Clarus Corporation (NASDAQ:CLAR) Q3 2023 Earnings Call Transcript
Clarus Corporation (NASDAQ:CLAR) Q3 2023 Earnings Call Transcript November 7, 2023
Operator: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's Financial Results for the Third Quarter ended September 30, 2023. Joining us today are Clarus Corporation's Executive Chairman, Warren Kanders; CFO, Mike Yates; and the company's External Director of Investor Relations, Cody Slach. Following their remarks, we'll open your call for questions. Before we go further, I would like to turn the call over to Mr. Slach as he reads the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.
Cody Slach: Thanks. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to potential risks and uncertainties that could cause the actual results of operations or financial condition of Clarus Corporation to differ materially from those expressed or implied by the forward-looking statements. More information on potential factors that could affect the company's operating and financial results is included from time to time in the company's public reports filed with the SEC.
I'd like to remind everyone this call will be available for replay through November 7, 2024, starting at 7:00 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release as well as on the company's website at claruscorp.com. Now I'd like to turn the call over to Clarus' Executive Chairman, Warren Kanders. Warren?
Warren Kanders: Thank you, Cody. Good afternoon, and thank you all for joining Clarus' earnings call to review our results for the third quarter of 2023. I am joined by our Chief Financial Officer, Mike Yates. I will start the call by addressing the overall business and corporate strategy. Mike will then provide specific comments on the performance of our three segments and a detailed financial review. Given the non-binding indication of interest I previously submitted to acquire the company's Precision Sports segment and our Special Committee's ongoing review, I believe it's prudent for Mike to handle today's Q&A session. Now, jumping to our performance. 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.
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, which I will discuss shortly. As an organization, however, we did not stand idle. During the quarter, we made significant strides in the strategic review of our brands developing compelling long-term growth plans, rebuilding our teams, and taking steps to recalibrate each business to operate most efficiently in the post-COVID era. We're undoing some of the choices made by prior management teams, so to a certain extent, we needed to press the reset button in order to pursue rebuilding our reputation as a customer-centric enterprise.
I am confident that the teams in place are fully capable of driving the turnaround. Both of our leaders at Outdoor and Adventure have specific past experiences as operators for private equity backed businesses, where they were responsible for structurally correcting and rightsizing iconic global heritage brands in preparation for their regrowth phase. We see the same characteristics with our brands, but the early steps require patience as the strategic initiatives are in motion. With our pivot away from a corporate cost structure nearly complete, each of the segment leaders now have full P&L ownership and are tasked with driving the success of their respective business units. As we build for the long-term, I am pleased with our ability to progress the cash flow initiatives that we can control in this challenging market.
We continue to seek opportunities to reduce our inventory levels without eroding overall gross margin. This includes improving the age of our inventory at Outdoor, while prioritizing the investment in new products underlying potentially compelling new business opportunities. As mentioned, Adventure turned the corner in Q3, reporting 9% sales growth and generating adjusted EBITDA margin over 13%. From an operational standpoint, we completely reshaped the Adventure organization, forming new leadership globally, engaging strategically with key accounts, and developing a clear three-year product horizon, which was well received. This includes the launch of our new Rhino-Rack Pioneer six product, our premium TRED portfolio leader, which we began delivering in October.
This product carries an average gross profit margin that is 1,200 basis points superior to the last generation product. This was supported with additional launches in our crossbar business with the introduction of both the RX100 and RX200 for our OEM partnership with Ford and their Everest product. In our recovery products, we launched the MAXTRAX Lightboard through an exclusive 500 door release with a key retail partner in Australia. Furthermore, we are excited about the acquisition of Australia based TRED Outdoors, which we acquired subsequent to quarter end. TRED is a fast growing outdoor adventure brand, best-in-class, innovative recovery products across offroad four by four automotive touring, camping, and caravans. TRED will continue to operate independently as a wholly owned subsidiary and will be part of our Adventure segment.
The TRED Outdoor brand is designed and built for the seriously adventurous and embodies Clarus's philosophy to identify brands that are passionately supported by customers and consumers who live and breathe the lifestyle. This transaction highlights our continued focus on identifying sought after brands within the Adventure segment that are expected to both enhance our offering to existing retail customers and expand our reach into new and larger channels. In our Outdoor segment, revenue trends improve sequentially from the low of Q2 to down only 3% in the third quarter compared to prior year third quarter. North America is stabilizing, but remains challenging as retailers continue to manage inventory and keep open to buys tight. 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 continued to be compressed as we right-sized inventory and cleared slower moving products. We also continued to pursue 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. 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. In apparel, an important growth driver for Black Diamond, we hired a new business unit director, strengthened the 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. 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. We have also bolstered our roster of legendary climbers, skiers, and mountain athletes with the addition of 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.
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. Zooming out on our consolidated brands and setting our sites on the fourth quarter and beyond, our priorities remain firmly set on the stabilization of sales and margins, additional organizational reshaping and cost reductions, and resetting our brands to a new baseline as we enter 2024. We are confident in our belief that this strategy is grounded in the maximization of shareholder value creation. Before the call -- before passing the call over to Mike, I'd like to update shareholders on a couple of matters. First, we are planning to host an Investor Day in late January.
