Good afternoon, everyone, and thank you for participating in today's conference call to discuss Black Diamond, Inc.'s financial results for the first quarter ended March 31st, 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 the remarks, we will 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, Ashley. Please note that during this call, the company may use words such as appears, anticipates, believes, expects, intends, is sure, 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. 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 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 strategies, 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 profitability, the company's exposure to product liability or product warranty claims and other loss contingencies, the ability of the company's manufacturing facilities to perform as required, 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 will be 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 10-Q, and current reports on Form 8-K. All forward-looking statements included in this 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 this call. I'd like to remind everyone that this call will be available for replay through May 22nd, starting at 8:00 P.M. Eastern. Webcast replay will also be available through the link provided in today's press release, as well as on the company's website at blackdiamond-inc.com.
Any distribution, 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 President, John Walbrecht. John?
Thank you, Cody, and good afternoon, everyone. It's a pleasure to be joining you. Our first quarter was the first clear sign that the steps we have taken to better serve our core customers are creating momentum, all while continuing to drive innovation in the current and adjacent product categories. We grew in all of our primary product categories and across all of our major markets, which was a key goal and a significant accomplishment in the current marketplace. This was highlighted by strong performance in our core product offerings, particularly in carabiners, protection, lighting, trekking poles, gloves, skis, and snow safety. This broad-based growth was made possible by our ability to satisfy demand, which is a credit to the improvements we have made in our supply chain for 2017. On time and more complete orders also helped drive healthy demand for our at-once or ASAP orders during the quarter.
We also began to make small incremental investments back into the brand via enhanced R&D, while also furthering the development of our e-commerce platform. Our investments in marketing campaign for spring 2017 speaks more clearly to our core audience and has demonstrated early positive results. We will continue to evolve our marketing campaign throughout the summer and into the fall as we focus on the Defy the Dark campaign. We believe our first quarter's results underscore the growing confidence of our retail partners and in our strategy to refocus on the core components of the Black Diamond brand and our underlying business. We expect our momentum to continue into the near term as we carry on with our renewed focus on strengthening our brand equity.
Before going into more details on the strategy, as well as some of the regional results, I would like to turn the call over to our Chief Administrative Officer and CFO, Aaron Kuehne, for a detailed financial overview.
Thank you, John, and good afternoon, everyone. Sales in the first quarter of 2017 increased 9% to $41.6 million.
Compared to $38.2 million in the same year-ago quarter. Foreign exchange had a minimal impact on the first quarter. As a result, excluding the impact of foreign exchange, sales were up 9%. The increase was due to strong growth across each of the different product categories of climb, mountain, and ski, especially within our direct-to-consumer and independent global distributor channels. In fact, our direct-to-consumer channel was up 30%, while our distributor business was up 18%. Gross margin increased 90 basis points to 29.6%, compared to 28.7% in the year-ago quarter. The increase was primarily due to a favorable mix of higher-margin products and retail channels. This was partially offset by $500,000, or approximately 110 basis points in previously capitalized negative production and sourcing variances that ran through the P&L in the first quarter.
While contemplated in our outlook, improved inventory trends heightened the impact of these negative variances during the quarter. We expect these capitalized variances to continue to run through our P&L in the second quarter before returning to a more normalized level in the back half of 2017. We also recorded certain non-cash inventory and warranty reserve adjustments of approximately $400,000, or approximately 100 basis points. The improvement of gross margins continues to be a primary focus. Although we experienced year-over-year improvements, we continue to focus on improving our channel and product mix, continuing to minimize the impact of discontinued merchandise and further optimize our sourcing capabilities and supply chains. Selling, general, and administrative expenses in the first quarter were down 12% to $12.5 million, compared to $14.2 million in the year-ago quarter. This decline is a direct result of the reformation that we announced in 2015.
The decline was partially offset by some of the initial brand-building investments that we spoke publicly about during our fourth quarter call. These included investments in research and development and further development of our e-commerce platform. Net loss in the first quarter of 2017 was $1.5 million, or a loss of $0.05 per diluted share, compared to a net loss of $4 million, or a loss of $0.13 per diluted share in the first quarter of 2016. Net loss in the first quarter of 2017 included $2 million of non-cash items and minimal restructuring charges, compared to $1.2 million of non-cash items, $500,000 in restructuring costs, and $100,000 in transaction costs in the first quarter of 2016.
