% increase in year-over-year revenue, reducing our inventory and increasing our cash position we know there's still much work to be done. Our new sales hires hit the ground running in April and May, and we believe their efforts will begin to make an impact on our sales.

Our new marketing initiatives, like the Survivor Collection, have been well received, and we are also making inroads in expanding our domestic customer base, particularly with the US, sales increasing 35% and accounting for 93% of our business this quarter. Follow-up on many contacts from the recent JCK jewelry show have focused in areas where we feel we can achieve the most meaningful sales success such as promoting the new Survivor Collection to targeted outlets. While progress has been made with both old and new relationships, our sales process is measured and deliberate, involving multiple presentations to department stores, mall-based jewelers, independent jewelers, mass merchandisers, e-commerce and TV shopping networks, recognizing that when exposed to moissanite jewelry, consumers generally want to purchase the jewelry. The challenge remains to expand awareness of our gem and, of course, provide retail outlets where consumers can purchase the jewelry.

Our Survivor Collection, which features unique and beautiful three-stone jewelry designs celebrating a cancer survivor journey, is being positively received. These exclusive designs consist of two brilliant clear stones and one pink signifying life before the diagnosis, the journey through treatment and the magical moment when the doctor says you are clear. Our partnerships with the Breast Cancer Research Foundation and the Women Survivors Alliance significantly enhance the meaningfulness of this collection to both our customers and our Company. We are very excited to announce that Boscov's department stores and Rogers & Holland Jewelers are two of the first retailers to sign up for the collection which are targeted to launch this fall.

Our direct-to-consumer business has increased 59% this quarter as we believe customers are drawn to the benefits of shopping online at moissanite.com or for our fine jewelry with their Lulu style advisor.

We are continuing our multiple -- multichannel approach in order to maximize our reach to consumers through retailers, distributors, TV shopping channels, e-commerce, and our direct sales model, Lulu Avenue. The Lulu Avenue business model strives to empower its style advisors to succeed by allowing them to prosper individually by selling Lulu Avenue designer branded jewelry and fine moissanite pieces supported with the latest technologies available in the direct sales business. Our home office team is dedicated to supporting each style advisor with outstanding customer service and high-quality products to help build the strong style advisor customer relationships.

Direct sales and social selling is now a multi-billion-dollar industry, and it is spreading globally. Our Lulu Avenue division is one of our fastest growing businesses, and it provides continued increased awareness of Charles & Colvard moissanite gems. With increasing brand awareness, new marketing campaigns and an expanded salesforce, we look forward with continued optimism towards the remainder of the year. We plan to continue focusing our efforts on increasing sales, reducing our inventory and generating new opportunities for our wholesale and direct-to-consumer businesses.

Let me take this opportunity to have Steve Larkin, our COO, discuss our direct-to-consumer initiatives.

Thank you, Randy.

Our direct-to-consumer businesses continue to grow. Revenue growth at 59% year over year for the quarter and at 72% year to date.

Also, as we continue to invest in these businesses, the growth resulted in a $450,000 reduced operating loss in the second quarter on a year-over-year basis.

The moissanite.com business continues to grow and achieved increases in conversion, average order value, margins, and page views. Our Lulu Avenue direct sales business continues to grow and achieved increases in the active number of style advisors, number of parties and productivity per party. We are now represented by style advisors in 43 states and the Commonwealth of Puerto Rico.

We just hosted our first annual Lulu Avenue Style Advisor Conference here in the Raleigh area with the leadership of Michelle Jones, our President of Lulu Avenue, her team and the participation of Lulu Avenue style advisors. It was an educational, enthusiastic and very exciting event.

Our e-commerce wholesale business is progressing, and we are working towards expanding our digital footprint, gaining impressions and awareness, as well as establishing strategic partnerships and subsequent revenues.

We are in the integration mode with a national multichannel retailer, e-commerce pure plays, marketplaces and shopping engines. We are integrating via vendor agreements and setups, product and digital asset selections, BVI inventory, fulfillment and invoicing methodologies. We also continue to work with and enhance our existing relationships with Kohl's, Helzberg, ShopHQ, and JTV.com.

