Black Diamond Inc. must growth its fourth quarter sales by at least 28 percent to meet its 2013 revenue targets after reporting third quarter sales grew just 8.0 percent because major retailers in both the Europe and the United States delayed deliveries of its skis, boots, poles and other winter hardgoods from September into October.
Founder, President and CEO Peter Metcalf assured skeptical analysts that the Salt Lake City, UT company can still reach its target of 17 to 22 percent annual revenue growth for the year.
“We believe our guidance is still valid,” Metcalf told analyst during the company's quarterly earnings call. “We’re pleased with how the fourth quarter is going at this point in time.”
BDE's sales reached $52.8 million in the quarter ended Sept. 30 compared with $48.7 million in the third quarter of 2012. U.S. sales increased 3.6 percent to $19.8 million, while international sales increased 11.9 percent to $33.0 million for overall growth of 8.0 percent.
“We clearly have had a situation here where quite a few significant retailers are managing their inventories very tightly and many have pushedÂ…orders that had come in the third quarter into the fourth quarter,” Metcalf said.
Sales of Black Diamond apparel and results from Gregory’s new subsidiary in Japan more than offset later shipments of Black Diamond skis, boots and other winter hard goods and sales lost during a recall of an avalanche transceiver made by its German-based PIEPS brand. Metcalf said the closing of national parks also hurt some the company’s dealers in the west and that the ASAP business was off slightly during the quarter.
Black Diamond shipped its new apparel line, which includes 440 SKUs across 22 fall and winter styles, to 240 of its top dealers in September. The collection is focused in backcountry skiing and alpinism and includes softshell, insulation and fleece products priced from $119 to $399 MSRP.
Analysts expressed disappointment that BDE’s gross margins declined 60 basis points (pbs) to 37.3 percent as the PIEPS recall, discontinued merchandise, production variances and inventory adjustments more than offset higher margins from the apparel business, Gregory’s new direct distribution model in Japan and a 30 bps bump from exchange rates. BDE said the recall of PIEPS’ new Vector avalanche transceiver knocked down its gross margin by $1.5 million, or 470 basis points, while the other factors cost another 200.
SG&A was $21 million, or 39.8 percent of revenues, up 630 bps from the third quarter of 2012. Net loss reached $1.3 million, or 4 cents per diluted share, compared to a profit of $726,000, or 2 cents per diluted share in the third quarter of 2012. After excluding one-time restructuring and transactions costs and non-cash charges, adjusted net income was $3.5 million compared to $5.5 million a year earlier.
BDE ended the quarter with inventory valued at $57.2 million, down 5.8 percent compared with Dec. 31, 2012 and 17 percent on a like-for-like basis. Non-cash working capital declined 1.9 percent to $74.6 million compared to $73.2 million at Dec. 31, 2012.
Metcalf said the company opted to recall the PIEPS Vector before a significant number were shipped to retail after concluding it did not meet BDE reliability standards. Of the $1.5 million charge taken for the recall during the quarter, $1.1 million represented non-cash write-offs of inventory and depreciation of tooling costs. The remaining $400,000 related to the actual cost of the recall, including the cost of buying back the product from customers and retailers.
“We are optimistic that we might be able to recover all or portion of this loss and are still evaluating all of our alternatives in this regard,” said Metcalf. “Either way, the recall decision is consistent with our mission in our brand and in the best interest of our community of users.”
Executives insisted the third quarter results were consistent with BDE’s expectations for the back half of 2013. They also affirmed their preliminary guidance for 2014, which calls for 20 percent sales growth, improved gross margins and accelerating profitability.
Much of that growth will come from shipments of Black Diamond first line of spring/summer apparel and POC’s first shipment of road cycling helmets. The spring apparel line consists of 50 styles and 608 SKUs, and will be available in approximately 400 retail doors at MSRPs between $32 and $189. By fall 2014, BDE expects to be selling 1,945 SKUs through 800 retail doors by adding women’s apparel, men’s hard shells and down outerwear.
Metcalf disclosed that BDE has launched a search for a senior executive with deep experience in managing lifestyle brands who will play a key role in helping the company develop its apparel and direct-to-consumer strategies in 2014. His or her responsibilities will include identifying where BDE can earn the best returns extending Black Diamond and POC into new categories, geographies and direct-to-consumer channels. POC, which made its name with helmets, goggles, glasses and body armor for cycling and snowsports, will launch its first apparel line for cycling next spring. Metcalf sees potential to extend the brand into many other apparel and lifestyle categories.
“Investment in our direct-to-consumer business is going to be a very important part of our business and very complementary to our wholesale business in the coming years,” said Metcalf. “To help us achieve this strategic pivot, we've retained an executive search firm to find a senior executive leadership candidate that would augment our strategic capabilities in lifestyle brand management and general management, specifically in the areas of apparel, retail and e-commerce.”
