Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Charles & Colvard, Ltd. (NASDAQ:CTHR)

Q2 2014 Earnings Conference Call

July 31, 2014 10:00 AM ET

Executives

Randall N. McCullough – President and Chief Executive Officer

Kyle S. Macemore – Senior Vice President and Chief Financial Officer

Steven M. Larkin – Chief Operating Officer

Analysts

Alex J. Fuhrman – Craig-Hallum Capital Group LLC

Justin T. Ruiss – Sidoti & Company, LLC.

Abba Horwitz – Old School Partners

Operator

Good morning, and welcome to the Charles & Colvard Limited Second Quarter 2014 Conference Call. All participants will be in listen-only mode (Operator Instructions)

This webcast may contain forward-looking statements as defined in Section 27 (1) of Securities Act of 1933 as amended including statements regarding among other things, Company's business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on our Company's expectations, and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control.

Future developments and actual results could differ materially from those set forth in contemplated by or underlined in the forward-looking statements. In light of these risks and uncertainties there can be no assurance that the forward-looking information will prove to be accurate. This webcast does not constitute an offer to purchase any securities, nor a solicitation of a proxy, consent, authorization or agent designation with respect to a meeting of Company's stockholders.

After this presentation there will be an opportunity to ask question. Please note this event is being recorded.

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

Randall N. McCullough

Thanks, Keith. Good morning and thank for joining us this morning. I'm very pleased to report our 20% increase in revenue growth this quarter. We believe our second quarter 2014 revenue growth is an indication that our strategies of growing our core business with key jewelry distributors and retailers developing a leading jewelry brand featuring moissanite and increasing consumer awareness are beginning to take hold. We also reduced our inventory and increased our cash position this quarter. As we continue to execute our strategies and manage our expenses, we believe the results will repel Charles & Colvard to revenue growth and long term profitability.

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

Kyle S. Macemore

Thank you, Randy. Good morning everyone and thank you for joining us today. As announced in today's press release, net sales for the second quarter of 2014 increased 20% to $7.8 million compared with $6.5 million in net sales during the same period of 2013.

U.S. net sales for the second quarter were $7.3 million, an increase of 35% over the same period in 2013. International net sales for the second quarter of 2014 were $574,000 a decrease of 50% compared to the $1.1 million in net sale in the second quarter of 2013. Wholesale net sales increased 16% this quarter compared to the second quarter of 2013 to $6.8 million and comprised 87% of net sales. The company's direct-to-consumer businesses increased 59% in the second quarter to $1 million or 13% of net sales.

Net sales of loose jewels decreased approximately 2% to $4 million in the second quarter and comprised 51% of sales this quarter compared with $4.1 million or 63% of sales in last year's second quarter. Net sales of Forever Brilliant loose jewels in the second quarter of 2014 were approximately $2.4 million or 60% of our loose jewel sales. Finished jewelry net sales during the second quarter of 2014 were $3.8 million, an increase of 57 % as compared to the same quarter in 2013.

Gross margin for the second quarter of 2014 were 32% compared to gross margins for the second quarter 2013 of 48%. The decrease in gross margin percentage was due to higher portion of sales in the second quarter of 2014 coming from finished jewelry and the sale at lower gross margin or slower moving inventory.

Operating expenses totaled $4.6 million in the second quarter of 2014 compared with $4 million for the same period of 2013. Operating expenses increased in the second quarter of 2014 impart due to an increase in bad debt expense of $683,000 associated with the company’s allowance for doubtful accounts reserve policy. The increase in this quarter was due primarily to one long standing customer who is behind on payment. We continue to pursue all measures to collect on this outstanding balance.

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

Included in the net loss for the second quarter of 2014 was income tax expense of $4.2 million resulting from a valuation allowance on certain deferred tax assets based on the company’s cumulative negative taxable income over the last three years and the uncertainly of sufficient future taxable income to utilize it’s deferred tax assets. This compared with an income tax benefit of $360,000 in the year-ago second quarter.