We will have myself, Mike, and our segment leaders, Neil and Matt, available to share their strategies and growth plans. And finally, although we do not make a practice of commenting on pending litigation, we are pleased with the progress of the lawsuit against Hap Trading LLC and its principle for disgorgement of short swing profits under Section 16B of the securities laws. Fact discovery has for the most part concluded and expert reports are due to be exchanged shortly in late November with rebuttal reports due by late December. The depositions of the experts will be taken by mid-January 2024, and the parties will submit a joint status letter to the court by late January, 2024. At that point, the court will issue a schedule for summary judgment and if the motion is denied, set a trial date.
With that, thank you for being with us today, and I will turn the call over to Mike.
Michael Yates: Thanks Warren, and good afternoon, everyone. Jumping right into the performance in the third quarter, total sales were $100.1 million compared to $115.7 million in the prior year quarter. On a reported and constant currency basis, total sales were down 14% and 13%, respectively. By segment, Adventure reported sales increased 9% to $20.2 million in the third quarter, and on a constant currency basis, sales were up 12% compared to $18.6 million in the third quarter Rack's home market of Australia and the stabilization of sales in the North American market. In Australia, new car sale records have been broken for the third month running with the Australian car market posting its best ever September. As such, we experienced sales in Australia surpassing the 20 million Australian dollars level for the quarter, which is a level not seen since the first quarter of 2022.
This was driven by strong OEM sales with the introduction of a new vehicle and product line and strong sell into a new box retail partner. The team did a tremendous job engaging with key accounts like these to promote our vision and product horizon was well received. In the US, Adventure revenue surpassed our internal expectations. While demand for overlanding gear remains sluggish, we experience success with select new customers through targeted marketing, promotion and training. We continue to focus on expanding our go-to-market strategy and increasing attention to our e-Commerce channel. Onboarding of large new customers in North American market that will start to ship in the fourth quarter of 2023 has completed with a specific product portfolio being tailored for their large national customer base.
But overall, customers domestically in the US 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 in order to reduce cost. In our MAXTRAX brand, sales in Q3 rebounded compared to Q2. A few key accounts are back online after softness in the second quarter, and we expect strong revenue in the fourth quarter in part due to the introduction of our MAXTRAX light new product. 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% adjusted EBITDA margins in our Adventure segment over the long-term.
And as Warren mentioned, after the quarter ended on October 9th, 2023, we purchased TRED Outdoors to compliment our other brands in this segment. We are excited by the prospects for growth in this recovery brand and currently expect TRED to contribute roughly US$1.5 million to US$2 million in sales in the fourth quarter of 2023. Moving to Outdoor. Sales were down 3% on a reported basis to $61.1 million versus $62.9 million in a year ago quarter. While sales have improved from Q2, the overall market continues to be soft due to excess inventory in the channel and a constrained consumer given the macroeconomic headwinds. As Warren mentioned, the regional dynamics are shifting from what we experienced earlier in the year and in the fourth quarter of last year, with our North American business stabilizing and the rest of the world getting tougher.
We 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 strength this region showed in a prior year. Partially offsetting this 3% decline at Outdoor was continued strong execution in our direct-to-consumer business at Black Diamond, which was up 22% in the quarter. We see our direct-to-consumer business as one of the best indicators of the strength of the brand since it is the fullest expression of our assortment and has less of the inventory hangover effect that has dragged on the wholesale market.
We have executed well on an initial set of immediate cost reduction and operational alignment priorities. Our results at Outdoor in 2023 from a margin standpoint reflect the difficult market conditions and our effort to right-size, not just a dollar value, but also the quality and aging of the inventory is all in an attempt to reset the business to a new baseline for 2024. Precision Sports sales were $18.8 million in the third quarter compared to $34.2 million in the third quarter of last year, down 45%. Sales in this segment were constrained by heightened inventory levels at both retail and key distributors, but also some wallet tightening by the consumer. 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.
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. Fall 2023 hunting season has been very tough. We did not move the expected ammo that we were planning to sell, especially at Barnes. 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.
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. Moving onto consolidated gross margins. In the second quarter, gross margin increased 140 basis points to 35.5% compared to 34.1% in the year ago period. This increase was primarily driven by easing freight costs, positively impacting gross margins by 90 basis points, along with positive channel and product mix of 80 basis points. This was somewhat offset by 30 basis point unfavorable impact from foreign exchange.
From a segment perspective, gross margin Adventure increased significantly to 40.7% in a quarter compared to 27.6% in the prior year quarter due to lower freight costs, the benefit from prior year cost out actions being realized in the current period and higher volume. Gross margin at Outdoor was 31.2% in the quarter compared to 33.6% in the prior year quarter, reflecting the continuing rightsizing of our inventory via promotional pricing and higher sales of discontinued merchandise. The quality of our Outdoor inventory is improving, but is not yet fully aligned with demand. We also continue to work on organizational reshaping to reduce cost and expect the actions we are taking to drive improvements in both gross and operating margins in 2024 at the Outdoor business.
