Charles & Colvard Ltd (CTHR) 2022 Q4 法說會逐字稿

Hello, and welcome to the Charles & Colvard Fourth Quarter and Full Fiscal Year 2022 Earnings Conference 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. Further 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.

Accompanying today's call is a supporting PowerPoint slide deck, which is available in the Investor Relations section of the company's website at ir.charlesandcolvard.com/events. The company will be hosting a Q&A session at the conclusion of prepared remarks. Should you have questions you'd like to submit, please e-mail ir@charlesandcolvard.com. Please note, this event is being recorded.

I would now like to turn the conference over to Don O'Connell, President and Chief Executive Officer. Please go ahead.

Good afternoon, everyone. Welcome to our fourth quarter and full fiscal 2022 earnings conference call. Our fourth quarter fiscal 2022 revenue of $9.3 million represents the second highest for the comparable period in company history. In addition, we achieved a record-setting year for our company, driving $43.1 million in revenue, the highest for any 12-month period ending June 30. This represents a 10% increase over last fiscal year and a 48% increase over fiscal 2020.

We attribute these positive results to our continued increase in brand recognition campaigns, demonstrating that our flagship Forever One moissanite and expanded Caydia lab-grown diamond product assortments are resonating with consumers. On our transactional website, charlesandcolvard.com, moissanite revenue grew 13% year-over-year while lab-grown diamond sales were up 173% year-over-year and 50% quarter-over-quarter.

Revenue from our Online Channel segment continued to grow. Most notably, charlesandcolvard.com experienced an increase of 24% over the prior fiscal year from $14.7 million to $18.1 million. And moissaniteoutlet.com experienced exciting growth in its first full year of existence, further validating our business strategy and underscoring the importance of our focus on direct-to-consumer initiatives.

Our Q4 margin was 41% primarily related to prudent end-of-year inventory considerations and disposition strategies with our blended margin for the full fiscal year remaining strong, comp to last year at 47%. Our gross profit was $20.2 million compared to $18.4 million last year. Cash flow from operations for fiscal 2022 was $600,000. Income from operations for fiscal year was $2.9 million as we concluded our eighth consecutive quarter of profitability.

So what does this mean? It means that we've demonstrated over the past 2 years that we continue to fortify the company by building our cash position to $21.2 million, bolstering our inventory position to $33.5 million; maintaining a healthy working capital position of $29.1 million, all while growing our infrastructure and capacity, adding key talent and optimizing our technology and facility, including our innovative digital and broadcast studio capabilities and our very first signature retail store, all with 0 debt.

I'll turn it over to Clint Pete, our CFO, to unwrap these numbers in more detail. And later on the call, I'll share additional insight on our results and updates on key initiatives. Clint?

Thanks, Don. Today, I'll provide a summary of key financials for fourth quarter and fiscal year ended June 30, 2022. Additional detail can be found in our earnings press release that we issued this afternoon in our Form 10-K, which we expect to file tomorrow. Please note all percentage comparisons are to the year ago quarter and prior fiscal year end unless otherwise noted.

We'll start with Q4 2022 revenue. In total, net sales for Q4 2022 totaled $9.3 million versus $9.7 million or a decrease of 4%. Net sales for our Online Channels segment, which includes charlesandcolvard.com, moissaniteoutlet.com, marketplaces, drop-ship retail and other pure-play outlets, totaled $5.7 million for the quarter or an increase of 3%, now representing 62% of total net sales. Net sales from our transactional website, charlesandcolvard.com, decreased by 3%, we believe, due to the timing of Prime Day this year versus last year.

Net sales for our Traditional segment, which consists of wholesale and brick-and-mortar customers, totaled $3.6 million for the quarter or a decrease of 14%, representing 38% of total net sales. Finished jewelry net sales increased 9% for the quarter as we continue to see strong demand for our premium jewelry on our online direct-to-consumer channels and with our brick-and-mortar retail customers.

Loose jewel net sales decreased 22% for the quarter. This is due to the decreased demand from our domestic and international distributors. Overall, international net sales increased 12%, while cross-border trade sales on our transactional website, charlesandcolvard.com, remained steady to the year ago quarter. For the full fiscal year of 2022, we reported $43.1 million in net sales, a 10% increase from fiscal year 2021.

