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spk02: Good day and welcome to the Charles and Colvard second quarter fiscal year 2021 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. 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 of the statement is made. These forward-looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified, and are beyond our control. Future developments and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. 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.charlesandculvard.com slash 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 email ir at charlesincolvard.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.
spk07: Good afternoon, everyone. Welcome to our second quarter fiscal 2022 earnings conference call. I'm extremely proud to share with you that in Q2, we delivered the highest revenue for a single quarter in the company's almost 27-year history. At $13.8 million, this new record is a 13% increase to the year-ago quarter and maintains our strong 49% gross margin. Additionally, we recorded $24 million in revenue for the fiscal year to date, achieving a 20% increase over 2020 for a blended margin of 50%. and a 32% increase over 2019. Our continued momentum represents six sequential quarters of profitability and double-digit growth for the company. This progress was largely fueled by the deployment of additional capital towards our increased brand awareness campaigns and our direct-to-consumer marketing initiatives. So what does this mean? We believe continued investments in paid and social advertising in support of our owned web properties and assets are paying off and are necessary to continue our growth trajectory. As we redefine real, our ability to offer consumers the choice between Forever One Moissanite and CATIA lab-grown diamonds enables us the opportunity to capture more of the total achievable market. With the lab-grown diamond market potential alone estimated to be $49.9 billion by 2030, Our product assortment is now becoming all-encompassing and more diverse from traditional bridal and anniversary styles to fine fashion to unisex bands. And we now appeal to a broader audience and have something for every fine jewelry consumer. The intersection of our price, quality, and value is making a positive impact on sales and a lasting impression on customers. Our made-not-mind messaging is resonating within the industry, and that conscious consumerism is the future. Here's what we know. Our online channels revenue grew by 23% over the year ago quarter to $9.3 million versus $7.6 million. This represents 68% of total revenue for the quarter. Fiscal year to date, online channels revenues was up 22% at $14.7 million versus $12.1 million and represents 61% of total revenue. In particular, Charles and Colvard.com revenue increased 49% over the year-ago quarter and 40% over the fiscal year to date comprise 68% of our online channels revenue for the quarter. Our website traffic is up 12% and our conversion rate is up 30% versus the year-ago quarter. Our signature collection sales are up 89% compared to the year-ago quarter. and our Moissanite business continues to grow 35% over the year-ago quarter and 72% quarter-over-quarter, while our lab-grown diamond sales are up 266% versus the year-ago quarter and 152% quarter-over-quarter. Now I'm going to turn the call over to Clint Peete, our CFO, to unwrap the numbers in more detail. Clint?
spk01: Thanks, Don. Today I'll provide a summary of key financials for a second. fiscal quarter, and six-month period ended December 31st, 2021. Additional detail can be found in our earnings press release that we issued this afternoon and our Form 10-Q. We expect to file them all. Please note that all percentages comparisons are to the year-ago quarter unless otherwise specified. We'll begin with revenue. In total, net sales for Q2 2022 totaled $13.8 million versus $12.1 million. or an increase of 13%. And for the six-month period into December 31st, 2021, net sales totaled $24 million versus $20.1 million, or an increase of 20% from the year-ago period. Net sales from our online channel segment, which includes charlesandcobar.com, moissanotoutlet.com, marketplaces, dropship retail, and other pure play outlets totaled $9.3 million for the quarter. or an increase of 23%, representing 68% of total net sales. Net sales from our transactional website, charlesandcovar.com, increased by 49%. Online channel net sales for the six-month period ended December 31, 2021, increased 22% to $14.7 million, or 61% of total net sales. All net sales from our transactional