Clarus Corp Q3 FY2025 Earnings Call

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 a 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 a $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 ANZ to restore profitability. Overall, in the face of a challenging macro environment, we continue to take decisive actions to enhance margins and set the stage for sustainable growth and profitable growth over the long term. With that, thank you for being with us today, and I will turn the call over to Neil.

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 the 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, air freighting 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 share some brief insights on the Adventure segment before summarizing the third-quarter financial results and moving into the Q&A session. Let's delve into Adventure. Our team achieved 15.9% year-over-year growth compared to the third quarter of last year. Excluding the RockyMounts acquisition, organic growth stood at 7.4%, which is a positive development. Reflecting our strategic aim to broaden our customer base, a robust pipeline that includes a new Rhino-Rack customer in Australia significantly contributed to this growth, although it was partly countered by declines in the recovery product line. Adventure's adjusted EBITDA reached $349,000, approximately $100,000 ahead of last year. However, our gross margin continues to face pressure primarily due to increased tariffs in the U.S., inventory clearances, and shipping costs to customers. We adjusted the prices of the RockyMounts line in the U.S. at the close of the third quarter, which will help mitigate the tariff effects and safeguard our gross profit moving forward. In Australia, we have not effectively captured price increases annually. This failure to capture price has considerably contributed to margin erosion, and we are implementing a revised pricing strategy for the ANZ region as a near-term measure to restore profitability. We do anticipate our gross margins will remain below historical levels while these changes are integrated into our financial results. On a more encouraging note, we managed to reduce SG&A by $600,000 compared to last year’s third quarter, thanks to the reorganizations we executed in November 2024 and July 2025, along with stricter controls over travel, marketing, and event costs. As Warren mentioned, we have eliminated $1.1 million in fixed costs annually from our recent restructuring efforts. Under Trip Wyckoff's new leadership, we are refocusing on executing the next phase of the Adventure growth strategy. We have previously identified investment opportunities to broaden Adventure's global reach, and although we have encountered declining sales and profitability during these investments, we are not forsaking these initiatives. We are balancing growth ambitions with necessary operational improvements, aiming to serve our existing customers better while offering more diverse products to enhance profitability. The last few months have been focused on clarifying our challenges and realigning our direction, both in the short term and long term. We are dedicated to becoming leaner and more efficient as we prepare for sustainable growth. In August, we launched our 3PL warehouse in the Netherlands, starting with a conservative inventory strategy and expecting customer orders to commence shipping from this facility in the fourth quarter of this year. This new facility enables us to serve clients more effectively in Nordic, U.K., and European markets, creating opportunities with small and mid-sized accounts that previously could not import full containers from Australia. This aligns with our vision for strategic growth. Regarding U.S. tariffs, while the added expenses present a challenge, we have concluded that maintaining production in Australia and China is currently logical. Approximately 75% of our total volume remains unaffected by these tariffs, making it impractical to raise FOB costs across the board just to avoid tariffs on a smaller sales portion. We continually assess our supply chain for opportunities to shift production when financially viable. Meanwhile, we have begun sourcing some high-volume production of MAXTRAX traction boards in Salt Lake City, significantly enhancing our control and reliability. Our partners in Asia have also contributed by offering unit price reductions to offset some tariff expenses. We will adjust Rhino-Rack pricing in the U.S. on December 1 to stay ahead of additional pressures. Currently, we are in the peak season of our core Australian market, experiencing robust early spring sales. Our key priorities for the remainder of the year are clear: drive profitable revenue growth while closely managing SG&A and personnel expenses. Looking to the future, our primary opportunity lies in product innovation, which has been underperforming for several years and is where we are concentrating our efforts. We are increasing resources, expanding our vehicle fit team for accelerated progress, and bringing in seasoned product developers with extensive category expertise. We have developed a three-year innovation roadmap that we believe will transform multiple product categories and help us retain leadership in the Australian market while gaining traction in the Americas and beyond. While this has been a challenging year for Adventure, it has also been a crucial one. We are confronting difficult realities, taking significant actions, and positioning the Adventure business for a stronger and more innovative future. Now, let me move on to the consolidated and segment financial review. Third-quarter sales totaled $69.3 million, up from $67.1 million in the prior year’s third quarter. The 3% overall sales increase was driven by a 16% rise in the Adventure segment, countered by a 1% decline in the Outdoor segment. Notably, Outdoor revenue was actually up 1% when excluding PIEPS from both periods. The consolidated gross margin for the third quarter stood at 35.1%, slightly higher than the 35% from a year ago, propelled by increased sales at Adventure and a favorable product mix at Outdoor. These gains were partially offset by an unfavorable product mix in Adventure, largely due to higher RockyMounts sales in North America, tariffs affecting both segments, and reduced volumes at Outdoor following the PIEPS sale in July, along with losses from foreign exchange contracts at Outdoor. The adjusted gross margin was 35.1% for the quarter, down from 37.8% in the previous year. Although we did not adjust gross margins for the third quarter of 2025, it's important to highlight that actual gross margins were affected by significant headwinds from tariffs and foreign exchange, items beyond our control. Outdoor has made considerable strides under Neil’s leadership to improve gross margins, yet these gains were partially diminished by tariff and foreign exchange impacts this quarter. Outdoor achieved a gross margin of 36.0% in the third quarter of 2025 compared to 33.2% in the previous year, which is commendable and aligns with expectations before tariffs and currency fluctuations. Conversely, Adventure faced greater challenges, with its gross margin at 33.2% for the third quarter of 2025, down from 40.1% last year. Regarding SG&A, expenses for the third quarter were $26.2 million, a decrease from $27.9 million or a 6% drop compared to the same quarter last year. This reduction was mainly due to decreased employee-related costs, lower expenses from PIEPS after the divestiture, and other cost-control measures across the segments and corporate. Adjusted EBITDA for the third quarter was $2.8 million, resulting in an adjusted EBITDA margin of 4.0%. This EBITDA is adjusted for restructuring charges, transaction costs, stock compensation expenses, contingent consideration benefits, and other inventory reserves. Additionally, starting in the first quarter of 2024, we adjusted for legal costs related to the Section 16(b) litigation and the Consumer Product Safety Commission DOJ matters. These legal costs amounted to $1.0 million in the third quarter of 2025 and $3.5 million for the first nine months of 2025. The third-quarter adjusted EBITDA by segment was $349,000 for Adventure and $4.7 million for Outdoor, with adjusted corporate costs at $2.3 million for the quarter. Now, let’s discuss liquidity and our balance sheet. Free cash flow for the third quarter of 2025 was a use of cash totaling $7.0 million, compared to a $9.4 million cash use for the three months ending September 30, 2024. As of September 30, 2025, total debt was $2 million, linked to an obligation from the RockyMounts acquisition, due for payment in December 2025. We have no other outstanding third-party debt. As of September 30, 2025, cash and cash equivalents were $29.5 million, down from $45.4 million at December 31, 2024. We utilized $7 million in free cash flow in the third quarter. In early July, we completed the sale of the PIEPS snow safety brand, realizing cash proceeds from this transaction. I expect the business to generate free cash flow during the fourth quarter in line with our historical performance, and I foresee our consolidated cash balance reaching between $35 million and $40 million by year-end. Regarding our full-year outlook, we have chosen once again not to provide guidance for 2025, consistent with our stance over the prior quarters. While we believe we have effectively addressed the tariffs with suitable countermeasures, ongoing uncertainties related to trade, consumer sentiment, and the broader macroeconomic landscape make it challenging to confidently project the business’s performance. Based on our current understanding of our order book and tariffs, we believe our actions align with market conditions, but due to the ongoing uncertainties, we prefer to remain cautious and abstain from giving guidance. Historically, our business exhibits a seasonal pattern, with revenue split approximately 45% in the first half and 55% in the second half of the year, and I anticipate we will see this trend continue in the second half of 2025. Lastly, I would like to highlight that revenue for October surpassed our forecasts for both segments.