There are 2 noteworthy highlights for the full year that I'd like to draw your attention to. First, in our Online Channels segment, net sales for fiscal year 2022 increased 15% to $26.8 million or 62% of total net sales, evidencing our continued growth as an e-commerce-driven business. Second, finished jewelry net sales for the fiscal year 2022 increased 22% to $29.7 million or 69% of net sales, up from 62% of net sales in fiscal year 2021, further distinguishing ourselves as a global fine jewelry company.

Moving on. We delivered a gross margin of 41% versus 45% in the year ago quarter, delivering $3.8 million in gross profit versus $4.4 million in the year ago quarter. For Q4 2022, in continued support of our growth initiatives, total operating expenses increased 14%, representing 40% of total net sales compared to 34% in the year ago quarter. Sales and marketing expenses increased 25% to $2.7 million, and G&A expenses decreased 8% to $1.1 million for the quarter.

We reported net income for Q4 2022 of $41,000 or $0.00 per diluted share compared with a net income of $8.4 million or $0.27 per diluted share in the year ago period, which included an income tax benefit of $6.3 million driven by the release of our deferred tax valuation allowance on our net operating loss carryforwards and a $974,000 extinguishment of debt related to our PPP loan, which was forgiven by the SBA in June 2021. Included in net income for Q4 2022 is income tax expense of $34,000. For fiscal 2022, income tax expense was $519,000.

Our weighted average shares outstanding used in the calculation of diluted earnings per share for the quarter were approximately 31.2 million shares at June 30, 2022, compared to 31.1 million shares at June 30, 2021. As an update to our $5 million stock repurchase program we announced in May 2022 during our Q3 2022 earnings call, as of August 26, 2022, 273,257 shares of the company's common stock had been repurchased that are held in treasury stock for an aggregate purchase price of $356,122 at an average purchase price per share of $1.30. As of June 30, 2022, we had repurchased 30,287 shares of the company's common stock for an aggregate purchase price of $38,164 at an average purchase price of $1.26.

Now let's move on to a snapshot of our balance sheet. Our liquidity and capital position remains solid as we end the quarter with $21.2 million of total cash compared to $21.4 million at our last fiscal year ended June 30, 2021. Our cash flow used in operations was $530,000 for the quarter compared to cash flows provided by operations of $1.8 million in the year ago quarter. Our working capital at June 30, 2022, decreased from June 30, 2021, by $1 million to $29.1 million.

In terms of other liquidity, we have access to our $5 million cash secured credit facility with JPMorgan Chase Bank, which we renewed on July 29, 2022, for 1 year. As of June 30, 2022, and through today, we have not accessed funds through our credit facility agreement. Inventory as of June 30, 2022, totaled $33.5 million compared to $29.2 million as of June 30, 2021. Loose jewels inventory was $16.2 million compared to $16.8 million as of June 30, 2021. Finished jewelry inventory was $17.2 million compared to $12.3 million as of June 30, 2021, to maintain stock levels for our growing demand requirements.

In conclusion, we are proud of the results we delivered, particularly for the full year 2022. We look forward to building on our success in fiscal year 2023 and beyond.

With that, I'll turn the call back over to Don.

Thanks, Clint. Now let's analyze our results a bit more closely and talk about the company's key initiatives for fiscal 2023. As we continue to focus on and invest in increasing awareness and positioning our overarching house brand and Caydia lab-grown diamond products, we increased our operating expenses by 14% for the quarter and 34% for the fiscal year. We understand the growing need to spend in order to increase our impact in the lab-grown and creative diamond market.

Most recent industry research demonstrates that this market is slated to reach 10% of the total diamond market share in 2022. This spend has been paying off as our strategic initiatives generated double-digit growth in sales this past fiscal year. Our sales and marketing expenses reflect increased digital and social media engagement opportunities to drive organic growth and awareness initiatives as well as increased resources to drive content development and subject matter expertise. We continue to make strategic investments to funnel additional consumers to the brand by way of digital streaming, live direct response shopping and education. We intend to continue to focus our efforts on these growth drivers during fiscal 2023.

As we continue to scale our operations, increase awareness and grow revenue, we are utilizing a data-driven approach when investing in the increasingly competitive digital advertising space. By analyzing consumer behaviors, audience signals and tapping into our rich first-party data, we were able to target high-intent shoppers, enabling a strong return on our digital advertising investments.

