Brand aggregator Compass Diversified (CODI) saw first-quarter sales decline 36 percent at BOA and 18 percent at Primaloft as both businesses continued to be impacted by stubbornly elevated inventories in the marketplace. Among CODI’s other active lifestyle brands, revenues grew 35 percent at Marucci Sports and 5 percent at 5.11 while sliding 30 percent at Velocity Outdoor.

On a call with analysts, Elias Sabo, CODI’s CEO, said, “In our consumer businesses, inventory destocking headwinds have lasted longer than anticipated and continue to impact our brands further down the supply chain. Regardless, end market sales continue to hold up remarkably well, and for our brands where there is not a large inventory overhang, we are experiencing strong performance.”

Sabo said CODI’s subsidiaries suffering the most from the destocking headwinds, BOA and Primaloft, are two of its “historically fastest-growing” and are expected to return to historical growth rates once the destocking subsides. He said, “We believe we could experience above-trend growth in 2024 as part of this normalization process.”

Encouragingly, Sabo added that CODI “started to see some green shoots emerge, giving us confidence that the destocking issues will end in 2023.”

Specifically, he noted that bookings for Primaloft improved in the second quarter and grew marginally over the prior year. That compares to double-digit declines experienced in the first quarter.

“Although one quarter does not make a trend, and we expect bookings to be choppy over the course of the year, this is the first positive sign we have seen in bookings over the course of the past 12 months for Primaloft,” stated Sabo. “Digging deeper, we know Primaloft began experiencing booking weakness three to four months before other consumer businesses, including BOA. As we look for the bottom of this inventory cycle, Primaloft has provided the first positive signal and leaves us optimistic that some of our other consumer businesses will soon return to positive bookings growth.”

BOA’s Q2 Sales Declined 35.8 Percent 
BOA’s sales in the second quarter fell 35.8 percent to $38.1 million from $59.4 million a year ago. The main factor of the sales decline was higher than anticipated end-market inventory levels due to supply chain normalization and the corresponding inventory ordering surge experienced in many of BOA’s industries in 2022. The company expects a normalization of inventory levels by the end of this year.

BOA’s operating income was down 22.1 percent to $8.1 million. Gross margins eroded to 59.8 percent in the latest quarter from 61.3 percent a year ago, driven by fixed manufacturing overhead expenses and increased depreciation related to tooling. SG&A expenses declined 23.2 percent, primarily due to decreased employee costs associated with BOA’s bonus plan, but still increased as a percent of sales to 27.7 percent of sales from 23.2 percent a year ago.

In the six months, BOA’s sales were down 34.5 percent to $76.1 million, while operating income fell 57.1 percent to $16.0 million.

On the analyst call, Pat Maciariello, CODI’s COO, said BOA again added new partner platforms in the quarter that should drive growth in 2024 and beyond.

“BOA’s selling continues to be significantly below end market demand,” said Maciariello. “We believe year-over-year comparisons will improve on a percentage basis in the third quarter of this year, and the 2023 adjusted EBITDA performance will track closely to full-year 2021 levels.”

Maciariello noted that launching the brand’s first ski boot with BOA lace technology in January in partnership with K2 continues to track above expectations. “We expect them to have a meaningful presence on the slopes in this upcoming ski season,” said Maciariello. “We are also proud of the continued widespread adoption of BOA-enabled products by cyclists. And this year’s recently completed Tour De France, approximately 75 percent of competitors, including the overall winner, Jonas Vingegaard, competed in shoes incorporating BOA fit technology.”

PrimaLoft’s Q2 Sales Drop 18 Percent
Primaloft, acquired in July 2022, saw sales decline 18.1 percent in the second quarter to $22.2 million from $27.1 million a year ago. Similar to BOA, the decline was attributable to lower ordering from existing customers due to higher inventory levels at retail customers which more than offset new customer wins. Primaloft is expected to benefit as retail ordering begins to normalize by the end of 2023.

