EXEC: Black Diamond Sales Thwarted By Weak Open

Posted by Thomas J. Ryan | Aug 8, 2023 | Exec Apparel, Exec Outdoor, Exec Sportsmans, Feature, SGB Executive

Black Diamond’s sales fell 23.7 percent in the second quarter due to a combination of lower consumer demand and continued lower open-to-buys as its primary North American wholesale partners work down inventory levels, according to its parent Clarus Corp. Company officials see improvement but do not expect marketplace inventories to rebalance until year-end.

Sales in Clarus’ Outdoor segment (Black Diamond) were $40.1 million in the quarter compared to $52.6 million in the year-ago quarter. Currency-neutral sales were down 22.8 percent currency-neutral)

“Our Outdoor segment was impacted by lower consumer demand, given the inflationary environment and continued lower open-to-buys as retail partners right-size their inventory,” said Aaron Kuehne, Clarus’ COO, on a call with analysts. “Additionally, our retail partners are acting conservatively in terms of building back inventory, specifically weeks of inventory on hand, where we are seeing key retailers behave conservatively and shorten up their weeks of supply.”

He added, “We believe this is due to bloated inventory levels industry-wide, specifically private label products, which impact overall working capital and open-to-buy dollars. However, as we head into Q3, we are starting to see retail purchasing habits normalize, but we do expect it will take until year-end before the market approaches equilibrium.”

Looking ahead, Kuehne said the Outdoor segment’s top priority remains seeking to bring supply and demand into better alignment across regions and channels while reducing Outdoor inventory levels by 15 percent by the end of this year over year. He added, “Also at the top of our priority list is the goal of rebuilding our go-to-market approach in North America, baselining our apparel initiative and bolstering our digital presence.

Partially offsetting the weakness in wholesale channels was continued strong execution in Black Diamond’s direct-to-consumer (DTC) business.

Warren Kanders, executive chairman, said on the call that the DTC strength led to sequential improvement in sales throughout the period at Black Diamond. He said, “We saw increasing sales each month, driven by a strong push in direct-to-consumer, aiding our inventory work down. While we saw some margin degradation due to off-price and promotional activity, we still increased our outdoor gross margin by 440 basis points to 37.5 percent, achieving our plan to generate cash and further normalize inventory.”

Clarus trimmed its overall outlook for the year after reporting second-quarter results fell below analyst expectations due to promotional pressure and prolonged inventory de-stocking that impacted its two other segments, Precision Sport and Adventure, as well.

Companywide sales in the quarter were $83.7 million, a decline of 27.2 percent. Wall Street’s consensus target had been $92 million.

Precision Sport (Sierra and Barnes ammunition) sales fell 26.7 percent to $25.8 million due to a more promotional retail environment, particularly in the ammunition product line. Kanders said that consistent with how others have reported in the channel, the Precision Sport segment experienced sales declines while holding EBITDA margins at 26 percent. He said, “We have taken cost out to match our expected production and sales levels, which we believe will drive higher margin in the second half. Further, we took important strategic steps to seek to stabilize our component supply chain, which we expect will enhance our ability to build programs for our partners going into 2024.”

Sales in the Adventure segment (Rhino-Rack, Maxtrax), were off 33.9 percent to $17.9 million, reflecting lower consumer demand given the challenging market conditions and the difficult macro-environment in both Australia and North America. Kanders said the Adventure segment saw continued stabilization in the market, resulting in improved gross margins of 370 basis points to 42.4 percent for the Adventure segment. He said, “We continue to see normalized sales levels in Australia, which we expect to increase in the seasonally-stronger second half as we introduce exciting new products. Adventure’s U.S. business experienced strong growth month-over-month during the quarter, improving sales by 63 percent over the first quarter of 2023.”

On an adjusted basis, earnings tumbled 67.9 percent to $4.2 million, or 11 cents a share, compared to $13.1 million, or $0.33 per diluted share, in the same year‐ago quarter. Analysts’ consensus target of 13 cents.

