Charles & Colvard Ltd (CTHR) 2017 Q1 法說會逐字稿

Good day, and welcome to the Charles & Colvard First Quarter 2017 Earnings Call. All participants will be in listen-only mode. (Operator instructions.]

This webcast may contain forward-looking statements as defined in Section 27A 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 the statement is made.

These forward-looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future developments and actual results could differ materially from those set forth in, 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 a proxy, consent, authorization, or agent designation with respect to a meeting of the company's shareholders.

After today's presentation, there will be an opportunity to ask questions. (Operator instructions.] And please note this event is being recorded.

I would now like to turn the conference over to Suzanne Miglucci, President and CEO, alongside Clint Pete, Interim CFO. Please go ahead.

Good afternoon, and thank you for joining us as we summarize Charles & Colvard's 2017 first quarter results. For today's agenda, I'll first discuss the strategic rationale that led us to revise our reporting segments, which we've reorganized to better reflect the way we manage our business. Then I'll highlight Q1 outcomes from the ongoing execution of our strategic plan. I'll turn the call over to Clint Pete for a detailed financial review, and then I'll wrap up our discussion with details of our ongoing go-to-market initiatives.

As we've been articulating for the past year, our strategic plan and rebranding efforts are direct-to-consumer focused. Central to this effort is making our products readily available to the consumer everywhere they're shopping. This omni-channel approach relies heavily on Charles & Colvard's online e-commerce presence to bring our products forward to the consumer, yet it's been difficult for our shareholders to properly assess the reach of our online efforts, given the way we've historically reported our net sales.

Since 2014, Charles & Colvard reported net sales under three business segments, Charles & Colvard direct, also known as Lulu Avenue, wholesale, and Charlesandcolvard.com. Let's break down each of these segments into their component pieces. Then we'll reconstruct how we're going to report our segments going forward.

In the first quarter of 2016, we made the strategic decision to divest our home party business, Lulu Avenue. In keeping, we began reporting this business segment as discontinued operations in the first quarter of 2016, leaving two remaining business segments, wholesale and Charlesandcolvard.com.

Historically, wholesale included distributors, retailers, television shopping networks, drop ship retailers who promote Charles & Colvard goods on their e-commerce sites, and pure play e-tailers, retailers who sell goods exclusively online. These various customers were grouped under wholesale because they do business with us at wholesale prices.

Charlesandcolvard.com was comprised of our own transactional website, Charlesandcolvard.com, as well as marketplaces, including Amazon, eBay, and others. We believe that both the drop ship retailers and pure play e-tailers, historically reported under wholesale, are more properly associated with online channels because these channels are exclusively e-commerce outlets.

Therefore, to provide a more accurate measure of our collective impact of our online channels going forward, our segments will now be as follows. Our traditional segment will be comprised of distributors, retailers, and television shopping networks. Our online channels segment will now include drop ship retailers such as Overstock.com, pure play e-tailers such as Gemvara, marketplaces such as Amazon and eBay, as well as our own transactional website, Charlesandcolvard.com.

Now, utilizing our newly cast segments, let's compare Q1 2017 to Q1 2016. In Q1 2016, 82% of our net sales were from traditional channels and 18% from online channels. In Q1 2017, 62% of our net sales were from traditional channels with 38% from online channels, indicating that online channels are a thriving and growing outlet for our moissanite gemstones and finished jewelry. Clint will provide further financial details on our recast segmentation during his prepared remarks.

Let's turn to Q1 highlights. During the first quarter, we began to see positive momentum as the outcomes of our rebranding effort took hold. We generated $5.6 million in net sales from continuing operations, with online channels' net sales increasing 5% compared to the same period in 2016. We believe this growth was fueled by our ongoing digital marketing efforts driving strong Valentine's Day sales and overall increased traffic to our many e-commerce outlets.

Our online e-commerce reach grew in the first quarter with the addition of two new marketplaces, Newegg and Bluefly. We're continually monitoring and will continue to onboard new online channels, as we believe it will provide meaningful opportunities to place our goods in front of consumers.

Our digital marketing and public relations efforts continue, with a focus on both awareness and customer engagement. We're seeing strong growth in emerging social media channels, including 34% growth in our Instagram followers and 108% growth in our YouTube views over Q4 2016 performance.

We continue to receive placements in large publications such as Brides and People, and we launched our largest influencer campaign to date with Becca Tilley, a fashion blogger made famous by her appearance on The Bachelor. Becca reached over one million of her followers with a Charles & Colvard message, and to date over 90% of the visitors from her blog were new visitors to our website.

