Clarus Corp (CLAR) 2021 Q1 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the first quarter ended March 31, 2021. Joining us today are Clarus Corporation's President, John Walbrecht; Executive Vice President and CFO, Aaron Kuehne; and the company's external Director of Investor Relations, Cody Slach. 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. Slach 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. Cody, please go ahead.

Thank you. Please note that during this call, the company may use words such as appears, anticipates, believes, plans, expects, intends, future and similar expressions, which constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on the company's expectations and beliefs concerning future events impacting the company and, therefore, involve a number of risks and uncertainties. The company cautions you that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

Potential risks and uncertainties that could cause the actual results of operations or financial condition of the company to differ materially from those expressed or implied by forward-looking statements used in this call include, but are not limited to: the overall level of consumer demand on the company's products; general economic conditions and other factors affecting consumer confidence, preferences and behavior; disruption and volatility in the global currency, capital and credit markets; the financial strength of the company's customers; the company's ability to implement its business strategy; the ability of the company to execute and integrate acquisitions; the impact that global climate change trends may have on the company and suppliers and customers; the company's exposure to product liability or product warranty claims and other loss contingencies; disruptions and other impacts to the company's business as a result of the COVID-19 global pandemic and government actions and restrictive measures implemented in response; stability of the company's manufacturing facilities and suppliers as well as consumer demand for our products in light of disease epidemics and health-related concerns such as the COVID-19 pandemic; changes in governmental regulation, legislation or public opinion relating to the manufacture and sale of bullets and ammunition by our Sierra segment and the possession and use of firearms and ammunition by our customers; the company's ability to protect patents, trademarks and other intellectual property rights; the ability of our information technology systems or information security systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes; our ability to properly maintain, protect, repair or upgrade our information technology systems or information security systems or problems with our transitioning to upgraded or replacement systems; the impact of adverse publicity about the company and/or its brands, including without limitation, through social media or in connection with brand damaging events and/or public perception; fluctuations in the price, availability and quality of raw materials and contracted products as well as foreign currency fluctuations; the company's ability to utilize its net operating loss carryforwards; changes in tax laws and liabilities, tariffs, legal, regulatory, political and economic risks; and the company's ability to maintain a quarterly dividend.

More information on potential factors that could affect the company's financial results is included from time to time in the company's public reports filed with the SEC, including the company's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. All forward-looking statements included in this call are based upon information available to the company as of the date of this call and speak only as of the date hereof. The company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date of this call.

I'd like to remind everyone this call will be available for replay through May 24, starting at 8:00 p.m. Eastern tonight. A webcast replay will also be available via link provided in today's press release as well as on the company's website at claruscorp.com. Any redistribution, retransmission or rebroadcast of this call in any way without the expressed written consent of Clarus Corp. is strictly prohibited.

Now I would like to turn the call over to the President of Clarus, John Walbrecht. John?

Thank you, Cody, and good afternoon, everyone. I hope that everyone is staying healthy and active in the outdoors. It is great to be addressing you today and speaking about the strong results we announced earlier this afternoon.

The first quarter was another quarter where we not only achieved what we set out to do, but we also exceeded our expectations. These results were driven by the continued execution of our brand playbook. This playbook focuses on our innovate and accelerate strategy, which calls for investing in R&D to drive innovation in both existing and new product categories, driving brand awareness, all while being easy to do business with and staying relevant to our core consumers. We believe that the super-fan brands excel within our Clarus strategy, making the execution of this playbook more seamless.

Total sales were up 41% as we experienced accelerating growth in both our Sierra and Black Diamond segments as well as robust demand across each of the product categories. We substantially improved gross margins and earnings thanks to the strength of our brands, our capabilities to fulfill demand and our consistent pricing strategy. This marks our third consecutive quarter of revenue expansion, and we generated $10.6 million in adjusted EBITDA for the quarter, representing a growth of 191%. These strong results, as well as our continued momentum, have us raising our full year financial outlook. Aaron will address the details of this shortly.

Across Black Diamond and Sierra, we continued to outperform the market as we executed our playbook, in particular with our key account relationships via higher levels of product availability in support of our increasing brand presence and accelerating demand amongst the core consumer. In Black Diamond, sales increased 13% as we benefited from the recovery in the outdoor market and reduced inventory volatility at retail, which allowed us to accelerate our growth, particularly with some of the key retail accounts. This is despite continued headwinds from COVID-19 and supply chain challenges. Demand in our bullet businesses continued to surge, and we were able to navigate component shortages relatively well, as seen by 94% and 92% pro forma first quarter sales growth for our Sierra and brand -- Barnes brand, respectively.

To continue with the supply chain challenges across our brands, we have leveraged our super-fan brand recognition to strengthen our relationships with our key retail partners and our global suppliers. We continue to see evidence that suppliers prioritize the formation of long-lasting and productive partners with brands that are best poised for long-term performance, and we believe our brands fit this mold. Building these favorable relationships also benefit the navigation of the current supply chain environment, which is why we believe we are outperforming our competition in this area of our business in the recent quarters.