Adjusted net income, which excludes the non-cash items and restructuring charges, improved to $500,000, or $0.02 per diluted share, compared to an adjusted net loss of $2.2 million, or a loss of $0.07 per diluted share in the first quarter of 2016. Adjusted EBITDA improved to approximately $600,000, compared to a loss of $2.4 million in the first quarter of 2016, with the increase primarily due to the aforementioned sales and gross margin improvements, as well as prudent expense management. Moving on to the balance sheet and cash flow. At March 31, 2017, cash and cash equivalents totaled $73.6 million, compared to $94.7 million at December 31, 2016. During the first quarter, we fully paid down our 5% senior subordinated notes for $22.6 million and term notes of $100,000. As such, today we are completely debt-free.
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 declined 6% to $43.5 million, which helped drive approximately $1.6 million of free cash flow during the quarter, compared to approximately $400,000 a year ago. During the first quarter, we repurchased approximately 3,000 shares of our outstanding common stock for a total cost of approximately $14,000 at an average price of $5.28 per share. As of today, approximately $17.8 million remains on our $30 million stock repurchase program. I'd now like to move to our 2017 financial outlook, which remains unchanged. 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.
We continue to expect gross margin in fiscal 2017 to increase approximately 300-400 basis points and range between 32.5%-33.5%, compared to 29.5% in 2016. We also 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. Finally, we continue to expect approximately $2.5 million in capital expenditures in 2017. 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 in order 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 March 31, 2017, our NOL balance remained at approximately $172 million. This concludes my prepared remarks. Now I'll turn the call back over to John.
Thanks, Aaron. Now I'd like to spend a few moments discussing our performance by region. North America and direct-to-consumer. Our North American business, particularly in the U.S., continued to perform well due to the strength of our foundational mountain categories. Our core retail base continues to be healthy, and our product sell-through was strong, which drove very healthy demand in ASAP orders in the first quarter. In addition, our direct-to-consumer business continues to grow strong, double digits, as we continue to invest in prospecting, retargeting, and increasing our social media presence. Our core product offerings of carabiners, protection, gloves, skis, and snow safety experienced the highest level of growth during the first quarter. Independent global distributors. Our independent global distributors business, which covers the rest of the world regions, including large markets in Asia, was strong again in our first quarter.
This strength was driven in large part by a strong load-in of pre-season bookings, facilitated by improved availability of product and further improvement in the sizable Japanese market. Apparel. In apparel, we continue to see early signs of success in our refocused approach to speak directly to our core consumer. In North America, we experienced solid sell-through in the first quarter and the fall 2017 bookings were very strong. We are pleased to see momentum in our outerwear, sportswear, and most significantly, in our logo wear, again proving that our customers are responding positively to our brand message. In Europe, the first quarter marked our first quarter of measurable year-over-year sales growth in this region since the fourth quarter of 2015. In fact, our hard goods business in Europe grew 8%. We are also seeing momentum again in our apparel business.
In addition, we are experiencing increased demand in ASAP orders, and our fall bookings exceeded our goal. Late in the first quarter, we launched our e-commerce site across Europe. While still in its early days, we are pleased with the performance. Considering the success of our direct-to-consumer platform domestically and the secular shift to the consumer shopping online, we're optimistic about the new sales channel in this important region for the brand in Europe. Transition and looking forward. To reiterate some of my opening comments, we believe that Black Diamond Equipment is on solid footing for the future, which we believe will enable us to make investments both in innovation and in marketing to propel the business forward. We have supported the strategy with a fall 2017 sales and marketing campaign centered around two key messages.
First, we have returned our focus back to Black Diamond Equipment, and secondly, we are striving to enhance our brand equity through targeted marketing centered around the brand experience and the aspirational nature of our products. This has translated into strong fall 2017 bookings. Speaking of fall, highlights of our fall 2017 line will include new avalanche safety and backcountry skiing products, and the ISPO Gold Award-winning Helio Glove, inclusive of the Skier's Choice Award for the Boundary Pro ski. Apparel will launch a new expanded First Light program, including the First Light jacket and hybrid jacket, and we will also continue our focus on climbing sportswear for both the fall and winter climbing gym seasons. In regards to spring 2018, we will be kicking off our global sales meeting May 15th at the Sundance Resort in Utah, and we are very excited about the BD Spring 2018 Collection.
Launching new developments in both climb and mountain, we anticipate seeing growing momentum as we continue to invest in new products alongside more disruptive marketing. A few of our new products include the launch of our rock shoe collection, an expanded spring rainwear collection, a new belay device, patented trekking poles, updated harnesses to name a few. We expect that fall 2018 will see even more new product launches. As we mentioned during our last call, 2017 marked the start of more disruptive marketing investments. With the addition of an expanded team, including the involvement of two leading outdoor climb photographers, Chris Burkard and Tim Temple, BD has posted more than 25 print ads in the first quarter, which will continue to increase as we move into the summer climb season and then into the fall campaigns.