The valuation adjustment doesn’t impact the company’s payment or cash taxes which was zero through the first six months of 2014. The company ended the second quarter with $3.4 million of cash and cash equivalents on the balance sheet compared to $2.5 million of cash and cash equivalents at the end of the first quarter of 2014. Inventory at the end of the second quarter of 2014 was $41.5 million which was a decrease of $2.3 million from March 31, 2014.

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

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

Randall N. McCullough

Thanks Kyle. While we are pleased to have achieved several financial initiatives this quarter including a 20% increase in year-over-year revenue, reducing our inventory and increasing our cash position, we know there is still much work to be done. Our new sales hires hits the ground running in April and May and we believed their efforts will begin to make an impact on our sales. Our new marketing initiatives like the Survivor Collection have been well received and we are also making inroads and extending our domestic customer base particularly with U.S. sales increasing 35% and accounting for 93% of our business this quarter.

Follow-up on many contacts from the recent JCK jewelry show have focused in areas where we feel we can achieve the most meaningful sale success. Such as promoting the new Survivor Collection to targeted outlets, our progresses made with the old and new relationships, our sales process is measured and delivered involving multiple presentations to department stores, mall based jewelers, independent jewelers, mass merchandisers, e-commerce and TV shopping network, recognizing that when exposed to moissanite jewelry consumer generally wont to purchase the jewelry. The challenge remains top expand awareness of our gem and of course provide retail outlets where consumer can purchase the jewelry.

Our Survivor Collection, which features unique and beautiful three-stone jewelry designs celebrating a cancer survivor’s journey, is being positively received. These exclusive designs consist of two brilliant clear stones and one pink; signifying life before the diagnosis, the journey through treatment, and the magical moment when the doctor says you are ‘clear.’ Our partnerships with The Breast Cancer Research Foundation and the Women Survivors Alliance significantly enhanced the meaningfulness of this collection to both our customers and our company.

We are very excited to announce that Boscov’s department stores and Rogers & Holland Jewelers are two to the first retailer to sign-up for the collection, which are targeted to launch this fall. Our direct-to-consumer business has increased to 59% this quarter as we believe customer are drawn to the benefits of shopping online at moissanite.com are for our fine jewelry with their Lulu Style Advisor. We are continuing our multi-channel approach in order to maximize our reach to consumer through retailer, distributors, TV shopping channels, e-commerce and our direct sale model Lulu Avenue.

The Lulu Avenue business model strives to empower its Style Advisor to succeed allowing them to prosper individually at selling Lulu Avenue designer branded jewelry and fine moissanite pieces supported with the latest technologies available in the direct sales business. Our home office team is dedicated to supporting each Style Advisor with outstanding customer service and high quality products to help build the strong Style Advisor customer relationships. Direct sales and social selling is now a multi-billion dollar industry and it’s spreading globally.

Our Lulu Avenue division is one of our fastest growing businesses and it provides continued increased awareness of Charles & Colvard. Moissanite Gems, with increasing brand awareness new marketing campaign and expanded sales forces, we look forward with continued optimism towards the remainder of the year. We've planned to continue focusing our effort on increasing sales, reducing our inventory and generating new opportunities for our wholesale and direct-to-consumer businesses.

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

Steven M. Larkin

Thank you, Randy. Our direct-to-consumer businesses continue to grow. Revenue growth at 59% year-over-year for the quarter and at 72% year-to-date, also as we continue to invest in these businesses the growth resulted in $450,000 reduced operating loss in the second quarter on a year-over-year basis. The moissanite.com business continues to grow and achieved increases in conversion, average order value, margins and page views.

Our Lulu Avenue direct sales business continues to grow and achieve increases in the active number of Style Advisors, number of parties and productivity per party. We are now represented by Style Advisors in 43-states and the Commonwealth of Puerto Rico. We just hosted our first annual Lulu Avenue style Advisor conference here in the Riley with a leadership of Michelle Jones, our President of Lulu Avenue, here team and the participation of Lulu Avenue Style Advisors. It was an educational, enthusiastic and very exciting event.

Our e-commerce wholesale business is progressing and we are working towards expanding our digital footprint, gaining impressions and awareness as well as establishing strategic partnerships and subsequent revenues. We are in the integration mode with a national multi-channel retailer e-commerce pure plays, market places and shopping engines. We are integrating via vendor agreements and setups, product and digital asset selections, EVI inventory fulfillment and invoicing methodologies.