Gross margin of Precision Sports increased 540 basis points to 44% in the third quarter compared to 38.6% in the prior year quarter due to favorable cost variances being realized along with better product mix, specifically less ammo sales, and more bullet sales, which are at a higher margin. Selling, general and administrative expenses in the third quarter decreased 2% to $31.8 million compared to $32.7 million in the same year ago quarter. The decline was driven by lower sales commissions, lower intangible amortization expense and lower non-cash stock based compensation expenses for performance awards at corporate, partially offset by investments in e-Commerce initiatives at the Outdoor segment, and approximately $400,000 of higher legal costs in the third quarter of 2023 related to the pending litigation against Hap Trading.
Net loss in the third quarter was $1.3 million or a negative $0.03 per diluted share. This compares to net income of $2.8 million or $0.07 per diluted share in the prior year quarter. Net loss in the third quarter included $1.1 million restructuring charge on a pre-tax basis relating to our efforts to take costs out across our portfolio. The net loss also included approximately $800,000 for transaction costs on a pre-tax basis. These transaction costs related to the TRED Outdoor acquisition and costs related to the ongoing process undertaken by the Special Committee of the Board of Directors relating to its evaluation of the potential sale the Precision Sports business. Adjusted EBITDA in the third quarter was $9.9 million, or an adjusted EBITDA margin of 9.9% compared to $15.1 million or adjusted EBITDA margin of 13.0% in the same quarter a year ago.
The decline in adjusted EBITDA was driven by lower sales volumes, partially offset by improvements in SG&A in the quarter. By segment, adjusted EBITDA was $3.5 million or 5.8% at Outdoor; $6.9 million or 36.6% at Precision Sports; and $2.7 million or 13.3% at Adventure for the quarter. The consolidated adjusted EBITDA includes $3.2 million in corporate costs, which was higher than the $2.8 million in the prior year due to higher legal costs associated with the short swing profit litigation. Now let me shift over to our liquidity At September 30th, cash and cash equivalents were $8 million compared to $12.1 million at December 31st, 2022. Free cash flow defined as net cash provided by operating activities less capital expenditures for the third quarter was a negative $1.1 million.
This compares to a negative $13.6 million of free cash flow in the same year ago quarter. The improvement in free cash flow was due to our efforts to reduce inventory. We paid down roughly $5 million of debt and ended the quarter with total debt of $122.6 million. This put us in a net debt position of $114.6 million, resulting in a net debt leverage ratio of 3.3 times on a trailing 12-month adjusted EBITDA basis. Under our $300 million revolving credit facility, we have approximately $10.4 million outstanding and further borrowing capacity of approximately $17.3 million at September 30th, 2023. Our inventories were lower sequentially by $8.5 million to $140 million at September 30th. This compares -- this $8.5 million decrease compared to the June 30th balance.
As Warren discussed, we did a good job of clearing slow moving inventory and investing behind products with good growth prospects. By Segment, Outdoor has approximately $70 million of inventory and was behind our internal targeted inventory balance due to softer market conditions and a mismatch between available inventory and demand opportunities. However, the aging of inventory is significantly improved in 2023, and the team is focused on prioritizing faster moving products. Precision Sports inventory was higher than expected. Precision Sports has $45 million of inventory at the end of the quarter due to the market slowing and fall hunt season weakness resulting in much higher finished goods, ammunition, especially at Barnes. Adventures trending as planned, ending the quarter of approximately $25 million of inventory.
This includes our investment in new inventory for the new commercial opportunity I mentioned in North American market with our new partner. From a tax perspective, we have over $18 million of NOLs remaining, and we expect these NOLs to offset any federal cash taxes due in 2023. Now let me move on to our 2023 outlook. We now expect sales to land within the range of $364 million to $368 million for the full year 2023, and adjusted EBITDA to be in a range of $33 million to $35 million or an adjusted EBITDA margin of 9.3% assuming the midpoint of sales and adjusted EBITDA guidance. We also now expect full year capital expenditures to be approximately $6 million and free cash flow is now expected to range between $20 million and $22 million for the full year 2023.
We expect to end the year with approximately $120 million in debt, and this is inclusive of approximate $6 million of debt we borrowed in October to fund the TRED Outdoor acquisition. For the fourth quarter, this outlook implies sales in a range of $83 million to $87 million and adjusted EBITDA to range between $6 million and $8 million. The fourth quarter and full year guidance includes one $1.5 million to $2 million of revenue related to TRED that I mentioned earlier. Lastly, during the quarter, Clarus confirmed the receipt of a non-binding indication of interest from Warren Kanders to acquire Precision Sports segment. In response, our Board of Directors formed a Special Committee and retained Houlihan Lokey as a financial advisor to evaluate the proposal and assist in the solicitation of parties that have expressed an interest in and other parties that might be interested in acquiring Precision Sports segments.
At this point, the process is still ongoing, so we have no updates to share. There can be no assurance that any definitive agreement will result from this process or that any transaction will be consummated, whether with Mr. Kanders or any other party. I will pause here, hand the call back to the operator as we're now ready for your Q&A.
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