Clarus Corporation a company focused on the outdoor and consumer industries, reported financial results for the first quarter ended March 31, 2020, including the Company’s position of strength to navigate the COVID-19 pandemic.
First Quarter 2020 Financial Summary vs. Same Year‐Ago Quarter
- Sales were $53.6 million compared to $61.2 million.
- Gross margin was 34.6% compared to 36.0%.
- Net income was $0.04 million, or $0.00 per diluted share, compared to $3.8 million, or $0.12 per diluted share.
- Adjusted net income before non‐cash items was $2.7 million, or $0.09 per diluted share, compared to $6.9 million, or $0.23 per diluted share.
- Adjusted EBITDA was $3.6 million compared to $7.3 million.
Given COVID-19, Clarus has prioritized its liquidity and strengthened its balance sheet. At the end of the first quarter of 2020, Clarus had $12.8 million in cash and access to $27.9 million in additional liquidity through its line of credit with J.P. Morgan Chase Bank, N.A. In addition, approximately $13.0 million in cash saving initiatives have been implemented or identified for the remainder of the year. Highlights of the various liquidity improvements and cash saving measures include:
- At March 31, 2020, Clarus had $32.1 million drawn on its revolving line of credit (compared to $22.7 million drawn at the end of 2019) with remaining access to $27.9 million. Cash and cash equivalents totaled $12.8 million compared to $1.7 million at the end of 2019.
- Subsequent to the first quarter end, Clarus borrowed $20.0 million under the term loan portion of its credit agreement to increase overall liquidity. The proceeds borrowed were used to pay down amounts outstanding on its revolving line of credit.
- Planned operating expenses will be reduced by an estimated $9.0 million for the remainder of 2020 as Clarus accelerates its shift towards a more digital presence, sharpens its focus on key product categories, drives improved operational efficiencies, and fosters a tighter connection with its distribution and supply partners.
- Postponed approximately $2.0 million of capital expenditures scheduled for 2020 until business conditions stabilize, with the exception of planned e-commerce investments.
- Temporarily replaced the Company’s quarterly cash dividend with a stock dividend.
“We began the year with great momentum after record financial results in 2019,” said Clarus President John Walbrecht. “However, in the final weeks of the quarter, our Black Diamond business experienced a dramatic global slowdown as our retail partners shut their doors and cancelled open orders due to the COVID-19 pandemic. Leading up to that point, our revenue and earnings were trending in line with our expectations for the quarter. These declines were somewhat offset by improving demand in our Sierra business late in the quarter, which highlights our product diversity, but in no way made our results immune to the pandemic.
“At the onset of the virus, we devised a plan to focus on three things—our people, the preservation of brand equity, and maximizing liquidity which, together, we believe will make us emerge as an even stronger company. At the end of the first quarter, we had nearly $13 million in cash and access to approximately $28 million in incremental liquidity with a modest long-term debt balance that we are comfortable servicing.
“Over the last three-plus years that we have been together as a team, we have focused on our ‘innovate and accelerate’ playbook regardless of market dynamics. This playbook includes further strengthening our brands’ market positioning by investing in product innovation, sales and marketing, and pursuing new, long-term revenue opportunities. It has also included the bolstering of our global distribution network and flexible supply chains that we have built over many decades, increasing our manufacturing capacity at Sierra, and driving efficiencies throughout our operations. We believe this provides the structural elements to benefit from what we believe, at least in the near-term, will be increased staycations and higher levels of interest in health, wellness and the outdoors. We also think these mega-trends play well when the consumer heads back outside after many weeks under stay-at-home ordinances.
“In addition, while apparel and footwear are key strategic initiatives where we believe substantial growth opportunities exist, it is important to note that they currently represent 14% of our business. The remaining 86% is equipment that is non-perishable and viewed as a necessity for our activity-based-consumer.
“Due to our discipline across the different businesses, we have been able to create optionality in both the Black Diamond and Sierra brands. For Black Diamond, as part of our mitigation efforts in response to the COVID-19 pandemic, we have re-allocated and eliminated over $9 million in SG&A. This has accelerated our shift towards a more digital presence, sharpened our focus on key product categories, improved operational efficiencies, and driven a tighter connection with our distribution and supply partners. For Sierra, during the last two years we have focused on improving efficiencies and increasing capacity. In fact, over this time, capacity has increased by approximately 30%.
“Ultimately, we believe our diversified brand portfolio, global distribution platform and fast-growing direct channel is well-positioned to navigate the current challenges and evolving consumer landscape.”
First Quarter 2020 Financial Results
Sales in the first quarter were $53.6 million compared to $61.2 million in the same year‐ago quarter. Black Diamond sales were down 13% and Sierra sales were down 12%. The decrease in Black Diamond was solely due to the COVID-related demand freeze in the final weeks of the quarter. While sales in Sierra were also down, the demand environment has improved since the beginning of 2020. Sales in the Company’s direct-to-consumer channel were up 16%. On a constant currency basis, total sales were down 12%.
Gross margin in the first quarter was 34.6% compared to 36.0% in the year‐ago quarter due to inefficiencies in the supply chain and logistics activities due to COVID-19. In addition, compared to last year, both foreign currency changes and the new tariffs had a negative impact on gross margins of 55-basis points and 35-basis points, respectively.
Selling, general and administrative expenses in the first quarter were $17.4 million compared to $17.6 million in the year‐ago quarter. The small decline reflects cost-saving initiatives enacted late in the quarter in response to COVID-19.
Net income in the first quarter was $0.04 million, or $0.00 per diluted share, compared to $3.8 million or $0.12 per diluted share in the year‐ago quarter. The decrease included $2.4 million of non‐cash charges and $0.3 million in transaction costs, compared to $3.1 million of non‐cash charges and minimal transaction and restructuring costs in the same year‐ago quarter.
Adjusted net income, which excludes the non‐cash items, as well as transaction and restructuring costs, in the first quarter was $2.7 million or $0.09 per diluted share, compared to $6.9 million or $0.23 per diluted share in the same year‐ago quarter.
Adjusted EBITDA in the first quarter was $3.6 million compared to $7.3 million in the same year‐ago quarter. The decline was primarily due to the aforementioned COVID-driven demand freeze for Black Diamond in the final weeks of the quarter. As a percentage of sales, adjusted EBITDA was 6.8% compared to 11.8% in the same year‐ago quarter.
Net cash provided by operating activities for the first quarter ended March 31, 2020, was $3.5 million compared to $5.7 million in the prior year. Capital expenditures in the first quarter were $1.3 million compared to $1.0 million in the same year‐ago period. Free cash flow, defined as net cash provided by operating activities less capital expenditures, for the quarter ended March 31, 2020 was $2.2 million compared to $4.7 million in the same year‐ago period.
Due to heightened uncertainty in the retail market relating to COVID-19, including the virus’ duration and overall effect on consumer demand, Clarus is withdrawing its guidance issued on March 9, 2020.
Net Operating Loss (NOL)
The Company estimates that it has available NOL carryforwards for U.S. federal income tax purposes of approximately $132 million. The Company’s common stock is subject to a rights agreement dated February 7, 2008 that is intended to limit the number of 5% or more owners and therefore reduce the risk of a possible change of ownership under Section 382 of the Internal Revenue Code of 1986, as amended. Any such change of ownership under these rules would limit or eliminate the ability of the Company to use its existing NOLs for federal income tax purposes. However, there is no guaranty that the rights agreement will achieve the objective of preserving the value of the NOLs.