We enhanced our management team in January with the addition of Jose Ayala, Senior Director of Merchandising, who brings extensive brand management and merchandising expertise, having worked with premier brands including Colombian Emeralds and Tiffany. Jose is expanding our jewelry assortment with a focus on additional fashion and fine jewelry options to complement our bridal selection.

We continue to grow our traditional retail presence through our partnership with Helzberg Diamonds. During our Q3 2016 earnings call, we announced a pilot program with Helzberg Diamond stores that began as a 26-store test in September of last year. During our Q4 2016 earnings call, we announced expansion to 51 doors by the height of the holiday season.

And today I'm pleased to announce that we are now present in 100 total Helzberg Diamonds' stores. Our team worked hard to achieve this geographic rollout target in advance of the upcoming Mother's Day holiday. This expansion and our ongoing growth are evidence of the strong performance of our product in this retail environment.

The ongoing rollout of Forever One, the world's first colorless moissanite gemstone, continues to be met with great enthusiasm from channel partners and consumers. In Q1, we expanded our Forever One moissanite collection with four new sought after shapes, emerald, pear, radiant, and hearts and arrows. This continued innovation is sparking worldwide interest in our up market brand, with Forever One representing 86% of our total Q1 2017 net sales.

In summary, Q1 2017 net sales of $5.6 million were down 50% compared with $11.4 million in the year-ago quarter. We faced a tough comp from Q1 2016, during which we had a one-time purchase of $6.8 million of legacy inventory from one of our wholesale customers. However, excluding that one-time sale, net sales in Q1 2017 increased 22% over Q1 2016.

In terms of margins, with our focus on Forever One sales and high margin channels, we achieved a substantially expanded gross margin, which doubled to 43% in Q1 from 20% in the year-ago quarter, which included the one-time sale of legacy inventory at low margins.

In terms of the balance sheet, we closed the quarter with $6.6 million in cash and cash equivalents, and we remain debt free.

To provide further detail behind these numbers, I'd like to turn the call over to Clint Pete, our interim CFO. Then I'll return to the call and close us out with a discussion of our ongoing strategic initiatives. Clint?

Thank you, Suzanne. Good afternoon, everyone, and thank you for joining us today.

As a reminder, due to the divesture of assets associated with Lulu Avenue in the first quarter of 2016, we are presenting Lulu Avenue in discontinued operations in our financial statements. There were no net sales, gross profit, or losses related to discontinued operations for the first quarter of 2017, and we did not include the net sales, gross profit, or loss from Lulu Avenue in our results from continuing operations for the first quarter of 2016. Unless otherwise noted, the financial results discussed during this call will be from continuing operations for both the first quarter of 2017 and the first quarter of 2016.

As announced in today's earnings press release, net sales for the first quarter of 2017 were $5.6 million, a decrease of 50% compared with $11.4 million in the year-ago quarter, which included a one-time $6.8 million sale of legacy loose gemstone inventory. Excluding that one-time sale, net sales in Q1 2017 increased 22% from Q1 2016.

Moving on to a more detailed analysis of net sales, first let's review our results on a segment basis. As Suzanne explained, this quarter we made the decision to revise our segment reporting, moving forward with two operating and reportable segments. One is referred to as traditional and the second is online channels. My discussions today will be based on this new segment reporting.

In the company's traditional segment, net sales decreased 63% to $3.5 million, or 62% of net sales for the quarter, compared with $9.3 million, or 82% of net sales, in the year-ago quarter. Excluding the one-time $6.8 million sale in the year-ago quarter, net sales increased in Q1 of 2017 by 36% from Q1 2016.

In the company's online channel segment, net sales increased 5% to $2.2 million, or 38% of net sales for the quarter, compared with $2.1 million, or 18% of net sales, in the year-ago quarter. We believe this growth represents the beginning of gains from our investment in online channels.

Now let's review our product line results. The company's net sales of loose jewels were $3.9 million for the quarter compared with $9.6 million for the year-ago quarter, which included the one-time $6.8 million sale, a decrease of 59%. Excluding the one-time $6.8 million sale in the year-ago quarter, net sales in Q1 2017 increased 37% from Q1 2016.

Finished jewelry net sales from continuing operations were $1.7 million for the quarter, essentially flat compared with $1.8 million in the year-ago quarter, or a 2% decrease due to less clearance items being sold.

