Clarus Corp (CLAR) 2020 Q3 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 third quarter ended September 30, 2020. Joining us today for Clarus Corporation's -- are Clarus Corporation's President, John Walbrecht; Chief Administrative Officer and CFO, Aaron Kuehne; and the company's external Director of Investor Relations, Cody Slach.

(Operator Instructions). 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.

Thanks, Darius. 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 the 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; impact of the global climate chain trend -- global climate change trends may have on the company and its 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 COVID-19 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 COVID 19; changes in governmental regulation, legislation or public opinion relating to the manufacture and sale of bullets and ammunitions by our Sierra and Barnes 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 Securities and Exchange Commission, 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 November 16, starting at 8:00 p.m. Eastern 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. Any redistribution, retransmission or rebroadcast of this call in any way without the express written consent of Clarus Corporation is strictly prohibited.

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

Thank you, Cody, and good afternoon, everyone. I hope everyone is staying healthy. Though 2020 has been a challenging year, our portfolio of super fan brands has consistently shown us that through any difficult environment, whether it be a bad winter, an economic recession or now a global pandemic, we will continue to perform. This was proven again in our third quarter results. As indicated in our pre-announcement a few weeks ago, our Q3 results showed the strength of our well-diversified brand portfolio. Total sales increased 7% with record results for our Sierra brand. We generated $9.1 million in adjusted EBITDA and $5 million in free cash flow, which equaled our cash balance to $17 million. These results ultimately tie back to our well-defined strategy of preserving brand equity while continuing to execute our innovate and accelerate playbook across all the brand's portfolios. Let me address this further by speaking about our specific brand and business performance.

Black Diamond sales continued to improve and ended the quarter down only 8%. COVID-19 is still hampering the return of a normalized retail order patterns, particularly domestically. So much of our sales were in the form of replenishment or at-once orders. This is despite otherwise strong consumer demand as people sought the outdoors during pandemic-related restrictions or concerns. In fact, in Europe, Black Diamond sales actually increased 11% with growth in every category.

In our international distributor business, we made the decision to transition to more markets, Spain and the United Kingdom, to our in-house direct agency model. We are always looking to drive more direct contact with both our retailers and our consumers. And this move is fully aligned with this strategy. The transition reduced Black diamond sales by approximately $2.5 million in the third quarter, but actually, we'd expect to more than make this up in the future once it is fully internalized. We expect to start selling directly in the U.K. in the fourth quarter of 2020 and then in Spain in Q2 of next year.

For the brand as a whole, by category, climb was down only 1%. Mountain was down 7% and ski was down 9%. Facing market oversaturation and aggressive promotions by other brands, we are pleased to report that the apparel was down only 22%. While apparel remains a key strategic growth initiative, it is important to note that the other categories make up roughly 90% of our sales are nonperishable and are viewed as a necessity for our activity-based consumers. Additionally, as we stated in the initial start of COVID last March, we decided to not aggressively promote the Black Diamond brand using off-price tactics believing this would actually strengthen our competitive position long term. We believe the category results I just mentioned show the resilience of our products in this current environment.

Complementing our retail partners, we continue to drive strong sales in our direct-to-consumer business, which included sales online and through our retail stores. For the third quarter, total direct consumer sales were up 24% and up 31% just online. We continue to experience improved activation in our e-commerce channel due to more effective prospecting and retargeting in order to drive higher levels of site traffic. We also continue to prioritize full-price selling with a focus on storytelling to capture the consumer's interest during this -- their increased time at home and online.

Within our own retail locations, traffic was down significantly due to COVID, but conversions were up nearly double proving an innovative products and strong engagement wins out. In our Sierra business, we experienced record sales of $15.1 million, up 135%. Sales growth was across -- broad-based across all geographies and channels, both bullets and ammunition. The continuation of our external demand drivers such as social and civil uncertainties and unrest as well as the upcoming U.S. election drove very strong domestic demand. We also returned to growth internationally in both our green box and OEM businesses due to the local markets finally opening up following their COVID concerns.

Last but certainly not least, we experienced strong traction in our ammunition business, with sales up $2.7 million or more than 3,200% increase since last year. We are extremely pleased with the rollout of our ammunition initiative supported by GameChanger, Prairie Enemy, SportsMaster and now the Outdoor Master collections. Each of these new collections highlights the super fan following within the Sierra brand, creating unmatched precision and accuracy in a full ammo cartridge.

