Clarus - Earnings Call - Q3 2014
November 3, 2014
Transcript
Speaker 0
Good afternoon, everyone, and thank you for participating in today's conference call to discuss Black Diamond Incorporated Financial Results for the Third Quarter Ended September 3034. Joining us today are Black Diamond Incorporated's CEO, Mr. Peter Metcalf the company's CFO, Mr. Aaron Cooney and the company's Director of Investor Relations, Mr. Cody Slaw.
Following their remarks, we'll open the call for questions. Before we go further, I would like to turn the call over to Mr. Slaw as he reads the company's Safe Harbor statement within the meaning of Private Securities Litigation Reform Act of 1995 that provides important cautions regarding the forward looking statements. Hodie, please go ahead.
Speaker 1
Thanks, Whitney. 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 based 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 including its ability to organically grow each of its historical product lines, its new apparel line and its recently acquired businesses the company's ability to successfully integrate and grow acquisitions the company's exposure to product liability or product warranty claims and other loss contingencies the stability of the company's manufacturing facilities and foreign suppliers the company's ability to protect patents, 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 carry forwards and legal, regulatory, political and economic risks in international markets.
More information on potential factors that could affect the company's financial results is included from time to time in the company's public reports filed with the SEC, including the company's annual report on 10 ks, quarterly reports on Form 10 Q and current reports on Form eight ks. 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 the date of this conference call. I'd like to remind everyone that this call will be available for replay through November 1734 starting at 8PM Eastern tonight. A webcast replay will also be available via the link provided in today's as well as on the company's website at blackdiamondinc.com.
Any redistribution, retransmission or rebroadcast of this call in any way without the expressed written consent of Black Diamond Inc. Is strictly prohibited. Now I would like to turn the call over to the Chief Executive Officer of Black Diamond Inc, Mr. Peter Metcalf. Peter?
Speaker 2
Thank you, Cody, and good afternoon, everyone. At the close of market today, we issued a press release announcing our financial results for the third quarter ended September 3034. Consolidated third quarter sales increased 24% driven by our POC and Black Diamond brands as well as strong fulfillment rates of both preseason fall bookings and ASAP or restocking orders. This efficiency and process improvement within our supply chain along with a higher margin product mix also drove a positive increase in consolidated gross margin to 41.4%. During the third quarter, POC continued to deliver its road bike line and Black Diamond apparel expanded its men's apparel collection with Gore Tex, Windstopper and Down as well as launched its women's apparel offering.
Midway through the third quarter, we appointed Zena Freeman as President and in the first half of twenty fifteen, we expect Zena to replace me as CEO of the consolidated enterprise Black Diamond Inc. Zena's appointment is the culmination of a three part strategic pivot that we announced at this time last year and is the result of a comprehensive search announced last fall for new senior leadership that would augment our strategic leadership capabilities in brand management. Zena brings Black Diamond Inc. A wonderful combination of long term tactical and strategic thinking, merchandising and consumer facing global brand expertise. She is precisely the kind of strategic merchant and dynamic brand leader that we have been seeking and we see her perfectly positioned to lead the company through the next ten years of global expansion.
Zena has been immersed in the business during her first seventy five days. She has traveled extensively to meet with customers and stakeholders globally, spending time with all of our brands and dividing her time between long term strategic development and day to day operations. We expect to formally introduce to our investors during our fourth quarter earnings call in early March, at which time we expect Xena to provide a glimpse into our vision for the future and the opportunities in front of all of our brands. Before I comment further, Aaron Cooney, our CFO, will discuss our financial results for the third quarter. Following Aaron's remarks, I will make some additional remarks and then open the call for questions.
Speaker 3
Aaron? Thanks, Peter, and good afternoon, everyone. The reported results we issued in today's press release from continuing operations excluding the results of Gregory Mount Products both for the three month and nine month periods ended September 30. We divested Gregory on July 2334. Sales in the third quarter of twenty fourteen increased 24% to 54,900,000 compared to the same year ago quarter.
The increase was across all brands and geographies benefiting from an increased fulfillment of preseason fall bookings. The third quarter was also highlighted by the continued delivery of POC's Road Cycling Collection and the launch of Black Diamond Apparel women's collection. Due to net weakening of foreign currencies against the U. S. Dollar, on a consolidated level, third quarter sales were negatively impacted by approximately 20 basis points or $110,000 on a constant currency basis.
However, Q3 sales still increased 24%. Consolidated gross margin in the third quarter increased to 41.4% compared to adjusted gross margin of 38.5% in the same period last year, which excluded $1,500,000 for PEEPS twenty thirteen product recall. Actual gross margin in the third quarter of twenty thirteen was 35%. The 2014 improvement is primarily due to both a favorable mix of higher margin products and higher margin channel mix. Foreign currency had an approximate 10 basis point drag on gross margin.
