Charles & Colvard, Ltd.
Q3 2013 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

Hello, and welcome to Charles & Colvard, Ltd. Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. The company's management may make forward-looking statements both during the call and in the following question-and-answer session. These forward-looking statements are not guarantees of future performance, are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what they discuss here. Risks and uncertainties are available for you in the press release itself, as well as with the company's filings with the Securities and Exchange Commission. You may obtain these documents from the company's website at www.charlesandcolvard.com, and they're also available on the SEC website sec.gov. Now I'd like to turn the conference over to Randy McCullough. Mr. McCullough, please go ahead.

[Randall N. McCullough:]

Thanks, Keith. Good afternoon, and thank you for taking the time to join us for our third quarter 2013 conference call. I will provide you an overview of our progress this quarter and year-to-date, then I will hand over the call to Steve Larkin, our Chief Operating Officer. After that, Kyle Macemore, our CFO, will review our financial results in more detail. As those of you who have been following our company for a while know, we're concentrating much of our efforts on building consumer awareness of our moissanite gemstones, including our relatively new Forever Brilliant brand. Growth through our wholesale business, with the largest and most important distributors and retailers, continues to be a primary focus. In addition, we are increasing awareness of our direct-to-consumer channels Moissanite.com and our recently launched fall 2013 collection at Lulu Avenue. As you have seen in our financial results, these efforts are paying off by growing revenue for the quarter and 9-month period. Compared with last year, our third quarter revenue increased 35%, while the 9-month period revenue increased 39%. Last quarter, we discussed the importance of our investments in our systems infrastructure, marketing and personnel to scale our business for growth. Those investments continued this quarter as we augmented our brand initiatives with advertising and marketing campaigns directed towards increasing awareness of moissanite in China and brand recognition and awareness of our Forever Brilliant gemstones across our markets. Our international sales almost tripled from last year's third quarter. They increased 195%, and on a year-to-date basis, international sales are up 95% over 2012 same period. Much of this growth came from sales of loose jewels in China. While we're excited about our international growth, we do not expect this significant increase to replicate itself in our future quarters. International sales comprised about 44% of our total sales during the quarter, which is up from 20% during last year's third quarter. The China market, as many of you know who follow the jewelry industry, has become one of the largest jewelry markets in the world. With more women entering the workforce in China, the demand for fine jewelry is increasing. In order to capitalize on this rapidly growing and important market, we have made sizable investments in our distribution channel in that country, which is paying off. We benefited this quarter from sales of loose gemstones for our classic moissanite and Forever Brilliant stones. Our U.S. sales were down by 5% for the third quarter compared with the same period last year due to timing of orders from our U.S. wholesale distributors. Year-to-date, U.S. sales were up 25% over the same period last year. To support our long-term growth, we continue to invest in marketing and advertising. Our marketing activities include both short- and long-lead press, outreach and events, broadcast, digital and social, as well as our marketing programs to the trade. We will be intensifying these programs for the holiday season and beyond. We are targeting audiences that we can introduce our products and brands to at a cost effective return, including soon launching our first moissanite consumer catalog with a targeted mailing to both educate and transact with a sizable audience of existing and potential new consumers. In terms of publicity efforts, we have been working with Cindy Riccio Communications on consumer, public relations and recently announced the hiring of Dian Griesel Int'l. for corporate and public relations. Cindy's team has secured Forever Brilliant product placements on TV news broadcasts, such as NBC Miami and Fox Chicago, as well as on many women's fashion and luxury websites, for a total of more than 25 million impressions. Lulu Avenue jewelry was featured by national consumer broadcast, print and online media, including the TODAY Show, InStyle Magazine, Cosmopolitan Magazine and fashion blogs, for a total of more than 27 million impressions. Dian Griesel Int'l. has been focusing on product marketing releases that are search engine optimized, with the goal of branding moissanite as the proprietary gem of Charles & Colvard. So when people think of moissanite, they think exclusively of Charles & Colvard and vice versa. These releases have each appeared on average of 575 websites, with more than 500 million aggregate daily visitors. These sites have a business focus -- these sites also have a business focus and includes Yahoo! Finance, Reuters, Bloomberg, Business Week and daily newspapers across the country. Before I turn the call over to Steve Larkin, I want to review our growth strategies which primarily focus on expanding our brand and consumer awareness. We are focused on strategies that we believe are right for the long-term health of the company and will deliver total shareholder return. These strategies include

