CLAR - NASDAQ

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, 2025. Joining us today are Clarus Corporation's Executive Chairman, Warren Kanders; CFO; Mike Yates; President of Diamond Equipment, Neil Fiske; and the company's External Director of Investor Relations, Matt Berkowitz. Following the remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to Mr. Berkowitz 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. Matt, please go ahead.

Thank you. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we will 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 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.

Good afternoon, and thank you for joining Clarus' earnings call to review our results for the third quarter of 2025. I am joined today by our Chief Financial Officer, Mike Yates, who will cover our third quarter results, including Adventure segment performance as well as Neil Fiske, who will discuss our Outdoor segment. During the third quarter, despite a difficult global consumer market, we made progress executing against our strategic plan. Our quarterly results reflected incremental financial improvement as we continue to reshape our organizational structure, product offering and go-to-market approach while also balancing the real-time evolution of global demand trends and consumer sentiment. Clarus generated net sales of $69.3 million, in line with our expectations, which was a 3% increase over the same period last year and quarterly adjusted EBITDA increase of 15%. Mike and Neil will detail the segment figures, but at a high level, these increases were driven by strong outdoor demand in North American wholesale, our largest channel, and success with the new adventure customer in Australia and sales from RockyMounts. A key highlight in the Outdoor segment has been the success of the revamped Black Diamond apparel line, which saw sales growth of 29%. Apparel is critical to our growth strategy, and we continue to be encouraged by positive signs that our new approach to apparel and enhanced creative direction is resonating with customers in both the retail and direct-to-consumer channels. Neil and his team have done an outstanding job prioritizing our best customers and our most profitable products and styles, evident in the stronger quality of revenue. Full-price product sales increased, sales from discontinued merchandise declined significantly, and the highest margin A styles represent approximately 70% of our inventory, which is a figure that has continued to trend upward in recent quarters. Now turning to our Adventure segment. We continue to make operational progress during the third quarter and have been pleased with the direction of the business under the new leadership team. There is significant work to do, but our simplified organizational structure is a step in the right direction. Of note, Q3 SG&A was down $600,000 year-over-year, driven by the reorganizations we completed in November 2024 and July 2025 as well as other expense reduction initiatives. On an annualized basis, we have taken out $1.1 million of fixed costs from the business in our most recent reorganization. Counterbalancing these positive developments, macro trade and consumer headwinds continue to weigh on near-term financial results across both segments. While the latest trade deal should ease some of the tariff burden, Outdoor and Adventure margins and cash flows were again pressured by increased tariff costs and cash outlays in the third quarter. Our Outdoor segment also dealt with significant losses on FX contracts in 2025, which amounts to $600,000 EBITDA impact in the third quarter. When these contracts roll off in 2026, we will see a lift in product margins. At Adventure, margins came in below expectations, primarily due to a combination of tariff-related headwinds on products sold in the United States, higher freight costs to customers and aggressive pricing of slow-moving inventory as we work through SKU rationalization and overall inventory simplification. In addition, pricing in several of our markets, particularly Australia, has not kept pace with inflation or our cost base, which has contributed to margin erosion. We will continue to take proactive steps to address these issues, including price increases in our U.S. RockyMounts line and a planned pricing reset in AN

