Good afternoon, everyone, and thank you for participating in today's conference call to discuss Black Diamond's financial results for the second quarter ended June 30, 2014. Joining us today are Black Diamond CEO, Mr. Peter Metcalf, the company's CFO, Mr. Aaron Kuehne, and the company's Director of Investor Relations, Mr. Cody Slach. Following their remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to Mr. Slach as he reads the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995, that provides important cautions regarding forward-looking statements. Cody, please go ahead.
Thanks, Delore. Please note that during this conference call, the company may use words such as appears, anticipates, believes, plans, expects, intends, future and similar expressions which constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on the company's expectations and beliefs concerning future events impacting the company and therefore involve a number of risks and uncertainties. The company cautions you that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.
Potential risks and uncertainties that could cause the actual results of operations or financial condition of the company to differ materially from those expressed or implied by forward-looking statements used in this conference call include, but are not limited to, the overall level of consumer spending on the company's products, general economic conditions and other factors affecting consumer confidence, disruption and volatility in the global capital and credit markets, financial strength of the company's customers, the company's ability to implement its growth strategy, including its ability to organically grow each of its historical product lines, its new apparel line, and recently acquired businesses.
The company's ability to successfully integrate and grow acquisitions, the company's exposure to product liability or product warranty claims and other loss contingencies, the stability of the company's manufacturing facilities and foreign suppliers, the company's ability to protect trademarks and other intellectual property rights, fluctuations in the price, availability, and quality of raw materials and contracted products, foreign currency fluctuations, and the company's ability to utilize its net operating loss carryforwards and legal, regulatory, political, and economic risks in international markets. More information on potential factors that could affect the company's financial results is included from time to time in the company's public reports filed with the SEC, including the company's annual report on 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.
All forward-looking statements included in this conference call are based upon information available to the company as of the date of this call and speak only as of the date hereof. The company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date of this conference call. I would like to remind everyone that this call will be available for replay through August 25th, starting at 8:00 P.M. Eastern tonight. A webcast replay will also be available via the link provided in today's release, as well as on the company's website at blackdiamondequipment.com. Any redistribution, retransmission, or rebroadcast of this call in any way without the express written consent of Black Diamond Inc. is strictly prohibited. I would like to turn the call over to the CEO of Black Diamond, Peter Metcalf. Peter?
Thank you, Cody, and good afternoon, everyone. As you saw at the close of the market today, we issued a press release announcing our financial results for the second quarter ended June 30th, 2014. Strong second quarter results were driven by double-digit sales growth across the Black Diamond, POC, and Pieps brands, as well as strong growth across every product category and region. We attribute these results primarily to the successful introduction of new and innovative hard goods products, the rollout of POC spring '14 road line, and the advancement of our apparel offering. In addition to strong operating performance, we have now completed or nearly completed all of the important strategic steps contemplated by the strategic pivot that we announced last year. Most importantly, we have officially hired an outstanding new leader in Zeena Freeman. In her role as BD Inc.
President, Zeena will be taking over all high-level operating responsibility of the Black Diamond Equipment, POC, and Pieps brands, including the full P&L, and it is our expectation that Zeena will succeed me as CEO no later than June 30th, 2015. The most important part of Zeena's background is the better part of a decade at Gap, working across multiple brands and across multiple functions, including retail, brand strategy, and operations. She brings to BD a wonderful combination of leadership, strategic thinking, brand management, consumer product, apparel, and omnichannel expertise. Most recently, Zeena led Sony's global retail and consumer business development. She is precisely the kind of strategic merchant, global GM, and dynamic brand leader that we have been seeking, and we see her as perfectly positioned to lead Black Diamond's fastest-growing brands through an omnichannel environment over the next decade.
While we expect Zeena to succeed me as the next CEO of Black Diamond, I intend to remain very involved with the business for the long term, both as a director and as a senior executive responsible for public policy Advocacy, activism on behalf of our community of users, as well as playing an integral role with our culture and values. I also expect to have a meaningful level of involvement with product and brand positioning. Secondly, the strategic pivot also contemplated a series of reorganizational steps to simplify our business and improve both our gross and operating margins. With the help of the L.E.K. Consulting Group, we have embarked on a plan to significantly reduce hard good SKUs by approximately 25%, more efficiently utilize and hence reduce the size of our global operating platform and rationalize the overall organization.
We expect these efforts to result in an overall cost optimization of our existing business of approximately $10 million by the end of 2016, with full year savings realized in 2017. A significant part of this plan involves developing alternative sourcing strategies for climbing hardware, some of which will likely be North American-based, as we seek to improve gross margins and reduce supply chain complexity. We expect these plans to be finalized and initiated during the third quarter and to produce improved gross and operating margins. We also expect to significantly reduce lead times and work-in-process inventory during 2015 and 2016. Third, the final part of our strategic pivot is the sale of Gregory, which was completed in July.
The sale simplified our business model, allowed us to take costs out of our operating platform, significantly strengthened our balance sheet, and enabled us to utilize a meaningful portion of our NOL. We have several months of work with Samsonite ahead of us to transition some important functions out from underneath of our operations, and then when these are complete, we expect to realize some additional expense savings by the end of the year. Before I comment further, Aaron Kuehne, our CFO, will discuss our financial results for the second quarter. Following Aaron's remarks, I'll make some additional remarks, and then we'll open up the call for questions. Aaron?
