Charles & Colvard sees brighter future with new gemstone

Forever Brilliant said to be up to four shades whiter

dbracken@newsobserver.com June 3, 2012 

  • Explaining the stone Moissanite is made from silicon carbide, the third-hardest substance known to exist. A diamond, which is made of carbon, is the hardest. Charles & Colvard has an exclusive agreement with Durham-based Cree to provide it with silicon carbide through 2015. Charles & Colvard, which went public in 1997, was founded by Eric Hunter, who also was a Cree co-founder and invented the synthesizing process for moissanite. Silicon carbide is primarily used in the fabrication of high-performance semiconductor devices. Cree uses silicon-carbide wafers to manufacture its LED lights. Cree creates the raw material used by Charles & Colvard in a lab and delivers it to the company in disk-shaped slabs. The material is then cut and polished into gemstones. Although moissanite has more sparkle than a diamond, the stone itself has a slight tinge of green in it. Charles & Colvard’s latest product, Forever Brilliant, has undergone a process that the company says improves the color of the stone by up to four shades. Staff writer David Bracken

— Two and a half years ago, when Randy McCullough was debating whether to delay his retirement again to take the CEO job at struggling gemstone maker Charles & Colvard, he had plenty of reasons to think twice.

The company had been churning through executives, and orders for its moissanite gemstones, which are marketed in jewelry stores as an inexpensive alternative to diamonds, had largely dried up.

The stock was trading at around 50 cents and had lost more than 90 percent of its value over the previous three years.

But McCullough, 60, who had run a string of successful jewelry businesses over the previous four decades, also saw a lot of things he liked. Charles & Colvard had plenty of inventory of gemstones, which are made using material supplied by Durham LED maker Cree. The company also had no debt and more than $8 million in cash.

“With those three things you should be able to make it work,” he said.

After taking over in November 2009, McCullough began to transform the company from just a provider of loose gemstones into a sales and marketing machine that would sell and promote the moissanite brand in a variety of ways. The company began selling its own finished jewelry on television shopping networks in late 2010, and launched its own e-commerce site in August.

The fruits of that strategy have begun paying off, with sales doubling in the fourth quarter and up 40 percent in the first quarter of this year – results that have helped boost the stock price 42 percent this year to $3.58.

This weekend, at the jewelry industry’s annual trade show in Las Vegas, Charles & Colvard unveiled its newest product, a whiter gemstone called Forever Brilliant that seeks to blunt the biggest criticism lodged against moissanite gemstones.

“The problem was the stone itself was a little dark and the color was a little downscale,” explains Marvin Beasley, who joined the Charles & Colvard board around the time McCullough was hired and who previously ran the national retailer Helzberg Diamonds. “When you find a way to improve that and bring that up by a color grade of even one or two it makes a huge difference.”

The company says the gemstone is enhanced by up to four color shades by undergoing a process patented by Serenity Technologies of California. Forever Brilliant will retail for about 20 percent more than existing moissanite stones, and Charles & Colvard are particularly optimistic about its sales potential in Europe and Asia, where buyers tend to be more fussy about having a colorless diamond.

Just how much of a difference will become apparent over the next year, as the company approaches retailers and consumers who may have previously found moissanite gemstones lacking.

Charles & Colvard’s 2011 net sales of just over $16 million accounted for less than 0.1 percent of the U.S. diamond jewelry market, but the company believes its product is well-positioned to increase its market share, particularly given what’s happening in the industry.

Alternative metals

The recession caused jewelry sales to plummet 30 percent initially, and while sales have begun to pick up in recent years many cost-conscious consumers remain reluctant to spend money on discretionary luxury items. Jewelry stores’ revenues have declined at an average annual rate of 1.3 percent over the past five years to $29.7 billion, according to estimates from research firm IBISWorld.

At the same time, the price of diamonds and many precious metals – particularly gold – have increased, causing manufacturers to seek out lower cost alternatives. A moissanite stone retails for about one-tenth the cost of a diamond – a 1-carat solitaire in moissanite retails for $499 while the same color and clarity of diamond costs more than $5,000.