Gross margins in the first quarter 2017 were 43%, more than double the level of 20% in the first quarter 2016. Gross margins were higher due to increasing sales of Forever One loose jewels, minimal sales of our legacy loose jewels, and higher margins on Charlesandcolvard.com due to less clearance inventory being sold.

Operating expenses for the first quarter of 2017 were $3 million, flat to the same period of 2016. Sales and marketing expenses for the first quarter of 2017 increased by approximately $390,000, which included approximately $246,000 in one-time severance expense primarily related to the previously announced departure of our former Chief Revenue Officer.

G&A expenses for the first quarter of 2017 decreased by approximately $390,000, primarily due to a decrease in executive salaries and related benefits, and a decrease in legal fees, primarily related to the divestiture of Lulu in the prior year.

Net loss from continuing operations for the first quarter of 2017 was approximately $560,000, or $0.03 per share, compared with a net loss of $750,000, or $0.04 per share, in the year-ago quarter. Net loss for the first quarter of 2017 was $567,000, or $0.03 per share, compared to a net loss of $1.3 million, or $0.06 per share, in the year-ago quarter.

The company ended the first quarter of 2017 with $6.6 million of cash and cash equivalents on the balance sheet, compared to $7.4 million at the end of 2016. The company anticipates continuing to invest some of this cash in marketing, branding, and awareness efforts during the upcoming quarters.

Inventory at the end of the first quarter 2017 was $28.9 million, a slight increase of approximately $800,000 from $28.1 million at the end of 2016. The first quarter 2017 inventory level was up slightly from the end of 2016 level as we expanded our rollout in the Helzberg stores and continued to add elevated jewelry to our Charlesandcolvard.com. Loose jewels inventory at the end of the first quarter 2017 was $22.9 million, and finished jewelry inventory was $6 million as well.

The company has no long term debt and has not utilized the $10 million credit facility we entered into with Wells Fargo at the end of June 2014. The credit facility will mature on June 25th, 2017. Accordingly, we are currently reviewing various credit facility options that, if pursued, may provide a credit facility (technical difficulty) 2017.

In summary, we were encouraged by the underlying financial trends in the first quarter. The growth in our online channels, combined with significantly improved gross margins and tightly controlled expenses, provide evidence that our strategy initiatives are gaining traction.

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

Suzanne Miglucci^ Thank you, Clint. As we noted in our Q4 2016 earnings call, we believe 2017 will be a year of optimization and growth, as we live into the new Charles & Colvard brand. We're working on expanding existing channels while discovering new channel partners and new markets through focused sales and marketing efforts.

Let's review our five key strategies for 2017 and what we're working on this quarter and next. Number one, expand our jewelry line and continue to innovate our Forever One gemstone products. In addition to the four new gemstone shapes announced this quarter, we continue to innovate both our gemstones and our jewelry, expanding our overall assortment so we can appeal to a broad customer audience. Watch us on Charlesandcolvard.com where you can view new product listings as they go live on our new arrivals section.

We're looking forward to our largest trade show of the year, JCK, which is being held in Las Vegas June 5th through 8th. This will be our 17th year at the event, and we're planning a presence beyond any prior year. Attendees will be treated to new styles and offerings never seen before in moissanite. Stay tuned for our announcements, which we'll issue from the event.

Our number two strategy is to intensify our omni-channel sales effort. In addition to our ongoing expansion in retail with Helzberg Diamonds, we continue to grow our presence with other traditional partners. Television shopping remains an important medium to exhibit the unprecedented fire and brilliance of our gemstones, and we plan to expand our broadcast hours this quarter in addition to our ongoing efforts to uncover new and innovative ways to reach the consumer everywhere they're shopping.

Number three, convey our e-commerce practice to new channels. We have two new e-commerce channels that just went live, and we intend to spend this quarter optimizing our presence and our selection on these new outlets. At the same time, we continue to grow our reach and net sales across existing e-commerce platforms as we expand our assortment with new jewelry styles.

Number four, evolve our customer service function. We're continually improving our customer service function with the intention of delivering world-class service to our wholesale partners and direct to consumers. We recently deployed a Net Promoter Score function that helps us measure customer satisfaction at many touch points along our customers' journey. This invaluable input provides us with insights and opportunities to improve our products and services and optimize our customers' experience.

And finally, number five, amplify our global marketing efforts. As we've discussed in prior calls, it's imperative that we not only gain exposure with consumers. We need to engage and delight them. In late Q1, we finalized our Share Your Love Story social media campaign, a terrific vehicle for migrating customers from awareness to engagement.

