Good afternoon, everyone, and thank you for participating in today's conference call to discuss Black Diamond's financial results for the third quarter ended September 30th, 2013. Joining us today are Black Diamond's President and CEO, Mr. Peter Metcalf, and the company's CFO, Mr. Aaron Kuehne. Following their remarks, we'll open the call for your questions. Before we go further, I would like to take a moment to read 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. 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, the financial strength of the company's customers, the company's ability to implement its growth strategy, 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, 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 Securities and Exchange Commission, including the company's annual report on Form 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 in this conference call and speak only as 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 November 18th, 2013, starting at 8:00 P.M. Eastern Time tonight.
A webcast replay will also be available via the link provided in today's press release, as well as available on the company's website at www.blackdiamond-inc.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 Chief Executive Officer of Black Diamond, Mr. Peter Metcalf. Sir, please go ahead.
Thank you, Sorelle, and good afternoon to everyone. As you saw at the close of the market today, we issued a press release announcing our financial results for the third quarter ended September 30th, 2013. Our third quarter results represent the first half of Black Diamond's fall/winter selling season, and they are consistent with our current expectations for the second half of 2013, as well as our preliminary view of 2014. Sales during the quarter benefited from the September launch of Black Diamond Apparel, which has generated an excellent response from our retail partners. This limited launch is now present in approximately 240 of our best retail doors and includes approximately 25 styles and 440 SKUs. During the third quarter, we continued to realize the benefits of owning our own distribution in Japan, both through comparable sales growth and enhanced margins from selling direct.
In some product categories, third-quarter sales were limited by both the timing of certain product shipments, which occurred in early October, as well as general early-season softness for hard goods in the marketplace. This is consistent with reports that we have seen from some of the outdoor industry bellwethers, such as VF and Columbia. We also made the decision late in the quarter to recall Pieps VECTOR avalanche transceiver product. Recalls are not extraordinary in our industry, and from time to time, certain products may fail to adhere to the strict quality standards we instill at Black Diamond. Excluding the financial impact of the recall, gross margins were also on track with our expectations for 2013. As you may have seen this morning, after a seven-month search, our board of directors promoted Aaron Kuehne to Chief Financial Officer.
Aaron, as you all know, has served as an interim CFO capacity for the past seven months. He joined Black Diamond nearly three years ago as the Director of Financial Reporting before being promoted to Vice President of Finance. He has proven his commitment to our team and demonstrated himself as a highly effective leader in positions of increasing responsibility and oversight. Aaron has been instrumental in the development and execution of our global accounting, finance, and treasury functions, including key strategic and financial initiatives, risk management, and the integration of POC and PIEPS. Perhaps most importantly, Aaron knows our business well and can meaningfully influence the dynamics of our long-term strategies. Before I comment further, I'd like to congratulate Aaron on his well-deserved appointment and ask him to take us through some of the details of our financial results for the third quarter.
Following Aaron's comments, I will conclude our call with some more details on BD Apparel and some strategic commentary before opening the call for questions. Aaron?
Thanks, Peter, and good afternoon, everyone. Black Diamond's consolidated total sales in the third quarter of 2013 increased 8% to $52.8 million, compared to $48.7 million during the same year-ago quarter. The increase was primarily attributed to the launch of Black Diamond Apparel, as well as the increase in Gregory sales in Japan due to the transition of the distribution assets from A&F. As Peter mentioned, these results were partially offset by a shift in timing of product shipments to early October and general retailer caution. 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 Swiss franc. Due to the net strengthening of foreign currencies against the US dollar, sales were impacted by approximately 30 basis points during the third quarter.
Gross margin in the third quarter of 2013 was 37.3% compared to 37.9% in the same period last year. Gross profit in the third quarter of 2013 included a $1.5 million charge for a PIEPS product recall, of which $1.1 million was non-cash and includes 100% of existing inventory. Excluding this amount, adjusted gross margin improved 10 basis points to 40.2% compared to adjusted gross margin of 40.1% in the year-ago quarter. The increase in adjusted gross margin was primarily due to a favorable mix of higher-margin products, such as Black Diamond Apparel, and more profitable channel distribution, such as Japan. Several factors also negatively impacted adjusted gross margin. These factors included a 110 basis point impact from discontinued merchandise or DM, as well as approximately 120 basis points due to production variances and inventory adjustments associated with product season changes.
This was partially offset by a 30 basis point increase from total FX. Taken together, these factors offset our gross margins by approximately 200 basis points. Overall, we were very pleased to see our investments in higher-margin products result in a 10 basis point increase in overall adjusted gross margins during the third quarter after the outlined negative impacts of 4.9%. During the third quarter of 2013, we held firm on operating expenses despite ongoing investments in our apparel infrastructure and other growth-related initiatives, as well as costs associated with some integration expenses for POC and PIEPS. SG&A, excluding restructuring, merger and integration, and transaction costs in the quarter was $21 million, compared to $16.3 million in the year-ago quarter and well within our budgeted range. Last year, we initiated a plan to improve working capital, sourcing, and inventory, and we continue to be very pleased with the results.
