Charles & Colvard's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.26.14 | About: Charles & (CTHR)

Charles & Colvard Ltd. (NASDAQ:CTHR)

Q4 2013 Earnings Conference Call

March 26, 2014 4:30 PM ET

Executives

Randy McCullough - President and CEO

Steve Larkin - Chief Operating Officer

Kyle Macemore - Chief Financial Officer

Analysts

Gerard Levin - Morgan Stanley Smith Barney

Lenny Brecken - Brecken Capital

Abba Horwitz - Old School Fund

Marc Robins - Catalyst Research

Operator

Hello, and welcome to the Charles & Colvard, Ltd. Fourth Quarter 2013 and Fiscal Year Results Conference Call. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions.

The company's management may make forward-looking statements both during the call and in the following question-and-answer session. These forward-looking statements are not guarantees of future performance, and are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from what they discuss here. These risks and uncertainties are available for you in the press release itself, as well as with the company's filings with the Securities and Exchange Commission. You may obtain these documents from the company's website at www.charlesandcolvard.com. They're also available on the SEC website sec.gov. Please also note this event is being recorded.

I would now like to turn the conference over to Mr. Randy McCullough. Mr. McCullough, the floor is yours, sir.

Randy McCullough

Thank you. Good afternoon, and thank you for taking time to join us and recap in Charles & Colvard’s fourth quarter and fiscal year that ended December 31, 2013. This past year represented the latest step in our four-year long progressive growth of the company, a journey that we begin in late 2009 when the company reached a low point where the market cap was approximately $10 million.

We achieved compounded annual revenue growth in excess of 30% for the past four years and made investments in management and infrastructure to prepare for the opportunities in 2014 and beyond. Let me take a minute and frame our recent results compared to industry statistics as reported in the February 2014 Rapaport News.

U.S. jewelry store sales rose 1.6% year-on-year to $6.5 billion in December the weakest sales increase of the year. Despite the lackluster sales growth rate for the most important retailing month of the year, jewelry store annual sales increased 8% to $34 billion in 2013 comparatively preliminary annual sales of jewelry for all channels in 2013 rose 7.7% to $71.3 billion.

Jewelry sales and store sales performed extremely well during the year when compared with department chains -- department store chains with total merchandise sales declined 4.7% to $174.7 billion. I’m proud of the extraordinary efforts Charles & Colvard people have made to keep our company growing to a very demanding economic period.

While we believe we rank among the best performers in our industry with annual net sales growth of 27% compared to the industry average of 7.7%, we must continue to work on our long-term annual objective of our single digit to low double digit earnings per share growth rate that is designed to create long-term shareholder returns.

To accelerate progress down this path, we are focusing on growing our business profitably on several fronts including pursuing additional new customers and sales channels. Our key areas of focus are continued top line and market share growth, expanding sales channels, accelerating growth in e-commerce market places, building our brands, innovation for growth through systemic enhancements and proven operational effectiveness, efficiency and cash flow, securing a long-term silicon carbide supply source.

We are expanding and realigning our sales organization in order to maximize our growth opportunities in a global jewelry market that exceeds $120 billion. We have engaged an outside commission sales representative, a 30-year wholesale jewelry veteran to increase our opportunities with midsize and major retailers including department stores.

We’ve added a VP of wholesale e-commerce sales with nearly 20 years of direct-to-consumer and e-commerce experience to focus exclusively on increasing sales to our online e-commerce sites for significant specialty and major retailers. This is just replicating what we accomplished with Kohl’s and Helzberg this past quarter.

In addition, we believe Lulu Avenue and Moissanite.com are positioned to drive incremental revenue and favorably impacting our bottom line as we invest in these direct to consumer initiatives. We recognized in order to grow our business, we need fully integrated marketing and branding that provides Charles & Colvard with a core competency and strategic differentiator of a leading sales, marketing and branding organization.

To that end, we have had a new VP of marketing and branding with over 20 years of luxury consumer product experience to the Charles & Colvard team to develop and provide leadership of our branding strategy. Her branding experience includes 12 years at L’Oreal, five years at Chanel and seven years with Calvin Klein.

Some of the responsibilities she takes over were handled by our previous VP of marketing and e-commerce who recently left the company to pursue other alternatives. We thank Craig for his efforts and wish him the best.

We are consolidating all corporate marketing and branding under this individual. This new marketing team will be responsible for the following: developing and executing a long-term brand strategy, be the brand’s [zar] (ph) for the organization and lead this strategy, delivering a consistent compelling message to our customers across all channels and position our products ahead of changing trends, identifying market needs and opportunities while overseeing programs to optimize our investment and advertising PR and social media to reach target consumers, influencers and end-users.

Historically, women who self purchased jewelry comprise over 75% of our estimated sales making them our primary consumer. In the future, we will improve our communications, offerings and messaging to better target the following segmented consumer buying groups in order to appeal to more women.

First the aspirational buyer, who desires fan jewelry, started seeking but may not be able to afford large diamonds. Next is sophisticated buyer, who has a higher income, appreciates designs, knowledgeable, can afford diamonds but is proud to say she bought an affordable luxury alternative. And last is the environmentally assisted buyer who does not like to purchase conflict diamonds and prefers a more sociable, responsible alternative.

We are excited about the opportunities we believe will help develop the Forever Brilliant brand and to a well-known and affordable luxury brand. Our objectives are to educate consumers to recognize Forever Brilliant as an intelligent alternative to a diamond, position us as a strong brand with superior quality, which coupled with competitive price points to help position us against competition that may arise in the future, add additional Forever Brilliant brands to the portfolio.

We will be announcing in the near future the survivor collection, featuring Forever Brilliant, an exclusive collection of philanthropic jewelry featuring the pink center stones, flanked by two white stones, symbolizing before, during and after cancer recovery.

We believe this brand has the ability to enable us to partner with national cancer organizations and increase awareness. In addition, we hope to announce an additional new brand at the upcoming JCK jewelry show in late May.

Another key objective for Charles & Colvard is securing a long-term exclusive agreement with the supply source of silicon carbide, which is a raw material Charles & Colvard utilizes in the production of Moissanite jewels. This supply source which we are actively pursuing, his targets provide our company with a competitive edge in quality and pricing.

Our objective is to sign a new exclusive supply agreement prior to the expiration of our current agreement, which expires in the summer of 2015. Due to the sensitivity of our current negotiations, I’m unable to comment further.