We are not only pleased with our top line growth, but also our ability to fill the extraordinary level of demand. At this time, we feel confident that this demand for our new ammunition collections will continue deep into 2021. In early October, we added the Barnes Bullets brand, our newest super-fan brand to our platform. Farms has been an industry leader in bullet technology and innovation since the early 1930s and holds strong brand awareness amongst the core hunting enthusiasts, a complementary consumer to those of the Sierra brand, much of which are focused on long-range precision and accuracy. Consumers have long trusted Barnes to be the ammo of choice for all their hunting needs. They are the leader in lead-free monolithic copper bullets and ammunition and have what we believe to be an untapped market potential. In fact, Barnes is already developing a strong pipeline of new technology to be launched in 2021, already catalyzing our innovate and accelerate growth plan. Early retail response to the acquisition has been very encouraging, and we are quickly filling the order book. We expect numerous financial and operational synergies to arise during the integration, and we will use our strong balance sheet to execute upon these most effectively.

Together with Sierra, Barnes gives us a leading specialty bullet and ammunition platform, targeting our sights on this segment being more than $100 million in sales over time and generating 20% to 30% adjusted EBITDA margins with high free cash flow conversions.

The acquisition caps off our strategy to build the leader in specialty premium bullets ammunition and also demonstrates our ability to patiently wait for strategic assets to attract value that we expect to drive growth and maximize our returns on invested capital. We look forward to seeking further acquisition efforts being in similarly accretive strategic areas but outside of the bullet and ammunition market. We expect to continue to ride our wave of momentum into the fourth quarter, getting -- generating revenue of approximately $67.5 to $69 million.

For Black Diamond, we are still tracking towards top line results being down high single digits, which, as communicated previously, would put us around the 2017 and 2018 levels, which were approximately $160 million and $177 million, respectively. Variables that could deviate from this trajectory of recovery on the downsides are, of course, retail and consumer response to what appears to be the second wave of COVID. On the upside, we are expecting a strong backcountry snow season. Regardless, I think it's important to reiterate the fact that the vast majority of our Black Diamond products are nonperishable and tend to be viewed as essentials to our activity-based consumer, and there will certainly be longings to get outdoors when the snow starts this fall.

In our Sierra business, we would expect domestic trends to continue this strong trajectory given the broader social and political environment. We also expect to benefit modestly from the acquisition of Barnes in the fourth quarter as we continue to work through the integration efforts as we work to establish their relationships processes and ordering cycles that were severed when Remington entered bankruptcy. We expect to have these activities completed by the end of the year or in early 2021.

It is still difficult to tell when our consolidated businesses will be fully normalized, but we do believe consumers will continue to be loyal to authentic brands that focus on their core users. Being the business made up of super-fan brands, we feel well positioned to handle the uncertainty in the future. As noted, our growth playbook includes seeking to further build our brands, our marketing position by investing in product innovation, strengthening our go-to-market strategy via sales and marketing and pursuing new long-term revenue opportunities. The diversification of our portfolio across new product expansions, geographies and channels has been one of our highlighted strength that is proven to be unique to the market.

Moving forward, we will continue to seek to invest in our direct-to-consumer channels, including e-commerce and flagship retail. This focus has proven to build both increasing revenue and awareness while preserving our brand equity. In fact, we are proud to announce our next flagship Black Diamond store, retail store in Big Sky, Montana slated to open later this week.

Lastly, we will continue to seek to leverage the strength of our balance sheet as we evaluate our long-term growth opportunities. Our primary focus is to maximize the organic growth and profitability of our brands. We believe this focus, along with taking a strategic and disciplined approach to our capital allocation, will provide the highest levels of return on invested capital. And as demonstrated this quarter, we regularly evaluate opportunities to acquire similar well-positioned super fan brands to add to our portfolio.

We believe the growing demand in our brands, our fast-growing direct-to-consumer channel and our team's ability to execute our innovate and accelerate strategy through the course of the pandemic has positioned us well for the future.

With that, I'll now turn the call over to Aaron Kuehne, our CFO, who will provide additional commentary on our performance in the third quarter and more detail on our game plan for the rest of the year. Thanks, Aaron.

Thank you, John, and good afternoon, everyone. Jumping right into it. For the third quarter of 2020, total sales increased 7% to $64.5 million. By brand, Black Diamond sales were down 8% and Sierra sales were up 135%. The decrease in Black Diamond was primarily due to lower levels of retail demand due to COVID-19. John touched on the factors that are offsetting this, such as strong brand equity, a product with less shelf instability or fashion risk, our ability to fulfill orders, a return to growth in Europe and a strong e-commerce business that is tailored to today's consumers' needs. The 135% increase in Sierra was due to strong growth across the board: OEM, green box, international, domestic and ammunition. Consolidated gross margin in the third quarter decreased 50 basis points to 33.6% compared to 34.1% in the year ago quarter due to unfavorable impacts on our supply chain and logistics as a result of COVID-19. During the quarter, we experienced a 30 basis point margin tailwind from foreign exchange. Overall, our sales and gross profit in the third quarter were positively impacted by foreign currency changes on a transactional basis by $279,000.

