Charles & Colvard, Ltd. reports that net sales decreased 41 percent to $3.4 million for the first quarter of 2008 as compared to $5.8 million in the first quarter of 2007.

The company attributed the sales decline to actions by retailers to effectively reduce inventory on-hand, “partially due to the challenging macro environment.”

Another factor that negatively impacted revenue during the first quarter was the time and effort necessary for several retailers to transition to new moissanite jewelry suppliers to replace the jewelry previously sourced thru K&G Creations. That company said that process will endin the second quarter and it expects to see the revenue contributions from those retailers return to a more normal pattern in the second half of the year.

Operating loss was $1.1 million compared to operating income of $587,000 for the same period in 2007. Net loss was $698,000 compared to net income of $339,000 in the comparable period of 2007.

The company also reduced its U.S. workforce by 18 percent which it said will result in annual savings in excess of $500,000.

“While we were disappointed with our first quarter financial results as sales trends at retail continue to be soft, we remain intently focused on addressing short-term challenges our company is facing,” said Bob Thomas, chairman and chief executive officer. “We are pleased to announce that Kanter International, a brand consulting firm we engaged to conduct a review of our company, has completed its assessment of our business model and provided recommendations. We are in the process of evaluating the recommendations which focus on organizational structure, brand building and sales growth strategies as well as expense controls and inventory management.”

Thomas added that during the annual shareholders meeting on May 27, the company’s board will undergo “significant changes,” as three directors will be replaced.

“We made a determined effort to recruit the talent and expertise required to guide our Company in this challenging time,” Thomas said.

Charles & Colvard’s domestic sales in the first quarter decreased 47 percent to $2.4 million compared to the first quarter of 2007. International sales for the first quarter fell 20 percent to $961,000, primarily due to decreased sales to the United Kingdom, Thailand, and Canada, which were partially offset by higher sales to Hong Kong. Total shipments of 18,400 cts. for the current period were 48 percent less than the 35,300 cts. shipped in the same period of 2007. Shipments of carats in the U.S. decreased 53 percent while international shipments of carats fell 28 percent.

Gross profit decreased 49 percent to $2.2 million compared to $4.4 million in the prior year period. Gross profit margins fell to 66 percent in the first quarter of 2008 from 76.7 percent in the comparable quarter of 2007, primarily as a result of a write-off and increase of a reserve relating to consigned jewels being returned in damaged condition by K&G Creations who, as previously noted, is exiting the moissanite business.

Total operating expenses decreased 13 percent to $3.4 million in the first quarter of 2008 compared to $3.8 million in the first quarter of 2007. Marketing and sales expense was down $758,000 in the first quarter versus the prior year primarily due to $631,000 of decreased advertising expense and a $122,000 reduction in travel expense.

In addition, general and administrative expense increased by $272,000, primarily due to $187,000 in fees paid to Kanter International.

These factors led to an operating loss of $1.1 million compared to operating income of $587,000 for the same period in 2007.

As of March 31, total inventory (including consignment) increased by $890,000 compared to Dec. 31, 2007, primarily due to the level of raw material purchases. The company’s raw material inventories of silicon carbide crystals are purchased under exclusive supply agreements with a limited number of suppliers. Because the supply agreements restrict the sale of these crystals to only the company, the suppliers negotiate minimum purchase commitments with the company that may result in periodic levels of raw and in-process inventories that are higher than the company might otherwise maintain.

“Looking ahead, we fully acknowledge the challenges and issues we face, and understanding that process change is required, we will work to deliver positive change in our performance,” Thomas said. “In our history we have demonstrated the capacity and the ability to embrace change when it is called for, and you should expect that we will identify and make necessary changes at this critical juncture.”

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