Thanks, Peter, and good afternoon, everyone. The reported results we issued in today's press release are from continuing operations, excluding the results of Gregory Mountain Products, the divestiture of which was completed subsequent to the end of the second quarter. I will discuss these results in detail, but first wanted to provide total sales for the first half and second quarter of 2014, including Gregory. Total sales for the first half of 2014, including Gregory, increased 8% to $97.5 million compared to the same period a year ago, which was in line with our prior guidance of $95 million to $100 million. Q2 sales, again, including Gregory, increased 10% to $42.9 million. From this point forward, all of my financial discussion, consistent with our press release, excludes Gregory and discusses continuing operations.
We are reporting sales from continuing operations in the second quarter of 2014 of $34.4 million, compared to $29.2 million during the same year-ago quarter, an increase of 18%. The increase was primarily due to an increase in the quantity of new and existing Mountain, Climb, and Wolves products sold, as well as the addition of apparel sold by Black Diamond Equipment and the launch of POC's road cycling collection. Almost every quarter, foreign exchange markets contribute some level of volatility to Black Diamond's financial results due to activities across multiple currencies, primarily the US dollar, the euro, the yen, and Canadian dollar. Due to the net strengthening of foreign currencies against the US dollar on a consolidated level, second quarter sales were positively impacted by approximately 70 basis points or $193,000. On a constant currency basis, Q2 sales increased 17%.
Gross margin in the second quarter decreased 30 basis points to 35.9%, compared to 36.2% in the same period last year. The decrease is primarily attributable to product and channel mix. During the quarter, we experienced a 28% increase in sales to our independent global distributors. These are sales at significantly lower average gross margins where our distributors incur all of the selling and distribution costs, and we believe this reflects very positively on our brand opportunity globally. Excluding FX or on a constant currency basis, gross margin would have been 35.5%. During the quarter, discontinued merchandise or DM and production and shipping variances had a negative impact of 240 basis points on gross margin, which for comparative purposes, is an improvement of 40 basis points compared to the prior year quarter.
Second quarter SG&A, which excludes restructuring, merger and integration, and transaction costs, was $18 million compared to $16.1 million in the year-ago quarter. The increase reflects continuing investments in the company's strategic initiatives such as BD apparel, the transition of certain POC distributors into our in-house operations, and the launch of POC's road cycling collection. Adjusted net income from continuing operations before non-cash items, a non-GAAP term, decreased slightly to a loss of $3.7 million, or a loss of $0.11 per diluted share in the second quarter of 2014, compared to a loss of $3.3 million, or a loss of $0.10 per diluted share in the second quarter of 2013. In spite of 18% sales growth, working capital decreased $2.6 million during the quarter, reflecting more efficient sourcing and inventory management.
Compared to June 30th, 2013, total inventory increased during the second quarter by approximately 14%, or $7.7 million, as the company is building inventory in anticipation of a rapidly expanding second half of 2014. At June 30th, we had $17.9 million outstanding on our $30 million revolving line of credit with Zions Bank. Total debt stood at $47.3 million, which includes $17.8 million of 5% subordinated notes due in 2017. On July 23rd, we completed the sale of Gregory to Samsonite for approximately $84.1 million. We have since fully paid down our Zions line of credit and paid off our $9 million Zions term note in full. The Gregory sale is expected to monetize approximately $30 million of our NOL balance, shielding approximately $10.5 million of cash taxes, leaving a balance of approximately $180 million.
In December, we expect to pay approximately $11 to $13 million in income tax associated with built-in gain taxes that could not be offset by our NOL. Looking ahead to our expectations for the second half of 2014. We expect sales to range between $113 to $118 million, which implies year-over-year organic revenue growth in the 15%-20% range. We expect gross margins to range between 39.5%-40.5%, which reflects a 1.6%-2.6% increase compared to last year's pro forma gross margins. For modeling purposes, we expect to spend between $40 to $45 million in SG&A, an increase of up to $5.5 million over the same period last year, and generate between $3 million to $6 million of free cash flow before giving effect to the tax payment associated with the Gregory transaction previously mentioned.
During the second half of 2014, we are planning to incur restructuring charges associated with the number of margin-enhancing initiatives that Peter described. We expect to quantify these specific charges during the third quarter of 2014. For the full year 2014, we expect sales to range between $192 million-$197 million, which implies year-over-year growth of between 14%-17%, and we expect gross margins to range between 38.5%-39%, or a 1.3%-1.8% year-over-year pro forma improvement. Preliminarily, we are currently planning our 2015 budget cycle around year-over-year sales increases of approximately 10%-13%. However, this is without the influence of our new Black Diamond, Inc. President, Zeena Freeman, who will oversee the full P&L. The sale of Gregory leaves us with an estimated $45 million of positive cash balance after the repayment of loans to Zions Bank.
During the third quarter, we plan to develop a cash-yielding investment strategy supported by a working capital line with Zions Bank for seasonal working capital purposes. I should remind you that our interest income is expected to be free of federal income tax as a result of our available NOLs. Before I turn the call back to Peter, I would like to address a few further points related to the sale of Gregory Mountain Products. First, the sale of Gregory was an asset sale. We sold the Gregory business, which had just under $12 million of non-cash working capital, as well as intangibles and other assets for $84.1 million. The pro forma information provided as part of our SEC filing on July 28th, 2014, only reflects the direct revenues and direct expenses of the Gregory business.
This does not include any allocated costs associated with the Gregory business that will be taken out of the business over a period of time. Furthermore, the timing of the pro forma information filed reflected all apparel expenses with little revenues. Secondly, we did not sell Gregory to raise capital in order to fund our existing business. We believe the existing business will continue to grow its revenues, experience enhanced gross margins, and increase in profitability. We did raise capital through the sale of Gregory to fund the development of a very measured omni-channel strategy. As a result, we believe that we have sufficient capital to invest simultaneously in our fastest-growing brands in an omni-channel model. Third, we believe we have some of the fastest-growing assets in the outdoor space. We are focused on revenue growth and improving gross margins.
