Clarus Corp., the parent of Black Diamond, the parent of the Black Diamond, Pieps, MaxTrax and Rhino-Rack brands, believes has laid the foundation to drive increased profitability and unlock new growth opportunities in 2024 and beyond. It appears Wall Street believes it too as CLAR shares surged nearly 19 percent on Friday after beating expectations and laying out a thoughtful strategic direction on a quarterly conference call with analysts.

Clarus first quarter revenue reached $69.3 million exceeding the company’s guidance of $64 million to $66 million, but falling short of the $70.3 million in the prior-year first quarter. The decline was said to be driven largely by the softness in the European wholesale market and Independent Global Distributor (IGD) markets in Outdoor, partially offset by strong Adventure segment sales growth. On a constant-currency basis, sales were down 0.5 percent.

FX fluctuations were not material in the first quarter.

“At our Investor Day, we outlined a strategic roadmap, highlighting anticipated multiyear growth and margin expansion targets for both segments that we believe Clarus can achieve,” offered company Executive Chairman Warren Kanders. “The first quarter of 2024 represented the initial phase of these plans.”

One of the commitments made at the March meeting was to provide more insight into the two segments of the business, Outdoor and Adventure, on the earnings calls. Neil Fiske, president, Black Diamond Equipment, and Mathew Hayward, managing director, Adventure, both joined the latest call to provide more insight into the first quarter and strategic plans going forward.

“We entered the year focused on initiating our strategic plans with Clarus’ next chapter as a pure-play ESG-friendly outdoor business,” noted company CFO Mike Yates. “As we have discussed previously, we completed the sale of our Precision Sports segment in February 2024, which represented a highly successful outcome for Clarus. Today, we have a more streamlined company focused on two consumer segments with broad appeal and attractive long-term tailwinds, Outdoor and Adventure.”

Yates said that complementing this progress, and following the sales Precision Sports segment, Clarus has a debt-free balance sheet that it believes provides it with significant optionality to allocate capital for the benefit of shareholders. He said that after retiring all of Clarus outstanding debt from the proceeds from the Precision Sports segment sale, CLAR had over $47 million of cash on hand at the end of the first quarter.

“Importantly, this provides the flexibility in how we seek to pursue our long-term value creation objectives and growth initiatives,” Yates added. “In terms of priorities, we are committed to reinvesting in our existing two segments to drive organic growth. We expect to continue to pay our quarterly dividend and also selectively look at smaller bolt-on M&A opportunities that may enhance our venture business in the United States and new geographies. Overall, our focus is on cash generation through the continued rightsizing of inventory and business expansion with the intent of accumulating cash on our balance sheet as we execute our strategic growth plans.”

Outdoor Segment
In Outdoor, which includes Black Diamond and Pieps, Yates said the focus was on “simplification and solidifying the core.”

“Although the macroeconomic backdrop remained challenging during the first quarter, the stabilization we mentioned during our Q4 and year-end 2023 earnings call was confirmed as our North American wholesale market grew year-over-year,” Yates offered. “We believe that the work the sales team put in during the second half of 2023 is paying dividends now as we start to listen to our paid account and deliver the right product for them on time. From an operation standpoint, we believe that our inventory reduction in SKU rationalization initiatives, are on track.”

Overall, results in the Outdoor segment were said to be in line with expectations for the first quarter of 2024.

“At our Investor Day in March, I said that 2023 was a reset year for the industry and for Black Diamond, and that 2024 would be about simplifying the business to solidify our core, improve profitability and lay the foundation for long-term sustainable growth,” Fiske noted. “This quarter, we are starting to see the early results from the hard work we put in over the last year. Importantly, our biggest region of North America returned to growth with the Wholesale channel, growing 10 percent year-over-year. This is one of the first areas of focus in our turnaround plan as we completely rebuilt our sales leadership team.”

Fiske continued, stating that, “in addition to the sales results, we’re hearing good feedback from our retail partners that our service levels have improved, that we are sharper in our brand positioning and execution and that we are, for the most part, outperforming the market in our core categories as we seek to expand our product leadership.”