Let me move on to Legal. I'd like to provide an update on the outstanding Section 16(b) securities litigation matters that the company is pursuing as well as an update on the open matter with the CPSC and the Department of Justice. We continue to proceed in our lawsuit against HAP Trading, LLC and Mr. Harsh A. Padia. In early 2025, the court granted summary judgment in favor of the defendants. We subsequently filed a notice of appeal and are opening appellate brief. HAP has filed its opposition brief and our replied brief will be filed this Friday, November 7. Oral arguments will likely be scheduled in the first quarter of 2026. We also filed a lawsuit against Caption Management and its related entities and controlling persons. The defendants filed a motion to dismiss, which was denied. The case is in discovery phase with documents having been exchanged and depositions likely to be held during the first quarter of next year. In the meantime, a mediation is scheduled for November 25, 2025. With respect to the open matters with the CPSC and DOJ, in late 2024, the company was notified by the CPSC that the unresolved matter involving Black Diamond had been referred to the Department of Justice. In early 2025, the DOJ served the company and Black Diamond with grand jury subpoenas requesting various categories of documents related to Black Diamond's avalanche beacons. We are cooperating with the DOJ in responding to its discovery requests and have produced substantially all the documents requested. Additionally, in early 2025, the company received a letter from the CPSC requesting various categories of documents and information in connection with a new investigation into whether BDEL sold products that were subject to a recall. The company has cooperated with the investigation, responding in full to the CPSC's document request and has heard nothing further. In conclusion, turning back to our 2 core segments, we believe the actions we've taken to prioritize our best customers and our most profitable outdoor products and styles, together with a simplified organizational structure with an emphasis on product and fitment and adventure position Clarus for long-term success. Supported by a balance sheet with 0 third-party bank debt, we are committed to taking a prudent approach to capital allocation and managing our business to drive long-term market share gains while delivering sustainable value for our shareholders. At this point, we're ready to take questions.

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?

I'll let Neil expand as well, but PIEPS had minimal impact this quarter, representing a year-over-year decline. The main issue, which Neil mentioned earlier, was the D2C business. In North America, the D2C business declined by 16.5%, and in Europe, it dropped by 16%. In summary, the absence of PIEPS coupled with weak D2C performance worldwide overshadowed the strength in North American wholesale. The apparel sector contributes to the North American wholesale, which is how we account for it within that category.

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 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. On the first question regarding spring, our order books look promising, although there is some caution from our retail partners. However, our order book is increasing. Ultimately, we need to see how much of that translates into sales, but the signs are encouraging. We feel strong momentum in the wholesale channel, particularly with major accounts like REI, MEC, and Amazon, as well as significant strength in specialty retailers. Looking ahead to spring, we are feeling as confident as possible in this environment about the wholesale channel's strength. Regarding the fourth quarter, we are taking a cautious approach. As Mike mentioned, it's too early to make definitive predictions. The current environment appears more promotional, and retailers seem hesitant to hold excessive inventory. Nevertheless, we still have a lot to experience in the fourth quarter. So while we're cautious, which feels prudent in this context, it's challenging to identify a clear trend for Q4 at this stage.

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.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect. Everyone, have a great day. Bye.