We believe that in these two categories, we are greater than most of our peers. Fourth, consistent with historical policy, we will not provide segment reporting. The business is too complex and integrated. Also, we do not believe this is helpful from a competitive basis. As a result, we will continue to report our financial results on a consolidated basis. This concludes my prepared remarks. Now I'll turn the call back over to Peter. Peter?
Thank you, Aaron. Before opening the call for questions, I have two objectives. The first is to provide you with some insight into our business plans for fall 2014 and spring 2015, and the second, in light of the recent performance of our share price, is to provide you with some big-picture and longer-term perspective. As I mentioned in my opening remarks, our strong and well-balanced Q2 sales growth is a reflection of demand for our new and innovative hard goods products, continued rapid growth from POC, highlighted by the Spring 2014 Road line launch and our expanded apparel offering. These results were also achieved in a slightly more cooperative global retail environment than we have experienced in several years. We believe this improvement is due to multiple factors, including more normal seasonal weather patterns, cleaner inventories, and a somewhat improving economy in several parts of the world.
These improving macro forces helped Black Diamond Equipment's healthy double-digit sales growth during the quarter. We also experienced strong ASAP sales with some of our Asian distributors, as well as in Northern Europe, where we are benefiting from a recent move to replace several sales agencies in key markets. We also have benefited from a diverse, innovative product line that we believe meets the needs of our consumer. Such products include new introductions in lighting, trekking poles, as well as climbing gear. In the second quarter, the buzz and brand awareness from POC continued to grow. As we've previously announced, POC partnered with the Team Garmin-Sharp to be the official helmet and sunglass sponsor of the Tour de France competing cycling team.
Many of you may have already seen the significant exposure POC has received during the world's largest annual sporting event, which attracts an estimated 3.5 billion viewers in over 180 countries around the world. The visibility of the POC brand during the tour was timed with our Road launch at retail. Q2 marked the shipment of the majority of POC's inaugural Road AVIP line, and the product was sold out on a bookings basis. All indications from our retail partners confirm that the line is well-positioned for the core cycling enthusiast, and our first year of limited distribution and scarcity strategy appears to have played out well. We believe we're making significant progress in the global centralization of our POC and European distribution capabilities.
On the last earnings call, we notified our investors that we successfully closed POC's two distribution centers in Sweden and Austria and integrated into a single central European 3PL warehouse. The warehouse is now fully operational, and we are on track to deliver BD apparel in Europe out of the same warehouse for Fall 2014 and all BD Inc. products by Spring 2016. We successfully converted POC's independent distribution structure in Japan, Canada, France, Holland, and Belgium to an independent sales agency structure. This commission-based comp structure puts us in charge of building these important markets by allowing POC to control its own sales and marketing efforts while providing higher wholesale margins that we can use to fund this investment. Fall 2014 is the first season that will completely benefit from these conversions and are reflected in our second half guidance.
In the spring of 2015, we expect to grow POC cycling revenue by increasing the number of SKUs and production quantities of the AVIP line, as well as increase the number of global doors carrying the line. We expect to introduce 14 new styles and 43 new SKUs and approximately double our door count to 1,000 doors in 2015. In addition, we expect to launch our second collection of cycling apparel and gear for Spring 2015, which we have labeled and appropriately positioned as Race Day. Race Day has approximately 34 new styles, including helmets, and 135 new SKUs. These expectations would position us to slightly more than double sales related to the Road product in just one year. Spring 2014 marked the first retail selling season of our Spring BD apparel.
Highlights of the line include alpine and crag climbing apparel such as shirts, hoodies, pants, and lightweight synthetic outerwear. Although the selling season is still underway, especially in some of the mountain towns where we have excellent support, our Salt Lake, European, Japanese operations are largely sold out. Average sell-through in North America was approximately 15 percentage points higher than our Fall 2013 launch at the same point in the season. Overall, we believe that our retailers are encouraged with the sell-through trends, and the decision to target a more athletic fit has resonated well with our targeted user, the core climber, and enthusiast. Our larger retail partners did as well with the spring line as our specialty shops, which is very encouraging.
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. In our direct-to-consumer business, we found ourselves sold out in the majority of the more popular sizes of the more popular products too early in the season. We will certainly take what we've learned from this initial spring selling season and apply it to Spring 2015. Nevertheless, our online apparel offering continued to help drive solid double-digit sales growth in our D2C business. We are also gearing up for the expected delivery of our Fall 2014 apparel line next month, which fills the collection to a more meaningful 1,945 SKUs sold through approximately 800 retail doors. Fall 2014 also marks our women's outerwear launch and will introduce men's hardshell and down outerwear.
In North America, we are booked to meet our sales goals, and the vast majority of production is tracking to plan. Outerwear and insulation are driving the bulk of our bookings, and the ratio of men's to women is 60/40, which we are exceedingly pleased to hit this ratio in our first full year. European bookings are about where we expect after a dry Central European winter, and our smallest market, Japan, after a few soft winters, will likely be more ASAP driven. Looking towards our Fall 2014 apparel line, our marketing initiatives are built on a two-pronged strategy. Build brand equity and drive apparel sell-through. The key components of our fall brand equity campaign are positioning BD as a snow safety brand and communicating our brand positioning, use, design, build, engineer, repeat.
