Charles & Colvard Ltd (CTHR) 2018 Q2 法說會逐字稿

Good day, and welcome to the Charles & Colvard Second Quarter and Fiscal Year 2018 Earnings Call. (Operator Instructions)

This earnings call 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 earnings call 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.

Please note, this event is being recorded.

I would now like to turn the conference over to Suzanne Miglucci, President and Chief Executive Officer. Please go ahead.

Good afternoon, and thank you for joining us as we summarize Charles & Colvard's results for the second quarter of 2018 and the 6-month transition period ended June 30, 2018.

Accompanying today's call is a supporting PowerPoint Slide deck, which we'll refer to during our formal remarks. This presentation file is available in the Investor Relations section of our website at ir.charlesandcolvard.com/events.

Let's begin our review of the results on Slide 4. As we continue our transformation to an e-commerce-driven business, we're making steady progress on our strategic initiative to grow sales in our Online Channels segment. We generated a 49% increase in Online Channels sales in the second quarter of 2018 compared to Q2 2017. That represents a 52% increase in our -- or 52% of our total sales. Our transactional website, charlesandcolvard.com, led the charge with 83% growth over Q2 2017.

An emerging driver of this growth is cross-border trade on our website. These transactions are booked as U.S. revenue but the originations of the orders are from countries around the world. While still a small portion of the total revenue from charlesandcolvard.com, cross-border trade grew over 400% compared to the same quarter last year.

Marketplaces also contributed significantly to our Online Channels growth, with 182% growth over the second quarter of 2017. Amazon continues to be our leading marketplace channel with a 225% growth over the same period last year.

Moving on to Slide 5. In our Traditional segment, where we serve our wholesale customers, we saw a 31% decline in Q2 revenue compared to the same quarter last year. This decline was due to a single distributor who implemented a change to their inventory management practices. This onetime shift in their inventory holdings paused purchases, which have since resumed to normal levels. The resulting gap in our traditional segment was partially offset by significant growth in brick-and-mortar retail, which was up 102% over Q2 last year. This performance was driven in part by success with Helzberg Diamonds stores where we have exposure in nearly all doors and continue to see meaningful growth.

Let's turn to product innovation on Slide 6. We continue to evolve our product line to attract a broad audience with a wide variety of gemstone and jewelry offerings. In Q2, we introduced 2 new gemstone cuts, elongated ovals and cushion hearts and arrows. We also expanded our fashion jewelry selections with a wide range of styles and price points to serve online and retail partners and our own transactional website. Included in this expansion was personalized jewelry to participate in this growing trend with millennial and Gen Z audiences.

While bridal continues to be a primary category and is experiencing significant growth on charlesandcolvard.com, fashion revenue also is steadily growing, with 36% growth over the second quarter last year. Fashion jewelry represents an easy entry point for new customers to adopt and fall in love with moissanite.

In Q2, we introduced Moissanite by Charles & Colvard, a new branded line of creative moissanite gemstones, which are value priced. Since moissanite went off patent 3 years ago, competitive products have entered the market. We're seeing varying clarity and a broad range of color [braids] in these competitive goods. In general, their lower standards of clarity and color are in turn driving down to a lower price point, similar to the way a diamond's lower clarity of color downgrades the gemstone's price.

Charles & Colvard's Forever One continues to be our flagship product and it commands a premium price given what we believe to be its unrivaled clarity, color, cut and polish. But not all Charles & Colvard produced gemstones make the Forever One grade. Historically, if any one of our grading measures was not fully met during our manufacturing process, a gemstone was rejected, until now. These near-perfect stones are now available as Charles & -- as Moissanite by Charles & Colvard. We can now compete directly with the lower-grade moissanite that we're seeing in the market, and we're able to compete on price and quality. We believe this will help us gain share of wallet from this price-sensitive segment of the market and offer a new range of products that will attract new partner opportunities.

Now let's turn to a discussion on sales on Slide 7. We launched a strategic partnership with Flont, a pioneer of jewelry as a service, which enables access to high-end designer jewelry through memberships and jewelry rentals. This service provides consumers an entirely new way to experience moissanite firsthand.

We expanded our footprint with partner and jewelry e-commerce provider Gemvara. We were previously a center stone option in Gemvara's build your own jewelry tool, and in Q2, expanded our presence with the availability of side stones. Gemvara serves a consumer -- a growing consumer base that wants to personalize and build jewelry to their preferred specifications. We're thrilled to be part of this growing trend and to have an expanded selection of gemstones with Gemvara.

