Good afternoon, everyone, and thank you for participating in today's confe renc e call to discuss Black Diamond Inc Financial results for the second quarter ended June 30th, 2017. Joining us today are Black Diamond Inc's Chief Administrative Officer and CFO, Aaron Kuehne, Black Diamond Equipment President, John Walbrecht, and the company's External Director of Investor Relations, Cody Slach. Following their remarks, we'll open the call for your questions. Before we go further, I'd 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, Kelly. Please note that during this 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 statement.
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 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 reformation and growth strategy, including its ability to organically grow each of its historical product lines, the ability of the company to identify potential acquisition or investment opportunities as part of its redeployment and diversification strategy.
The company's ability to successfully redeploy its capital into diversifying assets, or that any such redeployment will result in the company's future profitability, 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 patents, trademarks, and other intellectual property rights, fluctuations in the price, availability, and quality of raw materials and contracted products, as well as 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 SEC, 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 of this 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 call. I'd like to remind everyone this call will be available for replay through August 21st, 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 blackdiamond-inc.com.
Any redistribution, retransmission, or rebroadcast of this call in any way without the express written consent of Black Diamond is strictly prohibited. I would like to turn the call over to Black Diamond Equipment's President, John Walbrecht. John?
Thank you, Cody. Good afternoon, everyone. We're excited to be joining you. Our second quarter served as a period of continued progress to better serving our core consumers while driving innovation in current and adjacent product categories. We grew sales in all of our major markets, geographic markets, and across all of our distribution channels, including strong double-digit growth in our distributor and our direct-to-consumer businesses. Products that drove this growth included the launch of the new Black Diamond rock shoes, our new rope line, a category we introduced just last fall, as well as our harnesses, carabiner, and trekking pole collections. For spring 2018, we introduced our full range of new rock shoes at the June 2017 Friedrichshafen Show in Germany, and then followed up by shipping to a couple of our key retailers just weeks later after our launch for spring 2018.
This timing, very important as a strategic initiative, shows our improved speed to commercialization and, more importantly, our ability to better respond to retail demand. The response to our climbing shoe line has been quite strong, both in terms of consumer and retailer feedback, as well as trade recognition. I'll have more to share with you in our later comments. Our second quarter is typically a high replenishment order period for Black Diamond. The progress we've made to improve our supply chain allowed us to satisfy short order demand, particularly in our European and independent global IGD markets. Europe also benefited from small but steady improvement sales from our direct-to-consumer launch, which we launched in late Q1 of this year. In IGD, sales grew strong double digits due to fulfillment of certain second half 2017 pre-season bookings and increased replenishment orders for China, Korea, Japan, and Australia.
Our North American business, particularly in the U.S., continued to perform well due to the strong direct-to-consumer growth. In fact, our hard goods e-commerce sales were up 24% compared to the same quarter last year, and demand exceeded our production in both apparel and ropes again. For a channel distribution and product mix standpoint, we continue to strengthen our D2C platform on premium products versus promotional outlets. In fact, during Q2, we completely eliminated off-price promotions on our website, and the result has fueled this channel's strong performance. Given our progress, we accelerated the timing of various sales and marketing initiatives to further bolster what we expect to be the robust fall 2017 and spring 2018 selling seasons.
This included enhanced media spending, generating over 3.5 billion impressions during the first half of 2017, and continued investment in our R&D capabilities with several new hires, an incremental investment in visual merchandising and other summer trade show activities. In fact, at the recent summer OR Show, we won Best of Booth Presentation Award. These investments continue to be centered around the following two key themes. First, we have returned our focus back to Black Diamond Equipment and specifically on product innovation, as we have launched more than 10 new product category innovations for spring 2018 alone. Secondly, we are striving to enhance our brand equity through targeted marketing centered around brand experience and the aspirational nature of our products. We expect this marketing support will continue to drive sales growth in all markets for the upcoming selling seasons.
