Clarus Corp. reported that Black Diamond’s sales improved sequentially from the second quarter and were down modestly in the third quarter as the North American region showed signs of stabilization to offset softness in its European business.
Overall sales in the Clarus Outdoor segment, which includes Black Diamond and Pieps, an Australian-based maker of avalanche beacons and snow safety products, were $61.1 million, down 2.9 percent from $62.9 million in the year-ago period, a marked sequential improvement from the segment’s 23.8 percent year-over-year decline in the second quarter.
“North America is stabilizing but remains challenging as retailers continue to manage inventory and keep open to buys tight,” shared Warren Kanders, executive chairman of Clarus Corp., on a conference call with analysts. “Europe was a drag on the overall result as the region felt some of the inventory and macroeconomic challenges that our North American business faced in the fourth quarter of last year and the first half of this year. We expect this softness to persist in Europe in the coming quarters.”
Gross margins in the Outdoor segment reportedly remained compressed due to liquidation efforts to right-size inventories and clear slower-moving products. The Outdoor segment also continued various cost-reduction initiatives and operational improvements in the quarter.
“We drove efficiencies in our R&D, marketing, sales and discretionary areas while also strategically investing in key areas to get the brand growing from the core again,” Kanders said on the call. “As such, we hired a new vice president of North American sales and simplified the structure of the team while adding new directors for specialty and key accounts.”
The hires came as Clarus recently overhauled its management team. John Walbrecht, the company’s president since 2018, stepped down on March 31 in a mutual agreement with the company. On February 2, Neil Fiske was appointed president of Black Diamond. Fiske is the former CEO of Eddie Bauer and Billabong International. He was, most recently, CEO of Marquee Brands, the parent of Dakine, Body Glove and 11 other brands.
In apparel, still seen as an important growth driver for Black Diamond, the brand hired a new business unit director, strengthened its design team and implemented a “more rigorous athlete-driven” product development process.
“Importantly, we signed a multi-year agreement to be the official outfitter of Rainier Mountaineering, one of America’s premier guide services with over 70 guides around the world from Rainier to Denali to Akron Conga and the Himalayas,” added Kanders. “Under this partnership, Rainier Mountaineering will be a close partner in bringing innovation and extensive field testing to our alpine mountaineering apparel and hard goods.”
Black Diamond also bolstered its roster of elite climbers, skiers and mountain athletes, adding Angela Hawse, president of the American Mountain Guides Association; Adrian Ballinger, high altitude climber and skier and founder of Alpenglow Expeditions; and Topo Mena and Carla Perez, Big Mountain Alpinists and Guides based in South America.
Mike Yates, CFO, Clarus Corp., said the Outdoor segment “entered the fourth quarter with a strong order book; however, headwinds have continued to increase in our European market given mild early winter conditions, as well as impact from macroeconomic headwinds and geopolitical issues. Our international global distributor business remains resilient, but we do anticipate some softness relative to the strength this region showed in a prior year.”
Kanders said, “Given our operational progress in Outdoor this year, we expect to begin 2024 on a much firmer footing as we pursue growth from our core while seeking to develop new revenue streams and categories, channels and geographies.”
Companywide, consolidated sales fell 13.5 percent to $100.1 million in the third quarter. While sales were down in Outdoor in the Outdoor segment and fell 45.0 percent in Precision Sports (Sierra, Barnes), sales grew 8.6 percent in Adventure (Rhino-Rack, Maxtrax).
“Our brands largely experienced another challenging quarter given persistent macroeconomic headwinds that have constrained consumer demand and the continued inventory overhang at retail and distributors,” said Kanders. “This was especially pronounced in our Precision Sports segment, where customers stockpiling with markdown inventory earlier this year impacted sales velocity in the third quarter. This was partially offset by a snapback quarter in our Adventure segment.”
Precision Sport Segment Q3 Revenues Fell 45 Percent
Precision Sport segment sales were $18.8 million compared to $34.2 million in the year-ago quarter. The sharp decline was said to be due to the market for bullets and ammunition significantly slowing as a result of heightened inventory levels at retail and at key distributors, lower consumer demand given the promotional pricing environment earlier in the year, and broader macroeconomic headwinds
“As one partner told me, not only is there too much inventory at retail and in the distribution channel but there’s also too much inventory in the hands of the consumer,” said Yates on the analyst call. “We believe the consumer took advantage of the promotional pricing environment earlier in the year to stockpile inventory and frankly bought inventory when it was available, but now has ample supply to get them through this fall hunting season.”
