Charles & Colvard Sales Down 35%

Charles & Colvard, Ltd., the global source of moissanite, a created jewel available for use in fine jewelry, reported Thursday that net sales in the fourth quarter decreased 35 percent to $7.9 million year-over-year. Gross profit fell 42 percent to $5.4 million year-over-year.

Gross profit margins decreased 830 basis points to 68.6 percent in the fourth quarter of 2007 from 76.9 percent in the comparable quarter of 2006 primarily, as a result of higher production costs during the period being relieved from inventory, the Morrisville, N.C.-based company said.

Its domestic sales for the period, ended Dec. 31, 2007, decreased 40 percent to $6.6 million, compared to the fourth quarter of 2006. International sales for the fourth quarter increased 20 percent to $1.3 million, with strong results from all key geographic regions. Total shipments of 43,800 carats for the current period were 37 percent less than the 69,700 carats shipped in the same period of 2006. Shipments of carats in the U.S. decreased 43 percent while international shipments of carats increased 25 percent.

The company incurred a net loss for the fourth quarter 2007 of $1.1 million, compared to net income of $1.3 million in the fourth quarter of 2006.

“We are disappointed with our sales and earnings results in the fourth quarter as the retail environment remains challenging and we face unique issues in our distribution model,” said Bob Thomas, Charles & Colvard president and chief executive officer. “With the uncertainty in the retail economic environment retailers are managing their inventory more conservatively. We are committed to developing a business model that allows customers access to moissanite jewelry and that enables us to resume growth in our business over the long-term. As we stated in mid-January, we engaged Kanter International to evaluate our current business model and to make a recommendation to drive improved sales performance. We look forward to sharing these findings in the second quarter.”

As of Dec. 31, 2007, total inventory (including consignment) increased by $323,000, compared to the end of the third quarter of 2007, and by $8.5 million, compared to Dec. 31, 2006. 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. As previously announced, the company has reduced its raw material purchase commitments for 2008.

The company also said it is “discontinuing its policy of providing future guidance on sales, gross profit margins, and marketing and sales expenses.”

The company said it had a fourth quarter operating loss of $1.7 million, compared to an operating profit of $1.9 million in the same period in 2006. The decline in operating results was primarily attributable to lower sales, which resulted in marketing and sales expenses being 62 percent of net sales in the fourth quarter of 2007 as compared to 52 percent in the same quarter of 2006, and a $1.1 million increase in general and administrative expense resulting from a $1.1 million increase in bad debt expense.

The company said it committed substantially to all of its marketing and sales expenses prior to the commencement of the fourth quarter and could not adjust its spending as sales growth did not materialize. It added that the increase in bad debt expense is a result of a reserve recorded for customers with significant past due accounts.

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