Our inventory composition also reflects our continued reinvestments in CTHR. Revenue from our patented Signature Collection, which features our iconic Floret increased 33% year-over-year and comprised nearly 10% of all jewelry sales during fiscal 2022. Finished jewelry inventory, which carries higher intrinsic value than those gemstones for Q4, increased 9% from the prior year quarter as we continue to strive to become a leader in the finished jewelry and direct-to-consumer space, further positioning Charles & Colvard as a leading fine jewelry destination. This increased high-quality finished jewelry inventory supports our influencer marketing campaigns, gifts for style editors, features on programs, such as The Bachelorette and other awareness initiatives, and we believe puts us in the best position to capitalize on our critical holiday season. We've taken proactive steps related to our inventory in order to head off any unforeseen pricing pressure, logistics and supply chain issues as we prepare for what historically has been our busiest season.

We attended JCK, the industry's largest market week this summer, in order to make product selections for holiday. Stay tuned for planned exciting product releases this fall. In addition to expanding our online direct-to-consumer presence via broader product assortment, we've expanded online with some of our largest traditional customers, including Helzberg Diamonds, and have additional expansions planned for our brick-and-mortar business partners in time for holiday to support the growing demand in both channels.

We've introduced elevated lab-grown diamond fashion collections, recently launched our new high-carat-conscious couture collection and pavé lab-grown diamond collection and have added our moissanite engagement and bridal assortments. We've continued to broaden our assortments with our drop-ship retail partners, and that business remains steady for the year despite Overstock.com's exit from the jewelry and gemstone category. We've introduced our moissanite outlet assortment to our drop-ship retail partners to better compete with lower-end moissanite providers and capture a greater share of this wallet. This strategy allows for cross-utilization of inventory and resources.

I'm pleased to report that you can now find our moissanite outlet products on Amazon as well.

Recent meaningful Charles & Colvard press mentions include Brides, MSN, RetailMeNot and JCK, which featured our lab-grown diamond jewelry on the cover of its summer 2022 addition. We're further pleased to have recently secured appointments with style editors from Oprah Magazine and Brides, positioning us for added holiday press. We continue to drive awareness to our house brand and our transactional website, charlesandcolvard.com and moissaniteoutlet.com, where we have the ability to control the narrative. Revenues from these channels generally brings higher product margins, which can help offset the opportunistic buys consumers are making as the economy constricts and also against the global, geopolitical and economic uncertainty fueled by inflation.

We strive to invest in our brand to help ensure that Charles & Colvard remains top of mind under the current economic end market environment. We intend to continue to invest in our direct-to-consumer business and the lab-grown diamond space in order to become a leading destination for all things Made, not Mined. We believe these strategies are working.

Though up 2% for fiscal 2022, our Traditional segment remained a challenge for Q4 as we believe both domestic and international distributors responded apprehensively to worldwide economic indicators. This segment remains an important element of our business strategy. The truth is inflationary impacts are being felt globally as well as across our industry, and we are striving to mitigate these impacts by purchasing in bulk in advance while we establish consolidation points in order to further streamline and reduce our overall cost.

Regardless of the worldwide economic uncertainties, we feel it's critical that we invest in remaining top of mind for conscious fine jewelry consumers. So we intend to continue to fund initiatives to help us capture increased market share. We continue to invest in optimizing our enterprise resource planning system and our distribution platforms and have recently upgraded our marketing automation platform and implemented SMS. We continue to host successful live streaming and shopping events from our direct-to-consumer-owned properties as well as on social media platforms, allowing us to engage with customers in real time.

We've crafted and monetized upon experiential relationships with customers through enhanced marketing capabilities, direct response marketing and video technology. Despite supply chain constraints, our own innovative studio in support of our direct response digital strategy, which we've been testing and phasing in throughout Q4, is starting to bear fruit. Our soft launch in our first signature showroom is scheduled for September with a grand opening event planned for October in time for the holiday season.

As we look forward to fiscal 2023, our key strategic initiatives are strengthening our brand presence, increasing awareness through marketing strategy, enhancing and expanding product assortment, and broadening our footprint. We've been building our brand for the past 27 years, and we intend to continue to lean into this initiative. As the lab-grown gemstone category continues to gain momentum, the need to differentiate ourselves and articulate our unique offering becomes imperative.

Our focus this year will be on differentiation, education, organic growth and innovation, and we intend for every step we take in the upcoming year to be a step towards crafting a destination for all things Made, Not Mined and increasing our market share and overall brand equity.