While revenue during the first nine months of 2013 grew 12%, total inventory actually decreased by approximately $3.5 million or 6% to $57.2 million, from $60.7 million at the end of 2012. Excluding PIEPS and BD Japan, which we did not have in the year-ago period, inventory decreased approximately $11 million or 17% as of September 30th, 2013, compared to the same period in 2012. As of September 30th, 2013, we had $14.4 million outstanding on our $30 million revolving credit line with Zions Bank, compared to $20 million at December 31st, 2012. Total debt stood at $46 million, which includes $16.8 million of 5% subordinated notes due in 2017. This compares to total debt of $40.5 million at December 31st, 2012. At this time, our third quarter results are consistent with our expectations for the second half of 2013 and preliminary view of 2014.
We are currently in the midst of our 2014 budgeting cycle and plan to update investors on our outlook at a customary time during the first quarter of 2014. As a reminder, we are on the record with a limited 2014 outlook For a 20% sales increase, improved gross margins from a better mix of apparel and POC, and the beginning of accelerating profitability from better operating leverage in the business. This completes the financial portion of our presentation. Now I'll turn the call back over to Peter. Peter?
Thanks, Aaron. As I said in my opening remarks, we are halfway through our fall/winter selling season and are generally pleased with our financial results, acknowledging what appears to be a shift to later season deliveries. Ultimately, our second half is always very weather dependent, and while this winter initially appears more normal than last year, it is still too early to know what sort of winter temperatures will exist and whether how much snow will fall in the U.S. and Europe, or what kind of ASAP order volumes we'll actually realize. In spite of this normal seasonal uncertainty, we are deep in 2014 budgeting. POC is gearing up for a bold new launch at retail of its spring 2014 collection that takes us into the road category with a scarcity strategy similar to BD Apparel.
Therefore, we would expect its impact on sales to be more meaningful as the collection builds into spring 2015. However, this is cycling's largest and most vibrant niche, and POC's expansion into this has been part of its growth strategy for many years. During the third quarter, POC unveiled the road collection at EUROBIKE in Friedrichshafen and at the Interbike Trade Show in Las Vegas. Also during the quarter, we came to an agreement to be a 2014 helmet sponsor of a major Tour de France team. We view this marketing endorsement as absolutely critical to building a meaningful brand awareness for POC. In October, Black Diamond unveiled a new JetForce technology to great fanfare. JetForce is an innovative new avalanche airbag-equipped backpack that runs on a motor and solves many of the issues inherent with similar packs in the market that are triggered by compressed air.
We are particularly excited to be planning to launch JetForce technology in a very creative manner with three of our brands, POC, PIEPS, and Black Diamond, allowing each of our snow sports brands to take advantage of co-branding with JetForce technology. Moving on to the PIEPS product recall. We made this decision late in the third quarter to recall PIEPS' VECTOR avalanche transceiver before a significant amount of product shipped to retail and hopefully before any meaningful quantities could reach the field. While the product is innovative and has great technical elements, we made the determination that it is not reliable enough to meet Black Diamond's uncompromising quality standards. 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.
Either way, the recall decision is consistent with our mission and our brand and in the best interest of our community of users. What I think our community of users is most excited about is that the dream of buying BD Apparel became a reality toward the end of the third quarter. This limited launch began shipping approximately September 1st and encompasses approximately 25 styles and 440 SKUs. The collection is focused on backcountry skiing and alpinism and includes soft shell, insulation, and fleece products. The line is now on the shelves in approximately 240 of our best retail doors and ranges in price from $119-$399. Although it is still early in the launch, we are very gratified by our retailers' response, and inventory appears to be very lean.
It also is very exciting for us to see people in the streets and out on the mountain wearing Black Diamond brand apparel. Our spring 2014 apparel line has sold extremely well at wholesale and has sold out on a booking basis, which is consistent with our scarcity strategy. The spring line is designed around alpine and crag climbing and includes shirts, hoodies, and lightweight synthetic outerwear. The collection builds the line to approximately 50 styles and 608 SKUs and will be available in approximately 400 retail doors, retailing between $32 and $189. The designs for fall 2014 are complete, and initial showings have been very positive. Fall 2014 represents the introduction of women's apparel, and we will start with an outerwear launch. In addition, we will introduce men's hardshell and down outerwear.
This line raises our total expected commitment to 119 styles and 1,945 SKUs, and we expect to be sold through approximately 800 retail doors. In spring 2015, we expect to launch women's rock climbing apparel, and in fall 2015, we expect to include ski wear for both men and women. Currently, in spring 2016, we expect to expand our climbing and rain wear gear. We could not be more proud of our apparel launch. We are also sensitive to the execution and strategic challenges ahead. With the apparel launch behind us, we are more committed than ever to our long-term vision, and we are in the midst of a significant strategic pivot in several important ways. First, I would point your attention to the significant inventory reductions Aaron referenced this year as an early result of this pivot.
Secondly, we are acknowledging that the Black Diamond and POC brands are our fastest-growing assets, and they are worthy of investment to accelerate our organic growth. More specifically, we believe that our Black Diamond Apparel and POC lifestyle business display extraordinary growth potential and that over time, they are likely our most efficient and cost-effective use of capital. Thirdly, during the third quarter with the help of a leading consulting firm, we conducted a global profitability study across all of our product categories and geographies. We are still integrating some of the conclusions into our long-range thinking about the scale of certain categories, as well as the depth and breadth of certain categories and geographies. We are developing a better sense of the cost of a single SKU and expect to use this work to drive better marginal profitability in the out years and enhance our working capital.