website, charlesandcovar.com, increased by 40%. Net sales for our traditional segment, which consists of wholesale and retail customers, totaled $4.4 million for the quarter, a decrease of 3%, representing 32% of total net sales. As we mentioned last quarter, in Q1 2022, we saw strong demand from our domestic distributors gearing up for the holidays. Unlike last year ago quarter, where more of this demand flowed into Q2 2021. This decrease was offset by continued strong demand from our brick and mortar retail customers. Net sales for our traditional segment for the six-month period into December 31st increased 16% to $9.3 million, or 39% of total net sales. Venice Jewelry net sales increased 28% for the quarter as we continue to see strong demand from our premium jewelry and our online direct-to-consumer channels, along with our brick and mortar retail customers. Then as jewelry net sales for the six-month period ended December 31, 2021, increased 29% to $16.2 million, or 68% of net sales, up from 63% of total net sales in the year-ago period. Loose jewel net sales decreased 17% for the quarter due to our domestic and international distributors ordering in advance of the holiday as previously noted. Loose jewel net sales for the six-month period ended December 31, 2021, increased 4% to $7.8 million, or 32% of net sales. International net sales decreased 4% for the quarter and were flat to last year for the six-month period ended December 31st, 2021, as we continue to see impacts from the pandemic. Moving on, we delivered a strong gross margin of 49% for Q2 2022, steady to the year-ago quarter. For Q2 2022, total operating expenses increased 52%, representing 38% of total net sales compared to 28% in the year-ago quarter. In support of our brand awareness initiatives, sales and marketing expenses increased 64% to $4.1 million, and G&A expenses increased 22% to $1.2 million for the quarter. The main driver in the increase of G&A was increases in performance-based, stock-based compensation. Net income for Q2 2022 was $1.2 million, or $0.04 per diluted share, compared with $2.5 million, or $0.09 per diluted share, in the year-ago period. For the six-month period ended December 31, 2021, net income was $2 million, or $0.06 per diluted share, compared to $3.4 million or 12 cents per share in the year-ago period. Included in net income for Q2 2022 is income tax expense of $283,000 compared to $500 in the year-ago quarter. For the six-month period ended December 31, 2021, income tax expense was $406,000 compared to $1,000 for the year-ago period. Our weighted average shares outstanding using the calculation of diluted earnings per share for the quarter were approximately 31.3 million shares at December 31, 2021, compared to 29.3 million shares at December 31, 2020. The increase in our weighted average shares outstanding of approximately 2 million shares was driven by an increase in option exercises by insiders and issuance of restricted stock to executives. These factors higher income tax expense, as well as auctions, exercises, and restricted stock directly impacted our earnings per diluted share for the quarter and the fiscal year to date. Now, let's move on to a snapshot of our balance sheet. Our liquidity and capital position remained solid as we ended the quarter with $21.3 million of total cash compared to $21.4 million at our last fiscal year in the June 30th, 2021. and compared to $19.2 million in the previous quarter, increasing our cash position by $2.1 million. Our cash flow from operations remains strong at $2.3 million for the quarter compared to $3.1 million for the year-ago quarter. Our working capital increased to $31.3 million at December 31, 2021, compared to $30.1 million at June 30, 2021. In terms of other sources of liquidity, we have access to our $5 million cash secured credit facility with JPMorgan Chase Bank. At December 31st, 2021 and through today, we have not accessed funds through the credit facility. Inventory as of December 31st, 2021 totaled $31.8 million compared to $29.2 million as of June 30th, 2021. Finished jewelry inventory was $16 million compared to $12.3 million as of June 30, 2021. To maintain healthy stock levels in support of our growing demand requirements in our direct-to-consumer and brick-and-mortar business over the holiday and in preparation for the upcoming Valentine's Day season. Loose jewels inventory was $15.8 million compared to $16.8 million as of June 30, 2021. In summary, we remain confident in our financial strength and our continued efforts for the long-term growth. With that, I'll turn the call back over to Don.