So on a constant currency basis, gross margin would have been 41.5%. Third quarter SG and A, which excludes restructuring, merger and integration and transaction costs, was $20,400,000 compared to $19,300,000 in the year ago quarter. The increase reflects continuing investments in our strategic initiatives such as Black Diamond apparel, the transition of certain POC distributors into our in house operations and the launch of POC's new road cycling collection. With the sale of Gregory Complete, during the third quarter of twenty fourteen, we immediately began the process of realigning redundant operating platform resources that did not transfer to Samsonite in the sale. We have eliminated overhead and rationalized the business to support our remaining core brands of POC, Black Diamond and PEEPS.
During Q3, we incurred restructuring charges of $2,100,000 related to fixed asset write offs and facility exit costs and approximately $70,000 related to benefits provided to employees who were terminated due to a reduction in force. We estimate that we will incur approximately $4,000,000 to $4,500,000 of total cash and non cash restructuring costs related to fixed asset write offs, employee related costs and facility exit costs associated with our strategic pivot with approximately $500,000 of these restructuring charges turning over into twenty fifteen. Adjusted net income from continuing operations before non cash items, a non GAAP term increased to $4,000,000 or $0.12 per diluted share in the third quarter of twenty fourteen compared to adjusted net income of $1,100,000 or $03 per diluted share in the third quarter of twenty thirteen. At September 30, we had zero borrowings outstanding on our $30,000,000 revolving line of credit with Zions Bank. Total debt stood at $25,600,000 which includes $18,100,000 of 5% subordinated notes due in 2017 and $7,300,000 in a foreign seasonal working capital credit facility for POC.
As a reminder, on July 23, we completed the sale of Gregory DeSamsonite for approximately $84,100,000 recognizing a pretax gain on the sale of $39,500,000 We used a portion of these proceeds to fully pay down our Zions line of credit and paid off our $9,000,000 Zions term note in full. The Gregory sale is expected to monetize approximately $31,400,000 of our NOL balance, shielding approximately $11,000,000 of cash taxes, leaving a balance of approximately $179,000,000 In December, we expect to pay approximately $11,000,000 to $13,000,000 in income tax associated with built in gains that could not be offset by our NOL. Now to reiterate our expectations for the second half of twenty fourteen. We expect sales to range between 113,000,000 to $118,000,000 which implies year over year organic revenue growth of 15% to 20%. Please note, our expectations for sales and gross margin assume that the U.
S. Dollar and other and our other key currencies remained at the levels they were at during our second quarter call. Foreign currency markets have moved significantly since that time. More specifically, fluctuations of 6% to 8% in key foreign currencies have had a negative impact of approximately $1,600,000 on our second half sales expectations. We expect currency neutral gross margin to range between 39.5% to 40.5%, which reflects a 1.6% to 2.6% increase compared to last year's pro form a gross margins.
We expect to spend between $40,000,000 to $45,000,000 in SG and A, an increase of up to $5,500,000 over the same period last year. For the full year 2014, we expect sales to range between $192,000,000 to $197,000,000 which implies year over year growth of 14% to 17%. We expect gross margins to range between 38.5% to 39% or a 1.3% to 1.8% year over year pro form a improvement. We are still planning our 2015 budget cycle around year over year sales increases of approximately 10% to 13%, which is after the 25% SKU reduction, which we discussed last quarter. The impact of the 25% SKU reduction on sales is estimated to be approximately $6,000,000 We are hopeful to transition a portion of this reduction in sales to already existing SKUs.
I would remind listeners that our budget cycle is just beginning and that our fourth quarter results are always weather dependent. Ultimately, 2015 will be constructed on top of 2014 actual performance. This concludes my prepared remarks. Now I'll turn the call back over to Peter. Peter?
Thank you, Aaron.
Speaker 2
I would characterize Q3 as a well balanced sales growth quarter, accented by demand for innovative product and efficient delivery of pre ordered seasoned goods. Consolidated third quarter results also reflect the continued implementation of the company's strategic pivot, the impact of the sale of Gregory and the longer term investments in POP, Peeps and Black Diamond apparel, which taken as a whole have elevated the growth and margin profile potential of our business. These results were achieved against the global retail market that showed signs of strength and pockets of weakness during the quarter. In North America, we saw strong ASAP orders from POC's new road bike collection, while our more mature Black Diamond gear and equipment categories experienced slower than anticipated ASAP orders. Central Europe, specifically some of our largest markets of Germany, Austria and Switzerland is facing a combination of economic headwinds and unusual weather patterns, which made conditions at retail challenging.
