Black Diamond’s sales again fell sharply in the second quarter but management of its parent, Clarus Corp., told analysts the brand is making progress rationalizing its product lines under a “fewer, bigger, better” emphasis and reducing promotional pressures amid the continued slow stabilization of the North American wholesale channel.
Black Diamond is the primary brand in Clarus’ Outdoor segment. The segment also includes the Pieps snow safety brand, which the company announced will be undergoing a strategic review to explore a sale.
Warren Kanders, executive chairman, said on an analyst conference call, “At Outdoor in the face of strong market headwinds, the team continued to execute initiatives focused on simplification and right-sizing of the inventory. Importantly, inventory levels were down 17 percent year over year, and we’ve improved the quality and composition of the inventory to focus on our A-styles across categories.”
He added, “From an operational standpoint, we identified several opportunities that may drive efficiencies in the business, and we’ve been pleased with our progress, both reducing operating costs and solidifying the core.”
Sales in the Outdoor segment declined 9.7 percent in the quarter ended June 30 to $36.2 million, following declines of 11 percent in the first quarter and 8.0 percent overall in 2023. The quarterly decrease was primarily driven by softness in the European wholesale and North American direct-to-consumer (DTC.) channels.
Neil Fiske, president, Black Diamond Equipment, said on the call that overall revenues in the Outdoor segment were still in line with expectations “in the context of a market that is still adjusting to the post-pandemic demand levels.”
He added, “We were pleased with our progress in the face of some strong market headwinds.”
In North America, wholesale revenues in the Outdoor segment were down 4.7 percent on a comparable basis, falling into negative territory after showing a sales jump of 10 percent in the first quarter. Fiske said the North America quarterly wholesale decline in part reflects “significantly less promotional activity and one fewer map pricing breaks this year.”
For the first half of the year, North American wholesale was also still up 1 percent year over year. Fiske added, “We’ve rebuilt the sales team in North America and are very pleased with the results that we are seeing.”
North America digital DTC was down 15.7 percent for the quarter, due also in large part to less promotional activity and not repeating a “huge” June clearance event from last year. The digital channel represented 20.5 percent of the region’s revenue in the latest period compared to 22.2 percent last year while retail stores accounted for 4.4 percent of the total, down from 5.8 percent last year.
In the European wholesale channel, sequential improvement was seen with the Outdoor segment showing a 5 percent decline versus a 17 percent drop in Q1. The performance was also in line with expectations and continued improvement is expected in the second half with flat to up slightly growth. Fiske added, “That said, many accounts in Europe have bought conservatively for the fall/winter season and are counting on fill-in orders if the weather is normal to favorable.”
Europe digital DTC grew 7.4 percent in the quarter and “some modest acceleration” is expected in the second half, although the channel represents only 7.6 percent of the region’s revenue.
In international distributor markets, the Outdoor segment also saw sequential improvement with a decline of 7.8 percent after a 44.1 percent tumble in the first quarter. Fiske still expects 2024 to be a “reset year” for most distributor markets. He said, “Our regions are at varying stages of recovery, but signals point to them all heading in the right direction.”
Gross margins for the Outdoor segment in the quarter were down 180 basis points, primarily due to channel and product mix. For the first half of the year, margins were flat.
Operating costs, excluding restructuring charges, were down 9.3 percent year over year on a comparable basis. Fiske said, “We continue to drive efficiencies in the business and reshape the organization to be leaner and more agile. We expect to see additional cost savings materialize in H2 and continue to grow into 2025.”
The inventory reduction of 17.1 percent reflects a reduction in non-core products. Inventory in A-styles, which drives 80 percent of Black Diamond’s sales, accounted for 68 percent of Black Diamond’s inventory mix at the quarter’s close, up from 59 percent last quarter and 45 percent a year ago. Fiske said, “Our simplification work continues to improve the quality and composition of the inventory.”
Importantly, apparel inventory ended the quarter down 19.8 percent year over year. Fiske also noted that fill-in rates on wholesale orders improved to over 95 percent, reflecting stronger inventory management and improvement in sales and operation planning processes.
Regarding Pieps, Clarus has initiated a review and evaluation of strategic options with the intention of soliciting interest from potential acquirers. No timetable has been set to complete the review. Fiske said the exploration is also part of Black Diamond’s moves to rationalize and simplify its business. Fiske said, “The goal of this review is to assess whether the value of this business can best be unlocked by Black Diamond or another owner.”
Clarus acquired Pieps, a maker of avalanche beacons and other snow safety products founded in Austria, in 2012.
Outdoor’s Retail Marketplace Continues To Stabalize
Asked in the Q&A session about market conditions, Fiske remained cautiously optimistic but doesn’t see the retail marketplace fully recovering until 2025. He said, “We see the market continuing to stabilize with inventories coming more back in line with demand. But having said that, I don’t think we’re through it yet. We’ve still got another good six months, I think, before retailers are at the inventory levels they want with the right composition of inventory that they’re after. And so that’s a little bit of a drag and still a little bit of a headwind on the market overall.”