And lastly on the sales front, we're pleased to announce 2 new recent agreements. First, we signed a new retail partnership with Stein Mart, a national specialty off-price retailer offering designer and name brand fashion merchandise. We -- they have an established customer base that's both style-conscious and value-seeking with above-average household income. Stein Mart will be carrying products online that feature Moissanite by Charles & Colvard, which enables us to provide this new consumer with both high-quality and competitively priced jewelry.

Second, we signed an expanded partnership with Walmart. For the past year, we've had a third-party relationship with walmart.com through their marketplace functionality. This means that we could independently list our products to their website in order to garner sales from their vast audience. Now, however, based on sales trends and Walmart's interest in the alignment between our product and their customer demographic, we signed a new first-party agreement with Walmart. This provides a direct relationship between us and the retail giant. As part of this relationship, we enjoy the benefits of a direct technology integration, the involvement of their buying staff for assortment curation, better product placement and inclusion in their on-site jewelry events and promotions.

All of these partnerships are established and in effect for the 2018 holiday season.

Turning to Slide 8. Another key agreement we signed recently was the extension of our strategic partnership with Cree from whom we purchased its unique silicon carbide material that's the basis for our gemstones. This favorable amendment to the supply agreement extends our long-standing relationship for 5 years with an option for an additional 2-year extension for a total of 7 years. Cree has patented a micro-pipe free process for producing silicon carbide that results in unparalleled clarity in our gemstones. We have exclusive rights to this high-quality material for gemstone production, which we believe gives us a competitive advantage over other gemstone producers around the world and enables the production of our premium moissanite product, Forever One. In addition, the agreement now allows Charles & Colvard to supplement its Cree supply with alternate materials that may enhance our non-Forever One product lines and create a lower blended cost of goods. This is a significant change to our terms.

In summary, we're experiencing increased interest from direct to consumer channels, expanding online exposure and revenue through marketplaces and enjoying significant traction, including cross-border trade, on our charlesandcolvard.com website.

I'd now like to turn the call over to Clint Pete, our CFO, who'll provide additional financial details. I'll then return to close out the call with a discussion of our ongoing strategic initiatives. Clint?

Thank you, Suzanne. Good afternoon, everyone, and thank you for joining us. Today, we will review our results for both Q2, 2018, and for the 6-month period from January 1 through June 30, 2018. We had shifted to a fiscal year ending June 30. We will be filing a 10-KT transition report with results for the 6-month period ended June 30, 2018. Our fiscal year 2019 began on July 1 and will run through June 30, 2019.

Please turn to Slide 10. Net sales for the second quarter 2018 decreased 4% versus their year ago quarter. Net sales for the 6 months ended June 30, 2018, increased 7% versus the year ago period.

I will review our quarter-over-quarter net sales results and then the 6 months ended June 30. Here's the breakdown. In the company's Online Channels segment, which consists of e-commerce outlets, including charlesandcolvard.com, marketplaces, drop ship, and other pure play exclusively e-commerce customers, net sales for the quarter increased 49% to $3.3 million or 52% of total net sales for the quarter compared with $2.3 million or 34% of total net sales in the year ago second quarter.

In the company's Traditional segment, which consists of wholesale and retail customers and historically included sales on television shopping networks, net sales for the quarter decreased 31% to $3.1 million or 48% of total net sales compared with $4.4 million or 66% of total net sales in the year ago second quarter. The decline in net sales is primarily due to a single distributor that had a onetime shift in the inventory holding policy across their vendors.

On a product line basis, finished jewelry net sales increased 54% to $2.9 million for the quarter. This increase continues to result from our direct-to-consumer strategy to drive finished jewelry sales across multiple geographies and channels. The company's net sales of loose jewels decreased 27% to $3.5 million in Q2, primarily due to the previous-mentioned distributor's onetime shipped and holding -- inventory holding policy.

On Slide 11 is the breakdown of our 6-month net sales results. In the company's Online Channels segment, net sales for the 6 months ended June 30, 2018, increased 45% to $6.4 million or 48% of total net sales for the 6-month period compared with $4.4 million or 36% of total net sales in the year ago period.

In the company's Traditional segment, net sales for the 6 months ended June 30, 2018, decreased 14% to $6.8 million or 52% of total net sales compared with $7.9 million or 64% of total net sales in the year ago period.

On a product line basis, finished jewelry net sales increased 70% to $6.2 million for the 6 months ended June 30, 2018. The company's net sales of loose jewels decreased 19% to $7 million in the 6 months ended June 30, 2018.

