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Black Diamond (NASDAQ:BDE)

Q3 2013 Earnings Call

November 04, 2013 5:00 pm ET

Executives

Peter R. Metcalf - Co-Founder, Chief Executive Officer, President and Director

Aaron Kuehne - Chief Financial Officer, Principal Accounting Officer, Vice President of Finance, Treasurer and Secretary

James R. Palczynski - Senior Managing Director

Analysts

Camilo R. Lyon - Canaccord Genuity, Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Mark E. Smith - Feltl and Company, Inc., Research Division

Andrew Burns - D.A. Davidson & Co., Research Division

Sean P. McGowan - Needham & Company, LLC, Research Division

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Black Diamond's financial results for the third quarter ended September 30, 2013.

Joining us today are Black Diamond's President and CEO, Mr. Peter Metcalf; and the company's CFO, Mr. Aaron Kuehne. Following their remarks, we'll open the call for your questions.

Before we go further, I would like to take a moment to read the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Please note that during this conference call, the company may use words such as appears, anticipates, believes, plans, expects, intends, future and similar expressions, which constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on the company's expectations and beliefs concerning future events impacting the company and, therefore, involve a number of risks and uncertainties. The company cautions you that forward-looking statements are not guarantees, and that actual results could differ materially from those expressed or implied in the forward-looking statements. Potential risks and uncertainties that could cause the actual results of operations or financial condition of the company to differ materially from those expressed or implied by forward-looking statements used in this conference call include, but are not limited to, the overall level of consumer spending on the company's products; general economic conditions and other factors affecting consumer confidence; disruption and volatility in the global capital and credit markets; the financial strength of the company's customers; the company's ability to implement its growth strategy; the company's ability to successfully integrate and grow acquisitions; the company's exposure to product liability or product warranty claims and other loss contingencies; the stability of the company's manufacturing facilities and foreign suppliers; the company's ability to protect trademarks and other intellectual property rights; fluctuations in the price, availability and quality of raw materials and contracted products; foreign currency fluctuations; company's ability to utilize its net operating loss carryforwards; and legal, regulatory, political and economic risks in international markets.

More information on potential factors that could affect the company's financial results is included from time to time in the company's public reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

All forward-looking statements included in this conference call are based upon information available to the company as of the date in this conference call and speak only as the date hereof. The company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date of this conference call.

I would like to remind everyone that this call will be available for replay through November 18, 2013, starting at 8:00 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release, as well as available on the company's website at www.blackdiamond-inc.com. Any redistribution, retransmission or rebroadcast of this call in any way without the 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, Mr. Peter Metcalf. Sir, please go ahead.

Peter R. Metcalf

Thank you, Sheryl, and good afternoon to everyone. As you saw at the close of the market today, we issued a press release announcing our financial results for the third quarter ended September 30, 2013. Our third quarter results represent the first half of Black Diamond's fall/winter selling season, and they are consistent with our current expectations for the second half of 2013, as well as our preliminary review of 2014.

Sales during the quarter benefited from the September launch of Black Diamond apparel, which has generated an excellent response from our retail partners. This limited launch is now present in approximately 240 of our best retail doors and includes approximately 25 styles and 440 SKUs.

During the third quarter, we continued to realize the benefits of owning our own distribution in Japan, both through comparable sales growth and enhanced margins from selling direct.

In some product categories, third quarter sales were limited by both the timing of certain product shipments, which occurred in early October, as well as general early-season softness for hardgoods in the marketplace. This is consistent with reports that we have seen from some of the outdoor industry bellweathers, such as the VF and Columbia.

We also made a decision late in the quarter to recall PIEPS' Vector avalanche transceiver product. Recalls are not extraordinary in our industry, and from time to time, certain products may fail to adhere to the strict quality standards we instill at Black Diamond.

Excluding the financial impact of the recall, gross margins were also on track with our expectations for 2013.

Finally, as you may have seen this morning, after 7 months search, our Board of Directors promoted Aaron Kuehne to Chief Financial Officer. Aaron, as you all know, has served as an Interim CFO capacity for the past 7 months. He joined Black Diamond nearly 3 years ago as the Director of Financial Reporting before being promoted to Vice President of Finance. He has proven his commitment to our team and demonstrated himself as a highly effective leader in positions of increasing responsibility and oversight. Aaron has been instrumental in the development and execution of our global accounting, finance and treasury functions, including key strategic and financial initiatives, risk management and the integration of POC and PIEPS. Perhaps most importantly, Aaron knows our business well and can meaningfully influence the dynamics of our long-term strategies. So before I comment further, I'd like to congratulate Aaron on his well-deserved appointment and ask him to take us through some of the details of our financial results for the third quarter.

Following Aaron's comments, I will conclude our call with some more details on BD apparel and some strategic commentary before opening the call for questions. Aaron?

Aaron Kuehne

Thanks, Peter, and good afternoon, everyone. Black Diamond's consolidated total sales in the third quarter of 2013 increased 8% to $52.8 million compared to $48.7 million during the same year-ago quarter. The increase was primarily attributed to the launch of Black Diamond apparel, as well as the increase in Gregory sales in Japan, due to the transition of the distribution assets from A&F. As Peter mentioned, these results were partially offset by a shift in timing of product shipments to early October and general retailer caution. Almost every quarter, foreign exchange markets contribute some level of volatility to Black Diamond's financial results due to activities across multiple currencies, primarily the U.S. dollar, the euro, the yen and Swiss franc. Due to the net strengthening of foreign currencies against the U.S. dollar, sales were impacted by approximately 30 basis points during the third quarter.