[Steven M. Larkin:]

Thank you, Randy. Yesterday, as many of you have probably read, we announced a new and important partnership with Kohls.com. In time for the upcoming holiday season, Forever Brilliant moissanite jewelry is now available to Kohl's online customers. We believe Kohl's national presence represents an excellent opportunity for us to expand awareness of Forever Brilliant gemstones and bring them to a broader consumer base. Forever Brilliant, with its high quality and affordable price points, is a good match for the Kohl's consumers. Kohl's is currently featuring our finished jewelry products that include bridal, solitaire earrings and pendants, fashion pieces, among others. We're excited about this alliance and believe our advertising and marketing campaigns will help drive awareness of moissanite and potentially forge additional future relationship with both stores and e-commerce sites. With our continued focus on growing our wholesale business with various distributors and retailers, we remain confident that Charles & Colvard moissanite is destined to expand its share in the global jewelry market and that our multichannel sales and marketing strategies will play a key role in Charles & Colvard's future growth. We believe we are positioned for long-term growth and continue to make investments in our operation by implementing multiple systems enhancements, providing greater automation in our order management processes. These projects went live in early October, and we believe these investments will result in greater efficiencies, speed, accuracy and the scalability of our business for the long term. Expanding styles and price points in both of our direct-to-consumer businesses. We have added over 5,000 SKUs this quarter in our available range of direct-to-consumer products, enhancing and upgrading of our direct-to-consumer websites that has resulted in improved conversion, average order values and user experience. We are near completion of the launch of an on-site design studio application that will allow consumers to design their own jewelry with a large selection of styles and price points on Moissanite.com, and acquiring direct customers via our websites as well as social media platforms and utilizing the captured data to leverage behavior as well as trends across all aspects of our business. Last quarter, we announced our partnership with Amazon.com, which is featuring our moissanite jewelry under the Charles Winston brand on its website. The team is working with Amazon.com to enhance the consumer experience as well as presentation. Our staff is consistently working to improve that consumer experience to our mutual benefit and long-term success. We're pleased with the increases in both our wholesale and direct-to-consumer channels, with each of these channels showing strong quarterly and 9-month growth. I will now turn it over to Kyle Macemore, our Chief Financial Officer.

[Kyle Macemore:]

Thank you, Steve. Good afternoon, everyone, and thank you for joining us today. As many of you know, I recently joined Charles & Colvard, and I have thoroughly enjoyed my first few months on the job. I look forward to meeting many of our shareholders in person in the upcoming year. Let me now turn to our financial results for the quarter that ended September 30, 2013. As announced in today's press release, net sales for the third quarter of 2013 increased 35% to $6.9 million compared with $5.1 million in net sales during the same period of 2012. Our wholesale business increased 35% this quarter to $6.4 million and comprised 93% of sales, while our direct-to-consumer businesses increased 33% to $503,000 or 7% of our business. Sales of loose gemstones increased approximately 28% to $4.8 million and comprised 70% of sales this quarter compared with $3.8 million or 75% of sales in last year's third quarter. Our finished jewelry sales during the third quarter increased 56% from the same period in 2012 to $2 million. This compared with $1.3 million during the same period last year. The quarter was 44.5% compared to 58.7% in the year-ago third quarter. There were several factors that impacted our gross margin percentage in the third quarter of 2013. We continued to invest in operational resources to handle current sales volumes and with the goal of improving the infrastructure to support the long-term opportunity of the business. This negatively impacted our gross margin percentage in the third quarter. Cost of goods sold increased in the third quarter of 2013 by $143,000 compared to the third quarter of 2012 due to an increase in inventory valuation allowance, primarily due to increased risk of obsolescence to our direct-to-consumer finished jewelry. In 2013, the company began allocating information technology related costs based on headcount to more accurately assign operating cost on the income statement. This allocation in the third quarter of 2013 resulted in $141,000 increase to cost of goods sold when compared to the third quarter of 2012. As the company has discussed previously, as finished jewelry increases as a percentage of sales, it tends to negatively impact the company's gross margin percentage. Finished jewelry was 30% of net sales this quarter compared to 25% net sales in the third quarter a year ago. Operating expenses totaled $4.2 million in the third quarter of 2013 compared with $2.9 million for the same period of 2012, an increase of $1.3 million. Of this increase, sales and marketing expenses increased $771,000 when compared with the same period in 2012. This was primarily due to our ongoing investments in marketing, advertising and branding initiatives to better position Charles & Colvard's product lines in the marketplace, as well as personnel additions in support of our direct-to-consumer businesses. Included in general and administrative expenses in the third quarter was a onetime charge of $230,000 of severance associated with the departure of an executive officer. Included in the net loss for the quarter was $89,000 in income tax expense compared with $3,000 of income tax expense in the year-ago third quarter. The income tax expense in the third quarter of 2013 was a result of a lower full year estimated tax benefit based on estimated full year taxable income by NT [ph]. We recorded a net loss of $1.2 million or a net loss of $0.06 per share during the quarter relative to net income of $124,000 or $0.01 per diluted share in the third quarter of 2012. We ended the quarter with $6.2 million of cash and cash equivalents on our balance sheet, which is down from the $9.3 million of cash and cash equivalents at the end of the second quarter of 2013. This decrease was mostly due to a $4 million increase in inventory, primarily Forever Brilliant, during the third quarter. During the third quarter, we also secured a $10 million line of credit with PNC Bank, providing us the ability to pursue strategic initiatives and support the growing demand of our Forever Brilliant moissanite gem, as well as fund general corporate working capital requirements. The company has not taken any advances against the line of credit. I'd now like to turn the call back to Randy.