spk07: Thanks, Clint. Now I'd like to point out some key drivers that proved to be impactful this quarter. We distributed 14% more packages this holiday quarter compared to last year. We optimized our internal systems and processes to support the ever-growing demand. including strategic investments to enhance our ERP and warehouse management systems, maximizing our efficiency. We diversified our product offerings to reach broader audiences. We launched new collections and expanded assortments featuring both Forever One Moissanite and Cadia Lab Grown Diamonds ahead of the 2021 holiday season, including flexible bangles, tennis necklaces, men's rings, and zodiac pendants. We proactively scaled our sales and operations pipeline, forecasting ample inventory and capacity ahead of the busy holiday demand. We stepped outside the traditional sales methods to create more visibility for the brand. As their official jewelry partner, we designed and produced rings for the 2015 and 2019 U.S. Women's Soccer World Cup Championship teams. We enhanced our customer engagement by investing in our digital infrastructure. We made significant improvements to overall site performance and load times, and we launched streaming shoppable events on charlesandcolvard.com. We flexed our digital marketing approach and product segmentation strategy to meet real-time consumer demand and users' online shopping behaviors, increasing our website traffic and conversion rates. We also boosted our digital marketing initiatives to keep the Charles & Colvard brand top of mind, even against our competitive set. And lastly, we expanded our in-house video and production capabilities, enabling us to utilize the content across multiple platforms, including out-of-home advertising and key markets. As a pioneer in the lab-grown space, Charles & Colvard has been growing gemstones for almost 27 years. While we believe that many other brands are just beginning to integrate sustainable solutions and collections, into their repertoire, we can confidently say that our entire product offering began with a conflict-free and responsibly sourced mindset. 2022 is the year we expect to see the intersection of our forward-thinking product aligning with consumer values. We know that consumer values have evolved. Many customers demand more than just quality. They also want to understand the origin of the product and for it to align with their personal values. The significant increase in the demand for lab-grown diamonds in the fine jewelry market is indicative of this new consumer ethos. To be ready for the growth that continues with increased consumer demand in the lab-grown industry, we continue to make investments in our operations, infrastructure, and technology to capture a larger market share. As we expand our messaging to reach today's conscious consumer, we also evolve to adapt to the new customer. This means making the brand accessible beyond the traditional platforms and meeting the customer where they wish to shop, whether it be via live streaming, TV, e-commerce or virtual and brick and mortar showrooms. While 2021 was about solidifying our place as a direct to consumer brand, 2022 is about amplifying what we stand for and illuminating a more brilliant path forward for the brand and for the industry. With that, I'd like to turn it back over to the operator to open the lines for your questions.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Matt Coranda from Roth Capital. Please go ahead.
spk05: Hey, guys. Good afternoon. Just wanted to start off with the step up in sales and marketing. Where are the incremental dollars being spent? If you could just sort of unpack a little bit more detail. about sort of where we see opportunity, where we've been spending incremental dollars in that line item. And then maybe just if you could speak a little bit more granularly with respect to the results from the campaigns that you're running, and are there any headwinds to call out in terms of marketing efficiency? And then lastly on this front, like wondering if there's any spillover benefit from the ramp that we've seen this quarter that may result in better growth heading into the back half of the year.
spk07: Yeah, hey, Matt. So all pointed questions, and I appreciate the questions. As it relates to the spend, that's totally by design. We started speaking last quarter to the fact that we wanted to build a little bit more top of funnel. Also, as we start to become a significant player in the lab-grown diamond space, the cost associated with being in that space is much greater cost per clicks. So in order to be the player in that space, in order to be a leader in that space, we're going to have to kind of spend a little bit more. As well as that, on a Moissanite outlet, we spoke that we'd start deploying capital towards that, you know, word association, phrases, all these important things, performance-based marketing strategies that we have to put in place to be kind of a leader in that too as well. So we believe that we're very efficient in this. We believe that the ROAS is real strong. We believe that our direct-to-consumer businesses are really performing well, especially on our charlesandcolvar.com at a 49% increase We believe that's significant, and we believe that the deployment of capital towards that particular channel is performing quite well. Certainly, we want to continue to push that envelope. We started pushing the envelope in Q1. We're pushing the envelope further into Q2, and we'll continue to do so as long as we're getting the ROAS that we kind of set forth as a benchmark for us to really grow the business. I mean, it's time now to grow the business. six sequential quarters of profitability. We know how to run our business. We know the ebb and flows of the business. Now it's time to kind of drive more traffic and more sales. The conversion rate is increasing, too, as well, so we're very pleased by that. And we believe that we're putting the right foot forward to grow the business properly.