Gross margin in the third quarter of 2013 was 37.3% compared to 37.9% in the same period last year. Gross profit in the third quarter of 2013 included a $1.5 million charge for our PIEPS product recall, of which $1.1 million was noncash and includes 100% of existing inventory. Excluding this amount, adjusted gross margin improved 10 basis points to 40.2% compared to adjusted gross margin of 40.1% from the year-ago quarter. The increase in adjusted gross margin was primarily due to a favorable mix of higher-margin products, such as Black Diamond apparel and more profitable channel distribution, such as Japan.

Several factors also negatively impacted adjusted gross margin. These factors included a 110 basis point impact from discontinued merchandise, or DM, as well as approximately 120 basis points due to production variances and inventory adjustments associated with product season changes. This was partially offset by a 30 basis point increase from total FX. Taken together, these factors offset our gross margins by approximately 200 basis points.

Overall, we were very pleased to see our investments in the higher-margin products result in a 10 basis points increase in overall adjusted gross margins during the third quarter after the outlined negative impacts of 4.9%. During the third quarter of 2013, we held firm on operating expenses despite ongoing investments in our apparel infrastructure and other growth-related initiatives, as well as costs associated with some integration expenses for POC and PIEPS. SG&A, excluding restructuring, merger and integration and transaction costs in the quarter was $21 million compared to $16.3 million in the year-ago quarter and well within our budgeted range.

Last year, we initiated a plan to approve working capital, sourcing in inventory, and we continue to be very pleased with the results. While revenue during the first 9 months of 2013 grew 12%, total inventory actually decreased by approximately $3.5 million or 6% to $57.2 million from $60.7 million at the end of 2012. Excluding PIEPS and BD Japan, which we did not have in the year-ago period, inventory decreased approximately $11 million or 17% as of September 30, 2013, compared to the same period in 2012.

At September 30, 2013, we had $14.4 million outstanding on our $30 million revolving credit line with Zions Bank compared to $20 million at December 31, 2012. Total debt stood at $46 million, which includes $16.8 million of 5% subordinated notes due in 2017. This compares to total debt of $40.5 million at December 31, 2012.

At this time, our third quarter results are consistent with our expectations for the second half of 2013 and preliminary view of 2014. We are currently in the midst of our 2014 budgeting cycle and plan to update investors on our outlook at a customary time during the first quarter of 2014. As a reminder, we are on the record with a limited 2014 outlook for a 20% sales increase, improved gross margins from a better mix of apparel and POC and the beginning of accelerating profitability from better operating leverage in the business.

This completes the financial portion of our presentation. Now, I'll turn the call back over to Peter. Peter?

Peter R. Metcalf

Thanks, Aaron. As I said in my opening remarks, we are halfway through our fall/winter selling season and are generally pleased with our financial results, acknowledging what appears to be a shift to later season deliveries. Ultimately, our second half is always very weather-dependent. And while this winter initially appears more normal than last year, it is still too early to know what sort of winter temperatures really exist and when or how much snow will fall in the U.S. and Europe or what kind of ASAP order volumes we will actually realize. In spite of this normal seasonal uncertainty, we are deep in 2014 budgeting.

POC is gearing up for bold new launch of retail as its spring 2014 collection that takes us into the road category, with a scarcity strategy similar to BD apparel. Therefore, we would expect its impact in sales to be more meaningful, as the collection builds into spring '15. However, this is cycling's largest and most vibrant niche, and POC expansion into this has been part of its growth strategy for many years.

During the third quarter, POC unveiled the road collection at Eurobike in Friedrichshafen and at the Interbike Trade Show in Las Vegas. Also during the quarter, we came to an agreement to be a 2014 helmet sponsor of a major Tour de France team. We view this marketing endorsement as absolutely critical to building a meaningful brand awareness for POC.

In October, Black Diamond unveiled a new Jetforce technology to create fanfare. Jetforce is an innovative new avalanche airbag-equipped backpack that runs in a motor and solves many of the issues inherent with similar packs in the market that are triggered by compressed air. We are particularly excited to be planning to launch Jetforce technology in a very creative manager -- a very creative manner with 3 of our brands, POC, PIEPS and Black Diamond, allowing each of our snow sports brands to take advantage of cobranding with Jetforce technology.

Moving on to the PIEPS product recall. We made this decision late in the third quarter to recall PIEPS' Vector avalanche transceiver before a significant amount of product shipped to retail and hopefully before any meaningful quantities could reach the field. While the product is innovative and has great technical elements, we made the determination that it is not reliable enough to meet Black Diamond's uncompromising quality standards. We are optimistic that we might be able to recover all or portion of this loss and are still evaluating all of our alternatives in this regard. Either way, the recall decision is consistent with our mission in our brand and in the best interest of our community of users.

What I think our community of users is most excited about is that the dream of buying BD apparel became a reality toward the end of the third quarter. This limited launch began shipping approximately September 1 and encompasses approximately 25 styles and 440 SKUs. The collection is focused in backcountry skiing and alpinism and includes softshell, insulation and fleece products. The line is now in the shelves in approximately 240 of our best retail doors and ranges in price from $119 to $399. Although it is still early in the launch, we are very gratified by our retailers' response, and inventory appears to be very lean. It also is very exciting for us to see people in the streets and out in the mountain wearing Black Diamond brand apparel.

Our spring 2014 apparel line has sold extremely well at wholesale and have sold out on a booking basis, which is consistent with our scarcity strategy. Spring line is designed around alpine and crag climbing and includes shirts, hoodies and lightweight synthetic outerwear. The collection builds a line with approximately 50 styles and 608 SKUs, and will be available in approximately 400 retail doors, retailing between $32 and $189.

The designs for fall '14 are complete and initial showings have been very positive. Fall '14 represents the introduction of women's apparel, and we will start with an outerwear launch. In addition, we will introduce men's hardshell and down outerwear. This line raises our total expected commitment to 119 styles and 1,945 SKUs, and we expect it to be sold through approximately 800 retail doors.

