Black Diamond Inc. capped off its strategic pivot Monday by naming an executive with global apparel and consumer electronics retailing experience as president and successor to company co-founder, chairman and CEO Peter Metcalf Monday.
BDE said Zeena Freeman started as its new president Monday and will be taking over P&L and other high-level operating responsibilities from Metcalf. She will play a lead role in determining how the company invests $45 million in cash it has set aside from the July sale of Gregory Mountain Products. BDE’s board of directors expects Freeman to take over the CEO role from Metcalf on June 30, 2015, when Metcalf plans to shift his focus to advocacy, public policy and shepherding BDE’s corporate culture and product design.
Last month, BDE sold Gregory Mountain Products to Samsonite for $84.1 million.
“We have now completed, or nearly completed, all of the important strategic steps contemplated by the strategic pivot that we announced last year,” Metcalf said Monday in reference to BDE’s plans to shift capital toward BDE’s faster growing Black Diamond and POC brands, an expansion into apparel and a global omni-channel retailing platform.
While Freeman has not worked in the outdoor industry, she has extensive experience helping global hardgoods and apparel brands devise and implement omni-channel merchandising platforms. At Sony Corp., she served as general manager of global retail, responsible for Sony's worldwide store and e-commerce businesses and reported directly to the company's chairman and CEO. She has also served as CEO of People, an apparel start up in India and spent nearly a decade in senior merchandising jobs at Gap Inc. in the 1990s.
“Zeena brings Black Diamond a wonderful combination of leadership, strategic thinking, brand management, and consumer product and omnichannel expertise,” noted Metcalf. “She is precisely the kind of strategic merchant and dynamic brand leader that we have been seeking, and we see her perfectly positioned to lead Black Diamond's fastest growing brands through an omnichannel environment over the next decade.”
Second quarter performance
Those brands Black Diamond, POC and PIEPs experienced double-digit sales growth in second quarter. The company reported Monday that sales, excluding its recently divested Gregory Mountain Products business, increased 18.2 percent (17 percent currency-neutral) to $34.4 million from a year ago thanks to strong growth in Black Diamond hard goods and apparel, as well as at POC, a Swedish company that launched its first road biking helmet this spring. Including Gregory, second quarter sales increased 10 percent to $42.9 million.
Metcalf said the growth was aided by a more favorable retailing environment, which he attributed to more normal seasonal weather patterns, cleaner inventories and improving economies in many markets. The company’s direct-to-consumer businesses in North America, Europe and Japan have largely sold through their inventory and average sell through of the line at dealers is running 15 percentage points higher in North America than its fall 2013 launch was at the same point in that season.
“Our larger retail partners did as well with the spring line as our specialty shops, which is very encouraging,” Metcalf said. “However, we recognize our sell-through rates need to continue to climb before we will reach a level that some of our largest partners, like REI, consider a requirement for distributing throughout all or most of their stores.”
POC successfully launched its first line for road bike helmets to coincide with its sponsorship of the Garmin-Sharp racing team’s Tour de France run. Metcalf said POC will expand the line with 14 new styles, 43 new SKUs and 500 new doors in Spring 2015. POC also plans to launch a second collection of cycling apparel and gear under the Raceday label. Together, those product launches are designed to more than double POC’s road bike sales.
Gross margin dipped 30 basis points to 35.9 percent compared to the year-ago quarter due to a less profitable mix in product sales and channel distribution. Lower margin sales to independent global distributors, for instance, increased 28 percent with the company's.
BDE reported SG&A expenses increased 12 percent to $18.0 million, driven by investments in its strategic initiatives such as Black Diamond apparel, the transition of certain POC distributors into the company's in-house operations, and the launch of POC's road cycling collection. Still, the company was able to drive down SG&A as a percentage of net sales by 280 bps to 52.3 percent.
Net loss from continuing operations was $4.4 million, or -14 cents per diluted share, compared to a net loss of $4.2 million, or -13 cents per diluted share, in the year-ago quarter. Net loss from continuing operations in the second quarter of 2014 included $300,000 of non-cash items and $400,000 in restructuring costs, compared to $800,000 of non-cash items and $100,000 in merger and integration costs in the year-ago quarter. Excluding these items, adjusted net loss from continuing operations before non-cash items in the second quarter of 2014 was $3.7 million, or -11 cents per diluted share, compared to adjusted net loss of $3.3 million, or -10 cents per diluted share in the second quarter of 2013.
BDE used approximately $39 million of the proceeds from the Gregory sale to pay down debt since the end of the quarter and set aside the remaining $45 million in cash for investing in apparel and omni-channel expansion, a small stock buy back program announced Monday and other growth initiatives.
The company said it expects sales to reach $113 million to $118 million in the back half, which implies there year-over-year organic revenue growth of 15-to-20 percent and full-year sales of $192 million to $197 million, which implies growth o 14 to 17 percent. Gross margins are projected to range between 39.5 and 40.5 percent, up 1.6 to 2.6 percent, in the back half and 38.5 to 39 percent, up 1.3 to 1.8 percent, for the full year even as it ramps up spending on Black Diamond and POC apparel lines.
The growth will be aided by a greatly expanded fall apparel line that will include Black Diamond’s first outerwear pieces for women and hard shells and down outerwear for men. Just as importantly, Black Diamond will significantly expand in-store marketing at key retailers to include apparel windows and banners, brand kits, tech tag kits, and branded apparel body forms and hangers. Metcalf has said that the failure to make such investments last winter resulted in disappointing sales at some big box retailers such as Paragon Sports in New York City. BDE still expects apparel sales to triple this year.
Executives said they expect the reduction in hard goods SKUs to bring down top line growth in 2015, but anticipate it to accelerate in 2016 and beyond as apparel becomes a larger share of the business.
To provide added assurance, Metcalf noted that the sale of Gregory, which he described as the company’s “slowest growing” and “least valuable brand,” at 2.3 times projected 2013 revenue implied a minimum pre-tax break-up value of $15 for BDE, which closed Monday at just under $9 a share. He also noted that BDE's board had authorized a program to buy back up to 10 percent of the company’s stock.
Metcalf also revealed Monday that following a year-long analysis with a handful of strategic OEM partners, BDE had decided to shift manufacturing of more than half the hard goods it makes at its facility in China to its factory in Salt Lake City or U.S. based OEMs.
“We have come to the conclusion that a large, large part of that – a majority of that – can be repatriated to North America, and some of it to, perhaps, other suppliers in Asia, and give us higher margins, reduced overhead as well as reduced response time to our key customers” Metcalf said. “We see that as very important because we're in a period of just-in-time inventories, in a mode where the larger retailers like to work with forecast versus absolute [bought or] bookings and you need to be able to respond to that.”
BDE expects to complete a substantial repatriation of hardgoods manufacturing by early 2017. The initiative comes as BDE works with consultants to eliminate 25 percent of Black Diamond’s hardgoods SKUs to reduce the complexity and costs of its supply chain even as it greatly expands its apparel SKUs. While those SKU cuts could slow top line growth significantly in 2015, they will pave the way for healthier returns long term, Metcalf said.