We expect to be initiating large integrated digital and print multimedia campaigns with both Powder and Outside magazines. We will also be incorporating video campaigns, print advertising, and five digital catalogs. Finally, we are the underwriter and sponsor of the Mountain Project's mobile app guidebook, which is potentially the most widely downloaded and regularly utilized mobile app for climbing in North America. Every time you use it, you see our name, a headline, a hot link to something on our site. Since Black Diamond partnered with Mountain Project, the app has significantly increased downloads, and overall impressions are more than 5.8 million for Black Diamond Equipment. We are planning to significantly expand our in-store marketing at key retailers to include apparel windows and banners, brand kits, tech tag kits, and branded apparel body forms and hangers.
We also expect to be piloting a very robust apparel product seeding program to the staffs of our best retail partners, as well as conducting a retail co-op program with key larger specialty retailers, and expect to have a significant apparel presence through our sponsorship of two of the biggest climbing events in North America this fall. Looking towards spring 2015, North America's plan to be 60/40 men's, women's, and while the spring bookings process is still underway, the average shop door is booked substantially over spring 2014. In both Europe and North America, we are substantially ahead of bookings for spring 2015 than we were at this time last year for spring 2014. We are optimistic that these trends will allow our retailers to be more comfortable taking additional inventory. In Europe and Asia, Boulder and Sportswear are reasonably strong, while Tech Apparel is a bit more challenged.
With that being said, we believe Europe will hit our spring 2015 booking goals, and we expect to closely monitor Japan as we are still early in our bookings process there. To conclude, I would like to make five important observations. Today we announced that our board of directors has authorized a discretionary stock repurchase program for up to 10% of our stock. It is not our intention to use up our balance sheet to support our shares. However, our board wants to ensure that it has the ability to be opportunistic if the market presents any unusual opportunities.
Since initiating our strategic pivot in late 2013, in addition to solid first-half revenue growth, the company has executed against all of the strategic objectives, including the sale of Gregory, the hiring of a talented new president, and the development of a series of strategic initiatives to improve margins and profitability. The company realized $84.1 million in cash, or 2.3 times projected 2014 revenue for its slowest-growing, and in our opinion, least valuable brand. In our opinion, the Gregory sale validated our strategy and underscores the value that can be created through long-term investment in our fastest-growing brands. Based on our current revenue guidance and extrapolating the multiple we achieved in the sale of Gregory to our continuing brands and businesses, this implies a minimum pre-tax breakup asset value of greater than $15 per share.
Fourth, under Zeena Freeman's leadership over the next 12-18 months, we expect to develop plans to augment our growth through an omni-channel strategy, which is likely to involve some form of owned retail business and a significant business in our global direct-to-consumer capability. We expect to share these plans with you in more detail as they develop. Fifth, finally, we believe strongly that the company is well-positioned for growth. We are entering our second fall season since launching apparel, and POC has successfully expanded its product offering from skiing into cycling. As you can see from our guidance, for the balance of this year and beyond, we are also confident that we can simultaneously grow the business and improve margins. Perhaps most importantly, we believe that we have sufficient capital to invest simultaneously in our fastest-growing brands and in the very measured development of an omni-channel model.
Going forward, given the strength of our brands and margins, we are prepared to thoughtfully reinvest a significant amount, if not all, of our ongoing profits in our future growth. At this time, Aaron and I would like to open the call for a 30-minute question-and-answer session. Operator?
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one to ask a question, and we'll pause a brief moment to allow everyone an opportunity to signal for questions. We'll take our first question from Camilo Lyon with Canaccord Genuity.
Thanks. Good afternoon, guys
Hi, Camilo.
Aaron, there was a comment that you made in your prepared remarks. I just wanted to make sure I heard correctly. Did you say that you were now planning the initial planning for 2015 sales growth of 10%-13%?
That is correct. Recognizing that once again, those plans do not have the influence of our new BD President , Zeena Freeman, included in those numbers. That is how we're thinking about it right now.
Okay. Maybe you can help me connect the dots, because I guess just hearing that number, I'm a little surprised at that number, given that you've now sold Gregory, which was the slowest growing part of the business. I would expect that apparel is going to continue to expand its store penetration and its SKU count. I would expect that POC would also become a bigger part of the business. I'm a little bit not certain how to get to that lowered growth rate, particularly with the sale of Gregory now having been consummated, and now having that excess capital to accelerate growth in these other two brands.
Camilo, hi, this is Peter. Let me respond to that. The first point to make is that we have not even launched or even finalized last aspects of fall 2015 for either POC or Black Diamond. We're being conservative in putting forth these numbers until we have those plans fully developed. Secondly, yes, we have sold to Gregory and we've just consummated that sale. We are still in the process of developing our marketing plans on how we're going to grow our brands. Secondly, relative to an omni-channel strategy, we need Zeena to be in the saddle a little bit here before we have a plan and know when that plan is going to meaningfully begin to build revenue.
I think you're going to have to just wait for a further update as we get further into this, but that's the number we feel comfortable in giving at this time.
Has there been a material change in what you're seeing on the apparel business, in Black Diamond apparel, that would cause this number to be what it is?
I don't think I would say that. What I would say is that we haven't shipped fall 2014. We are pleased, as I've communicated with the bookings, and we need a good winter. We need to see the impact of our marketing programs, and then as that goes, as we hope and anticipate, we may take another look at our forecast for fall 2015.
Okay. Maybe it's safe to say that this doesn't embed any sort of significant growth from the apparel business. I'm just trying to connect the dots as to what is the part of this guidance that you do feel comfortable with and what's really being left out and will come into that guidance as this fall 2014 season unfolds.