spk05: Great. Thanks, Don. And then on the gross margins, I was curious if you could sort of level set expectations for – how gross margins sort of trend over the next several quarters. It does seem like we took a little bit of a step down quarter over quarter. So maybe first you could just speak to sort of some of the drivers of gross margin this quarter, whether that be sort of inbound freight, product costs, or mix that sort of drove it down quarter over quarter despite the higher revenue. And then just on a go-forward basis, any commentary you can provide to sort of help us understand sort of where those trends That'd be helpful.
spk07: Yeah, so industry-wide, 49% gross margin is very strong, in my opinion. So, sure, we went from 51% to 49%, but certainly as we, you know, have a sale cadence throughout, you know, the holiday season, we pretty much kind of forego some margin points or some margin creep happens in that regard. But we continue to kind of look at all the blended margin. Certainly... signature collection, which is our number one critical category that we want to grow in the business because that increases the margin for the overall business. With 89% increase on the signature side, it actually keeps healthy margins up. As you'll look forward into the quarter, as you'll look to us leaning more on signature, more on the higher margin items and lifting our margin percentage. make no mistake at 49% to 51%, we're very pleased with that margin. We believe that we can consistently drive that margin through the next couple of quarters for sure.
spk05: Great. Uh, thanks for that as well. Um, and then just last one for me, if I could squeeze one in, uh, on the wholesale channel. Um, just wondered if you could maybe unpack that a bit more in terms of the trends you saw this quarter. Um, in particular, I'm just interested in sort of the international distributor revenue versus sort of some of the domestic retail that you have and sort of how those trended. That'd be really helpful.
spk07: Yeah. So on the domestic retail front, um, still remains very strong. So a lot of consumers are buying their jewelry at the retail stores and that's beneficial to us too, as well, because we certainly have that offering and that option for that consumer. On the international side, we definitely are still facing headwinds there, you know, between the pandemic, between kind of our overall distributors having difficulty within the region. So you'll see us kind of continue to face some headwinds in that particular regard. Our domestic distributors actually pulled forward in Q1. If you recall, in Q1, we had a 43% or 42%, if I can correct me, on increase in our domestic distributor side and That was primarily due to really responsible thinking and forecasting with our sales and operations team to be able to get with those distributors and have them plan ahead early enough for holiday. And that allowed us kind of the increased capacity to be able to grow and ship more for our made-to-order and our direct consumer businesses. So, you know, that increase there, you know, was quite nice, but we did – you know, pretty much drop off a little bit on the traditional side just because they proactively bought ahead of schedule in Q1. But I would look at the full half of the year or the first half of the year as kind of a basis for the business and the overall health of the business. I mean, we certainly had $24 million in revenue for the first half of the year, which is very significant for Charles and Colvard, significant for me as the CEO, and it's definitely moving in the right direction.
spk05: Great. Thanks, Don.
spk02: I'll jump back in queue here. Again, if you have a question, please press star, then 1. There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Don O'Connell for any closing remarks.
spk06: Yeah, I believe we do have one more question.
spk02: Yes, we do. Eric Landry from BML Capital. Please go ahead.
spk03: Hi, thanks. Hi, Don. The $4 million in sales and marketing, is that sort of the new level that we should expect here going forward? Or how are you thinking about that?
spk07: Well, certainly we want to continue top-line growth. We still delivered $1.5 million in income from operations and $1.2 million in net income. So our bottom line is still remaining strong. We're still comfortable. Cash flow is really strong. So that gives us an opportunity to keep pushing the envelope. So I would anticipate that we're going to continue to spend and grow, but certainly maybe not at the level of this quarter. This was the holiday quarter. So there was a lot of players in the sandbox that were, you know, vying for, you know, search terms and keywords. And as we start to, you know, kind of move the business and grow the business in the lab-grown diamond space, it's not a crowded space at this point, but it's getting more and more crowded, you know, as kind of the months and quarter go by. So I would anticipate that that cost per click and that spend is going to, you know, continue to be, you know, pretty much steady, if not increase. But to your point with the $4 million, we believe that that will come down a little bit within this quarter because it's not the holiday quarter for us.
spk03: If I hear you correctly, you're indicating that it's taking more investment now to drive the business than it did. Is that the correct assumption or is this something like back to the strategy that the old CEO had of different parts of the funnel, if I remember correctly?
spk07: Yeah, so I wouldn't compare myself to anyone else. This is a specific strategy. We've actually started to do out-of-home marketing campaigns. We've done some different campaigns that we've done in the past to be able to kind of test the envelope to see what's performing. Also, prior, the company was not in the lab-grown diamond space and didn't offer the other product offerings, certainly driving the highest revenue in the single-quarter history of the company. is pretty strong, so we're getting the top line growth, we're getting the revenue, whereas in the past, the spend was there without the revenue and without the profitability. So, two fundamental differences there. We're spending where we're getting the result and where we're getting the ROAS, and where we see the opportunity for growth in the business. Also, we didn't have lab-grown diamonds in the past, we do now. So that means we can get additive revenue or accretive revenue to the business in that product category, and we want to go after that category. So we're leaning in on it just to kind of see where we're going, but, you know, certainly I wouldn't compare myself to the past. I believe that the company and kind of the fundamentals over the last six quarters of what we'll call kind of a change management or the new way is a completely different way and solid performing business. growth along the way, and profitability all the way forward, too, as well.
spk03: Okay. That's great. I appreciate that. But I guess is it – I don't know how to sort of frame this, but it appears to me that the company now going forward, at least for the next few quarters, is going to be a little bit less profitable than perhaps I and maybe others assumed going into the quarter. which is, I guess, a little bit alarming, but hopefully most of the decrease in profitability is because of the pullback in the traditional segment, and hopefully the online segment keeps chugging along as it was.
spk07: Let's talk about that a little bit. So to the value investor, what do they look for? They look for stability. They look for cash. We're very strong in cash, right? So we have $21.3 million in cash. We know how to grow cash, we're growing cash. So that itself is a really important factor for stability in the business. We're still producing a million dollars or close to a million dollars a quarter in profitability, so that's also strong. How do we get this company from, you know, where it was in the past to, you know, 20-ish million dollars to 39 million dollars just the last, you know, fiscal year, now into the 50-plus million? We're gonna have to deploy capital to get this company to increase that value to that growth investor too as well. Somewhere between value and growth is where Charles and Colbert's going to be. That's not going to happen unless we start to spend money to be able to drive growth. Will we continue to spend? Absolutely. At these levels, it really just depends on the products and the offering and then how much return on ad spend we get from a different channel or a specific channel. top of funnel type advertising specifically for us is conversion based. So we'll do top of funnel, but it's still converting. We'll do mid to lower, but it's still converting. We'll do some new inventive advertising campaigns like, you know, like the soccer championship. So those are the type of things that are probably nuances that didn't occur the prior quarter will not occur in the next quarter. But there's a cost associated with those type of awareness campaigns. and we intend to play in that space, all the while being fiscally responsible with our shareholders' money and growing the business along the way.
spk03: All right, Don. I appreciate that. I appreciate that. Thanks. I just wanted to make sure that we're getting return on these ad dollars we're spending.