I would now like to turn the call over to Steve Larkin, our Chief Operating Officer.

Steve Larkin

Thanks, Randy. With Q4 being the largest quarter of the year, the enhancements we make to order management, quality assurance, barcode scanning and EDI drop-ship capabilities will put to the test.

Our performance, efficiencies and speed were dramatically improved, not only by our internal measures and metrics but also by the measures from our customers. We are targeting to expand our existing partnerships and scaling new businesses in our wholesale, drop-ship and direct-to-consumer channels.

In the fourth quarter of 2013, the key operating metrics for our direct-to-consumer businesses were up versus prior year as well as sequential quarters. Moissanite.com had healthy increases in traffic conversion as well as average order values. Lulu Avenue had healthy increases in active style advisors for a number of parties and sale per party.

Our direct-to-consumer businesses give us frontline consumer feedback of our products and services. We are collecting and utilizing data from consumer behavior, actions and trends. We are utilizing that data in decision-making across all areas of our business. We are listening to our customers and are very passionate about our gems as well as our jewelry.

I will now turn the call over to Kyle Macemore, our Chief Financial Officer.

Kyle Macemore

Thank you, Steve. Good afternoon, everyone and thank you for joining us today. As announced in today’s press release, net sales for the fourth quarter of 2013 increased 6% to $8.6 million compared with $8.1 million in net sales during the same period of 2012.

Net sales for 2013 were $28.5 million compared to $22.5 million in 2012, an increase of 27%. The company’s net sales for 2013 were the highest levels since 2006. Wholesale net sales declined 1% this quarter compared to the fourth quarter of 2012 to $7.3 million and comprised 85% of net sales. The decrease in the fourth quarter of 2013 was primarily due to a decline in sales to international distributors.

A couple of international distributors placed orders in the third quarter of 2013 instead of the fourth quarter as they have done in 2012. The company’s direct-to-consumer businesses increased 69% in the fourth quarter to $1.3 million or 15% of our net sales. This was the first quarter that net sales of the direct-to-consumer businesses exceeded $1 million.

Net sales for our wholesale business for 2013 were $25.6 million, an increase of 23% from net sales in 2012. Direct-to-consumer net sales were $2.9 million for 2013, an increase of $1.3 million or 78% from 2012.

Net sales of loose jewels increased approximately 12% to $5.2 million in the fourth quarter and comprised 61% of sales this quarter, compared with $4.7 million or 57% of sales in last year’s fourth quarter. For the full year of 2013, net sales of loose jewels increased approximately 23% to $18.5 million compared to $15 million in 2012.

Net sales of Forever Brilliant loose jewels in 2013 were just over $7 million. While the company expects our premium Forever Brilliant brand to be a higher percentage of loose jewels net sales in 2014, our classic brand continues to be in popular demand.

Finished jewelry net sales during the fourth quarter of 2013 were $3.4 million, a decrease of 3% as compared to the same quarter in 2012. Finished jewelry net sales for 2013 were $10 million and comprised 35% of our net sales compared to $7.5 million and 33% in net sales in 2012.

U.S. net sales for the fourth quarter were $6.3 million, an increase of 18% over the same period in 2012. International net sales for the fourth quarter of 2013 were $2.3 million, a decrease of 17% compared to the fourth quarter of 2012.

U.S. net sales for the year were $20.7 million in 2013, an increase of 23% compared to $16.9 million in 2012. International net sales for 2013 were $7.8 million compared to $5.6 million in 2012, an increase of 40%.

Gross margins percentage for the fourth quarter of 2013 was 47% compared to 48% in the fourth quarter of 2012. Gross margin percentage for 2013 was 49% compared to 56% in 2012. There were several factors that impacted the gross margin percentage in 2013. The company invested in operational resources to handle increased sales volumes and processing of new material to finished stones.

In 2013, the company began allocating information technology related costs based on headcount to more accurately assign operating cost on the income statement. This allocation in 2013 resulted in a $484,000 increase to cost of goods sold when compared to 2012.

In addition, as finished jewelry increases as a percentage of sales, it tends to negatively impact the company’s gross margin percentage. The company expects gross margins in the future to range between 40% and 50%, which is consistent with the results of the last three quarters.

As the company continues demand of production transition with the addition of Forever Brilliant, we anticipate more aggressive pricing of selected classic brand loose jewels. Our objective is to expand our consumer base with the wider stones Forever Brilliant, while maintaining an ongoing percentage of our business in the original classic stones.

Operating expenses totaled $4.2 million in the fourth quarter of 2013 compared with $3.6 million for the same period in 2012. Operating expenses were flat sequentially from the third quarter of 2013.

Operating expenses for 2013 were $15.5 million compared to $12.2 million in 2012. The increase in operating expenses was due primarily to a $2.4 million increase in sales and marketing expenses to support the direct-to-consumer businesses, Moissanite.com and Lulu Avenue, and product branding initiatives. The company recorded a net profit of $105,000 or $0.01 per diluted share during the fourth quarter of 2013, relative to net income of $4.1 million or $0.20 per diluted share during the fourth quarter of 2012.

The fourth quarter of 2012 included a $3.8 million tax benefit resulting from the company’s reduction of valuation allowance on certain deferred tax assets. The company recorded a net loss of $1.3 million or net loss of $0.06 per share in 2013, compared to net income of $4.4 million or $0.22 per diluted share in 2012. Included in net income of $4.4 million for 2012 was approximately $4.1 million of tax benefits due to reversals of certain valuation allowances.

Company ended the quarter with $2.6 million of cash and cash equivalents on the balance sheet, which is down from the $6.2 million of cash and cash equivalents at the end of the third quarter of 2013. This decrease was primarily due to a $2 million increase in inventory, a $1.4 million decrease in accounts payable, and a $1.2 million increase in accounts receivable. The company ended 2013 with $42.4 million of inventory.

Loose jewel inventory was $32.9 million and finished jewelry inventory was $9.5 million. The $32.9 million of loose jewel inventory was comprised of $3.3 million of raw materials; $9.5 million of work-in-process, of which approximately $8 million was new material from Cree; approximately $20 million of the loose jewel inventory was finished stones, which included approximately $2 million of Forever Brilliant.