The move to our new facilities provided us with space and resources to support the future growth of this channel while leveraging a centralized inventory and asset model. We completed the move in June with no disruption to service and continue to focus on providing excellent service to our current and future customers. As we continue to invest and grow our direct-to-consumer businesses, we will continue to get our beautiful gemstones and gemstone jewelry in front of and in the hands of many satisfied customers.

I'll now turn the call back over to Randy.

Thanks, Steve. This concludes our formal remarks this morning, and now we would like to open the call to answer a few questions that participants on the call may have.

Operator, could you please open the floor to the Q&A session?

(Operator Instructions). Alex Fuhrman, Craig-Hallum.

Thanks, guys. Congratulations on getting back to nice revenue growth here. Would love to dive in a little bit more specifically kind of by different channels and accounts, and it looks like obviously the international business wasn't a huge contributor here. That's been down for the last couple of quarters. Is that still an area where you're seeing strong sell-throughs, and is that something that you would expect to contribute to growth in the back half of the year and beyond?

And then within your United States business, or perhaps this is international as well, I'm curious it looks like you sold a good amount of the older inventory at a lower price, which is great to get the cash balance up there. I think that was probably a smart move. Was that one specific transaction to an existing customer or a new customer, or was there anything we should be aware of on that side? Because it looks like the gross margin was a little bit lower than expected, even with the mix shift into finished jewelry? And then any color on, you know, how your business went on on JTV or ShopHQ in particular would be very helpful. Thank you.

Okay, Alex. That's a lot. So you may have to help me remember a few of these questions, but first with the international. Tom and I are in constant communication with our international distributors, and they are still reporting a challenging retail environment, and also they are reporting some generic moissanite being distributed in a few markets. We are currently working with those distributors to help address these issues. I'm just not prepared to make that what our initiatives that we are going to launch over there are at this time. For obvious reasons, we don't want the competition to know what's going on.

It is important to note in India we do not have patent protection, and that's where most of this product is entering the market. And just to give you a tidbit on international, one distributor I spoke with last week said that in purchasing some of that what he called very opportunistic inventory, he unfortunately found out that the vast majority of it was CZ coated with silicon carbide.

So I think the marketplace is going to kind of take care of itself, and a large part but we are -- we have put together some initiatives that we'll be launching over there very soon.

In turning to the US and specifically the older inventory, we are working with a host of our distributors, and we are also working with the JTV folks to create and mount up styles that utilize some of that inventory that we are strategically moving, and you are right we are giving them a very advantageous price. But at the same time, we've made a profit on every sale, which is very important to us.

JTV, just as a note, I think now a couple of weekends ago ran a 16-hour show split up in two our segments with Charles Winston hosting the show, came back with loose jewels for two hours, and he almost doubled their projections. And then the balance of the show on an hourly basis and a per-show basis, he broke every record he had ever set before.

So we continue to see increases with JTV, but we don't know what the ceiling is yet. We are all excited about it, and we'll be working with JTV on the second half of the year to hopefully take advantage of a lot of these opportunities.

Great. That's really helpful. Thanks and good luck.

Justin Ruiss, Sidoti.

Just a quick question on OpEx. I know that you had mentioned that it was tied to bad debt expense and the allowance for doubtful accounts. Do you think this -- do you see this being kind of in perpetuity, or is this -- what can we expect from these levels going forward?

Hey, Justin. It's Kyle. I'll take that. Yes, so the big driver for the quarter was obviously the bad debt expense. I think we have said that if you look at our last three or four quarters, we've been averaging around $4 million a quarter. Some a little higher, some a little lower. Q1 was a little lower. I think that's probably a reasonable run rate. We said that we think our OpEx will grow probably at less than 10% rate from last year would be the maximum. And we'll -- we're trying to grow it very carefully, but strategically in the right areas where we think there's opportunity. So, I think a $4 million per quarter has been what we've been running the last probably three, four, five quarters.

Got you. Perfect. Thank you very much.

Abba Horwitz, Old School Partners.