In Spring '15, we expect to launch women's rock climbing apparel; and in fall '15, we expect to includes skiwear for both men and women. Currently in spring '16, we expect to expand our climbing and rainwear gear.

We could not be more proud of our apparel launch. We are also sensitive to the execution and strategic challenges ahead. With the apparel launch behind us, we are more committed than ever to our long-term vision, and we are in the midst of a significant strategic pivot in several important ways.

First, I will point your attention to the significant inventory reductions, Aaron referenced, this year as an earlier result of this pivot. Secondly, we are acknowledging that the Black Diamond POC brands are our fastest-growing assets, and they are worthy of investment to accelerate our organic growth. More specifically, we believe that our Black Diamond apparel and POC lifestyle business display extraordinary growth potential. And over time, they are likely our most efficient and cost-effective use of capital.

Thirdly, during the third quarter, with the help of a leading consulting firm, we conducted a global profitability study across all of our product categories and geographies. We are still integrating some of the conclusions into our long-range thinking about the scale of certain categories, as well as the depth and breadth of certain categories and geographies. We are developing a better sense of the cost of a single SKU and expect to use this work to drive better marginal profitability in the out years and enhance our working capital.

Fourthly, to help us achieve this strategic pivot, we've retained an executive search firm to find a senior executive leadership candidate that would augment our strategic capabilities and lifestyle brand management and general management, specifically in the areas of apparel, retail and e-commerce. We don't know how long this process will take, but we want to invest in and expand our leadership capability in these areas.

Finally, as you look into the future, into 2015 and beyond, we understand and believe that retail and e-commerce will likely drive additional investment. We continue to believe that we can fund these initiatives from our existing balance sheet and from our existing operations. At this time, we have no plans to access the capital markets, and we will continue to explore the waterfront of strategic alternatives to facilitate the acceleration of our investment for the future. Ultimately, we expect this rationalization process and product mix to manifest itself into healthy organic growth and improve margins in the out years.

We thank you, and at this time, I'd like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Camilo Lyon with Canaccord Genuity.

Camilo R. Lyon - Canaccord Genuity, Research Division

I wanted to delve into a couple of things on the quarter, and then just some longer-term questions. First, Aaron, could you talk about what -- could you quantify what the shift was from Q3 to Q4?

Aaron Kuehne

So what we'll say about the shift related to Q3 to Q4 is that it was significant. And similar to how we don't break out a variety of our -- the different brands of segments of the business, we're not going to break out how much that shift was, but it definitely was significant.

Camilo R. Lyon - Canaccord Genuity, Research Division

Well, if it's significant, don't you think it's worthy of sharing?

Aaron Kuehne

We'll just say that at this time no. We'll just say it was significant, but this is why, once again, just to remind everyone on the phone call as well, is that this is why we view our business in 2 seasons, not just in 4 quarters. And so when we measure the overall success of our fall/winter season, it only encompass the full 6 months, not just the 3 quarters or in Q3.

Camilo R. Lyon - Canaccord Genuity, Research Division

Okay. Then could you just update or provide any updates to the full year 2013 guidance, if there are any?

Aaron Kuehne

Yes. As mentioned in the script, we are -- we believe that the results in Q3 and how we think about the rest of the year is consistent with what we have already communicated back in -- at the end of our -- as part of our Q2 call.

Camilo R. Lyon - Canaccord Genuity, Research Division

So no change to the '13 guidance?

Aaron Kuehne

No.

Camilo R. Lyon - Canaccord Genuity, Research Division

Okay. And then, I guess, just on the apparel business, in thinking about the rapid pace of SKU proliferation and acceleration, does that cause you guys to think about a different or an accelerated time frame of reaching that $250 million annual sales goal by 2020?

Peter R. Metcalf

This is Peter. No, it's very much in line with the guidance that we've given, as we've mapped this out right from the very beginning. It's very much our belief that this is the level of SKU growth and category growth that we need to offer in order to achieve the time line that we have for growth. So -- but I will say this is that you will not see this acceleration in SKU growth in additional seasons. It's going to slow up. This is the big jump up relative to the growth in SKUs, and it's also probably one of the larger jump-ups in growth in apparel as a percentage.

Camilo R. Lyon - Canaccord Genuity, Research Division

And maybe, Peter, if you could just shed some light on discussions that your retailer -- your retail partners have had with you, those that don't have the apparel line yet and maybe what are the discussions that you're having with them with respect to their demand for the products, given some of the reads that -- the retailers that do have that products in-store have communicated?

Peter R. Metcalf

We have, both in New York and in this transcript here, are indicating that we believe right now that we will be for, fall '14, in 800 retail doors, which is a really large step-up from where we are at this point in time. It's over threefold. And right now, that was just updated with discussions with our global sales team, sales management team, both with our independent global distributors, Europe, Japan and North America. So the response that we're getting and showing in this line is such that the 800 figure is what we believe that is a very achievable number, and we feel good about that number, as a good number of doors to be in to achieve our sales -- the sales results that we're seeking for next year.

Camilo R. Lyon - Canaccord Genuity, Research Division

Okay. And then just finally, if I could, when you guys speak about pivoting and focusing on the POC and Black Diamond brands in the portfolio, we'd infer that there's some sort of potential for a disposition of assets at some point down the road.