[Randall N. McCullough:]

Thank you, Kyle. Our company has made significant investments to prepare us for the future growth. We are making substantial progress in these efforts as you can see from our revenue growth this quarter. We also believe we are making great strides in increasing our footprint in the jewelry marketplace, including the ever important Internet. I believe we have a talented team in place to execute our strategic growth strategy. While we do not have a crystal ball and I can't predict the economy, what we are certain about is that moissanite continues to shine in its quality, value, brilliance and popularity. Whether it's our classic moissanite gemstones or our premier Forever Brilliant brand, whether it is loose or finished jewelry, our wholesale or direct-to-consumer, no matter how one analyzes our performance to our strategy, we had sturdy metrics this quarter and are cautiously optimistic about the upcoming holiday season as discerning customers are attracted to the beauty of Charles & Colvard created moissanite and the affordability of our product. This concludes our formal remarks this afternoon. And now we would like to open the call to any questions that participants in the call may have. Operator, could you please open the floor to the Q&A session?

[Operator:]

[Operator Instructions] And the first question comes from Lenny Brecken from Brecken Capital.

[Leonard Brecken:]

Looks like things are progressing well. I do have a question. Kyle, you outlined the changes in gross margin percentages year-over-year. Am I to understand that the historical average of the high 50s to 60 and the difference this quarter was completely attributable to the 2 things that you mentioned, the higher finished goods and the allocation of IT expenses?

[Kyle Macemore:]

Lenny, thanks for the question. I outlined 4 things, so 2 of which you mentioned. I also outlined that we have a mix between finished jewelry and gemstones, along with the IT allocation. The third thing I mentioned was the inventory reserves, and the fourth thing was we are investing in our operational infrastructure, our overhead, to prepare for future growth, and that impacted our gross margins as well. There's a lot of things that impact gross margins, as you know, mix, et cetera, but those were 4 of the large drivers that impacted our gross margin percentage.

[Leonard Brecken:]

Was the inventory charge -- I guess you would classify that as a charge, was that the greatest amount of the 4 or 5 things you mentioned? Or can you order them?

[Kyle Macemore:]

Yes, it was comparable to the increase with the IT allocation. They were both about $140,000 year-over-year each.

[Operator:]

The next question comes from Mark Weindling from JHS Capital Advisors.

[Mark Weindling:]

It sounds like things are moving along and swell I concur. I do have a question concerning Lulu Avenue. Could you give us a little additional flavor on how that's progressing? I know it's been recently opened, I think, since August. But I'd appreciate if you could give us a little additional flavor.

[Randall N. McCullough:]

Yes, Mark, thanks for the question. Mark, Michelle came on board, I think, 4 months ago now, going on 5, and she introduced a lot of changes, changed a lot of the people. And the performance of Lulu Avenue is double digit, probably approaching triple digit increases. And it's definitely on the right track. We're excited about where she's taken it. If you haven't seen the new catalog, I think it's available online now. You should go online and see it. You can actually flip through the pages. They just continue every week to have more successful shows and bring in quality women. We're extremely optimistic about where we're going.