He said they are also pleased with their progress in strengthening relationships in the specialty channel, a top priority for the company strategically.

“We are continuing to rationalize our product line under the direction of fewer, bigger, better. This quarter, for example, we made the decision to exit our distribution of ski bindings, a category which has low margins, high SKU complexity, low term and high cost to serve, Fiske shared. “We expect to see further category in SKU reduction over the course of the year as we focus on our core sports and build on positions of strength. As we simplified the business, we’ve streamlined the organization and taken out costs.”

Fiske said operating costs are down 8.3 percent year-over-year, and he expects that they will continue to fall as a percentage of sales over the course of 2024.

Black Diamond closed five underperforming stores versus the same period last year, Fiske added.

“We’ve also made major strides in both the quality and levels of our inventory,” he continued. “Overall inventory is down 15 percent versus last year. But equally important, we’ve moved more of this inventory value into the A styles, which drives 80 percent of our sales. Fifty-nine percent this year versus 45 percent last year, and the trend is still improving.” He said fill rates are up, markdown exposure is down.

Fiske also said apparel inventories were brought in-line, with a 38 percent reduction versus a year ago.

Geographically, the regions were said to be in different stages of recovery.

“We’re pleased to see the turnaround in our largest region of North America,” Fiske commented. “However, the Europe and Independent Global Distributor (IGD) markets still face tough market conditions.”

The EU was down 17 percent in wholesale, which he said was better than expectations. The smaller D2C segment in EU was up 33 percent. EU represents 34 percent of revenues in the first quarter.

“IGD is a different story altogether,” Fiske cautioned. “Here, we have an added layer of distribution that is still overstocked from the pandemic boom and will likely take all of 2024 to get back in-line. For the quarter, IGD was down 44 percent, and we expect the year to be down 25 percent to 30 percent as inventories rebalance across the network. IGD represents 10 percent of our revenue in Q1.”

Outdoor segment gross margins were said to be flat year-over-year.

“While we’re still carrying through and rightsizing inventory, we believe we are less promotional than the overall market in North America and Europe,” Fiscal said.” “We have, however, begun to build a reserve to deal with any PFAS-related inventory that may be more difficult for us to move as a result of new regulations taking effect at the end of this year. By fall of 2025, all of our apparel and packs will be PFAS free, but there will likely be some residual PFAS inventory to clear in the first half of next year. In summary, we’re pleased with our progress and confident in our strategy, knowing there’s so much more to do and to demonstrate.”

Adventure Segment
In Adventure, which houses the MaxTrax and Rhino-Rack brands, Yates said the core objective was to “invest at scale.”

“We saw a continuation of the strong sales growth momentum we established in the back half of 2023,” Yates added “We may describe both increasing brand awareness through global marketing programs and strengthening our Adventure team to ensure we’re best positioned to capitalize on strong market tailwinds.”

Mathew Hayward joined the call from Australia, saying he would try to tie back to many of the things the company touched on during its Investor Day in order to track progress financially and strategically.

“2023 marked a reset and stabilization year for the Adventure segment, and we are pleased to have kicked off 2024 with significant momentum,” he commenced. “The first quarter represented the initial phase of our new three-year strategic plan, and we took important steps launching compelling new products and continuing to expand beyond the home market in Australia.

Hayward said Q1 sales increased 27 percent year-over-year, supported by two primary drivers. In Wholesale, Hayward said they saw strong key account performance across Australia, New Zealand and combined with the onboarding of new key accounts in the U.S. market.

“This has been supported by strong product portfolio introductions across all of our key categories, inclusive of trades where we have our category leading Pioneer 6 platform, our new crossfire system of RX100 and RX200 introductions and new accessory ranges with rooftop tents and storage boxes,” he detailed.

“Second, we continue to experience strong demand in our OEM channel, a vital channel for us that we believe will drive volume while enhancing our brands in new markets and vehicle models,” Hayward continued. “Following the first deliveries to new OEM customers in 2023 for a product launch, demand has continued to remain robust, which has helped accelerate sales growth.”

