Black Diamond Inc. reported pre-season shipments of its greatly expanded apparel line led a double-digit increase in sales from continuing operations in the third quarter, despite a significant reduction in the number of REI stores carrying the new line.

BDE reported sales from continuing operations, which excludes results from Gregory Mountain Products, which Black Diamond sold July 23,  increased 24 percent to $54.9 million in the third quarter ended Sept. 30, compared to $44.2 million in the third quarter of 2013. The increase reflects fulfillment of pre-season orders for Black Diamond’s second fall apparel collection, which includes the brand’s first Gore-Tex, Windstopper and Down outwear for men as well as its first pieces for women.

The company nearly sold out of its down and Gore-Tex items on a pre-booking basis and has seen a “very significant” increase in ASAPs from Europe in recent weeks compared with a year ago thanks to the arrival of cold weather there, said BDE CEO Peter Metcalf. Approximately 800 stores will carry Black Diamond apparel this fall, compared with about 400 last year.

Metcalf said pro deal sales of the fall apparel collection to retailers employees have “been phenomenal,” but disclosed that REI has cut back distribution of Black Diamond apparel to 34 of its 135 stores this fall.

“For a major chain like REI, to want to place a meaningful percentage of the apparel in a meaningful number of their stores they need to see a higher sell-through rate than they had in the first two seasons,” Metcalf explained. “We have focused on a much smaller number of doors to carry a more meaningful amount of the product where we can better support it and where they had a more technical customer base based upon their sales of gearing equipment and BD gearing equipment. How that goes, will play a material role in how we grow the business each season with REI.”

While BDE’s apparel sales to REI are up from a year ago, BDE has taken several steps to boost better sell-through of its 2014 fall apparel collection. Those initiatives include incentivising reps to do more in-store clinics, persuading retailers to
feature the apparel in window displays and investing in co-op
advertising programs with REI, Zappos.com, Localgear.com and other
select specialty retailers.

At POC, the Swedish action sports helmet brand BDE acquired in 2012, shipments continued to grow thanks to ASAP demand for road cycling helmets and apparel launched in the spring and pre-season fulfillment of ski helmets, which continue to benefit from exposure the brand received during the Sochi Winter Olympics.

In North America, BDE saw strong ASAP orders for POC’s new road bike collection while its more mature Black Diamond gear and equipment categories experienced slower than anticipated ASAP orders. In Western Europe, an unseasonably dry winter followed by an extremely wet summer resulted in “challenging” retail conditions. In Northern and Eastern Europe, where weather patterns were more normal, sales grew in the double digits. In Japan sales slowed as consumers pondered a weaker yen, a new sales tax and the death of 50 hikers during the Sept. 27 eruption of Mount Ontake.

“Hiking in Japan’s iconic volcanoes has become one of the country’s most popular outdoor activities and one where the Black Diamond equipment brand has a strong presence,” said Metcalf.

Gross margin expanded 630 basis points (bps) to 41.4 percent, or 290 bps after excluding a $1.5 million charge for a PIEPS product recall in the third quarter of 2013. A 360 bps contribution from a higher mix of higher-margin products and sales channels, as well as efficiency gains in the supply chain and lower markdowns for discontinued merchandise more than offset the impact of foreign currency exchange rates.

Selling, general and administrative expenses increased 6 percent to $20.4 million, or 37.2 percent of  sales, down 650 bps from the year earlier quarter, when BDE boosted spending to launch Black Diamond’s first line of apparel, POC’s new road cycling collection and take some POC distribution in house in Canada, France, Holland and Belgium. 

Net loss from continuing operations was $419,000, or 1 penny per diluted share, compared to $3.65 million, or 11 cents in the year-earlier quarter. Adjusted net income from continuing operations, which excludes non-cash items, increased to $4.0 million, or 12 cents per diluted share, compared to $1.1 million, or $3 cents.

BDE was able to report net income of $20.8 million thanks to results from, and the sale of Gregory Mountain Products, which it sold July 23. BDE expects to offset $11 million of income taxes due on its pre-tax gain of $39.5 million from the sale by using approximately $31.4 million of its net operating loss carryforwards, leaving it with approximately $179.0 million to offset future income taxes.

BDE used the $84.1 million in proceeds from the Gregory sale to pay down outstanding amounts under its $30.0 million line of credit and pay off a $9.0 million term note and was still able to end the quarter with nearly ten times more cash than a year ago and a third less debt compared with Dec. 31, 2013.

BDE reiterated its guidance for second half sales to reach $113-$118 million, which implies year-over-year organic revenue growth of 15-20 percent in currency-neutral (c-n) terms. The company expects c-n gross margin to range between 39.5-40.5 percent, up 160-260 bps from the second half of 2013. Sales for the full year are expected to range between $192-$197 million, which would represent an increase of 14-17 percent from 2013. Full-year gross margin is expected to reach 38.5-39.0 percent, up 130-180 basis points. Apparel sales remain on track to triple compared with 2013.

In 2015, BDE will be looking to the launch of Black Diamond’s first Spring apparel collection for women to drive growth. Based on double-digit growth in pre-season apparel orders, BDE expects 40 percent of its 2015 Spring apparel sales in North America and Europe will come from the women’s line.

POC, meanwhile, expects to introduce 14 new styles and 43 new SKUs and approximately double its door count in 2015. The brand plans to launch its second collection of cycling apparel and gear in the spring. Dubbed “Race Day,” the collection has approximately 34 new styles, including helmets, and 135 new SKUs.

“We expect these initiatives to position POC to slightly more than double sales related to its road product in just one year,” Metcalf said of POC’s road cycling collection.

BDE will simultaneously begin phasing out climbing and mountain equipment SKUs in the spring as part of its strategic pivot, which calls for a higher ratio of apparel to equipment sales.

Metcalf declined to comment on whether BDE had adjusted its long-term revenue goals or share any new details regarding the company’s plans to expand its retail operations. He said Zeena Freeman, who joined the company in August and will replace Metcalf as CEO next year, will address both topics when BDE reports first quarter results in March.