Charles & Colvard Q4 Sales Down 55%

Charles & Colvard, Ltd., the sole manufacturer and distributor of moissanite, said Friday that net sales for the fourth quarter were down 55 percent to $3.5 million compared to the fourth quarter of 2007, due to the “significant slowdown in the retail environment and reduced inventory commitments from major retailers that sell moissanite jewelry.”

Net loss for the fourth quarter, ended Dec. 31, 2008, was $1.3 million for the Morrisville, N.C.-based company, compared with a net loss of $1.1 million for the fourth quarter of 2007.

A $3.2 million reduction in marketing and sales expenses combined with a $1.9 million reversal of bad debt expense related to the receivable settlement with a wholesale customer of the company partially offset the impact of lower sales and $1.6 million additional income tax expense upon establishing a valuation allowance for certain U.S. deferred tax assets, the company said.

“We are focused on improving the company’s overall operating position by adjusting our marketing plan to better match customer revenue expectations and by broadening our marketing beyond self-purchasing women to encompass a wider range of market segments. We are continuing to explore sales initiatives intended to reduce our finished goods inventory,” said Richard A. Bird, Charles & Colvard chief executive officer.

“The business environment is extraordinarily challenging and our customers are experiencing severely reduced sales and order rates,” he added. “Our short-term efforts are directed toward cost control and near-term sales initiatives. Considering our longer term position, we are conducting a new assessment of our customer value proposition and are developing an updated strategy with the intent to position us for profitable growth in the future.”

Domestic sales for the fourth quarter declined 59 percent to $2.7 million and international sales for the fourth quarter decreased 38 percent to $800,000. Total shipments of 18,200 carats for the current period is a 58 percent from the 43,800 carats shipped in the same period of 2007. The volume decline was somewhat offset by a 5 percent increase in average selling price per carat in the fourth quarter of 2008.

Gross margin decreased to 61 percent in the fourth quarter of 2008, down from 69 percent in 2007, primarily due to an increase in the reserve on jewelry inventory.

Operating expenses were $1.5 million in the fourth quarter of 2008, a decrease of $5.6 million year-over-year. This decline was attributable to marketing and sales expenses of $1.6 million which were down $3.2 million from the 2007 fourth quarter. The company said it has curtailed many marketing activities as it assesses its market channels and redefines its strategy. In addition, the decline in operating expenses was due to a $1.9 million reversal of bad debt expense originally recorded in the third quarter of 2008 related to a wholesale customer.
As of Dec. 31, 2008, Charles & Colvard had $5.6 million in cash and no long-term debt.

At the end of the fourth quarter, the company had accounts receivable of $3.8 million. Total inventory, including current, long-term and on consignment inventory totaled $43 million at the end of 2008.

The company said it expects to receive a tax refund of approximately $2.1 million in mid-2009 related to 2008 net operating losses and the closure of its Hong Kong operations.

Annual results
For the year, the company reported sales decline 47 percent, year-over-year, to $14.7 million, mostly due to a decline in shipments that was somewhat offset by an 8 percent increase in the average selling price per carat.

“U.S. retailers’ inventory requirements have declined dramatically due to the challenging U.S. economic environment,” the company said. “Also negatively impacting revenue during 2008 was the termination of manufacturing agreements with two of the company’s largest wholesale customers.”

Gross profit margin for the year was 62 percent, down from 73 percent in 2007. Lower margin was primarily caused by higher production costs in the first-in, first-out accounting period relieved from inventory, the write-off of damaged returned consignment inventory, and an increase in the reserve on jewelry inventory.

Net loss for 2008 was $6.2 million, compared with break-even results in 2007. Included in the net loss in 2008 was $2.7 million, net of income tax, of non-cash bad debt expense, severance costs and other non-recurring charges. Also included in the 2008 net loss was $1.6 million of additional income tax expense due to the establishment of a valuation allowance against certain United States deferred tax assets.

NASDAQ listing status
In August 2008, Charles & Colvard was notified by the Listing Qualifications Division of The NASDAQ Stock Market LLC that its common stock is subject to potential delisting from the NASDAQ Global Select Market because, for the preceding 30 consecutive business days, the price of the company’s common stock had closed below the minimum $1 closing bid price requirement. In response to extraordinary market conditions, NASDAQ has since suspended enforcement of the minimum $1 closing bid requirement until July 19. The company now has until Nov. 18 to regain compliance with the minimum $1 closing bid price requirement for continued inclusion on the NASDAQ Global Select Market.

“There is much change that needs to be made at Charles & Colvard in order to truly capitalize on our unique jewel, moissanite,” Bird said. “We believe there is a significant market opportunity for our jewel, and we are evaluating various business alternatives as we develop an updated strategy for today’s environment.”