With 30% of our global sales being denominated in foreign currencies, we attempt to manage our foreign currency risk on the continuous basis through natural hedges and foreign currency hedge contracts. At Sierra, approximately 45% of our product costs consist of materials such as copper and lead. We seek to actively manage the impact that commodity costs have on our business, specifically on gross margins with our vendor partners. We believe that we have a sound process in place that enables us to mitigate this risk for a period of 6 to 9 months out.

Another point on gross margin, specifically surrounding the impact from the trade war. Our cost of goods sold were negatively impacted by approximately $220,000 in the third quarter. Our efforts to mitigate the negative tariff impacts continue to be on plan, as we continue to decrease the amount of Black Diamond product sourced out of China from 38% to now 27%.

Selling, general and administrative expenses in the third quarter increased 14% and to $18.7 million compared to $16.4 million in the year ago quarter, primarily due to higher stock-based compensation. Black Diamond brand SG&A was down 11% due to cost-saving initiatives; and Sierra SG&A was up 14% due to the 135% sales growth. We are quite pleased with the expense management at both brands given their respective performance.

Net income in the third quarter was $1.2 million or $0.04 per diluted share compared to net income of $3.5 million or $0.11 per diluted share in the year ago quarter. The decrease included $6.6 million of noncash charges and $1.4 million in transaction costs compared to $2.5 million of noncash charges and minimal transaction and restructuring costs in the same year ago quarter. Adjusted net income in the third quarter was $9.2 million or $0.30 per diluted share compared to an adjusted net income of $6 million or $0.19 per diluted share in the same year ago quarter. Adjusted EBITDA in the third quarter increased 34% to $9.1 million compared to $6.8 million in the same year ago quarter.

Let me now shift to our liquidity. At September 30, 2020, cash and cash equivalents totaled $17 million compared to $21.5 million last quarter and $1.7 million as of December 31, 2019. During the third quarter, we generated free cash flow to fund as net cash provided by operating activities less CapEx of $5 million compared to a cash outflow of $4.9 million in the third quarter last year. We also raised $11.5 million from 3 of our top 10 investors to bolster our financial strength and support our growth.

Total debt was $41.1 million, and we have remaining access to roughly $38.9 million on our revolving line of credit. Our net debt leverage ratio as of September 30 was 1.3x. We are comfortable servicing our debt requirements at our 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.

Please note, our balance sheet as of September 30 reflects the full purchase price of the Barnes bullets acquisition of $30.5 million, even though we closed the acquisition a few days after quarter close. As expected, inventory levels continued to decline and were $8.5 million below where we ended 2019. We have adjusted the flow of goods in line with expected future demand and continue to maintain strong relationships with our supply chain partners where we can dynamically manage our inventory levels with demand.

On the Sierra side, the business continues to experience significant output and great efficiencies, so we remain in a strong position there.

Now turning to updates on our mitigation efforts from a financial perspective. We continue to be focused on strong liquidity, the health of our balance sheet and generating maximum operating cash flow; and the quantitative factors we laid out earlier in the year remain intact. Total operating expenses will be reduced by an estimated $9 million in 2020. This has accelerated our shift towards more of a digital presence, sharpened our focus on key product categories, improved operational efficiencies and driven a tighter connection with our distribution and supply chain partners. Similar to our top line expectations, these cost reductions are expected to recalibrate our SG&A within Black Diamond to levels that we experienced for that business exiting 2017.

We did decide to convert our recent quarterly dividend back to a cash dividend. As we continue to recover from the height of the pandemic, we believe that we have made great progress stabilizing the business across our diversified portfolio of brands, and today's results are proof. We continue to believe Clarus is well positioned both strategically and financially to navigate the COVID pandemic. We remain optimistic that consumer demand and retail orders will get back in sync as our partners get more confident about the shape of an extended recovery.

But the current uncertainty created by the virus and a second wave means that visibility to a recovery path is limited. There are many factors outside of our control, like consumer and retail buying behaviors, which makes it difficult to provide specifics beyond 2020. But I'd like to reiterate some of John's comments on our current business conditions and our priorities for the rest of the year.

As mentioned earlier, the demand environment in our Sierra business has continued to improve significantly. We would expect this high demand to continue for the remainder of the year and likely into 2021, both in our domestic green box and OEM businesses as our domestic partners restock their inventory as well as within our ammunition initiative. For Black Diamond, as more of our retailers continue to see their operations improve and consumers become more comfortable trafficking in those locations, our sales are expected to follow, but we've built nice optionality in our own direct business and the ability to fulfill when our customers need us most, which should provide some resilience to any prolonged stay-at-home mandates or virus spikes.