I think the best way to answer to this point in time is that typically we wouldn't be giving guidance for 2015 at this point in time. Because of the sale of Gregory, we felt the need to give some ballpark figures. We also recognize that we are better off giving conservative guidance than liberal guidance. That's something we've learned from the Street very well. Until we have the line, the marketing plans completed for fall 2015 and see a little bit as to how the season takes off, we're going to at this moment stay conservative in the forecasting.
Okay. Is it fair to assume that the fall 2015 apparel line or really all of 2015 apparel will have a greater SKU representation and a greater door penetration than 2014?
I'll have to share with you, I don't have the SKU count in front of me. That line is about done, but it's not absolutely finalized. The SKU count, I believe, does go up modestly. We certainly anticipate having more doors as well. Then I should add, there's one other element that you should be aware of that we're taking into account as we give these numbers, and that is one of the integral parts of the pivot is a SKU reduction of 25% of hard goods SKUs. In that, we have approached that very strategically and thoughtfully with two ideas in mind. One is to improve margins, to improve overall profitability of that line, and to do the best to maintain growth momentum.
At the same time, when you reduce 25% of your SKUs, you are, for the first year, acting a bit as a break on revenue. Our revenue growth in the largest category within gear and equipment is going to grow, we believe, but it's also going to have to not only grow in the 75% we're retaining, it's got to also make up for the 25% that we are cutting out next year from the line. That we're cutting out because we don't believe it was overly profitable. We believe that it hurt margins, and we believe that we can ultimately make that up. We made a very deliberate decision to simplify, streamline, and put our focus on a more tightly curated line. What comes with that is a loss of some revenue.
Lastly, just how quickly do you think the new president's influence can start to impact the business positively? Can it happen in 2015 or does it need to be 2016 once she's had some time to season?
I appreciate that question. How I'm going to answer it very seriously is that I believe Zeena Freeman can begin to have a positive influence on this business within weeks. How that manifests itself in margin and revenue, that will take longer, just because it's the nature of being in a senior position. It's the nature of the timelines in a business like this. She will have, I'm confident, a positive influence and effect on this business very quickly in what she can get started and what she can move on and just how her influence can be felt by the senior team and all the brands. Again, to attempt to quantify at this moment, today was her first official day. As relative to revenue or margin, I'm going to have to just pass on that question because it's really impossible to answer at this moment.
Okay, fair enough. Good luck with the holiday season.
Thanks very much. Appreciate that.
We'll move next to Andrew Burns with D.A. Davidson.
Thank you. I was hoping you could provide a little bit more information on the SKU reduction, if there's any particular category that's hard to fit, whether it's ski, mountain, or climb. First half, second half revenues, or product mix that would be most impacted. Thank you.
Yeah. Hi, Andrew. This is Peter. I think at this point, what we'll say is that it is spread to all categories. I think that BD being a product-driven company loves product. The team has been better at adding than subtracting. Part of this process was a curation process throughout the line, that I would say that there is probably a slight weighting to the fall/winter line. Yeah, there's definitely a slight weighting there. I can't give you the exact numbers off the top of my head, but it is definitely weighted somewhat more towards the fall/winter and ski line where we wanted to tighten that up more.
Okay, thanks. On the idea of outsourcing some of the equipment, I'm sure that's not a decision taken lightly. Can you maybe walk through that decision process and perhaps if you can provide any details to us, your own facilities in China or the Salt Lake manufacturing, what happens, and the timeline of which any sort of outsourcing could occur? Thanks.
Yeah. Okay, Andrew, very good question. Here's how we're looking at it. Seven or eight years ago, we and many of our peers in the American manufacturing and consumer products world saw China as a place with an endless supply of very inexpensive labor and the place to make all goods at the lowest prices possible, and saw it as the panacea for everything. We are at a point now where as we, as both a manufacturer in China with our own greenfield project and working very closely with a good handful of strong strategic OEM partners, are recognizing that, especially on the product, and that's what I'm talking about, that we ourselves are making in China at our own facility.
As we've studied very carefully now for a full year, the macro, the holistic cost, all the costs really involved with everything from the commercialization to the product to getting it back here. When you really look at that, we have come to the conclusion that a 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 a reduced response time to our key customers, which we see is very important, simply because we're in a period of just-in-time inventories and in a mode where the larger retailers like to work with forecasts versus absolute bomber bookings, and you need to be able to respond to that.
A significant part of this is looking at what we can bring back into our own facilities here, and reduce that 60-day back-and-forth lead time. We're looking at all the various scenarios, we do know that some of that will end up back here, but we can't speak to. At this moment, I can't tell you what percentage of that precisely, but we will certainly know that and have our plans finalized by the end of this year, we will be moving on that very quickly. We believe that we will have this repatriation and redistribution of those products relative to their manufacturing completed by early 2017 or late 2016.
Thank you. I'll jump back in the queue.
Next we'll move to Dave King with Roth Capital Partners.
Good afternoon. This is Joe Bess on for Dave. My first question is, can you talk a little about the traction of your spring apparel line and any of the significance of some of the promotional activity out there, and how you plan to address or reduce it in the future seasons?
Hi, Joe. This is Peter. I just want to make sure I understand your question. Are you saying that, how are we going to reduce discounting with our spring line?
Yeah. We've seen quite a bit of discounting online lately, and we're just looking to get a little bit more color on what you can do to kind of offset that in the future seasons.