“Jewelers today have to merchandise products in alternative metals, otherwise you’re so high-priced you just can’t compete,” Beasley said.

Charles & Colvard is already a very different company from the one that existed before it was forced to overhaul its management and slash jobs in 2008 and 2009. The company currently has 46 employees, about double the amount it had after the cuts but still well below its peak of more than 70.

The fact that the company has yet to fully capitalize on consumers’ new-found frugality in the wake of the recession speaks to just how much its business had deteriorated. Charles & Colvard had its best run in the years following the 2001 recession, when its sales grew from $11.5 million in 2002 to $43.5 million in 2005. The company’s stock price peaked in early December 2005 at more than $25.

But by the time the Great Recession arrived, the company’s approach to doing business – cutting and selling gemstones to wholesalers, who then sold them to distributors who mounted them in settings for retailers – had become antiquated.

“I think the old Charles & Colvard model was a bit inefficient,” Beasley said. “Retailers today have to be efficient. They have to buy the product from the prime source as much as possible.”

The company also suffered as its inventory in many retail stores failed to be turned over quickly enough. Successful jewelers must have the discipline to aggressively replace those items that aren’t selling with ones that are, but McCullough said that wasn’t happening in many cases.

“They didn’t manage the inventory,” McCullough said. “The best pieces sold out, and they were stuck with all the other stuff.”

TV sales up

Moissanite jewelry was once found in most major retailers, including J.C. Penney, Macy’s, Kohl’s and Zales, but today its presence in retail stores has been significantly reduced. Re-establishing those relationships is crucial to Charles & Colvard increasing sales, but many independent retailers remain wary of the stone because they’re so-called “diamond mavens.”

“I think there are a lot of traditional jewelry retailers who wish that the product would simply go away,” said Chuck Lein, a Charles & Colvard board member who previously was chief operating officer of jewelry manufacturer Stuller and helped recruit McCullough.

The company’s current strategy reflects the need to overcome retailer intransigence, in part by proving on its own that there is substantial customer demand for moissanite products.

“Let’s continue to work through traditional channels, and that is growing albeit slowly,” Lein said. “But we’ve got to find a way to satisfy the demand of the ultimate consumer.”

Charles & Colvard still makes most of its money from selling loose stones to distributors who mount them in settings and sell them to independent retailers. But the company also now mounts some pieces that it sells on its e-commerce site, or, for lower-end pieces, outsources the work to manufacturers in Thailand and India.

The most successful of the company’s new sales channels has been television. Sales from shopping networks accounted for 20 percent of Charles & Colvard’s net sales last year, up from 7 percent in 2010, and Jewelry Television has become the company’s largest customer for its finished jewelry.

In addition to its e-commerce site, Charles & Colvard is also preparing to sell through Tupperwarelike home parties, where the hosts will be independent contractors paid a commission.

Raising awareness

McCullough says directing marketing dollars to direct-to-consumer initiatives that it controls provides the company a much better return on its investment, particularly compared to the nearly $40 million that the company spent on traditional advertising between 2004 and 2009.

“That’s key right now, to raise the awareness,” he said.

Building up the company’s new sales and marketing channels will take both time and money, and as a public company Charles & Colvard will need to persuade investors to be patient as it tries to expand its business. The company’s sales and marketing expenses increased $821,000, or 120 percent, in the first quarter, causing the company to report a net loss of $376,000.

Another challenge is a familiar one for Charles & Colvard: how best to tell the moissanite story. Eighty percent of the company’s sales are self-purchases by women, who aren’t likely to tell people it’s not a diamond.

“They’re never going to tell anyone it’s moissanite,” McCullough said. “That’s bad for us.”

McCullough admits the company may have emphasized the scientific aspect of the gemstone’s origins a bit too much in the past. But at the end of the day, he said, women just want a nice piece of jewelry.

“Nobody’s going to know the difference,” he insists. “They’re not.”

Bracken: 919-829-4548

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