[Mark Weindling:]

That's great. I appreciate it. I guess one additional. With the Kohl's announcement, are they going to be showing any of your jewelry in any of their stores? Or is this just going to be Internet?

[Randall N. McCullough:]

Not in the stores at this time. The proposal that we put to them and that we both agree with, we're doing the fulfillment. They have the product on their website, and this is the beginning. We hope to grow it from here. We're working with them to enhance their presentation. As you know, with any of these large corporations, they control what happens on their site. So we have no ability to adjust or change anything on their sites. So while sometimes we're not in complete agreement with how they present it, we're happy that they are presenting it because they have millions of shoppers, and these are millions of shoppers that otherwise we wouldn't have an opportunity to get in front of. The success of this will determine whether or not there'll be an opportunity to go any further.

[Operator:]

Next question comes from Mark Wright [ph], a private investor.

[Unknown Attendee:]

I'd like to get more detail on Amazon's direct selling of moissanite. I see 8 items sold by Amazon.com. There's 4 necklaces, and there's 4 rings in 2 or 3 sizes with no mention of the size of the stone. Are there more selections and better descriptions coming?

[Steven M. Larkin:]

We are working with them. We were obviously less than pleased with the presentation that they have produced thus far. We're in constant communication with them in order to upgrade that presentation in terms of SKUs as well as information and selling attributes. To the point Randy made, it's somewhat contingent upon them to actually get the work done and to do it, but we are anticipating improvements.

[Unknown Attendee:]

That would be great. I don't see how they can sell any of the rings with the descriptions they have out there.

[Randall N. McCullough:]

Yes.

[Unknown Attendee:]

If I could ask one more question. Cash has dropped. Inventory has increased. Is this due to product in the pipeline that is expected to sell in the fourth quarter?

[Kyle Macemore:]

Mark, this is Kyle. We don't obviously comment on future guidance, but I will say it's the increase in inventory is due to our Forever Brilliant inventory, and we are trying to position Forever Brilliant to get inventory in stock. As you know, we've been trying to do that over the course of the year, starting earlier in the year to acquire the material from Cree and then turn that into inventory that will be available for sale. We also have some finished jewelry that we have stocked for our direct-to-consumer business, as well as our Internet fulfillment business with Kohl's, for example. So the build on inventory is primarily Forever Brilliant.

[Unknown Attendee:]

Okay. Let me revise it a little bit. What I want to try to get through is it in the pipeline? Like these are finished jewelry items that are being completed. Does it take 6 or 8 weeks, or maybe it was longer than that, to actually complete a finished jewelry item? And I'm thinking maybe this inventory increase is due to product that is in the pipeline right now, so it's not just sitting around waiting to be sold. It's in the pipeline.

[Kyle Macemore:]

It's in all stages, from everything from raw material to work in process to finished gemstones. Our inventory, we had about $9 million in finished jewelry and about $31.4 million in loose jewelry inventory, and that loose jewelry inventory is in, as I said, various stages from work-in-process to finished stones to our raw material.

[Operator:]

The next question comes from Austin Hopper from AWH Capital.

[Austin Hopper:]

Randy, I was hoping, can you just give us some -- I don't know if I missed this, give some color on JTV and just kind of how that relationship's going?

[Randall N. McCullough:]

Our relationship with JTV couldn't be any better. We -- I'll give Charles Winston a pat on the back. A few weeks ago, I think 3 weeks or so, he set a new record again, broke his old record. He came close to $1.5 million in a weekend. I think it's like $1.4 million and change. Don't quote me on the number, but I know it was substantial. And we've -- Tom is actually on his way back from meeting with JTV over the last 2 days. They've added additional hours, additional shows. It's just a great, great relationship. They love the product, and we love what they're doing with it.

[Austin Hopper:]

Can you -- how much of the business in the quarter was with JTV?

[Kyle Macemore:]

We don't disclose specific customers, how much of our business is by specific customers.

[Austin Hopper:]

Okay. And then Randy, you mentioned that you've got someone new working on Lulu and maybe work through some issues or made some changes. I was just curious in terms of -- you've been at that for a while, what you're learning and what you're changing?