We had several thousands entries for this campaign, all of whom willingly shared content with Charles & Colvard. We collected love stories and photographs and insight into some of the most romantic marriage proposals we've ever heard. And by way of opt-in permissions, we can now extend their stories into our campaigning, leveraging our customer stories to bring additional awareness to Charles & Colvard and moissanite. Three lucky winners will be receiving prizes, with our top winner being awarded a moissanite engagement ring and wedding band. We expect (technical difficulty) stories to roll out over social media (technical difficulty).

Concurrently, we have several initiatives underway to support our continued public relations, social media, and demand generation efforts. For example, in Q1 we joined Accessories Council, a not-for-profit international trade organization established to stimulate consumer awareness and demand for fashion accessory products. Since joining, we've already participated in their recent Mother's Day event and have enjoyed meaningful press coverage from our presence. We also continue to utilize influencers to help us reach new audiences, which is proving to be a highly effective way to engage new followers.

In summary, we're executing on our plan to optimize our direct-to-consumer presence here in the US, ensuring our entire supply chain runs smoothly in preparation for future international expansion. In Q1 2017, 7% of our net sales were related to our international presence. But as we've hypothesized and are proving in the US, it's necessary to have a direct relationship with the consumer to convert them to believers. We remain confident that by the second half of 2017 we'll be ready to test the consumer appetite for moissanite in new international markets.

Lastly, we're focused on our continued advancement toward profitability. We made meaningful strides in that direction in 2016 with our full year net loss totaling $4.5 million compared to $9.6 million in 2015. And in Q1, our loss from continuing operations was reduced from the same period last year. Rest assured we believe we are making calculated and judicious investments with an eye toward growth and profitability.

This concludes our formal remarks for this afternoon, and we'll now open the call to answer a few participant questions. Operator, would you please open the lines for the Q&A session?

We will now begin the question and answer session. (Operator instructions.] We do have a question from Preston Foulks with Lincoln Financial. Please go ahead.

Yes, I'm just calling in, I heard a couple remarks on the call about Amazon. I know years ago they touted Amazon and everyone got excited. The other thing on international, I know that was something that was very costly and they decided that they'd rather have a lot of market share here in the US. Why are now you planning to go international when the sales and the initiative here, you've got so much room to grow, or haven't grown? Just want a point on those two aspects.

Great, Preston. Thank you for calling in. We do appreciate it, and we appreciate the question. So, yes, we are on Amazon. It's a fairly new recast presence for us on that e-commerce outlet. We were there years ago with a minor presence. We came off of the site for several months.

There were some miscommunications, if you will, between Charles & Colvard and Amazon about how you measure moissanite. Unfortunately, Amazon was measuring us the same way you measure a diamond, and that is an incorrect way to measure moissanite. We had to do some educating, get them up to speed, help them understand how to properly measure our product.

Once we squared that away, we went live again last week. We've been growing that presence since then, and it is actually a very significant and, I will say, the largest of our online channels in the marketplaces category. It's growing. We are expanding our presence with Amazon by way of fulfillment by Amazon. We talked about that in the last quarterly call. This helps us win the buy box and to get tagged as a prime supplier. So, this will really help us with our growth effort there.

What's wonderful about working with Amazon, Preston, is that once you establish your presence in the US and you start using their fulfillment by Amazon functionality, which is from their distribution centers, we can lift that capability once it's baked, if you will, and we can bring it to international markets with a very low overhead and a low footprint.

So, where going internationally is traditionally, you're right, a very expensive undertaking, doing so via marketplaces is a very agile way of doing just that. So, we can go out there and test that market at someone else's expense, if you will. We're going to use Amazon's eyeballs, we're going to use Amazon's real estate, we're going to use Amazon's presence to gain traction for moissanite.

Only then, when we see the consumer raising their hand and showing interest in our product, will we determine whether or not we have a more Charles & Colvard specific expanded presence in that particular region. But marketplaces are a very low hanging fruit way for us to actually make that entre into those international theaters. Hopefully that makes sense.

Okay, one last question I just have. I was on the call last time but there was a lot of talk about the box stores. I know I didn't hear anything about Boscov's stores. You said about the jewelry company. Still it's hard going. It's a missed market that people can't go out and see this. I know you say you have a lot of social media and people are talking and chatting. But where's the sales, all this stuff? Is the box stores coming, or you just have the one jewelry company you're working with? Or what's the story there?

