Black Diamond Inc. CEO Peter Metcalf said record sales and a big swing in cash flow in the second quarter prove that a decision to redirect the company's resources to its fast growing POC brand and higher margin apparel and direct-to-consumer businesses is paying off.
The Salt Lake City-based company reported revenues reached a record $35.1 million in the second quarter ended June 30, up 2 percent from a year earlier as sales of POC's first line of road bike gear and the Black Diamond brand's first complete line of women's spring sportswear easily offset currency headwinds. Excluding the impact of exchange rates, sales grew 7 percent.
Sales increased in the double digits in North America, where sales are now up more than 20 percent year-to-date.
“This is driven by POC's road line as well as strong growth in core Black Diamond climbing and mountain gear as retailers focus their purchases and bought deep with key brand partners in foundational equipment businesses like climbing, lighting and trekking poles,” Metcalf explained.
Strong ASAP orders for POC's Raceday Collection
POC, a Swedish brand that only entered the road biking market last year, more than doubled those sales by offering 34 new styles and 135 new SKUs to twice as many retail doors compared with a year ago. POC’s new Raceday collection of helmets, sunglasses, goggles, gloves, apparel and accessories performed very well at retail and generated strong ASAP orders.
At Black Diamond apparel, top sellers from the new women’s line included the Sister Superior Tank, Alpinestart Hoodie and Levitation Capris, which provide comfort in the gym, on the boulder or under a climbing harness.
“We have and we are continued to invest in gym-to-crag, semi-technical apparel, and remain well-positioned in this up-and-coming category,” noted Metcalf
Progress at REI
Metcalf also noted that REI sales of Black Diamond products grew in the double digits at five flagship stores that commemorated a historic free climb of El Capitan's Dawn Wall by two Black Diamond athletes.
“This is a major step in reinforcing the Black Diamond brand presence in this key retail partner,” said Metcalf. “The double digit lift in sell through within the stores is causing REI to think about expanding this sort of program.”
BDE’s direct-to-consumer sales continued to grow in the strong double-digit range with apparel growing triple digits.
JetForce recall update
Metcalf disclosed that BDE has spent about $141,000 so far fixing a firmware glitch that prompted it to recall its innovative JetForce avalanche airbag packs, but noted consumers will soon be able to make those fixes themselves.
“In the future as a result of planned product upgrades and our new relationship with the tier 1 supplier in 2016, we expect further firmware updates of this nature to be handled by the consumer in the field,” said Metcalf.
International sales
In Europe sales were flat to down, with pockets of strength. In Eastern Europe, Scandinavia and the United Kingdom, year-to-date sales are up mid-single digits. Softness in Japan, Russia and – to a lesser extent – South Korea, continue.
“BD has a strong presence in Japan and the country is experiencing both consolidation and stabilization after a three-year growth spurt,” Metcalf explained. “Hence in 2015 is about aligning inventories with flat demand.”
A big swing in cash flow
BDE reported gross margin increased 80 basis points to 36.7 percent, in spite of a 280-basis-point headwind from foreign currency. Excluding the impact of foreign exchange, gross margin increased 360 basis points. The improvement was attributed to a higher mix of higher margin products – such as apparel – and direct-to-consumer sales. Growing apparel and direct-to-consumers sales are key elements of a “strategic pivot” the company undertook following the June 2014 sale of Gregory Mountain Products to to Samsonite International S.A. in June, 2014.
Selling, general and administrative expenses were essentially unchanged at $18.1 million, as $700,000 in severance payments to former president Zeena Freeman offset savings from a restructuring plan implemented in 2014 in a bid to improve cash flow and profits. SG&A declined to 51.6 percent of net sales, compared with 52.3 percent in the second quarter of 2014.
Net loss from continuing operations reached $5.4 million, or 17 cents per diluted share, including non cash items totaling $3.6 million and non-recurring items. Restructuring costs, including the cost of repatriating manufacturing of carabiners and other non-ski hardgoods from China, totaled $1.4 million, or 4 cents per diluted share. Advisory fees paid to two investment banks hired to weigh a possible sale of the company or its brands came to $689,000, or 2 cents per diluted share. Excluding the non-cash items, adjusted net income from continuing operations, improved sharply to $184,000, or a penny per diluted share, compared to a net loss of $3.67 million, or 11 cents reported in the second quarter of 2014.
BDE generated free cash flow or $4.2 million during the quarter compared to a $9.1 million cash outflow during the same period last year. The huge swing was attributed to a $14.2 million decrease in working capital that came even as the company took on approximately $10 million of incremental inventory to mitigate potential disruptions from its insourcing initiatives and to sustain growth in its apparel business, Metcalf explained.
“We remain pleased to see our strategic pivot continuing to manifest itself not only in sales growth but also in margin expansion, cost reduction and cash generation,” he said. “The second quarter reflects the company's initiatives to grow sales and gross margin while controlling expenses and improving cash flow,” said Metcalf. “Our 7 percent currency-neutral sales growth, despite continued headwinds in parts of Europe and Asia, and 360 basis point currency-neutral gross margin expansion demonstrates that our initiatives remain on track.”
Full-year guidance affirmed
BDE affirmed its full-fiscal year guidance, which calls for sales to grow 11 percent and gross margin to reach 40 percent after in currency-neutral terms. Momentum in legacy equipment sales, aided by launches of new backcountry ski and snow safety gear, the first full season of availability of the JetForce pack and the release of Black Diamond’s first ski apparel collection, is expected to fuel sales of the Black Diamond brand. Double-digit growth in pre-season bookings for POC’s fall ski and bicycle products and solid double-digit gains in both POC and Black Diamond's direct-to-consumer sales are also expected to drive record results in 2015.
Black Diamond is also beefing up in-store marketing with key rock gyms and outdoor specialty retailers in a bid to elevate its brand ahead of the fall and winter apparel season. In September, for instance, Tucson, AZ retailer Summit Hut will activate a Black Diamond shop-in-shop. Black Diamond has also sponsored the Access Fund's 2015 Rock Project Tour, in a bid to build brand awareness with the next generation of climbers coming up through rock gyms – which Metcalf described as the fastest growing segment of the climbing market. Finally it will launch BD TV, a branded content channel that will – among other things – promote key retailers such as Evo of Portland, OR and Escape Route in Whistler, British Columbia.
BDE did not provide an update on an ongoing strategic review, which its board of directors expects to complete before releasing its third quarter earnings in November. BDE hired the financial advisory firms Rothschild Inc. and Robert W. Baird & Co. March 16 to explore a full range of strategic alternatives, including a sale of the entire company or sales of Black Diamond Equipment (including the PIEPS avalanche beacon brand) and POC brands in two separate transactions.
“At this point, it is too early to discuss the details of any of the companies' alternatives other than to say that one possible outcome is the sale of some of the company's assets to monetize a small portion of the company's NOL (net operating loss carry forwards) and a redeployment of the proceeds to unrelated and diversifying investments,” Metcalf said.
