EXEC: 5.11 Tactical was the Lone 2023 Active Lifestyle Gainer at CODI

Brand aggregator Compass Diversified (CODI) saw full-year 2023 sales increase 2.6 percent to $1.33 billion in its Consumer Brands segment, which includes the 5.11, Boa, Primaloft and Velocity Outdoor brands in the active lifestyle market, among other brands in other consumer markets. The 5.11 Tactical brand was the only active lifestyle brand in the segment to post an increase in sales for the year, due in large part to its direct-to-consumer component of the business as all other active lifestyle brands continued to deal with the ongoing retail de-stocking process prevalent across the U.S. retail landscape.

5.11 Tactical
5.11 full-year 2023 sales increased 9.6 percent to $533.1 million in 2023. The growth was attributed primarily to a $29.8 million increase in direct-to-consumer sales – largely due to strong demand in digital sales – in addition to sales from new retail store openings since December 2022 – bringing the total store count to 123 as of December 31, 2023. Additionally, international sales reportedly increased $8.0 million while domestic wholesale sales increased $7.9 million both resulting from strong demand and inventory availability improvement as compared to the prior year.

Consolidated segment gross margin was 52.0 percent of sales in the year ended December 31, compared to 52.9 percent in the year ended December 31, 2022. Gross margin was said to be unfavorably impacted by increased product costs, promotional activity to sell through seasonal inventory and an increase in inventory reserves, which was offset favorably by price increases, as well as customer mix and product mix.

Selling, general and administrative (SG&A) expenses for the year increased to $220.9 million, or 41.4 percent of net sales, compared to $203.7 million, or 41.9 percent of net sales, in the prior year. The increase in SG&A expense for the year was said to be largely driven by the costs associated with additional retail stores, increased headcount since the end of 2022, as well as increased bonus-related expenses. These increases were reportedly offset by decreases in expenses related to the usage of temporary labor, bad debt expense and other expenses.

Segment operating income for the year was $46.7 million, an increase of $3.2 million year-over-year when compared to 2022.

Fourth quarter sales at 5.11 increased 8.7 percent to $147.4 million, compared to $135.6 million in the prior-year Q4 period. Adjusted EBITDA for the 5.11 business was $21.3 million in Q4 2023, compared to $19.6 million in Q4 2022.

In August 2021, CODI completed a recapitalization of 5.11 whereby the company entered into an amendment to the intercompany loan agreement with 5.11. The 5.11 Credit Agreement was amended to provide for additional term loan borrowings of $55.0 million to fund a distribution to shareholders. The company owned 97.7 percent of the outstanding shares of 5.11 on the date of the distribution and received $53.7 million. The remaining amount of the distribution went to minority shareholders.

5.11 purchases inventory from a vendor who is a related party to 5.11 through one of the executive officers of 5.11 via the executive’s 40 percent ownership interest in the vendor. During the years ended December 31, 2023, 2022 and 2021, 5.11 purchased approximately $1.7 million, $2.0 million, and $1.1 million, respectively, in inventory from the vendor.

Boa
Boa net sales for the year ended December 31, 2023 were $155.8 million, a decrease of $52.9 million, or 25.3 percent, when compared to net sales of $208.7 million for the year ended December 31, 2022. The decrease was reportedly reflected across key industries including Snow Sports, Cycling, Outdoor, Athletic, Workwear and Performance Bracing. The main factor of the decrease in sales was said to be higher-than-anticipated end-market inventory levels due to supply chain normalization and the corresponding inventory ordering surge experienced in many of the brand’s industries in 2022. The company said it anticipates a normalization of inventory levels by the middle of next year.

Gross margin was 59.7 percent of net sales for the year, compared to 60.7 percent for the same period in 2022. The decrease in gross margin was said to be driven by fixed manufacturing overhead expenses and an increase in depreciation expense related to tooling.

SG&A expense for the year was $49.0 million, or 31.5 percent of net sales, compared to $52.3 million, or 25.0 percent of net sales for 2022. The $3.2 million decrease in SG&A expense for the year was said to be primarily due to decreased employee costs related to Boa’s bonus plan.

Segment operating income was $27.3 million for the year ended December 31, 2023 as compared to $57.8 million in segment operating income in the year ended December 31, 2022, a decrease of $30.5 million.

Fourth quarter sales at Boa were flattish, totalling $42.4 million, compared to $44.5 million in Q4 2022. Adjusted EBITDA for the Boa business increased to $14.0 million in Q4, compared to $13.8 million in the 2022 fourth quarter.

In December 2023, CODI completed a recapitalization at Boa whereby the LLC entered into an amendment to the intercompany loan agreement with Boa. The Boa Credit Agreement was amended to provide for additional term loan borrowings of $165.9 million to fund a distribution to shareholders. The LLC received a distribution of $131.0 million related to their ownership of the outstanding shares of Boa on the date of the distribution. Non-controlling shareholders received a distribution of $11.7 million, and the remaining amount of the recapitalization was used to repurchase employee-owned shares and to pay a bonus to employees who held phantom stock options and were not eligible to participate in the distribution to non-controlling shareholders. Boa recorded compensation expense of $3.1 million related to the bonus paid to employees as part of the recapitalization.