Peter R. Metcalf

I think probably the best way to answer this, Camilo, is that -- let's look at it this way: 3.5 years ago, we stood up in front of the Wall Street having just gone public through a reverse merger and laid out a really bold vision as to where we were going to go over the next 3, 5, 7 plus years. And as we look at our business right now, 3.5 years into standing up in front of you and saying what we were going to achieve, at least internally, we look at it and go, "It's been an amazing 3.5 years." We have accomplished nearly everything that we said to you in the investor community that we were going to accomplish from the perspective of entering the apparel market. We have delivered fall '14 -- fall '13 to really great accolades. We've raised the brand profile substantially. We've sold in spring '14. We are in the process now of showing and selling fall '14. That's all going as to plan. We reorganized BD from Black Diamond Equipment to BD, Inc. and brought on board Gregory, POC and PIEPS. We have just about completed the integration of all of those. We really invested heavily into our global IT MIS systems to integrate those businesses and to be able to run them much better. We opened up a ski factory in Asia, invested into our brands. We're really proud of what we've accomplished and where we are. And at this point, we, as a management team, a global management team, are looking out again now another 3.5 years to see where we're going, how we're going to continue to drive forward to that long-term vision that we laid out. And what we're saying here is as we look at that, we are gauging where there are needs for investment, what the proper levels of investment are. And one of the areas that we see is that investment in direct to -- our direct-to-consumer business is going to be a very important part of our business and very complementary to our wholesale business in the coming years, and we want to make sure that we have the wherewithal and resources if we decide to ramp that up in a relatively aggressive rate, if that's what we so decide. And so what we're committed to doing as part of our strategic planning here, and what we're doing now, which is the way we have consistently run this business, is to really look at the full waterfront of alternatives that will best support our achievement for the vision that we laid out and communicated to you and the rest of the Wall Street 3.5 years ago and have consistently both communicated over the last 3.5 years and, I think, very consistently in a very measured way continue to achieve. And so I think that's probably the best way to sum it up at this point in time.

Operator

Our next question comes from the line of Sean Naughton with Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Hoping we could just talk a little bit about the gross margin line here. I'm surprised that there was not some better gross margins given the favorable sales mix impacts from POC and Gregory coming back in-house, from Japan and also launching apparel because I would have thought there would have been a higher gross margin than the traditional hardgoods business. Are there specific things we can point out here that maybe why even on an adjusted basis we didn't see more than 10 basis points of expansion?

Aaron Kuehne

So Sean, this is Aaron, and good question. So overall, when you think about -- as we described or outlined in the script is that one, we were obviously impacted by the charge with the PIEPS recall but -- and that gets us up to the adjusted gross margin of 40.2%. But then we had some additional takes of, call it, 200 basis points that also had a negative impact. When you think about the overall business during Q3, we definitely had some good results coming out of Japan, out of POC and out of apparel that were margin accretive. It's just that some of these other takes offset some of the benefit that we obtain from those parts of the business.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Is there any way we can -- you can describe some of the discontinued operations or product production variances that you were describing? I mean, what are those specifically? Are those apparel related? Is that -- I mean, what is the -- what are these line items we're describing?

Aaron Kuehne

Yes. Okay, so for DM, it primarily relates to winter seasonal product that had a changeover in season, and a lot of this is carryover from the prior year. We're still early on in the actual selling season of current year product, and so it's none of that. It's just carryover from prior year, which primarily is related to winter seasonal product. And then also as seasons change in product categories and also as we continue to ramp up some parts of our in-house manufacturing, we have seen some modest adjustments related to inventory in that, just make sure that we've got those properly valued, but then also just the continued ramp-up of our operations. Sorry, Sean, none of it is in line product, no.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. And then, I guess, I'm just trying to clarify as well some of the different comments you made in the release and then during the presentation today, just trying to make sure we're all on the same page. Just you had an 8% growth rate in the third quarter and then you talked about that being consistent with your current second half expectations and then also into 2014. So I'm just curious, is that leading us to believe that we should be thinking about a lower sales growth rate in 2014? Because then you mentioned something about the preliminary guidance before. So just trying to get my hands around that.

Peter R. Metcalf

Yes. Sean, this is Peter. Yes, we've always thought about Black Diamond and as well Gregory and POC as a 2-season business. This industry operates as a -- on a seasonal basis, not on a quarterly basis. And the industry really doesn't recognize the difference between a September 30 and October 1 in line. And we clearly have had a situation here where quite a few significant retailers are managing their inventories very tightly and many have pushed what had been previously orders, and this is not -- orders that had come in the third quarter into the fourth quarter. So when we look at this, what gives us our confidence about our business is simply that we believe here we have a timing shift or a timing issue between the third and fourth quarters. It's not that we have an overall business challenge. And that is why we are maintaining the level of direction that we're giving for 2014, our guidance. We are very upbeat about our spring bookings. We are upbeat about apparel. We're upbeat about POC. We're upbeat about the innovative new products that we've launched at the August trade -- July and August trade shows. And so we believe we've got a bit of a timing issue here. It's related to just primarily retailers taking goods a bit later than they traditionally have and consumers buying a little bit later more in a just-in-time fashion.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. So there's no change then based on your initial view for 2014 at this point in time, knowing full well the portfolio could change or there could be changes in the environment or the ordering patterns, but at this point in time you guys still feel good about that initial guidance for '14?

Peter R. Metcalf

Yes, we do.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. And then just lastly, on the -- just the apparel at retail, I think when we were talking at this time last year, it was going to be supported with some pretty strong point-of-sale displays, maybe even hangers and fixture packagings at retail. Just not seeing a ton of that out there. Just wondering if there's going to be some -- is it a timing issue? Or are you trying to make sure that you get all of it out at the same time? Or are you happy with the point-of-sale displays that you have out there at retail for the apparel?