Thanks, Warren. Turning to Slide 6, I will review the Outdoor segment's Q3 performance and our expectations for the remainder of 2025. Overall, we delivered solid results for Q3 in the face of stiff macro trade and consumer headwinds. I'm pleased with our continued progress, the strengthening of the Black Diamond brand and reshaping of the business to be more focused, more profitable and more competitive. Revenue, gross margin and EBITDA were all up for the third quarter compared to prior year's third quarter, excluding PIEPS. Costs were down and inventories ended the period in great shape. As with my last update, I'll address tariffs and currencies at the top of my remarks. My remarks exclude the PIEPS brand, which we divested on July 11, 2025, in the year-over-year comparisons. First, tariffs. In early May, we initiated the first phase of our tariff mitigation plan, which included raising prices, negotiating vendor concessions, airfreighting products where necessary and accelerating our exit out of China. On our last call, we estimated that in 2025, we could offset roughly half of the tariffs that were in place at the time, which included 50% on steel and aluminum, 54% on China and a 10% reciprocal tariff on most other countries. Since then, reciprocal tariffs have increased from the original 10% to a range of 20% to 35% or more. We estimate the unrecovered impact of tariffs on EBITDA will be $2.5 million to $3.5 million in 2025. With the second round of tariff mitigation actions going into effect in 2026, we expect to offset about 70% of the annualized tariff impact next year or approximately $7.8 million out of the $11 million in tariffs, leaving us again with approximately $3.2 million in unrecovered tariffs. We believe that $3.2 million represents the downside as we see it today. Further reductions in the tariff burden will come over time from sourcing, product reengineering and new product introductions, but those initiatives will take time to fully materialize. Next, let me address currency. While we benefited from the translation of the higher euro to the dollar, we also incurred significant losses on FX contracts in 2025. Year-to-date, these losses, which amount to $1.3 million swing year-over-year flow through and suppressed product margins. We roll off these contracts at the end of 2025. Now let's turn to operating results. Revenue for the quarter was ahead of the prior year by 0.7%. But breaking that number down further, we showed a solid growth of 4% in our full price in-line business and a 37% reduction in sales from discontinued merchandise, again, reflecting a healthier business and stronger quality of revenue. By region and channel, North America wholesale, our largest channel, had a very strong quarter, up 15.6% from the prior year period. North America digital D2C, which represents 13.6% of the region's revenue, was down 16.5% as we continue to pull back on pro channel sales. We also saw some sales pullback from our price increases as we are generally ahead of the market in implementing tariff-impacted prices. Margins, however, lifted 820 basis points, and we were actually ahead of the prior year period on channel contribution margin dollars, reflecting a much improved profitability equation for the channel. In total, North America was up 9.1% versus prior period. Europe wholesale without the impact of FX contracts was up 2.9% in dollars and down 3% on a constant currency basis. Europe digital D2C, which is 5.8% of the region's revenue was down 16% in dollars and 21% in constant currency. Here again, we pulled back on pro sales and discounting, which resulted in a 570 basis point improvement in margin. In Europe, without the impact of FX contracts, the region was down 1.9% in revenue, 4.0% in constant currency. Our international distributor channel was down 28.9%, reflecting the timing shift discussed on our last call, wherein we have realigned our deliveries to better suit the needs of our international markets. We have now fully cycled those 2 shifts from Q1 into Q4 and from Q3 into Q2 and expect normalized comps going forward. Within our business units of apparel, mountain, climb, ski and footwear, we saw breakout growth in apparel and solid sales in mountain, offset somewhat by softness in climb, a strategic pullback in ski and narrowed focus in footwear. The decline is consistent with broader industry trends based on point-of-sales data. I want to call out, in particular, the strong momentum we are seeing in apparel across channels and regions. Apparel was 23% of our mix in Q3, up 490 basis points from a year ago. Total apparel sales were ahead by 29% versus the prior period, with in-line sales up 40.5% and discontinued merchandise down 24%. Margins meanwhile were up 650 basis points for the apparel business unit. Overall, a great story upon which we expect to build. Turning to gross margin. Our results reflect the progress we are making in building a healthier full-price premium brand. Gross margin was ahead of prior year by 320 basis points. Excluding the impact of FX contracts, comparable gross margins were up by 410 basis points. Operating expenses, excluding restructuring and legal costs from both periods, were down 4.6%. Adjusted EBITDA came in at $4.7 million for the quarter, up 9% to prior year period. Inventories ended the quarter in great shape. We were up 2.1% compared to the prior period at $62.8 million, largely due to increases in capitalized duties from higher tariffs. Inventories of discontinued merchandise is down $2.1 million or 25% at quarter end. We are now near our target of having 70% of our inventory against our best-selling A styles. Operationally, we've made great strides in rebalancing our supply chain in response to the current tariff environment and expect to see new country of origin production up and running in 2026 for headlamps, climbing helmets and other categories historically sourced from China. We have also deployed a new state-of-the-art sales and operation planning capability, which is expected to better match supply and demand globally and within each channel. Organizationally, the company is leaner, more focused and more productive. Lastly, I want to give a big shout out to our creative teams. We have elevated the creative expression of the brand through our new website, recently launched catalog and refreshed marketing assets. While our product line exudes that rare alchemy of beautiful design and superior engineering that has always set BD apart. The brand looks better than ever, and our creative just keeps getting stronger, fresh, original, progressive and true to who we are. Looking ahead to the fourth quarter, our outlook is more cautious. Consumer sentiment remains low. Promotional activity seems to be on the rise as the broader market struggles to balance cash and working capital requirements. Macro factors continue to cause uncertainty and disruption. Tariff impacts are not yet fully understood nor manifested. Retailers are taking a conservative stance. And so against this backdrop, we'll continue to simplify, reduce costs and stay laser-focused on the fundamentals of our strategy. In closing, I'd like to thank our teams around the world for their incredible perseverance, creativity and drive in the face of this turbulent often chaotic and certainly unpredictable global environment. With that, I'll turn it back to Mike.