While loose jewel inventory is higher than the company preferreds, the cycle time to convert raw material into finished stones is generally 90 to 120 days. Due to this cycle time the company invested heavily in raw material in 2013 in order to build a stock of Forever Brilliant to support future orders. The company expects inventory to decrease in 2014 primarily from classic inventory and become a source of positive cash flow.

I would now like to turn the call back to Randy.

Randy McCullough

Thanks, Kyle. Before I turn the call over for questions, I just want to reiterate we intend to focus on strategies that we believe are right for the long-term health of the company with the objective of delivering shareholder return, our core markets such as the U.S. to strengthen and grow our business, our investments on the categories and businesses with the largest opportunities and realigning resources to create incremental value.

This concludes our formal remarks this afternoon. And now, we would like to open the call for any questions that participants and the caller may have. Operator, could you please open the floor for the Q&A session?

Question-and-Answer Session

Operator

(Operator Instructions) The first question that we have comes from [Mark Wright, Investor] (ph).

Unidentified Analyst

Hello, everybody. The [fighter] (ph) moissanite, Randy that was intended to give us more access to Asia markets and retailers. Is Forever Brilliant increase in sales in Asia. I see Kohls.com where we do the fulfillment but are retailers carrying Forever Brilliant?

Steve Larkin

In Asia or the U.S., you went back and forth there?

Unidentified Analyst

I am giving you both choices fighter moissanite was supposed to increase our sales in Asia and also gives more access to retailers. I am asking are you seeing that increase in Asia, are you seeing that increase in retailers?

Steve Larkin

Mark, we sell $7 million of Forever Brilliant during the course of the year and the vast majority of that was in the U.S. There is some of that in Asia that was not in there in any prior year.

Operator

I am sorry, was there a follow-up question, sir?

Unidentified Analyst

No, I don’t think so. Thanks.

Operator

(Operator Instructions) Next, we have Gerard Levin of Morgan Stanley Smith Barney. Please go ahead.

Gerard Levin - Morgan Stanley Smith Barney

Hello. I am on these conference calls the last three or four and I have noticed that the inventory creeps up, creeps up, creeps up, and then it catapults it up this quarter, and of course that causes a drain on your cash and cash is down low. I would like you to address in greater detail the rising inventory and why it’s getting out of hand using your own words. And are you going to need some cash in 2015 to continue to operate the business?

Kyle Macemore

Thanks for the question. This is Kyle. So let me take this in a couple of points. So on the cash position, we believe based on the cash we have on hand, our accounts receivable, and the amount of inventory we have that we can continue to proceed to run the business. We do have a line of credit in place which we have not used. And as we discussed in our prepared remarks, we expect inventory to be a source of cash and come down over the course of 2014.

As it relates to inventory, in general, we did start buying new material from Cree in 2013 and a lot of that inventory as we discussed in the prepared remarks is still in work-in-process. It takes us a fairly brief moment of time 90 to 120 days to take that raw material and turn in to finished stones. So we consciously made the decision to purchase that raw material and increase the Forever Brilliant inventory.

Gerard Levin - Morgan Stanley Smith Barney

To follow up, what is the size of the line of credit you have currently?

Kyle Macemore

$10 million.

Gerard Levin - Morgan Stanley Smith Barney

$10 million.

Kyle Macemore

Yes.

Gerard Levin - Morgan Stanley Smith Barney

And you say you expect that inventory will be a source of cash in the current year. But as I mentioned, the inventory has been creeping up for quite a while and the fourth quarter increase was significant. What leads you to expect that the trend will be reversed, what’s specific reasons?

Randy McCullough

Yes. Gerald, it’s Randy McCullough. I don’t know if you’ve attended our shareholders meeting in May of last year.

Gerard Levin - Morgan Stanley Smith Barney

I did not.

Randy McCullough

Well, at the shareholders meeting last June/May, I told the shareholders that we will be bringing on a new line of material from Cree to fulfill the Forever Brilliant brand. It is no different than in a store. If you had a small store, and you were selling wheat, whole wheat bread and all of a sudden you have decided to that white bread, you’ve got about the inventory, you’ve got about the stock, you can’t turn whole wheat into white bread. So we made the investment. We’ve sold off about 7 million and we have in work now in material and supply is all based on anticipated sales.

For the next two quarters, we have to stay two quarters in front of our shelf and we have to have on the shelves what we would deem based on historical sales, the best selling sizes and the best selling shapes. So we work in -- towards making the appropriate adjustments. Now we do want and have been working towards lowering the older classic inventory.

It started, when I came on board, that inventory was right at $40 million. Today it’s about $18 million left of the older classic inventory. We are when we cut from raw material, when we cut and polish, if we cut and polish a thousand stones, 700 of them approximately end up this Forever Brilliant and about 300 or 30% end up being graded into classic.

So we’ll always have a supply of classic feeding in. We’re trying to focus at on our, again on our bestsellers. And then obviously for your large special order, we have to process that through. But we’re leveraging the existing inventory. We’re managing our relationships with our customers i.e. the majority of our distributors who service the independent jewelers have migrated towards the Forever Brilliant.

And that’s a much more acceptable stone for them because a lot of them are using it and (inaudible) , they already have in their inventory. And that stone being a much fighter stone, matches what’s in the mounting with the diamonds. So it’s useable and gives them a price point that they can enhance their sales.

Now when you look at someone like JTV, who their consumer base is quite different than they’re more focused on running the classic, which is good and may provide the value and their able to take in private label brand under their fire brand. No different than you’d see Target or anyone else and so we analyze the inventory.

We have a plan in place. We know we want to bring dollar out of the classic. And the Forever Brilliant is about where it needs to be. So at this part, we’re about more what we call a maintenance mode based on future projections. Now if we bring on new customers and Forever Brilliant ramps up, they will have to buy more material to manufacture or polish the stones in Forever Brilliant.

I know that’s a long winded explanation but we’re not just a jewelry company. We’re a stone manufacturer, manufacturing two qualities. We currently sell two qualities. We will be selling two qualities forever. We’re also a jewelry manufacturer and we manufacture jewelry to fulfill our jewelry customers like JTV and Kohl’s.

Gerard Levin - Morgan Stanley Smith Barney

Thank you very much for a very comprehensive answer.

Steve Larkin

No problem.

Operator

Next way -- excuse me, next we have Lenny Brecken, Brecken Capital.