First of all, I want to congratulate you on making some real progress here, which is important. I just wondering if you could comment on some of the big box -- any progress there in terms of big-box retailers, and maybe comment even on Kohl's, how it did? Also, if you could comment on how much cash do you assume that you will be able to generate from the selling of the long-term inventory by year-end, and that's it for now. Thanks.

Okay. Thanks, Abba. With the new Survivor Collection, obviously with the connection with the cancer folks, we've had, at the JCK show, the reception with the buyers from the big boxes was very good. We do have meetings scheduled with the big boxes. Those for the most part are in August, selling September. So we haven't made the formal presentation to what I call the really big boxes.

Now Boscov's has 40 something, I believe -- you can check it on the Internet -- department stores. We did get our presentation into them in July, and they have signed up. And Rogers & Holland, I think, has about 70 or 80 jewelry stores in the Midwest. And as well with them, they have signed up.

So we are really just out of the gate from the -- the jewelry show was the 1st of June with getting those appointments and making those presentations. I'm very optimistic that we've got an opportunity here, and hopefully we'll be able to report some really positive news in the near future.

On the dot-com side with Kohl's, I'm going to let Steve answer that because that's really kind of under his wing, and I know Tom's been making a lot of progress there.

Yes, without getting into any of the call specifics, I'll tell you our dropship programs for our existing dot-com partners are all proceeding nicely, and they are all expanding the programs relative to product assortment, marketing initiatives, selection of key items for this upcoming holiday season, and we continue to service those businesses, grow them, and are working on bringing additional partners into those programs, again leveraging our infrastructure of inventory, creative assets, etc.

Okay. Any progress -- can we assume that you'll have someone the size of Kohl's before the holiday season?

Another dot-com he's saying.

Say, could you repeat the question, please?

Do you expect to get another Kohl's for the holiday season, either dot-com or even big box for that matter?

You mean another account?

Correct.

Similar to Kohl's? Yes, we do.

Fantastic. One other thing. Can you comment, Randy, on just a sense of the feedback of the consumer adopting the moissanite product, if you are seeing better feedback on it and better demand in interest from jewelers as well?

You know, that's the part that has always amazed me and continues to. If you look on any of the dot-coms that post the consumer feedback, I know Kohl's posts it, JTV posts it, ShopNBC posts it. Well, it's ShopHQ now. Our moissanite.com posts them. These women, and even if you go to our Facebook pages, whether it's on Lulu or whether it's on Charles & Colvard, these women when they get a piece of moissanite jewelry, they absolutely love it, and we see the repeat buys on our moissanite.com and hear it from our others.

Why the jewelers have resisted and then jewelers in general why they have resisted putting moissanite in their case, it just baffles me. Because they're missing a real opportunity to increase their cash flow and their profit by selling the product. Again, consumers love it.

I think you're going to see the dot-coms embracing it more. You know, they are recognizing the fact that Kohl's and others are experiencing some really strong sales. And those that are tracking it and looking at their numbers can see that generally we are in the top 15% or 20% of each company that we are involved with sales.

And so, again, it's an opportunity. It baffles me with the jewelers, but what we've got to do is focus on getting in front of more consumers. Lulu Avenue is doing a fantastic job with that. Our dot-com business is doing a fantastic job with that. And the partners that we've taken on and the partners that we are bringing up between now and the Christmas selling season, I'm extremely optimistic we are going to increase our awareness significantly.

All right. Beautiful. Thank you.

Thank you and there are no more questions at the present time. So I would like to turn the call back over to Mr. McCullough for any closing comments.

Thank you, Keith. Once again, I'd like to thank everyone for taking the time to participate in our call today and most of all thank our employees for all their hard work and continued dedication.

As Steve said earlier, the move was -- really went without a glitch, and I can speak I think for all the employees who are in a much better environment who were positioned to handle much greater volume that we anticipate will come soon hopefully.

The operator -- we are finished with the call. This is it. Thank you very much.

Thank you. A replay of this call will be available starting at roughly 12:00 Eastern time today. You may access the replay by dialing 1-877-344-7529 or 1-412-317-0088. You will be prompted to enter a code, which will be 10038569. You also will be asked to record your name and your affiliation.

Thank you for attending today's presentation. You may now disconnect your lines. Have a nice day.