Before turning the call over to Aaron, we believe our second quarter results continue to build confidence in the mind of our retail partners amidst a overall difficult retail backdrop. We believe retailers are investing behind the brand and that have momentum and are bringing truly innovative products to the market. At Black Diamond, we believe we're innovating best-in-class products, bringing true innovation to the market, and doing so more rapidly than our competition, all the while supporting this innovation with clear marketing that speaks to our core consumer. This strategy is driving sell-through at retail, and the return is building their support for our brand. We expect our momentum to continue in the near term as we carry on with the renewed focus of strengthening our brand equity.
Before providing some additional commentary, I would like to turn the call over to our Chief Administrative Officer and CFO, Aaron Kuehne, for a detailed financial overview. Aaron?
Thank you, John. Good afternoon, everyone. Sales in the second quarter of 2017 increased 5% to $30.7 million, compared to $29.1 million in the same year-ago quarter. On a constant currency basis, sales were up 6%. The increase was primarily due to a strong growth in our climb and ski categories, especially within our independent global distributor and direct-to-consumer channels. In fact, during Q2, our distributor business was up 23%, while our direct-to-consumer channel was up 15%. Gross margin increased 90 basis points to 29.5%, compared to 28.6% in the year-ago quarter. The increase was primarily due to a favorable mix of higher-margin products and channel distribution. This was partially offset by approximately 220 basis points in prior year capitalized negative production and sourcing variances that ran through the P&L in the second quarter. These variances were expected and discussed in our first quarter earnings call.
It was also offset by lower-than-anticipated gross margins on higher-than-expected sales of discontinued merchandise, primarily associated with the right sizing of our apparel line. This had an overall negative impact of 150 basis points on the quarter. Although this impacted our margins, we exited the quarter with very little discontinued merchandise, especially apparel merchandise, in our inventory. In addition, our efforts to recalibrate our apparel line to a more focused SKU count is largely complete. It is important to reiterate that the impact of low-margin discontinued apparel sales on our overall gross margin was the result of the fact that the level of sales of discontinued merchandise was higher in the quarter than what we expected, not the result of lower gross margins on our newer merchandise. Selling, general, and administrative expenses in the second quarter were up 11% to $12.9 million, compared to $11.6 million in the year-ago quarter.
We believe that this increase is a direct result of the strategic initiatives we introduced at the beginning of the year to drive new product introductions and to increase brand equity. In fact, as John mentioned, the early success of this strategy caused us to accelerate the timing of these investments ahead of the important trade show selling season. Net loss in the second quarter of 2017 was $3.7 million, or a loss of $0.12 per diluted share, compared to a net loss of $3.2 million, or a loss of $0.10/ diluted share in the second quarter of 2016.
Net loss in the second quarter of 2017 included $0.2 million of non-cash items and minimal restructuring charges, compared to $2 million of non-cash items, a half million dollars in restructuring costs and $100,000 in transaction costs and a $2 million cash arbitration award for the Pieps Vector recall in the second quarter of 2016. Excluding the award, net loss in 2016 would have been approximately $5.2 million. Adjusted net loss, which excludes the non-cash items, restructuring charges, and the arbitral award was $3.4 million, or $0.11/ diluted share, compared to an adjusted net loss of $2.5 million or $0.08/ diluted share in the second quarter of 2016. Adjusted EBITDA was a loss of $2.7 million compared to a loss of $2.3 million in the second quarter of 2016. Moving on to the balance sheet.
At June 30th, 2017, cash and cash equivalents totaled $63.4 million compared to $94.7 million at December 31, 2016. We carried zero debt compared to debt of $21.9 million at the end of 2016. For flexibility, we continue to maintain a $20 million revolving credit facility, which was renewed on March 3rd and now matures on April 1, 2020. Our year-over-year inventory position increased 17% to $54.8 million in anticipation of our upcoming fall/winter selling season and our focus on improving on-time deliveries. I'd now like to move to our financial outlook. We continue to anticipate our fiscal year 2017 sales to grow between 3% and 7% to approximately $153 million-$158 million, compared to $148.2 million in 2016.