Lenny Brecken - Brecken Capital

Thanks. I have a question. Kyle, would you say you had $2 million in Forever Brilliant in finished goods?

Kyle Macemore

$2 million of finished stones. We have about $8 million of new material that’s either in raw material form or work in process. And as Randy said, most of that will convert Forever Brilliant, when we turn it into stones.

Lenny Brecken - Brecken Capital

Okay. That’s really. So the majority of -- and what’s the composition of the finished jewelry that the $9.5 million…

Kyle Macemore

It’s a little bit more difficult for us to break out but most of that is classic. There is some Forever Brilliant in there that were using direct ship to some of our customers but I said it still majority of classic at this point. Plus there is some inventory for Lulu Avenue in there.

Steve Larkins

And Lenny, I’m going to jump in on that one too. Well, you have to understand at the end of the each quarter, that’s a snapshot of your mounted inventory. You could have $1 million or $2 million, that’s already allocated to orders, that’s coming the door but we can’t ship until the ship date. They don’t want to take it in their quarter so we may ship it in the following week. So that inventory is a moving target.

Lenny Brecken - Brecken Capital

Okay. Now I understand that but we just a snapshot to look at overall. So we have to go where we have. It’s fair to say then the Forever Brilliant overall is still the minority of inventory. And from my calculations on the $7 million you gave in sales, it represented virtually all the growth in 2013. And its probably running 30% to 40% at sales Randy, is that about rate?

Randy McCullough

Kyle, gave that number, I think.

Kyle Macemore

It’s about 38% of our loose stone sales.

Lenny Brecken - Brecken Capital

Okay. That’s very encouraging. So when do you guys think that you are going to cross, meaning Forever Brilliant is going to be over 50% of your business?

Randy McCullough

Lenny, that -- it could happen this year, it could be early next year. That’s one is tough for us to predict as we just don’t have enough data from the old, enough history in Forever Brilliant yet to project that.

Lenny Brecken - Brecken Capital

Okay. Well, I have you just one last question and then I’ll go back into the queue. Randy, can you just outline, the perception is that Forever Brilliant, you got a few retailers but the perception is that overall the things are happening slower than what many investors hope in terms of adoption. Can you just summarize where you are with retailer discussions and why is that true, there has been some slowness in terms of adoption. What the reasons are? Thank you.

Randy McCullough

Sure. Lenny, as with any new product, sales are going to mimic the flow through of the finished inventory. As you can see, we’re sitting on $2 million of finished inventory and obviously we’re almost at the end of the first quarter. So that inventory is moving at a pace that consumes almost as quick as we bring it in. The sales, I mean, can seven or being eight, nine maybe but if we have had $15 million or $20 million, we probably would not have been able to fill it at that point. We are ramping up for that.

We’re building inventory if you can see with the raw material. But we’re also trying to be conservative and just being -- they are economical in the way they were approaching the retail market with. We are making presentations weekly with all the measures that we can get up and put in the door. And that just continues around the clock. We don’t sit back and wait to sell this product.

We believe in Forever Brilliant. We like Forever Brilliant. Consumers love Forever Brilliant. Just go on our website or any website out there selling it and read the consumer feedback, it’s off the charts. We go, read Kohl’s’ feedback, I mean it’s absolutely off the charts.

Lenny Brecken - Brecken Capital

Randy, is it affecting you don’t have enough inventory, a problem with getting brick-and-mortar there. I mean, is that the problem? It doesn’t sound like you have a hell out of the inventory?

Randy McCullough

Well, I don’t know about whether or not we have a hell out of our inventory. We have a lot of inventory to the volume that we’re doing. But when you say the problem with the bricks-and-mortar, what we got to do, we got an opportunity with Kohl’s and we have proved to Kohl’s that our product will sell. And that could possibly open up some new opportunities with Kohl’s. I can’t go further than that because we are in discussions.

But we’ve had discussions with other retailers and we’ll continue to have those discussions. We think Forever Brilliant as in these last two quarters has proven the sell through to the industry and they’re watching it close. And we think that, we feel that that it is going to open the doors for some new opportunities. It’s not easy out there right now Lenny.

Lenny Brecken - Brecken Capital

I understand but one last thing I forgot to ask you as well. You have mentioned Canadian TV or international closing some last minute terms from a discussion on the video back at the end of last year. Can you update us on that, status for that? Thanks.

Steve Larkin

Yeah. We are still talking to the Canadian TV company. And hopefully, we get a deal consummated here fairly soon. Just so, these TV organizations typically have planned six months in front of themselves. They have allocated their hours and they know who they are going to have on. They are building the inventory. You have to allow three months just to have the inventory ready.

Lenny Brecken - Brecken Capital

I got you. All right. That’s good. So we are closing on the six months. I understand this in terms of investor perception. I think when your revenues cross, that -- I mean, your problem right now is getting management that classic inventory down. I think that’s your problem. I think that’s what everyone is concerned with and hopefully a follow-up and asking few questions with that. So I appreciate all the color. Thank you.

Steve Larkin

And we absolutely agree with you on managing the classic down. I think the company is doing an excellent job in cutting that more than in half. We’ve lowered it by over $20 million. I know it’s taken four years to do it but we brought in a new brand to help position the company.

Operator

Next with Abba Horwitz of Old School Fund.

Abba Horwitz - Old School Fund

Hi. Good afternoon.

Randy McCullough

Hi Abba.

Abba Horwitz - Old School Fund

Couple of questions. Hi. Couple of questions here is, could you talk about the Amazon business, how that did in the quarter. Is that improving at all? We lost the upstart, I wanted to know if maybe you get a pickup there?

Steve Larkin

Yeah. This is Steve Larkin. We are disappointed with that business. We brought them on as a wholesale client. They put some goods in. We were disappointed with the execution of that. We know as you saw in the initial remarks that brought some one in with expertise to specifically handle that and all other e-commerce type sites be that pure-plays, be the e-commerce sites of specialty stores, department stores, market places et cetera. So we’re really going -- taking another run at that with almost a fresh start and we’re expecting to see much, much better execution.

Randy McCullough

Abba, in the meantime though, let me just add to that, subsequent to that, we went into Kohl’s and we also went into Helzberg, both of those sales have been very robust and both have worked with us to extend the assortment, you likely see more SKUs coming on their sites in over the next month or two.