[Randall N. McCullough:]

Well, we learned a lot when we brought Anne Butler on our board. Anne Butler, just -- I'm sure you have heard of her or maybe read her bio, but just a quick briefing, she's been in that business for over 30 years, and she has -- she was the one that helped us recruit Michelle in here, and it was the right choice. Anne has taught us the business and really opened our eyes. When we entered the business, we were somewhat naive, just like anybody going into a business for the first time. And I think now we have a pretty clear expectation and clear picture of what the business is like and the type of people that we need, the quality of people, and Anne has helped us position those people with Lulu. Lulu's new President, Michelle, she brought on board training and development. She's attracting phenomenal talent, with years and years of experience; have a pretty good team under them already, and they're excited about moissanite. We've got moissanite sales as a percent of sales are increasing daily, and it's -- I mean, you can just look at the catalog. Compare it with the catalogs that were out there a year ago and you will see the difference in the quality of what Lulu's is positioned to do out there. The key also was training these women more about moissanite, not just about the selling process itself, but to get them excited and train them. And those pep rally kind of calls, they're having them weekly. My wife signed up for it, and she gets the calls once a week.

[Operator:]

And the next question comes from Jeb Terry of Aberdeen Investment Management.

[Jeb Terry:]

Well, it sounds like there's a whole lot of shaking going on over there. So a couple of questions. I saw that your CapEx bumped up, and I know that there was some intention in the past to perhaps execute on your investments in laser cutters and the like. And I guess, given the 5,000 new SKUs, you probably have a use for that. Did that happen?

[Randall N. McCullough:]

We have and continue to test lasers. We have not brought one into the U.S. yet. We're doing most of that overseas.

[Kyle Macemore:]

Most of the CapEx increase, Jeb, is IT-related and as far as IT infrastructure.

[Jeb Terry:]

Okay. And clearly, doing fulfillment for Kohl's would -- I can sympathize that would require kind of IT investments for order management. And obviously, just back again to the 5,000 SKUs, that's an impressive add for this kind of operation. So relative to that, Randy, in the past you mentioned ShopNBC was also getting some pretty terrific sell-through, not -- just similar to JTV. Is that still the case?

[Randall N. McCullough:]

ShopNBC's team just left here this morning. They've been here 3 days, or 2.5 days, videotaping to use on the shows. They ran a test show, Jeb, last month. Don't shoot me if it was a month before, it was either the end of the month before or last month, they ran test shows on the new Forever Brilliant stone, and it was the largest sales per hour that they've ever experienced with moissanite. They are really intrigued. And as you can tell, they sent their team down with a producer to put together footage that they're going to take back and work into the upcoming shows.

[Jeb Terry:]

Well, that all is well, as I'm sure, for the holiday season. And presumably, the Kohl's is -- your announcement suggests that and your inventory growth suggests that you are -- this is positioned for this year Christmas sale-through [indiscernible]? Is that correct?

[Randall N. McCullough:]

Yes, absolutely. Kohl's, we sent our folks out to Kohl's for a few days, and they have worked closely with all of our team here. We're connected up from IT forward. I'm happy to report also that also we have barcode in place. I know you and I talked about it a long time ago, but now we're into the 21st century. And then I think that will help us facilitate better going forward with more volume, but also control some expense. Kohl's is committed to this. They're committed, and we're committed.

[Jeb Terry:]

And are there -- I understand Kohl's does about 10% of their revenue online, and that may be a dated number. Are there some metrics about Kohl's online sell-through, online activities that could help us assign some scale to this?

[Randall N. McCullough:]

Yes, we had to, as you can expect, sign a confidentiality with Kohl's early on. So they're pretty touchy about us discussing any numbers or figures.

[Steven M. Larkin:]

Yes, this is Steve. What I would add is that the IT infrastructure, that's EDI integration, it's everything from inventory, order management, confirmations, invoicing, et cetera, that's happening on a regular basis in real time, is fairly easily replicable, so we can roll that out to other people where those opportunities exist. But we built that infrastructure specifically with Kohl's criteria in mind, but it is pretty universal IT architecture.

[Jeb Terry:]

Okay. And Steve, while you're on there, are there any metrics you can help us with in terms of the Moissanite.com? I mean, clearly, it sounds like you got some integration opportunities and cross-selling opportunities with these other sites, certainly with branding, that now ripples across bigger universe of uniques. And now obviously, also with this order management and fulfillment system on board, they obviously apply to your size as well, and I'm very intrigued about the consumer ability to design their -- how that flows through the same infrastructure. What can you tell us about that?