Fourthly, 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. We don't know how long this process will take, but we want to invest in and expand our leadership capability in these areas. Finally, as we look into the future, into 2015 and beyond, we understand and believe that retail and e-commerce will likely drive additional investment. We continue to believe that we can fund these initiatives from our existing balance sheet and from our existing operations. At this time, we have no plans to access the capital markets, and we will continue to explore the waterfront of strategic alternatives to facilitate the acceleration of our investment for the future.
Ultimately, we expect this rationalization process and product mix shift to manifest itself into healthy organic growth and improved margins in the out years. Thank you. At this time, I'd like to open up the call for questions.
Thank you, sir. We will now begin the question and answer session. If you have a question, please press the star followed by the one on your touch tone phone. If you would like to withdraw your question, press the star followed by the two. If you are using speaker equipment, you will need to lift the handset before making your selection. Our first question comes from the line of Camilo Lyon with Canaccord Genuity. Please go ahead.
Thanks, good morning, everyone. Good afternoon. Excuse me. I wanted to delve into a couple of things on the quarter and then some longer-term questions. First, Aaron, could you quantify what the shift was from Q3 to Q4?
What we'll say about the shift related to Q3 to Q4 is that it was significant. Similar to how we don't break out a variety of the different brands and segments of the business, we're not going to break out how much that shift was, but it definitely was significant.
Well, if it's significant, don't you think it's worthy of sharing?
We'll just say that at this time, no. We'll just say that it was significant. This is why, once again, just to remind everyone on the phone call as well, is that this is why we view our business in two seasons, not just in four quarters. When we measure the overall success of our fall-winter season, it'll encompass the full six months, not just the three quarters during Q3.
Could you just update or provide any updates to the full year 2013 guidance, if there are any?
As mentioned in the script, we believe that the results in Q3 and how we think about the rest of the year is consistent with what we've already communicated back as part of our Q2 call.
No change to the 2013 guidance?
No.
I guess just on the apparel business, in thinking about the rapid pace of SKU proliferation and acceleration, does that cause you guys to think about a different or an accelerated timeframe of reaching that $250 million annual sales goal by 2020?
Camilo, hi. This is Peter. No, it's very much in line with the guidance that we've given. As we've mapped this out right from the very beginning, it's very much our belief that this is the level of SKU growth and category growth that we need to offer in order to achieve the timeline that we have for growth. I will say this, is that you will not see this acceleration in SKU growth in additional seasons. It's going to slow up. This is the big jump up relative to the growth in SKUs, and it's also probably one of the larger jump ups in growth in apparel as a %.
Maybe, Peter, if you could just shed some light on discussions that your retail partners have had with you, those that don't have the apparel line yet, maybe what are the discussions that you're having with them with respect to their demand for the product, given some of the reads that the retailers that do have that product in store have communicated.
We have, both in New York and in this transcript here, are indicating that we believe right now that we will be, for fall 2014, in 800 retail doors, which is a really large step up from where we are at this point in time. It's over threefold. Right now, that was just updated with discussions with our global sales team, sales management team, both with our independent global distributors, Europe, Japan, and North America. The response that we're getting in showing this line is such that the 800 figure is what we believe that is a very achievable number. We feel good about that number as a good number of doors to be in to achieve the sales results that we're seeking for next year.
Okay. Then just finally, if I could, when you guys speak about pivoting and focusing on the POC and Black Diamond brands in the portfolio, we'd infer that there is some sort of potential for a disposition of assets at some point down the road.
I think probably the best way to answer this, Camilo, is that, let's look at it this way. Three and a half years ago, we stood up in front of Wall Street, having just gone public through a reverse merger, and laid out a really bold vision as to where we were going to go over the next three, five, seven plus years. As we look at our business right now, three and a half years into standing up in front of you and saying what we were going to achieve, at least internally, we look at it and go, it's been an amazing three and a half years. We have accomplished nearly everything that we said to you and the investor community that we were going to accomplish from the perspective of entering the apparel market. We have delivered fall 2013 to really great accolades.
We've raised the brand profile substantially. We've sold in spring 2014. We are in the process now of showing and selling fall 2014. That's all going as to plan. We reorganized BD from Black Diamond Equipment into BD Inc. and brought on board Gregory, POC, and PIEPS. We have just about completed the integration of all of those. We really invested heavily into our global IT MIS systems to integrate those businesses and to be able to run them much better. We opened up a ski factory in Asia, invested into our brands. We're really proud of what we've accomplished and where we are. At this point, we as a management team, global management team, are looking out again now another three and a half years to see where are we going, how are we going to continue to drive forward to that long-term vision that we laid out.
What we're saying here is, as we look at that, we are gauging where there are needs for investment, what the proper levels of investment are. One of the areas that we see is that 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. We want to make sure that we have the wherewithal and resources if we decide to ramp that up at a relatively aggressive rate, if that's what we so decide.
What we're committed to doing as part of our strategic planning here, and what we're doing now, which is the way we have consistently run this business, is to really look at the full waterfront of alternatives that will best support our achievement for the vision that we laid out and communicated to you and the rest of Wall Street three and a half years ago, and have consistently both communicated over the last three and a half years, and I think very consistently in a very measured way, continue to achieve. I think that's probably the best way to sum it up at this point in time.