The region underwent an unseasonably dry winter last year followed by an extremely wet summer this year. Northern and Eastern European markets witnessed more seasonable weather patterns and healthy double digit growth in the third quarter. Conversely, although a small percentage of total go forward revenues because of the sale of Gregory, another example of regional challenges is that of Japan. The Japanese market was negatively impacted by the spillover effect from the tragic eruption on Mount Ontake, which killed more than fifty hikers. Hiking Japan's iconic volcanoes has become one of the country's most popular outdoor activities and one where the Black Diamond equipment brand has a strong presence.
Other headwinds in this market include the weaker yen, a new consumer excise tax and the stabilization of a three year growth spurt in that marketplace. Seasonally speaking, our second half is always very weather dependent. It is still too early to know when or how much snow will fall and what kind of ASAP order volumes we will actually realize. But in spite of this normal seasonal uncertainty, we remain committed to our outlook for the second half of twenty fourteen, largely due to the diversity of our brands, product lines and geographies. Before diving into our second half growth drivers led by POC and Black Diamond apparel, I'd like to mention that our JetForce product, which we're planning to make available across each of the Black Diamond, POC and Peach brands is in the final preparation stages before shipping.
We believe that JetForce represents a breakthrough technology with real performance benefits that we're proud to have designed, developed and engineered by our colleagues within Black Diamond Equipment and Pete's. We are seeing unique synergies ensuring capabilities, resources and IP between our brands. JetForce continues to pass the necessary certification requirements and while we do not expect it will have the financial impact that apparel does, we expect it to solidify both Black Diamond equipment and Peach's competitive positioning in this core equipment category. In the third quarter, the buzz and brand awareness from POC continued to grow. The brand continues to be well positioned in the market and a survey from key specialty retailers exiting last winter voted POC as the number one performing brand.
As expected, POC continues to take market share. Our strong sales growth this quarter, which was a continuation of solid results last year was driven primarily by on time shipments of their ski helmet product in part due to the strong brand exposure POC received at the Sochi Winter Olympics where the product was so prominently displayed by various athletes. While Q2 marked the shipment of the majority of POC's inaugural Road of Deep product and was sold out on a bookings basis, Q3 was also helped by the continued delivery of the line. We believe the product has great momentum that should carry into spring twenty fifteen booking season. POC has also recently won or been nominated for a couple of prestigious design awards.
At Eurobike in Friedrichshafen, POC received the Eurobike Award for their cerebral helmet. The Eurobike Award is one of the most prestigious design awards in the bicycle industry and this year's are 500 entries. The AVEEP concept is nominated for Design S and is one of the three finalists for this prestigious design award. Winners will be announced in mid November. Design S is Sweden's National Design Award and it singles out creative and innovative solutions in every imaginable area of products, services and environments, regardless of the design field.
The award has been presented every second year since 02/2006. During 2014, we successfully converted POC's independent distribution structure in Canada, France, Holland and Belgium to an independent sales agency structure. This commission based comp structure puts us in charge of building these important markets by allowing POC to control its own sales and marketing efforts, while providing higher wholesale margins that we can use to fund this investment. Fall twenty fourteen was the first season that completely benefited from these conversions and we saw a modest jump in our sales because of it. In spring twenty fifteen, we expect to grow POC cycling revenue by increasing the number of SKUs and production quantities of the Veep line as well as increased number of global doors carrying the line.
We expect to introduce 14 new styles and 43 new SKUs and approximately double our door count in 2015. In addition, we expect to launch our second collection of cycling apparel and gear for spring twenty fifteen, which we have labeled and appropriately positioned as Race Day. Race Day has approximately 34 new styles, including helmets and 135 new SKUs. We expect these initiatives to position POC to slightly more than double sales related to its road product in just one year. Fall fourteen initiated just a second fall retail selling season of our men's black diamond apparel line and the inaugural selling season of our women's apparel collection, which focuses on outerwear.
Fall fourteen will be introduced in approximately 800 retail doors worldwide and marks the introduction of more significant commercial categories. Such categories include a complete down collection featuring innovative new down blended installation from Primaloft, a completely waterproof outerwear collection featuring GORE TEX and cohesive embedded hardware and a comprehensive collection of technical women's product. The down in shell categories have been our best sellers. In both categories, we brought meaningful insight to the product and unique new technologies to the user, consistent with our commitment to innovation in comfort and protection. Given that our apparel line has just embarked on its second fall season and season number three of a fall six season rollout, we recognize the sell through rates need to improve to a level that some of our largest partners like REI will consider distributing our apparel throughout all or most of their stores.