Abba Horwitz - Old School Fund

Okay. That’s very good. Okay. Can you give us some color on how this quarter has done. You have just few days left for the quarter, certainly give us some insight as to the Q1?

Randy McCullough

All right. I’m going to take that one, Abba. Let me just say this. The trends we saw in the fourth quarter are continuing in this quarter, the first quarter with our direct-to-consumer business is showing good growth and our wholesale business has been a little more challenging. We believe that the changes that we talked about in realigning and refocusing some of our internal staff and adding additional staff where we see the opportunities there. We’ll capture additional wholesales opportunities during 2014.

Abba Horwitz - Old School Fund

Okay. And just final question, Lulu Avenue, you put out a number but it was the dotcom as well with the Lulu Avenue. I was wondering if you can give us some insight about that the numbers, some metrics that we could understand, what’s going on here. I know that the woman who received it has done a very good job but maybe we get some metrics in terms of what’s going on here?

Kyle Macemore

Yes. David, this is Kyle. I’ll take that. So as we said in the prepared remarks, our direct-to-consumer business hit $2.9 million this year and increased by $1.3 million. I would say that both of these businesses, both Moissanite.com and Lulu Avenue had very high growth rates year-over-year. I will also say that at this point Moissanite.com makes up the majority of the revenue in that direct-to-consumer segment. But we don’t split that segment out to the individual businesses in part for competitive reasons.

So at this point, that’s kind of all we can say about this two businesses. I think Steve also alluded in his comments about lot other metrics internally that we track whether it be conversion rates for the website or number of style advisors are trending at a very positive direction for us.

Abba Horwitz - Old School Fund

Okay. And at what point, will you feel comfortable if they give us those kind of numbers, break up those numbers?

Kyle Macemore

I think that we’ll always consider and look at in the future in discussion with management, the board and other parties but right now we think that it make sense to report that as one segment how we manage it.

Abba Horwitz - Old School Fund

Okay. But it’s not something that -- it's something that right now you are encouraged to continue it because it is causing you quite a bit of money?

Kyle Macemore

Yes. We have continued to invest and as Randy talked about earlier we think that those two businesses provide the unique opportunity that reached directly to consumers. So to all of our other businesses, we are going through a distributor or a retailer to get to the end consumer. For those two businesses, we get straight to the end consumer which is positive in our eyes, gives us a lot of feedback and information.

Abba Horwitz - Old School Fund

Okay. Great, thank you.

Operator

Next we have Marc Robins, Catalyst Research.

Marc Robins - Catalyst Research

Thank you very much. Randy, I guess maybe this would be best directed to you. One of the major problems we will kind of discuss it out here regarding Charles & Colvard and their quest to gain sales is really the lack of brand that Moissanite has. And if you’ve tried to kind of repair that situation with Forever Brilliant. I think a good update on, what you think the acceptance is for Moissanite now that you’ve been working with the Forever Brilliant and then our consumers are little more aware of what the product is and do we have the huge void of unfamiliarity, we had to content with over the last couple of years?

Steve Larkin

Look obviously the Board narrows every year. Through our marketing and PR efforts, we’re reaching literally millions of consumers. The other piece, you got JTV and ShopNBC out there reaching their audience. Both of their audiences exceed 20 million. So the company did not have that in 2009 or 2008.

The social media has actually been phenomenal for the dollars that we invest in it. And that’s something that we’ll be leveraging even stronger. And the Forever Brilliant brand, I have had no retailer, no distributor, no one that has that brand give us any negative feedback, consumers are off the chart. They love the stone. They absolutely love it. And it’s just a matter of giving it to more consumers.

Now, you bring it up, it is not easy to convince a jewelry store, our chain of jewelry store who has been in the jewelry diamond business for decades and decades to put an assortment of Moissanite into the facet. And I’ll be honest with you, they are afraid of it. They are afraid that it will cannibalize sales from their diamonds and they have already made the investment in their diamonds.

So we are seeking alternative sources. We are focusing primarily our efforts will never walk away from the opportunity of getting into those but we are focusing our efforts on the major big boxes and other alternative retailers that could really benefit well. And I will just use an example like a Chico's with women’s clothing that has obviously a huge population and we think that what we’ve been able to produce with Kohl’s and Helzberg, will certainly get those types of people to at least allow us to prove ourselves on their e-commerce site because we do the fulfillment. They’ve essentially got no investment there and the new gallery we brought on board, if so, focus and like is reaching out and contacting those people.

We were thrilled with the results that we’ve got from Kohl’s and Helzberg e-commerce and we want to go out and replicate that as much as we can. And while we are targeting these alternative sites that have the right demographic and these sites absolutely have the right demographics.

Marc Robins - Catalyst Research

I guess you are really riding a double ablated sword here. On one hand if you go to the jewelry stores, they are going to cite this product because the contribution margin per sale is going to be way lower than it is for a diamond. And then conversely if you go to a site like, let’s use Amazon just as a referring example, there might not be the familiarity that you can gleam upon our own sites or own allied sites to get a sell-through to the ultimate customer. If I go to Amazon, I will look for books I may not look for “Moissanite or Forever Brilliant”. I mean, isn’t that kind of a battle you are fighting?

Randy McCullough

No. Actually, Mark, you made a big profile there and I’m going to help you with this one. The margins on diamonds, in my 42 years in the business are the lowest I have ever seen them and every retailers absolutely screaming about it as is every distributor. The margins, especially in the mall-based stores, the margins are so thin today on diamonds and there is a host of reasons as that’s happening that by the time they pay the overhead and pay the sales people, they simply can’t make money and they are having to realign their whole model. But our margins typically own Moissanite, classic or Forever Brilliant will give any retailer an additional 10 to 15 points.

Marc Robins - Catalyst Research

That just seems best acreage but I could understand how the market could be kind of topsy-turvy like that, okay. And again, one of the other things that this is one of the other benefits of Lulu Avenue, if you’ve got say 10,000, 20,000, 30,000 women out there selling those are women, there is got to be a way to increase awareness and brand familiarity. So this new stone called Moissanite isn’t quite as challenging to understand and the value proposition is better conveyed. You have to have it in the industry how absolute luxurious it looks.

Randy McCullough

I agree. Absolutely agree.

Marc Robins - Catalyst Research

Okay.

Randy McCullough

And the Moissanite sales and Lulu have increased substantially.