We -- as for the rest of 2020 strategic decisions will be prioritized around maximizing the organic growth and profitability of our brands. We strongly believe this will provide the highest levels of return on invested capital, but we will prioritize our strong balance sheet, liquidity and the preservation of shareholder capital, first and foremost. Before turning the call back to the operator for Q&A, I would like to recognize the performance and commitment of our great team at Clarus, and our thoughts continue to be with those around the world suffering from the virus. Operator, we are now ready for Q&A.

(Operator Instructions) And our first question will come from Randy Konik with Jefferies.

Quick question, so -- or first question, any color on -- it seems like, obviously, on the BD side of things, business is kind of picking up. I think you said it was up in Europe. Just any color on how we should be -- how you're seeing things for orders and customer posturing for spring 2021?

I think we're positive about spring '21. We've seen momentum moving in spring '21. I think as we've said, with watching retailers very closely, we not only monitor sales per week but, more importantly, inventory positions in each of our retailers. And consistently, the theme that we have seen, though bookings continue to move up, the business leans more and more towards ASAP, and though sales are increasing in the market, inventory positions at our retailers are way down. And so as we said, sometime between now and as people load into spring '21, which effectively is probably March given the expectations of this winter, sometime between now and then, retailers will have to kind of refit all their inventory levels to keep up.

Obviously, you can't keep running negatives on inventory, growth on sales and eventually, not -- the 2 not get separated too far. So we're seeing that. I think retailers are still a little conservative as to how they plan this out now that there's a second wave. Maybe today's announcement by Pfizer on a vaccine will give confidence on that, maybe the holiday season, which seems to be kicking off strong. At some point here, retailers and brands will come to a new norm of normalization and inventory levels and demand will start to align with consumer demand. Hopefully, that helps it.

Yes. That's helpful. And then just on Sierra and Barnes side of things. Can you talk about how Barnes gives you potentially more capacity or -- and really give us a -- maybe some picture about what the capacity kind of looks like today? Obviously, it seems as if you're in a position of demand far outstripping supply and capacity. So maybe give us some mosaic thoughts around how that's playing out in terms of getting more capacity, more supply to the market.

Okay. So obviously, everybody would tell you that in the bullets and ammo world that demand is far exceeding what is capacity out there, and that's from everybody. So I think you have to look at capacity and break them down separately. If you look at the Sierra model, we've been investing in machinery as well as being smarter and smarter about our lean manufacturing in placements and the way in which we're really driving long runs. And so our goal there is to continue to keep the pace we're at on the bullet side and increase our capacity, both through machines as well as through efficiency; on the ammo side, through partners with OEMs as well as our own loading to keep chasing that.

But to be honest with you, we doubt in 2021, we will be able to catch up to what that full demand is. And we're accelerating it as fast as I think anybody else is in the market or faster. In the case of Barnes, because of its -- the management and ownership with Remington, there is more capacity and opportunity there, and we are staffing up in terms of people, are looking at additional machinery as well as how do we utilize current capacity we have to reaccelerate that business. Fortunately, the super fan never left that brand, and we think there's significant capacity upside if well-managed both in bullets but also in ammo in 2021. And so that's part of the integration and transition that we're doing is ramping that up. And as Aaron said in the report, using our balance sheet, to help accelerate that brand here in the short term, super helpful.

Our next question comes from the line of Jim Duffy with Stifel.

I want to start on Black Diamond. Can you talk about fourth quarter trends that you're seeing in differences in domestic versus international markets. Are there different dynamics we should consider for each market. And then I'm curious, your inventory position in snow sports product to chase demand that might carry into the first half of '21 and building on Randy's question, can you comment for the Black Diamond brand on just the state of channel inventories in the spring/summer? With spring/summer goods, John, it sounds like retailers are really managing those lean.

Yes. So to answer all your questions, one, I think, obviously, each market is dealing with COVID and either shutdowns or mandates a little differently. Without question, the overall global theme is outdoorism is on a rise. In each market, it's slightly different, given the climate or whatever it is. But I would say in the third and fourth quarter, we are seeing a surge for outdoorism that has been translating into things like headlamps, trekking poles, gloves, even high outdoor climbing equipment. Obviously, to your next question, we are seeing a surge in Backcountry. And it snowed in Utah this weekend in the valley probably about 4 inches, at Alta about 27 inches and the mountains were already out with many, many people. So we are expecting, as have the trends, a very strong backcountry market. We are -- we have been chasing this in every aspect from skis, poles, gloves, outerwear, snow safety equipment, skins, you name it, bindings. We will do our best to achieve maximum opportunity this winter in servicing that market.