Our two key marketing initiatives for fall fourteen are to build brand equity awareness and drive apparel sell through. Let me explain each in more detail. We are positioning Black Diamond equipment as the leader in snow safety. We have a digital broadcast partnership with Powder Magazine highlighted by a project called The Human Factor, which is a series of five stories co created by Powder and Black Diamond Equipment. They will be broadcast in powdermagazine.com and Black Diamond owned media.
We estimate this will generate 5,800,000 impressions. We are prominently broadcasting the Black Diamond brand story, use, design, engineer, build, repeat. We have a digital broadcast partnership with Outside Magazine, highlighted by a series of three stories created by their team and broadcast through outsideonline.com, 4,700,000 impressions are estimated. To drive sell through, in store marketing for Fall fourteen line encompasses apparel windows and a few key retailers, as well as things like brand kits, apparel banners, apparel tech tag kits, apparel body forms, apparel hangers, a significant quantity of product that we see the key shop staff. Outside magazine and Pattern magazine are advertising the line along with our Black Diamond Mountain Project mobile application.
Altogether, we estimate 11,000,000 impressions. We've created five digital catalogs featuring apparel on our website and promoted through social media. We have retail co ops with rei dot com, zappos.com, locogear.com and other select specialty retailers. Finally, Black Diamond had and will continue to have a presence at the two biggest climbing events in North America, Yosemite Facelift and Bozeman Ice Festival. Looking towards spring twenty fifteen, North America and Europe is planned to be sixtyforty men's women's and the average shop per door is booked substantially over spring twenty fourteen.
In both geographies, we are seeing solid double digit growth in bookings for spring twenty fifteen. At this time, Erin and I would like to open the call for a thirty minute question and answer session. Operator?
Speaker 0
Thank you, sir. And our first question will come from David King with Roth Capital Partners.
Speaker 4
I guess, first off, the gross margin improvement you had this quarter I thought was very strong. Congratulations there. I guess Aaron, how much of that was product mix versus channel mix versus supply chain initiatives, etcetera? And as we think about the outlook for gross margin into the fourth quarter, I would have thought that some of that would have continued, but still you kind of maintain guidance for the year. Can you just talk about the puts and takes there and what might be driving that?
Thanks.
Speaker 3
Yes. So to answer your first question regarding the puts and takes related to Q3, about three sixty basis points of gross margin improvement came from the higher channel mix and also product mix. We also saw some favorable impacts of lower DM impacts and also promotional activities, which were offset then by some other takes within gross margin primarily related to production variances and also the FX impact communicated. As we think about Q4, good question. And the reason for that is that we are in Q3, we benefited from as communicated the higher gross margin sorry, the higher margin product and channel mix.
And in Q4, we are expecting to see some of the larger dollar items such as ski category that don't have as high of gross margins that may potentially bring that down. For that reason, we're sticking with the guidance previously communicated.
Speaker 4
Okay. That helps. Thanks. And then Peter, I guess maybe just on apparel as we now move into the third season or second fall line, guess, do you have any initial color in terms of that you can share in terms of some of the new items that you've got for this fall and how the sell in has gone for those? Guess particularly what I'd be asking about would be the women's line, how that's proceeding and then hard shell jackets, stuff like that and conversations with retailers, sell in, etcetera.
Thanks.
Speaker 2
Sure. David, thanks for the question. And let me begin by saying, it's very early as you know in the fall to really draw conclusions. We just saw this weekend literally in North America, the first cold weekends here in the Rockies and the Northeast etcetera. So we're just beginning the season.
That said, I'll share with you some vignettes and antidotes that we find encouraging. First off, as far as bookings go, we did just about sell out on a pre booking basis of our down and Gore Tex shell items. They were the more in demand product. Secondly, though it has just gotten cold in Europe, in the last couple of weeks we have seen a very significant increase in ASAPs over the previous season. Though admittedly we have a much more significant line this fall than we did last year.
We saw the same pickup in our own direct to consumer business, especially among pros and we're gratified to see such an increase among the pro community for BD apparel. And then I think the last comment, it's worth two more comments worth making is that we have this year offered some aggressive pricing to the staff when our sales people go in and do clinics at retail stores. And the response to that has been phenomenal, which I think is a great testament to the strength of the brand and the retail staff's affinity for BD. And they get offered these kind of deals from other apparel companies. So that's very gratifying to us as well.
And I think the last two comments I'll make is that, yes, we are receiving very nice feedback from the marketplace in the form of e mails and just commentaries both on the women's apparel, its fit and how people are liking it and some of the change fit in some of the men's apparel items. So all that said, those are a set of observations, antidotes and vignettes that come very early in the season. So we are guardedly optimistic, but we recognize that the season really has just begun here in the last week. I appreciate it. Thanks for all
Speaker 4
the color and good luck with the rest of the season. Thanks.