Peter R. Metcalf

Yes. What we're really -- I'll tell you what we're psyched about and then what we want to do more of. So what we really are excited about are the window displays that we have done. Those have really helped raise the profile of the BD brand at retail in a way that I think few other brands have been able to do with an apparel launch. And we've had those in key retail stores in the U.S. We've done them in South America. We've done them in Europe. We've done them in Asia. And I think they're really, really powerful. And that is one of the a more significant places that we funneled our in-store marketing dollars because we really liked the way that was looking and we appreciated the response we're getting from retailers who were willing to commit to do that, very high profile. And rather than do any small number of expensive racks, we decided to put our money towards a combination of the window displays, in-store events that we ran throughout North America, some in Europe, where we invited VIP customers, staffs in for special clinics, special evenings, food, wine, et cetera, so they could meet members of the BD team firsthand, talk to us, learn more about it, get a small presentation with videos, et cetera. And then there were some hangers that went with the apparel as well. And in addition to that was the most robust expensive print and online marketing media push in the history of this company by leaps and bounds. So I don't think we've quite hit the sort of the peak of all of that. But relative to the window displays that have been put up around the world, they are all in place. Relative to the opening event we're doing in partnership with key retailers in Europe and North America, those are now absolutely completed. And then relative to online marketing and print media, we're not done. That is still ongoing, and it's about to reach its peak at this point in time. And then, I guess, to your final question, are we happy with that? I am really pleased with how much bang we got out of the dollars that we invested in this, which was the largest push in our history. I would love to have it been tenfold larger. That's what Tim Bantle would have liked to have seen, too. But I think it was very powerful. And next year, we're going to maintain that kind of cadence, that level of investment, up it perhaps a little bit. But we'll be building off at the investments that we made this year and keep going from there.

Operator

Our next question comes from the line of Joe Altobello with Oppenheimer & Co.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

I apologize from beating a dead horse here, but I just want to make sure I understand exactly what you're saying, Peter, with regard to the guidance because you have sales up 8 in the third quarter. The second half guidance was up 17 to 22. And if I understand what you're saying correctly, but for this sale shift or the timing shift, you would have been within that 17 to 22 in the third quarter.

Peter R. Metcalf

Joe, hi, this is Peter. I don't think we've ever, to the best of my knowledge, given out guidance on a quarter-to-quarter basis, because we just don't think of our business like that. We think about it as a 2-season business. So relative to the -- we've given basically year, full year guidance, and we've given seasonal guidance. And so to your question with the updated guidance that we gave a few months ago, if your question is are we still sticking with that updated guidance for the full year in the second half, the answer is yes. We believe that, that guidance is still accurate with some -- dependent on a bit of, as I said, you have winter and then people walk into the store, and so we do believe it's still achievable.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Okay, let me ask it maybe a slightly different way. If look at the fourth quarter, just [indiscernible] the low end of your guidance. You've got to 28% growth. So does your guidance assume an acceleration in the base business, or is it a continuation of current trends in the base business, plus the sale shift in 4Q?

Peter R. Metcalf

I'm not 100% sure I understood the question. If the question is, do we expect to see acceleration in existing categories, an acceleration in some of the new categories in sales, is that the question?

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Yes, no, I guess, what's baked into your fourth quarter? Because obviously, it implies, even if you get to the low-end of your full year guidance, you've got to do 28% sales growth in the fourth quarter and 8% in 3Q, right?

Peter R. Metcalf

That's right.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Okay. So you're assuming some acceleration in the base business?

Peter R. Metcalf

Yes. I mean, we really feel that -- I mean, if you look at the -- you read the same reports that we do, and we felt that the third quarter was impacted really in 3 ways: One, the increasing tightness that was retailers running inventory to a more just-in-time positioning; secondly, the shutdown of the federal government on and the impact that had them shutting down national parks, national forest campgrounds, national monument really did impact business for many of our retailers, certainly in the West. And I can speak to that firsthand, having been down to Zion the day before the park reopened; and thirdly, there' just been a little bit of a headwind there at retail with customers coming into stores, and we attribute some of that to the just-in-time mentality when we juxtapose that against good user participation numbers, the growing awareness that these activities have in the media and in the public in general. And the fact, that winter is upon us, and we have inventory here. So all these reasons and strong bookings for November, December give us the confidence, the cautious confidence we have that we believe our guidance is still valid.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Okay, that's a very good color. I appreciate that. And then, just kind of moving along in terms of investments that you alluded to earlier to help drive future growth. You guys have made a fair amount of investments already, I guess, the past 2 or 3 years in a number of areas. I would have assumed that we'll start to see these winding down. So are these incremental to what you're -- to what you've already done? And does that change your outlook on SG&A for next year? Because I think in the past, you talked about maybe $10 million to $12 million of incremental SG&A in 2014.

Peter R. Metcalf

Let me address that, Joe, and then I'll let Aaron jump in. And yes, we were using the term here now, pivot, and it's another way to scintillantly and articulately capture the messaging that we have been giving for over a year, probably 2 years that we're going through a major investment phase into acquisitions, integrations, putting in place a much more robust globally integrated operating platform investing into apparel with no sales or revenue, investing into POC into new categories. And we absolutely do believe now that -- more than believe, our strategy, our plans that we'll be talking about early next year, indicate that we can now begin this pivot, which is we do not need to make the level of additional investments into our global operating platforms, our MIS, a whole array of areas that we had to do to get us to this point. We believe that we are now, as part of this pivot, moving into higher operating profits, and that will continue. And then what we're also saying is that if we look further into the future, that one area of additional investment that may be significant is -- relates to where we want to go with direct-to-consumer. And what I can say about that is that we definitely believe that we need to develop another distribution channel, that is very synergistic to and complementary to our wholesale business and our premium positioning. And that is something we're going to work on, and we have some ideas on that. And we will develop that. But at this point, it is -- it could well be that if -- within the medium-term future, that will require additional investment.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Okay, in terms of 2014 specifically on SG&A?

Peter R. Metcalf

No, I didn't say 2014. I mean, right now, where we are working on a 2014 is to deliver on this pivot and what we have been communicating, which is show that we can produce higher operating margins, higher operating profit as we come out of this period of significant investment in our brands, into our operating platform, into our systems and that sort of thing.