PrimaLoft’s operating income dropped 50 percent to $2.8 million. Gross margins improved to 63.1 percent from 61.0 percent a year ago due to price increases implemented in the fourth quarter of 2022. SG&A expense increased by 3.6 percent while increasing as a percent of sales to 25.7 percent of sales from 20.3 percent a year ago.

In the first six months, PrimaLoft’s sales were down 11.7 percent to $46.7 million, while operating income decreased 28.4 percent to $7.8 million.

Maciariello said, “PrimaLoft continued to show modest declines in both revenue and adjusted EBITDA in the year-to-date period as customers continue to hold on to target inventory levels. As Elias mentioned, we believe we are seeing somewhat of a bottoming in our end customers’ inventory cycles and bookings have shown improvement since the end of the first quarter. We continue to have project wins at PrimaLoft in the second quarter and continue to believe 2024 will be a strong year for the company.”

5.11 Sales Expand 5 Percent 
At 5.11, the outdoor and tactical gear brand’s sales grew 5.0 percent in the second quarter to $126.0 million from $120.0 million a year ago. The increase was driven by a $9.0 million gain in direct-to-consumer sales primarily due to strong e-commerce growth and sales from thirty new stores opened since June 2022. 5.11 had 121 stores as of June 30. The sales gain also reflected a $1.6 million increase in international sales resulting from strong demand and inventory availability. These increases were offset by a decrease of $5.5 million in domestic wholesale sales due to a greater fulfillment of backorders in the year-ago period.

5.11’s operating income in the second quarter slid 13.8 percent to $10.6 million. Gross margins eroded slightly to 53.9 percent from 54.2 percent a year ago. Increased product costs and promotional activity to drive sales were nearly offset favorably by price increases, customer mix, and product mix.

Maciariello said, “Despite continued revenue growth in the second quarter, adjusted EBITDA fell slightly as gross profit margins marginally as the company looked to reduce seasonal inventory in the quarter.”

In the first six months of the year, 5.11’s sales were down 11.8 percent to $250.5 million, while operating profits were about flat, at $18.3 million against $18.2 million for the same period in 2022.

Marucci Sports’ Q2 Revenues Expand 35.1 Percent
Marucci Sports’ sales grew 35.1 percent in the second quarter to $37.3 million from $27.6 million a year ago. Sabo said, “Marucci’s end markets are not suffering from an inventory hangover, and their strong product lineup has demonstrated that the consumer is still spending for on-trend products.”

The sales increase was due to higher customer demand, particularly at big-box retailers and through direct-to-consumer channels, and market share growth in Marucci’s key product lines, including aluminum and wood bats and batting gloves. Marucci completed an add-on acquisition in early April, Baum Bat, a manufacturer of composite bats, which allowed further penetration of the wood bat market during the quarter.

Marucci posted an operating profit of $3 million against an operating loss of $1.4 million a year ago. Gross margins improved to 54.3 percent from 45.6 percent a year ago due to higher spending on air freight in the prior year’s quarter due to supply chain disruption and higher direct-to-consumer sales during the current quarter.

Due to sales leverage, SG&A expenses increased 23.9 percent but declined to 38.8 percent of sales from 42.4 percent a year ago. The overall SG&A expense reflects the increase in net sales, with increases in credit card expenses, royalties, commissions, business development fees, and other variable costs. In the current quarter, additional promotional and marketing expenses were incurred due to seasonal programs at several retail customers and increased operational expenses to support its growth.

“Marucci once again had an exceptional quarter,” said Maciariello. “Sales growth was strong across most channels. Our latest acquisition of composite bat maker, Baum Bat, performed well in the quarter, and we are pleased with the integration to date. The company has made significant progress in several of its adjacent categories, and we are particularly excited by strides made in the large fielding glove market and Marucci’s growth geographically, primarily in Japan.”

In the half, Marucci’s sales grew 19.9 percent to $95.6 million, while operating earnings gained 170 percent to $17.3 million from $6.4 million a year ago.