In September 2021, Boarepurchased shares of its issued and outstanding common shares from its largest minority shareholder for a total payment of $48.0 million, which Boa financed by borrowing under the BOA Credit Agreement. The BOA Credit Agreement was amended to provide for additional term loan borrowings of $38.0 million, and consent to the repurchase of the shares from the minority shareholder. The transaction was accounted for in accordance with ASC 810 – Consolidation, whereby the carrying amount of the non-controlling interest was adjusted to reflect the change in the ownership interest in Boa that occurred as a result of the share repurchase. The difference between the fair value of the consideration paid of $48.0 million and the amount by which the non-controlling interest was adjusted of $39.4 million was recognized in equity attributable to the company.

A contract manufacturer used by Boa as the primary supplier of molded injection parts is a non-controlling shareholder of Boa. During the years ended December 31, 2023, 2022 and 2021, Boa purchased approximately $42.1 million, $56.1 million and $48.3 million, respectively, from this supplier.

PrimaLoft Technologies
PrimaLoft Technologies reported net sales for the year ended December 31, 2023 were $67.1 million, a decrease of $12.9 million as compared to net sales of $79.9 million for the year ended December 31, 2022. The decrease in net sales during the year was said to be attributable to higher-than-anticipated end-market inventory levels leading to lower ordering from existing customers in the first half of the year.

The company expects that retail ordering will begin to normalize in 2024.

Gross margin for 2023 was 62.7 percent of sales, as compared to gross margin of 59.4 percent for 2022. In the prior year, PrimaLoft recorded $0.6 million in amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the step-up amortization, the gross profit as a percentage of net sales for 2022 was 60.2 percent of sales. Gross margin increased year-over-year primarily due to price increases implemented in the fourth quarter of 2022.

SG&A expense for the year was $19.4 million, or 29.0 percent of net sales, compared to $27.6 million, or 34.5 percent of net sales, for 2022. SG&A expense in 2022 included $5.8 million in transaction costs associated with the company’s acquisition of PrimaLoft. Excluding the transaction costs, SG&A expense decreased approximately $2.4 million due to a decrease in stock compensation and a reduction in marketing costs.

PrimaLoft performed an interim impairment test of their goodwill as of December 31, 2023 as a result of operating results that were below forecast amounts that were used as the basis for the purchase price allocation at acquisition. The impairment test resulted in PrimaLoft recording an impairment expense of $57.8 million in the year ended December 31, 2023.

Segment operating loss for the year ended December 31, 2023 was $57.1 million compared to segment operating loss of $1.9 million for 2022, primarily as a result of the goodwill impairment recorded in the fourth quarter of 2023.

Fourth quarter sales at Primaloft fell 32.8 percent to $9.4 million, compared to $14.0 million in the prior-year Q4 period. Adjusted EBITDA for the Primaloft business was $1.7 million in the 2023 fourth quarter, down sharply from $4,3 million in the 2022 fourth quarter.

Velocity Outdoor
Velocity Outdoor, which includes the Crosman, Benjamin, LaserMax, Ravin, CenterPoint and King’s Camo brands, saw
net sales for 2023 decline $60.0 million, or 25.9 percent, to $172.2 million compared to net sales of $232.2 million in 2022. The decrease in net sales for the year was said to be primarily due to declining consumer demand in the overall outdoor sporting goods category and retailers reducing the inventory days on hand.

Gross margin for the year was 26.2 percent of net sales, an 80 basis point decline from 27.0 percent in the year ended December 31, 2022. The decrease in gross profit as a percentage of net sales was primarily attributable to customer and product mix.

SG&A expense for the year was $36.3 million, or 21.1 percent of net sales, compared to $33.9 million, or 14.6 percent of net sales, for 2022. The increase in SG&A expense was said to be primarily driven by reduced revenue and marketing investments associated with the King’s acquisition.

Velocity performed an interim impairment test of their goodwill during the quarter ended September 30, 2023 as a result of operating results that were below forecast amounts that were used in quantitative impairment testing performed in March 2023. The impairment test resulted in Velocity recording an impairment expense of $31.6 million in the year ended December 31, 2023.

Velocity Outdoor segment operating loss for the year ended December 31, 2023 was $32.8 million, a decrease of $51.8 million when compared to segment operating income of $19.0 million for the comparable period in 2022.

Fourth quarter 2023 net sales at Velocity Outdoor were down 10.9 percent to $45.8 million, compared to $51.5 million in Q4 2022. Adjusted EBITDA for the Velocity Outdoor business was $3.1 million in Q4, compared to $3.8 million in the prior-year fourth quarter period.

Image courtesy 5.11 Tactical