Moving on to Slide 12. In the second quarter 2018, our gross margin was 35% compared to 42% in the second quarter 2017. During the 6-month period ended June 30, 2018, our gross margin was 37% compared to 43% in the year ago period. This decline was mainly due to the intentional impact of higher levels of finished jewelry sales containing our legacy inventory gemstones and other inventory adjustments during the 6 -- first 6 months of 2018. We have strategically focused on moving these older gemstones and jewelry pieces out of inventory through promotional programs while still generating positive margins. While this legacy material strategy impacts our overall blended gross margin rate, it's important to note that our product and segment margins have remained strong and consistent with our growth areas of Forever One and Online Channels.

On Slide 13. For the second quarter of 2018, our operating expenses were $3.2 million, essentially flat with those in the year ago quarter. Sales and marketing expenses in Q2 were $2 million compared to $1.8 million in the second quarter 2017, which was principally due to an increase in our digital marketing expenses, aligned with the ongoing strategic expansion of our overall sales and marketing initiatives.

G&A expenses in Q2 were $1.2 million, a decrease of approximately $173,000 compared with the year ago quarter. This decrease was principally due to a decrease in bank fees primarily related to our credit facility and credit card processing charges.

Our operating expenses for the 6 months ended June 30, 2018, were $6.5 million compared to $6.2 million in the year ago period. Sales and marketing expenses in the 6 months ended June 30, 2018, were $3.9 million compared to $3.7 million in the year ago period.

G&A expenses in the 6 months ended June 30, 2018, were $2.6 million, an increase of approximately $127,000 compared to the year ago period.

On this chart, we also show operating expense as a percentage of net sales. While this ratio increased in the second quarter 2018, the trend line continues to reflect the scalability that we have built into our business.

Slide 14. We reported a net loss for the second quarter of 2018 of approximately $698,000 or $0.03 a share. This compared to net loss of approximately $403,000 or $0.02 a share in the year ago quarter. We reported a net loss for the 6 months ended June 30, 2018, of approximately $1.3 million or $0.06 per share. This compared to a net loss of approximately $962,000 or $0.05 a share in the year ago period.

Our results for Q2 2018, as well as the 6 months ended June 30, 2018, were favorably impacted by the recognition of a federal income tax benefit in Q2 2018 of approximately $328,000. This benefit was related to the recognition of an expected refund of our AMT deferred tax credits resulting from the December 2017 Tax Cuts and Jobs Act.

Slide 15 presents a snapshot of our balance sheet. We ended the second quarter of 2018 with $3.4 million of cash and cash equivalents compared to $4.6 million at the end of 2017. The company anticipates to invest a portion of this cash in marketing and branding initiatives during the upcoming fiscal year. The company continues to have no long-term debt and has not accessed funds through our credit facility.

Total inventory at the end of the second quarter 2018 was $31.8 million compared to $31 million at the end of 2017. At the end of Q2, loose jewels' inventory increased to $24.0 million from $22.1 million at the year-end 2017, reflecting increased purchases of raw materials and higher levels of work-in-process inventories. Finished jewelry inventory decreased to $7.8 million compared to $8.8 million at the end of 2017. This trend reflects our success in selling finished jewelry with both our current higher-margin Forever One gemstones and our legacy lower-margin gemstones.

On Slide 16, we provide in detail the classification of new versus legacy materials. At the end of the second quarter 2018, 70% of our inventory was classified as new. This leaves just $9.5 million or 30% of our inventory classified as legacy inventory at the end of the second quarter. Based on the carrying value of our inventory, this change in legacy inventory represents a 15% reduction from the amount of inventory classified as legacy at year-end 2017 and a 33% reduction from the amount of inventory classified as legacy inventory at year-end 2016.

Before closing, I'd like to highlight a couple of finance-related and shareholding reporting matters for your information. In early July, we entered into a new $5 million asset-based revolving credit facility with White Oak Commercial Finance. The annual borrowing fees associated with our new credit facility are lower than those with the previous credit arrangement with a commercial bank. And moreover, we believe the borrowing terms and covenants underlying our new credit facility are less restrictive than those under our previous arrangement. We feel our new credit facility will allow us to be more nimble with meeting working capital needs and executing our strategic plans.

In addition to the 10-KT, we expect to file a proxy statement in early October in advance of our 2018 Annual Shareholders' Meeting that will be held on November 8, 2018, at our headquarters in Research Triangle Park, North Carolina.