[Steven M. Larkin:]

Yes, without getting into too many details and specific, which we'd like to keep proprietary, we've put a lot of work into obviously SKU expansion on the site. We want to be the -- that site to be the authority as it relates to product, as it relates to information, as it relates to site functionality. We've gotten a lot done. It's still a long way to go. The team has put a lot of work and a lot of effort into the sites, and where -- we've got other things happening alongside the build-a-ring application, which we're anxiously gearing up for obviously the all-important fourth quarter holiday selling season, with Thanksgiving, Black Friday, Cyber Monday, holiday gift-giving, holiday traffic, jewelry out there publicly in the face of the consumer from a lot of different places and directions. And obviously, we're of the belief that we've got a superior gemstone, a superior value proposition. And we want to get that in front of as many people digitally, in print, in broadcast, as we can. And obviously get the product and the gemstone jewelry in as many consumers' hands as possible because once they view it personally and get it on, they become advocates.

[Operator:]

And the next question comes from Jeff Kone from Wall Street Capital Partners.

[Jeff Kone:]

Just not to beat the dead horse, but on Kohl's, how long has it -- has the merchandise been in the store? And how long is this, what I would call, a test, you know Internet before into the retail stores? How long would the test be running? And do you have any other large retailer or big box stores? And if so, what's the policy for announcing news of new customers like this?

[Randall N. McCullough:]

You always ask the questions that I can't answer, but let me answer the ones I can. Jeff, first off, they do not have our merchandises here. We're doing the fulfillment. They post the pictures on their site. They take the order. They send us the data electronically. We pull it same day, ship it to the customer and then they pay for it. We chose, both of us, to bring the product up. It's the same process that we use when I used to open stores. We did a soft opening for 4 or 5 days. In this case, we brought the product, ran it through the weekend, fixed a few little back and forth issues that we -- that popped up, and then we felt good about it Monday. And that's when we both agreed to make the press release. That is going to be the process going forward. We are not going to put press releases out there until we validate that not only the product's up, but it's working correctly. It's just the right way to run a business. We're not running the business trying to pump the stock. We're running the business to do a good job, and we're very focused on bringing new customers. The better we do with all of these people that you see us bringing up, the more new people we'll be able to attract.

[Jeff Kone:]

So in the case of Kohl's, rather than using the word merchandise in the store, how about in terms of up on their site, how long has it been up on the Kohl's site?

[Randall N. McCullough:]

It just came up early last week. I think they're in a test, to my knowledge.

[Jeff Kone:]

Okay. Okay. And then any idea on -- did they give you an idea of how long that would run for them to validate?

[Randall N. McCullough:]

We work together on that. You're asking a lot of questions. I wonder why. Help me understand.

[Jeff Kone:]

Pardon?

[Randall N. McCullough:]

Help me understand. What would it matter?

[Jeff Kone:]

What would it matter? I'm just trying to get an idea in terms of future news flow and also an idea on how well it's going with Kohl's, if it's too soon to tell.

[Randall N. McCullough:]

It's too soon. So we have had some sales. It's too soon to tell and...

[Jeff Kone:]

Yes, if it's been a week, I agree.

[Randall N. McCullough:]

They have -- they are really committed to this. There's a lot of marketing plan that they'll be using their database for that holiday season, which is really when the biggest piece of it will come.

[Jeff Kone:]

Okay. And the other part of the question about others that are in test. I know you can't name names or anything like that because maybe or not, it's far along in the channel. But are there others that are being tested?

[Kyle Macemore:]

We're in constant discussion with various people, which is what we've said consistently in the past, and we can't really comment any further than that.

[Operator:]

And we have a follow-up question from Lenny Brecken from Brecken Capital.

[Leonard Brecken:]

I have a couple, so I'll try and make it brief. Just to follow up on the prior question. Typically, retailers don't roll out products much past in November, and that's typically been the case and then they wait until like late winter. Is that generally the case? Or since you're pursuing online, there may be exceptions because you can expedite that rollout. I mean, is that -- Randy, is that generally -- am I in the right ballpark? I mean turn off is like right around early November. It won't roll it out...

[Randall N. McCullough:]

Yes, Lenny, I want to defer to Steve because Steve ran the online for Zale.com, and then he also ran the online for Golfsmith, both of which exceeded hundreds of millions.