Returning to our Q1 brand performance. The 13% increase in Black Diamond sales was mostly attributed to surging consumer demand and the recovery from the pandemic. By category, Ski was up 23%. Mountain was up 20% and Climb was up 3%. Hard goods growth of 16% was driven by solid double-digit growth across the product portfolio, in particular, trekking poles, skins, headlamps, lighting, gloves, packs, bouldering and helmets.

Our wholesale channel led the way of sales performance in Q1 on the back of solid growth at our specialty retail partners and especially our key accounts. The reopening of markets and broader COVID recovery is certainly a key factor enabling this growth. Our direct-to-consumer channel slowed compared to recent quarters as we prioritized inventory allocations to our wholesale partners to ensure their ability to have strong kickoffs to the spring 2021 season. This reinforces our partnership approach and the ease of doing business with mentally.

We continue to be excited by our ever-improving digital presence, led by launching our new website in January of 2021. This was a major undertaking, especially while most of the team was working remotely during COVID-19. During Q1, we continued to refine our updated platform, driving improved activation with more sophisticated prospecting and retargeting efforts. As we continue to improve our inventory position, develop more refined data-driven tools and expand our retail footprints, we believe our direct-to-consumer channel will become the most brand accretive touch point of our super fans.

Our North American and European businesses both grew double digit on the reopening momentum. This growth was partially offset by a decline in our international global distributor market due to lingering COVID-19 impacts as well as our transition away from a distributor model into the brand-controlled strategy in Spain in the second quarter. We successfully transitioned the U.K. in Q4 and believe this will become one of our top 5 markets in the region, serviced by our Black Diamond European office.

In apparel sales, sales remained stable during the first quarter despite the lower than expected inventory availability due to elongated logistic challenges experienced globally due to shipping delays. Our order books are quickly filling for the second half of the year due to our wholesale partners regaining confidence as their own customers return.

Within our own retail stores, we are also seeing increasing traffic. This traffic is incredibly important as it helps us to gain insights into the brand perception. This is essential for something like our apparel offering. We continue to treat apparel like equipment, employing technical reach features as well as points of differentiation. At our stores, we were able to see and hear firsthand how our consumers use the product and how they can be improved, whether that's through next-generation material innovation or advancement of technical aspects.

Speaking of technical aspects of our products, we recently saw that our Black Diamond quickdraws were used by the NASA's SpaceX Crew-1 in their mission back to Earth last week from the International Space Station. This is a great example of how our quality products can be used in a variety of ways and shows the importance of our tireless innovation efforts.

Continuing on the topics of technical development, specifically in our Apparel business unit, we recently hired Tony Rivera, who will lead the business unit under our Vice President of Product, Kolin Powick. Tony has extensive knowledge in merchandising and was most recently responsible for driving consumer conversion at Arc'Teryx. He's a key hire as we seek to expand our growing momentum in our apparel initiative. While inventory is a near-term challenge, we remain optimistic that we will grow Apparel into a $100 million business over the long term.

Now moving to our Sierra segment, we generated sales of $23.5 million or up to 103% from the prior year quarter or 94% when excluding Barnes. This performance reflects sustained broad-based sales growth across both bullets and ammunition. We continue to experience strong domestic tailwinds ahead of and following the U.S. election as well as an increased participation in outdoor hunting and indoor shooting ranges. Our bullet and ammunition categories remain impacted by industry-wide supply shortages as we work to secure enough components to keep our manufacturing on pace with the heightened demand.

To successfully navigate this environment, we will continue to seek to utilize our balance sheet to enhance product availability and leverage our strong relationships with our key retail partners. Since October, we've leveraged Sierra's leadership team to support the excellent existing teams at Barnes in order to increase daily output and navigate industry material shortages and effectively lift each brand's ability to meet and exceed customer demand. Our combined order book of 2021 continues to quickly fill as we get closer to achieving our stated goal of delivering $100 million in sales over the long term, while approximately 30% adjusted EBITDA margins and a high free cash flow conversion.

Looking ahead, we will remain cognizant of health recommendations, especially as it relates to the conditions within the retail and supply chain environment that we operate in. While challenges remain, we are confident in our well-diversified super-fan brand portfolio that has served its core users throughout the pandemic. We will continue to execute our strategy and produce strong results despite the dynamic environment.

Another important piece of our organic growth plan is our M&A strategy. We have a disciplined acquisition strategy that we believe ensures we will be able to deploy our innovate and accelerate brand strategy. With the strategy, we target super-fan brands that may give us a foothold in a new product group or customer channel as we seek to diversify us further within the outdoor and consumer markets. We anticipate progress on this end and hope to be sharing further details in the short term.

Lastly, I would like to welcome Susan Ottmann as our Board of Director nominee to the organization. Susan has over 2 decades of leadership experience within large public companies and academia. She currently works at the University of Wisconsin in Madison where she directs online degrees and engineering professional development program as well as teaches courses in technical leadership and technical product project management. Previously, she managed Thermo Fisher Scientific global analytical instrument business, a multi-$100 million business where she managed a team of 770 associates with operations in the U.S., U.K., Germany and China as well as sales teams worldwide. Susan has also held leadership roles at Danaher and Schneider Electric. We're pleased to have nominated Susan to our board and believe that her focus on innovation, scaling operations and her people development skills will be a great asset to our board.

With that, I'll now turn the call over to Aaron Kuehne, our Chief Financial Officer, who will provide some additional commentary on our performance in the first quarter and more details on our increased 2021 outlook. Thank you, Aaron.