Well, let me begin by saying, we have very well-developed, very didactic MAP policies that we work to enforce pretty rigorously. I think overall, that our retail partners abided by those MAP policies to the same level that they did with our competition. Relative to anything going on sale right now, this falls within the MAP policies. I don't believe what is being put out there, what is being promoted, is any more substantial than any of the end-of-the-season sales that your city retailers will have in August as they prepare to bring in winter apparel, which many of them bring in in August. It's a fairly natural process. From what we know relative to sell-through, which as I already stated in my remarks, was up 15 percentage points at the time that we put that information together before the show.
Over winter, we're seeing a positive trend. We don't believe there is a substantial amount of unsold product out there. Yes, clearing out inventory at the end of every season is a part of the process. Relative to next season, for those who were at the Outdoor Retailer trade show last week, they had a chance to meet our new Vice President of Global Marketing, Niklas Buehren, who came to us from Salomon. He was the head of the global brand for Salomon for many years before he came over to the States to take this position late this past winter.
He presented, in a very succinct format, what our marketing strategy is for spring, what the themes will be, how we will execute on that, and that is the answer to how you diminish how much product is left in the channels at the end of each season to be discounted and put on sale. There will always be some. That's just the nature of the beast. The goal is to have as little as possible, and I think we will do that through more robust, richer, better integrated, and more hard-hitting marketing programs. That's exactly why we hired Niklas, and that is what he showed in a succinct format to those who were at the Outdoor Retailer trade show.
Okay, great. Thanks for the color there. Just a follow-up. I think you said that there is modest SKU or style expansion in the Spring 2015 apparel line. Is that what you said? Also, can you just give us an update on how you're thinking about that style and SKU expansion longer term?
Yeah. First, for Spring 2015, that's a very robust increase. The line that we're showing and have been showing, and have been selling, and have been getting a very solid response on is what we're entitling at its core, From the Gym, the climbing gym, to the Crag. It's our unique perspective on the unfulfilled needs of climbers as they cross the spectrum of various active athletic activities. That include just wanting to be able to go into the pub or hang out with their friends after a bouldering session or campusing or out at the crag or at the gym. We've increased the SKU count very substantially, and it's the launch of a women's line. It's our first spring women's line. I think it's very strong. It was a very large SKU count increase.
I don't have those numbers in front of me, but we've been very public with those. Relative to Fall 2015, we haven't absolutely finalized Fall 2015. It is being sampled. We're getting ready for that. We do have the numbers. I just don't have them in front of me. In our next call, we will have that for you. What I should share is then after that, we are looking to basically tighten up the curation. We will launch additional collections, but we're going to curate and hone, because I don't believe we need substantially more SKUs at that point in time. We need to really cultivate the best sellers and have different versions of that, and it's to continue to build our marketing. I think we'll have a very strong line.
Okay, great. Can you talk a little bit more about the rationale behind selling Gregory, given that it seemed like it was a fairly profitable business, even if it wasn't really one of the faster-growing businesses in your guys' portfolio?
Yeah. This is Aaron, and when we think about the sale of Gregory, it really comes down to, once again, our focus on the fastest-growing components of the business, primarily being BD apparel and POC. It's not to say that we needed to sell the Gregory business because we felt that we had sufficient capital to be able to continue to grow those pieces of business based off of the existing business. However, in order to really expand the business into this omni-channel strategy, that's where we felt the need, but also the opportunity to be able to raise some capital through the divestiture of one of our brands, which once again, we believe to be the least valuable of our brands and the slowest-growing.
For that reason is why we sold Gregory, is to be able to take advantage of the opportunity to pursue this omni-channel strategy that we believe will require some element of capital.
Okay, great. Aaron, you talked about guidance for SG&A in the back half of the year, about $40 million-$45 million. Looks like a little bit of an increase year-over-year. Kind of a little bit higher on a run rate basis. Can you talk about what sort of expenses are being added?
Yeah. First of all, that represents up to a $5.5 million increase year-over-year. While we're looking at revenues growing 15%-20%. We believe that this is a good manifestation of the business beginning to take hold and to be able to start leveraging some of these investments that we've put into place. I will say this, that increase is primarily related to POC and BD apparel. It's the focus or the investment into those brands to continue to further those businesses along. That's where the increase in SG&A is coming from.
Okay, perfect. Thank you. I'll jump back in the queue.
Next, we'll move to Joseph Altobello with Oppenheimer.
Thank you. Good afternoon, guys. First question, I wanted to go back to the guidance for a second, and I want to make sure I understand this. It looks like you guys sort of pulled down the second half revenue guidance. If you back out what we thought Gregory was going to do by about $5 million. Is that due to slowdown in the base business, or is that partly due to the SKU rationalization that you guys are undergoing?
Yeah. The way that we're looking at the second half is based off of where we stand right now, current market trends. It does have an element of the SKU rationalization because that process, as we announced earlier in the year, had already begun to a certain degree. As we sit here today, we feel more comfortable with where we're at and the direction that we're taking there. Overall, Joe, this is where we're very pleased with the overall guidance that we're providing. We're seeing the businesses, whether it be gear and equipment, apparel or POC, and also Pieps, seeing some good growth rates and definitely above the peer group.
It is slower than what you thought originally three months ago.
It's right in line. Obviously, you're dealing with ranges, right?
Right.
All in all, it's still right in line with how we've thought about the business for the last several months.
Okay. In terms of apparel, I didn't hear you guys today, but do you still expect that business to triple in size this year versus last year, given the success you've had so far on the spring line?
Yes.
Absolutely.
Okay. One last one, and I think Peter touched on this a little bit, but can you tell us about what in Zeena's background you found most interesting or most attractive that would translate into success at Black Diamond? Thanks.