Well, thank you for that color, congrats on the launch on apparel. Good luck with the holiday. Thanks, guys.
Thank you so much.
Thank you. Our next question comes from the line of Sean Naughton with Piper Jaffray. Please go ahead.
Hi there. Hoping we could just talk a little bit about the gross margin line here. I'm surprised that there was not some better gross margins given the favorable sales mix impacts from POC and Gregory coming back in-house from Japan and also launching apparel, as I would've thought that would've been a higher gross margin than the traditional hard goods business. Are there specific things we can point out here that maybe why, even on an adjusted basis, we didn't see more than 10 basis points of expansion?
Yeah. Sean, this is Aaron, good question. Overall, when you think about, as we described or outlined in the script, is that, one, we were obviously impacted by the charge with the PIEPS recall, and that gets us up to the adjusted gross margin of 40.2%. We had some additional takes of, call it 200 basis points that also had a negative impact. When you think about the overall business during Q3, we definitely had some good results coming out of Japan, out of POC and out of apparel that were margin accretive. It's just that some of these other takes offset some of the benefit that we obtained from those parts of the business.
Is there any way you can describe some of the discontinued operations or product production variances that you were describing? I mean, what are those specifically? Are those apparel related? I mean, what are these line items we're describing?
Yes. Okay. For DM, it primarily relates to winter seasonal product that had a changeover in season, a lot of this is carryover from the prior year. We're still early on in the actual selling season of current year product, it's none of that. It's just carryover from prior year, which primarily is related to winter seasonal product. Also as seasons change in product categories and also as we continue to ramp up certain parts of our in-house manufacturing, we have seen some modest adjustments related to inventory in that just need to make sure that we've got those properly valued, also just the continued ramp-up of our operations.
Okay.
Sorry, Sean.
Go ahead.
None of it's in-line product, no.
Okay. I guess I'm just trying to clarify as well some of the different comments you made in the release and then during the presentation today, just trying to make sure we're all on the same page. Just, you had an 8% growth rate in the third quarter, and then you talked about that being consistent with your current second half expectations, and then also into 2014. I'm just curious, is that leading us to believe that we should be thinking about a lower sales growth rate in 2014? You mentioned something about the preliminary guidance before. Just trying to get my hands around that.
Sean, this is Peter. We've always thought about Black Diamond, and as well, Gregory and POC, as a two-season business. This industry operates on a seasonal basis, not on a quarterly basis. The industry really doesn't recognize the difference between a September 30th and October 1st deadline. We clearly have had a situation here where quite a few significant retailers are managing their inventories very tightly, and many have pushed what had been previously orders, and this is orders that had come in the third quarter into the fourth quarter. When we look at this, what gives us our confidence about our business is simply that we believe here we have a timing shift or a timing issue between the third and fourth quarters. It's not that we have an overall business challenge.
That is why we are maintaining the level of direction that we're giving for 2014 of guidance. We are very upbeat about our spring bookings. We are upbeat about apparel. We're upbeat about POC. We're upbeat about the innovative new products that we launched at the July and August trade shows. We believe we've got a bit of a timing issue here that's related to just primarily retailers taking goods a bit later than they had traditionally have, and consumers buying a little bit later, more in a just-in-time fashion.
There's no change then based on your initial view for 2014 at this point in time?
No.
Knowing full well the portfolio could change or there could be changes in the environment or the ordering patterns. At this point in time, you guys still feel good about that initial guidance for 2014?
Yes, we do.
Okay. Just lastly, on just the apparel at retail. I think when we were talking at this time last year, it was going to be supported with some pretty strong point-of-sale displays and maybe even hangers and fixture packagings at retail. Just not seeing a ton of that out there. Just wondering if there's going to be Is this a timing issue where you're trying to make sure that you get all of it out at the same time, or are you happy with the point-of-sale displays that you have out there at retail for the apparel?
Yeah, I'll tell you what we're psyched about and then what we want to do more of. What we really are excited about are the window displays that we have done. Those have really helped raise the profile of the BD brand at retail in a way that I think few other brands have been able to do with an apparel launch. We've had those in key retail stores in the U.S., we've done them in South America, we've done them in Europe, we've done them in Asia. I think they're really, really powerful. That is one of the more significant places that we funneled our in-store marketing dollars because we really liked the way that was looking, and we appreciated the response we're getting from retailers who are willing to commit to do that very high profile.
Rather than do a small number of expensive racks, we decided to put our money towards a combination of the window displays, in-store events that we ran throughout North America, some in Europe, where we invited VIP customers, staffs in for special clinics, special evenings, food, wine, et cetera, so they could meet members of the BD team firsthand, talk to us, learn more about it, get a small presentation with videos, et cetera. Then there were some hangers that went with the apparel as well. In addition to that, was the most robust, expensive print and online marketing media push in the history of this company by leaps and bounds. I don't think we've quite hit the sort of the peak of all of that. Relative to the window displays that have been put up around the world, they are all in place.