spk02: Thank you. Absolutely. Again, if you have a question, please press star, then one. Our next question comes from Jason Ersanner from Bumbershoot Holdings. Please go ahead.
spk04: Good afternoon. Congrats on the continued profitable growth. I guess just, you know, you sort of answered it on the last call, but I wanted to follow up. You know, you kind of, in the first question, you remarked you've had, I think, six quarters of profitability and growth, and now it's time to grow the business. The question, you know, last time, is this seizing the opportunity? I mean, how much can you see... you know, in terms of competition, this is kind of a greenfield space to grow, and this is the time to do it. And what's kind of the feedback mechanism you get on that spending? How quickly can you tell if something's working versus not? And, you know, kind of keep putting money towards the things that are working, obviously.
spk07: Yeah, so thanks, Jason. I appreciate the question. And I also appreciate seizing the moment. So that exactly is probably the correct – nomenclature for what's happening. Lab-grown diamond industry is very, very strong right now. The whole lab-grown diamond space is very strong. The momentum is moving in this space. It's our time, and it's our time to kind of get a foothold and become one of the leaders in the industry, if not the lead in made-not-mine gemstone jewelry, which is really kind of our forte and what we've been doing for a long time and what we do better than most. So We believe that we have real-time data. We're making data-driven decisions. Basically, we're able to see the moment we deploy a campaign, if it's a, you know, whatever campaign it is, we can actually visually see the performance almost in real time. And we're able to kind of react to that. We're able to spend more in that campaign. But certainly, you know, we'll continue to see those moments when they arise. And we have to.
spk04: Okay, and can you maybe just talk about the difference in brand between Moissanite versus Diamond where, you know, with Moissanite you had the, I guess, supply advantage versus with lab-grown diamonds it feels a little different. So just competitively, you know, is the path to building a brand the same, you know, or what makes it different in the lab-grown diamond space specifically versus, I guess, historically, you know, how you guys have built the brand in Moissanite?
spk07: Yeah, certainly in the Moissanite space, we're the leader. We've been the leader for almost three decades now, a couple decades for sure. We certainly do it better than anyone, in my opinion. We believe that we bring the best of breed of silicon carbide and gemstones to market, as well as beautifully crafted jewelry. That's a quality that literally me, being in the industry for over three decades, am proud of. As it relates to lab-grown diamonds, it's kind of a different mix, so it's different shapes and sizes. It doesn't have all the shapes and size opportunities that the Moissanite pieces do, so it's kind of a new lane for us. But certainly the jewelry aspect of it, we have that down, and we believe that we're best of breed in kind of style, design, and quality in that regard. We're not as vertical, of course, because we're basically taking – You know, those particular gemstones are already faceted, but what we did do early on is we identified the fact that over the last couple of quarters that there is a fashion consumer there, and that consumer is looking for a beautifully crafted product with multiple small what we call melly stones, and we're bringing that to market, and it's actually resonating quite well with our consumers. And that's why... You know, we talk about our increase in lab-grown diamond sales versus a year ago quarter, 266%. And that's significant for us, and we'll continue to build upon that. And we believe we can be the lead in that category because we basically went to market knowing that we had to position ourselves. If you look at some of the increased inventory, that's due to us, you know, kind of securing our position and being prime in those goods. Certainly in the larger center and the larger center stones, We specialize in a quality standard that's above the rest, and that standard is what we focus on. We're letting the others play in the sandbox with the low margin kind of qualities for now until we kind of, you know, get a little bit more learnings under our belt related to the lab-grown space and the opportunity.
spk04: Okay, great. Appreciate all the comments. Thanks.
spk02: Again, sorry. Again, if you have a question, please press star, then 1. Okay, there are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Don O'Connell for any closing remarks.
spk07: Yeah, thanks, Jason. So we appreciate your time today. Thank you for your continued support in Charles and Colvard with that. Have a great weekend and until next time.
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