The net loss, including non‐cash items and transaction costs, was $2.1 million, or 6 cents a share, compared to net income of $3.8 million, or 9 cents, in the prior year’s second quarter.

Gross margins eroded to 36.7 percent from 38.0 percent primarily driven by discounting of ammunition in the Precision Sport segment given the more promotional environment. Easing freight costs positively impacted gross margin by 140 basis points, which was more than offset by unfavorable channel and product mix of 160 basis points and a 110 basis point negative impact from foreign currency exchange.

SG&A expenses declined 15 percent to $30.2 million compared to $35.4 million in the same year‐ago quarter. The decline was driven by expense reduction initiatives in the Outdoor, Adventure and Precision Sport segments, as well as lower non-cash stock-based compensation expenses for performance awards at corporate. As a percent of sales, SG&A expenses increased to 36.1 percent from 30.8 percent.

The company now expects fiscal year 2023 sales of $385 million to $400 million (approximately $420 million previously) and adjusted EBITDA of $42 million to $50 million (approximately $60 million previously). In addition, capital expenditures are now expected to range between $6.5 million to $7.5 million (between $7 million to $8 million previously), and free cash flow is now expected to range between $30 million to $35 million ($35 million to $40 million previously) for the full year 2023.

In the Q&A session, Kuehne noted that the destocking marketplace challenges are mainly impacting Black Diamond. He said the most-problematic destocking issues are taking place at national accounts and key accounts that have been particularly challenged by their exposure to private label inventory. He noted that Black Diamond’s distribution in North America consists of national accounts, key accounts, and specialty retail making up about a third of sales each

Kuehne further noted that Black Diamond’s retail partners remain “very conservative” when they think about weeks of inventory on hand. He added, “Just for context, pre-COVID, it was typical that retail partners would carry anywhere from 10 weeks to 12 weeks of inventory on hand. During COVID, it jumped up to 18 weeks to 20 weeks of inventory on hand. And currently, we’re sitting at six weeks to seven weeks of inventory on hand. And so what it’s actually doing is shifting a lot of that risk towards the different brands, and it’s also forcing us to revisit our demand planning process, which we’re in the middle of doing.”

Clarus is not only seeking to better manage inventory levels but is looking at ways to better optimize its supply chain to ensure high levels of fulfillment and that its brands are “easy to do business with.” He said Black Diamond in the near term will be focusing on building out its digital presence and supporting its challenged wholesale accounts “with various sell-through initiatives to totally accelerate the destocking activities and get to a more normalized level here over the next six months.”

Kanders said Clarus is moving forward with its strategic plan announced last quarter to decentralize the business and focus on individual segment performance.

“Our management teams continue to seek to simplify their businesses and invest more dollars into commercializing new products and improving sales channel management,” added Kanders. “We have worked with our retail partners carefully to help drive sell-through, while working with our supply chain partners to dynamically manage the flow of inventory in order to seek to reduce inventory levels, while ensuring on-time deliveries and higher levels of fulfillment.”

Clarus has also evaluated its corporate structure and has implemented a series of initiatives to reduce its normalized corporate overhead by $1.5 million compared to that of 2022.

He noted that Neil Fiske, the recently-hired president of Black Diamond, and Matt Hayward, its new president of the Adventure segment, will be providing their vision for long-range plans later this year.

The changes come as John Walbrecht, the company’s president since March 2018, stepped down on March 31 in a mutual agreement with the company.

Kanders concluded, “To summarize, we believe that we have reached the trough in our Outdoor and Adventure segments, and the quick actions we have taken to right-size those segments should set us up for more profitable growth in future periods. While Precision has experienced a slowdown from market dynamics and the normal summer slump, we believe that hunt season and the looming election cycle into 2024 should catalyze demand.”

Photo courtesy Black Diamond