Marc Robins - Catalyst Research

I will get back.

Randy McCullough

But they’ve been really encouraging for us.

Marc Robins - Catalyst Research

Okay. I will get back in queue and come back again. Thank you, sir.

Randy McCullough

Sure, Mark.

Operator

Next, we have Joseph Goldstein, Investor.

Unidentified Analyst

Hi, Randy.

Randy McCullough

Hi, Joe.

Unidentified Analyst

Yeah, I think the last questions got pretty much along the line what I was going to say. I agree with everything you said. People love Moissanite from my experience and in all of Moissanite, we haven’t have. Ladies love it. And the way they love it is they see it first hand, maybe next to the diamonds or even without their diamonds. That happens as we all know, the best in brick-and-mortar stores and we were successful in having so many stores carrying it. The issue I believe, correct me if I’m wrong that lot of them stop carrying it as they didn’t get as much new business because of awareness and ladies wear Moissanite most of the time as a diamond, not wearing as it Moissanite. And as I’ve heard the word use, they only have a lot of third-party referrals.

So what do we think we can do and Lulu Avenue, maybe there is few people out there that see it but not in numbers that you need it at least so far? What are we going to do in the awareness area to get this into places where people can see it on their hands and around their necks and their ears?

Randy McCullough

Yeah. That’s one of the reasons that we look up and we took a rather long hard look at potential candidates to come in here and help us, put together a marketing and branding but not just to mark. We only need people just to throw and add out, probably go out and try to hire celebrity, that’s not going to get us there. It’s a very comprehensive branding effort all the way from product design to presentations to everything involved and you understand it because you were there. And what we found was that the people in the jewelry industry really struggled with it.

But when we presented it and spoke to people outside the jewelry industry, especially from the cosmetic industry, they had created ways to take this to market especially through the big boxes that we never dreamed off. And we choose a lady that starts with us next month and obviously through her 20 some odd years of relationships with the big boxes, she is able to get a lot of doors to at least take a look and I’m very optimistic that this is going to be our year to get this back out there.

I’m not going to address what went wrong in the old days because I wasn’t here. I don’t know, you were here and all I know is what I face when I go and talk to those people today. They all want to know what’s going on out with it and I’m talking to the jewelry industry specific. They all actually love this new stone. Guess what, they are all buying for their wives. I mean, that’s what I get from them. I go and show it to them. So, philosophically I’m struggling to put them in the store. But no by the way, I need you to make me a two carat pair for my wife. I mean, it’s a direness thing I have ever seen. So we’ve just go to work. We’ve just got to work our way to get to the consumer in the avenues that will work with us and get there. But it is got to be in volume. You are absolutely right.

Unidentified Analyst

And as I say back, as you say back in the beginning, there were lots of people, lots of jewelry stores of carat that and because awareness didn’t spread fast enough, their business went down and down and down and now we are where we are.

Randy McCullough

Yeah. My business didn’t go down at Samuels. I headed in 200 stores in 2005 and I was taking it on consignment through a program, through lease part. And we were doing quite well with it. And then JCPenney promoted it at about 40% less than we were selling it. I would have to drop my margins to 10% in order to compete with that and our box, we sent it back. They didn’t work that way. And we are going to make sure that when we put it, when we do -- and we did recolls on their website. We insisted that that was a floor that the price could go to. And it’s not going to let that happen going forward.

Unidentified Analyst

I’m looking forward, yeah.

Randy McCullough

All right, man. I appreciate.

Unidentified Analyst

Thank you.

Randy McCullough

Thanks.

Operator

Next, we have a follow up from Lenny Brecken, Brecken Capital.

Lenny Brecken - Brecken Capital

By the way I love the discussions. I’m learning a lot from all the questions and you guys been so interactive, so I really appreciate it. Randy, I guess everyone -- the picture is the product screen. The retailers seem to be resistant folks for whatever reason, maybe if they do a diamond box?

Randy McCullough

The jewelry retailers.

Lenny Brecken - Brecken Capital

Yeah. I don’t know, I mean, maybe it’s opposed to because we haven’t seen another agreement, nor things are going so well at all. We haven’t seen them sign up for brick-and-mortar yet. There are lots of questions. But my point is why not -- retails are driven by exclusivity. We saw -- I mean I know like sales strategy was driven by exclusivity. Have you ever put a thought to really get this thing kick started to really creating incentive, a strategic partnership with a big retailer? It could be Kohl’s, it could be Macy’s, it could be someone in that category to really get this product the recognition it deserves, because you know what the tragedy if at all is when in the channels it sells.

My survey prove it, it’s everywhere you have the product, it sells really well. The market share is well above the overall market share of the dining market if you want to look at it in that way. So why hasn’t management then said look back to what, we can throw this thing out to 20 retailers if they take it.

Why don’t we focus on the leaders in their respected categories, Signet, Zales now, wherever it maybe and say, hey, why don’t you take this product not just bought because it’s going to give you points on a margin, but because of its properties, because we are going to view it exclusive to really sell this product and it sells everywhere else and really make it happen, create a partnership rather just making a sell and seeing it fixed. Did you ever put any thought to that back altering a strategy a little bit and making that happen in that way?

Randy McCullough

Lenny, I have to chuckle, are you still blustering or what?

Lenny Brecken - Brecken Capital

No, look, I am trying to say, I chuckle because I see how well it sells in respected channels but it’s not been.

Randy McCullough

We have lot of people on the phone and you are chewing up a lot of time. Let me answer your question.

Lenny Brecken - Brecken Capital

Yes, sorry.

Randy McCullough

I just have to get a little chuckle in there, don’t take it personal.

Lenny Brecken - Brecken Capital

All right. I am not.

Randy McCullough

Lenny, you’ve got Steve Larkin in here with over 40 years experience, myself with 42 years experience, I could just go on and on with the experience in here. So you nothing, how can you say we didn’t go out and do that. I mean that’s…

Lenny Brecken - Brecken Capital

I didn’t say you didn’t go out and do that.

Randy McCullough

You did say that. Now listen to me, Lenny, we do that every time we are out there. We are talking to all of the majors. We have offered them deals. We have offered them deals where we made no margins for a year. Trust me, we are on this. So we are going to make this happen. We will get it done. If it can be done, we will get it done.