While we continue to expect full year gross margin to come in well above the 29.5% reported in 2016, the higher than expected sales of low margin discontinued apparel in the second quarter will likely result in the overall gross margin coming in toward the low end of the previously anticipated range of 32.5%-33.5%. Assumed in our outlook for the year is greatly improved gross margin on a year-over-year basis, which we expect to further improve as we head into 2018. We expect this will be accomplished by continuing to focus on improving our channel and product mix, minimizing the impact of discontinued merchandise, and further optimizing our sourcing capabilities and supply chain. We continue to expect selling, general, and administrative costs, including approximately $4.5 million of cash corporate overhead expenditures, to be approximately $50.5 million compared to $49.9 million in 2016.
We continue to expect approximately $2.5 million in capital expenditures in 2017. While it continues to be too early to provide any specific guidance or details around the redeployment of our capital, it remains one of our highest priorities and we are very active in our strategy to acquire high-quality, durable, cash flow producing assets that are potentially unrelated to the outdoor equipment industry to diversify our business. Before passing the call back over to John, as a reminder, our common stock continues to be subject to a rights agreement that is intended to limit the number of 5% or more owners, and therefore reduce the risk of a possible change of ownership to maximize the value of our NOLs. Any such change of ownership under these rules would impair our existing and significant NOLs for federal income tax purposes.
As of June 30, 2017, our NOL balance remained at approximately $172 million. This concludes my prepared remarks. I'll turn the call back over to John.
Thanks, Aaron. To summarize my opening comments, we continue to believe that Black Diamond Equipment is on strong footing for the future, enabling us to invest in marketing and innovation to drive the brand forward. This can be best characterized by our fall 2017 product lineup. For fall 2017, we are excited about our brand's momentum heading into the season, focused on improving on-time delivery, stronger sell-through, and ease to do business with. In tandem with our aggressive national ad campaign, which encompasses both print and television, we will be focusing on our Defy the Dark headline campaign and our backcountry skiing campaigns. These will be supported by product ads focused on our ISPO Gold Award-winning Helio Glove, the Consumers Choice Powder Award for Boundary Pro Ski of the Year, and our award-winning First Light breathable insulation outerwear program, including the hoodie, the jacket, and the hybrid.
Additionally, with winter gym season approaching, we will continue our focus on climbing sportswear, a category where we continue to see stronger than expected demand. For spring 2018, we just attended the Summer Outdoor Retailer Show and are seeing stronger than expected growth in our spring 2018 bookings. Spring 2018 will see the launch of new developments in both climb and mountain, and we anticipate seeing growth momentum as we continue to invest in new products alongside our more disruptive marketing. A few of our new products include the launch of a rock shoe collection, which I discussed in my opening remarks, an expanded Spring Stretch rainwear collection, a new device called the ATC Pilot, patented trekking poles, updated harnesses, expanded packs, sportswear, logo wear, et cetera.
During the spring 2018 trade show cycle, including the recently completed Outdoor Retailer Show, Black Diamond continued its success in innovation, receiving the 2017 Editors' Choice Gold Award for the Mega Light tent, Outside Gear of the Show for the Black Diamond Momentum rock shoe, GearJunkie's Best in Show for the BD Momentum rock shoe, Gear Patrol Editor's Choice for the Black Diamond Shadow rock shoe, Men's Journal Top Five Items for BD Momentum shoe, as well as Outdoor Retailer Booth of the Show award. In addition, Backpacker Magazine awarded our Distance Z poles as one of the best new trekking poles for 2017. As we look forward to 2018 and beyond, we have more than 30 new product initiatives in the works across the 30-plus categories that BD currently offers.