He added that first quarter margins were affected by a less favorable channel mix, particularly given the outperformance of OEM as that continues to grow. First quarter gross margins in the Adventure segment was 38.4 percent of sales, compared to 41.0 percent in Q1 last year.

“We also saw onboarding of new key account programs and locations, which do bring in some lower margins in order to be good partners in our dealer base,” Hayward detailed. “We continue to take immediate and intermediate steps expected to improve overall profitability and are committed to seeking to drive better SKU productivity, inventory management and organizational efficiency.”

He said the ramp-up of opportunities across both Maxtrax and Tred are key as they expand brand and category reach across 2024.

“In terms of market conditions, more generally, positive fundamentals continue to be supported by strong auto sales,” Hayward offered. He said the facts and figures standard for vehicle deliveries in Australia showed all-time record first quarter results for the auto sector, with 300,000 sales, a year-over-year increase of 13 percent. Hayward added that new vehicle sales are expected to have risen 5.6 percent year-over-year to 3.8 million units volume in the first quarter of 2024.

“During the first quarter, we identified several key positions that we believe will enhance our ability to grow,” noted Hayward when diving into strategic initiatives. “With our focus on delivering best-in-class products globally, we have recently added a national marketing leader that will sync up with our shared services in Australia to deliver best-in-class content tailored specifically for North America.

He said that will soon be joined by local IT leadership to not only help drive greater DTC transformation, but also to support enhanced integration with key partners locally.

In an effort to grow the OEM opportunities on a global level outside of Australia and New Zealand, Hayward shared that the company is adding a new global head of OEM sales and development in the U.S. in Q2, based in the company’s Denver office.

“In terms of brand investment, we’ve stepped up investment and support across both trade marketing and parallel digital investment,” Hayward continued. “Within trade support, we’ve been very excited to launch our first truly global brand and product catalog for Rhino-Rack, delivered in multiple languages for the very first time for partners across Japan, China and Germany, and also added patents with basal specifics for U.S. and Canada. This has been supported with trade-through investments across Japan, France and we will continue across markets in 2024.”

Income Statement
Consolidated gross margin was 35.9 percent of sales compared to 36.3 percent in the year-ago quarter. The decrease was primarily attributable to promotional pricing at the Outdoor segment, the increase in cash-related inventory reserves as well as unfavorable channel mix in the Adventure segment. Yates highlighted that adjusted gross margin of 36.9 percent in the first quarter improved 50 basis points versus Q1 of last year. Adjusted gross margin is adjusted for the PFAS reserve in the Outdoor segment. CLAR reserved $729,000 in the first quarter for this exposure.

Selling, general and administrative (SG&A) expenses in the first quarter were $28.2 million compared to $29.4 million in the year-ago comparative quarter. The decrease was said to be attributable to success reducing costs in the Outdoor segment as well as lower intangible amortization and lower stock compensation expenses. Higher investments in marketing initiatives in the Adventure segment partially offset the overall decrease, according to Yates.

The loss from continuing operations in the first quarter of 2024 was $6.5 million, or 17 cents per diluted share, compared to a loss from continuing operations of $2.0 million, or 5 cents per diluted share, in the year-ago quarter.

Yates detailed that the loss from continuing operations in the first quarter included $3 million of charges relating to the legal costs and regulatory matter expenses and $700,000 of PFAS inventory reserves. Adjusted loss from continuing operations was $0.1 million or $0.00 per diluted share, this compares to adjusted income from continuing operations of $400,000, or 1 cent per diluted share, in the year-ago quarter.

Adjusted EBITDA in the first quarter was $2.0 million, or an adjusted EBITDA margin of 2.9 percent, compared to $1.1 million, or adjusted EBITDA margin of 1.6 percent, in the year-ago quarter. CLAR beat its own expectations of adjusted EBITDA of $1 million to $2 million for the quarter.