Supporting these progressions are the recent appointment of three key new hires filling the roles of the director of brand management, the new created position of retail and visual merchandising, as well as a lead photo editor. Between the launch of numerous short films, more aggressive social media campaign, as well as a BD 30-second commercial branded as Defy the Dark, our goal to create 1 billion consumer impressions is still driving our efforts. Alongside many of our new product innovations in 2017, we anticipate strong PR and editorial coverage throughout the year. In conclusion, we expect the momentum we are experiencing for the first quarter positive results to continue in 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 is an exciting time once again at BD, and we look forward to updating our shareholders along the way. I'd now like to turn the call back over to our operator for Q&A before my closing remarks. Operator?
Thank you. 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. Again, press star one. We'll pause for just a moment. We'll take our first question from Dave King with ROTH Capital. Please go ahead.
Thanks. Afternoon, guys.
Good morning, Dave.
I guess first off, it sounds like some of the revenue improvement was you guys being able to better meet demand at this point. I guess maybe along those lines, how far through the issues I think associated with the repatriation are we? Are those now sort of in the rear-view mirror? Are they still weighing in any way? As sort of an indicator of in demand, is there any sense on how sell-through is kind of trending across your various categories? I think, John, you talked about apparel being pretty good on that front. I think we heard ASAP orders were pretty strong across the board. Any color there I think would be helpful as well. Thanks.
In regards to the repatriation, obviously there are categories that we produce in-house. We are and will continue to focus on making improvements in both efficiencies, margins, availability of products, inventories in those categories we develop in-house. Those will continue even though they represent 20% approximately of our business. To your question in regards to sell-through, though it has been a late spring by most people's standards, our product sell-through has been very strong and similar to the comments we said, it has been strong in all product categories across all channels and across all geographic regions. That was a goal we started with in spring, and I'm pleased to say that that's occurring. To me, that is a function of execution in supply chain meets execution in marketing, that allows us to do both.
That to me is one of the big successes of this first quarter.
Got it. That's fantastic and great color. Aaron, I think you said it, so forgive me if I missed it, that 100 basis points of reserve adjustments, was that in the quarter were there reserve adjustments, and then were those positives or increases or decreases to the inventory reserve, if I heard you correctly?
They were increases to the reserves, and so it had a negative impact.
Okay, it was like 30.6% sort of core, I guess, if you back that out on the gross margin?
Right. Actually, if you back out the flow-through of the negative variances that were capitalized in the inventory last year and that are flowing through the P&L, you'd add another 110 basis points.
Okay. Well, that sort of answers my other question. I guess just then, in terms of gross margin, getting to the 33-ish you're targeting for the year, how should we expect it to kind of flow through over the course of the year, that improvement? Is there a good way to be thinking about that?
Yeah. We're going to continue to see some of these capitalized variances flow through the P&L in the second quarter. That will continue to have a negative impact on the overall gross margin for us with Q3 and Q4 normalizing or increasing to where we expect them to be.
Okay. That helps.
As a mix as we move into fall, other categories, ski and mountain become equally or more important, and therefore they start to have a margin mix.
Yep.
Okay. Fair point. I guess lastly from me on expenses, are you able to quantify how much of the increased R&D and your marketing cost was reflected in the $12.5 million? I guess to get to the $50.5 million for the year, I think it still sort of bakes in a bit of savings maybe in other areas, at least using typical seasonality. How should we expect that to flow through over the year, and what are the puts and takes to that?
You bet. There was approximately $250,000-$300,000 worth of additional or incremental spend associated with these initiatives that we put into place. With that being said, one of the things that John and I continue to look at is just how we're allocating the dollars within the different departments and within the different functions. You'll see Q2 historically is a little bit lower than the rest of the quarters and as it relates to SG&A spend with it then building up in Q3 and Q4 to hit our targets or to hit the $50.5 million that we outlined.
Okay. That helps. All right. Well, thanks for answering all my questions and good luck with the rest of the year.
Thank you, guys.
We'll take our next question from Andrew Burns with D.A. Davidson. Please go ahead.
Thanks. Good afternoon. Question on the buyback program, about $17.8 million left. How do you think about using or completing that program versus your acquisition ambition? Thanks.
Thanks, Andrew. This is Aaron. I'll take that. As it relates to the repurchase program, we will continue to be opportunistic in repurchasing our shares. That does not impact or influence the way that we think about the redeployment strategy. As it relates to our redeployment strategy, we continue to be actively looking at opportunities. Other than that, there's really no new update to provide at this time.
Okay. Thanks. Just a higher-level question on the state of the outdoor specialty channel. You've seen numerous bankruptcies in mainline and now in the hook- and-b ullet channels. Do you have any sense on how outdoor specialty has trended year to date? What's your thoughts on store closures in that channel being a headwind to growth in the coming years? Thanks.
