Liberty Safe Weighs on Q3 Results at Compass Diversified Holdings

Plummeting sales of gun safes again dragged down results at Compass Diversified Holdings Inc.’s Branded Consumer businesses in the third quarter, despite double-digit growth at Ergobaby. At CamelBak, declining military sales continued to overshadow solid growth in bottle sales.

Net sales at CODI’s Branded Consumer businesses declined $11 million to $75.8 million in the third quarter ended Sept. 30, as a nearly $20 million decline in sales at Liberty Safe overwhelmed a $5.5 million increase in sales at Ergobaby, which makes products for carrying infants. Sales at CamelBak declined $1.2 million. While segment gross profit margin increased 70 basis points (bps) to 40.0 percent, SG&A grew 410 bps as a percentage of revenue, due to the deleveraging at Liberty Safe. Operating income declined 44 percent due a loss at Liberty Safe EBITDA declined 22 percent and operating

CODI stopped consolidating results from Fox Factory Holdings Inc. July 10, when it reduced its stake in the company from 53 to 41  percent. Fox, which CODI spun off through an IPO last year, also reported third quarter results last week. (See story this issue.)

At CamelBak, net sales slipped 3.3 percent during the quarter as a continued decline in military sales, continued to mask strong sales of recreational products. Military sales declined to 20 percent of total sales during the quarter compared to 30 percent in 2013. Sales of Hydration systems and Bottles climbed to 86 percent of total sales, up 2 bps from the third quarter of 2013. Military sales declined to 26% of gross sales from 30%. International sales were approximately 19%, up 1 basis point.

Third quarter sales of bottles increased $1.4 million and were propelled by sales of the Eddy, Chute and insulated Podium bottles as well as the Relay, a filtered pitcher introduced last year in a bid to take the CamelBak brand indoors.

“We are really pleased by CamelBak,” said CODI CEO Alan Offenberg. “We think the company’s performance is really strong. We expect a continued strong year for CamelBak and would anticipate growth into the following year.”

Sales of Hydration systems declined $2.0 million, due to the timing of shipments for certain hydration packs and lower military sales. Accessories sales declined $300,000 and Gloves sales fell $500,000 due to the timing of government orders. While CamelBak occasionally wins military contracts that can skew its top line, the bulk of its military sales come from on-base retail sales that ebb and flow in tandem with overseas deployments of U.S. troops.

CamelBak’s gross margin fell 280 bps to 43.8% in the quarter due primarily to increased bottle supplier costs not passed on to customers and an unfavorable sales mix in Hydration systems.
SG&A declined 120 bps to 25.7% of net sales due to the timing of certain expenses and the closing of an international sales office. Income from operations declined 20 percent to was approximately $2.8 million.

At Ergobaby sales grew 32.5 percent to $22.4 million on strong demand for the Ergobaby Four  Position 360, which enables parents to carry infants facing into or away from their back or chest. The company also owns the Orbit stroller brand. Ergobaby’s gross margins increased 390 bps to 64.3 percent, the segment’s highest by far. That enabled Ergobaby to spend $2.1 million more on SG&A than in the third quarter of 2013 and still reduce SG&A as a percentage of net sales by 20 bps to 38.8 percent. Income from operations rose 63.3 percent to $4.9 million, making it the segment’s biggest profit contributor.

At Liberty Safe, net  sales and gross margin plunged 43.5 and 74.8 percent respectively, resulting in an operating loss of $1.7 million, compared with a profit of $4.2 million the year before. The company nearly broke even in EBITDA terms, thanks to the decision to slash production at its factory in Utah in the second quarter to lower costs until retailers work through inventory purchased going into last year’s boom in firearms sales. Liberty still expects sales will bottom out this year and return to 2011/12 levels next year, but has reduced its full-year EBITDA forecast to $4 million from $5-$7 million.  

“The inventory situation is more attributable to all producers producing just as much as they possibly could last year, as well as bringing in as many imports as they possibly could bring in,” Offenberg said “But I dont think what we have is a situation where you have got all domestic producers of safes having invested in excess capacity during that one-year surge that’s going to lead to . . . the industry having excess production capacity.”

Offenberg said valuations remain high and competition stiff in the M&A market, but that with $140 million in the bank, its revolving credit line  and its 47 percent stake in Fox Factory Holdings Inc. currently valued at $230 million, CODI is well prepared to pursue acquisitions.