Operator

Our next question comes from the line of Jim Duffy with Stifel, Nicolaus.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Aaron, congratulations on your promotion. I'll have a few questions for you, but I wanted to start out with Peter. Peter, the role you have in mind for the new executive that you're searching for to help manage this strategic pivot, what type of skill sets that you see is appropriate? And then related to that, Peter, when you were recruiting this executive, do you view that you may be recruiting your successor at some point? Is that how you're thinking about it?

James R. Palczynski

Yes. This is Jim, thanks for the question. I tell you, how I'm thinking about it is that we have a senior management team here that has been going at a full-out sprint in an ultra marathon. And you know many of these people because you've been in many of the events and gotten to know them very well. It's a stellar team of incredibly, I think, competent, committed individuals who are quite diversified. There's a lot they can do. But the one thing they can't do is go without sleep completely. And as we look at the growth opportunities in front of us, which I include the continued growth of apparel, the opportunities for direct-to-consumer and retail, and that's not just for the Black Diamond brand per se. I mean, POC, as you know, has a store in Chamonix. POC has some interesting opportunities in front of it. There's no lack of opportunities in need. But with the team we have, they are deeply committed and skilled, there's a finite number of hours they can work. And as we look at where we're going, we could just benefit from adding one more senior executive with some real experience in the world of the global marketplace with direct-to-consumer, retail, apparel and those skills because there isn't a lot of depth there within BD in some of those areas. So that is something that we would benefit from. Relative to myself, I am absolutely committed to this company. I'm excited and passionate about it today as I was when I took over the reins nearly 32 years ago. That said, I look at the whole senior team as people who are potential, or many of them as potential successors to me when that time comes. But that time hasn't come. But certainly, I'd like to look at all the members of the senior team as potential candidates for that.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

That's great, thanks for your perspective on that. Aaron, jumping over to you, some good progress on the working capital, particularly the inventories. Can you speak about the receivables? Is there any changes that may have influenced that account on a year-to-year basis?

Aaron Kuehne

Yes, so good question. One thing that has been impacting us from the AR perspective is that specifically related to Japan and POC, they typically had a little bit longer dating or collection process than what we've historically had with the base business of BD and Gregory. And so as they continue to become more relevant, that does stretch out the DSO, if you will, a little bit for us. I mean, overall though, the health continues to be pretty solid. We continue to have minimal write-offs in AR. It's just a shift in timing of different parts of the business and how they've been able to collect or the timing of when they collect their receivables.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then Aaron, can you help us on the accounting, around the product recall? Specifically, what are the cash costs? What are the noncash costs? How do you reserve for recalls across the business, et cetera? That would be helpful.

Aaron Kuehne

Yes, for sure. So as, I guess, in general, as it relates to product recalls in general, as Peter mentioned, recalls are not extraordinary to our overall industry. However, fortunate enough that BD, we don't have too many of these in the history of our business. And so we usually take these on a one -- on a case-by-case situation. And we do have a general warranty reserve, but it's not worth diving into the details there. As it specifically relates to the $1.5 million charge, as described on this -- on the -- during the prepared remarks, $1.1 million of that was considered to be noncash. And what that represents is the write-off of existing inventory and also the full depreciation of certain tooling costs. The combination of those 2 equaled about $1.1 million. And so you're left with close to $400,000 related to the actual cost of the product recall in that, what we're offering to the end customers and dealers in terms of compensation for the recall of the product.

Operator

Our next question comes from the line of Dave King with Roth Capital Partners.

Unknown Analyst

This is actually [indiscernible] on for Dave King. I guess, first off, on the revenue growth, we were just wondering if you've already seen a meaningful acceleration in the first 5 weeks of Q4, or are you hoping that those will sort of pickup in the remainder of 2013?

Peter R. Metcalf

So let me just say this. Right now, we're pleased with how the fourth quarter is going at this point in time.

Unknown Analyst

Okay. And then if you could just remind us how you came up with the $250 million apparel revenue target.

Peter R. Metcalf

Yes, that was both a top-down and bottoms up ball we came up with. First, as we began thinking about apparel and hired -- begin to hire the team, we looked at where we wanted to be positioned as a specialty brand, a global specialty apparel brand and not a brand that was in the big boxes or department stores, looked at the relative size of the markets and it's specialty and we wanted to come up with a number that was ambitious, but at the same time, achievable and not over-the-top, and that would not communicate that we were -- had any plans to go outside of premium and specialty retailing. And then we came out at the other way, which was to look at our dealer base. As you know, we've got, with BD, right now, about 4,400 doors globally. If you add in then PIEPS and POC, you actually get to over 9,000 doors and began to develop the plan from a standpoint of categories and collections, that would be in the different size of tiered retailers around the world and built it up from how many collections and styles and what kind of revenue could they do with those collections and what did that look like while also adding an element of our own direct-to-consumer business that was not overly robust, but based upon our knowledge of the market and coming up with a percentage of that overall business that we, ourselves, wanted to control in a way that was both complementary to and synergistic to the wholesale numbers.

Unknown Analyst

Okay. So does that $250 million revenue target include or exclude the planned opening of retail stores?

Peter R. Metcalf

We had a component of that. It is made up of direct-to-consumer. And we didn't initially break it out between retail stores and a dot com business. But that number does include a component for direct-to-consumer.

Unknown Analyst

Okay. And then just lastly, how should we think about the pace of store openings, and then in what year do you think they might start to begin?

Peter R. Metcalf

I think the best way to answer that is to ask me that question 12 months from now. Because as I've shared, we are just in the process of really looking at that, and 2014 is -- what we have shared with the Wall Street is, will be the year that year that we develop the strategy in some level of detail, and then we'll be able to communicate it to you in a way that, I think, will meet your needs.

