Clarus Corp. lowered its guidance for the year as strong demand for its Precision Sport segment, led by Sierra and Barnes, was offset by softer sales in its Adventure segment, which consists Rhino-Rack and Maxtrax. The Outdoor segment, led by Black Diamond, saw strong demand but is facing some supply chain challenges and reduced open-to-buys from larger accounts.
“Our results this quarter demonstrate how resilient superfan brands are and how they continue to take market share even in the midst of down markets,” said Clarus’ President, John Walbrecht, on an analyst call. “We delivered market outperformance in our outdoor and Precision Sports segment and in our Adventure segment, while we are experiencing short-term challenges due to vehicle delivery shortfalls and strained supply chains, we are confident that we are positioning the brands for growth as outdoor adventure through overlanding continues to build momentum globally.”
In the third quarter ended September 30, sales grew 6.2 percent to $115.7 million. The sales increase includes a revenue contribution of $3.7 million from Maxtrax, acquired on December 1, 2021. Organic sales were up 6 percent in the quarter, Maxtrax contributed 3 percent and foreign exchange was a 3 percent headwind.
On a constant currency basis, total sales were up 9 percent in the quarter. By segment, Outdoor grew 7 percent, Precision Sports jumped 13 percent and Adventure declined 5 percent. Excluding the impact of currency changes, Clarus would have seen 11 percent growth in outdoor, a flat performance in Adventure and a 13 percent gain in Precision Sports.
Net income fell 37.8 percent to $2.8 million, or 7 cents a share. On an adjusted basis excluding non‐cash items and transaction costs, earnings fell 43.6 percent to $10.2 million, or 26 cents per share.
Outdoor Segment Sales Expand 7 Percent
Sales in the Outdoor segment increased 7 percent, or 11 percent on a constant currency basis, to $62.9 million due to strong demand, slightly offset by supply chain challenges associated with microchips that negatively impacted the company’s ability to deliver its snow-safety products on time and in full.
“Deliveries remained strong in the third quarter, driven by 35 percent growth in apparel and 7 percent growth in hard goods, specifically gloves, packs, ski poles and core climbing equipment,” said Walbrecht. In order to meet customer demand, an incremental $1.1 million was spent on air freight. Mike Yates, CFO said, “We will need to continue to do this in the fourth quarter given the persistent demand imbalance.”
Walbrecht estimated Black Diamond ended the quarter with $8.5 million plus in back-order demand globally and expects to work through this in the coming months.
Yates also noted that while apparel was strong in the quarter, a slow start has been seen to winter selling in North America, which is believed to have pushed out some purchasing of cold weather apparel from a traditional preseason model into more of a replenishment model. Yates said, “Despite this, we expect sustained growth in the apparel category going forward.”
By sales channel, specialty accounts continued to outpace big box and national accounts with specialty account sales up 69 percent in the quarter, which Walbrecht declared as “again proof of market share gains.” Black Diamond’s larger national accounts pulled back on orders as they faced elevated inventory levels, warehouse congestion and slowing retail traffic. This resulted in “dramatically” reduced open-to-buys. Walbrecht said, “This wasn’t a Black Diamond issue as our products continue to show strong sell-through, while other discretionary categories not geared towards the activity-based consumer were meaningful impacted.”
As a result, Black Diamond expects a shift to a much more at-once-driven business with its larger accounts through Q4 and into 2023. Black Diamond’s direct-to-consumer business was up 23 percent in the quarter year-over-year. Overseas, Europe’s sales were down only $1 million year-over-year, inclusive of more than $2.4 million impact from FX alone. Said Walbrecht, “We believe this highlights the strength of our relationships with the vast network of European specialty stores and the desire for the consumer to remain active.”
Precision Sport Sales Jump 13 Percent
Precision Sport sales increased 13 percent to $34.2 million, reflecting continued strong demand and market share gains. Strength in the international business was offset by lower domestic ammo sales due to supply chain constraints around shell cases for the full range of products
“Our niche brand positioning and approach to maintaining predictable, balanced end market results in another record quarter,” said Walbrecht. The growth was driven by the prioritization of orders for the military and law enforcement and accelerated demand in its international business. Demand for its centerfire rifle hunt product remains high, limited only by availability of brass cases required to load and deliver this product, which slightly impacted sales through domestic wholesale channels.