Relative to the opening events we're doing in partnership with key retailers in Europe and North America, those are now absolutely completed. Relative to online marketing and print media, we're not done. That is still ongoing, and it's about to reach its peak at this point in time. I guess to your final question, are we happy with that? I am really pleased with how much bang we got out of the $ that we invested in this, which was the largest push in our history. I would love to have it been tenfold larger. That's what Tim Banta would've liked to have seen, too. I think it was very powerful.
Next year, we're going to maintain that kind of cadence, that level of investment, up it perhaps a little bit, we'll be building off of the investments that we made this year, and keep going from there.
Great. Thanks for the color. Best of luck.
Yeah.
Thank you. Our next question comes from the line of Joe Altobello with Oppenheimer & Co. Please go ahead.
Hey, guys. Good afternoon. I apologize if I'm beating a dead horse here, I just want to make sure I understand exactly what you're saying, Peter, with regard to the guidance, because you have sales up eight in the third quarter. The second-half guidance was up 17%-22%. If I understand what you're saying correctly, for the sales shift or the timing shift, you would've been within that 17%-22% in the third quarter?
Joe, hey. This is Peter. I don't think we've ever, to the best of my knowledge, given out guidance on a quarter-to-quarter basis because we just don't think of our business like that. We think about it as a two-season business. We've given basically full-year guidance, and we've given seasonal guidance. To your question, with the updated guidance that we gave a few months ago, if your question is, are we still sticking with that updated guidance for the full year and the second half, the answer is yes. We believe that that guidance is still accurate, dependent on a bit of, as I said, that we do have winter and that people walk into the stores, we do believe it's still achievable.
Okay. Let me ask it maybe a slightly different way. If you look at the fourth quarter, just to get to the low end of your guidance, you've got to do 28% growth. Does your guidance assume an acceleration in the base business, or is it a continuation of current trends in the base business plus the sales shift in 4Q?
I'm not 100% sure I understood the question. If the question is, do we expect to see acceleration in existing categories and acceleration in some of the new categories in sales? Is that the question?
Yeah, no. I guess what's baked into your fourth quarter? Obviously it implies even to get to the low end of your full-year guidance, you've got to do 28% sales growth in the fourth quarter-
That's right
from eight in 3Q, right?
That's right.
Okay, you're assuming some acceleration in the base business.
Yeah, we really feel that. You read the same reports that we do, we felt that the third quarter was impacted really in three ways. One, the increasing tightness by which retailers are running inventory to a more just-in-time positioning. Secondly, the shutdown of the federal government and the impact that had in shutting down national parks, national forest campgrounds, national monuments, really did impact business for many of our retailers, certainly in the West. I can speak to that firsthand, having been down to Zion the day before the park reopened. Thirdly, there's just been a little bit of a headwind there at retail with customers coming into stores. We attribute some of that to sort of a just-in-time mentality.
When we juxtapose that against good user participation numbers, the growing awareness that these activities have in the media and in the public in general, the fact that winter is upon us and we have inventory here. All these reasons and strong bookings for November, December give us the cautious confidence we have that we believe our guidance is still valid.
Okay. That's a very good color. I appreciate that. Then just kind of moving along, in terms of the investments that you alluded to earlier to help drive future growth, you guys have made a fair amount of investments already, I guess, the past two or three years in a number of areas. I would've assumed we would start to see these winding down. Are these incremental to what you've already done? Does that change your outlook on SG&A for next year? I think in the past, you talked about maybe $10 million-$12 million of incremental SG&A in 2014.
Let me address that, Joe, then I'll let Aaron Kuehne jump in. We were using the term here now pivot, it's another way to succinctly and articulately capture the messaging that we've been giving for over a year, probably two years, that we're going through a major investment phase into acquisitions, integrations, putting in place a much more robust, globally integrated operating platform, investing into apparel with no sales or revenue, investing into POC, into new categories. We absolutely do believe now that, more than believe, our strategy, our plans that we'll be talking about early next year indicate that we can now begin this pivot, which is we do not need to make the level of additional investments into our global operating platforms, our MIS, a whole array of areas that we had to do to get us to this point.
We believe that we are now, as part of this pivot, moving into higher operating profits, that will continue. Then what we're also saying is that if we look further into the future, that one area of additional investment that may be significant relates to where we want to go with direct to consumer. What I can say about that is that we definitely believe that we need to develop another distribution channel that is very synergistic to and complementary to our wholesale business and our premium positioning. That is something we're going to work on, we have some ideas on that, and we will develop that. At this point, it could well be that within the medium-term future, that would require additional investment.
Okay. In terms of 2014 specifically on SG&A?
No, I didn't say 2014.
Okay. Beyond that.
Right now, what we are working on in 2014 is to deliver on this pivot and what we have been communicating, which is to show that we can produce higher operating margins and higher operating profits, as we come out of this period of significant investment in our brands, into our operating platform, into our systems, and that sort of thing.
Okay. Well, thanks for clarifying. I appreciate it.
Yeah.
Thank you. Our next question comes from the line of Jim Duffy with Stifel Nicolaus. Please go ahead.
Thank you. Hello, everyone. Aaron, congratulations on your promotion.
Thank you very much. Much appreciated.
I'll have a few questions for you, but I wanted to start out with Peter. Peter, the role you have in mind for the new executive that you're searching for to help manage the strategic pivot, what type of skill sets do you see as appropriate? Related to that, Peter, when you're recruiting this executive, do you view it that you may be recruiting your successor at some point? Is that how you're thinking about it?
