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“We believe our portfolio of Super Fan brands has us well positioned to continue our market momentum. Our activity-based brands have demonstrated strong resistance to recent economic headwinds, while outdoorism continues to fuel demand for the outdoor activities that we serve. As a result, we believe that we are well positioned for another record setting year in 2022. “
– Clarus Corporation President, John Walbrecht
Rating:
I am long-term bullish on Clarus Corporation (NASDAQ:CLAR) (hereinafter “Clarus” or the “Company“). Over the next 2-3 quarters, however, I am not particularly bullish on retail, and I suspect the recession we are in will be a deep one. Consequently, I have hedged my position in Clarus and certain other small caps in my portfolio with a short of the Russell 2000 Index via the related product ProShares Short Russell2000 (RWM) (referred to herein as “RWM”)
Introduction:
Headquartered in Salt Lake City, Utah, Clarus is a developer, manufacturer and distributor of outdoor equipment and lifestyle products. As of this writing, the Company has a market capitalization of roughly $750 million. Its products are focused primarily on the climb, ski, mountain and outdoor sport markets. According to its website, the Company’s products are known for, among other things, innovation, style, quality, safety and durability.
Clarus’ portfolio of brands includes Black Diamond®, Sierra®, Barnes®, PIEPS®, SKINourishment® and Rhino-Rack®. The Company’s products are sold via specialty and online retailers and distributors, among other channels. The Company believes its products are iconic and of the highest quality, resulting in a loyal customer base. The Company operations are divided into three business divisions: 1) Outdoor; 2) Precision; and 3) Sports & Adventure.
Per the Company’s recent earnings call, the President provided some color on Clarus’ operations in Q2 2022 (emphasis added):
The demand in the Outdoor segment remains strong. Black Diamond proved again its industry-leading momentum… across all categories, most importantly in apparel, headlamps, trekking poles and core climbing equipment…. Throughout the pandemic and through spring 2022, we have been prioritizing product innovations and fulfillment in these key categories and the consumer response has been strong. Overall, for Q2, Outdoor experienced better than 20% growth when adjusted for the FX headwinds… We continue to purchase inventory in line with our demand plans. However, we are handicapping the order book in our 2022 sales guidance because of the supply chain and logistics challenges we continue to face, as well as the headwinds experienced from foreign currency….
[O]ur Precision Sports segment delivered another record sales quarter, once again proving [that] premium positioning and product innovations pave the way for continued market share gains. Demand remained high in the quarter, especially for centerfire bullets. We… deliver a premium, unique product demanded by the special forces, law enforcement, reloaders, competitive shooters and hunters…
As demand continued to exceed supply for both Sierra and Barnes, we continued to increase capacity in both bullets and loading of ammo, driving towards an end-of-year bullet production run rate target of 350 million bullets at Sierra and 120 million at Barnes and an ammo-loading capacity of 50 million rounds….
Within our Adventure segment… Q2 marked the second quarter of Rhino-Rack’s introduction into North America and reception remained strong, as pro forma sales were up 31% in North America. MAXTRAX also had strong growth in North America, as we race to increase inventory allocations to meet the demand for our recovery boards.”
As an investment idea, I learned of Clarus in 2021 after reading a quarterly letter from Maran Capital Management. That letter provides in pertinent part with respect to the Company’s valuation:
In my 2Q 2018 letter, I shared my (then) perspective on Clarus’s potential. The stock was trading at approximately $8 per share, and I laid out a potential path to $35 per share. Careful readers may recall the math:
15 + 5 + 5 + 3 + 7 = $35
I have written occasionally about the importance of continually re-underwriting theses given changing information – of frequently checking one’s hypothesis, in a Bayesian-Laplacian manner, against new data. Had I put a firm “price target” of $35 on Clarus three years ago, perhaps I would consider trimming or selling the stock as it approaches that level. Instead, given a recent detailed re-underwriting of the company, I have updated my opinion about Clarus’s potential value several years out. Given meaningful progress on apparel, footwear, retail stores, the company’s sporting segment, and capital allocation (including the recent acquisition of Rhino-Rack, with more to come), I now believe the stock could climb above $60 per share over the next three years. Here’s the updated math:
25 + 15 + 10 + 10 = $60
• Black Diamond could be worth approximately $1bn, or $25+ per share, on $400mm+ of sales at a 15% EBITDA margin. 2.5x sales would not be particularly aggressive for a business of this caliber.
• Rhino-Rack could grow to approximately $500mm+ of value, or $15 per share, as EBITDA doubles over the next few years to $40mm+.
• Sierra + Barnes: $350mm+, or $10 per share, of potential intrinsic value on $125mm+ of high margin revenue.
• Free cash flow generation and capital allocation could create another $10 per share of value over the next several years…. I believe there is a long runway for Clarus results to continue to “meet or exceed” expectations and that its growth prospects are far better than what the current valuation implies. Management remains aligned with shareholders via its ~20% equity ownership position.”