Speaker 2
Thank you, David.
Speaker 0
And we'll take our next question from Andrew Burns with D. A. Davidson.
Speaker 5
Thanks for taking the questions. Peter, in the prepared remarks, you talked about sell through and the opportunity to improve that to really get greater traction across all your customers. I was hoping you could elaborate a little bit on that perhaps what you're finding most successful on the marketing front whether the store windows, the point of sale brand messaging, marketing things of that nature? And also what if anything needs to change on the product side?
Speaker 2
Andrew, okay, thanks. Good questions as well. And so let me begin by saying, as you know, this is our third season, fall was very much sort of a beta test season, very narrow line, 24 styles, 120 some SKUs, no women's apparel, very niched. And then we had spring, which was a continuation of some of those fall products and some sportswear. And so this season, fall fourteen is truly our first real season relative to a meaningful collection product that appeals to a broader demographic.
It is our first season with women's apparel. So it's early to be drawing too many conclusions. As far as the marketing assets that we have put out there, we're excited by all of them. And if you've seen any of the window installations we've done, we've done them around the world from South America to Europe to Asia to here. They're very powerful.
I've had people send me photos of these things that they themselves have snapped. So we think that is working. As far as which of these initiatives that we have deployed this season is the best and most effective, I think that's really too early to draw any conclusions on because the season has just really begun. But we were very deliberate and rigorous in coming up with the quiver of assets that we're going to deploy, because we believe all
Speaker 6
of them
Speaker 2
in various forms mixed together are all valuable to us. So again, a little bit early to see, but relative to sell through etcetera, I think it's again, it's too early to say, but what we did have seen is that our core retailers, core specialty shops that we have had such a long relationship with and that's such a good relationship with because of the sorts of customers that come through those doors that is a generalization. They have often had stronger sell through than the more of the box stores. But that has also probably been in part predicated upon the mixture of product. So again, we're very early into this.
This is our first real season and we are very, very keen to learn from the marketing assets we put out there, the broader line that we've put out there, the women's line that we have put out there and we will tweak, adjust, modify as we get the appropriate feedback and implement those changes in future seasons.
Speaker 5
Great, thank you. Had a question on Black Diamond in Europe and how you think about growing the brand in that region over the next several years in terms of is the biggest incremental growth driver apparel? What's there on the equipment side in terms of either new doors or getting greater assortment at existing accounts? I was hoping to think about the drivers there over the next several years.
Speaker 2
Sure. So I'll begin by saying that I don't have the numbers in front of me. I've certainly looked them in the past. We have for the Black Diamond brand, we have no lack of doors. What we want to do with those doors is focused on those better specialty shops, those better accounts that we believe have the potential to represent a much larger share of Black Diamond's products across the board, both gear and equipment from climbing and mountain to the apparel.
And that's really our focus at this point in time is taking the accounts that we believe have got the most potential and spending more time with them with our salespeople, more time engaged in doing joint marketing, putting in place merchandising tools with them, that sort of thing. We do not have the same amount of market share in Europe in almost any category that we have in North America. There are some of the categories we are quite dominant in, cams, ice screws or two in particular. But when it comes to apparel, which is the largest opportunity for the Black Diamond brand globally, it is certainly true in Europe. And if you look at our apparel collection and you look at our brand positioning, it is actually more it resonates even more strongly in Europe with its very strong Alpine culture, the juxtaposition of the major urban centers to jagged Alpine places where people engage in everything from ski mountaineering and Randon A to Alpine touring to Alpinism mountaineering via Faretta's and this sort of thing.
And right now we are seeing that. We're seeing good resonance in Europe and we believe that Europe has the potential to be a larger apparel market more quickly than potentially even North America. Just because of that in our designers and our merchants and brand leadership are is looking at Europe in that way at this time as they think about styles, fit, skews, colors, etcetera.
Speaker 6
Great. Thank you and good luck.
Speaker 2
Thanks, Andrew.
Speaker 0
And we'll take our next question from Camilo Lyon with Canaccord Genuity.
Speaker 7
Good afternoon, guys. So let me ask a follow-up to Andrew's question, see if I can ask it a little different way. What prompted the comment about needing to improve sell through rates with RA? Was there a conversation that was had? Was that based on the initial reads on a few of their doors?
Was there something that worked in some stores that didn't work in others? If you could just elaborate what prompted that comment, because I think it's an interesting one to understand a little bit more of understanding that this is early in the season and more will be to come. But I'm just curious as to the prompting of that comment.