Among channels, he said the specialty retail segment is “holding its own” and showing improvement sequentially with sales he estimates running down collectively around low-single digits. However, open-to-buy ordering remains conservative. Fiske said, “Our retailers are still cautious about what the outlook is and making sure not to get over-inventoried and overbought. So, they’re being quite tight on their purse strings and forward orders. But I think as I look at the specialty business, the core of it seems in pretty good shape.”
Fiske does expect “a little bit of shakeout of small accounts in the market with the kind of multi-year pressure that’s been in the market,” but most have seen their business stabilize. Fiske said, “Overall, we’ve seen specialty coming back and becoming healthy and that remains a super important part for the industry and for our strategy as well. It’s very much the top of our distribution pyramid.”
He said national accounts, citing REI, are seeing “a little bit of the same story” with results improving sequentially and inventories continuing to be rebalanced.
On the positive side, Fiske believes Black Diamond is outperforming competitors in its categories and gaining market share. He said, “It’s hard to get the data, but from what we hear from our buyers, Black Diamond continues to be a brand by virtue of its equity and leadership positions in core categories that those big retailers count on. When things get a little rocky, one of the good things about being one of the market leaders is you tend to get a little bit more of that open-to-buy because you’re more of a sure bet. And I think we’re seeing as a brand, we’re seeing some of that pickup.”
Clarus Companywide EPS Miss Plan Due To Adventure Segment Shortfall
Overall, Clarus’ sales declined 2.4 percent in the quarter to $56.5 million, missing guidance in the range of $58 million to $62 million. Adjusted EBITDA from continuing operations totaled a loss of $1.9 million, also below guidance in the range between zero and positive $0.5 million.
The shortfall was due to an underperformance the Adventure segment, which includes the Rhino-Rack, Maxtrax and Tred Outdoors brands, in the U.S. and rest of world operations, said Mike Yates, CFO.
Sales in the Adventure segment increased 13.6 percent in the quarter to $20.3 million, reflecting higher demand from OEM customers and an increase from the acquisition of Tred Outdoors in October 2023.
Mathew Hayward, managing director of Clarus’ Adventure segment, said results in the segment’s core Australian/New Zealand markets “were solid” as strong demand by OEM customers and specific key accounts offset softness in certain retail accounts that are managing inventory levels “tighter” than prior years.
However, sales in the U.S. and rest of world “lagged behind” with sales skewed more towards OEM products rather than higher-margin, foreign distribution revenue depressing margins. Hayward said, “Simply put, the U.S. market has not delivered to plan, and that weakness hampered our results. While we underperformed in terms of second quarter net sales, gross profit and EBITDA, we believe our key investments made in the first half of the year should pay expected dividends moving forward.”
The investments include the hiring of Tripp Wyckoff to the role of general manager of the Americas. Hayward said Wyckoff previously worked for Thule in the U.S. “where he grew the brand significantly in their peak periods, and was primarily responsible for bringing to market global initiatives, building one on one customer relationships and integrating key acquisitions.”
In other regions, Daniel Bruntsch, formerly at Australia’s Bromic Group, was appointed head of the EMEA region while Chris Radford was promoted to head of the APAC region.
“We now have three clearly defined regions, each with proper management structures incentivized to drive profitable growth supported by our shared services in our HQ in Sydney,” said Hayward. “We believe these steps will go a long way towards improving overall profitability as we allocate resources to drive performance outside of our home market.”
The Adventure segment overall added 15 new employees across the three key regions and is also investing in marketing, technology and supply chain areas. Hayward noted that the Adventure segment has engaged an outside firm to explore global sourcing and supply chain initiatives “that we believe could deliver meaningful margin improvement across ‘25 and beyond.”
Clarus’ companywide loss from continuing operations in the quarter of 2024 was $5.5 million, or 14 cents a share, compared to loss of $4.3 million, or 12 cents, a year ago. The latest loss included $0.4 million of charges relating to legal cost and regulatory matter expenses and $0.7 million of PFAS inventory reserve.
The adjusted loss from continuing operations was $1.2 million, or 3 cents a share, compared to adjusted loss $0.1 million, or break even per share, in the year-ago quarter.
Outlook
Looking ahead, Clarus continues to expect fiscal year 2024 sales to range between $270 million to $280 million. Outdoor segment revenue is still expected to be approximately $180.5 million while Adventure segment sales are still projected to be $90 million for the full year.
The Outdoor business is also still expected to generate $14.5 million in adjusted EBITDA, representing a nearly 8 percent margin.
However, Clarus now expects the Adventure segment to only generate a 10 percent EBITDA margin in the year compared to guidance of 15 percent margin shared earlier in the year. As a result, companywide adjusted EBITDA is now expected to be in the range of approximately $11 million to $14 million, or 4.5 percent at the mid-point of revenue and adjusted EBITDA. Under previous guidance, adjusted EBITDA was expected between $16 million to $18 million, or 6.2 percent at the mid-point.
Yates said the reduced expectations for Adventure’s margin contribution largely reflects the planned investments to support the segment’s growth opportunity. The CFO said, “We believe we have a tremendous strategic plan to take an iconic market-leading Australian, New Zealand roof rack brand and turn it into a global brand. And in order to do that, we need to make investments to scale the business. We are continuing to make these investments here in 2024 despite challenging market conditions.”
Image courtesy Black Diamond