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

Thank you, Clint. Recent activities in the lab-created space have drawn significant attention to our segment of the gemstone market. As you'll see on Slide 18, there's an exciting buzz around lab-created gemstones. One of the largest site-holders of diamond mines, De Beers, announced in June its intention to enter the lab-created diamond space with a line of fashion jewelry. There's been tremendous coverage of this strategic move as highlighted in some of these press announcements. We believe this decision by the company that for its storied history has downplayed lab-created stones as not the real thing is incredible affirmation for the lab-created industry and confirmation that the millennial consumer is driving demand for ethically sourced gemstone options. For Charles & Colvard, we believe this is definitive validation of our business model and our value proposition. The primary difference for us is that moissanite is the most brilliant of all available gemstones.

We believe this nod of approval from the diamond industry will drive consumer interest in lab-created gemstones and additional attention to moissanite. We are poised and ready. We're harnessing the momentum from this increasing awareness as we head into the holiday season.

Here is an update on our 4 strategic initiatives. On Slide 19, under our strategic initiative to drive organic revenue growth in the U.S. and maintain attractive margins, we're implementing several enhancements to our charlesandcolvard.com website to ensure an optimal customer experience. Enhancements include upgraded on-site search, photography and video enhancements to our imagery, new payment methods, site speed improvements and more. These enhancements are currently rolling out and are anticipated to be live for the 2018 holiday season.

Also in time for holiday, we're expanding our in-store brick-and-mortar programs to include expanded assortments with an emphasis on bridal, additional case space and loose gemstone offerings that we believe will drive additional sales for the period. And we continue to judiciously apply our marketing spend on campaigns and digital advertising efforts that drive top-of-funnel awareness and convergence to sales.

We have exciting near-term plans for continued expansion of our gemstone and jewelry offerings to serve a broad range of customers. We're in the process of rolling out new products across the fashion, fine jewelry and bridal categories that will enhance holiday options for all of our channel partners, including our own website. In the coming weeks, we expect to launch our very first jewelry collection, Signature Collection by Charles & Colvard. Watch for the release of this unique, stunning line of product.

Along with the release of Signature Collection, we're retraining our attention to intellectual property. We produce a significant amount of unique property with our gemstones and jewelry, and we believe we should establish ownership and derive value from our exclusive designs. In keeping, we have a patent pending on our Signature Collection and there's more to come.

We're advancing our strategic initiative to target the global market opportunity through continued brand building, focused channel expansion and world-class customer service. We intend to target the global opportunity in an agile and low-cost manner. With minimal digital marketing and brand exposure, we could leverage cross-border trade and marketplaces to test the waters in new international markets. With 84% of global e-commerce transactions predicted to originate outside of Europe and North America by the year 2020, we believe there's significant upside in the international market.

To support the growing opportunity with cross-border trade, we're investing in our international customers' website shopping experience to ensure a seamless experience from shopping to international shipping and returns.

With our fourth initiative, we aim to balance growth-oriented investments to generate sustainable earnings improvement. We'll continue to focus on the development and application of technology to optimize our business. For example, we recently implemented a new technology platform for e-mail marketing that amplifies our ability to segment and target our market. And we're rolling out a new social media solution to optimize our social engagement and drive awareness of our brand.

Our ability to identify and implement new technology has helped us support the tremendous growth we've experienced in our Online Channels and efficiencies we've gained in our supply chain and operations.

And finally, we've planned to maintain financial flexibility and use data-driven business decisions to balance investments in future growth with consistent, near-term financial performance.

We're pleased with the terms of our new credit facility and believe it will assist us in being nimble in our reactions to market opportunities.

We believe our team's ability to execute on these strategic initiatives can drive further shareholder value.

On Slide 20, we summarize the 5 key investment themes that we believe best capture the tremendous opportunity our company can leverage. Number one, by 2020, the global online fine and fashion jewelry market is expected to be in the range of $75 billion, with an annual global market for lab-created gemstones of $8 billion. Number two, as the original pioneer of lab-created moissanite, Charles & Colvard provides an ethically sourced brilliant product with exceptional value at a revolutionary value. Number three, our products appeal to socially conscious millennials and emerging Gen Zs who represent nearly 50% of our current customers and are reaching prime jewelry-buying age. Number four, we've been delivering double-digit revenue growth of over 40% through our Online Channels, including charlesandcolvard.com, and a range of marketplaces, such as Amazon. And finally, number five, we believe we could execute a global growth strategy that's flexible, scalable and requires minimum capital investment by driving cross-border trade sales on our website and accessing international online marketplaces.