Yeah. Thanks, Joe. Sure. If you look at the Black Diamond POC Pieps team, I think we have a great degree of experience, skill, acumen in the gear and equipment world on a global basis in the wholesale channels. However, as you all know, a very substantial part of our future growth is predicated upon building an omni-channel business, doing that on a global basis, and apparel. Apparel both for Black Diamond and apparel for POC, which we've already launched and growing that. Our experience at the senior level and tenure in those areas of global direct-to-consumer apparel and omni-channel, it's just not where we would like it to be relative to the ambitions we have.
Zeena comes in here with an impeccable track record of being a truly global executive, having comfortably moved into leadership assignments in foreign countries, Japan for Sony, and in India for an apparel retail startup. It's those areas. She just brings a level of leadership experience at a global basis in the apparel direct-to-consumer retail world, that we just don't have with our team here. She's a perfect complement to what we do have, and she has a great passion for these brands. She's a nice hybrid between a general manager, a merchant, and a marketing brand builder, and she really sees the incredible value that resides within, especially the POC and Black Diamond brands, and is certainly enthused about what Pieps has as a supporting brand.
Plus, she has a great appreciation for the outdoors and what these markets represent. It's all of those. I just think she's a one in a million find for this business.
Thank you, Peter.
Next, we'll take Sean McGowan with Needham & Company.
Hi, guys. A couple of maybe quick housekeeping stuff and then some longer ones. Aaron, will you be providing all of the quarters for 2013 on a pro forma basis?
Eventually, yes.
Only after they've been reported?
No. You can get to first half and second half now based off of what we've provided, right?
Right.
Obviously, when we get to Q3, that's when Q3 of 2013 will be presented.
Okay. Not before then?
No.
Okay. Rats. Second, Peter, your last comment in your prepared remarks before the Q&A, I just want to make sure I understand what you said. Did you say you're prepared to invest all of your profit in growth? What does that mean?
What we're saying is that we are prepared to invest all of our profit into growth if we see the opportunities to do that. We would do that in a very thoughtful, judicious, and systematic manner.
Okay. Going back to Camilo's earlier question, I'm also a little surprised if you're getting rid of the slowest growing part, that you'd be left with one that's slower growing than we thought it was. Is it safe to assume that you're expecting, given all the initiatives, SKU reduction, all the cost-cutting stuff that you've talked about, that the margin on that revenue that you see now in 2015 would be considerably higher as a % of sales than what we would see then than what we'll see in 2014?
It will be higher, yes.
Okay. Then finally for you, Peter, given Zeena's arrival and the timing of when she takes over as the CEO, what will your role be from that point forward?
Great question. It will be a focus on the areas that, as you know, Sean, I have an incredible amount of passion for. I have a lot of passion for all things Black Diamond. I can focus on an area that I'm very passionate about and have had very little time to invest in the last few years that I think are very defining to, especially the Black Diamond brand. What I mean by that, when we created this company, the why behind creating it, the sustainable why, is to make a difference for a fellow community of users. How we attacked that was twofold: by bringing forth truly innovative, paradigm-changing gear, equipment, and now apparel for the outdoor mountain canyon crag sports enthusiast, and by championing the issues of great importance to that community. I'm going to focus on the latter of those two.
How do we make a difference to our customers? That's the why we're in business. That's the sustainable why. My focus is going to be on advocacy, activism, public policy, being somewhat of a front person for the brand on boards out there with the community user groups and communities. Also very involved with our culture and onboarding new people. I think that's critical as we grow to make sure that we maintain a culture that celebrates, in a tangible manner, the vibrancy and the uniqueness of these mountain canyon crag sports. I want to have more time to do what I did at one time, which is to be more involved with product in a myriad of ways, direction, details, opportunities, et cetera, as well as how we represent these brands to the communities that I'm so passionate about and still a very active member of.
Great. That's what I thought it was. Thank you.
Yeah.
Once again, everyone, it is star one if you have a question or comment at this time. We'll move to Jim Duffy with Stifel.
Thanks. Good afternoon, everyone. You guys have given us an awful lot to digest here. I'm going to ask, I guess, direct questions. We're all trying to solve here to an underlying growth rate and margin structure for the remaining business. You've given us a 10%-13% objective for 2015. Is that what we should expect going forward? Based on the results of the study of the consultants and their conclusion, what type of margin structure of the business should we be looking to down the road? What's a reasonable objective?
Yeah. Jim, let me take the first part of your question, and Aaron can talk about margins here in a minute. Right now, we're in a sort of unique position here with BD relative to growth in that none of the omni-channel initiatives are going to grow any quicker than what we've been funding at an organic rate next year. Secondly, though, we are excited about the opportunities for apparel growth and POC's growth in cycling. Both of those still are very small and very new relative to the core BD gear and equipment business, which, as you can tell from the numbers, is growing. It is not growing anywhere near the rate that POC's road business can grow for us and where it's going, or BD apparel.
What you have in 2015 is a situation where you've got the largest part of the business growing more slowly. We're going to work on margins, as we've talked about, and Aaron will address that. The apparel parts, the BD apparel, the POC new categories, they need to get a bit bigger. They will get there in 2015, we do believe that growth will accelerate at that point between our global investments, the fact that those two entities are now the size that their growth generates an overall higher growth rate for the aggregate. We'll begin to benefit from a very thoughtful-paced omni-channel investment.
Fair enough.
