Charles & Colvard, down Now, but are they Out?

Implications: 1. Charles and Colvard reported a 78% decline in 1^st quarter earnings citing in part higher inventory and slower sales.

2. Moving forward, C & V will need to adapt to the new realities of $1,000/toz gold and to current trends in consumer behavior in order to ensure it has a profitable future.



Analysis: Charles and Colvard reported a 78% decline in 1^st quarter earnings citing in part higher inventory and slower sales. Manufacturers of moissanite, a synthetic, diamond look alike, the company impressed investors by their early success in selling the lab grown material for as much as 500 times similar diamond substitutes like cubic zirconia (CZ).

Convincing consumers that the gem material had some intrinsic value, the company’s initial success was due to limited distribution in specialty jewelry stores where store sales associates sold the merits of the synthetic gem as an alternative to much higher priced diamonds.

A relaxed sales policy increased the distribution of moissanite to departments stores like Federated (Macy’s) and J.C. Penny’s where the product was subsequently offered at discounts of 50% and more. Later, Federated’s consolidation of its May Co. stores depressed sales as a number of department stores were either sold or consolidated.

While making synthetic gemstones was the company’s primary business, it also contacted with jewelry manufactures to make Charles and Colvard jewelry using moissanite, as well as, selling loose moissanite to wholesalers that mounted the stones in their own styles. It isn’t clear, but it appears that the company may have offered consignment merchandise to some customers as an enticement to stock moissanite jewelry and return privileges too. That would explain part of the higher inventory problem that emerged in the 1^st quarter as retailers returned stock that was on consignment or items that didn’t sell.

Declining sales may be harder to explain. There is a growing body of evidence that the consumers love affair with fine jewelry as the preeminent luxury gift is waning. By most accounts fewer shoppers bought fine jewelry as a gift last Christmas season. That could have depressed moissanite sales. Store managers may have encouraged sales associates to sell product that the company owned to improve inventory turn.

With retail prices increasing faster than sales, merchandise managers are faced with either increasing inventory investment or decreasing the assortments. That may reduce their interest in fringe product categories like moissanite, even it is on consignment

Moving forward, C & V will need to adapt to the new realities of $1,000/toz gold and to current trends in consumer behavior in order to ensure it has a profitable future. For instance, management may need to invest more in marketing like watch brands do and imitate the methods used by Swarovski to build brand value.