Profits at Clarus Corp. fell 41.2 percent on an adjusted basis in the third quarter ended September 30 as sales declined 13.5 percent. By segment, sales were down 2.9 percent in Outdoor (Black Diamond, Pieps) and plunged 45.0 percent in Precision Sports (Sierra, Barnes) while gaining 8,6 percent in Adventure (Rhino-Rack, Maxtrax).
Clarus also reduced its earnings and sales guidance for the second quarter in a row.
Third Quarter 2023 Financial Summary vs. Same Year‐Ago Quarter
- Sales of $100.1 million compared to $115.7 million.
- Gross margin improved 140 basis points to 35.5 percent compared to 34.1 percent.
- Net loss of $1.3 million, or $(0.03) per diluted share, compared to net income of $2.8 million, or $0.07 per diluted share.
- Adjusted net income before non‐cash items of $6.0 million, or $0.16 per diluted share, compared to $10.2 million, or $0.26 per diluted share.
- Adjusted EBITDA of $9.9 million with an adjusted EBITDA margin of 9.9 percent compared to $15.1 million with an adjusted EBITDA margin of 13.0 percent.
“Our brands largely experienced another challenging quarter given persistent macroeconomic headwinds that have constrained consumer demand, as well as the continued inventory overhang at retail and distributors,” said Warren Kanders, Clarus’ executive chairman. “However, we made significant strides in the strategic review of our brands, developing compelling long-term growth plans, rebuilding our teams, and taking steps to recalibrate each business to operate more efficiently in the post-COVID era.
“We also made progress on our inventory reduction initiatives. This includes improving the aging of our inventory at Outdoor while prioritizing the investment in new products underlying potentially compelling new business opportunities. We accomplished this all while reducing total debt in the third quarter.
“Looking towards the fourth quarter, our priorities remain set on seeking the stabilization of sales and margins, additional organizational reshaping and cost reductions, and resetting our brands to a new baseline as we enter 2024. We are confident in our belief that this strategy is grounded in seeking the maximization of shareholder value creation.”
Third Quarter 2023 Financial Results
Sales in the third quarter were $100.1 million compared to $115.7 million in the same year‐ago quarter. Foreign currency exchange was unfavorable to sales by $0.4 million in the third quarter as the U.S. dollar continued to strengthen against the Australian dollar but weakened compared to the Euro.
Sales in the Adventure segment increased 9 percent to $20.2 million, or $20.9 million on a constant currency basis, compared to $18.6 million in the year-ago quarter, reflecting increased demand in Australia and continuing stabilization in North America. Sales in the Outdoor segment were $61.1 million, or $60.8 million on a constant currency basis, compared to $62.9 million in the year-ago quarter. The 3 percent decrease at the Outdoor segment was due to declines in the company’s North American and European sales region, partially offset by strength in the direct-to-consumer channels and the Pieps brand. Precision Sport sales were $18.8 million compared to $34.2 million in the year-ago quarter. Sales in the Precision Sport segment were down 45 percent compared to the year-ago quarter due to the market for bullets and ammunition significantly slowing as a result of heightened inventory levels at retail and at key distributors, lower consumer demand given the promotional pricing environment earlier in the year, and broader macroeconomic headwinds.
Gross margin in the third quarter increased 140 basis points to 35.5 percent compared to 34.1 percent in the year‐ago quarter, primarily driven by easing freight costs positively impacting gross margin by 90 basis points, along with positive channel and product mix of 80 basis points. This was somewhat offset by a 30-basis point unfavorable impact from foreign currency exchange.
Selling, general and administrative expenses in the third quarter declined 2 percent to $31.8 million compared to $32.3 million in the same year‐ago quarter. The decline was driven by expense reduction initiatives, lower non-cash stock-based compensation expense for performance awards at corporate, lower sales commissions because of the lower revenue, and lower intangible amortization expense. These decreases were partially offset by higher legal costs of $0.4 million at corporate due to the litigation related to the Short Swing Profit trading situation from the third quarter of 2022 and investment in e-commerce initiatives at the Outdoor segment.
Net loss in the third quarter was $1.3 million, or $(0.03) per diluted share, compared to net income of $2.8 million, or $0.07 per diluted share, in the prior year’s third quarter. Net loss in the third quarter included a $1.1 million restructuring charge related to cost reductions, as well as $0.8 million of transaction costs associated with the TRED® acquisition and the costs associated with the process related to the company’s evaluation and exploration of possible strategic alternatives in response to the non-binding indication of interest received from Mr. Kanders, the company’s Executive Chairman, to acquire the company’s Precision Sport segment.
Adjusted net income before non-cash items in the third quarter, which excludes non‐cash items, restructuring charges and transaction costs, was $6.0 million, or $0.16 per diluted share, compared to $10.2 million, or $0.26 per diluted share, in the same year‐ago quarter.
Adjusted EBITDA in the third quarter was $9.9 million, or an adjusted EBITDA margin of 9.9 percent, compared to $15.1 million, or an adjusted EBITDA margin of 13.0 percent, in the same year‐ago quarter. The decline in adjusted EBITDA was driven by lower sales volumes and a $0.4 million consolidated foreign currency exchange headwind due to the strength of the U.S. dollar against the Australian Dollar. These impacts were partially offset by improvements in SG&A in the quarter.
Net cash provided by operating activities for the three months ended September 30, 2023, was $0.1 million compared to $(11.5) million in the prior year quarter. Capital expenditures in the third quarter of 2023 were $1.2 million compared to $2.1 million in the prior year quarter. Free cash flow for the third quarter of 2023 improved to $(1.1) million compared to $(13.6) million in the prior year quarter, mainly driven by reductions to inventory.
Liquidity at September 30, 2023 vs. December 31, 2022
- Cash and cash equivalents totaled $8.0 million compared to $12.1 million.
- Total debt of $122.6 million compared to $139.0 million.
- The company’s credit facility matures in April of 2027 and bears interest at a variable rate that was approximately 7.7 percent at September 30, 2023.
- Remaining access to approximately $17.3 million on the company’s revolving line of credit.
- Net debt leverage ratio of 3.3x compared to 2.0x
TRED Outdoors Acquisition
On October 9, 2023, Clarus acquired Australian-based TRED Outdoors, a fast-growing, outdoor adventure brand producing best-in-class, innovative products that expand the company’s recovery board solutions, for a combination of cash, stock, and future consideration. TRED will continue to operate independently as a wholly owned subsidiary of Clarus and will be part of the company’s Adventure reporting segment, which also includes Rhino-Rack and Maxtrax.
2023 Outlook
The company now expects fiscal year 2023 sales of $364 million to $368 million ($385 million to $400 million previously) and adjusted EBITDA of $33 million to $35 million ($42 million to $50 million previously). (At the beginning of the year, guidance called for sales of approximately $420 million and adjusted EBITDA of approximately $60 million). In addition, capital expenditures are now expected to be approximately $6 million and free cash flow is now expected to range between $20 and $22 million for the full year 2023.
Net Operating Loss
The company estimates that it has an available net operating loss (NOL) carryforwards for U.S. federal income tax purposes of approximately $18.9 million, which includes $3.1 million of U.S. federal NOL carryforwards that expire on December 31, 2023. 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 NOL for federal income tax purposes. However, there is no guarantee that the company will be able to fully utilize the NOL to offset current and future earnings or that the rights agreement will achieve the objective of preserving the value of the NOL.
Photo courtesy Sierra