I think it is tied in part to BD's differentiated brand strategy and our mix of product. Obviously, we don't sell every specialty retailer in the North American market or globally by any means. We are, come spring, highly focused on climb, and then it transfers over to mountain and ski as we go into the fall and the winter. For us, to date, our specialty business has been very strong. I think BD and climb have been positive reinforcements of growth and strength in the industry as a whole. I think that will continue at least for the foreseeable short-term future. We haven't seen that, and we haven't heard that. In fact, relative to BD, we've heard the opposite through the first quarter.
Great, thanks. Then just one more just on the apparel side. Now that the product line has been reset and you're managing that growth opportunity for profitable growth, it sounds like you're getting some success and fall order book is shaped up well. What kind of growth trajectory could the apparel category have for you as you think about balancing the growth with a profitable margin profile? Thanks.
I would love to give you that number. To be honest, we are one season into this process. We booked fall 2017. We are now starting spring 2018. Apparel represents 10%+ of our business. We're optimistic about it, and we'll obviously invest in it with our account support. I think, frankly, over the next couple of seasons, that number will become more self-evident. We're optimistic, but a number right now is premature for me to say because that's literally one season in.
Okay. Great.
Come fall, we'll see a lot more. By the time we book spring 2018 and then fall 2018, we'll start to see a lot more trend.
Great. Thanks and good luck.
Thanks.
As a reminder, if you would like to ask a question, it is star one. We'll take our next question from Jim Duffy with Stifel.
Thanks. Hi, guys.
Hey, Jim.
Hey, Aaron. I'm going to start with you. Just a question on the first quarter gross margin, were those in line with your expectations? I know you maintained the guide for the year. Is that kind of what you were thinking you would see in the first quarter?
They were a little bit lower than what we were expecting for the first quarter, and primarily due to the way that our inventories turned. It just heightened or elevated the negative impact of that, you know.
I see.
Capitalized variances that turned during the quarter.
Got it. Okay. You spoke to strength in the fall bookings. What are the categories driving that strength?
To be honest with you, Jim, we are very pleased across the board. As we saw in the first quarter, one of our major focuses for overall brand strength is to see growth by category, growth by region, and growth by geography. That balanced approach has been part of our strategy here at BD to get back to focusing on who BD is, not to be driven by one category or one product. We're very pleased with that move. That's a function of a combination of new product innovation meets marketing execution. Build brand awareness in those adjacent categories and innovate in those categories other than what you would assume as climb categories. To be honest with you, all categories, all markets, all regions have been positive going into fall.
Do you guys feel like that signifies a change in retailer buying patterns? Are they in a situation now where they're more willing to commit in advance, whereas before it was more an at-once pattern? I guess where I'm going with this question is, with the improved visibility, with the healthy bookings, why not a more ambitious outlook for the remainder of the year?
I would say to your first question on that, we believe that the retailers, as we said, took their foot off the brake, coming out of fall 2016 and into our fall 2017 booking campaign. Their view has been, look, we agree with your statement to focus on Black Diamond the brand, and we agree with your statement to invest in product and invest in brand image, to ship earlier on time, to have good sell-through, and to be easy to do business with. If you do that, we will have confidence in your brand moving forward. We're seeing that. They've taken their foot off the brake. I would say again, that it's probably premature after one booking season to give any trajectory path off of one point for the future and determine that that means pre-season bookings versus ASAP orders have changed significantly.
To date, we haven't seen that trend. We've seen strong bookings, and we've seen strong ASAP orders. In all fairness to your last question, why not change our forecast? One data point is not a great way to extrapolate a future line. My view at this point, let's continue to execute what we're doing with excellence, focusing on new product and on marketing, and put the same efforts into spring 2018 booking and fall 2018 and see if the continual trend stabilizes and becomes the new norm.
Okay. Thanks for that. My last question, probably best directed to Aaron. Andrew started down this path earlier, Aaron, just any more detail on the thought process around acquisitions in the search. Are you not seeing interesting properties? Is it a function of valuation? We've been hearing about the NOLs for a number of years now, of course, you need taxable income to utilize those. I guess I'm surprised nothing has come through on the acquisition front.
Yeah, it just continues to be one of those things where we are actively looking and finding the right match, finding the right partner, and we're still in that process. Unfortunately, I can't really elaborate much more than that. We continue to be actively searching for that opportunity.
Okay. I'll leave it at that. Thank you, guys.
Appreciate it.
Appreciate it.
At this time, that concludes our question- and- answer session. I would now like to turn the call back over to Mr. Walbrecht for any additional closing remarks.
Okay. We'd like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our second quarter results. Thanks again for joining us.
Once again, that does conclude today's presentation. We thank you all for your participation. You may now disconnect.