I think the -- one of the things we are learning with BD, and this was kind of one of our expectations of coming out of COVID is that a rising tide rises all ships, suffice it that all those ships can chase it. If they can't chase it, then obviously, it really throws things into whack, and we've seen that. And I think one of our dates has always been, deliver on time, have good fulfillment, be easy to do business with, be the easiest partner to fulfill for someone, and you will gain that business. And now it's literally chasing.

And Aaron and the team have done a great job of managing our supply chain and maximizing it to this opportunity.

And then your final piece, yes, all the retailers are running extremely lean in inventory going into holiday and leaning more on whether it's drop ship from us or just ASAP orders, and we are seeing ASAP order surge dramatically. Obviously, it makes a little tougher to forecast because it's not planned in the model.

For spring '21, we're seeing that take a turn. We're seeing ASAP orders continue big into spring, we think. And obviously, we're even seeing preseason orders now coming back and being revisited. And we do believe, as I said to Randy in the earlier call, that sometime between now and March, retailers are going to have to load in significantly on inventories to keep up with consumer demand. You can only run that lean quick term mentality on inventory so long.

That's great. So I wanted to ask on the Sierra, Barnes business, how does that business split between ASAP and forward orders? And can you comment on your visibility into 2021? How far out into '21 as capacity spoken forward orders?

I would say that right now, because demand so far exceeds capacity for the whole industry as a whole, that it really doesn't matter between what we would call preseason orders or ASAP orders at this point. It's totally based on availability in the market. You continue -- we continue to receive orders from retailers as well as OEM, but they believe it's all predicated on your ability to get manufactured to the bullet demand, which they all know is more than supply. And then on the ammo, it's just all down to the components.

We see positive trends going on, and we literally keep track of preseasons. But like I said, in this business, it's really all moved to ASAP, especially now that there's not been a shot show moving on in January.

Got it. And last one, Aaron, maybe you mentioned it and I missed it, but did you speak to where you expect inventory levels at year-end?

I did not. But based off of how things are trending, we do anticipate that inventory levels will be very consistent with what we're seeing today, what we reported at the end of Q3. There's -- as John mentioned, one of our focus is just making sure that we continue to fill in the gaps where appropriate. Obviously, on the Sierra side, we'll continue to focus on increasing our overall capacity, not necessarily from a machinery standpoint, but from a personnel or from a direct labor side of things, we'll be doing the thing out of Barnes.

And then on for Black Diamond, we feel that we have a study flow of inventory that's properly calibrated for not only the recovery that we're seeing but also the increase in demand, especially with the backcountry and also making sure that we don't see any hiccups associated with the New Year and the way that the logistics and the ports are coming together with Chinese New Year and what people are expecting there. But overall, we anticipate that the inventory levels will be fairly consistent with what you saw at the end of Q3.

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

Congrats on the acquisition of Barnes. I'd love to hear any commentary, high level about your M&A strategy going forward. Would you be interested in potentially pursuing further acquisitions in the bullet and ammunition space? Or do you think your -- that business is set from an organic standpoint? And are there any verticals you would really like to touch upon going forward?

Yes. I would say we have been watching Barnes for over 2 years, and that was always a hope in our strategy, believing that Sierra plus Barnes would literally pinnacle the top 2 premium bullet ammo manufacturers in the marketplace and that we could build long-term strategic growth opportunities off those 2 brands. For us, that chapter today is closed in terms of the brand perspective of it.

For future acquisitions, our real focus is on more super-fan brands in the outdoor space, activity-based that align with our consumers and/or our retail partners and our understanding and our strategy to innovate and accelerate, brands that we know have a super core consumer but haven't really focused on the go-to-market opportunity. And we see more opportunities there than maybe they're able to see or able to exercise.

But ideally, we'll stay in the outdoor space and like I said, more mountain-based when possible.

That's great to hear. And a little bit more near-term question here. But Aaron, did you parse out the revenue and EBITDA contribution from Barnes in the fourth quarter?

No, we did not. So for Barnes, we've highlighted that this is a business -- at the end of June 30, it was doing roughly $22 million in revenues. We anticipate that we'll be able to start to ramp that up, but we are still working through an integration process associated with that business. As John mentioned, there are certain activities that were severed because of the Remington bankruptcy that we're in the process of repairing or rebuilding. And then also from an EBITDA perspective, please note that we -- the way that we've talked about this in the past is that this is a business that we expect, once we get up and going, we'll be generating anywhere from 25% to 30% EBITDAs.

Very helpful. And then my last question in terms of the fourth quarter. Aaron, how should we think about the gross margin? And then SG&A was pulled back for the third quarter. Are there any puts and takes we should think about in terms of SG&A? Does it -- whether it's marketing or integration costs with Barnes?