Thank you, John, and good afternoon, everyone.

Diving right into our results, for the first quarter of 2021, total sales increased 41% to $75.3 million. By segment, Black Diamond sales improved 13% to $51.8 million, and sales in the Sierra segment increased 203% to $23.5 million. Excluding Barnes, which we acquired in early October 2020, our first quarter sales in the Sierra segment were up 94% organically. Barnes continues to outperform our expectations.

The performance within Black Diamond was primarily due to the growth in our hard good products, particularly in Ski and Mountain. This overall demand increase was driven by the continued recovery within the outdoor space. We also experienced an increase in sales at our key retail accounts as well as at specialty retail. We believe this was driven by the fact that we were the best positioned to fulfill inventory in the current volatile supply chain environment with the core brand that has maintained on price. This growth was partially offset by a decline in our international global distributor market due to lingering COVID-19 impacts as well as our transition away from a distributor model into a brand-controlled strategy in Spain. We started selling directly in the U.K. in the fourth quarter of 2020, but Spain will transition in Q2 of this year. This transition reduced Black Diamond sales by approximately $1 million in the first quarter, but we would expect to more than make this up in the future once it is fully internalized.

The $7.3 million or 94% increase at Sierra was due to continued robust domestic demand for green box, OEM and our new ammo initiative. Roughly $1.7 million of this increase was driven by growth in Sierra's ammunition business.

Barnes continues to exceed our expectations, bringing in $8.5 million of sales in the first quarter with domestic black box and ammo leading sales growth. We continued making progress with our integration efforts as we relaunched the brand and began to implement new processes to drive higher levels of output in order to fill market demand.

Consolidated gross margin in the first quarter improved 130 basis points to 35.9% compared to 34.6% in the year ago quarter. Improvements in product mix and foreign exchange benefits more than offset unfavorable impacts under supply chain and logistics due to the COVID-19 pandemic. Excluding a fair value inventory step-up associated with the Barnes acquisition, adjusted gross margin in the first quarter increased 180 basis points to 36.4%.

During the quarter, we experienced a 100 basis point margin tailwind from foreign exchange. As a reminder, with over 30% of our global sales being denominated in foreign currencies, we attempt to manage our foreign currency risk on a continuous basis through natural hedges and foreign currency hedge contracts.

Also at Sierra, material costs such as copper and lead make up 45% of the product costs. We actively manage our costs with our vendor partners because we understand the impact that commodity costs have on our business, specifically on gross margins. Through this active and deliberate management, we expect to be able to mitigate risk for a period of 6 to 9 months out.

SG&A expenses in the first quarter were $20.9 million compared to $17.4 million in the year ago quarter, primarily due to the inclusion of Barnes, which contributed $1.9 million, and an increase in stock-based compensation of $900,000 due to the vesting of certain performance awards. Black Diamond brand SG&A was up 2%, and Sierra SG&A was up 9%, which excludes the impact of Barnes. Both were up due to the strong sales progression. We remain extremely pleased with our expense management within both segments.

Net income in the first quarter increased significantly to $5.7 million, or $0.17 per diluted share, compared to net income of 400,000 -- $40,000, or $0.00 per diluted share in the year ago quarter. The improvement is largely attributed to our profitable sales growth. Adjusted net income in the first quarter increased 280% to $10.2 million, or $0.31 per diluted share, compared to an adjusted net income of $2.7 million, or $0.09 per diluted share in the same year ago quarter.

Adjusted EBITDA in the first quarter increased 191% to $10.6 million compared to $3.6 million in the same year ago quarter.

Now I'll shift to our asset efficiency and liquidity. Inventory levels were at $70 million, up slightly from where we ended last quarter. We continue to maintain strong relationships with our supply chain partners so that we can adjust the flow of goods in line with expected demand and dynamically manage our inventory levels. Additionally, we remain committed to seeking to increase capacity with our own bullet manufacturing and ammunition loading where possible across our Sierra and Barnes manufacturing facilities in order to keep pace with the elevated demand.

At March 31, 2021, cash and cash equivalents were $6.5 million compared to $17.8 million as of December 31, 2020, and $12.8 million in the year ago period. During the first quarter, we utilized free cash flow, defined as net cash utilized or provided by operating activities less CapEx, of a negative $3.9 million compared to generating $2.2 million in the first quarter last year. The use of free cash despite strong net income was primarily driven by our continued investments in key inventory items to seek to insulate ourselves from commodity pressures, scarcity concerns and to satisfy strong consumer demand.

Total debt was $28.6 million, and we have remaining access to roughly $49.3 million on our revolving line of credit. Our net debt leverage ratio as of March 31 was 0.6x versus a covenant requirement of 4x. We are comfortable servicing our debt requirements at an attractive rate of LIBOR plus 150 to 225 basis points. Based on our current projections, we expect to be well within our leverage and fixed-charge coverage ratio requirements and in full compliance with our current debt covenants for the remainder of the year.

This provides a nice lead-in to some important topics we want to frame related to our capital structure. We are extremely pleased with the direction of our business, which inherently provides us with additional growth opportunities for us to evaluate, both organically and through M&A. You may have noticed the recent filings of our S-3 and S-4, which expired in December 2020. These filings have a shelf life of 3 years. We believe it is completely natural and good corporate hygiene for us to keep these effective.