We will also continue to work with and enhance our existing relationships with Kohl's, Helzberg, ShopHQ and jtv.com. The move to our new facilities provided us with space and resources to support the future growth of this channel while leveraging a centralized inventory in asset model. We completed the move in June with no disruption to service and continue to focus on providing excellent service to our current and future customers. As we continue to invest and grow our direct-to-consumer businesses, we will continue to get our beautiful gem stones and gem stone jewelry in front of and enhanced many satisfied customer.

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

Randall N. McCullough

Thanks Steve. This concludes our formal remarks this morning and now we would like to open the call to answer a few questions that participants in the call may have. Operator, could you please open the floor for the Q&A session?

Question-and-Answer Session

Operator

Yes sir. Thank you. We will now begin the question-and-answer session (Operator Instructions) at this time; we will pause momentarily to assemble our roster. And the first question comes from Alex Fuhrman from Craig-Hallum.

Alex J. Fuhrman – Craig-Hallum Capital Group LLC

Great. Thanks guys. Congratulation on getting back to nice revenue growth here. Would love to dive-in a little bit more specifically kind of by different channels and accounts and it looks like obviously the international business wasn’t a huge contributor here that’s been down for the last couple of quarter. Is that still an area where you’re seeing strong sell throughs and is that something you would expect to contribute to growth in the back half of the year and beyond? And within your United State’s business or perhaps this is international as well, I’m curious it look like you sold a good amount of the of the older inventory at a lower price, which is great to get the cash balance up there, I think that was probably a smart move. Was that one specific transaction to an exciting customer or new customer or is there anything we should be aware of on that side, because it looks like the gross margin was a little bit lower than the expected even with the mix shift into finished jewelry and then any color on how your business went on JTV or at ShopHQ in particular would be very helpful. Thank you.

Randall N. McCullough

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

It is important to note in India we don’t have patent protection and that’s where most of this product is entering the market. And just to give a tit bit on international, one distributor I spoke with last week said that in purchasing some of that what he called very optimistic inventory, he unfortunately found out that the vast majority of it was CZ coated with silicon carbide. So I think that the marketplace is going to kind of take care of itself and in a large part, but we have put together some initiatives that we’ll be launching over there very soon.

And turning to the U.S. and specifically the older inventory. We are working with a host of our distributors and we’re also working with the JTV folks to create amount of styles that utilize some of that inventory that we’re strategically moving and you are right, we are giving them a very advantageous price, but at the same time, we've made a profit on every sale which is very important to us.

JTV just as a note, I think in our couple of week end go ran a 16-hour show split-up in 2-hours segments with Charles Winston hosting the show, came back with loose Jewels for two hours and he almost doubled their projects and in the balance of the show on an hourly basis and a per show basis, he broke every record he had ever set before. So we continue to see increases with JTV, we don’t know what the cilium is yet. We are all excited about it and we’ll be working with JTV on the second half of the year to hopefully take advantage of a lot of these opportunities.

Alex J. Fuhrman – Craig-Hallum Capital Group LLC

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

Randall N. McCullough

Thanks.

Kyle S. Macemore

Thanks Alex.

Operator

And the next question comes from Justin Ruiss with Sidoti.

Justin T. Ruiss – Sidoti & Company, LLC.

Good morning.

Randall N. McCullough

Hey, Justin.

Justin T. Ruiss – Sidoti & Company, LLC.

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

Kyle S. Macemore

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

Justin T. Ruiss – Sidoti & Company, LLC.

Got you. Perfect thank you very much.

Kyle S. Macemore

Okay.

Operator

Thank you. And the next question comes from Abba Horwitz with Old School partners.

Abba Horwitz – Old School Partners

Hi, good morning.

Kyle S. Macemore

Good morning Abba.

Randall N. McCullough

Hey Abba.