Through the first half of 2017, BD held true to its promises, strengthening our sell-through and our marketing efforts, achieving more than three and a half billion impressions en route to our goal of five billion impressions for 2017. Our partnerships with key photographers like Tim Kemple, Jimmy Chin, and Chris Burkard, alongside our BD athletes, continues to drive very strong brand impressions. From Adam Ondra's climb of the Dawn Wall to Babsi Zangerl's climb of Zodiac, Joe Kinder's Bone Tomahawk, Alex Honnold's free soloing of the Freer ider in Yosemite, and Joe Grant's third-place finish at Hardrock 100, BD continues to make dominant impressions with our consumers. As a concluding remark, we expect our continued momentum to drive strong results for the remainder of 2017, as we further our renewed focus on enhancing the Black Diamond brand.
We also expect the steps we are taking in both product development and marketing will exceed our retailers' expectations and help set up a strong selling season for 2018. It's an exciting time once again at BD, and those that attended the BD booth during OR saw firsthand the increased enthusiasm and energy surrounding our brand. I'd now like to turn the call back over to our operator for any Q&A questions before my closing remarks. Operator?
Thank you. At this time, if you do have a question, please signal us by pressing star one. Once again, that will be star one for questions. We'll hear first from Dave King with ROTH Capital.
Thanks. Good afternoon, guys. I guess, trying to understand the decline in operating margins a little bit more. If we take out the 150 basis points of impact, then the 220 basis points of impact, I guess, or benefit from the repatriation issues, is it right to be assuming that 20 basis points of improvement came from mix improvements and product cost improvements? The reason I ask is, assuming that's sort of the number, how should we be thinking about the puts and takes to get to sort of the full year guidance with those repatriation issues likely to subside from that 220 basis point tailwind? How should we be thinking about getting the margin up to get to that guidance at now at 32.5%?
This is Aaron, and I'll take that.
Yeah.
Dave, you're right. Let me back up. In Q2, we were negatively impacted by two primary components here. First of all, with the repatriation of the manufacturing activities from China to Salt Lake. As you noted, it cost us, or it had a negative impact of about 220 basis points. We now believe that we have these negative variances or capitalized negative variances behind us as of the end of Q2, those should not be reoccurring into the future. That's one primary component. The other piece is that we did have an increase in the movement of discontinued merchandise or closeouts, that also had a negative impact on the gross margin profile for Q2 as well. As we look to the back half of 2017, we do anticipate seeing significant improvements related to product mix, channel mix, and our sourcing activities.
Once again, we should see that these negative capitalized variances no longer continue to have the negative impact that they've had as we stabilize our sourcing activities, primarily our in-house manufacturing activities here in Salt Lake. We are sitting on a much better position when it comes to our closeout or discontinued merchandise. It's the lowest that I've seen it in the last year and a half. Then back again, as we've eliminated the promotional activity on our website, and as we continue to focus on product mix and channel mix, that's where we're expecting the benefits or the increases to come from in the back half.
Okay. That helps. I guess, if you're able to then back that out, what was the benefit that you got from product cost improvement or mix in the quarter? We can take it offline if it's easier, but I'm just trying to get a sense of what the underlying improvement was in the quarter that should be sort of sustainable number as we look to the back half.
Yeah. For the quarter, we saw a benefit of about 90 basis points due to product mix and channel mix.
Okay. Similarly, in thinking about the operating margin decline, the expenses, it seems like you're guiding to a decline from the current run rate, even with what I would think would be seasonal increases in the fourth quarter. I guess, how should we be thinking about the trajectory? It sounds like there was some accelerated investment in the second quarter. How much that should continue. I guess, what are the puts and takes there? Thanks.
Yeah, for sure. We did accelerate, definitely, the investments that we made in our marketing and R&D components, further supporting our strategic initiatives around product innovation and increasing brand equity. I'll give you a little bit more specifics as it relates to the year-over-year increase.