Operator

Our next question comes from the line of Mark Smith with Feltl and Company.

Mark E. Smith - Feltl and Company, Inc., Research Division

Aaron, congrats, and then I have a question for you. On your gross profit margin guidance that you guys gave, it sounds like you're reiterating that. I just want to make sure we're looking at that right with the adjustment on the recall.

Aaron Kuehne

Yes. So add back in the adjustment for the recall and yes, we're still in line.

Mark E. Smith - Feltl and Company, Inc., Research Division

Sure. Perfect. And then, can you guys talk about any product area or geographies that maybe we saw any weakness in during the quarter?

Aaron Kuehne

The what?

Mark E. Smith - Feltl and Company, Inc., Research Division

That you saw any weakness in, either products or different countries or geographies?

Peter R. Metcalf

That question is actually a little bit tougher, Mark, than you might think to answer because between the 4 brands that we have, plus apparel, depending on which band and which geography, I'd answer that somewhat differently. But I -- what I think I would say is a general comment relative to the third quarter. Europe and North America were not all that different relative to just the desire of key larger retailers, as well as some of the smaller ones who are just dialing in their business to match inventory with demand. We saw the same sort of behavior in both of those markets. And in the third quarter, ASAP business was a bit less than robust. But then I'd also say that, we get the leisure trend numbers, and I'm sure some you guys look at those now as well, and the SIA numbers, and we're proud to say that our brands are global. And most of the categories that we are competing in, we are gaining market share. And I think that's an important part of -- an important aspect and strength of this company and the -- or the companies that comprise BD, Inc., that we have brands that are gaining market share in the majority of categories they compete in. And that is what gives us great confidence. I've been at this for, I hate to say, over 31 years now, and in this period of time, I've seen substantial -- really incredible growth in the industry on a global basis. But it has been punctuated by every 6, 7 years, a headwind. Sometimes, it lasts 6 months. Sometimes, it lasts 18 months. They come in there, the chance for the industry to take a timeout and a breather. Clearly, we're in one of those periods right now, but it is a time to -- I believe, we believe here at BD, Inc. that it is time where you continue to thoughtfully invest appropriately in those areas that you believe will accelerate when the market picks up. And we do have growth here. And you continue to invest appropriately scaled to the level of business you think you're going to get in those parts of your business that are quite profitable, help fund additional growth and are defining to your brand. So that's how we approach it. We have some of the best, most admired and beloved brands in the industry, and they're global, and they're very strong. So we continue to be quite optimistic and guardedly bullish about our business and where it's going. And I say that based upon what we're seeing in market share gains and orders for spring, orders in November and December, et cetera.

Mark E. Smith - Feltl and Company, Inc., Research Division

And then last question. Just if you can discuss or give an update on how Gregory Japan, on the transition and on that business. Are you starting to see more momentum there?

Peter R. Metcalf

Yes, I mean, Mark, it -- look, any time you establish a brand-new business and transition out a -- long term, in this case, almost 3 decades, 2.5 decade-long respected distributor, even when you have a great team, and we do have a great team of people there, headed up by the former President of The North Face Japan, Mori Hikari. Even with that, it's -- the passing of the baton takes a bit of time, and for retailers to adjust to your new terms and your new way of doing business and calling a different number and talking to different reps than they've been dealing with for a few decades. So that did take, certainly, the first half of the year to get that going, which, in the scheme of things, is relatively little time. And in the third quarter, we began to see the first, I think, benefits of results of that relative to beginning to get the sales growth that we hoped we'd begin to get in the third quarter, beginning to see that the relationships grow from retail to Gregory/BD, Inc. in Japan. So we're feeling quite good about it, considering that we only really just finished the 3 quarters into what is a multi-year, decade-long time future for BD, Inc. in Japan. So the first benefits just started to accrue to us in the third quarter.

Operator

Our next question comes from the line of Andrew Burns with D.A. Davidson.

Andrew Burns - D.A. Davidson & Co., Research Division

I just have one question regarding POC. When you think about investment in POC as a lifestyle brand, that phrase was used a couple of times in the conference, call it, certainly larger ambition than the helmets, sunglass, protection gear product lines. Are you thinking more about a broader investment in apparel with that brand, or perhaps footwear or other categories?

Peter R. Metcalf

Thanks, Andrew. This is Peter here. We believe that POC has an incredible amount of potential in front of it. It's a super premium brand in the sporting goods category. It has established itself with a high degree of both elasticity and premium quality so that it could move from one category to another within the snow and wheels categories, from helmets to goggles, glasses, body armor and apparel. And as you know, we've launched now, for spring, road-riding apparel. But to answer your question, yes, we believe with time, as POC continues to grow its business in the categories that is currently in, the apparel categories, but specific to ski, riding in particular, and that could go in towards commuting, and then branch out a little bit from that, we believe to think about it as a sports lifestyle brand is an important way to think about it because it just helps us think about what its future opportunities may be. And that's not immediate, but we are positioning that brand and growing it very much in the premium aspirational way and a luxury brand. It gives us opportunities to do additional things in the future that are synergistic to its core positioning.

Operator

[Operator Instructions] Our next question comes from the line of Sean McGowan with Needham & Company.

Sean P. McGowan - Needham & Company, LLC, Research Division

I also have a couple of questions. Aaron, a quick question on the recall. As best as you can estimate, are we done with charges related to that, or might there be some additional charges?

Aaron Kuehne

No. As of right now, the expectation is that we are done with charges.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay. And is the EPS impact of those charges as simple as simple as taking that $1.5 million and putting the tax rate on it, or is there...

Aaron Kuehne

Yes. Yes.