With that being said, as we have historically shown, we will continue to seek to utilize our balance sheet as the first and foremost way to grow. We have a business with increasing levels of EBITDA and strong reoccurring free cash flow. We also have great relationships with our banking partners who are extremely supportive of our strategic initiatives. We are owners and operators that are committed to being shareholder friendly and responsible in how we run the business, including the amount of leverage we take on. We believe there's an optimal balance here with leverage to range between 2x to 3x. At times, we might extend this a bit higher. However, it will always be with a clear path of how we bring it back to within this range over the course of a 12-month period. There might come a time where we will look to access the capital markets for additional liquidity, but it will be with the expectation of activating what I have just described in terms of pursuing our strategic initiatives, being shareholder friendly and running a disciplined business with a responsible amount of leverage.

With the strong consumer demand across our segments, we continue to believe Clarus is well positioned both strategically and financially to benefit from the tailwinds we are experiencing across our brands. With that context, along with our strong first quarter, we are pleased to announce that we are raising our full year financial outlook. We are now expecting 2021 sales to grow 32% to $295 million compared to 2020. This is an increase from our previous guidance of $280 million. By segment, we now expect Black Diamond to increase 20% to $205 million. And for Sierra, which includes Barnes, we expect actual sales to increase 71%, or pro forma sales to increase 26%, to $90 million.

On a consolidated basis, we now expect adjusted EBITDA in 2021 to grow approximately 70% to $38 million compared to 2020. We had previously guided to $35 million. In addition, we expect capital expenditures of approximately $7.5 million and free cash flow of approximately $15 million in 2021.

Across our organization, we remain grateful for our team's focus and dedication to executing on our strategic priorities and generating the highest possible returns on invested capital. We remain proud of our strong operational and financial foundation that we have built over the years, and as we continue in 2021, we will continue to strive for positive results. We have proven time and time again that our innovate and accelerate playbook and our commitment to super-fan brands is important to our success and allows us to prosper no matter the external market environment.

Operator, we are now ready for Q&A.

(Operator Instructions) Our first question will come from Jimmy Duffy from Stifel.

John, I wanted to start on the Sierra and Barnes business. You raised the guide there by about $10 million. Really strong results from Barnes in the first quarter, just annualizing the quarterly run rate for Barnes. Should we interpret that the majority of that increase through the year comes from Barnes? And I guess related to that, pencil's to Sierra of about $15 million in the first quarter. Is that maxed capacity on the Sierra business, or is there room to increase our quarterly productivity rate for the Sierra business?

So twofold answer to your question. The first is obviously at both brands, we will continue both from a people perspective as well as a CapEx perspective, continue to strive for increased capacity to meet our demands. Demands exceed our ability to produce all that the market would want at this point. So obviously, that's a first point. And each of those come with their challenges. A, can you get enough people as soon as you want and train them up? Can you buy the machines in the appropriate turnaround time to be effective immediately? That's the first piece.

The second piece to your question is, obviously we continue to see a strong demand book. We are very scrappy or agile, as we say, in regards to chasing down components. We are aware that the market is challenged where it comes to all the components we don't produce, that of brass, primers or propellant. Like I said, we are just crappy as anybody can be to acquire those, but we're also conservative in saying, look, if we can't get everything we want, despite a very strong order book, we cannot load all the ammo that the market would like or demands from us at this point. And so as always, we are transparent with you. We will absolutely charge forward, be as scrappy and aggressive in the marketplace in fulfilling demand and supporting our retailers, but we're also aware that there are challenges in the market. We think we can overcome them, but as we always say, we want to make sure that we are upfront with any and all potential risks or challenges that could happen in the next 9 months.

Okay. Fair enough. And then shifting gears to Black Diamond. Back to 2019 levels in the first quarter. There was still some impediments, right? You had seemingly some supply chain dynamics that held back revenue in North America. Is that accurate?

Correct. As you said, it's not a demand book, and it's not even a factory book issue. In terms of can our factories meet up our demand, have they been given purchase orders, are they shipping accordingly on time to them? Yes. What we faced, as the whole market did in Q1, was the elongated delays around logistics, which impacted our ability to get all that product through the channel in Q1.

And then a few forward-looking questions on the BD business. First, the distributor component, what are the sightlines to normalization of demand there? Are those distributors sitting on inventory that they need to move through and therefore it could be a prolonged impact? Or is it merely a matter of reopening and there'll be a need of inventory and the demand will turn back on? And then I wanted to ask if you're starting to see signs of life in Climb, whether indoor climbing is coming back and you're starting to feel that in the business.

So Jim, this is Aaron. I'll take the first part and John will take the second. As it relates to our IGD business, or the international global distributor business, we actually see that things are starting to break free a little bit for us. And so we anticipate that we should start to see things normalize and return back to a steady progression of growth in the back half of this year. It's been a little bit slower coming out of the COVID situation. As a result, there has been the need for inventory levels just to work through the system. However, we are starting to see higher levels of interest as it relates to ASAP or replenishment orders. And all indications are starting to give us some pretty decent suggestions that the back half should start to normalize and get back, as I say, to certain levels of growth.