We plan to maintain the commitment we've made to our customers to continue providing the highest quality of lab-grown gemstones and fine jewelry set with our premium Forever One moissanite and Caydia lab-grown diamonds. We plan to develop and present new proprietary collections and on-trend luxury styles that resonate with our consumers.

We intend to elevate the breadth of our current marketing to reach not only more consumers but the right consumers. This includes optimizing our paid media campaigns while also making a deliberate and meaningful push towards sustained top line organic growth.

Lastly, our goal is to meet the fine jewelry consumer wherever those consumers are shopping. As we continue expanding our omnichannel brand strategy in the fine jewelry space in brick-and-mortar and digitally and through our strategic partners. We are committed to growth from every angle and from the inside out: growth for the brand as we work to sharpen our positioning and creative to communicate our commitment to redefining love; growth for our infrastructure as we purposely work to scale the business and technology and operations to support it; growth for our product development as we demonstrate that conscious luxury is not only possible but necessary; growth beyond the traditional platforms for selling jewelry and into a world that prioritizes experience and accessibility for the new consumer culture; and growth for our own community as we evolve the Charles & Colvard culture for our team, including philanthropic initiatives that may deepen our relationship with the environment.

We know that our conscious consumer is fast evolving their values and expectations, and adapting to their needs remains at the core of our brand. Listening to them and learning from them is a daily practice throughout the business and one that sets us apart. It allows us not only to own the Made, Not Mined movement but to create a brand that is largely influenced by its community and anchored in love.

With that, I'd like to turn it back over to the operator to open the lines for questions.

(Operator Instructions) The first question comes from Matt Koranda with ROTH Capital Partners.

This is [Ray] on for Matt. So I just -- I wanted to talk a little bit about the gross margins. It looked like it dropped about 400 bps year-over-year. Can you give any color on this? And what are the main drivers for the change there?

Yes. Sure. So let's talk a little bit about the blended margin first for the full year. And we appreciate your call today. So 47% blended margin for the full year has comped to last year, and we're pretty pleased with the comp year-over-year. Certainly, every business looks at the bottom line and looks at the drivers to move forward into the next year. So we did that in Q4. It's no different than we did in the prior quarters too as well. We always look at our inventory. We always look at opportunity. And this quarter, we saw the opportunity to be able to pretty much move some of the legacy goods or obsolescent goods throughout the pipeline through a little bit more discounting and a little bit more incentive to that consumer.

Also, given the current environment and the economic conditions, it's pretty interesting. We offer what's called Brilliant Savings, which is a little bit more down in the bottom of the funnel and also right before we decided to move into our moissanite outlet property certain discounts. And we're seeing an increase in those particular goods selling into the market. And generally, that was at an even pace, but we saw a little bit of an uptick there too as well.

I will tell you also, we did experience a little bit in pricing pressure related to pretty much the lab-grown diamond market pressure in the pricing there. We've since solved those particular matters. Those are economies of scale as we start to elevate the lab-grown diamond positioning as we start to become more of a major player within the industry, we're being in a much better position to be able to purchase at a bigger level and capitalize on those positions.

So also look to our inventory composition too as well. We'll start to plan a little bit ahead in the coming quarters to be able to solidify that pricing and the methodology moving forward. We do not feel that the margin of 41% is any indication of the forward progression. We just feel that it's just a circumstance that occurred in Q4, and it's good business practice for us.

Perfect. That was super detailed and helpful. And then that kind of brings me into my follow-up question. How have the lab-grown products been performing versus the moissanite products? And how has that affected the overall AOV?

Yes. So another great question. Our AOVs right now remaining pretty consistent and very strong. So our demand AOV is running between $1,200 to $1,300. We anticipate to push that up a little bit in the coming year as we start to expand the LGD and kind of our market share and awareness and the destination for lab-grown, certainly a bigger category for us. It's certainly filling a lot more of the consumer needs for us.

Moissanite still remains very strong. And actually, we increased by 13%. But really, the growth right now for us is in lab-grown diamond space. So we anticipate those higher-ticket values. And to the consumers, we've kind of answered their call in the lab-grown diamond too as well. We just launched our conscious luxury campaign in couture collection. We're finding that the consumer is resonating with a lot of the products that are incredible sales in -- product development team is bringing forward. This couture collection is higher-end items. We're doing full diamond carat weights and diamond necklaces. We're doing bigger, higher-ticket items, and those are resonating too as well.

