Riding a 17 percent gain in the climbing category, Clarus Corp reported sales in the third quarter jumped 16.2 percent to $45.8 million. On a currency-neutral basis, sales grew 14 percent.
The parent of Black Diamond Equipment and the recently-acquired Sierra Bullets reported its losses widened in the period to $1.6 million, or 5 cents a share, from $405,000, or 1 cent, a year ago. Adjusted to excluded non-recurring items, net income before non-cash items increased 70.6 percent to $2.9 million or 10 cents per share, compared to $1.7 million, or 6 cents.
“We believe our third quarter was an important confirmation of our strategy is right on track,” said John Walbrecht, president of Clarus, on conference call with analysts.
He said the gains in the climbing category were driven by strong growth in more approachable bouldering and gym statements. Said Walbrecht, “This aligns with the theme that we have been communicating that climbing is becoming more mainstream.”
Specific products that performed well included the newly-launched Momentum rock shoe as well as ropes, climbing accessories, helmets and harnesses.
Apparel grew 10 percent, driven by strong fall and winter preseason bookings which was aided by improved fulfillment rates. Strong growth is being seen in its first climb collection as well as its full stretch air perm insulated jacket series. The recalibration of its apparel line was largely completed in the second quarter to support the growth.
The ski category increased 9 percent due to increases in snow safety equipment.
The acquisition of Sierra Bullets on August 21 added $3.5 million to sales in the third quarter. Excluding the acquisition, sales still increased a healthy 7 percent. The quarter benefited from a 12 percent increase in preseason orders compared to last year while improved fulfillment rates and healthier inventory levels drove a solid 23 percent increase in at-once orders.
These increases were partially offset by a 63 percent decrease in the amount of discontinued merchandise sold during the quarter, reflecting improvements supply chains, inventory management and from its streamlined apparel initiative.
North America’s growth was supported by strength in climb and ski, the further development of its apparel initiative and “by higher levels of support within our specialty retailers,” said Walbrecht.
In Europe, strong fall 2017 bookings, higher-than-expected at-once or replenishment orders and increased fulfillment rates drove growth.
Gross margin increased 210 basis points to 33.4 percent compared to 31.3 percent in the year ago quarter. The increase was primarily due to a favorable mix of higher margin products and channel distribution, the stabilization of its sourcing strategy, especially its in-house manufacturing and reflected more normalized levels of discontinued merchandise than expected. Excluding the Sierra acquisition, gross margin was 33.7 percent.
The bottom line was impacted by a hike in SG&A expenses to $14.4 million compared to $11.5 million in the year-fago quarter. The increase was due to continued strategic initiatives around new product introductions and increasing Black Diamond’s brand equity as well as approximately $630,000 of incremental expenses due to the inclusion of Sierra.
Looking ahead, Clarus raised its 2017 sales outlook. Sales are now expected to grow between 11 percent and 13 percent to approximately $165 million to $168 million, which reflects an estimated contribution of $9 million from the inclusion of Sierra. The prior outlook called for sale between $153 million and $158 million.
Gross margin for the year is now expected to increase approximately 200 basis points and to 31.5 percent. On an adjusted basis, which excludes the fair value inventory step up associated with the Sierra acquisition, gross margin in 2017 is projected to increase approximately 300 basis points and to 32.5 percent. The prior outlook called for gross margins to be in the low end of the 32.5 percent to 33.5 percent range.
SG&A, including approximately $5 million of cash corporate overhead expenditures, is now expected to be $54.5 million compared to $49.9 million in 2016. The prior outlook called for SG&A of $50.5 million.
Walbrecht noted that as the company mentioned on its last quarterly call, it accelerated the timing of various sales and marketing initiatives to further boost what is expected to be “a strong fall 2017 and an even stronger spring 2018 selling season.”
He added, “Given our third quarter results, we are seeing these campaigns have their intended effect and will continue to remain positive on our spring 2018 outlook.”
Walbrecht said the investments are focused first on refocusing on Black Diamond and specifically on new product innovations for the brand. Secondly, the focus is on driving brand equity for Black Diamond through targeted marketing and PR campaigns centered around brand experience in national advertising.
The company also strengthened its team with eight new hires in engineering, including Dan Rowe from Nike Innovation, Alex Szela from Giro, Laura Smith from Patagonia and the promotion of Jake Hall as director of design.
The company also initiated its redeployment and diversification strategy with the acquisition of Sierra Bullets. Said Walbrecht, “As the only pure-play bullet brand in the world, Sierra shares our commitment to the consumer by delivering a product backed by world-class manufacturing and the industry’s highest quality control. These attributes have driven the financial characteristics we are seeking in our acquisition strategy, mainly high recurring revenue and a strong cash flow that we can expect to maximize through utilization of our significant net operating loss carryforwards.”
The company estimates that it has available NOL carryforwards for U.S. federal income tax purposes of approximately $172 million.
Walbrecht noted that Sierra also has a “very strong cash flow and margin profile.” The company generated 95 percent free cash flow conversion ratio with limited ongoing CapEx requirements and an average EBITDA margin of more than 35 percent from 2007 to 2016.
For Spring 2018, the Black Diamond brand will have more than 50 new products. Looking forward to 2018 and beyond, the brand has more than 30 new product initiatives in the works across more than 30 product categories it currently offers. In addition to the launch of the rock shoe collection, a few of its new products include the expanded spring stretch rainwear collection, a new belay device called the ATC-Pilot, patented trekking poles, updated harnesses, expanded packs, sportswear and logowear.
In marketing, the Black Diamond brand has achieved more than 4.5 billion impressions in line with its a goal of five billion impressions for 2017 in PR and editorial alone. Black Diamond’s Instagram followers have expanded by more than 45 percent in this year alone. Beyond marketing such as its “Defy The Dark” headlight campaign, partnerships with key photographers like Tim Temple, Jimmy Chin and Chris Burkard as well as its athlete ambassador is supporting its reach.
“We believe our retailers continue to invest behind brands that have momentum and are bringing truly innovative products to the market,” said Walbrecht. “At Black Diamond, we believe we are innovating best-in-class products, bringing true innovation to the marketplace and doing so more rapidly than our competition, all the while supporting this innovation with a clear marketing strategy that speaks to our core consumer. This strategy is driving sell-through at retail and in return is building their support for our brand. We expect our momentum to continue and even build and look forward to integrating Sierra into this model.”
Photo courtesy Black Diamond