Yes. So SG&A, excluding Barnes is going to be fairly consistent to what we saw in Q4 of last year. There will be a little bit of noise just from an integration side of things as we work through that process with Barnes. But from a gross margin perspective, Q4 is anticipated that not only will we continue to see the strong growth and performance coming out of the Sierra, Barnes businesses now, but also strong -- continued strong growth with our direct-to-consumer business and a more favorable product mix. And so as a result, we do expect to see a nice recovery of our gross margins compared to what we saw in Q3 and get back on track with continuing to see margin accretive or margin-enhancing activities taking place.

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

I wanted to cover BD for a moment. Just your commentary around BD, I guess, suggests if you're at the midpoint of the guidance range that you've been providing, you'd be closer to sort of $53 million or so in revenue in 4Q, which is down a touch year-over-year. But everything you say, I guess, in the Q&A portion of this call seems to suggest there's quite a bit of strength given that inventory positions are relatively lean. In the retail channel, backcountry ski demand is really strong. So I'm just curious what factors would hold you back from getting toward the higher end of the range that you provided for BD and that sort of the upper $170 million range for the full year.

Yes. I think the only thing we've said and everyone is I think, to the market's anticipation in some cases may be surprised, but the second wave of COVID and just how that plays in. One part, you could be very positive about the growth of backcountry. You can be very positive that you're moving into the fourth quarter, which normally represents a strong surge because of holiday shopping, because of the retail growth, D2C opportunities, our own retail, retailers catching up on inventory.

Conservatively, and we -- our goal is to always under-promise, over-deliver. And our view is that, look, we -- in prep to these write-ups, during these write-ups, here in Utah, even last night, Governor Herbert came out and had to put new stage lines on Utah relative to mask mandate, socializing the whole thing because we've been surging not only in Utah but obviously, around the country.

So that -- we just put that in as a conservative view. We have no idea what occurs over the next 6 weeks as this goes on in the marketplace. And obviously, we've already seen that in Europe as well and have to be careful. Obviously, Q2 results would be extremely tough, and we don't think it's that part.

But as you know, the U.K., other markets have already shut down for weeks. We see it surging in Central Europe and the DAC countries and just not sure, ultimately, how that impacts the consumer's ability to get out to shop, right, and transition this through the holiday window.

So yes, is there some upside? Yes, potentially. Is there some risk? Yes, and unbeknownst to managing in a pandemic.

Seems fair. Got you. And then I guess that leaves, depending on how much we want to give you credit for on the BD side and we can back that out of, I guess, the $67.5 million to $69 million in revenue guidance. That would leave somewhere around $15 million contributed from Sierra and Barnes in the fourth quarter, which -- I guess, what I'm curious about is are we expecting Sierra to drop sequentially just given I know it was a super strong quarter at Sierra with like $15 million in revenue. But given all the demand commentary that you guys have provided, that sounds very strong and industry is sort of still trying to keep up with overall demand. I would expect to sort of drag that out for the next quarter or so at least. I mean, why shouldn't we be doing that? And what's in the plan for Barnes, I guess, as well? That would be helpful to understand that.

Yes. So in fairness to all those questions, good reading in the numbers and the tea leaves. Obviously, there is a conservative view on COVID. When it comes to Sierra, we anticipate Sierra to maintain flat. To where we're at right now and what we're projecting and what we saw in the back half of the second quarter and in the third quarter. And we don't see that changing given demand today.

In the Barnes piece, in fairness, we acquired the business, an asset transaction out of a bankruptcy, and a lot of things that would have been put into place in the second and third quarter in order to maximize the fourth quarter were not put into place in the second and third quarter because of either financial limitations, strategy, vision, ordering components, you name it. And so you're obviously chasing towards that.

Do we anticipate that Barnes will have revenue? Of course. Are we ready to project Barnes to perform the way we have managed Sierra? No. And it's going to take a little bit of a transition. That's not going to happen overnight. But we believe the brand has both the capacity and frankly, the strength to be a great performer in time. And we're going to race like crazy to get there. We're just putting out conservative now so that, again, we under promise, over-deliver.

Fair enough. And then one more if I could sneak one in, just on Barnes specifically. How much slack ammo capacity do they have? And how quickly can you convert that capacity to produce Sierra-branded ammo? Would that be in the plan for next year? What would that imply, I guess, if we got to sort of a normalized or annualized run rate of production on their equipment, where could we be with the ammo business, call it, next year or another few years out that yes.

So -- yes, lots of trick questions in there in a positive way. So is there capacity? Yes. Has the brand been held down without question? If you extrapolate that business out, it's probably a mid-20s to low 30s number onto today's trajectory or whatever it was. One of what drives next year is in the ammo business is not just the bullets you can make, but it's the componentry to make all the ammo and demand of the marketplace. And projecting that out and securing the time lines and the vendor support for all those items.