Speaker 2
Sure, Camilla. Thanks. The prompting of that comment really was just and I should say, let me preface this that that is not predicated on fall fourteen sell through, it's way too early to make any kind of comments on fall fourteen sell through. But what the catalyst for this has been the number of inquiries we've been getting from the investor community about how many doors we're in, what's our strategy with REI, we appear to be in less doors then previously or with fewer products that kind of thing. And so what we want to communicate is that for a major chain like REI to want to place a meaningful percentage of the apparel in a meaningful number of their stores, they need to see a higher sell through rate than they had in the first two seasons.
So with REI, we are in 27 stores, but that is with in that number of stores, a very small number of products. And we have or I think it's excuse me, 34 stores if you include sportswear, but we have focused on a much smaller number of doors to carry a more meaningful amount of the product where we can better support it, where they have a more technical customer base based upon their sales of gear and equipment and BD gear and equipment. We have a good a very strong presence at their flagship store in Seattle and of course online, pleased with that. And we're working with them to build sell through there this fall and depending on how that goes, we'll play a material role in how we grow the business each season with REI. So that's again, what we wanted to do is communicate to the street just how we're working with REI.
We do have more dollars within this fall than last fall in a smaller number of doors and concentrated because we believe that's a better strategy to build higher sell through.
Speaker 7
Okay. So they're still committed to expanding the brand and the apparel category with you?
Speaker 2
So you're asking two questions. They are committed to the brand. We're doing all sorts of great things with them with the gear and equipment that is very exciting that we can talk about in future calls. And on the apparel, as I shared with you, they wrote more dollars with us this fall than they did in fall twenty thirteen. But together, we have structured to deploy it differently with the goal of getting a higher level of sell through, which we both feel we need to continue to build the business with REI.
Speaker 7
Got it. Thanks for the color. That's helpful. And then as you think about this is a longer term question, Peter. As you think about the learnings you've had in apparel over the last twelve to eighteen months, does anything that you've learned alter or change the way you view the long term opportunity initially when the goal was set of reaching $250,000,000 by 2020?
Obviously, that had been without any sort of sell through data or even product to speak of. You now have product, you have a little bit of sell through data. Obviously, thrust of that is coming now. Is it too soon to comment on any sort of alterations to that outlook? Or can you opine on how that should transpire?
Speaker 2
Yes, that's a great question, Camilo. And I think probably the way to say it is, when Andrew was asking about sell through, I had made the comment and you followed us very closely, so you know this, this season is really the first season of a material collection of men's more than just niche product, including some really beautiful, well fitted, I think unique women's product. So this is really season one. And I should say that it's early to make more conclusive statements about that question of what size and scale in what year, but Jan is saying, we do remain cautiously optimistic. We believe in this marketplace.
We believe in our brand. We have a great brand franchise, but we have a lot of work here to do. And I think what we really need to see is to get through this winter, see how well the women's apparel sells through, the new men's collection sell through, see how our marketing initiatives that we're very excited about and you've seen some of those, not all of them resonate with customers, see how D2C goes. And I think as the season wraps up, as Zena who has got decades worth of apparel experience completes her getting up to speed with this or analysis of it, working with the global team. I think then in March, we'll be able to make some more definitive comments about the cadence of growth, what size and in what years, but to make more comment at this point in time other than we believe in what we're doing and we're waiting to see now how the marketplace responds to this and we believe in the beauty of our product.
I don't really have more to say on that specific goal other than to say we will certainly comment on it and Xeno will specifically come March when we've had enough time to digest our first season in the market with our women's line and a meaningful collection of the men's and a more material marketing program that was designed between Tim and our new Global Director, VP of Marketing, Nicholas Burling.
Speaker 7
Great. And just finally a question for Aaron, clarification question. So it sounds like the guidance expectation for the back half has remained the same except for a greater impact from FX to the sales line of about 1,000,000 point dollars Is that correct?
Speaker 3
Yes. So we are sticking with the guidance provided, wanted to highlight that we have seen some negative impacts related to FX as you just stated of about $1,600,000
Speaker 7
Okay. So that guidance then is exclusive of that FX impact?
Speaker 3
So when we provided the guidance right, we provided it without knowing how the currencies would change. And so we're not coming off our guidance as of right now, but wanted to highlight that from that point in time that we provided that initial guidance in August, we have seen some declines in the overall forecast related to the impact of FX.
Speaker 7
Okay. Could there be at once orders that would absorb some of that FX negative impact?
Speaker 3
Yes. Mean, it's obviously Q4 is very dependent on the weather and it's very ASAP driven. And so we'll see how it plays out. But just once again wanted to highlight that although we are not coming off our guidance, we wanted to let the Street know and let the analytical community know that FX has had a negative impact on those projections since we communicated them in August.
