Charles & Colvard-Is licensing in their future?

Implications: Charles & Colvard might be more profitable licensing the manufacturer of moissanite.  Here's why.

Analysis: Charles and Colvard under performed the jewelry market; posting a decline in second quarter sales of 11% and a 14% drop in gross profit. Not surprisingly, the company attributed its sales decline to an unfavorable economy. However, foreign sales performance was equally disappointing, especially in Canada, which has shown greater strength in jewelry because of the positive impact its oil exports are having on the economy.

According to management 71% of their sales come from four large customers. In particular, JC Penny and Finlay Enterprises comprise a significant part of that seventy-one percent. JC Penny’s jewelry sales have generally out performed the market during the spring, while Finlay’s department store units have continued to loose market share to the competition. The fact that moissanite hasn’t performed well in either store suggests the problem is more than just the US economy.

The company reported that the role out of moissanite product in approximately 150 Sears stores had been delayed isn’t surprising. Sears store for store jewelry sales continue to decline as the both the merchandise mix and the quality of their product has been down graded. Given the departments decline, it’s problematic whether moissanite relatively high price points will appeal to Sears’ new customer. Add to that, Sears has a new jewelry merchandise manager which may well delay any role out past fall 2007, if ever.

C &C mentions the continued role out of its product to Kohl’s stores. However, there have been other product tests that it hasn’t discussed, for instance, Zale Outlet stores. Other customers that have sold moissanite in the past include Carlyle Jewelers. Carlyle is now owned by Finlay Enterprises which suggests that the company may also have jeopardy in their independent jewelry distribution.

Moissanite still suffers from product awareness which means it is a hard sell rather than an easy buy for consumers. Massive discounting continues to plague the product with 50%, 60%, and 70% off sales. That erodes brand value and makes the product less appealing as an asset purchase to retailers. Instead, the trend may move toward guaranteed sale and consignment inventory deals. But that may be inevitable if the company’s guarantee to buy all the available rough material means the ultimate manufacturer of more finished good than there is demand.