[Steven M. Larkin:]

Yes. One of the beauties of the online space is the ability to react fairly quickly. If it's fairly quick, fairly painless, if the IT architecture and infrastructure is in place, there's really no negative to launching product essentially 365 days a year. Obviously, from a business perspective, from both sides of the equation, from the wholesale and the retail side, you want to get it up in advance of the big holiday rush. The fourth quarter holiday season for a lot of people in the jewelry business is the significant season of the business. In a lot of cases, it's the make or break time frame. So we're real glad we're up on Kohl's in advance of that holiday rush. And again, we can replicate these systemic processes we've put in place for other people.

[Leonard Brecken:]

All right. But -- I mean, but is it the case that -- I mean, if mid-November comes around, is the likelihood of when online launches dramatically reduced because it's late season. That's all I'm trying to get at. And they'll defer those decisions till they clean up the inventory from the holiday season, and then probably sometime in March is generally when they make these decisions for the new year. Is that right?

[Steven M. Larkin:]

Yes, I wouldn't draw that conclusion given the fact that, that the online world is different than the brick-and-mortar world in that they're not making a significant of a fixture fill investment in the inventory. So it's much more easy to facilitate getting SKUs up on a website, putting a drop ship program in place. And again, if you got the ability to get goods and garner any revenue even if it's 3 days in advance of Christmas, you should do it.

[Leonard Brecken:]

Okay. That's a good point. That is a good point because there's no inventory commitment. Kyle, can you just -- just in terms of the domestic sales that fell 5%, there was a mention of the timing of an order. What kind of magnitude would that have shifted the growth in the quarter?

[Kyle Macemore:]

We -- Lenny, to be clear, I think that was in Randy's section. I don't think he said timing of a specific order. He just said the timing of when our orders have come in through distributors. And we've tried to caution people -- I think in the past -- the company's cautioned people to look at longer period trends such as year-to-date. We obviously focus each quarter. But depending on -- given the way our business is structured, orders from distributors can flow between quarters, and that can drive to quarterly volatility. So that's why we try to focus on the full year number, which is up, I believe, 25%.

[Leonard Brecken:]

Okay. But that's not indicative of the underlying sales trends to leave you concerned about domestic demand because that number is down 5%. I think it's -- that's what I'm asking.

[Kyle Macemore:]

Yes, again, we don't -- we're not in the business of giving future guidance. But we feel very good that it's up year-to-date. And I think as Randy walked through all of our various metrics, whether you look at wholesale, our direct businesses, our U.S., our international on a year-to-date basis are up in sizable amounts.

[Leonard Brecken:]

Okay. That's good. That was what I wanted to clarify. In terms of looking forward, talking about the numbers, and this is a question for Randy, is -- you look like you're on a trajectory growth rate of somewhere around 35%, give or take, a quarter. It fluctuates. But to maintain a given growth rate moving forward, is the business more dependent on mining the existing channels you have to achieve and replicate the growth throughout 2013 into 2014? Or is it dependent more on getting more retailers on board for '14 to make -- to replicate what you did in '13?

[Randall N. McCullough:]

I tell every one of these guys, Lenny, every week, every day, I'm around them. All of the above. They can't take their eye off of any ball. We got to keep pushing on all fronts, very important.

[Leonard Brecken:]

But do you think you have enough wind in the sails given -- I mean, Amazon, you haven't even -- they haven't even started promoting the product and Kohl's just launched. I mean, do you have enough gas in the tank, even if you didn't get more than one retailer expansion next year to continue to seek organic growth of what you saw in '13? I mean, you still have in mind Lulu Avenue as well. I mean, that channel hasn't even begun to get mined.

[Randall N. McCullough:]

Yes, I don't want to get into giving guidance because we're just not there yet. But Lenny, I would say this, if we didn't -- if we were not able to take this existing base and show some increase, then the wrong management team would be in here. You just need to replace us. I mean, it's -- that's not a hard job. This product is selling. It's doing great. It looks better every week. When Cree brings the materials, they brought more materials today and it's better than what I saw last week. It just -- everything just keeps getting better.

[Leonard Brecken:]

That was my last question. In terms of coming out with an even better, call it, quality product, can you just give us a flavor of if that could occur technically and on -- under what time frame could we possibly see even better quality?