Yates said the fall 2023 hunting season “has been very tough,” with sales particularly challenged at Barnes. Yates said, “We have been working through this rough patch and need to find an equilibrium of supply and demand for Precision Sports business. We specifically did not take any action to be promotional in our pricing to move our premium inventory. We are comfortable with our Barnes center filed rifle hunting ammo and did not want to liquidate these premium products hastily, as we expect that demand will recover in the coming quarters.”
He added, “Moreover, given the two geopolitical conflicts our world is facing, we are seeing a modest uptick on some of our bullet calibers in October geared towards the military and the defense sector. While this could be a catalyst for growth in 2024, it’s still too early to tell, but we are shifting production capacity to these new opportunities.”
In September, Kanders, who is Clarus’ largest shareholder, submitted a non-binding bid to acquire the company’s Precision Sports segment for $160 million. Kanders said a special committee continues to undertake an ongoing review to explore the sale.
Adventure Segment Posts Sales Growth
Adventure segment sales increased 9 percent to $20.2 million, reportedly reflecting increased demand in Australia and continuing stabilization in North America.
Yates said that in Australia, new car sale records have been broken for the third month running to drive a healthy Rhino-Rack sales recovery in the region, driven by strong OEM sales with the introduction of a new vehicle and product line and strong sell into a new box retail partner. In the U.S., Adventure revenue surpassed internal expectations.
Yates said that while demand for Overlanding gear “remains sluggish” in the U.S., the category gained traction with new customers and through e-commerce. The CFO said, “Overall, customers domestically in the U.S. have been and continue to control their open-to-buy dollars and are selective on their replenishment. As an example of tighter purse strings, many participants pulled out of the Overland Expo, and manufacturers are not displaying at SEMA this year to reduce cost.”
At Maxtrax, sales in Q3 rebounded compared to Q2, with strong revenue expected in the fourth quarter. Yates said, “We currently believe the worst is behind us for our Adventure brands in this segment, and we’re quite constructive about the opportunities we have to drive strong sales growth and better than 13 percent adjusted EBITDA margins in our Adventure segment over the long-term.”
On October 9, Clarus purchased Tred Outdoors, an Australia-based outdoor and recovery gear manufacturer, to add to the Adventure segment. Tred is expected to contribute about $1.5 million to $2 million in sales in the fourth quarter.
Gross margin improved 140 basis points to 35.5 percent, primarily driven by easing freight costs positively impacting gross margin by 90 basis points, along with a positive channel and product mix of 80 basis points, somewhat offset by a 30-basis point unfavorable impact from foreign currency exchange.
SG&A expenses declined 1.5 percent to $31.8 million, driven by expense reduction initiatives, lower non-cash stock-based compensation expense for performance awards at corporate, lower sales commissions because of the lower revenue, and lower intangible amortization expense. These decreases were partially offset by higher legal costs of $0.4 million at corporate due to the litigation related to the Short Swing Profit trading situation from the third quarter of 2022 and investment in e-commerce initiatives in the Outdoor segment.
As a percent of sales, SG&A expenses increased to 31.8 percent from 27.9 percent.
The net loss came to $1.3 million, or 3 cents a share, compared to net income of $2.8 million, or 7 cents, in the prior year’s third quarter. The latest quarter includes a $1.1 million restructuring charge related to cost reductions, as well as $800,000 of transaction costs associated with the TRED acquisition and the costs associated with the process related to the company’s evaluation and exploration of possible strategic alternatives in response to the non-binding indication of interest received from Kanders to acquire the company’s Precision Sport segment.
Excluding a $1.1 million restructuring charge related to cost reductions, Tred acquisition costs, and the costs related to Kanders’ Precision Sport’s proposal, the adjusted net income fell 41.2 percent to $6.0 million, or 16 cents per share, from $10.2 million, or 26 cents, in the same year‐ago quarter. Analysts’ consensus EPS estimate had been 19 cents.
Adjusted EBITDA in the third quarter was $9.9 million, or an adjusted EBITDA margin of 9.9 percent, compared to $15.1 million, or an adjusted EBITDA margin of 13.0 percent, in the same year‐ago quarter. The decline in adjusted EBITDA was driven by lower sales volumes and a $0.4 million consolidated foreign currency exchange headwind due to the strength of the U.S. dollar against the Australian Dollar. These impacts were partially offset by improvements in SG&A in the quarter.
Clarus Lowers Outlook As Q3 Misses Analyst Targets
Companywide, Clarus scaled back its outlook for the second straight quarter as third-quarter sales and earnings were below year-ago levels and analyst targets.
Clarus now expects fiscal year 2023 sales of $364 million to $368 million ($385 million to $400 million previously) and adjusted EBITDA of $33 million to $35 million, previously $42 million to $50 million. At the beginning of the year, guidance called for sales of approximately $420 million and adjusted EBITDA of approximately $60 million.
Photo courtesy Black Diamond/Kelly Halpin