Clarus Corporation (CLAR) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the second quarter ended June 30, 2026. Joining us today are Clarus Corporation's Executive Chairman, Warren Kanders; CFO, Mike Yates; President of Black Diamond Equipment, Neil Fiske; and the company's External Director of Investor Relations, Matt Berkowitz. Following their 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 second quarter. I am joined today by our CFO, Mike Yates, who will provide a financial update, including Adventure segment performance as well as Neil Fiske, who will discuss our Outdoor segment. Overall, our second quarter performance reflected continued operational execution and simplification. Mike will discuss the IEEPA tariff refund, which we recognized during the quarter, which lifted earnings and gross margin. Excluding that benefit, our underlying results across both Outdoor and Adventure were solid and reflect progress across our overall earnings profile. At Outdoor, second quarter revenue, margin and EBITDA all increased year-over-year, evidence of the team's hard work concentrating inventory on our highest volume, highest margin products. Our big 3 Outdoor categories of Mountain, Climb and Apparel drove 95% of total segment revenues. Apparel is a key pillar of our long-term strategy. Our product continues to resonate with the consumer as we delivered Apparel sales growth for the fifth consecutive quarter. With cleaner inventory, less discounting and a shift toward a full-price model, we are well positioned to drive improved profitability at Outdoor. At Adventure, we have improved the organizational shape to capture more margin as the business rescales. While second quarter sales did not meet our expectations, ongoing pricing actions and cost controls have paid off. Second quarter gross margin improved 420 basis points year-over-year. We continue to balance rigorous cost discipline with targeted investments. During the second quarter, we completed the bolt-on acquisition of certain assets and liabilities of ONWRD Supply Co., enhancing our portfolio mix with complementary high-margin in-vehicle accessories. I would also like to highlight that we executed share repurchases during the second quarter under our $50 million buyback program. We bought back 153,331 shares for approximately $400,000 or $2.292 per share. We believe these repurchases represented an attractive use of capital. We maintain approximately $42.4 million under our program, and we'll continue to assess buyback opportunities while preserving financial strength and flexibility to make strategic investments. Turning to guidance. Despite continued geopolitical and macro uncertainty across the global Outdoor market, we still expect Clarus' full year revenue to fall within our previously provided guidance range. Including the IEEPA refund and certain other factors, Mike will detail shortly, we now expect 2026 adjusted EBITDA to range between $12 million and $13 million. Before passing it over to Neil, I will briefly touch on the review of strategic alternatives we announced in May. We continue to explore a range of potential actions aimed at unlocking value more effectively than the market is currently recognizing today. We have retained Jefferies as our financial adviser to assist in this process. Potential alternatives could include the sale of all or part of the business or other strategic or financial transactions involving the company. Please note that we will not be answering any questions or commenting further on our strategic review process until additional disclosure is appropriate or required. With that, thank you for being with us today, and I will turn the call over to Neil Fiske.

Thanks, Warren. Turning to Slide 6, I will review the Outdoor segment's second quarter performance and our expectations heading into the remainder of 2026. Overall, Black Diamond had a strong Q2 with revenue margin and EBITDA, all well ahead of prior year as our strategy of simplification, focus and business reshaping continues to pay off. Note, my remarks exclude our divested PIEPS business from the prior year to provide more comparable results. Total revenues for the quarter were up 9.1%, reflecting growth in all regions and across our major categories. Our big 3 segments of Mountain, Climb and Apparel drove 95% of total revenues and grew 9.5%. The takeaway is clear. The core of our business is healthy and growing. For the quarter, Mountain was ahead 7.4% versus prior year. The Climb segment posted a very strong 13.5% growth rate. Apparel was up 7.4% for the quarter. Notably, for Apparel, in-line sales were ahead, a robust 22.9%, while clearance and discontinued merchandise was down 61%, showing a much healthier full-price business and fewer markdowns. We're seeing excellent response and building momentum for our revamped apparel offering. Gross margin is also a good story for the quarter, although a more complicated one with the ever-changing situation on tariffs. We received $6.1 million in tariff refunds in Q2, which lifted our gross margins to 52.0% versus 34.9% in the prior year. Even without the tariff refund, however, gross margins improved 160 basis points to 36.5% compared to the prior year period. The improvement reflects the progress we've made in the quality of our inventory, our focus on our most profitable categories, less discounting and a more full price premium business model. Second quarter selling, general and administrative expenses were $13.8 million compared to $13.7 million in the same year-ago quarter. Second quarter 2026 expenses reflect higher marketing costs. Other operating expenses for the quarter included a benefit of $1.4 million for CPSC legal adjustments, which Mike will address shortly. Adjusted EBITDA for the second quarter came in at $9.0 million. Putting aside the tariff refund and the CPSC legal adjustment, adjusted EBITDA for the quarter would have been $1.5 million compared to $0.3 million in the prior year period. Inventory ended the quarter at $72.2 million, up 12% versus the prior year period. The increase reflects the growth of the business and the build for what we expect to be a strong second half. Now turning to results by region and channel. North America wholesale grew 0.5% on top of 4.8% growth in Q1. North America digital direct-to-consumer, which represents 17.7% of the region's revenue was up 5.7% on the top line, with much healthier margins and less discounting. EU wholesale was up 25.3% in dollars and 16.7% in constant currency. EU digital D2C, which represents 5.3% of the region's revenue was down 10.6% in constant currency as we pulled back on promotional activity and less profitable transactions. Our international distributor channel was up 10.6% for the quarter. In sum, we are pleased with our results in Q2 and for the first half. Our strategy is paying off. Execution continues to improve. Product and marketing are resonating with the consumer. Our relationships in the wholesale channel have never been stronger. Our big 3 categories have real momentum. We feel confident going into the second half, mindful that the conflict in the Middle East remains a major geopolitical and business risk. I'd like to congratulate and thank our teams around the world for all their hard work, passion and skill in driving these results. With that, I'll turn it over to CFO, Mike Yates.