Do we know long term we can accelerate this brand similar to the performance we've done with Sierra? That is our expectation and our goal. A lot of that is going to be determined in the next 3 to 6 months on how demand continues in the market and then our ability to secure both the commodities as well as the components to accelerate that as quickly as we'd like.

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

With the DTC channel up 24% during the quarter, I think up 31% online, is there a way to help us think about how that shook out between BD and Sierra, just given kind of how different the gross rates look during the quarter? And then, I guess, more broadly, just given the broader uptake we're seeing in e-commerce, under COVID-19 and some of the growth you've done today, is there a way you can kind of help us understand where your DTC penetration is today and where you think that can ultimately go over time?

Yes. So just to back up and define that one, that is all under the BD brand. So 24%, when you combine retail, which has obviously had an impact during COVID, though still very positive and then online, up 31%. That does not include anything from Sierra, Barnes, online, D2C revenue.

The second side of that, and there's a fine line we walk here, within our D2C, our goal is to continue to create super fans in the community and is a combination of new websites, better interaction, more content, we've seen that. But it's also, at the same time to keep a level playing field with our best retailers and not erode our retail partnerships by off-price competition from our own brand.

Today, D2C represents about 10% to 12% of our business. We believe long term, with the consumer trend, that probably should represent 25% to 30%. We will continue to add flagship stores, which we think support the omnichannel, which obviously has a positive impact of the flagship retail store but also has a long-term impact to the consumer on -- through e-com. We also believe that a rising tide of brand awareness through e-com, through flagship retail actually helps our retailers, our retail partners perform better with the brand. Just more demand, more products.

And then as we've always said if you've been to the trade show, we have a booth that's ballpark 6,000, 7,000 square feet of product, and it doesn't even fit everything we make within the brand of the 600 pages plus of the catalog. There's not a retailer in the country who will allocate rightfully 7,000 square feet.

We don't even do that within our own flagship stores. So clearly, there's a lot of product opportunities out there that allow us to have channel management as well as product segmentation to the consumers, something's online, some things through wholesale, somethings available in retail and only online as such.

So we'll continue to accelerate that. I think the most exciting for us is that through this, the interaction of our superfan consumer to our website has seen very strong growth in the number of visits, time conversion on our site. And that's just a function of interacting with the brand at a higher cadence.

Got it. Very helpful. And then, John, I guess just with retailers so focused on replenishment and running inventory gain, does that force you to have to kind of change your approach to innovate and accelerate this year? I guess is there still demand out there from new product? And how do we think about that influencing what you can control under your power?

Yes. It doesn't actually change the brand strategy at all, and that's a great thing about a super fan brand and why we love our portfolio. We believe we could take any super fan brand, obviously, some of them closer to heart to us, distribution relationships with retailers, the consumer or whatever, but every super fan brand follows -- if they manage it well, follows the exact same strategy, innovate new products and then accelerate that. The shift in the ASAP doesn't change our innovate and accelerate strategy, and it doesn't even change the amount of new products that we try and innovate in the market. Innovation in the market may be a function of ability to work with factories in Asia or supply chains because of COVID, but it doesn't slow down our desire to innovate.

Where it really changes is how we service that market from a forecasting communication to our retailers to understand the trends they are seeing from their own consumers early enough, often enough so that we can project knowing that they're not going to put as much preseason orders in because they're running leaner inventories in hopes of having higher inventory turns and being much more focused on their cash flow positivity at this moment. We just have to be more in tune with those retailers to project that in order to maximize the opportunity. And what we believe will occur from this is that rather than being seen as a boat on the rising tide that rises when the tide rises, that Black Diamond is becoming the rising tide itself and becoming a strategic competitive advantage to a lot of these big retailers who are leaning on us, our knowledge through D2C or retail or our ability to participate with them, work with them and deliver at a faster cadence and becoming critical to their long-term success. And we believe that's going to translate into more market share now, more market share next year. And as the market renormalizes, that market share will then translate into more revenue.

Your final question comes from the line of Mark Smith with Lake Street Capital Markets.

So I apologize if some of this has been asked already. But just if you look at -- as we look at Barnes and capacity, can you just talk about increasing and kind of ramping there. Is most of that investments in kind of people and processes? Or how much of that comes down to capital equipment and investments that you need in kind of machinery and tooling there?

Yes. I mean, we always will look at that, Mark, but that's always -- that's the third solution. The first solution you have to look at is do you have the right people to maximize the machines you have today. And obviously, that's a function of how many shifts, how many people, how fast do they churn in the efficiencies.