Yeah. This is Jim. Thanks for the question. I tell you how I'm thinking about it is that we have a senior management team here that has been going at a full-out sprint in an ultramarathon, and you know many of these people because you've been at many of the events and gotten to know them very well. It's a stellar team of incredibly, I think, competent, committed individuals who are quite diversified, and there's a lot they can do. The one thing they can't do is go without sleep completely. As we look at the growth opportunities in front of us, which I include the continued growth of apparel, the opportunities for direct-to-consumer and retail, and that's not just for the Black Diamond brand per se. POC has, as you know, a store in Chamonix. POC has some interesting opportunities in front of it.
There's no lack of opportunities. With the team we have, even though they are deeply committed and skilled, there's a finite number of hours they can work. As we look at where we're going, we could just benefit from adding one more senior executive with some real experience in the world of the global marketplace with direct-to-consumer, retail, apparel, and those skills, because there isn't a lot of depth there within BD in some of those areas. That is something that we would benefit from. Relative to myself, I am absolutely committed to this company. I'm as excited and passionate about it today as I was when I took over the reins nearly 32 years ago.
That said, I look at the whole senior team as people who are potential, or many of them as potential successors to me when that time comes, that time hasn't come. Certainly, I like to look at all the members of the senior team as potential candidates for that.
That's great. Thanks for your perspective on that. Aaron, jumping over to you. Some good progress on the working capital, particularly the inventories. Can you speak about the receivables? Are there any changes that may have influenced that account on a year-to-year basis?
Yeah. Good question. One thing that has been impacting us from the AR perspective is that specifically related to Japan and POC. They've typically had a little bit longer dating or collection process than what we've historically had with the base business of BD and Gregory. As they continue to become more relevant, that does stretch out the DSO, if you will, a little bit for us.
Okay. Great.
Overall though, the health continues to be pretty solid. We continue to have minimal write-offs in AR. It's just a shift in timing of different parts of the business and how they've been able to collect or the timing of when they collect their receivables.
Okay. Aaron, can you help some on the accounting around the product recall? Specifically, what are the cash costs? What are the non-cash costs? How do you reserve for recalls across the business? Et cetera. That'd be helpful.
Yeah, for sure. I guess, in general, as it relates to product recalls in general, as Peter mentioned, recalls are not extraordinary to our overall industry. However, fortunately enough at BD, we don't have too many of these in the history of our business. We usually take these on a case-by-case situation, and we do have a general warranty reserve, but it's not worth diving into the details there. As it specifically relates to the $1.5 million charge, as described during the prepared remarks, $1.1 million of that was considered to be non-cash. What that represents is the write-off of existing inventory and also the full depreciation of certain tooling costs.
The combination of those two equaled about $1.1. You're left with close to $400,000 related to the actual cost of the product recall in that what we are offering to the end customers and dealers in terms of compensation for the recall of the product.
That's great. Thanks, guys. Let's pray for snow.
Yeah. It's happening right now, Jim.
I'm glad to hear it.
Thank you. Our next question comes from the line of Dave King with ROTH Capital Partners. Please go ahead.
Good afternoon, guys. This is actually Cala Soto on for Dave King. I guess first off, on the revenue growth, we were just wondering if you've already seen a meaningful acceleration in the first five weeks of Q4, or are you hoping that sales pick up in the remainder of 2013?
Let me just say this. Right now, we're pleased with how the fourth quarter is going at this point in time.
Okay. Then if you could just remind us how you came up with the $250 million apparel revenue target.
Yeah, that was both a top-down and bottoms-up goal we came up with first as we began thinking about apparel and began to hire the team. We looked at where we wanted to be positioned as a specialty brand, a global specialty apparel brand, and not a brand that was in the big boxes or department stores. Looked at the relative size of the markets and its specialty and wanted to come up with a number that was ambitious, but at the same time achievable and not over the top, and that would not communicate that we had any plans to go outside of premium and specialty retailing. Then we came at it the other way, which was to look at our dealer base. As you know, we've got with BD right now about 4,400 doors globally.
If you add in then Pieps and POC, you actually get up to over 9,000 doors and began to develop the plan from the standpoint of categories and collections it would be in, the different size of tier the retailers around the world, and built it up from how many collections and styles, and what kind of revenue could they do with those collections. What did that look like, while also adding a element of our own direct-to-consumer business that was not only robust, but based upon our knowledge of the market and coming up with a percentage of that overall business that we ourselves wanted to control in a way that was both complementary to and synergistic to the wholesale numbers.
Okay. Does that $250 million revenue target include or exclude the planned opening of retail stores?
We had a component of that that is made up of direct to consumer, we didn't initially break it out between retail stores and a dot com business. That number does include a component for direct to consumer.
Okay. Just lastly, how should we think about the pace of store openings, and in what year do you think they might start to begin?
I think the best way to answer that is to ask me that question 12 months from now, because as I've shared, we are just in the process of really looking at that. 2014 is what we have shared with Wall Street as will be the year that we develop that strategy in some level of detail. We'll be able to communicate it to you in a way that I think will meet your needs.
Okay. Thank you.
Thank you. Our next question comes from the line of Mark Smith with Feltl and Company. Please go ahead.
Hi, guys. Aaron, congrats.