On the second part to your question, as you saw in the first quarter, Climb was 3%. That was a combination of one, weather, obviously winter, and we were selling more skis. As we kick into Q2, Climb starts to surge twofold. We are seeing a surge in Climb as we go into Q2 and beyond in both outdoor and as expected. But then climbing gyms are starting to open up. And it is our anticipation that by Q3 and Q4, if not at full capacity, they'll be pretty close to as vaccines roll out more, as people are a little more excited about getting into gyms. So at this moment, like I said, Climb is back to being one of our strong growth categories in the future, and we anticipate chasing that well in through the rest of 2021.

Our next question comes from the line of Laurent Vasilescu from Exane BNP Paribas.

Congrats on really phenomenal results. Last quarter, Aaron, I think you talked about supply chain delays. You talked about it again this quarter. Can you maybe quantify how much 1Q revenues fell into 2Q, and any breakdown potentially between BD and Sierra? And then as we look out, consensus is at $53 million for 2Q. Is that the right way to think about it? Or should we think about a [6] handle for the quarter?

Yes. Good question, Laurent, and pleasure to speak with you. As it relates to the carryover from Q1 to Q2 for Black Diamond, we estimate that to be in the $5 million to $8 million range. On the Sierra Barnes side of things, that's a little bit more difficult to quantify just considering the magnitude of the order book that exists, and so it's really about just increasing output as quickly as possible. Really good question also as it relates to the consensus amount for Q2. The way that we've thought about it is that we'd like to -- we're pegging something closer to $65 million, $68 million for Q2 in terms of revenue. So hopefully folks can reflect that in terms of how they think about modeling the rest of the year, in particular Q2.

Very helpful. And then last quarter, you commented that the Sierra Barnes platform has long-term runway to $100 million revenue at a 25% to 30% adjusted EBITDA margin. It looks like EBITDA margins have been more like in the 30% to 35% range in the last 2 quarters with Barnes. Why should we think about that kind of range going forward? And are any investments or anything that we should consider that would temper the EBITDA margin going forward?

No. As we continue to integrate Barnes into the system and get more and more comfortable with its underlying characteristics and the way it behaves as we ramp this up, we are more comfortable with that target being increased to 30% EBITDA levels. Naturally, as well documented by others within the industry but also by ourselves, the commodity pricing side of things is a topic of discussion. With that being said, we'll continue to be extremely responsible, but also partnership oriented in terms of how we think about price increases. There is opportunities to be had there, but at the same time, we feel that we've been able to manage that exposure not only through our own internal hedging activities, the way that we've been able to increase overarching efficiencies and output levels, but also the way that we partner up with key accounts in terms of activating price increases. And so we've provided ourselves with a little bit of range just in terms of headroom there, but we do feel comfortable in being able to sustain that 30% adjusted EBITDA level on the combined business of Sierra and Barnes.

As we've seen over the last 12 months, every time we turn around, there's a new learning curve. And though we feel like we quickly figure it out and continue to find ways to be scrappy and accelerate, it's probably naive to assume that everything is behind us.

That's great to hear, John. Lastly, I think last quarter you kind of implied that the BD apparel business is around $30 million in absolute dollar terms. With Tony's onboarding, can you talk about the building blocks to get to $100 million apparel business? And then maybe near term, where do we think the apparel business goes for 2021?

Yes. So I think we've targeted the apparel business for 2021 somewhere in the $35 million to $38 million as we chase that. Now obviously, that has been hampered a little bit in Q1 as we talked about because of the elongated logistics challenges. It wasn't the demand and it wasn't the supply, i.e., the factories, but just our ability to move that product as quickly as we wanted to within the 90 days of the quarter into the market. We're excited about Tony joining the team and the merchandising of the collection. We continue to see very strong demand for apparel.

And if you also saw on Instagram today, the Treeline shell for spring '21 won Gear of the Year from Outside Magazine. And we continue to gain momentum, both in our apparel add equipment and our ability to create product that is award winning and differentiated in the marketplace. As we continue to look beyond and the $100 million goal, we continue to see that the drive of outdoorism continue to gain for us and our brand's momentum, brand awareness overall. You will see us continue to expand in the categories of Alpine, which is traditional outdoor. You'll continue to see us expand and we continue to have strong momentum around backcountry and winter snow sports. We continue to see opportunities within both sportswear and bottoms within the climb market. You will see us continue to accelerate the trail run, run-trek-hike direction, fast and light product. And then we continue to gain momentum in logowear and accessories.

And so we've been pretty targeted at those categories. We continue to see this on a global basis, so it's not regional. We're seeing strong momentum in Europe as well as North America and with our IGD partners. We -- obviously, as I mentioned, we'll continue to roll out flagship retail stores with 3 to 4 this summer. And they continue to be strong drivers to our growth in Apparel as well. So we're very positive on it.

Our next question comes from the line of Ryan Sundby from William Blair.

Congrats on a good quarter here. John, I guess now that we're kind of a year plus of the pandemic here, I wanted to hear a little bit more about what kind of response to the pandemic you're seeing from competition as well as maybe the retail channel. So on the competitive front, any changes there in terms of pricing, promotion, innovation versus kind of early on in the pandemic? And then on the retail front, are you seeing any new concepts or redesigns start to emerge? And I guess there I'm thinking kind of about some of the format experimentation we're seeing out of Dick's, and could that maybe open up additional distribution for you down the road?