The second is are you maximizing, from a lean perspective, the machines you have. And a, are you picking the right demand? Are you maximizing? Are you doing long runs versus short runs and changeovers? And then finally, if you maximize both of those and cannot create any more opportunity, then, by default, you have to look at buying additional machines.

At the Sierra level, we've worked on all 3 of those simultaneously, as we -- as you know, from previous discussions with us literally for the last 18-plus months in prep to this, knowing that none of these things come on fast, and you have to have very disciplined long-term approaches to this.

In the case of Barnes -- and this is the difference between these 2 brands. In the case of Sierra, when we acquired Sierra, we would say it was in a very neutral position. Did it have back order? Yes. Was there opportunity? Yes. But was the brand held down? No, brand actually performed well, and the retailer's only request is more innovation, more acceleration. Perfect. That's a super-fan brand.

In the case of Barnes, Remington probably didn't treat it the same way as a super-fan brand and financially couldn't make the investments in order to innovate and accelerate at the same pace we would like. And so therefore, it's kind of been held down a lot harder than Sierra. It will take a little bit more to get it going, but once it gets going and out of the station, it will have a lot of upside and momentum.

So we're going to focus on the first 2. We're going to focus on maximizing the people. And we're going to focus on maximizing the current capacity, when those 2 and our plans can't get to where we believe the opportunity is. And the opportunity isn't driven by our vision of it. Is literally driven by the demand of the orders from our retailers and our OEM partners. They set the pace because they tell us specifically each month what they want from us. And our goal as a brand, as a superfan brand is to deliver that.

And people get confused. It's not a financial plan. The financial results are just the outcome of the strategy is just live up to the expectations of retailers. If at that point we can't reach their goals and their demands, then we will look at what that comes at from a machinery or CapEx issue. But that's not our first and foremost role, and we don't think that's the lowest hanging fruit at this moment.

Okay. Great. And then looking at Black Diamond, as we look at winter sports, especially in Europe, can you talk a little bit about trends that you're seeing today? And then I think we focus a lot on North America and Europe, but can you talk also any trends and kind of what businesses like what you're seeing in Asia or anywhere else in the world?

Yes. I think 2 things that we continue to see is that BD as a brand continues to gain momentum. And that what we've always expected is that this equipment house would start to translate with more and more super fan brand consumers into new category opportunities, which has led us to footwear, apparel, packs, gloves as opportunities. And we're seeing those surges in the business.

Obviously, you got to caveat that with that we're still seeing surges in our equipment so that the growth is not solely on the apparel footwear pack of side. Obviously, winter is surging, and we're seeing that already. And we expect it to be a big winter year. Backcountry ski probably represents about 7% of the industry. It will probably double this year, but it will feel like it represents 50% of the industry because the amount of tension it will get.

And our goal is to maximize all the opportunities of that in the short term but realize this is a long-term play for this brand, continue to gain market share as rapidly as you can, good years and bad years, continue to innovate and accelerate that, maximize our opportunity to deliver on time and have good fulfillment with our retailers. And so obviously, chasing inventory in segments as fast as we can. But there will come a point this season that we will probably run out of skins, beacons, avi sets, bindings, skis, you name it. No matter how many reorders we put in, the season has a window.

I think the same is true of Asia. Asia has been a little bit behind because COVID has had longer impacts over there. And they'll start to see these surges come back. I just think you're going to like the things that really started off and opened up in Europe and then came to the United States, and it will eventually come to the IGD markets. It will just be 3- to 6-month lags as all that starts to come back.

Okay. And then the last one for me to squeeze one more in just retail stores. You guys have been -- you've opened more over the last year or so here. Can you talk about what you've learned? And then kind of your appetite to continue opening retail stores?

Yes. So I think what we have learned is that to our expectation is that our super-fan brand buys experiences. And that consumer wants to buy equipment in order to have the best days in the mountains or to do something he's never been able to do or have an experience. And retail flagship stores in destination markets, Park City, Bozeman, Montana; Jackson, Wyoming, places like that, the consumer gets to not only learn about the product but get the instruction and engagement with the brand that allows him to have the best days out there. And that's what's critical for us, the amount of event and engagement.

Now obviously, during COVID, that's been lessened. But to our surprise, though traffic has been way down, our conversion has been a lot higher and consumers getting out and are learning online or through other opportunities, Instagram, YouTube, whatever, about our products.

We're positive on it. Obviously, we're very cautious about where we put stores, our negotiation on the space of the stores because that's obviously the biggest cost, how well we manage that communication and the cadence. We like what we're doing. We're going to be super smart about as we continue to expand and look for opportunities, not only domestically but internationally.

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

Okay. Thank you, guys, for today's meeting. We really appreciate the time you've taken with us. We look forward to speaking to you again after the fourth quarter and our thoughts on moving forward in 2021 and beyond. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.