Abba Horwitz – Old School Partners

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

Randall N. McCullough

Okay thanks Abba. Abba with the new Survivor Collection obviously with the connection with the cancer folks we've had – at the JCK show the reception were buyer from big-box boxes was very good, we do have meetings scheduled with the big-boxes, those for the most part are in August some in September. So we haven’t made the formal presentation to what I call the really big-boxes now Boxkat [ph] has 40 something I believe if you could check it out on the internet department stores.

We did get our presentation into them in July and they have signed-up and Rogers & Holland I think has about 70 or 80 jewelry stores in the Mid-West and as well within they have signed-up. So we’re really just out of the gate from the jewelry show as the 1 of June with getting those appointments and making those presentations. I’m very optimistic that we've got an opportunity here and hopefully we’ll be able to report some really positive news in the near future. On the dot.com with Khol’s, I'm going to let Steve answer that because really kind of under his wing and I know Tom has been making a lot of progress there.

Steven M. Larkin

Yes, without getting into any of the Khol’s specifics outside, a drop shipped programs for our existing dot.com partners are all proceeding nicely and they are all expanding the programs relative to product to showroom and marketing initiatives, selection of key items for this upcoming holiday season and we continue to service those business, grow them and are working on bringing additional partners into those programs, again leveraging our infrastructure of inventory, creative assets, et cetera.

Abba Horwitz – Old School Partners

Okay. Any progress, can we assume that you will have someone the size of Khol’s before the holiday season?

Randall N. McCullough

Another dot.com, he is saying someone…

Abba Horwitz – Old School Partners

Yeah.

Steven M. Larkin

Sir, could you repeat the question please?

Abba Horwitz – Old School Partners

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

Steven M. Larkin

You mean another account?

Abba Horwitz – Old School Partners

Correct.

Steven M. Larkin

Similar to Khol’s, yes we do.

Abba Horwitz – Old School Partners

Okay fantastic. One other thing, can you comment Randy on just the sense and the feedback the consumer adopting the moissanite product, if you are seeing better feedback on it and better demand interest from jewelry as well?

Randall N. McCullough

You know that’s a part that has always amazed me and continues to, if you look on any of the dot.coms that post the consumer feedback, I know Khol’s posted, JTV posted, Shop NBC posted – well its ShopHQ now, our moissanite.com post them. I mean these women, and even if you go to our Facebook pages whether its on Lulu or whether it’s on Charles and Colvard, these women when they get a piece of moissanite jewelry, they absolutely love it and we see the repeat buyer on our moissanite.com and hear from others.

Why the jeweler have resisted and Jewelers in general why they have resisted putting moissanite in their case. It just back holds, because they are missing a real opportunity to increase their cash flow and their profit by selling the product. Again, the consumers love it. I think you are going to see the dot.coms embracing it more. They are recognizing the fact that Khol’s and others are experiencing some really strong sales in it.

Those that are tracking it and looking at their numbers can see that generally we’re in the top 15% or 20% of each company that we’re involved with sales and so again it’s an opportunity, it back holds me with jewelers, but all what we've got to do is focus on getting in front of more consumers. Lulu Avenue is doing a fantastic job with that our dot.com business is doing a fantastic job with that and the partners that we've taken on and the partner that we’re brining up between now and the Christmas selling season. I'm extremely optimistic we’re going to increase our awareness significantly.

Abba Horwitz – Old School Partners

All right beautiful. Thank you.

Operator

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

Randall N. McCullough

Thank you Keith. Once again, I would like to thank everyone for taking the time to participate in our call today and most of all thank our employees for all their hard work and continued dedication. As Steve said earlier, the move really went without a glitch and I can speak I think for all of the employees, we’re in a much better environment where we’re positioned to handle much brighter volume that we anticipate will come soon hopefully. Operator we’re finished with the call. This is it. Thank you very much.

Operator

Thank you. A replay of this call will be available starting round roughly 5 0’ clock Eastern Time today. You may access the replay by dialing 1-877-344-7529 or 1-412-317-0088. You will be prompted to enter a code, which would be 10038569. You also will be asked to record your name and your affiliation. Thank you for attending today's presentation. You may now disconnect your lines. Have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Charles & Colvard's (CTHR) CEO Randall McCullough on Q2 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts