Charles & Colvard, Ltd. (NASDAQ:CTHR) Q4 2023 Earnings Call Transcript

Charles & Colvard, Ltd. (NASDAQ:CTHR) Q4 2023 Earnings Call Transcript October 13, 2023

Operator: Good day, and welcome to the Charles & Colvard Q4 Fiscal Year 2023 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] This earnings call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended including statements regarding, among other things, the company’s business strategy and growth. Expressions that identify forward speaking 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 and contemplated by or underlying the forward-looking statements.

In light of these risks and uncertainties, there can be no further 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.charleandcolvard.com/events. The company will be hosting a Q&A session at the conclusion of the prepared remarks. Should you have any questions you’d like to submit, please e-mail cthr@lythampartners.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.

Don O’Connell: Good afternoon, everyone, and welcome to our fourth quarter and fiscal 2023 financial results conference call. The challenging macroeconomic backdrop, a weakened consumer outlook and a softening engagement market greatly impacted our quarter and fiscal year. We are not alone, as these circumstances and heightened downward pricing pressure on both lab grown and mine diamonds created significant headwinds for the entire jewelry and gemstone industry. Until now, these challenges have not greatly affected our overall business. These trends in the diamond market have now put considerable pricing pressure on moissanite, affecting our overall traditional wholesale business and consumption of raw materials. This has caused us to reevaluate our supply chain and gemstone cost, pricing methodology and go-to-market strategy, as we experienced margin erosion and softer sales.

In addition, late in Q4, we identified a cybersecurity incident that temporarily disrupted the company’s IT network and resulted in some limited downtime for certain systems. Our investigation revealed no evidence that any sensitive customer data was compromised as a result of this incident. Our relationship with our customers has not been negatively impacted and no payments were made to the ransomware threat actors. We have, however, incurred costs in the first quarter of the fiscal year ending June 30, 2024, and expect to continue to incur some additional cost in the future related to enhancements to our cybersecurity measures. Despite these challenges, our balance sheet remains strong, and the company continued to manage cash effectively, closing out the quarter and fiscal year with over $15.6 million.

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The company remains debt free, all the while making strategic investments in support of our future growth opportunities and initiatives. Other notable highlights for Q4 include; we launched both successful Mother’s Day and Father’s Day campaigns on charlesandcolvard.com. As we look to expand our repeat customer base, highlighting men’s and unisex jewelry, we hosted a private invite-only spring preview in New York City in April with more than 30 editors and influencers from well-known publications and websites such as The Knot, NBCU, TODAY and U.S. Weekly to showcase our new expanded fine jewelry styles. We launched the company’s new owned B2B web property, charlesandcolvardirect.com. Selling loose moissanite gems, Forever One and moissanite by Charles & Colvard to selected retailers.

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Q&A Session

We expanded our assortment of new Forever One moissanite and Caydia lab-grown diamond fine jewelry styles on charlesandcolvard.com across all categories, including our signature and exotic collections, along with our fashion jewelry assortment, in both lab-grown diamonds and moissanite and our maiden color collection in unisex bands and lab-grown diamonds. We launched three new drop-ship partnerships featuring Moissanite by Charles & Colvard fine jewelry. We attended JCK in Las Vegas in June to engage with customers and our vendors in support of growing our customer base and product assortments. We launched an ad campaign promoting the company’s signature showroom in the local Midtown magazine. We showcased and highlighted our brand in the Direct Selling Association’s Annual Conference in Scottsdale, Arizona in June, to further build our brand awareness and establish non-traditional partnerships.

We appeared in 34 brand and product placements and 23 features including notable outlets such as Marie Claire, The Hollywood Reporter, Brides, JCK, The Knot and AC Magazine. And revenue on our moissaniteoutlet.com owned property increased by 64% for the quarter, which enabled us to capture a greater market share of those consumers seeking lower priced fine jewelry items. We believe responsible inventory management is crucial for maintaining competitiveness amidst a challenging economic landscape. Given the seismic shifts in the industry, pricing pressure, and constrained consumer demand, we have taken a position to write down $5.9 million of certain lower grade non-Forever One moissanite and lab-grown diamond raw material and gems. The company’s inventory level remained solid at $26.75 million, which we deem adequate to support the demand for our Forever One product category for the foreseeable future.

We are confident that advancements in our technology are proprietary cutting and fastening methods and our ability to procure alternative SiC material as needed enable us to navigate the fluid environment more responsibly. As we look ahead, let’s take a moment to look at the positives that we believe will better position us for future growth beyond the macroeconomic and industry headwinds in the short-term. The holiday season fast approaching, has historically been our strongest quarter as consumers are predisposed to purchase. Our proprietary signature collection continues to resonate with the consumer as we seek to differentiate the brands and products we have to offer, supported by a 36% increase in revenue for Q4 compared to one-year ago.

In addition, during the fiscal year and quarter, the company’s AOV or average order value remains stable, which reflects that we’ve been able to maintain our price points despite the macroeconomic backdrop. While we believe the lab-grown diamonds have gained significant market penetration and that our Caydia lab-grown diamonds will become the highest growth product category for us, witnessed by more than a 20% increase over the comparable periods, we also believe that moissanite will remain an integral part of our overall business composition as it continues to offer an attractive value proposition to the price-conscious consumer looking for quality fine jewelry products. The increased demand for lab-grown diamonds amplifies the need to grow our Caydia lab-grown diamond business in a responsive way as we seek to migrate our diamond products into existing channels to capture a greater share of wallet.

We believe that the lab-grown movement plays into our hands, and as more consumers come to understand that lab-grown diamonds are identical to their mined counterparts, the only difference being the origin. According to the knot.com, a wedding planning website, of the 12,000 couple surveyed, more than one-third opted for lab-grown diamonds as their ring centerstone, double the number just three years ago. As a result of these trends, sales of lab-grown diamonds are expected to double to $55.5 billion by 2031. As we move forward, we will continue to evaluate the competitive landscape and the value proposition between moissanite and lab-grown diamonds and its overall impact on our business. We will continue to invest responsibly and seek opportunities to make our brand and products top of mind.