Thank you, Neil, and good afternoon, everyone. On today's call, I'll provide an update on the Adventure segment and then conclude with a summary of our Q2 financial results, followed by the question-and-answer session. Starting with Adventure. As expected, our top line results in Q2 were pressured by a challenging market in both North America and Australia. In North America, initiatives to reach new customers have not met expectations. The one positive in the North American market remains the RockyMounts business, where we continue to see solid demand. With a new product introduction, we expect RockyMounts to remain on a growth trajectory. In Australia, where we had previously noted a difficult outlook, sales were better than forecast despite consumers dealing with higher fuel prices and elevated interest rates. RockyMounts continues to be a bright spot in Australia, showing increased traction. In Europe and Asia, brand penetration is also improving as we delivered double-digit growth in France, Germany, the U.K. and Japan. Although that strength was not sufficient to offset weaknesses in our larger markets, an important point to make about the softer sales is that we believe that the decline has been market-driven rather than share-driven. Against this backdrop, we continue to focus on what we can control, driving margin expansion, maintaining cost discipline and improving operational efficiency. Gross margin hit 41.5% in Q2, up 420 basis points compared to the prior period. Our SG&A continues to be managed tightly and was down $0.6 million compared to the prior period. Specifically, headcount is down 20% and the cost base is 11% lighter. The business is above breakeven on materially lower revenue. As Warren mentioned, we acquired certain assets and liabilities of ONWRD Supply Co., a small in-vehicle accessory business that enhances our portfolio mix. These are high-margin products and immediately add new exciting product SKUs to our offering. We are committed to investing with discipline and building for the next cycle. The first of a new series of [ Rhino-Rack ] legs launches in September alongside ONWRD in Australia in time for spring/summer season. And our recently launched MAXTRAX integrated shovel has outsold forecast in every market. We will be presenting at Automechanika and SEMA this fall, and we are bringing an exciting assortment of new products across all 4 brands for the Northern Hemisphere spring 2027 season. We expect the double-digit growth in Europe and Asia to accelerate further with OEM interest from multiple European carmakers. We continue to take decisive actions on the cost side while we rebase our product initiatives to drive newness and growth. We have expanded RockyMounts via new U.S. and Australian accounts, increased Rhino-Rack and MAXTRAX's brand penetration across Asia, Europe and the U.K. and begun to introduce ONWRD to the broader market. We see a path to maintaining the margin improvement realized in Q2 moving forward despite moderate sales expectations for the remainder of the year at Adventure. With that, let me now turn to the consolidated and segment financial review on Slide 8. Consolidated Clarus second quarter sales were $56.2 million compared to $55.2 million in the second quarter of the prior year. Sales were up 1.6% compared to the prior year. On a reported basis from a segment perspective, Outdoor was up 8.5% and Adventure was down 11.9%. As Neil mentioned, sales were up in nearly every market and the weakness at Adventure was primarily in the North American and Australian wholesale markets for Rhino-Rack. The consolidated reported gross margin rate in the second quarter was 48.9% compared to 35.6% in the prior year quarter. We received that IEEPA tariff refunds associated with the Outdoor segment during the quarter. Specifically, Outdoor received a total of $6.4 million, which represented $6.1 million of refunds of tariffs previously paid and $3 million (sic) [ $0.3 million ] of interest income. The $6.1 million of tariff refunds were recorded as a reduction to cost of goods sold and the interest income is recorded in other income and expense in our income statement. From a segment perspective, gross margin was 52% at Outdoor and 41.5% at Adventure. Excluding the tariff refunds, Outdoor's gross margin would have been 36.5%, while the consolidated Clarus gross margin would have been 38%. Gross margin improvements, excluding the tariffs were attributable to price capture and favorable product mix at both the Outdoor and Adventure segments. Second quarter selling, general and administrative expenses were $24.3 million compared to $26.9 million in the same year ago quarter. Second quarter 2026 expenses reflect lower marketing costs and other expense reduction initiatives at Adventure to manage cost and the removal of PIEPS due to its sale last year, partially offset by higher marketing spend at Outdoor. Adjusted EBITDA in the second quarter was $7.6 million or an adjusted EBITDA margin of 13.6%. The second quarter adjusted EBITDA by segment was $0.5 million at Adventure and $9 million at Outdoor. Adjusted corporate costs were $1.9 million in the second