Speaker 7
Okay. And is there any margin impact guidance that you'd like to offer from FX?
Speaker 3
Is so this is why we're also staying consistent with our margin guidance previously provided as well.
Speaker 7
Thanks very much and good luck guys.
Speaker 2
Camilo, I'm going add one more comment just to what I said earlier. I think I want to just add that is thinking about this is that for Black Diamond, we are absolutely focused first in quality versus quantity. We want to build this apparel business with a really strong foundation and we want to build it with the same integrity that we've built all the BD categories. So that's what we're really focused on doing at this time. And I think come March, we'll be able to give that some additional insight on the cadence of growth.
Speaker 7
Great. Thanks for the color, Peter. Good luck. Yes. Thanks.
Speaker 0
And we'll take our next question from Jim Duffy with Stifel.
Speaker 6
Thanks. Good afternoon, everyone.
Speaker 8
A couple of questions. Can you speak in more detail around the SKU reduction? To be clear, is spring twenty fifteen the first season where this begins to impact the numbers? And will the reduction in SKUs be concentrated anymore in either the spring or the winter season?
Speaker 2
Hey, Jim, it's Peter. Yes, spring twenty fifteen is where the first few reductions are hitting and they go through the fall. In spring, you'll see the reductions in climb and mountain and then in the fall it's mountain and ski. And I don't think there is a meaningful concentration, maybe a little bit more to yes, I guess a little bit more to the fall slightly in the fall than in the spring. So it would take the twelve months to roll through and it represents a little over $6,000,000 of revenue, some of which we certainly believe will make up by directing our customers to other products.
Speaker 8
Very helpful. Thanks. And then Aaron, the inventory and receivables, can you give some numbers for year to year comparison?
Speaker 3
Yes. So Just one second.
Speaker 8
Sure.
Speaker 3
So year over year, our inventory increased about $10,700,000 or 19%. Now the inventory number from the prior year did include Gregory as well. And so that's obviously not a real apple to apple comparison, but it is as we all know Gregory's inventory also was fairly modest to the overall pie of the inventory on hand. And then also accounts receivable is about flat year over year.
Speaker 8
Okay, great. And then last question kind of relates to the implied fourth quarter guidance. To what extent is that dependent on ASAP orders versus orders that you have in hand or have visibility to at the moment? Just trying to get a feel for current visibility versus the ASAP dependence.
Speaker 2
Yes. There's a substantial without giving you exact number. We are much more dependent upon ASAPs
Speaker 6
in
Speaker 2
the fourth quarter than we are in the third quarter. And we also have second orders with many retailers, which at the end of the day haven't been in this a long time. Those are really backup orders, meaning it's something that our retail partners believe they will really need and that's why they ordered it. But should there be a dearth of cold and snow and customers coming into their door, they will cancel and we would probably allow them work with them on that rather than have them be stuck with inventory that would be hard for them to pay. So yes, we are more dependent in the fourth quarter on ASAP and some cooperation from the marketplaces.
Speaker 8
Thanks for that guys. I'll leave it at that.
Speaker 2
Okay. Thanks, Jim. And
Speaker 0
we'll take our next question from Sean McGowan with Needham and Company.
Speaker 6
Hi, guys. Thank you. I apologize for asking me to go back over something. Was just in the middle of getting out of the cab when you made the comment regarding staying in REI. Peter, were you saying that you needed to see an increase in sell through to maintain the presence that you had there or to increase it?
Speaker 2
To increase it.
Speaker 6
Okay. Thank you for clarifying. I just wanted to go back to some comments you made earlier in the year regarding expected growth for POC overall and for apparel. I think you said at the end of the last call that you're still on track to see a tripling in apparel volume this year and that POC was still tracking to the kind of growth that was implied or in that ballpark in the aggressive earn out provisions that were put in place at the time of that acquisition. Is that still the case?
Speaker 2
So you're asking two questions. Let's split them up. The first one is, are we tracking to see the roughly the tripling of apparel revenue sales in 2014? And the answer is yes. To your second question, I do not believe we said that POC was tracking to hit the aggressive all the aggressive goals in their LTIP.
I think what we said was that POC sales growth was tracking roughly in line with what it had been doing at the time we acquired it, was in the middle modest middle double digit rate.
Speaker 6
Okay. Thanks. All right. Thank you very much. That's it.
And
Speaker 0
we'll take our next question from John O'Neill with Imperial Capital.