So we've just expanded on that and just launched that collection. So we believe there'll be a nice blend between the consistency of our moissanite business and kind of that value proposition to that consumer that's targeting those particular items in conjunction with the higher-ticket items with the blended averages in the lab-grown diamond, we believe consistently we could remain the same. If not, I do believe that margins and the actual AOVs will rise.

The next question comes from [Paul Johnson], private investor.

Can you talk more about the traditional channels? I think it's down 14%, you said, in the current quarter. And obviously, we know what's going on at retail. But are you seeing any kind of normalization? Or is it continuing to be soft?

Yes. Paul, great question. Our Traditional segment is comprised of our wholesale distribution partners as well as our brick-and-mortar partners. From the retail side throughout the year and even in this quarter, it's been very, very consistent. We've done a really good job, and my sales team have done a good job in bringing new products forward, expanding those products primarily in Helzberg Diamonds too as well, as well as Macy's.

The distribution kind of side of the business is absolutely where that shrinkage in that market is starting to kind of impact the overall look of the Traditional segment. So the distribution partners are feeling some weakness within that category. International is also weak given the COVID constraints between the Asia Pac market in which we were very strong, and we had a nice position there. We have not been able to rebound that. But fortunately, for us, it's still delivering the highest revenue at $43.1 million. It just means that we've been vigilant in overcoming those gaps and overcoming those weaknesses, looking more towards direct-to-consumer to be able to drive the sales and the revenue and the growth of our company.

So -- and traditionally, the Traditional segment has been relatively nice and consistent, which throws off really nice profit dollars to the overall mix. But it has been a very -- from the distribution side just pretty much a flat and even steady business, which has been very nice. But the growth and kind of the future state will come from the direct-to-consumer as witnessed in kind of our online business growing exponentially year-over-year.

So that makes sense, and it's a good thing that you've developed those other channels. I guess, obviously, you are seeing higher percentage growth in those new channels, and so we understand why the SG&A has gone up that much. But if you look at it overall, SG&A went up $4 million for the year just ended and sales went up $4 million a year just ended. So looking on that basis, it hardly seems like a good investment.

But I know what you're probably going to say is that it's well worth it because all that SG&A money is really going towards the new channels. And if they grow, particularly the lab diamond, then it will be well worth it. And correct me if I wrong, I don't want to put words in your mouth, but I guess the bigger question is, at what point do we start to see a little bit better return on these SG&A dollars?

Yes. There's different types of philosophies, right? Some people get preoccupied with kind of that 40% of revenue is all on the total OpEx side, on the net income, and it impacts that. But in order to grow a business and find a catalyst that's going to take this company to another level, management has to make those really, really firm decisions in growing it and looking where that revenue is and looking where that consumer is shopping.

In our particular case, in our digital spend, we believe that we've got a methodology in place that really defines the ROAS that's profitable for us. And we know by our digital spend that our ROAS is working in that space. So the dollars representative in those digital spends are bearing fruit and paying off. But as a business, we have to look forward. We have to think ahead. We have to build the business. So that means we need to bring in subject matter expertise. We have to bring in resources. That means we have to look to expand our entire marketing team and our entire capability.

So if you recall, we've been building out a digital production studio. Now this studio, we believe, will bear fruit in the end. So a lot of those expenses that you're seeing and we're realizing now not only contributed to the millions of dollars and increased, but also it helped build out our infrastructure and our capabilities for video content production and our fashion photography. We now have 2 studios that enables us to do live photo shoots where we used to spend $20,000, $30,000 bringing in models and doing off-site lifestyle shoots. Livestream shopping capability to be able to hit that consumer with direct response, being able to monetize that coming forward will be something to look forward to. Live product launches, exclusive reveals, designer and influencer campaigns, those are things that cost money to build out the future state of direct-to-consumer.

Whereas when you were looking at our business, if you're modeling it over the past years, be mindful of the fact that the last 2 years under the new transition we call new management, is considerably different both in revenue and profitability. We were predominantly a gemstone company, which required less resources to be able to run that business. Whereas a direct-to-consumer brand or a lifestyle brand and a company that's trying to find its voice that separates us from the rest of the market, it costs us money and we're going to need to put that capital forward.