Maran Capital Management has an impressive track record, so I give its analysis appropriate deference.
Balance Sheet:
Clarus has a good balance sheet, which is summarized in part below:
| $ in Thousands | June 30, 2022 | December 30, 2021 |
| Cash | $ 13,888 | $ 19,465 |
| Inventory |
$ 153,056 |
$ 129,354 |
| Total Current Assets | $ 250,861 | $ 229,946 |
| Total Assets | $ 638,011 | $ 631,827 |
| Total Current Liabilities | $ 69,173 | $ 72,983 |
| Total Liabilities | $ 264,985 | $ 261,659 |
| Stockholder Equity | $ 373,026 | $ 370,168 |
As of June 30, 2022, the Company’s current assets exceed current liabilities by more than 3x and overall stockholder equity has grown by roughly $3 million over the last six months. That said, inventories are ticking up to the tune of roughly $25 million, and it is important to track whether that trend will continue. Purchase of additional inventory has caused the Company’s cash balance to decline by more than $5 million.
During the earnings call, management noted, however, that this was a strategic decision by management in order to “mitigate supply chain and logistics challenges.” Moreover, certain of Clarus’ products (e.g., ammunition, ice axes, etc.) hold their value over time (mitigating some of the risks that come with high inventory). In any event, management is aware of the rising inventory, and they do intend to bring the June 30, 2022 level down by about $10 million by the end of 2022 (per the earnings call transcript linked above).
As for financial metrics, management also noted on the call that
At June 30, 2022, total debt was $149.6 million…. Under our new $300 million revolving credit facility, we have $25.5 million outstanding at June 30, 2022. We have further borrowing capacity of nearly $275 million at June 30, 2022. To be clear, we could borrow the full amount and still be in compliance, combined with the required coverage under the credit agreement. So, from a capital perspective, we are in great shape.”
Notwithstanding the balance sheet strength, borrowing costs are rising and Clarus will not be immune from this trend if it continues.
Q2 2022 Earnings Highlights:
(Q2 2022 vs. the Q1 2022 quarter):
- Sales of $114.9 million increased 57%.
- Gross margin was 38.0% compared to 38.2%.
- Net income increased 105% to $3.8 million, or $0.09 per diluted share, compared to net income of $1.8 million, or $0.06 per diluted share.
- Adjusted EBITDA increased 51% to a record $17.6 million with an adjusted EBITDA margin of 15.3% compared to $11.7 million with an adjusted EBITDA margin of 15.9%.
Source: Press Release. Overall, the market responded favorably to the news, with the stock climbing more than 10% (above $23), but the price then settled down and finished the day with only a modest gain (perhaps focusing on the increased inventory and slight downturn in margin). As of this writing, Clarus was trading below $21 and its 52-week high is $31.20.
Digging deeper into the net income statement, I noticed that the Company’s share count did increase by roughly 20% over the prior year. As a result, even though the Company had roughly 20% more operating income for the six-month period ended June 30, 2022 compared to the prior year period ($9.1 million vs. $7.5 million), the net income per share for the two periods were identical at 0.24 cents per share. Not wanting to be diluted, I’ll be tracking this going forward. Perhaps the Company’s recently announced share buyback program will mitigate against recent dilutive practices.
Cash Flow:
Per the Statement of Cash Flows for the six months ended June 30, 2022, Clarus had negative operating cash flows to the tune of ($6,276,000) compared to positive cash flow of $362,000 for the comparable 2021 period.
The reasons of the negative cash flow in the quarter are attributable to:
1) Increased payment of Accounts Receivable (more than 10X the amount paid for the prior period);
2) Increase in Inventory purchases (discussed above); and
3) Increase in income taxes paid.
Other notable items for me are that: a) stock compensation has more than doubled for the six-month period over the comparable 2021 period (see my dilution discussion above); and b) currency exchange has had an adverse cash flow effect of $457 thousand versus $138 thousand in the prior period. These items are worth monitoring going forward.
The Company pays a modest quarterly dividend of $0.025 ($0.10 annually) at a current cost of approximately $1 million per quarter. The per share amount of the quarterly dividend has not increased since Clarus started paying a dividend in 2018.
Concluding Thoughts:
1) Clarus has strong niche brands which are showing positive momentum and sales trends.
2) The Company’s balance sheet is in good shape and the Company’s debt is modest. Financial covenant compliance is secure.
3) Strong brands and financial flexibility, coupled with secular trends that favor outdoor activities and defense, give management an enviable growth runway (of course, capital allocation decisions by management will be key).
4) I have taken a small position in Clarus, which, as noted above, is paired with a short of the Russell 2000 via RWM. I am open to taking a larger position in Clarus, particularly if management can maintain margins and generate meaningful cash flow, strategically reduce inventories as outlined on the earnings call, and slow the share dilution which accelerated over the last six months of 2022. Shares are enticing below $20.
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