This concludes our prepared remarks. We'd now like to open the call to take your questions. Gary, would you please poll for questions from our listening audience?

(Operator Instructions)

While we're waiting for your questions to fill the queue, we did have one e-mailed question that we thought we'd begin with. We were asked about the Cree agreement and how any changes to our terms might impact gross margin.

The terms of our Cree agreement are a matter of public record, and you can view those terms in the 8-K we published in June of this year.

What you'll find is that certain of our terms have been redacted for confidentiality reasons. But that said, we can provide some high-level color, and for that, I'm going to pass it over to Clint.

Thanks, Suzanne. As we have mentioned previously, the terms in the contract are favorable. As to gross margins, there will be no near-term impact. But long term, we believe gross margins will be positively impacted as we blend the goods purchased under the new contract into our existing inventory -- impact positively our cost of goods sold.

Okay. Gary, do we have any questions in the queue?

Yes, the first question comes from John Lawrence with Coker & Palmer.

Yes. Just a couple of questions, Suzanne, on the retail partners with Walmart and Stein Mart. What can you tell us about the infrastructure to be able to make that happen? Inventory requirements? What does it cost to get this sort of up and running? And just, I guess, what did they see and give us a little sense of how this development sort of has taken place over the last several months?

Sure. John, thanks for joining. We appreciate it and appreciate your question. So both of these retail agreements are for Online Channels, so with walmart.com and steinmart.com. Each of these organizations see an alignment between our product and their demographic, their customer. We're all trying to go after that millennial consumer. She's absolutely shopping online, and she has a myriad of places she goes to find her goods, Stein Mart being one, Walmart being another. So we're thrilled to be on their marketplaces and on their websites to sell our goods. The good news here, this is very different than doing a retail-type relationship that is brick-and-mortar. There is very low overhead for us to build these relationships. That's the beauty of them. We can create jewelry that sits on our shelves in our distribution center in North Carolina. And we can share the listings of those goods with Stein Mart, we can share the listing of those goods with Walmart, we can share the listing of those goods with the Amazon and our own .com site, although we do some segmenting to make sure that each of them have some uniqueness in the curation of goods that they have. But the beauty is, we have very low overhead. We don't have to carry hundreds of goods in order to serve this customer, it sits on a shelf in North Carolina. We have an integration with their dot-com platforms that allows us to have round-trip transactions of orders. So when orders get placed in their shopping carts and they are paid for, those orders come directly to us and we fulfill them from North Carolina. We ship directly to the customer. That's what's called drop ship. And so it gives us a chance to put Charles and Colvard goods in a Charles & Colvard box. And to have an open-the-box experience with our brochureware and all of our messaging, so we can really control the experience with the brand.

So ultimately, the cost of getting up and running is minimal because it simply requires a connection with their e-commerce platform, which we have become very adept at doing. And to hold a modicum of inventory on the shelf here that's available to ship. The one thing we have to remember is that we need to ship lickety-split when these goods are ordered because these consumers expect as they do when you buy goods on Amazon that within 2 days, it's going to be sitting on your doorstep. So we do keep a minimal amount of those goods on the shelves, but again, we can share it with multiple marketplaces across the industry. Does that answer your question, John? And did you have anything else?

Great. And just a little bit on the history of this development, if you could give us that, please?

Sure. With Walmart, we started out with what's called a 3P relationship. So they're pretty open to having just about anyone come in, you have to kind of hit some minimum standards, but come in and try out your products on their website, and they're happy to take a portion of the sale for you getting out there and being a retailer on their dot-com site. But when they see promise, when they see sell-through, when they see consumers engaging, when they see people talking about the product on their web pages and on blog posts and so on, they take note. And then a percentage of those retailers are then invited to the party to be a 1P or first party relationship and that was the segue of the relationship with Walmart. So we've been with them about a year, and we moved across to this 1P relationship. Stein Mart is a little bit different. Stein Mart have begun to get a little bit more into the luxury space. They have a very high sort of income households that are their typical customers. They started a program with some very high end, what they call gently loved goods that they serve in some of their stores and online. And it's doing incredibly well for them. So they're leaning it -- leaning in a bit on these luxury goods, and they believe that moissanite actually fills a very white space that they have for this luxury consumer. And so they're very interested in trying it out on the website to see how it performs.

The next question comes from Eric Landry with BML Capital.

Is there anything you could add to what happened with that traditional customer that had an inventory pickup, which caused your revenue to shrink?

Yes. Clint, do you want to answer that?

