By Charlie Lunan
Black Diamond Inc.’s (NYSE:BDE) decision to repatriate manufacturing of carabiners, cams and other climbing hardgoods from China to Salt Lake City is costing it dearly.
The company said August 1 that gross margin in the second quarter ended June 30 plummeted 640 basis points to 28.6 percent, reflecting a 240-basis-point impact from higher manufacturing costs and a 250-basis-point impact from currency translation. On a currency-neutral basis, gross margin was 31.1 percent. After also excluding higher costs incurred repatriating manufacturing activities, gross margin was approximately 33.5 percent. Also dragging down margin was an unfavorable mix in lower-margin products.
“Despite record factory output levels in May and June, the manufacturing activities that we repatriated from China back to Salt Lake City continued to operate at higher costs, further impacting gross margin,” said Mark Ritchie, Black Diamond Equipment’s brand president. “We’re actively engaged in activities designed to improve, manage and measure factory efficiencies, and expect to achieve higher gross margin, lower overhead and reduced response time to our customers in 2017.”
The performance was actually better than the first quarter, when product recalls and supply chain problems shaved 270 basis points off Black Diamond’s gross margin. Still, the company lowered its full-year forecast for gross margin to around 30 percent. That compared with 34.9 percent in 2015 and the 32.5 to 33.5 percent Black Diamond had forecast previously.
“If we had the sorts of availability that we had forecasted to build, we would be in a really good position,” said Ritchie, noting that he detects no weakness in specialty outdoor retail. “Our larger key dealers continue to drive strong sell-through of our products. And despite the noise in the overall retail landscape today, we generally characterize our North American dealer base as solid. We also have a very diversified mix of retail channels like e-commerce that helps to insulate some of the challenges brick and mortar is currently facing.”
Richie said Black Diamond has caught up on the majority of backorders in North America and less in Europe.
The company also took another step toward addressing its manufacturing issues by naming Rick Vance as director of quality, effective August 1. Vance, whose background includes stints at an orthopedic lab and the defense industry, will oversee Black Diamond’s quality policy, controls and processes, including controls and practices within Black Diamond’s Salt Lake manufacturing operations.
Korea and Japan Orders Rebound
Black Diamond had better topline news. Sales from continuing operations in the second quarter reached $29.1 million. While down 3 percent in reported terms, sales were up slightly in currency-neutral terms. Black Diamond earns 40 percent of its revenue overseas, primarily in the euro, Canadian dollar, Swiss franc, British pound and Norwegian krone, officials said.
Growth was driven by North America, where climbing gyms are creating demand and strength in Black Diamond’s global direct-to-consumer channel. Sales to independent global distributors were up low double digits, particularly in the important Japanese and Korean markets, where retailers have begun to replenish inventory after a period of industry consolidation and other market headwinds.
Solution, Momentum, Primrose and Couloir harnesses, the Half Dome helmet, climbing accessories, particularly the Mojo Chalk Bags, Creek climbing packs, bouldering products and rock-climbing sportswear, especially the Credo and Notion pants, drove growth. Ritchie said Black Diamond’s lighting and trekking products gained market share.
“Our spot headlamp was a real winner, benefiting from the momentum generated as a result of a key account early launch,” he said.
Countering the growth were tough conditions in Europe, where foreign exchange rates knocked 900 basis points off Black Diamond’s sales growth in the quarter.
The decline in global sales and gross margin more than offset a $2.5 million, or 18-percent, cut in selling, general and administrative expenses. Black Diamond’s net loss from continuing operations improved slightly to $3.2 million, or -10 cents per share, compared with a loss of 3.8 million, or -12 cents in the year-ago quarter. Excluding a laundry list of non-cash charges and non-recurring items, the figure improved to -$2.5 million, or -8 cents. Adjusted EBITDA was -$2.3 million compared to $1.9 million.
Holding Pattern on Possible Acquisitions
Black Diamond offered no update on its hunt for acquisitions, which is focused on cash-flow-positive U.S. companies within or outside the outdoor recreation industry. The company is eager to invest some of its early $100 million in cash into profitable operating companies so it can use tax credits that can be used to offset $166 million in profits.
Black Diamond reaffirmed its fiscal year 2016 sales expectation, which calls for currency-neutral sales to be flat to up 3 percent from 2015.
Lead photo courtesy Black Diamond