Yes. So, great questions all the way along. I think one of the reactions, when we saw early in March of 2020 the quick promotional piece, as we said then, we made it a cognizant strategic decision to not chase price with our product, and in fact, go the opposite. Continued to innovate our apparel at a pretty rapid rate, and all product categories mind you, but Apparel is seeing a big growth opportunity. And really differentiate our products through our sustainability efforts and the ways in which we were creating product that was really industry-leading in that category, but also from a technical features, new materials types of things. And we're seeing a strong response to that, both in bookings by accounts seeing the point of difference with BD now, and it's really around this activity-based model that what people want from apparel is product that'll help them to have their best days in the mountains. And so that's what we're really focused on.

Like I said, we continue to see that in the right environment, i.e., even our own flagship stores, we see sales of apparel representing 55%, 60% of sales, where in our traditional wholesale model globally, it represents 15% to 18% of our business. So and that aspect continues to prove out, and as we said in the notes, it gives us a great environment to talk with and really learn from our core consumers what is it that makes BD apparel unique in the marketplace. To your format is rolling out, we'll continue to roll out our own flagship retail stores and what we refer to as community centers where we can instruct around the activities and provide the product, whether it's hard goods equipment or apparel to help their solutions.

Obviously, I think as BD continues to gain momentum, we're continuing to see success not only in traditional hard goods equipment categories, but also in categories like packs and gloves, footwear and apparel, what we call our transformational categories, and we'll continue to see that. And then the market obviously is getting aggressive in a positive way. REI continues to add new doors. As you've mentioned, Dick's Sporting Goods is adding Dick's Sporting Goods doors. They've also launched the new House of Sport formats. And then under Todd's leadership, they'll be launching Public Lands. And I think that opens up a lot of opportunities given BD's leadership in key categories of growth within outdoor today, that being of climbing, both in hard goods and apparel. Bottoms specifically for us is a big driver.

In backcountry, again, apparel specific for backcountry is different than front mountain insulated ski jackets. And then as trail-run-hike fast through continues to become the new driver, BD's lighter, faster, more breathable, stronger product really plays into that. So I think retailers are excited about the direction we're going. We're seeing very strong sell-in and very strong sell-through, and aligned in leadership with how we are seen now in the equipment side of the business, which has been a great positive momentum.

Great assessment there. And then I guess just kind of to follow-up on that. How do you think about expanding Black Diamond distribution, but yet still protecting the brand's image and authenticity? Can you lay out maybe criteria or what -- I guess what would make you comfortable aligning the brand with a new retail partner or concepts?

Yes. So obviously, we break our accounts into multiple tiers, what we call our national accounts, accounts that represent outdoorism across the whole country. We then have key accounts either in regions or by categories. And then we have a very strong specialty ski avenue. And then obviously our own direct-to-consumer, both through e-com and pro segment, but also through the expansion of our retail stores. And we're really about -- at the end of the day, the question is really driven by where does the consumer expect to find BD products. And that really is the driver to it, right? Where is our consumer? Where is our community? And hence, you see stores opening in places like Boulder, Colorado, Jackson, Wyoming, Bend, Oregon, Park City where our consumer resides and plays our sports.

In terms of other distribution, currently, right now we have a lot of demand within our current distribution. So I would say we're tentative on adding a lot of distribution at this moment until we can be, as we've said, easy to do business with, deliver on time, have good fulfillment and be long-term partners that are the competitive advantages to our retailers. One of the things that we're seeing and is really promising for BD is that Black Diamond is becoming viewed as a competitive advantage brand to many of our retailers as they either edit and amplify categories and BD wins out, given our leading market share, or they edit and amplify brands based on the brand's ability to prove that it can navigate the challenging times right now and still be a good partner delivering on time.

Our next question comes from the line of Ryan Meyers from Lake Street Capital.

First one for me. Can you talk about the monthly cadence of sales for the Black Diamond business during the quarter and then if you're seeing that again so far in the second quarter here?

Yes. I think, obviously, monthly cadence, we have very strong order books that we book on a seasonal basis, spring/summer, fall/winter. Obviously, the cadence is increasing, and that's really more of a function, not about the order demand book. I think the retailers would have taken everything in January if we would have had it available. As logistics, which were the challenge in Q1 become more consistent, and it's really just about planning out what was typically a 6 weeks logistics challenge became a 12 to 14 weeks, that obviously has a roll forward impact. Once you get into that cadence, retailers as well as us, then we're able to meet closer to that demand. Though I will say, consumer demand is accelerating as we go -- as we went from winter into spring, we've seen the consumer demand accelerate. And as we go into summer, we anticipate it'll continue to accelerate summer and into fall.

Great. That's helpful. And then can you talk a little bit more about the e-commerce business and direct-to-consumer during the quarter and how you've seen that grow and maybe what percentage of mix that was for the quarter?

Yes. So D2C represents about 15% to 20% of our business. As mentioned in our prepared remarks, if we had all availability of inventory right now, and one of the first questions is how much did we really post in Q1 that had to move into Q2. When you can't meet all your retailers' demand in either on-time delivery or fulfillment and we're prioritizing them, it makes it more difficult for us to allocate or prioritize that product availability to our own direct-to-consumer model.