Yes, Eric. As we mentioned, it was a primary contributor to the impact in the quarter and compared to the year-ago quarter. As we stated in the call, this one-time shift in our inventory -- in their inventory holdings caused purchases to slow down, which now we're seeing they're resuming back to those normal levels. We don't give much more on customer specifics, but that's basically what happened. It's just an inventory rebalancing that they had with all the vendors, not just us.

Right, I'll add some color to that, Eric. As we understand it, they simply wanted to hold less inventory. And so they decided to sell-through a bit more and have less overall inventory on the shelves and do a little bit more of a just-in-time purchases as needed in order to meet business needs like all of us. We're trying to carry the least amount of inventory in order to closely manage our business, and that was the hiccup that we experienced with them. But as Clint noted, we're back to typical order volumes and back on track.

So I mean, if -- let's say if you net this particular customer out, is there anything you could say about what revenue growth would have been ex this particular customer?

Yes. We don't talk specifics, Eric, on customers. I would surmise this one might be pretty easy to model out. We've -- we saw a fairly significant dip in traditional, but traditional has been growing very steadily quarter-over-quarter, and it's pretty trackable. And since this is one of the very major contributors to this mix, I think you could probably model that. That's about as much as we can say.

Got you. So traditional doesn't change much quarter-to-quarter you're saying?

It has a very predictable growth trajectory, as does online. The good news is that the online growth trajectory is a meaningful one, and I would say, if you're interested in modeling how this business is going to perform going forward, especially as they get into our very important holiday season, the performance that we're measuring in Online Channels is the one that I think I'd have you focus on.

Okay. Has anything changed with the Helzberg relationship?

Helzberg is going incredibly well for us. In fact, as we talked about the -- for the 102% growth here in brick-and-mortar, a big contribution to that is our relationship with Helzberg. We constantly work with them on curating their assortment, there's stuff that sells, there's stuff that doesn't. We move it in and out. Next week, we're participating in their leadership conference to talk with their stores about how to best position the product. We've really been invited to the table, and we really value this relationship. It's a great way for the consumer to see the product. So as they really -- if you are a consumer that needs to touch and feel and look at the beauty of this product, we're thrilled that we're in nearly all Helzberg doors. So it's in very good shape.

Okay. And I just wanted to clarify, you said brick-and-mortar grew by 102%?

Yes. Over the same quarter last year.

Okay. Does Helzberg carry roughly the same amount of SKUs as it has in the past? Or is the number of SKUs increasing? Or is there a plan to increase the SKUs there?

So, we can't talk futures with them, and we will certainly will expose any of that as it comes to light. But we do modify that inventory. I will say that we started out very conservatively. And over the course of the relationship to where we are today, it certainly has -- it has grown. But any future growth we'll talk about at the time that, that happens.

Got you. Okay. And then lastly, can I ask one more or is there someone waiting?

No, you go right ahead.

I noticed that the legacy inventory is down to 30% of total. Is there a goal for future levels other than just lower? I mean, is it something that we can count on continuing to drop at a rapid rate?

All right. Eric, yes, that's our strategic initiative. Right now, it's about $9.5 million. We want to convert that to cash, but we want to do it while doing it at a profit and continue to draw that down. And our goal would be to get rid of it all at some stage, and now that we're in the premium -- now that we're in the -- we're getting from Cree, that premium Forever One product, which is all great product and is -- the clarity, the color, the colorless theme, that's what we want all our inventory to be, but we do need to -- our goal is to get it down as soon as we can.

So eventually, Eric, the goal is to have it gone. We had an engineering breakthrough in the 2015 time frame where for all the years in our history of building the product, we changed the formula and the way that we grow the crystals and stack silicon carbide. And that's what created Forever One. And in fact, that's also what now supports the new product Moissanite by. And it kind of has this beautiful total colorless or very slight hue that has a bit of blue color to it. It's absolutely stunning. Everything before it that we call legacy is from the previously engineered product. And so it has a little bit of a yellow to gray hue to it. It has some warm tones. We find that the consumer responds really positively to the newer engineered material. And so the intent is that, going forward, we want to focus on those products, and so we want to sell out the legacy, which is really why we have lower overall margins in this quarter 2 and the transition period. We have been aggressively trying to pull down this inventory. And what we're also finding is, as we do that, we wind up with what we call broken categories. So we find that rounds are very popular a shape in gemstones. But as you sell through all the rounds, you might wind up with one or two in a particular size and it's hard for us, at wholesale anyway, through distribution channels to sell these off. And so we're now backfilling that with Moissanite by Charles & Colvard because we now have this new product that we can fill back into that category. In fact, we believe that -- we had some competition coming in and nipping at our heels in that low end of the market because we were getting a little bit low on that low-end material. So we're thrilled that Moissanite by Charles & Colvard is now here for us to sort of regain share of that price point market. But we still do need to sell through the legacy goods, and thankfully, that's why we have the eBays and some of these marketplaces that are more value-tuned. And so the intent is that we sort of load up these legacy products in jewelry and then we sell the jewelry on marketplaces. That takes a little bit more time. So there's a -- building the goods takes a couple of months, we get it on the website, we sell it through. But we kind of have an engine now to do that. So we are cranking away and slogging our way through this legacy product so that we can then backfill it with Moissanite by and with Forever One, and we're off to the races.