Thank you.
A question for you. On your gross profit margin guidance that you guys gave, and it sounds like you're reiterating that, and I just wanted to make sure we're looking at that right with the adjustment on the recall.
Yeah. Add back in the adjustment for the recall, and yes, we're still in line.
Perfect. Then can you guys talk about any product areas or geographies that maybe we saw any weakness in during the quarter?
The what?
That we saw any weakness in, either products or different countries or geographies.
That question is actually a little bit tougher, Mark, than you might think to answer because between the four brands we have, plus apparel, depending on which brand and which geography, I'd answer that somewhat differently. What I think I would say as a general comment, relative to the third quarter, Europe and North America were not all that different relative to just the desire of key larger retailers, as well as some of the smaller ones who are just dialing in their business to match inventory with demand. We saw the same sort of behavior in both of those markets. In the third quarter, ASAP business was a bit less than robust.
I'd also say that we get the Leisure Trends numbers, and I'm sure some of you guys look at those now as well, and the SIA numbers, and we're proud to say that our brands are global. Most of the categories that we are competing in, we are gaining market share. I think that's an important aspect and strength of this company or the companies that comprise Black Diamond, Inc., that we have brands that are gaining market share in the majority of categories they compete in, and that is what gives us great confidence. I've been at this for, hate to say it, over 31 years now, and in this period of time, I've seen substantial, really incredible growth in the industry on a global basis. It has been punctuated by every six, seven years, a headwind.
Sometimes it lasts six months, sometimes it lasts 18 months. They come and they're the chance for the industry to take a time out and a breather. Clearly, we're in one of those periods right now, but it is a time to, I believe, we believe here at Black Diamond, Inc., that it is a time where you continue to thoughtfully invest appropriately in those areas that you believe will accelerate when the market picks up. We do have growth here. You continue to invest appropriately scaled to the level of business you think you're going to get in those parts of your business that are quite profitable, help fund additional growth, and are defining to your brand. That's how we approach it. We have some of the best, most admired and beloved brands in the industry, and they're global, and they're very strong.
We continue to be quite optimistic and guardedly bullish about our business and where it's going. I say that based upon what we're seeing in market share gains, in orders for spring, orders in November and December, et cetera.
Yeah. Last question, just if you can discuss or give an update on Gregory Japan on the transition and on that business. Are you starting to see more momentum there?
Mark, like any time you establish a brand-new business and transition out a long-term, in this case, almost three-decade, two and a half decade long respected distributor. Even when you have a great team, and we do have a great team of people there, headed up by the former president of The North Face Japan, Mori Hikari. Even with that, the passing of the baton takes a bit of time and for retailers to adjust to your new terms and your new way of doing business and calling a different number and talking to different reps than they've been dealing with for a few decades. That did take certainly the first half of the year to get that going, which in the scheme of things is relatively little time.
In the third quarter, we began to see the first, I think, benefits or results of that relative to beginning to get the sales growth that we hoped we would begin to get in the third quarter. Beginning to see that the relationships grow from retail to Gregory/BD Inc. in Japan. We're feeling quite good about it, considering that we're only really just finished three quarters into what is a multi-year decade, long time future for BD Inc. in Japan. The first benefits just started to accrue to us in the third quarter.
Great. Thank you.
Thank you. Our next question comes from the line of Andrew Burns with D.A. Davidson. Please go ahead.
Thanks. Good afternoon. Just have one question regarding POC. When you think about investment in POC as a lifestyle brand, that phrase was used a couple of times in the conference call. It's certainly a larger ambition than the helmet, sunglass protection gear product lines. Are you thinking more about a broader investment in apparel with that brand or perhaps footwear or other categories? Thanks.
Thanks, Andrew. This is Peter here. We believe that POC has an incredible amount of potential in front of it. It's a super premium brand in the sporting goods category. It has established itself with a high degree of both elasticity and premium quality so that it could move from one category to another within the, quote, "snow and wheels categories," from helmets to goggles, glasses, body armor, and apparel. As you know, we've launched now for spring road riding apparel. To answer your question, yes, we believe with time, as POC continues to grow its business in the categories that it's currently in, the apparel categories, but specific to ski riding in particular, and that could go in towards commuting and then branch out a little bit from that.
We believe to think about it as a sports lifestyle brand is an important way to think about it because it just helps us think about what its future opportunities may be, and that's not immediate. We are positioning that brand and growing it very much in a premium, aspirational way and a luxury brand that gives it opportunities to do additional things in the future that are synergistic to its core positioning.
Thanks and good luck.
Thank you.
Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time. As a reminder, if you are using speaker equipment, you will need to lift the handset before making your selection. Our next question comes from the line of Sean McGowan with Needham & Company. Please go ahead.
Evening, guys. Thanks a lot. I also have a couple of questions. Aaron, quick question on the recall. As best as you can estimate, are we done with charges related to that or might there be some additional charges?
No. As of right now, the expectation is that we are done with charges.
Okay, thanks. Is the EPS impact of those charges as simple as taking that $1.5 and putting a tax rate on it? Or is there?
Yes.
Okay.
Yeah.
