Charles & Colvard Sales Down 52%

Charles & Colvard, Ltd. reported that net sales in the second quarter fell 52 percent to $3.6 million. Operating loss for the period was $1.6 million compared to an operating income of $889,000 for the same period in 2007.

“As we navigate this difficult economic environment, particularly with its deep impact on the jewelry industry, our priority for the near term is to improve our cash position, by turning our current inventory investment to cash and deepening our cost cutting initiatives,” said Dennis M. Reed, president and chief marketing officer of the Morrisville, N.C.-based company . “Our primary focus is to build a strong foundation from which to fund long-term growth that will be grounded in a more consumer-driven branding strategy supportive of our retail customers.”

Reed is now responsible for managing the company, the global sole source of lab-created moissanite, following the July 21 resignation of Robert S. Thomas as chief executive officer of the company, chairman of the board of directors, and as a director. Frederick A. Russ, the lead independent director, now serves as the interim chairman of the board of directors.

“The board of directors will look to Dennis Reed … to lead the company in stabilizing, and then growing, its sales and cash position,” Russ said. “We are already drawing on the expertise and knowledge of the board of directors, along with the company’s management team, to guide the company to a sound financial position. The board is working closely with Dennis to broaden the audience of the company’s marketing and to focus on improving sell-through at existing retail locations. With our recent additions to the board of directors, we have deeper, more applicable experience in marketing, finance, and operations to assist management in accomplishing these short-term changes and to set a new long-term strategic direction for the company, both domestically and internationally.”

Although sales were up over the first quarter, comparisons to the second quarter of 2007 are “unfavorable,” the company said in its report.

“The sales decline in the second quarter of 2008 was mainly attributable to actions by retailers to reduce their current inventory levels, due to the challenging macro environment. Another factor was the transition by several retailers to new moissanite jewelry suppliers that had been sourced by a former customer. That transition has concluded and we expect to see revenue contributions from those retailers return to a more normal pattern in the second half of the year.”

Charles & Colvard’s domestic sales for the period fell 65 percent to $2.2 million compared to the second quarter of 2007. International sales for the second quarter increased 13 percent to $1.4 million, primarily due to increased sales to India. Total shipments of 21,100 carats for the current period were 55 percent less than the same period of 2007. Shipments of carats in the U.S. decreased 68 percent while international shipments of carats increased 25 percent.

Gross profit decreased 62 percent to $2.1 million compared to $5.5 million in the prior year period. Gross profit margins decreased to 57.4 percent in the second quarter of 2008, from 72.5 percent in the comparable quarter of 2007. The decline in gross profit margin is due to higher production costs of the inventory being relieved and the write-off of consigned jewels returned by a former customer, offset by the benefit of a 9 percent increase in our average selling price per carat, the company said.

Total operating expenses decreased 20 percent to $3.7 million in the second quarter of 2008 compared to $4.6 million in the second quarter of 2007. As the company focuses on cost containment, advertising expenses declined $1.3 million and other expense, including salaries and travel, declined $380,000. Offsetting these reductions were severance costs of $186,000, increases in receivable bad debt reserves of $475,000, and an increase in professional fees of $103,000.

These factors led to the $1.6 million operating loss, the company said.

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