Lenny Brecken - Brecken Capital

I am not going to comment on making such an offer to a retailer and then not getting turn down. But one of the thing, Charles Winston keeps on referring to price increases on JTV, can you just in light of the fact that Kyle said actually you are going to be more aggressive in price in classic going forward, can you corroborate the two?

Randy McCullough

No, I can’t -- I can tell you exactly what’s happening. We have asked Charles not to say that. I don’t know why he keeps saying it. The conversation that happened at JTV was that at some point in the future it could be a six months, it could be a year, it could be three years. You are going to chew away at the older material and we are going to have to migrate to the newer material which is much more expensive, not much more, it’s about 25% more cost per gram for us to buy the raw material.

At that point we are going to have to move the prices. And they asked us to lock in this year and I said I just can’t do it. I will make every effort because you guys are going great. We want to maintain the pricing because it’s working. Charles has had -- he just had 14 hours this past weekend, it was the best he has ever done and they were concerned about adding the extended the hours because he had never ran that many hours in one weekend. And he absolutely nailed it. It’s ball out of the park.

But they are certain sizes. The best sellers are always the 6.5 millimeter one caret and the 8 millimeter two caret round stones and that is in the new material. And when we use that for anybody’s product, we have to price it accordingly. So they are taking shorter margins on that. We are working as tied as we can work in order to keep the price points similar to where they are have been in the past. We are also migrating to, if you are going a halo earring with stones around it, we can substitute 6 millimeter and just beef up the outside stones and still get the same total weight. So we are working, doing work around.

I don’t know why Charles keeps saying that. We have asked him not to and we are going to have the conversation again with him.

Operator

(Operator Instructions) Next we have [Rodney Beiber] of Newport Coast Securities.

Unidentified Analyst

I have to follow Lenny.

Randy McCullough

Yes. You do.

Unidentified Analyst

Oh, my god, you do this on purpose. Randy, we still are getting transparency on direct-to-consumer with Lulu and dotcom. And just a quick update, I would like to hear just briefly why we are not offering up transparency, is there a competitive reason? But my real question is not that it’s -- I was here just to unpack these two items for us. Obviously, Lulu Avenue has potential to be an absolute huge opportunity for us, but these things take time. I mean we all know that and we’ve all been waiting for to kick in at Lulu and dotcom is something that it works well when it’s done properly, but we haven’t seemed to be able to ramp that up.

So do us a favor of stockholders and if you would, did this share some insights, what you are thinking about those two? The losses keep piling up. Is there something work forever committed to? Do you see the light at the end of the tunnel and it’s going to actually happen or something that we can kind of bite into it. I think that I would appreciate knowing how you are thinking about that?

Randy McCullough

Let me give you a little history first. When we put together a direct-to-consumer strategy, we, the Board, when I say we, the Board sit with our outside auditing firm and discussed what the methodologies that we could use. And we chose to do it as one unit a direct-to-consumer and we are locked into that. If I broke that out, then I have got to change our entire recording and reporting mechanisms and we are just not prepared to do that, especially not today. Is it going to come in to future? Probably, probably sooner than we -- everybody would expect because sales are ramping and we are very happy with both channels.

I think Kyle alluded to the fact that moissanite.com was ramping up faster, and obviously they are ramping up faster. They are going to hit a breakeven on the profitable number first. It’s just going to happen. But Michelle is an absolute homerun and my only regret is we didn’t have Michelle in the very beginning. We made investments. We lost some time. We had to do a restart but we did build the infrastructure. The infrastructure is solid, go work to website, look at it, look at the training materials on the website. They are changing things daily. They have video training, video. They are doing conferences on a weekly basis. I mean in the catalogs, they are nothing short of fabulous. The merchandising is fabulous. Moissanite sales continue to increase as a percentage of their sales, I mean these women are own power.

Unidentified Analyst

What about the uptake from the women, we don’t hear anything about how many women involved and all those kind of things, there is just the reason for that I am sure. How is the ramp up actually going and can you clarify that at all?

Randy McCullough

Well, I can’t quantify because then I break out what we elected to do and that was reporting the consolidated too, but it’s -- she is exceeding everything that she projected to us when we put our numbers together last fall.

Unidentified Analyst

And the dotcom, has there been a changes in management there what you said at the beginning of the call?

Randy McCullough

Yes, Rodney, you probably know best, Steve Larkin has a phenomenal e-commerce background and rather than go out and put someone in between there we just said we’d just let that segment just report direct to Steve. And he is got it on fire. They’re rocking and rolling.

Unidentified Analyst

Terrific. All right. Anything else on it before I let you go?

Randy McCullough

No, I wouldn’t say anything bad about Lenny though. We like Lenny. He is a good guy.

Unidentified Analyst

Thank you, guys. Appreciate it.

Randy McCullough

Thanks.

Unidentified Analyst

Okay.

Operator

And our final question today will be a follow-up from Lenny Brecken of Brecken Capital.

Lenny Brecken - Brecken Capital

You see and I got to comeback at you. I’m only kidding.

Randy McCullough

That’s perfect.

Lenny Brecken - Brecken Capital

Guys, the drag on the business for the entire year is going to be probably the classic as the Forever Brilliant ramps. But I’m still -- my formal question from the last time around, I’m still not clear how you are going to change the selling dynamic? That’s what I’m trying to get at. How are you going to change the selling dynamic to try and penetrate traditional retailer -- retail, excuse me. And also the dotcoms because your proposition is really risk less to them and we still haven’t seen a great many sign up. So, I’m just trying to get at, what is your change in dynamic going through the year? Thanks.

Randy McCullough

So, Lenny, what you are telling me is I need to go back into this whole presentation over because you miss the fact that we hired a guy, that’s going to do nothing but focus on the large volume dotcom companies whether it would be a Macys.com or whoever Ice.com and drive that business that is so function in life. He wasn’t here. So we could go, he was not a part of this team.

Lenny Brecken - Brecken Capital

Randy made those calls already. I listened to that, I heard that. It’s very encouraging. You hired a Marketing VP. Thank you as a shareholder. I really appreciate it. No, I’m not dismissing that but I don’t see the change in the selling dynamic. I mean, how you are going to reposition the stone to get in there and one more specifics I guess, that’s what I’m asking?