As it relates to margins, this is part of what we expressed in our prepared remarks, is that once again, our focus is on revenue growth and enhancing gross margins. All the initiatives that Peter outlined, we believe will enhance our gross margins over time. Also, just through the inherent growth of POC and BD apparel, we're changing the characteristics of the company. We're changing the margin profile of the company with each of these investments. That's where, yes, we do believe that margins will continue to improve. As Peter mentioned, these investments are still relatively small compared to the broader core business of gear and equipment. However, even at that, with these initiatives, whether it be the SKU rationalization or some of the optimization initiatives that we're taking on, we do believe that those will all have accretive or beneficial impacts to gross margin.
Well, again, just to highlight that one point, there will be a one-year diminution to the revenue lost from the 25% of the SKUs that we're knocking out. We're still growing gear and equipment, but as I pointed out earlier, when asked that question, we have to not only grow those categories, they have to grow fast enough to compensate for the SKUs we knocked out, which obviously they will be growing. We have a one-year timeframe where we do feel the diminution of the SKU reduction, then we accelerate out the next year.
Okay. Let me take a different approach at this. Peter, I found it interesting you referenced comparable price to sales multiples as a reference for the breakup value of the company. How is the board thinking about the value of the equity and improving the value of the equity? Do they see the price to sales multiple as the most relevant metric, or is there an objective to be valued on some measure of profitability?
Very good question, Jim. I think what we were trying to communicate to you and all of our investors in the financial community is that we are building very significant intrinsic value in our investment strategy and how we're growing these brands. I think that the fact that we've received the value we did on Gregory, which has been our slowest growing brand, we think is an affirmation of that. Moving on to the guts of your question, we're about growing great global brands that can really become very large in revenue brands. It will be done in a very steady way. It will be done with margin enhancement. We're not about operating income or retained earnings. What we are about is building these brands into great brands, and we're pleased with the growth it appears we're going to have this year.
We're pleased with the margin expansion. That's what we're going to focus in on, margin enhancement and growth. Do it in a way that momentum can continue, that it is a robust platform for growth and is not a quick and dirty sort of growth initiative that ends up running out of steam. This thing should build momentum, and that's how we're looking at it. Again, it's about building great brands that can expand. It's about revenue growth, and it's about margin expansion.
When you say margin, is that gross margin, or is that at the operating margin line?
At this point in time, it's gross margin. However, let me point out that if you're not in the acquisition mode where you can capitalize your acquisitions, you instead grow organically. That's what we're doing with Black Diamond apparel, with POC entering the road category with apparel, et cetera, or converting distributors, which as you know, with Gregory, costs money, and then you add cost. That all hits SG&A, and you can't capitalize that. What we were trying to communicate today to the financial community is that we can run a very efficient, honed business. I did it for 20 years before we went public. We grew this business from less than $1 million worth of equity to about $100 million.
The fact that we have identified how to pull $10 million worth of cost out of here by 2017 in the core business shows we're honed, lean, efficient, capable operators that I'm very proud of. At the same time, we know how to build businesses as we've done in our past. That's how we've gotten to this point, and as we're doing with POC, with BD apparel, and with global distribution. We don't see the two as inimical. We can be honed and be cutting cost and scaling and right sizing one part of the business while making very meaningful, robust investments in the other. Again, we see the two as complementary, not as inimical, but it is a little bit hard to sort of look at it firsthand until you get that insight. That's how we see it.
we're running an efficient business, and at the same time, we're building it and investing.
Got it. Thank you.
Yeah.
We'll move on and take our final question from Mark Smith with Feltl & Company.
Hi, guys. First, just a couple housekeeping items. Aaron, sorry if I missed it. Can you just give us the net cash position today?
Yeah. After we paid off the Zions line of credit and the term note, we're sitting on about $45 million in cash.
$45 million in cash, no debt?
No debt. Well, we obviously have some sub-debt out there and a modest line of credit out with our foreign subsidiaries funding POC. Also as discussed, we do expect to be able to generate some free cash flow of anywhere from $3 million to $6 million in the back half. We are expecting to be able to have about $45 million on hand in order to invest strategically.
Okay. Then Peter, I think you said that all businesses were up double digits in the quarter. Maybe if we dig deeper, was the Black Diamond business, excluding apparel, a grower in second quarter?
Yeah, double digit.
Still double digit. Okay. You just talked a little bit about cash. Can you talk about plans for retail stores now with more capital?
Yeah. Great question, Mark. I know that's something that's on the minds of a lot of the Street, not to mention ourselves. That is why we hired Zeena Freeman , because we did not have enough bandwidth with the senior team here to be putting together a detailed, thoughtful plan that we're ready to execute on. That is one of the highest priorities for Zeena Freeman to lead as she gets her feet under her right now, is to develop that omni-channel strategy and program. As we develop that, we are certainly going to share that with the Street.
My last question, when you bought POC and Pieps, both those businesses were running mid- 40% to almost 50% gross profit margins. Are those still similar gross profit margins today? Have you seen a decline? Have you seen any improvement in those businesses?
They're still running at those levels, especially for POC, as we continue to expand our distribution and take over certain distributors and bring them in-house, as we think about the omni-channel strategy, we actually expect those to continue to increase over time.
Okay. That's perfect.
At this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Metcalf for closing remarks.
Hey, thanks so much. Looking toward the second half of 2014, our powerful brands and efficient global operational platforms have us well positioned to continue our momentum where we implement the final initiatives of our strategic pivot. Ultimately, we expect all pivot initiatives to conclude by the end of 2016, that this rationalization process will begin to manifest itself into healthy organic growth and improved margins through completion. Thanks again for joining us today.
Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.