“Our adjusted EBITDA is adjusted for restructuring charges, transaction costs, stock compensation expense, and this quarter, we began adjusting for the PFAS inventory reserve,” said Yates. “Additionally, beginning in the first quarter, we adjusted for the costs associated with the Section 16B litigation and the Consumer Product Safety Commission matter known as the CPC matter. These legal costs were $502,000 in the first quarter.”

Yates also detailed legal costs and regulatory matters with a $2.5 million estimate for the company’s liability for the matter outstanding with the CPSC, which the company recorded as a liability in the first quarter.

“We have adjusted our EBITDA for this estimated liability as well,” Yates said. “After consideration of these adjustments, the year-over-year improvement in adjusted EBITDA reflects the early results of our efforts to achieve less complexity and focus on the highest margin, highest return opportunities, particularly at the Outdoor segment.”

First quarter adjusted EBITDA by segment was $2.9 million at Outdoor and $1.9 million of debenture. Adjusted corporate costs was $2.8 million in the first quarter.

Balance Sheet and Cash Management
Cash and cash equivalents were $47.5 million at quarter-end, compared to $11.3 million at December 31, 2023. Total debt at March 31, 2024, was $100,000 compared to $119.8 million at the end of 2023.

“Our reduced debt and substantially improved cash position reflects the closing on the Precision Sports sale in February and the termination and repayment in full of our credit agreement,” Yates shared. “During the first quarter, we realized a gain on the sale of Precision Sports of $40.6 million, which was recognized through discontinued operations on our statement of income. Consolidated cash tax expense for the full year is expected to be $2 million. which will allow us to maintain most of the net cash realized from the sale of Precision Sports. Free cash flow, defined as net cash provided by operating activities less capital expenditures for the first quarter was an outflow of $18.3 million compared to positive free cash flow of $1.7 million in the prior year quarter.”

Free cash flow was said to be significantly lower because of the significant reduction in accounts payable during the first two months of the quarter. Yates shared that the company has net operating loss (NOLs) carry-forward for U.S. federal income tax purposes of approximately $7.7 billion at December 31, 2023. The company expects to utilize all the remaining NOLs in the future years.

Legal
Yates also highlighted that Clarus continues to proceed in its lawsuit against HAP trading LLC and Mr. Harsh A. Padia.

“Both fact discovery and expert discovery has been concluded,” he noted. “The court set the following schedule for that half summary judgment motion and challenged our expert witnesses. Motion papers to be filed by May 9, 2024, opposition papers by July 2024, and we reply papers by August 9, 2024. If this matter goes to trial, we would expect the trial to commence in the fourth quarter of 2024 or sometime in 2025.”

Sale of Precision Sport | Discontinued Operations
On December 29, 2023, the company announced the sale of its Precision Sport (Ammo) segment for $175 million. As the disposition was completed on February 29, 2024, it recognized a gain of $40.6 million, pending customary working capital adjustments, during the three months ending March 31, 2024. The activities of the Precision Sport segment were segregated and reported as discontinued operations for all periods presented.

Outlook
CLAR has reaffirmed its guidance and continues to expect sales to range between $270 million and $280 million and adjusted EBITDA from continuing operations of approximately $16 million to $18 million or an adjusted EBITDA margin of 6.2 percent of the midpoint of revenue and adjusted EBITDA.

“We continue to expect capital expenditures to range between $4 million and $5 million and free cash flow to range between $18 million and $20 million for the full year 2024,” Yates said. “Consistent with our historical seasonal pattern, the second quarter decelerated compared to the first quarter, therefore, second quarter sales are expected to be between $58 million and $62 million and adjusted EBITDA is expected to be between zero and $0.5 million.”

Yates also to reiterated that the outlook does not include any expense for ongoing litigation specifically relating to the Section 16B matters, the CPSC matter or further increases in PFAS-related inventory reserves.

“As we look forward to the remainder of 2024, we are pleased with the incremental progress we are making in both Outdoor and Adventure segments, and we believe the foundation is in place for profitable growth ahead,” Yates closed with his prepared remarks. “While hurdles remain, we are confident in the exceptional team we now have in place and our new positioning as a pure-play Outdoor company.”

Image courtesy Black Diamond