Confirming that the relocation of its European head office from Basel in Switzerland to Innsbruck in Austria should be finalized in May (see The Compass Vol. 9 n° 1-2 of Jan. 21), the management of the Black Diamond group said it should reduce operating costs by $2.2 million on a normalized basis this year. The progress was detailed in a conference call around the U.S. group's annual results last month.
As previously reported, the move of the European office is part of a reform package launched a few months ago to make Black Diamond Equipment (BDE) more profitable, after the Black Diamond group's decision to stick with BDE and Pieps, an Austrian brand of snow safety products, and to “redeploy” the group's significant capital resources into diversifying assets.
The group said BDE should return to its 2011 cost structure sometime later this year, amounting to an Ebitda margin run-rate of about 10 percent excluding corporate costs and transitional gross margin factors related to foreign currency and the repatriation of manufacturing. The target is to increase operating cash flow and to return to an Ebitda margin of about 10 percent for BDE and Pieps together by 2017, excluding several factors affecting gross margins.
The restructuring measures should entail cash and non-cash restructuring charges of $3 million to $4 million this year. Apart from the relocation of the European office, they involve significant cost reductions in North America and a reorganization of the group's apparel strategy.
The move of the European office was described as a means to reduce costs, as running a business in Innsbruck was estimated to be 30 percent cheaper than in Basel, but at the same time the company wants to reduce complexity and to minimize issues associated with currency exchange rates between the euro and the Swiss franc.
Led by Tim Bantle, former president of the BDE brand, the European structure has already been reorganized on the basis of different types of retail accounts, splitting operations between strategic accounts, regional retailers and specialty stores. It has also started launching e-commerce operations, which opened up in the U.K., Germany and Sweden in November. This was a prelude to a full European launch, with more than ten countries to be added in the second quarter.
Black Diamond's targets and offering for the BDE apparel range are to be scaled down. The company had outlined an annual sales target of $250 million by 2020 for apparel when it launched the first collection in 2013. The range is to be narrowed from about 3,000 SKUs last year to 2,400 this year, and the entire offering should be more accessible, i.e. less technical.
Mark Ritchie, president of the BDE brand, insisted that it remained committed to apparel but added that it is adjusting its ambitions in the segment to allow for organic and profitable growth with much reduced sales targets. The range should mainly consist of products for core mountain climbers as well as emerging gym climbers.
The company says it has already started to eliminate functions that were used for its wider brand platform, providing centralized human resources, customer service, IT, supply chain management and other services to all of the group's brands including Gregory Mountain Products and Poc, which were sold to Samsonite in 2014 and to Investcorp in 2015, respectively.
As previously reported, the group also started to pull back some Chinese manufacturing functions to its head office in Salt Lake City, Utah. This entire program, along with the above reforms, are anticipated to be completed this year.
The update came as the Black Diamond group reported that sales generated by its continuing operations declined by 4 percent to $44.1 million in the fourth quarter of 2015. The turnover was flat in constant currencies, despite lower product volumes in Japan.
The group's gross margin dipped by 1.6 percentage points to 33.5 percent for the three months, but again it would have increased by 0.9 percentage points without currency exchange rate changes, due to a more favorable mix.
Black Diamond ended the quarter with a net loss from continuing operations of $31.7 million, much greater than the loss of $3.1 million booked in the same quarter of 2014. This included $31.1 million in non-cash items, chiefly consisting of $29.5 million in goodwill impairment charges related to the drop in the group's market capitalization in the fourth quarter.
For the full year, the group's sales slipped by 2 percent to $155.3 million but they were up by 2 percent in constant currencies. The gross margin shrank by 1.5 percentage points to 34.9 percent, but again, excluding currency exchange rates, it would have gone up by 0.9 percentage points. Selling, general and administrative expenses were reduced by 9 percent to $58.5 million.
Black Diamond ended the year with a net loss from continuing operations of $86.5 million, compared with $9.6 million the previous year. This included $81.7 million of non-cash items, $3.4 million in restructuring costs and $0.9 million in transaction costs. Black Diamond estimates that it has $166 million of net operating loss carryforwards available for U.S. federal tax income purposes.
The company said its sales should reach $145 to $150 million this year, although in constant currencies the trend is predicted to oscillate between flat sales and an increase of 3 percent. The gross margin should range between 32.5 and 33.5 percent, down from 34.9 percent last year, but in constant currencies it should manage an increase of between 0.9 and 1.9 percentage points. SG&A expenses are expected to decline by 16.2 percent to $49 million, due to the cutbacks in the group's cost structure.
Black Diamond reiterated that it was still aiming to acquire durable, quality companies with an enterprise value in the range of $250 million to $500 million. It has retained Rothschild to search for such investments, focusing on the U.S. market and potentially outside the outdoor industry.