House of Taylor Jewelry, Inc. said Monday that net sales for the third quarter of 2007 fell 59 percent to $4.9 million, year-over-year. The West Hollywood, Calif.-based jewelry company said the decline in sales for the period ended Sep. 30 resulted from a $6.4 million drop in sales from loose diamonds as the company focused on sales of its branded jewelry.

In 2006, loose diamonds were sold by to increase market penetration and brand awareness, House of Taylor said in a statement. In addition, inventory was temporarily affected in the third quarter because the company did not close its $30 million credit facility until Oct. 12, after the end of the third quarter. This contributed to the decline in sales of the company’s Elizabeth(R) and Kathy Ireland branded products, which accounted for the balance of the decline in sales as compared to the third quarter of 2006.

Gross profit for third quarter fell nearly 59 percent to $395,000, year-over-year. Gross profit as a percent of sales increased slightly to 8.1 percent of consolidated net sales in the third quarter of 2007 from 8 percent, year-over-year. The decline in gross profit reflects the decrease in loose diamond sales as well as a decrease in the company’s Elizabeth and Kathy Ireland branded products compared to the third quarter of 2006.

For the third quarter, the company, whose principal shareholders include Dame Elizabeth Taylor, Kathy Ireland, and members of the Abramov family, reported that’s net loss fell 22% to $2.4 million, year-over-year.

“While our financial results are not currently in line with our long-term objectives, we are extremely pleased to have recently achieved a key objective for the third quarter in securing a new credit facility and completing our equity offering which closed on October 12, 2007,” said Jack Abramov, House of Taylor president and chief executive officer. “This additional capital substantially increases our financial flexibility and provides the necessary support for our long-term growth strategies. During the quarter, we also continued to make progress in expanding the distribution of our Kathy Ireland bridal and fashion collections through the independent channel, as well as establishing new relationships with PeachDirect and the U.S. Military Exchange’s catalog and websites to increase access to our products as consumers enter the holiday shopping season.”

Selling, shipping, and general and administrative expenses were $2.4 million for the third quarter, compared to $1.9 million for the third quarter of 2006, due in part to an increase in the company’s advertising and marketing initiatives as it seeks to enhance its brand recognition, the company said. Also, non-cash stock compensation expense and payroll increased.

The company incurred interest expense for the third quarter 2007 of $987,000, of which $770,000 was non-cash expenses due to the amortization of costs of the convertible notes, compared to $1.4 million for the same period last year, the company said.

“In 2006, the company’s initial marketing and distribution strategies included establishing relationships with a substantial number of independent retailers for our Elizabeth, House of Taylor Jewelry, and Kathy Ireland Jewelry Exclusively for House of Taylor Jewelry brands as well as securing a consistent supply of loose diamonds to accelerate market penetration and bolster brand awareness. As we focus on higher-margin branded jewelry sales in 2007, we expect that our near-term top- line growth will continue to be impacted by a decline in loose diamond sales. While the efforts of this strategy were reflected in the third quarter’s lower sales and improved gross margin, we believe we are positioning the company to accelerate our goals of generating long-term growth and improved profitability.”

Net sales for the nine months ended Sept. 30 decreased 10.4 percent to $14.2 million. Year-over-year, House of Taylor said. A sales decline in loose diamonds and in Elizabeth(R) and Kathy Ireland branded products were partially offset by a slight sales increase in the company’s House of Taylor Jewelry brand.

Gross profit for the nine months ended Sept. 30 increased by 45.5 percent to $1.7 million. Gross profit as a percentage of sales for the nine-month period increased to 11.7 percent from 7.2 percent for the comparable period in 2006.

For the nine-month period, House of Taylor posted a loss of $5.4 million. This compares to a loss of $5.5 million for the nine months in 2006.

Selling, shipping and general and administrative expenses increased by 5.3 percent to $6.5 million for the nine-month period, due primarily to an increase in advertising and marketing as well as payroll expenses. Interest expense was $3.9 million for the period, of which $2.9 million was non-cash expenses related the amortization of costs of the convertible notes, compared to $2.3 million for the same period last year.

“Looking ahead, we are focused on establishing a sustainable and profitable business model and achieving long-term growth,” Abramov said. “Specifically, our top priorities in the near-term are to expand our sales force by bringing on additional sales ambassadors to cover new geographic regions of the U.S. and continued expansion of our distribution into other strategic channels.”

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