Said Walbrecht, “As we look towards the remainder of the year and into 2023, we expect our bullet business to remain stable and our international business could have more aggressive near-term growth curve if the war in Europe persists. We see opportunities in our ammo initiative and centerfire rifle business, partially offset by ongoing challenges in our ability to source materials.”
Adventure Segment Sales Impacted By Constraints on Vehicle Production
Sales in the Adventure segment were $18.6 million, reflecting lower consumer demand given the challenging economic environment and constraints on new vehicle deliveries, which impacted new product sales both in the Australian and North American markets.
Walbrecht said Adventure segment results were consistent with what larger competitors in the space are seeing. Walbrecht said, “New vehicle supply, particularly in Australia, continue to lag demand with consumers waiting months for their vehicles, and we began to experience similarly difficult conditions in North America as well.”
He estimates new vehicle introductions can account for 10 to 15 points of annual growth for Rhino-Rack and Maxtrax.
In addition, global economic headwinds, including inflationary pressures and FX, impacted the segment’s ability to drive growth and profitability. Walbrecht said, “Given the relatively young age of these brands within our portfolio, we are still in the process of activating our innovate and accelerate playbook including meaningful new product introductions and sales channel development.”
Walbrecht said the combination of factors impacting the Adventure segment in the quarter will be short-lived. Said Walbrecht, “Our growth premise for Adventure segment has remained unchanged. We continue to see global vehicle trends shift towards more SUVs, CUVs, trucks, and side-by-side or utility task vehicles. Outdoorism combined with overlanding is setting the global automobile fashion trends. North America, Europe and the Middle East are years behind the overland market development in Australia.”
Gross Margins Erode 190 Basis Points
Companywide gross margins in quarter eroded 190 basis points to 34.1 percent. Improvements in channel and product mix were more than offset by higher freight costs, as well as unfavorable foreign exchange movements. Higher freight costs had a negative impact on gross margin of 200 basis points, while foreign currency had a 180 basis point impact.
SG&A expenses in the quarter were $32.3 million, or 27.9 percent of sales, compared to $31.3 million, or 28.7 percent, a year ago. The inclusion of Maxtrax and higher go-to-market investments in the Outdoor segment were partially offset by lower non-cash stock-based compensation for performance awards.
Adjusted EBITDA was down 21.3 percent to $15.1 million from $19.2 million a year ago with the EBITDA margin sliding to 13.0 percent from 17.7 percent. The decline in adjusted EBITDA was driven by lower sales in the Adventure segment, as well as heightened freight costs and unfavorable movements in foreign exchange rates, partially offset by lower discretionary spending. Removing FX, adjusted EBITDA margin would have been 15.4 percent.
“We believe elevated freight costs are transitory as supply chains continue to stabilize, and we are encouraged by the reduction in lead times back to pre-pandemic levels, while container costs are decreasing dramatically,” said Walbrecht. “While we believe that we will continue to experience downward FX pressure in the short term, we expect the rates will normalize over time.”
Inventory levels were $155.2 million compared to $153 million at the end of the second quarter. Yates said Clarus continues to carry higher inventory than typical in an effort to ensure on-time deliveries and fulfillment as well as to mitigate supply chain and logistical challenges. The CFO added, “As a reminder, our inventory does not go bad, but we are still focused on seeking to reduce our inventory as we close out the year. Our goal is to end 2022 in an inventory position that is approximately $145 million.”
Lowered Guidance
Guidance for the full year was reduced due to lower sales in the Adventure segment, as well as the volatile foreign currency market and higher freight costs. The updated outlook now calls for:
- Sales to grow approximately 19 percent to $445.0 million (up 25 percent to $470.0 prior) compared to 2021. This includes the assumption that the strong U.S. dollar will be a $6 million sales headwind in the fourth quarter of 2022;
- By segment, sales in the Outdoor segment are expected to increase 1 percent to approximately $223.0 million, up high-single-digits to $237.5 million previously). The Precision Sport segment is now expected to increase 18 percent to approximately $130.0 million, up 16 percent to $127.5 million previously, and the Adventure segment is now expected to contribute approximately $92 million ($105 million previously;
- Adjusted EBITDA in 2022 is now expected to be approximately $64 million, $78 million prior, or an adjusted EBITDA margin of 14.4 percent, 16.5 percent prior; and
- Capital expenditures are now expected to be approximately $8.0 million, $9.0 million previously, and free cash flow is now expected to range between $0 million to $5 million, $30.0 million to $40.0 million previously, for the full year 2022.
Photo courtesy Black Diamond