Velocity Outdoor’s Sales Fall 30 Percent
Velocity Outdoor’s sales declined 29.7 percent in the quarter to $37.8 million. The segment includes the Crosman, Benjamin, Ravin, LaserMax, CenterPoint, and King’s Camo brands in the airguns and archery space. The decrease was primarily due to softening consumer demand caused by macroeconomic factors.

Velocity Outdoor’s operating loss in the quarter was $1.6 million versus operating income of $5.4 million in the same period a year ago.

Gross margins declined to 26.4 percent from 27.8 percent a year ago due to product mix and reduced absorption of operating costs. SG&A expenses increased 26.4 percent due to product mix and reduced absorption of operating costs.

In the half, Velocity Outdoor’s sales fell 31.7 percent to $71.9 million. Velocity Outdoor’s operating loss for the six months of $4.9 million compared with operating income of $8.5 million for the same period a year ago.

Maciariello said the Velocity business continues to see pressure in its major end markets due to reduced sell-through and tight inventory controls by hunting and fishing-focused retailers. He said, “As we have discussed repeatedly, Velocity benefited greatly from demand pull-forward during the pandemic, as outdoor activity levels increased dramatically. As anticipated, the company is now paying the cost for this, and demand has declined significantly below what we see as what have historically been trend-line levels. The impact of this bullwhip effect is having an outsized and, we believe, short-term impact on our consolidated financials.”

He added that while point-of-sale activity remains sluggish in Velocity’s airgun segment, the brand sees slightly more positive signs around end-customer demand in archery. Maciariello noted that retailers have been slow to add to depleted inventory levels. “While we believe the company will have meaningfully positive adjusted EBITDA in the second half of 2023, we continue to focus both on cost controls and demand stimulation as we continue to navigate this difficult period,” said Maciariello of Velocity.

CODI’s Overall Q2 Results Top Expectations
Overall, CODI’s Branded Consumer segment, including active lifestyles brands and Ergobaby and Lugano Diamonds, saw total revenues down 1.4 percent in the quarter to $348.5 million. Adjusted EBITDA grew 3.9 percent to $75.6 million.

At its Niche Industrial segment, which includes Altor, Arnold Magnetic Technologies, and Sterno, sales decreased 7.1 percent in the second quarter to $175.6 million. Adjusted EBITDA improved 7.5 percent to $33.8 million.

Companywide, sales were up 2 percent on a reported basis and down 3 percent on a pro-forma basis to $524.2 million.

Net income declined 44.8 percent to $17.1 million from $31.0 million in the second quarter of 2022. Net income from continuing operations slumped 51.3 percent to $12.9 million—the decrease in revenue due to higher SG&A expense, interest expense, and amortization expense.

Adjusted EBITDA was $90.1 million, up 3.1 percent from $87.4 million a year ago. The increase was said to be primarily due to the acquisition of PrimaLoft.

Sabo said second-quarter results exceeded expectations, pointing to the benefits of CODI’s diversification efforts. He said, “While several of our consumer businesses continued to be impacted by persistent inventory destocking headwinds, our Niche industrial businesses continued to perform well. The overall strength of our subsidiaries gives us confidence in our belief that we’re well positioned to not only grow this year but have a snapback year in 2024 once these headwinds fully dissipate.”

Maciariello summed up the quarter, “As a whole, given the headwinds, we are pleased with our performance in the second quarter as it comes in above our expectations. Though we believe that some of the broader headwinds facing our companies are starting to improve, our management teams remain vigilant in the going costs. We believe we will grow in 2023 and anticipate a strong 2024.”

Regarding CODI’s 2023 outlook, Sabo said that given the persistence in inventory destocking and the lag between bookings growth and revenue growth, the company expects third-quarter adjusted EBITDA to be roughly similar on an absolute dollar basis to this year’s second quarter. CODI still expects adjusted EBITDA growth for the full year compared to 2022, with a “strong rebound in growth” anticipated in the fourth quarter.

Sabo also said he sees some signals of an improving M&A environment. He observed, “In terms of M&A, deal activity has remained suppressed below historical levels for some time now. However, we started to see some increased activity in the second quarter that we expect to gain momentum over the balance of the year.”

Photo courtesy Primaloft