Sales and profit margins took a big hit at Black Diamond during the first quarter of 2016 from currency headwinds and poor sales of ski products in Europe. They also suffered a “perfect storm” from the bankruptcies of some major U.S. retail clients, disruptions in the raw materials supply chain and the repatriation of its production of carabiners, cams and other anodized climbing gear from China to Salt Lake City, which was completed last year.
The manufacturing problems were exacerbated by the company's recent recall of 1.16 million carabiners and 208,600 nylon climbing runners. Most of the recalled items that were inspected didn't need to be replaced. The others, however, required extra manufacturing time, which was not easy to obtain because of a tight local labor market in the area, where the unemployment rate has been cut in half to 3 percent in the last few years. The situation is expected to improve during the current quarter.
The end result was a net loss of $4,013,000 from continuing operations for the quarter, up sharply from the $1,745,000 loss of the year-ago period. Excluding one-off charges including restructuring and transaction costs, Black Diamond still incurred an adjusted operating loss before amortization (Ebitda) of around $2.4 million, against positive Ebitda of $1.2 million, and a net loss of around $2.2 million compared with net income of $0.1 million.
Sales fell by 9 percent to $38.2 million for the quarter. Domestic sales rose slightly to $19.6 million from $18.3 million, with double-digit growth in climbing and strong sales of other mountain products, thanks also to reorders of carabiners and other products. BD experienced higher-than-expected demand for its new harnesses, the Half Dome helmet and other climbing accessories such as the Majo chalk bag and creek climbing packs. Rock climbing clothing sold well, too.
Conversely, reported sales generated outside the U.S. fell sharply by 21 percent to $18.6 million, where 5.1 percentage points were due to the weak euro and other foreign currencies. The biggest problems were encountered in Europe, due to the weather situation and closeout sales of apparel, but Pieps performed relatively well. Demand is beginning to stabilize in distribution markets such as Japan and South Korea.
The gross margin dipped by 6.7 percentage points to 28.7 percent. Excluding the impact of foreign currencies, which took 3.8 percentage points out of the margin, it would have reached 32.5 percent. Another 2.7 percentage points came from the relocation of manufacturing activities to the U.S., and 0.9 points from the writeoff of inventories related to the U.S. bankruptcies. Adding extraordinary charges, the company suffered an operating loss of $3,873,000, up from a loss of $896,000 in the first quarter of 2015.
Black Diamond's management remains positive about the relocation of production activities from Asia to the U.S., feeling that it will reduce overhead costs and response time to customer demands in the long term.
The company has developed point-of-sale merchandising for a new network of shop-in-shops that will include Black Diamond's reduced line of apparel. In-store displays have been shipped to 27 key retailers. Mark Ritchie, president and chief operating officer of the company, told financial analysts that the brand is focusing on transactional marketing, in particular in-store marketing, in order to drive sell-through at the point of sale and to grow brand awareness. The strategy is being applied first and foremost to a growing number of climbing gyms and to its strategic and key specialty retail accounts.
The management confirmed a sales projection for the full year of $145-150 million, down from $155.3 million in 2015, indicating flat revenues in terms of constant currencies. The turnover should be largely the same in the first and second half of the year.
The management also confirmed its forecast of a gross margin ranging from 32.5 to 33.5 percent against 34.9 percent, due to a negative currency impact of about 3.3 percentage points. On a constant-currency basis, it should improve by between 0.9 and 1.9 percentage points.
By 2017, Black Diamond is expected to approach an Ebitda margin of around 10 percent, including the results of Pieps, and excluding extraordinary items.
Despite the net loss incurred in the quarter, Black Diamond still had $96.2 million in cash and marketable securities at the end of the period that would be available preferably for potential acquisitions, or for stock repurchases.
The acquisition target should have an enterprise value of between $250 million and $500 million, but Black Diamond would prefer to invest outside the outdoor equipment sector for diversification purposes. The company also has net operating loss (NOL) carryforwards of about $166 million that it can use against future federal U.S. income taxes.