Sean P. McGowan - Needham & Company, LLC, Research Division

Circling back, Peter, to your -- an earlier question regarding retail and check with me in 12 months. I think you said at the event in New York a few weeks ago, look to see retail stores in the not-too-distant future. And as I've thought about the line as it stands now and how it's going to stand in '14, I kind of scratched my head and said, "It doesn't really make sense to have a retail store until you have a lot more retail stuff to sell." So would you rule out a store in the next 12 months?

Peter R. Metcalf

I'll never say never. However, when you think about BD retail store, that is the brand manifestation in 3 dimensions. And whatever we do in the way of retail stores, whether we do them on our own or whether we do them as a licensed store, however we do it, we're going to give this incredible thought, attention, et cetera, so that it really -- when and if we do it, because we haven't announced formally that we are doing it yet, it will be something that really is the brand manifestation in a way that is accretive to how you think about BD, equal to the product, equal to the marketing. Everything about it would have to be just right so that the stores would be, if we did them, just a great -- not only profitable, but a great way to showcase the brand. And to do these things really, really well as opposed to do them like 2/3 of retailers in most parts of the world, you need to have the right team of people. You really need to think about this. You really need to get it dialed because you're setting the stage for future ones. And it's not something to do quickly or without a lot of thought, attention, sweating blood and going through a lot of iterations on paper in 3 dimensions to make sure you have exactly what you believe is the look and feel of what BD is going to be at retail into the future. And it is something that we want to have manifest itself in the future in display racks, merchandising, in-store -- store-in-stores, our tradeshow booth, things like that. So we don't think of this lightly. We think of this as a very substantial strategic objective that has got to be done with the same level of thought and attention that BD Apparel had. And as you know, when I first announced that back 2.5 years ago, and we told the markets the timeframe it will take to do that, a lot of people were scratching their heads, thinking can't you do it in a year. And you can do anything in relatively little time if you're not that concerned about what you're doing. But to do it in a way that would be accretive to BD's positioning and accretive to achieving that long-term goal of 2020 of $250 million BD stores would have to be absolutely dialed in right.

Sean P. McGowan - Needham & Company, LLC, Research Division

Right. I wouldn't look for it next month, but as we think about a store, or if I ever walk in, in a Black Diamond store -- or is there a place where all of your brands would be showcased, or is it -- would it be focused just on those that are called Black Diamond?

Peter R. Metcalf

So number one, as I say, we are in the process of developing this, but what I would share with you is that as we look at the retail landscape, what we see is that consumers enjoy and appreciate and patronize brand stores and stores that really can capture the feel, the essence and personality of a brand as what they're seeking. And if you're not seeking to do that, then there are a host of really great specialty stores out there that do a good job of showcasing 2 or 3 brands, plus hardgoods, plus, plus, plus. So we think about it. We think about discrete brand stores.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay, that's very helpful. And then final question. As I've gone to visit some of the stores, I got an impression that there is maybe not a consistent level of understanding of the apparel features relative to the competitors' products among the in-store folks. Now you've talked earlier about some of the events that you've done, but can you talk a little bit more specific about what you're doing on an ongoing basis, sort of every week, to make sure that the people at the store level have, at their fingertips, as much information as possible about what sets Black Diamond apparel apart from the next guy?

Peter R. Metcalf

Yes. So very good question, Sean. And you have just zeroed in with laser-like focus on the #1 challenge of any vendor of great consumer products to independent retail, is that the majority of retail stores around the country in the U.S. have staffs that unfortunately don't have a long career path there. They change often, probably a majority of the staffs change every year. And so you're in a constant battle to clinic, educate, inspire and train these staffs of people. And the way that we are addressing that -- and what I will say is that, if your brand has been established on a category, if the people are people who've worked retail in various locations over time, and some people are perennial people who come back on and off to retail, they might be a little bit more familiar with your brand. But for us and these folks, it is new. And we have -- as you know, number one, we, in order to address this, it's several things. The first one -- the most significant transformative changes that BD went through in North America was to make a commitment to transforming a relatively small, tight group of employees sales reps that could not visit the stores as frequently as one would want with apparel and instead, move them, worked with them to create sales agencies around North America so that you had more people to support BD, because you also had apparel, with gear and equipment. And so that you could get tech reps to come in and do the clinic-ing that apparel needs, more of that in gear and equipment because it changes each season. So we do have around the country now, in most places -- I won't say we've completed this in every territory, but the majority of North American territories have been converted. We have agencies with, in most cases, the previous employee reps. We have additional skilled people there, usually with a real apparel experience. And we have directed those folks to higher tech reps who can come in and support the reps in doing clinics. So what we've done is we've done these special events around the country with the key retailers who are willing to commit their staffs' time to this. You don't always get a retailer willing to do that. But in most -- in many cases, we got that. And then we have our guys and gals going into the stores separately, conducting additional clinics during the year, especially in those places where staffs are coming on later because the buying cycle is a little bit later, and retailers really are watching their overhead dollars and who they're hiring and when they're hiring. So it's an ongoing process. And I'll be candid with you, I don't believe we'll ever achieve the level we want, simply because the level of turnover is so high. But I think we can continue to make very substantial strides. But we just need the season. And many of the stores, including in New York, are still ramping up at this moment with the staff. So we have to keep getting our people in to make sure they clinic.

Operator

This concludes the question-and-answer session. I would now like to turn the call back over to Mr. Metcalfe for closing remarks.

Peter R. Metcalf

All right, thank you. And I'd like to end our call with the following brief comments: First, we're focused right now in the execution of our fall-winter selling season and the fourth quarter. It's certainly one of our strongest quarters. And while we're very focused on this, we look forward to investing more in our big brands to create further momentum in 2014 and in the outyears. Thanks, again, for joining us, and we look forward to speaking with you again in February, when we discuss our outlook for 2014.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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