So I understand the investor who is conservative and wants to see some real nice consistent growth with profitability. We are certainly of that mindset. But if we're looking to find the catalyst to move us to another level to make our shareholders -- for all intents and purposes, to create higher shareholder value, we have to do something to be able to create that brand equity and that value proposition to not only the consumer but to our shareholders as well.

Yes. No, I appreciate that, and it is sort of a balance. I mean one concern is how strong is our competitive position in lab-grown diamonds given the size of the category and given that there are a lot of big players out there that could spend tons more money than we ever could? I mean that's -- we worry about that.

Another fantastic question. And also, there is a huge consolidation on the retail front, not only on the e-commerce side but the brick-and-mortar retail. But I would tell you that the pie is tremendous, right? So it's in the billions and billions of dollars. We represent a small fraction of that. So we believe there's a tremendous amount of runway there.

We also believe that the knowledge and skill set that we have internally is probably one of the best, if not the best, in our category or Made, Not Mined category. And we believe that the product and presentation that we're bringing forward is that we do have to build more awareness and campaign in that sea of all these big players, but we aspire to be in the top 10. I mean that's really where we want to be.

The big behemoths are there, but there's plenty of room. So I had a call, and this is just my opinion. It's not -- don't quote me on it. But I believe there's a few very strong players, but there's a tremendous amount of smaller $1 million to $5 million players. We believe that our position overall in the jewelry space for the revenue at $43.1 million is significant, and we believe we are a very powerful strong player, and we believe that the future for us is even stronger.

So I would imagine that -- we always kind of look to how do we do that in a meaningful way and become relevant to a broader audience. So look for us to consider vertical acquisitions, look to us to consider other means to be able to grow our footprint and grow our business. Right now, if you look at our digital footprint and what we're creating within our studio, our ability to reach millions of customers in a short order is about to take shape. So we're excited about that. My team is excited about that. So we believe we'll build a broader audience, and that consumer will go (inaudible). So I would...

I appreciate the color on that.

Yes. No problem. We appreciate your call, Paul.

The next question is from [Vital Patel], retail investor.

So to your comments on previous question, it looks to me like a lot of investment that you are doing will be fixed cost. It should not be repeated. So when we look at sales and marketing, when you look at setting up digital studio, so is there a point where rate of investment will slow down compared to the percentage of sales because it will be fixed investment? And if so, when will we start to see those in the future?

Thank you, Vital. So we certainly have some incredible initiatives moving forward. So we'll continue to capitalize and make prudent investments along the way as we kind of see fit to grow the brand and grow the business and grow our overall presence. Certainly, a lot of the infrastructure that you're kind of alluding to and the costs associated with that have already been kind of in place. But we do have costs related to co-op advertising supporting our brick-and-mortar, so going back to sales and marketing side and the increase. As our brick-and-mortar partners increase, we certainly want to incentivize them to promote Charles & Colvard, promote our brands and increase our brand equity. So we do some co-op with them.

We also spent dollars, and I'll just shed a little bit of color too as well, on the U.S. women's soccer championship partnership that we've had this past year so -- where we made all the U.S. women's soccer championship rings for 2 years. So those were dollars there that will not be repeated certainly. Co-op will be as we consider, but that's all driven by the revenue. So obviously, the success of our brick-and-mortar partners will increase our co-op support as well as a percentage basis and then look to us to continue that.

But the investments we made on infrastructure and building out the facility and then the soon-to-be-open retail signature showroom, those hard costs and all that has been absorbed. We will make strategic investments in building out our web property, continuously seeking to be the best in place and the best breed. But we do realize we'll have some normalization across the way. But as we expand our direct-to-consumer presence and now, which represents the bulk of our business, there's advertising vis-à-vis other types of channels that there's a cost associated with building out a lifestyle brand.

My next question would be, really, our business is mainly focusing on the discretionary spending, and it looks like our business is going through headwinds with inflation and interest rates and all of those things. So looking at the numbers on gross margins on the downtrend, sales and marketing is on the hot trend, so by connecting all the dots, when we say our inventories a little more than $33.5 million, shouldn't -- or should it be -- will it be possible that it will write off inventory because of all the headwinds the business is facing? If not, why not? If yes, what are you -- how are you trying to basically just discount sale or just do anything?

