Clarus: Debt Problem Solved With Precision Disposal (NASDAQ:CLAR)

Clarus Corporation (NASDAQ:CLAR) is somewhat compelling. They are selling their precision businesses to an unaffiliated buyer, not the chairman Warren Kanders, and apparently it’s going to solve the debt load completely for the company. The residual business is pretty interesting, too. It’s growing, and dependent on pretty resilient factors. The multiple it comes with is also not very high, and in the context of possible growth offered in particular by the Black Diamond business, makes for a compelling value case. But it’s not a slam dunk and doesn’t blow us away due to pressures on discretionary markets and the lack of a clear value proposition.

Earnings

There are three segments: precision which is getting sold, outdoor which is dominated by Black Diamond, and then the adventure businesses which are driven primarily by car demand and OEM partnerships for roof racks, but also outback traction pads for stuck SUVs and pickups in Australia.

Across businesses, gross margins improved on easing freight costs which peaked last year, leading to more than a 1.4% increase in the GM. Adjusted EBITDA is down over 30% YoY, driven in general by volume declines and not just in Precision, which saw its margins actually grow substantially even if sales fell.

Precision was driving the declines of sales this quarter reaching probable troughs, as it was digesting some destocking issues not only at retailers and in the distribution channels but also among consumers who’d been hoarding ammo, resulting in a decline of 45% YoY in sales or $16 million. Fall hunting season wasn’t great. Overall company sales declines were around $15.6 million, so without the ammunition business, sales would be flat.

The overall outdoor sales growth was flat YoY in Q3, despite some pressures in European retailing, reflecting resilience in the residual outdoor business dominated almost entirely by the Black Diamond equipment and apparel catalogue. The DTC channel was particularly strong at BD, with 22% sales growth representing 10% of the BD sales, but the net effect was that sales declined. As a reminder of Black Diamond’s products:

The adventure segment is the other segment, including the Rhino-Rack and MAXTRAX brands, which were up 9% in sales for the Q3 thanks to some new product launches and strong underlying car new sales in Australia in particular following the further recovery after the 2021-2022 semiconductor shortages, and limits to rate hiking regimes due to an already overleveraged populace. In the U.S. there was some pressure on overlanding demand in general, but MAXTRAX seems to be picking up despite some soft quarters with an additional impulse from the release of a new product.

Bottom Line

The company has around $127 million in net debt, and they just reached an agreement for the ammunition business before the new year for $175 million, which brings Clarus back into net cash, and does so with an acquisition at what we believe is a pretty fair multiple considering the P/E and macro environment. The sale is going to be to an unaffiliated U.S. investor, and not to Warren Kanders the Chairman of Clarus who made an initial non-binding offer that introduced somewhat of a floor to what might have been a bidding process that followed with this other investor. There was no related party transaction here.

We take the current run-rate EBITDA figures from the remaining businesses to get the valuation, assuming resilient sales in line with TTM data and margins of 5.8% and 13.3% for outdoor and adventure respectively. A 7.67x multiple more or less reflect the current growth prospects, which are not particularly strong and are dependent on new product successes rather than underlying growth due to the macro pressures on discretionary spending. Running some basic comps helps us conclude that Clarus is fair value.

The company is aiming to double outdoor margins and continue to improve adventure margins, but we’re not sure that’s possible. Also, we feel that for a stronger case to own Clarus Corporation stock, more growth would be needed. While some end markets are exploding in popularity like climbing, we are generally too tentative about discretionary spending and discretionary markets to take a position here, although there are some merits to the thesis.