Gary, anyone else in the queue?

Not at this time. (Operator Instructions) Our next question comes from Rodney Baber with Paulson Investment Company.

A couple of things. There's so many moving parts on this that it's impossible from the time the numbers come out to when we start this call to really work through and have any specific terrific questions to unpack what's going on at the company. So I'm going to ask a philosophical question in a second. But the up 102%, which has mostly got to be Helzberg, begs the question, why aren't we getting other major firms like Helzberg that are seeing what's going on out there coming in and signing up and adding the concept out there on their own stores? What's -- why is that not developing? Or maybe what am I missing on that?

That's a great question, Rodney. So the good news is that we have a very nice case study in Helzberg to speak to other retailers about, and we do have other retailers. I mean, you can find us in the greater Northeast in Boscov's stores for example. And by the way, we're also in hundreds of other mom-and-pop retail stores that receive their goods through our distribution partners. So there are hundreds of places across the country where you can by Charles & Colvard goods. However, I will say that we're pretty judicious about which retailers we want to do business with because there is an investment to be made. It goes all the way back to the question that John Lawrence asked about the Stein Mart and Walmart relationship. He said, what's the infrastructure and the inventory and the cost of getting running? When you are getting a retailer running, now the cost is that you have to produce goods and place them in all of their stores. And typically, in jewelry, you have to do it on consignment. So here we are, imagine this, we're creating for a store, we have maybe 25 goods in the case that we need to have 1 or 2 backups. So we have 75 items that were sitting at a store. Each one is worth about $1,000 average order value. So I have $75,000 worth of retail goods sitting in a store. But the impact that we can have on that store is probably 5 square miles. If I put that same $75,000 worth of goods on the shelf in my distribution center in North Carolina, it will sell within the day on all of my Online Channels. It will sell within the year in that retail store. So we're really carefully balancing which ones do we want to do. And so when a name like Helzberg comes along, it's very attractive to do a relationship with because it's lifts the [brand]. And so as others come along, we absolutely consider them, but we're really, really careful about it. We do think there's a few others that could be a very nice fit, and it's something for us to consider as they arrive. We were at JCK (inaudible) trade show in June of this year and there was tremendous buzz and lots of talk about trends and so on, lots of talks from retailers. We're there every year, and we're entertaining those conversations. We're being very careful because if we can make crazy margins like we do on dot-com and we can hold all of our goods in our distribution center in North Carolina, we think that's a pretty smart model. So that's the balance that we're striking between a consignment world of retail and the online world of high margin.

All right. Good answer. Let me move to something else. My original question was to come in about Walmart and Stein Mart and then John Lawrence preempted that with his own questions. What I was going to ask you is to help me understand what the perspective should be on those 2 companies, especially Walmart. What's the order of magnitude of sales increases when you go from, I think you called it, Q3 to Q1? Do you disclose what your Walmart online sales have been? What kind of numbers they've been providing us? I mean, is that something you can talk about? Is it millions? Or...

Yes, we don't, Rodney. So we kind of blend it together with our overall Online Channels segment. So it's all rolled up in there. But I think Clint sort of discussed a little bit earlier the incredible growth that we had with marketplaces. You want to touch a little bit more on those numbers?

Sure, sure. I mean, if we -- from the standpoint of marketplaces, we saw a pretty hefty increase, Rodney, this past quarter related to the prior period. I mean, as I think Suzanne mentioned it earlier, we saw net sales traction of about 182% growth in that overall marketplaces. And that's where the Walmarts are. Like I said, we don't disclose customer specifics as far as revenues, but that's where you can -- watch out for that number going forward.