quarter. Let me shift over to liquidity and the balance sheet. Free cash flow, defined as net cash provided by operating activities less capital expenditures for the second quarter 2026 was $0.6 million compared to a $11.3 million outflow for the 3 months ended June 30, 2025. At June 30, 2026, total debt was 0. At June 30, 2026, cash and cash equivalents were $28.9 million compared to $36.7 million at December 31, 2025. As Warren mentioned, we repurchased 153,331 shares of common stock during the quarter for approximately $448,000 or $2.92 per share. With that, let me move on to our 2026 outlook. I'm on Slide 9. We continue to expect fiscal year 2026 sales to be between $245 million and $255 million. We now expect full year revenue at Adventure to be approximately $68 million and full year Outdoor revenue to be approximately $182 million. We have revised our full year 2026 adjusted EBITDA to be in the range of $12 million to $13 million or an adjusted EBITDA margin of 5% at the midpoint of our revenue and adjusted EBITDA ranges. The revision to our full year adjusted EBITDA guidance compared to our prior guidance of $3 million to $5 million is as follows. Assuming the midpoint of the 2 guides, the primary difference between the $4 million and the $12.5 million is the benefit of the $6 million of tariff refunds and the elimination of $2 million of estimated legal expenses that will not be incurred during the remainder of the year. As a reminder, last quarter, we assumed $1 million a quarter for each quarter for the remainder of the year. We incurred $1.2 million of legal expenses in the second quarter, slightly higher than expected, but we now expect to avoid these types of legal expenses in the back half of the year. I will explain further in a moment. Turning to the third quarter. Sales are expected to range between $66 million and $68 million, and adjusted EBITDA is expected to be approximately $3 million in the third quarter of 2026. Now I'd like to discuss our legal update. Specifically, I will cover updates with regards to the company's Section 16(b) litigation and the CPSC and DOJ matters involving Black Diamond Equipment Limited. In the company's action against HAP Trading, LLC and Mr. Harsh A. Padia for disgorgement of short-swing profits under Section 16(b), the District Court granted summary judgment to the defendants on March 14, 2025, based on the market-making exemption under 16(b). The company's timely appealed and appeal was argued before the Second Circuit on February 12, 2026. The SEC has declined the Court's invitation to submit an Amicus brief, and the company is awaiting the Second Circuit Court's decision. The company's Section 16(b) action against Caption Management and its related entities and controlling person was resolved under a February 24, 2026 settlement agreement pursuant to which Caption paid the company an undisclosed sum in exchange for, among other things, mutual releases and dismissal of the claims with prejudice without any admission or liability of wrongdoing. The related stockholder action was dismissed without prejudice on February 10, 2026, as duplicative of the company's direct action. On April 11, 2026, the stockholders' attorney filed an action against the company in the New York State Supreme Court seeking legal fees. The company intends to defend that action and argue that any recoverable fees are limited to services performed before the company filed its direct action. With respect to the CPSC and DOJ matters, the CPSC previously referred to the DOJ, the unresolved matters concerning Black Diamond's reporting obligations relating to certain avalanche transceivers. On June 4, 2026, the DOJ advised the company and Black Diamond that it had closed its criminal investigation as to them. On the same date, the Department of Justice separately advised John C. Walbrecht and Rick Vance that had also closed the investigation as to each of them. The company has heard nothing further from the CPSC or the DOJ regarding these matters. In addition, on January 28, 2026, the CPSC closed without further action, a separate investigation into whether Black Diamond sold products subject to a recall. As such, we expect to save on legal expenses in the back half of the year per my comments around the 2026 guidance. In closing, we are focused on unlocking the intrinsic value of our Outdoor and Adventure segments and maximizing long-term value for our shareholders. With a more focused business, a simplified operating structure and a debt-free balance sheet, we believe we are well positioned to execute the next phase of our transformation. At this point, operator, we're ready to take questions.

[Operator Instructions] Our first question comes from Laurent Vasilescu with BNP Paribas.

I was curious to know about in the context of a potentially very warm winter, what your conversations are, like, with your retail partners if you're having those discussions with potentially trimming any wholesale orders? Or is that not in the cards just yet?

Laurent, you're referring to the coming winter, I assume, right?

Neil, why don't you handle that?

Yes, Neil, why don't you go ahead?