IDEX Online Research: Charles & Colvard – Dramatic Sales & Profit Gains

Sales doubled and pretax profits were up four-fold for Charles & Colvard (CTHR) in the three-month period ended September.  By any measure, that’s a stellar performance, especially in a U.S. jewelry industry that is currently experiencing lagging sales.  Wall Street investors have pushed the price of CTHR shares from $10 in January to nearly $29 recently. 

What is behind the company’s dramatic gains?  The answer:  Charles & Colvard’s chairman Bob Thomas and his talented team of merchants have repositioned moissanite from being a “diamond look-alike costume jewelry” to a respectable “created gemstone.”  As a result, big-name jewelers have recently added moissanite jewelry to their product line, and reports indicate that consumer demand is very strong.  Finlay Enterprises said that moissanite jewelry should be one of its biggest sellers during the upcoming 2005 holiday selling season. 

Moissanite is a fashion gemstone.  When it is cut correctly, a good piece of moissanite has the fire and brilliance of a diamond, but at a lower cost.  Moissanite jewelry is not cheap, like cut glass or CZ.  A nice piece of moissanite jewelry can retail for many hundreds or thousands of dollars. 

Recent Results Fueled by New Customers

Here’s what fueled moissanite sales – and Charles & Colvard’s financials – in the third quarter ended September, 2005. 

• U.S. Revenues – U.S. sales, which represent 93 percent of total corporate revenues, were up 137 percent in the quarter.  Sales were driven by two key customers:
• J.C. Penney – The roll-out of moissanite jewelry began in the fourth quarter of 2004.  At the end of the quarter, 462 Penney stores carried moissanite jewelry. 
• Finlay Enterprises – The roll-out of moissanite products began early this year; currently, 220 of Finlay’s roughly 1,000 locations carry moissanite jewelry.  Finlay makes asset purchases of moissanite for its stores, and it uses memo goods for its trunk shows. 
• International Revenues – Demand for moissanite jewelry increased in Thailand, Canada, Italy, and Taiwan.  Demand was sluggish in Singapore and Australia.
• Gross Margin – The company’s gross margin rose to 67.5 percent from 63.2 percent last year, largely due to economies of scale.  Further, consignment inventory was about $3 million at the end of the quarter, down slightly from last year.  In other words, the company did not give away product, just to drive sales.

Outlook:  More Stores, Heavy Advertising

The jewelry industry is going to see a lot more of moissanite, especially in the all-important holiday selling season.  Charles & Colvard’s advertising budget will be up nearly 60 percent, excluding co-op advertising.  Here’s what you’ll see, and where you’ll see it.

• New advertising campaign – This campaign, titled “Moissanite is Me”, is designed to strengthen moissanite jewelry as the reward of choice for self-purchasing women. 
• More co-op advertising – In the fourth quarter of 2005, Charles & Colvard will allocate about $3.8 million to advertising (excluding co-op funds), up from $2.4 million last year.  Ads will appear in Elle, House Beautiful, InStyle, Ladies Home Journal, Oprah, and Vogue.  The ads will be tagged to various retailers according to geographic region and include, in alphabetical order, Belk, Boston Store, Carson Pirie Scott, Daniel’s Jewelers, Day’s Jewelers, Dillard’s, Famous Barr, Filene’s, Foley’s, J.C. Penney, King’s, Lord & Taylor, Macy’s, Marshall Fields, Meier & Frank, Parisian, Robinsons-May, and The Jones Store.  Additionally, there may be newspaper ads in cooperation with Harry Ritchie Jewelers, Helzberg Diamonds, Landau, Morgan, Samuels Jewelers, Von Maur, and others. 
• Other support – Charles & Colvard has developed support items including direct mail pieces, brochures, counter cards, in-case placards, window banners, and posters.
• Training – Charles & Colvard has a training team who travels extensively to assist jewelry sales people.  Sales training is the key to selling moissanite successfully. 
• Trunk shows – Between September and December, Charles & Colvard customers will hold over 500 trunk shows for moissanite. 
• International sales efforts – In Japan, the company began selling moissanite over Jupiter TV in conjunction with JoAlan Design.  France and the U.K. are also potentially important markets for Charles & Colvard. 
• More retail outlets – J.C. Penney continues to roll out moissanite jewelry in its stores.  Likewise, Finlay is also adding moissanite to its leased departments.  While Finlay is exiting more than 200 Federated stores, Charles & Colvard believes that it may be able to convince Federated management to test moissanite jewelry in its department stores.  Helzberg Diamonds began testing moissanite in September, and Gordon’s Jewelers began testing moissanite in October.  Finally, independent jewelers have begun recognizing the potential appeal of moissanite, and the company’s new customer list is growing rapidly. 

The author owns one hundred (100) or fewer shares of CTHR