Thanks, Neil, and good afternoon, everyone. On today's call, I'll provide a brief comments on the Adventure segment and we'll then conclude with a summary of the third quarter financial results followed by the Q&A session. Let's take a closer look at Adventure. Our team delivered 15.9% year-over-year growth versus the third quarter of last year. Excluding the RockyMounts acquisition, organic growth was 7.4%, which is a solid step forward. Consistent with our strategic focus on expanding our customer base, a strong pipeline filled with a new Rhino-Rack customer in Australia drove much of the growth, which was partially offset by declines in the recovery product line. Adventure's adjusted EBITDA came in at $349,000, which is about $100,000 ahead of last year. Gross margin at Adventure continues to be pressured, mainly due to additional tariffs in the U.S., inventory clearouts and cost of freight to customers. We made price adjustments to the RockyMounts line in the U.S. at the end of the third quarter, which will help offset the tariff impact and protect our gross profit dollars moving forward. In Australia, we haven't done a good job capturing price on an annual basis. The lack of price capture has meaningfully contributed to margin erosion, and we are implementing an updated pricing strategy for AN

[Operator Instructions] Your first question comes from the line of Laurent Vasilescu with BNP Paribas.

This is William Dossett on for Laurent. So my first question was just parsing out the Outdoor segment sales, they were flat in the quarter, but Black Diamond apparel was up 29%. And so can you just parse out what was the offset to the Black Diamond strength?

Well, I'll let Neil expand too, but this -- PIEPS was essentially 0 in the quarter. So that's a year-over-year a headwind. The real challenge, and I think Neil covered in his remarks, was the D2C business. The North American D2C business was down 16.5% and the European D2C business was also down 16%. So the short answer is no PIEPS, D2C was weak across the globe and that offset the North American wholesale strength. And the apparel business is part of the North American wholesale, that's where we capture that as part of the wholesale business.

Okay. I appreciate that. And congrats on the success of Black Diamond. And my other question would be on just how your retail partners are ordering for the spring of 2026 in the Outdoor segment. How much more conservative are they going to be in this backdrop? And as well while we're looking forward, just wanted to get any thoughts that you had on the holiday this year. I appreciate it.

Well, I would I can start with that. I think the holiday is always kind of a little bit of an unknown, right? The coming net...

Mike, why don't you let Neil answer that question?

Yes, sure.

Yes. Let me -- on the first question, William, regarding spring, our order books look pretty good for spring and certainly reflects some caution on the part of our retail partners. But we -- our order book is up. And of course, ultimately, it comes down to how much of that sticks. But I think the indications are quite positive. And we feel like we have really good momentum in the wholesale channel, both with our big national accounts, REI and MEC as well as Amazon and real strength in specialty. So I think looking ahead to spring, we feel as good as we can in this environment about the strength of the wholesale channel. And so that's part one. Regarding the fourth quarter, I think that we're just cautious. And as Mike said, it's too early to tell. We do see the environment being more promotional. We see retailers being cautious and not wanting to take on too much inventory. But I would say 90% of the game is still to be played in the fourth quarter. So we're cautious. I think it's prudent to be cautious in this environment, but it's really hard to find a trend line at this point for Q4.

[Operator Instructions] There are no further questions at this time. I will now turn the call back over to Mike Yates for closing remarks.

Okay. Great. Thank you very much. I want to thank everyone for attending the call this afternoon, and your continued support and interest in Clarus. We look forward to updating you on our results again next quarter. Thank you.