One, we invested an incremental $1 million in marketing during Q2 versus the prior year Q2. That investment was an acceleration of those expenses. We do not anticipate to have that be incremental per se to the overall view on 2017. It's just that we shifted the timing of it. We do anticipate that we will continue to be in line with the guidance that we provided from an SG&A perspective. It's just a matter of how it now gets reallocated into Q3 and Q4.
Okay. I guess, lastly for me, John, it sounds like the fall 2017, spring 2018 bookings are up, encouraging there. I guess, can you give us a sense of order of magnitude on those things and just remind us again of how much of the business is typically comprised of ASAP orders? Just, it seems like you're guiding to sort of a deceleration in the revenue growth in the back half versus what you've been doing. At the same time, it seems like the business is sort of humming along on the top line. Maybe you can talk a little bit about that.
Yeah. I guess the two things I would say to you, typically, we run around a 20% at-once run rate. In the second quarter, we saw better than that, so I expect that will continue. I guess the best I can give you as an understanding of where fall bookings are going is, if you go back to the statement that Aaron said on our year-over-year inventory increase, which ate up part of our capital. Obviously, we wouldn't invest in more inventory than we think the business can achieve.
Okay.
You remember that number?
Yeah. No, yeah, it's fine. I'll take it offline because some of that was new product, but it sounds like some of that was also better on-time delivery, but we can take that offline.
Right. Both of those are critical because earlier on-time delivery means an increase in your reorder, first in, first out.
Fair point. Okay.
If I can ship earlier, not only do I capture the adage, kill two birds with one stone. Not only do I get earlier revenue, in which we're doing that by shipping earlier on a month-to-month basis, at the same time, because I ship earlier, first in, first out, we actually are seeing an increased percentage of reorder because we've actually been on the floor and more competitive earlier in the season.
Okay. That's really good color.
It's a win on both. That's why we always stress, ship on time, have good sell-through, because obviously shipping on time and not having good sell-through, all you've done is make it more relevant to the retailer that you're not selling through. Have good sell-through, hence the marketing, ship earlier, and then you will have better reorders as well as better bookings. We're seeing both of those. The inventory buyup is anticipation of the combination of the booking and the reorder demand.
Okay. That helps. All right. Thanks for taking my questions, and good luck with the rest of the year.
Thank you.
We'll hear next from Andrew Burns with D.A. Davidson.
Good afternoon. Aaron, I was hoping that you could clarify some of the online commentary. I think I heard U.S. hard goods on DTC was up 24%. I think the overall was up 15%. That up 15% would include Europe, which would be new revenue. What's the disconnect there?
Apparel. It's the continued scaling of apparel.
The apparel scaling down.
We have more demand for apparel than we had planned on going into that season. Our view was to cut back our apparel demands and scale that business back. We chased it all season. Again, based on when we bought and when we planned that season versus fall 2017 and spring 2018, where we're seeing strong momentum again for BD apparel.
Great.
We just need to be, again, ship on time, have more inventory, have better sell-through. Though they read as negative, they're actually positive opportunities for the brand.
Okay. As it relates to the gross margin guidance moving towards the lower end of the range, has anything changed in terms of your second-half gross margin outlook? Understanding that if a lot of the inventory that needed to be cleared out occurred in the second quarter, I would think perhaps 3Q and 4Q would have been stable or even improved a little with less discounting.
Yep. No, you're spot on, Andrew. You're just bringing up the low average of the second quarter of getting rid of product that had more negative margins than we'd like from 2016 carryover, and then that we sold a lot more closeout inventory earlier in the year than anticipated. More and earlier.
Okay. Great. One last one, just on the climbing shoes, it sounds like a very encouraging start, and I think at the OR Show, you referenced that ropes and climbing shoes were 40% of total category spend. The question would be, how do you ramp doors, and how do you sort of think of a timeline to get a Black Diamond appropriate market share on those two categories?