[Randall N. McCullough:]

Yes, Lenny, let me say this. I am challenging everybody to not only improve the quality of the material but also, we're doing R&D on different cuts to improve the brilliance of the stone, our different marketing aspects. And some of that has got me real excited, but we're not ready to release any of that yet.

[Leonard Brecken:]

Okay. And Randy, the promotional question on Amazon, do they plan -- have any plans to do any promotional activity for the holiday?

[Randall N. McCullough:]

I know Tom has been in touch with them. Without Tom here, I couldn't respond to that. Lenny, I'm optimistic that as smart as they are, they're going to get it right sooner than later.

[Operator:]

[Operator Instructions] And we do have a follow-up from Mark Wright [ph], a private investor.

[Unknown Attendee:]

Purchases from Cree worth $300,000 to $400,000 per week in the second quarter. Did it continue at that rate in third quarter?

[Kyle Macemore:]

Yes, that's a general ballpark. I mean, it varies by week, and it goes up and down in certain periods based on their availability of supply, but it's been our run rate over the last few weeks.

[Unknown Attendee:]

Okay. Fair to say then about the same amount and purchases from Cree in the third quarter as we did in the second quarter?

[Kyle Macemore:]

Yes. We've been trying to continuously bring in material to -- as we discussed earlier, the cycle time to turn that material into stones, it takes a little while. So we try to keep that flow going so we can build up inventory for a brilliant to be prepared for future event.

[Unknown Attendee:]

All right. And do you expect your cash position to remain flat or increase going forward or drop going forward?

[Kyle Macemore:]

As far as cash flow goes, like our other metrics, we don't -- we're not giving future guidance, but we feel like we have cash in hand, the $6 million plus a large amount of inventory and a solid AR balance to collect from. We did get a line of credit put in place with PNC, which we had a few questions about. And I will just clarify that line of credit, we felt like that was just a good business practice to do. We're not paying any expenses on that line of credit unless we use it. So we put that in just for a company our size. We felt like it was the right thing to do. So with all those various tools at our disposal, we feel like we can continue to proceed with the business.

[Operator:]

We have an additional one from Mark Weindling of JHS Capital Advisors.

[Mark Weindling:]

Can you tell me how many employees do you have now? Primarily relating to, are you over 50 at this point with your [indiscernible]?

[Kyle Macemore:]

Yes, we are.

[Mark Weindling:]

So is the Affordable Care Act going to have any kind of material impact on your expenses?

[Randall N. McCullough:]

Already has. You're just trying to get my blood pressure up, aren't you, Mark?

[Mark Weindling:]

No. No. I get to [indiscernible]. Okay. Well, that was really my only other question.

[Operator:]

We have an additional follow-up from Lenny Brecken of Brecken Capital.

[Leonard Brecken:]

Kyle, was the AR rise primarily tied to the international sales that occurred in the third quarter?

[Kyle Macemore:]

Yes.

[Leonard Brecken:]

Okay. So in terms of domestic AR, there was no discernible change there in terms of the trend there?

[Kyle Macemore:]

Lenny, to be honest with you, I haven't looked at the domestic ARs broken out separately. But in general, a big increase in AR in the quarter was from our international business because it was a sizable portion of our revenue.

[Leonard Brecken:]

Okay. And Randy, did I get that right that we should expect additional hours from ShopNBC in the foreseeable -- -- the near term?

[Randall N. McCullough:]

Compared to what they did last year, that's what I'm being told.

[Leonard Brecken:]

Okay. And correct me if I'm wrong, how many hours do you actually have? Isn't it just one show a month or something like that right now?

[Randall N. McCullough:]

Yes, I don't have that data, I'll be honest with you.

[Leonard Brecken:]

Okay. All right. Well, that's good to hear anyway that they're increasing the hours. So I was wondering when they would do that.

[Operator:]

And as there are no questions at the present time, I'd like to turn the call back over to Randy McCullough for any closing comments.

[Randall N. McCullough:]

Thanks, Keith. Once again, I'd like to thank everyone for taking the time to participate in our call today and most of all, thank our employees for all of their hard work and continued dedication. I hope that everyone shares our enthusiasm for the remainder of 2013. We will be presenting at the upcoming investor conferences in Dallas and Los Angeles in November and December. Please check our Investor Relations at charlesandcolvard.com in the near future for times and info on these conferences. And if you're in the area and able to attend, I look forward to seeing you there. Thanks, everyone.

[Operator:]

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