Thank you, Vital. So let's talk about that. So first, I'll start off at Charles & Colvard, we have no debt, right? And we have 21 -- we're north of $21 million in cash. So $33.5 million in the composition of that inventory in comparison to where it's been over the years, for us, we believe it's a great place to be. That $33.5 million and the concentration of that and the percentage that's in finished jewelry, which has an intrinsic value associated with it because the commodity based on the market, right? So we believe we're very confident there.

We believe that we did do a responsible write-off several years ago of obsolescence inventory that we felt that was not good for the company or good for our future. So the increase in inventory, don't forget, we built a new business and the new business is in the lab-grown diamond space. So as that business starts to grow, we have to support that. We needed to build product and merchandise to be able to drive that consumer confidence where we have it in stock and it's ready to pick back and ship.

We also have SLA requirements for our strategic partners in brick-and-mortar. So for example, Helzberg Diamonds, we're in all of their doors, and we have showcase representation in every single one of those doors. So that means whether we have 6 foot a showcase, 4 foot a showcase in pretty much close to 150 doors, those dollars in inventory are there for that consumer right at that time supporting our brick-and-mortar partner. Same thing with Macy's. We have to kind of deal with that too as well.

Now if I can go back to the first part of your question, I do agree with you that the headwinds were there and are there and will be there as it relates to a specific economy conditions and economic conditions for the traditional -- pretty much the distributors and distribution partners. Our CDC and online business has been growing, and our CDC online business has been performing quite well. And that's the shift, and that's the direction we're going with the business.

So as far as the inventory and a write-off in the composition, we make those value-based decisions every single day. But we believe that the composition of that inventory is good given our cash position, given where we are in business and given where we are heading into the holiday season that we need to support kind of that holiday, which is traditionally our biggest selling season of the year. So we're positioned right. We believe we're in good shape. We can talk next quarter. We can have another conversation in the quarter after. But I certainly appreciate the commentary and your question.

(Operator Instructions) The next question comes from [Sanjay Ragaga], private investor.

I just wanted to ask about the signature showroom. So Don, I believe on the last conference call in May, you had anticipated that it would be open by the end of June. So could you just talk a little bit about what has caused the delay? And has the cost for the showroom gone over budget?

Sanjay, so thank you for that question. I will tell you, let me lead off by saying the good part of this answer is that it has not been an area where we've been able to monetize yet because we have not gotten the store opened yet. So the upside is that the store and the retail showroom will be open and opening soon and will then start to contribute to our overall revenue stream.

The unfortunate side of it is that supply chain constraints that are beyond our control between shipping and logistics of -- I'll be very candid with you and transparent. Showcases, also inspections from construction from the local municipalities, we're beholden to them when there's inspections and when they have the ability to issue a certificate of occupancy to be able to kind of have our opening. So unfortunately, that has been a little bit of a drag and has been the -- really the reasoning for the store not opening. Nothing more than that. It's very simple.

And as far as the costs associated and contributed with that, if you recall, we talked about some sold improvement allowances when we renegotiated our lease. So some of that was subsidized, so we're good there. And our costs have been right in line with expectations of where we anticipated.

Okay. And just a follow-up on the loose jewels sales. They seem to be trending down quite a bit. So is that something that -- is that something you're actively pursuing to reduce the percentage of loose jewel sales as a -- in comparison to the finished jewelry sales?

Yes. So those have been modeling -- we're paying attention to our earnings over the last 2 years since the transition. We'd take note that we had a reduction in our supply agreement with our strategic partner to reduce the amount of raw material that we were actually procuring and purchasing, which is in line with really the consumption, so that was a good thing.

So we have -- to answer your question, we have made a conscious effort to reduce the volume of loose jewels within the business because we're targeting more of a direct-to-consumer, individual consumer, where we're packing and shipping individual items. So instead of selling 500 to 1,000 of an individual jewel, we will sell individual pieces with individual rings. So as the traditional side in the wholesale distribution consolidates look to us to increase more towards our direct-to-consumer and in jewelry.

So it doesn't mean that -- it just means that more jewelry is being sold and more finished jewelry is being sold as opposed to just becoming -- just as we were before prior, we were primarily just a loose gemstone company. So as that kind of transformation occurs from a loose gemstone distribution company into this globally recognized fine jewelry company, making jewelry, establishing new collections and assortments, that is by design.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Don O'Connell for any closing remarks.

Thank you, MJ. We appreciate your time today. On behalf of everybody at Charles & Colvard, I just want to thank you for your continued support of and interest in CTHR and Made, Not Mined movement. Thank you.

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