Sure, let's talk about that. We did talk about retail last time we held this call. Retail's going through a tough time. Stores are closing at an unprecedented rate, and retailers are struggling to get foot traffic in the malls and in their stores. And for that reason, we're cautious about what type of a physical retail presence we might have.

That said, it's very important for certain consumers to see our product. And that's why a calculated retail presence is important for us. Helzberg allows us 100 opportunities across the country to actually get in front of those customers. And it's a very nice alignment between the Charles & Colvard brand and the Helzberg brand. We very much target the same consumer. And given that we are in part very bridal focused, we lend ourselves very nicely to their stores. So, this expanded presence gives us quite a bit of reach across the United States.

I'll remind everyone that we also have a very significant presence through independent jewelers. We don't sell to independents directly. However, we go through our distribution channel and our partners there who tend extend the sale of moissanite into independent jewelers. We aggregate various places where people can go and see us in retail on our website on our where to buy application. If you click through there, you'll actually see numerous places where you can find moissanite and Charles & Colvard goods worldwide.

We'll continue to evaluate whether or not retail is the right (technical difficulty). I'm certain there will be other opportunities for us to be in retail stores. And it's worthwhile for us to consider that, but it's a lot of overhead. So, we're making cautious decisions about whether or not we're going to make that investment while we're expanding our reach on e-commerce because, again, higher margins and an easier market for us to push our products.

The next question today comes from John Lawrence [ph] with Verivu ph . Please go ahead.

When you look at the numbers -- and thanks for that detailed sort of comparison of redefining the income statement. Can you talk a little bit about I guess big picture? Number one is how you measure the return on investment for this advertising and obviously the metrics you'll use. And I know it's been early, since October or so, that you've really redefined dot com. But can you give us a sense of how you're measuring that, the conversion rates and those half a million people that are on social media?

Sure. So, there's kind of two steps, John, to conversion. One is getting followers. And so, we measure that by simply people that are following us, so how many new followers do we have on our social media sites and so on. We had a 34% increase on our Instagram page. We had a 108% increase in the number of views of videos that we post to YouTube. So, that's sort of the awareness number.

And then we have the conversion number. Conversion is, when you have people come to your website, how many of them actually become paying customers. And so, we watch that one very closely as well. With mobile commerce becoming so prevalent, conversion rates are actually down across the entire industry because people are doing more viewing.

People are doing more homework. People are clicking on more pages but not acting because they're simply -- they're getting some information. So, we're watching those trends and those conversion rates, but we certainly are expecting them to click in the positive direction and see more and more conversion as we're doing more engagement.

The other thing we measure, John, is how many touches we have with these customers that then get them to convert. And so, we're very carefully watching what we call path to close. So, we're watching all the way from when did you start following us and what medium were you on when you began following us? How many of our campaigns do you interact with? Did you submit to Tell Us Your Love Story? Did you click on an advertisement that we put on Facebook? So, what are all those touch points, and then what pages have you visited on our website? And then when do you convert? When do things go in the shopping cart?

The more we understand about each of these measures the more we can shorten the sales cycle so that other consumers that look like you will have a very streamlined experience from Charles & Colvard to come in and become a buying customer. We're really drilling into these measures, these paths to close measures, in order to boost our conversion.

Great, thanks. And just a couple of others. On the G&A expense or the overall expenses that were $3 million, I guess, in the quarter, pretty much flat. Is there anything expense wise as you roll out these initiatives that -- I know there was a little bit of noise with expenses, severance, etc. -- that makes that number sort of move around, or is it pretty much -- I don't know how much variable is in that number. I guess the point is, when do you start really leveraging that SG&A or marketing number?

Like you said, I think most of the expenses were flat this quarter. There's not much variable other than items such as advertising. We're able to come in and look and see our results, look at our return on investment. And the advertising dollars are probably the variable one that we can kind of pull or increase, as we kind of go through the quarter, based on our performance.

(Operator Instructions) And we are showing no further questions. I would like to turn the conference back over now to Suzanne Miglucci for any closing remarks.

Thank you, Ryan. Once again, I'd like to thank everyone for taking the time to participate in our call today. I want to thank our team at Charles & Colvard for all of their hard work and continued dedication. And my most sincere thanks to our shareholders for their continued belief in the opportunity we have at Charles & Colvard. Thank you, and good evening.

And as a reminder, a replay of this conference call can be accessed online at the Charles & Colvard events page on the live link at the address IR.charlesandcolvard.com/events.

This now concludes the conference. Thank you for attending today's presentation. You may now disconnect.