Clarus Corp., the parent of Black Diamond, Sierra, PIEPS, and SKINourishment, reported earnings in the third quarter slid 14.3 percent as sales grew 8 percent. The company reduced its guidance for the year due to weakness at Sierra and accelerating headwinds due to the strengthening U.S. dollar and the escalating trade wars.
Third Quarter 2019 Financial Summary vs. Same Year-Ago Quarter
- Sales increased 8 percent to $60.2 million.
- Gross margin was 34.1 percent compared to 35.7 percent.
- Net income was $3.5 million or $0.11 per diluted share, compared to $4.1 million or $0.14 per diluted share.•
- Adjusted net income before non-cash items was $6.0 million or $0.19 per diluted share, compared to $7.0 million or $0.23 per diluted share.
- Adjusted EBITDA was $6.8 million compared to $7.1 million.•
- Repurchased 243,873 shares of the company’s common stock for approximately $2.7 million, or $10.92 per share.
Management Commentary
“Our third quarter continued to be driven by the momentum in our Black Diamond brand with sales up 14 percent,” said John Walbrecht, president of Clarus. “We grew in every geography, sales channel and category, led by 61 percent growth in ski on strong demand in our backcountry portfolio of products like JetForce, beacons and packs. Apparel also continues to meaningfully contribute to brand sales growth, up 23 percent driven by men’s and women’s sportswear, technical outerwear, and logowear. These strong top-line trends also drove a 13 percent increase in brand EBITDA. Our commitment to product innovation, new product introductions and an accelerated go-to-market strategy are producing these results.
“As expected, continued bullet and ammunition market softness impacted our Sierra brand during the quarter. However, we have further strengthened the brand’s market positioning by investing in product innovation and forging new, long-term revenue opportunities like our launch into ammunition. Despite what we believe are short-term market headwinds, Sierra still meaningfully contributes to our profitability and free cash flow, and we look forward to various opportunities that we believe will re-accelerate brand sales growth in the near-term.
“We also experienced headwinds during the third quarter due to the strengthening U.S. dollar and the escalating trade wars. While the proactive steps we laid out in early August were expected to minimize the tariffs announced at that time, the impact of additional assessments since then will exceed our mitigation efforts.
“We view these headwinds as transitory, and most importantly, we believe our brands are better-positioned for growth than they have ever been. Our commitment to innovation is fueling new and more disruptive products that are being recognized by trade publications and well-received by our retail partners. We believe the continued focus on our brands will ultimately drive both long-term growth and profitability, as well as shareholder value creation.”
Third Quarter 2019 Financial Results
Sales in the third quarter increased 8 percent to $60.2 million compared to $55.7 million in the same year-ago quarter. The increase was driven by 14 percent growth in Black Diamond, partially offset by a 24 percent decline in Sierra. The year-over-year decline at Sierra was expected due to headwinds in the bullet and ammunition industry. On a constant currency basis, total sales were up 10 percent.
Gross margin in the third quarter was 34.1 percent compared to 35.7 percent in the year-ago quarter. The decline was primarily due to foreign exchange headwinds from the strengthening U.S. dollar, the impact from recent tariffs, as well as channel and product mix. Foreign exchange headwinds reduced year-over-year gross margin by approximately 80 basis points in the third quarter of 2019 and the impact from tariffs was a 60 basis point headwind.
Selling, general and administrative expenses in the third quarter were $16.4 million compared to $15.8 million in the year-ago quarter. The increase was attributable to the company’s continued investment in Black Diamond brand-related activities like research and development and direct-to-consumer. As a percentage of sales, selling, general and administrative expenses declined 100 basis points to 27.3 percent compared to 28.3 percent in the year-ago quarter.
Net income in the third quarter was $3.5 million or $0.11 per diluted share, compared to $4.1 million or $0.14 per diluted share in the year-ago quarter. The decline was primarily due to lower sales from Sierra, which carry higher operating margins than the Black Diamond brand, and foreign exchange and tariff headwinds. Net income in the third quarter of 2019 included $2.5 million of non-cash charges, compared to $2.8 million of non-cash charges and $0.1 million in transaction and restructuring costs in the same year-ago quarter.
Adjusted net income, which excludes the non-cash items, as well as transaction and restructuring costs, in the third quarter was $6.0 million or $0.19 per diluted share, compared to $7.0 million or $0.23 per diluted share in the same year-ago quarter.
Adjusted EBITDA in the third quarter was $6.8 million compared to $7.1 million in the same year-ago quarter. As a percentage of sales, adjusted EBITDA was 11.2 percent compared to 12.7 percent in the same year-ago quarter.
Net cash provided by operating activities for the nine months ended September 30, 2019 was $5.6 million compared to $7.6 million in the same year-ago period. Capital expenditures for the nine months ended September 30, 2019 were $2.8 million compared to $1.8 million in the same year-ago period. Free cash flow, defined as net cash provided by operating activities less capital expenditures, for the nine months ended September 30, 2019 was $2.8 million compared to $5.8 million in the same year-ago period.
At September 30, 2019, cash and cash equivalents totaled $1.9 million compared to $2.5 million at December 31, 2018. During the third quarter, the company repurchased 243,873 shares of its common stock for approximately $2.7 million, or $10.92 per share, leaving approximately $10.8 million remaining on its $30 million share repurchase program. The company’s debt balance at September 30, 2019, was $24.9 million compared to $22.1 million at December 31, 2018.
Updated 2019 Outlook
Clarus now anticipates fiscal year 2019 sales to grow approximately 7 percent to $228 million compared to 2018. By brand, the company still expects sales for Black Diamond to increase low-double digits but sales for Sierra to now decrease double-digits. Previously, Clarus expected sales to grow approximately 8% to $230 million and sales for Sierra to decrease high-single digits.
The company now expects adjusted EBITDA to increase approximately 6 percent to $22 million compared to 2018. Previously, Clarus expected adjusted EBITDA to increase approximately 20% to $25 million.
Clarus still expects capital expenditures to be approximately $4.5 million and free cash flow to be approximately $10 million in 2019.
Net Operating Loss (NOL)
The Company estimates that it has available NOL carryforwards for U.S. federal income tax purposes of approximately $141 million. The Company’s common stock is subject to a rights agreement dated February 7, 2008 that is intended to limit the number of 5% or more owners and therefore reduce the risk of a possible change of ownership under Section 382 of the Internal Revenue Code of 1986, as amended. Any such change of ownership under these rules would limit or eliminate the ability of the Company to use its existing NOLs for federal income tax purposes. However, there is no guaranty that the rights agreement will achieve the objective of preserving the value of the NOLs.
Net Operating Loss (NOL)
The company estimates that it has available NOL carryforwards for U.S. federal income tax purposes of approximately $141 million. The company’s common stock is subject to a rights agreement dated February 7, 2008 that is intended to limit the number of 5 percent or more owners and therefore reduce the risk of a possible change of ownership under Section 382 of the Internal Revenue Code of 1986, as amended. Any such change of ownership under these rules would limit or eliminate the ability of the company to use its existing NOLs for federal income tax purposes. However, there is no guaranty that the rights agreement will achieve the objective of preserving the value of the NOLs.