I think that part of it starts with product innovation and making sure that both in ropes and footwear, our product is innovative and demanded. It's shipping earlier, and we've already started shipping this fall, and gaining market share as we go into the winter indoor climb season, back to gym season. Then it's continuing to innovate and steal market share, both through product and through consumer brand awareness. This is a category that, though BD hasn't been playing in these two categories, our competition is strong in these categories, and it's intended to be the battleground.
Thanks and good luck.
Yep, appreciate it.
Once again, for questions, that is star one at this time. We'll move next to Jim Duffy with Stifel.
Thanks. Hi, guys. A few questions.
All right, Jim.
I'm going to start down the path on the gross margin. You mentioned a desire to be better in stock. Of course, the flip side of in-stocks is margin risk if you have to clear it. Aaron, can you just share a little more color on the inventory position? I think you mentioned that the discontinued merchandise is down. What is it that caused the growth in the inventory year-over-year? Is it a unique compare with a year ago?
Let's start with the discontinued merchandise piece first. As mentioned, I believe that we're in the best position we've been in for a long period of time as it relates to the overall health of our inventory. We are currently sitting on about 3.1% of our inventory being discontinued merchandise, but more importantly, it's clean or rich DM. We were running through some of the apparel DM that had been built up over prior seasons that was just needing to get off our books, that came at a higher cost, higher than expected cost in terms of negative impact to gross margin. As it relates to the overall increase of our inventory, this goes back to our overall focus on ensuring on-time deliveries and ensuring that we have our top 100 styles in stock ready to go for our retail partners, we've benefited from that.
We've been able to capture a higher rate of ASAP or replenishment business, also ensure that we had a higher fulfillment rate as well. It's been beneficial for us. It has increased our working capital needs, et cetera, we do anticipate that through the course of the next four or five months, that we'll be able to start seeing that come down as we satisfy our fall or our second half pre-season bookings and orders that come in.
Okay. That's helpful. Thank you. Then it sounds like the clearance apparel product was fall 2016 product.
Even prior.
Okay.
Even prior.
You just made a decision to get that off the books.
Yes.
Move forward. I'm trying to reconcile that with John's comment that you didn't have enough inventory and apparel.
For spring 2017, we did not.
Okay.
Remember, we have two six-month seasons that we're dealing with. The new spring 2017, we came out of spring 2017 very clean as it relates to apparel inventory, and we expect the same as we come out of the back half of 2017 as well. Because of the buildup that occurred over the previous seasons, there was still some hangover that needed to be cleared out. We opted to move it through some different channels, but they came out at a more negative gross margin than what we had originally anticipated.
Okay. John, question for you just on innovations and product pipeline as you look out to 2018. Your enthusiasm was very evident at the Outdoor Retailer show. Can you share a little bit of what you learned based on your discussions with retailers in the order season? What are the products that the retailers are really responding to? What is it that is really supporting that enthusiasm as you look out to fall and spring of 2018?
I think what you will see is the brilliance of BD's strategy being in 33 categories, and so retailers are looking for us to play in wider spectrums of opportunity. I think that we are finding ways to be innovative in climb, in ski and mountain, as well as apparel. I believe that the brand continues through a combination of brand strength and product innovation in tandem with the marketing to gain consumer support. In consumer support, we see innovation as well as product demand in logo wear, sportswear, outerwear, apparel, packs, what I call brand identities. I think as you saw on the booth, that big graphic, that mural on the wall that had all the products we do. As I said in our meetings there, we either have 120 competitors or no competitors, depending upon how you look at our category offerings.
I think our retailers, because of our specialty nature, are enthused and excited about the different product innovations that were coming out across a broad range of product categories. We're seeing it in 20-plus different categories. That's where BD's strength lies.
Okay. Thanks so much.
Yep.
At this time, that does conclude our question and answer session. Mr. Walbrecht, I'd like to turn things back to you for closing remarks.
We'd like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our third quarter results. Have a great fall season, and thanks for joining us.
Ladies and gentlemen, that does conclude today's conference. Again, thank you all for joining us.