And so until we get back to full inventory opportunities, we've chosen in Q1 to work with our key retail partners, as we said, to make sure that they were able to kick off their spring seasons with as much product as we could, given their order book, but also the increasing demand. We have built the platform. We believe strongly in our data analytic tools. We believe that long term there's a huge opportunity for the brand.

In addition to it, as a support to what we're doing with our current wholesale business, we also see opportunities to continue to expand our flagship retail stores, and those have had a very good response. Despite the traffic concerns of COVID, we are seeing 50% to 60% to 70% conversion rates on a consumer basis within our retail stores. And so the super-fan, albeit social distanced, mask in hand and separated, still comes out. So we -- long term, we still believe very much in that. We believe that someday D2C ought to represent 30-plus percent of our business. But our belief is that that is in addition to continuing to be the best strategic partner we can for our -- the rest of our retail partners.

Great. And then last one for me. It looks like another strong quarter gross margin. How should we think about that for the rest of the year and if there's any promotions that we should be thinking about maybe in the third or fourth quarter?

No, we're not anticipating any significant promotions or anything of the like. Instead, we would anticipate that we would continue to see the progression that we saw in Q1 for the rest of the year, naturally balanced for -- appropriately for the different quarters.

Remembering that we sometimes have a mix of product -- a mix of product that has different margins based on the season.

Our next question comes from the line of Matt Koranda from ROTH Capital.

And thanks for the margin -- or sorry, the revenue commentary on 2Q, the $65 million to $68 million. I just had a follow-up question on that. So maybe could you help us with the split between BD and Sierra Barnes? I guess if I just drag out the run rate in 1Q from Sierra Barnes, it would suggest pretty big year-over-year acceleration in BD. Is that the message we should be taking away here? Or do we expect to get a little bit more juice out of Sierra Barnes in the second quarter in terms of quarterly run rate?

No. It's really going to be driven by the BD business. We would anticipate that the results for Sierra Barnes for Q2 are very similar to what we saw in Q1. And so that progression is on the BD side and continue to see the recovery, but also the acceleration of that business.

Okay. And then the categories within BD in 2Q, I know that John sort of alluded to them. But maybe, John, could you talk a little bit more specifically about where you're seeing the biggest acceleration? I know you mentioned climb. But maybe you could also talk about apparel versus hard goods. And sort of apparel I guess was a little bit of a laggard this quarter. Does that pick up into 2Q given the flow of supply that we have coming on?

Yes. So I think what you will see in Q2 is a return to growth, a more significant growth for the category of climb. You will continue to see strong growth in what we call new outdoorism, which is really this trek-hike-trail run segment, which for us is supported heavily by trekking poles, headlamps, day packs, that type of item. And then you'll continue to see apparel gain momentum to our goal as we've seen it for the whole year, putting apparel growth in high -- strong double digit growth and moving forward like that. So the seasons shift. The biggest impact in Q1 was literally a logistics issue, and so it doesn't show. And then also the transition between what typically is fall/winter, the fourth quarter and the first quarter are heavily driven by Ski, and the second and the third quarter are more driven by Climb.

Okay. Very helpful. And then if we could shift over to the Sierra Barnes business. I guess if we assume that the 1Q run rate is sort of max capacity for the moment at least, where are some of the components that are sort of providing or presenting the biggest headwind, especially for the ammo business? And maybe you could break out how much was ammo versus projectiles in the quarter as well would be helpful.

Yes. I would say ballpark what we'd like to see at the Sierra level is -- we have 3 tiers of business. One is called OEM, as you know, where we ship bullets to either law enforcement, military or others to load ammo. Then you have the green box side of businesses which we send to consumers who load their own ammo. And then the third element of that is being the ammo we load ourselves through our OEM third partnerships. We would love to see those at 1/3, 1/3, 1/3 consistently and gaining. And that exceeds even what our original strategy was with Sierra of originally targeting about 10% of our business in ammo. We've now seen based on demand that that's significantly higher than we originally projected, and so now filling that gap between 10% and the market opportunity.

And so today, we've targeted that we'd like to see at about 1/3 of our business a quarterly or monthly basis. As to your point, that's really driven by the components that we cannot supply. That means first and foremost for us, the biggest challenge has really been around brass and getting reliant brass components that we feel match up well with Sierra quality in terms of loaded ammo and the importance of accuracy. We've been able to be very scrappy and resolve around primers and around propellant, but brass seems to still be the biggest challenge in ammo.

In the Barnes side, that business is much more of a 50-50, a lot less OEM and more black box and ammo opportunity. And we see the opportunity for the ammo to be much bigger than we ever anticipated, and that was just limited by the management and ownership of the past. And again, that -- the same. We have the opportunity to load ammo within Barnes. We obviously can provide ourselves with the bullets. We've been able to be very scrappy and acquire primers and propellant and continue to face the challenges of getting the brass that aligns again with the quality and importance of Barnes ammo.

Our next question comes from the line of Linda Ann Bolton-Weiser from D.A. Davidson.