Steve Larkin

Lenny, it is Steve Larkin. Let me give you some specifics. It will be everything from the sales pitch and the proposal, in terms of making it simple and easy to working with those potential retailers and wholesalers as well relative to presentation, positioning, messaging, promoting, training, etc. So what we really don’t want to have happening is get distribution out there and like it that happens in the past, not basically be well executed and sell through in retail. So, we’ve got a VP of Marketing coming who is going to assist us in many of those efforts.

We’ve got someone whose going to be calling on brick-and-motor accounts who’s got experience in relationships. In doing that, we’ve got somebody handling the digital channels. Again, as of a couple of weeks ago, we didn’t have that. So we now think, we are going to go to those people with a much, much stronger program with a way more insight, way more expertise, way more of a much higher level of service during the sale as well as after the sale.

And obviously, we want them to be successful. And then hopefully, we get some leverage and a little bit of what we want is some disruption quite honestly and a tipping point. We wanted to work, we wanted to get notice, we wanted to get recognized and we wanted to expand. So that’s what we’re looking to do. I think all of us and everybody has committed on the Kohl’s. We’ve got a great product. Women love that product. They are our best advocates when we get it. We just have to get it in front of more people and get it into more people hands.

Lenny Brecken - Brecken Capital

Amen, Steve. But can you just name the two things right that as you see them, could you have the most insight and I thank you for that detail. On the two top reasons why you think retailers don’t take the product?

Steve Larkin

I think Randy alluded to it earlier. I think one of it is some degree of fear of cannibalizing at existing business. I think the other thing honestly is 2013 was a pretty challenging economic environment out there between weather and new healthcare and everything else there was happening. The ability to get people’s attention in time and facilitate just an appointment and the ability for people to get to behind something and execute it was challenging this year and I think that that was true not only of us, but a lot of people out there in the manufacturing, wholesale and retail environment.

So, we’ve got the back half of this year ahead of us. And we’re getting into the timing here when people are planning. In the jewelry industry, the all important back half of the year and holiday, we’re really excited about the things that we are going to be doing, showing and the meetings that we’re going to be having in the Vega Show at the end of May.

So, we’re really giving up and getting this people well armed to produce and pay you up as soon as possible. Some of the direction that we’ve given and I’ve given is leveraging the existing inventory and turning into a cash as soon as possible. And so we are arming these people. We brought on board to go out there and do that.

Randy McCullough

And Lenny, there’s one other piece, Lenny that I’ll bring up.

Lenny Brecken - Brecken Capital

Fantastic by the way. Yeah.

Randy McCullough

And this is more with the e-commerce guys, the larger ecommerce guys were extremely concerned whether or not we could handle the fulfillment because we had no history. We have zero history. Now what we have is a fourth quarter with Kohl’s where we scored an A plus every month. I give a report card every month and we have it. We can show that.

Steve Larkin

They give us a monthly report card very, very detail but from a high level its inventory in stock, its speed of delivery, its quality of delivery. It’s the EDI communication and the speed in validity of that. And as Randy said, we received (indiscernible) every quarter and we’ve got the ability to scale that business, so that’s what we’re looking to do. We’ve proven we can do it and we’re really happy with that business.

Lenny Brecken - Brecken Capital

So guys, you have no Holy Grail to fight against the resistance of the diamond knok or substitute at retail and here it’s going to clean gross margin dollars. Is there no Holy Grail or nothing down the pipe that we can say, hey, we are going to overcome that anytime soon?

Steve Larkin

Part of the Holy Grail, Randy mentioned it earlier is the fact that we could actually from a pure profit standpoint add more dollars to many retailer’s bottom line. And we view it in many cases as incremental business, not specifically cannibalized business. So the best example you can give if someone goes into a store looking to buy a bridal piece. And they see what they like in diamond product and they like the setting and they like the semi-mount and when you add the center stone in it, it becomes prohibitively expensive.

Based from an economics perspective but also from a credit approval perspective, most of these purchases get put on credit whether it’s a house credit card or a bank card. And the approval to get a $4,000, $5,000, $6,000 ring approved is not a very easy process in this economy. We provide an alternative to that. They don’t have to sacrifice the size of the stone. They don’t have to sacrifice the quality of the stone. And I’ve got to tell you inside the industry with people I’ve spoken to, there is more, it’s coming slow, it’s not an avalanche but there’s more acceptance to diamond to alternatives.

So quality diamond alternatives, that could be using sapphire as center stones. That could be using other alternatives inclusive of Moissanite. So we feel that that’s really an opportunity that we are an incremental revenue and profit opportunity to the retail community as opposed to being a cannibalization potential. That’s one of the angles that we’ve taken and that’s part of that selling proposition.

Lenny Brecken - Brecken Capital

Is that new by the way, Steve? Is that an angle new? Or is that something that you can always.

Steve Larkin

I think we’ve intend to find it dramatically.

Randy McCullough

The issue we had in the past Lenny was the color of separation. The diamond that they carry are usually a fairly white like an (indiscernible) color. And the Moissanite was glaringly darker in saturation. But with the new Forever Brilliant it’s a perfect match. So now with the newer stone, it’s gaining a lot of respect. We are opening some doors.

Lenny Brecken - Brecken Capital

All right. Go get them guys. Thank you.

Randy McCullough

Thank you.

Operator

That concludes our question-and-answer session. I will now like to turn the conference back over to Mr. Randy McCullough for any closing remarks. Sir?

Randy McCullough

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

I’d also like to remind everyone that our annual shareholder’s meeting will be on May 21, 2014 here in Durham.

Unidentified Representative

Durham, North Carolina.

Randy McCullough

It’s the Sheraton.

Unidentified Representative

Imperial.

Randy McCullough

Sheraton Imperial and we will be sending out information to our shareholders, those of you that we are able to reach. You can always call Bernadette here at the office and she will be glad to give you information. I look forward to seeing you there and hope you guys are able to attend.

Operator, that concludes our presentation.

Operator

Okay. Thank you, sir and to the rest of the management team for your time today. As a reminder to all parties to access the digital replay of this conference, you may dial 1-877-344-7529 or area code 412-317-0088. Again that is 1-877-344-7529 with area code 412-317-0088 beginning at about 6 p.m. Eastern Time today. You will be prompted to enter a conference number which will be 10038553. Again the access number is 10038553. Please record your name and company when joining. The conference is now concluded. We thank you all again for attending today’s presentation. At this time, you may disconnect your lines. Thank you and take care everyone.

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