So let me -- and let me put this perspective on it, too. I'm going to remind you how we began with Helzberg. We began online, and we did a terrific job of knocking it out the park to create a sell-through of our goods on helzberg.com. As we're entering new relationships with new retailers, it's really a test bed for us. If we're doing incredibly well on any one of these retailers' websites, why would they not consider potentially putting us in store? And in the meantime, as we're testing the relationship, we can determine do we like each other. Do we want to dance further and have a deeper relationship? Do you have a consumer, Mr. Retailer, that is the right consumer for our moissanite product. And vice versa, can we help you with the right curation of goods. So it's a great place for us to test each other out. That is, again, very low overhead for Charles & Colvard, but each and every one of these is a potential additional expanded relationship, like we've done with Helzberg now that we're in all of their doors. So I would, if I were on the other side of the phone, consider these great opportunities and door openers. And because we know how to do e-commerce so well, there's a very high likelihood that we're going to knock all of these out of the park.

All right. I'm going to give you, your philosophical question, okay?

I thought I already had that one, but go ahead.

No, that was -- no, those were more specific. This one is, as a long-term stockholder, I'm curious every quarter about what's going to come out and the transition that we're in and we're morphing the business from what it was to what it will be. But we're still dealing with basically flat numbers that go back many, many quarters. And I know you've got some really good things to discuss, and -- but the question is this, the couple of things that are really working that we'll look back on down the road that would change this company into being much bigger and much more successful that you just highlight for us just, again, to refresh our memories. But then the other thing, it seems like every quarter, there's something that slips in and kills, like this inventory issue and all of that kind of stuff. And those are kind of one-off items, but what are the couple of things that are just driving you crazy that you're not getting traction with that keeps these numbers flat? I mean, there seems things like the rat is going to go through the snake at some point and come out the other side and we're all going to be smiling because you will have gotten -- we would be going to the next level. We've been in the $25 million for 10 quarters now, more or less. So there's a question in there. I love your updates on this. But is this -- this has to be frustrating for the team as well as all of us as stockholders that we continue to look at the same numbers and when or will that ever end, that kind of thing. So anyway...

Yes, it's a good question, Rodney. And I tell you what, we talk about it every day. I think if I were to share one of the frustrating items, it would be one of the questions I think that Eric asked about this legacy inventory. We got a fair amount of it. And so it takes time, right, and effort. And so -- but we need to draw it down in order to fill our shelves with the newer and upgraded material. And it just takes a while just because we're in those broken categories. I'd love to have one big buyer come along and take the whole lot, but it's not crafted in such a way that somebody can make hundreds of jewelry pieces consistently out of the stone that we have. So we have to mount it in jewelry and we have to sell it on marketplaces. The good news is, we have a disposition strategy that's very strong and is working. It's just a long tail, and it's going to take some time. The good news is that in the process of standing up this omnichannel strategy, we've created what we believe is the infrastructure needed for the growth. And we've learned out of the U.S. in the last 2 years now, especially on Amazon but some eBay and other marketplaces that we've been working on, we've learned how to use marketplaces as a way to go and disposition goods. And now that we've sort of burned it in and we've understood it, we can lift this model and we can take it globally. So the trick for us is to take now this learning on Amazon and how can we take this somewhere else in the rest of the market. How can we take learning on Amazon and take it to other English-speaking countries in order to sell our goods in a new place. Because we have learned all the ins and outs and pitfalls of doing Amazon that now we can actually take this to other places without a whole lot of fanfare, without a whole lot of additional effort and lifting because the infrastructure is built. Now we can turn on another Amazon and we can actually go and we can execute in another country. The learnings are done, the infrastructure is here, we've done the hard work. And so now we can not only disposition the legacy goods but bring net new product to net new markets. And it doesn't cost a whole lot of money or overhead. We can still ship from North Carolina. It's just a matter of listings in a new country. We think of it as market research. And so for us, it's a way to dip a toe somewhere and say, hey, out there, is there a moissanite customer here in the U.K? Let's figure that out, and do we have a presence there? So philosophically, that's what it is we have going. So I think that's all the time we have for today. That was the last of the calls, Gary, that we had in the queue, is that correct?

That's correct.

Okay. So let me just pass along some closing remarks here then. Once again, we'd like to thank everyone for taking the time to participate in our call today. With expanding retail interest, new Online Channel partners and industry validation for lab-created gemstones, we believe Charles & Colvard has an exciting opportunity in fiscal 2019. We appreciate your time, your interest and your investment in Charles & Colvard. We look forward to being in touch and to updating you on our continued progress. Thank you, and good evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.