Circling back, Peter, to your earlier question regarding retail and check with me in 12 months. I think you said at the event in New York a few weeks ago Look to see retail stores in the not-too-distant future. As I've thought about the line as it stands now and how it's going to stand in 2014, I scratched my head and said, "It doesn't really make sense to have a retail store until you have a lot more retail stuff to sell." Would you rule out a store in the next 12 months?
I'll never say never. However, when you think about a BD retail store, that is the brand manifestation in three dimensions. Whatever we do in the way of retail stores, whether we do them on our own or whether we do them as a licensed store, however we do it, we're going to give this incredible thought, attention, et cetera, so that when and if we do it, because we haven't announced formally that we are doing it yet, it will be something that really is the brand manifestation in a way that is accretive to how you think about BD, equal to the product, equal to the marketing. Everything about it would have to be just right so that the stores would be, if we did them, not only profitable, but a great way to showcase the brand.
To do these things really, really well as opposed to do them like two-thirds of retailers in most parts of the world, you need to have the right team of people. You really need to think about this. You really need to get it dialed, because you're setting the stage for future ones.
Right.
It's not something to do quickly or without a lot of thought, attention, sweating blood, and going through a lot of iterations on paper in three dimensions to make sure you have exactly what you believe is the look and feel of what BD is going to be at retail into the future. It is something that we want to have manifest itself in the future in display racks, merchandising, in-store and stores, our trade show booth, things like that.
We don't think of this lightly. We think of this as a very substantial strategic objective that has got to be done with the same level of thought and attention that BD Apparel had. As you know, when I first announced that back two and a half years ago, we told the markets the timeframe it would take to do that, a lot of people were scratching their heads saying, "Can't you do it in one year?" You can do anything in relatively little time if you're not that concerned about what you're doing. To do it in a way that would be accretive to BD's positioning and accretive to achieving that long-term goal of 2020 of $250 million, BD stores would have to be absolutely dialed and right.
Right. I wouldn't look for it next month. As we think about a store, if I walk in and it's a Black Diamond store, is it a place where all of your brands would be showcased, or would it be focused just on those that are called Black Diamond?
Number 1, as I say, we are in the process of developing this. What I would share with you is that as we look at the retail landscape, what we see is that consumers enjoy and appreciate and patronize brand stores. Stores that really can capture the feel, the essence, and personality of a brand is what they're seeking. If you're not seeking to do that, then there are a host of really great specialty stores out there that do a good job of showcasing two or three brands, plus hard goods, plus, plus. We think about it, we think about discrete brand stores.
Okay. That's very helpful. Final question. As I've gone to visit some of the stores, I've gotten the impression that there's maybe not a consistent level of understanding of the apparel features relative to the competitor's product among the in-store folks. You talked earlier about some of the events that you've done, can you talk with a little bit more specifics about what you're doing on an ongoing basis every week to make sure that the people at the store level have at their fingertips as much information as possible about what sets Black Diamond Apparel apart from the next guy?
Yeah. Very good question, Sean, and you have just zeroed in with laser-like focus on the number one challenge of any vendor of great consumer products to independent retail, is that the majority of retail stores around the country in the U.S. have staffs that unfortunately don't have long career paths there. They change often. Probably a majority of the staffs change every year. You're in a constant battle to clinic, educate, inspire, and train these staffs of people. The way that we are addressing that. What I will say is that if your brand that's been established longer in a category, if the people are people who've worked retail in various locations over time, and some people are perennial people who come back on and off to retail, they might be a little bit more familiar with your brand.
For us and these folks, it is new. As you know, number one, we, in order to address this, did several things. The first, one of the most significant transformative changes that BD went through in North America was to make a commitment to transforming a relatively small, tight group of employee sales reps who could not visit the stores as frequently as one would want with apparel, instead moved them, worked with them to create sales agencies around North America so that you had more people to support BD, because you also had apparel with gear and equipment, so that you could get tech reps to come in and do the clinicking that apparel needs more of than gear and equipment because it changes each season.
We do have around the country now, in most places, I won't say we've completed this in every territory, the majority of North American territories have been converted. We have agencies with, in most cases, the previous employee reps. We have additional skilled people there, usually with real apparel experience, we have directed those folks to hire tech reps who can come in and support the reps in doing clinics. What we've done is, we've done these special events around the country with the key retailers who are willing to commit their staff's time to this. You don't always get a retailer willing to do that, in many cases, we got that.
We have our guys and gals going into the stores separately, conducting additional clinics during the year, especially in those places where staffs are coming on later because the buying cycle is a little bit later and retailers really are watching their overhead dollars and who they are hiring and when they are hiring. It is an ongoing process, and I will be candid with you. I do not believe we will ever achieve the level we want, simply because the level of turnover is so high. I think we can continue to make very substantial strides. We just need the season, and many of these stores, including in New York, are still ramping up at this moment with the staff. We have to keep getting our people in to make sure they are clinicked.
Great. Thanks a lot. Appreciate that.
Thank you. This concludes the question and answer session. I would now like to turn the call back over to Mr. Metcalf for closing remarks.
All right. Thank you. I would like to end our call with the following brief comments. First, we are focused right now on the execution of our fall/winter selling season in the fourth quarter. It is generally one of our strongest quarters. While we are very focused on this, we look forward to investing more in our big brands to create further momentum in 2014 and in the out years. Thanks again for joining us, and we look forward to speaking with you again in February when we discuss our outlook for 2014.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.