I was just curious, on the M&A front, I think you alluded to some activity that maybe you're looking at things. Can you just talk about, do you find the environment difficult because of the SPACs kind of going after a lot of deals? Some of the companies have said that.

I'll jump in, and then Aaron can add his piece. I think twofold for us. One, we have a very clear view of what we would consider appropriate M&A within the Clarus portfolio. And so it's -- we have well-targeted brands that we define as super-fan brands. If they don't fit in that mix, we typically don't track them, irregardless if they're in a process or not in a process. And then a lot of the super-fan brands we work through are not processed-oriented brands. They are founder-led organizations that through long-term relationships, we've built an understanding that Clarus is the right organization to manage and continue to accelerate those super-fan brands, realizing that those founders want a long-term emotional connection to them and want to be proud of where that brand goes.

So we haven't been really impacted by the whole SPAC discussion going on or felt pressured by that in terms of the multiples in the marketplace. I think we continue to look for super-fan brand opportunities and are very, I would say, disciplined in our approach. And as Aaron mentioned in the script, ensuring that the way we look at them, both from an ability to accelerate through the innovate and accelerate strategy, but then also knowing what it would cost us and what that impact would be on our leverage within our own situation. And the way in which Aaron has managed the financials of the business has allowed us to be -- or look to be more aggressive in the near future.

Our last question comes from the line of Randy Konik from Jefferies.

So I guess back on, just on the acquisition kind of topic for a second. Maybe just give us some perspective on capacity you may have to look at acquisitions at this point, Aaron? Like what do you have kind of firepower at your disposal to look at some of these opportunities that may be out there? Just curious.

Yes. So naturally, with the pro forma business that we have today and the progression that's taken place, candidly, we have quite a bit of dry powder as it relates to our ability to evaluate and to be able to fund through the utilization of our balance sheet and partnering with the different bank relationships that we have within our group. I'll hold off on getting too specific there, Randy, just because naturally, these things take a life of their own. But that's why we did highlight what we did as it relates to how we think about our capital structure. It's important for us to maintain a responsible level of leverage. But first and foremost, we will be looking to utilize our balance sheet, our banking relationships, upsized credit facilities, et cetera, et cetera, that would enable us to continue to progress forward with the growth and development of the Clarus holdings.

Great. That's super helpful. And then I don't know if you guys discussed this. I had to hop on the call a little late. But the one thing I have noticed from a consumer-facing perspective is that there's -- the website is full of really immersive kind of content and really just highlights the products, the ambassadors for the brand of Black Diamond, et cetera. So just curious on feedback or any type of conversion improvement you're seeing as a result of that improved content experience on the website with your customer base.

Yes, great question, Randy. And that was -- and I'm glad you picked up on that. That was the major focus. Websites have 2 purposes. One is they are today the face of every brand. If you've never heard of something that I tell you about, Randy, the first thing you do is look at your phone and look it up. And the first impression of that brand or that website tells you a good portion of do I want to see more. And so first and foremost, it was about making sure that our activities, our athletes, our content, our whole statement about why BD was pretty present in our website and communicated that.

The second side of that is just how quick you can navigate through the website clicks and be into a shopping cart, should you wish to acquire products. And all the data analysis we're doing from retargeting through to increasing our traffic to expounding and tying into sale -- purchase opportunities through Instagram. And so we're on a pretty aggressive approach on both sides. Continue to make sure that our website is the end all be all for the sports in which we serve as a brand -- that of climbing, backcountry, trail running -- and showcases all aspects of it from trekking poles to jackets to pack.

And then the other side is just making sure that we continue to be very inviting to the way in which we communicate with our consumers on a regular basis through e-mail, Instagram, social media, Facebook, to drive traffic to the awareness of our new products. And you're going to see, as you recently have the integration between our website and our Instagram to really showcase all these amazing products we have that in the past, we didn't do as great a job at showcasing the 100 to 150 new innovations that we pump out each season.

Yes. Super helpful. And then could you give an update on where you stand on your levels of supply as it relates to the bullet ammunition area of the business?

What we're seeing is that it continues to be pretty consistent with what we saw in Q1. We are making concerted efforts to increase that as time progresses, and we feel like we are making some headway there. However, as it relates to some of the ammo components, as John described, there are some headwinds there, some constraints. But candidly, nothing that we haven't been able to solve for and nothing that we won't continue to be able to solve for as the year progresses and as we continue to work through this. I think that's something that we have really demonstrated across the board is our ability to work with partners in managing our supply chains in a very dynamic way, but also ensuring and securitizing the different components, whether it be raw materials, but also the components for the Sierra Barnes business or being able to get inventory out of the factories for the BD business. It really is just a matter of timing and how we've been able to line some of that out and cadence it accordingly. And that's also reflected in the updated guide that we provided for the year.

Randy, we take the approach that if you want to win the game, it doesn't matter what the weather is. Figure it out. Snow, rain, hail, wind, just figure it out. Everybody's playing on the same level playing field. You just got to be smarter, scrappier. May have to work a little harder, but those who figure it out win.

At this time, this concludes our question-and-answer session. I would now like to turn the call over back to Mr. Walbrecht for closing remarks.

Thank you. We'd like to thank everybody for listening to our call today, and we look forward to speaking to you again when we report on our second quarter 2021 results. Thanks for following up. All the best, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.