Speaker 6
Thank you. I thought that the quarter looks good compared to my expectations. So with your maintaining guidance, just trying to get a better feel for difference between third and fourth quarter here. And to follow-up on the ASAP order question, can you give us maybe order of magnitude, how much ASAP orders comprise the fourth quarter? And then with respect to the apparel business, does most of that ship in the third quarter?
Or is there still a large part of the apparel business that could be ASAP ordered? I guess another way, demand is really strong, do you have enough product that you can ship in, in the fourth quarter to meet that?
Speaker 2
Okay. So three questions there. The first one is, is demand is really strong, do we have enough product to ship in there? Everything is within reason. And I guess the question is, what's reason?
But we would be happy to sell through and everything. And if we left people hungry in certain categories, that's probably good training, right, to get them to write more. So we're comfortable with our inventory levels. Secondly, the third quarter in this industry, whether you're in hard goods or you're in soft goods is where the majority of your pre seasons go because the orders you have in the fourth quarter are backup orders that might be canceled and you are more dependent on ASAP. I'm not going to break out the percentages, but the point that we're just trying to make here is a combination of a greater dependence on ASAP and backup orders to retailers who as we know if will be anxious to work with one to bring those down if they don't get the traffic because there's no snow, no cold, that sort of thing.
So I mean, that's something that's not unusual to us. We've been at this for many decades. It's not new to the industry. But all of us who operate here in the vendor side in the winter business have more exposure in the fourth quarter. That's just the way the game is played.
Speaker 6
And with respect to sales and marketing, you have a $5,000,000 variance with one quarter less than the year. Can you maybe talk about what your SG and A plans are for this fourth quarter? Is some of that targeted towards trying to elevate the brand and move to the apparel or have you not decided how much you're going to spend yet?
Speaker 2
I'm missing the question. Do we have we determined how much we're going to spend on marketing and selling apparel in the fourth quarter? Is that the question?
Speaker 6
Yes, because it looks like in your SG and A, you're still guiding to like a $5,000,000 range.
Speaker 2
We are as I was just sharing a moment ago, we are in the first full season, this is the first season of a reasonably full apparel collection and it's our first season with women's. And we're very proud of the product. We like the feedback we're receiving on it. And to make the world aware of it as we learned last fall with our limited launch was that the season ended and many people didn't even know we had launched apparel. And so it is really crucial to support the women's launch, the broader launch of a more complete men's collection within appropriately robust marketing spend to elevate the brand as a brand that is synonymous with technical, innovative, beautifully designed men's and women's apparel.
And I think we believe here if we were to take our foot off the modest pedal that it's on, it would not be to the benefit of any of our shareholders because we would not be firing on all cylinders as we need to continue to drive the growth of apparel to make it successful, to have it truly a leading global business is what we intend to do in the coming years. So we're not going to back off of what we had intended to do at this point.
Speaker 6
Thank you.
Speaker 0
And we'll take our next question from Mark Smith with Bettle and Company.
Speaker 9
Hi guys. Real quick, now with Xena on board and good cash on hand, can you give us an update on your plans for a retail store strategy going forward?
Speaker 2
Hi, Mark. This is Peter. And we've talked a bit about an omni channel strategy. And in March after Zenith had enough time here to really get up to speed in all aspects of the business, have time to work with all the players and time to really develop strategy, we'll talk about that in some kind of detail. What I will say at this moment is that our focus relative to omni channel is first and foremost, it's a marketing focus to improve content.
And we really believe that that's the underpinning of omni channel. And it's about really great digital and in store storytelling that supports customer engagement socially, as well as for commerce in any channel where BD is sold, whether it's a store of ours, online or at our specialty partners. And so right now what we are focused first and foremost on this winter is working to support our specialty partners to make sure that they know we are committed to their success with our apparel as they are. And then come spring March, you'll hear more from Zener about our multi channel strategy.
Speaker 9
Okay. And then I'm going to see if we can dig a little deeper on revenue numbers here of the 24% growth. Can you give us more insight or quantify the biggest contributors there or maybe specifically talk about kind of core Black Diamond hard goods and whether that business is up or down and how you feel about that business currently?
Speaker 2
We don't break out our sales by brands. But what I will say and reiterate from what we just shared at the beginning of this call is that what has been the really material drivers to the growth in the third quarter first and foremost has been a combination of Black Diamond Apparel and POC.
Speaker 9
Okay. Thank you.
Speaker 0
At this time, this concludes our question and answer session. I would now like to turn the call back to Mr. Metcalf for closing remarks.
Speaker 2
All right. Thanks, Whitney. Would like to thank everyone for listening to today's call and we look forward to speaking with you when we report our fourth quarter results, which we expect to do in early March of twenty fifteen. Again, thanks for joining us.
Speaker 0
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.