Clarus Corporation (CLAR) Q4 2020 Earnings Report, Transcript and Summary

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the fourth quarter and full year ended December 31, 2020. 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 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 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 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 COVID-19; changes in governmental regulation, legislation or public opinion relating to the manufacture and sale of bullets and ammunition 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, 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 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 March 22, 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 everyone has remained healthy and active in these first few months of the new year. Though we operated in a dynamic retail environment throughout 2020, our strategy and our portfolio of super-fan brands remained resilient. As indicated in our February pre-announcement and supported by today's results, Q4 showed the enduring strength of our well-diversified brands. Total sales were up 24% as we experienced accelerating sales growth of our Sierra brand and continued recovery of our Black Diamond brand. We generated $11 million in adjusted EBITDA for the quarter, representing a 56% increase year-over-year. Despite the retail demand freeze we experienced in the first half of 2020, our full year consolidated sales, gross margin and adjusted EBITDA results were also resilient, declining only slightly from our record performance in 2019. We also generated $24 million in free cash flow in 2020, more than 3 times increase from 2019. This is a testament to the hard work of our team and our commitment to our strategic priorities of preserving brand equity, while continuing to execute our innovate and accelerate playbook across our brand portfolio. As we have historically stated, our playbook focuses on investing in R&D and expanding product categories, new product innovation and driving brand awareness, all while remaining relevant to the core user. To break this down by our specific brand and business performance, Black Diamond sales continued to improve and ended flat to the prior year despite a lackluster winter season and continued negative impacts associated with COVID-19. Participation in the outdoor activity has broadly increased amid pandemic related restrictions, and this trend has showed no signs of stopping in 2021. Amid this elevated demand, however, global supply chains remained impacted by the pandemic, challenging the speed and the efficiency with which brands operators across industries can fulfill their orders. Despite these challenges, we have worked hard to deepen our relationships with our key retail partners and global suppliers, which are reflected in our results today. Our super-fan brand strategy has also benefited us in this regard as we believe suppliers will form long-lasting and productive partnerships with the brands that are best poised for long-term performance. Complementing our wholesale business, we have maintained momentum in direct-to-consumer sales across our online and retail store channels. For the fourth quarter, total direct-to-consumer sales were up 12%. We have driven further improvements into activation with our e-commerce channel through our focus on increasing site traffic by optimizing our prospecting and retargeting processes. Within our own retail locations, traffic has continued to be down due to COVID-19-related restrictions, but conversions continue to rise, proving innovative products and strong engagement win out within today's evolving retail landscape. Moving forward, we expect to continue to seek to invest in our direct-to-consumer channels to further strengthen our omnichannel presence. As consumers continue to seek the outdoors amid pandemic-related restrictions, apparel was our highest growing product category in Q4 with 19% revenue growth over the prior year quarter. This performance is reflective of our decision to not aggressively promote or discount Black Diamond products at the onset of the pandemic, and we believe that this has strengthened our long-term competitive position. By category, climb was down 15%; mountain was down 5%; while ski was up 3% during the fourth quarter. As I mentioned, consumer demand across all outdoor categories remains robust, with climb, backcountry skiing and associated products such as headlamps and trekking poles, gaining particularly strong momentum. However, we are still working to mitigate supply chain impacts to fulfill these orders at an optimal pace. Despite having a responsive supply chain that can be managed in a dynamic environment, we encountered unforeseen challenges at the raw materials and the component levels. This took away our ability to fully leverage the dedicated capacity we have with our vendor partners. Compounding this is the well-documented logistic challenges associated with the geographic imbalance in container availability and the current port congestion. These dynamics has caused us to experience significant delays in pre-planned product availability with expedited airfreight as an onsetting lever, which comes at a much higher levels of costs. While certainly 2020 presented a difficult operating environment, we believe that super-fan brands can provide market share gains even faster during challenging times. In 2020, BD was recognized with over 100 product awards, validating our super-fan brand approach. Most recently, Black Diamond was recognized as one of the best-selling climate equipment brands in a January installment of the SNEWS 2020 Retailer Survey. We earned leading positions across 4 product categories and we're named as the #1 Selling Brand for Hardware and Harnesses. Our team at BD strives to deliver the most innovative products for our core consumers and results like this show we are continuing to be on track. Looking to 2021, we are encouraged by BD's brand momentum and return to growth. We expect the trends in the outdoor participation to continue, including an acceleration in our apparel business, further adoption of lighting and trekking pole lines, expanded distribution with our gloves and strong backcountry season providing additional upside to our growing ski category. In our Sierra business, we generated sales of $13.5 million, up 167% from the prior year quarter. This performance reflects sustained broad-based sales growth across both bullets and ammunition in each of our channels. We continue to experience strong domestic tailwinds ahead of and following the U.S. election as well as increased participation in outdoor hunting and indoor shooting ranges. Similar to fulfillment challenges within Black Diamond, our bullet and ammunition category was also 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 leverage our strong relationships with our retail partners. Over the coming months, we will continue to work to increase our production of loaded ammo at our Barnes facility. In the time since we completed our acquisition of Barnes in early October, the brand has outperformed our expectations. We believe that this further validates that Barnes, with its rich history of product innovation and strong brand awareness amongst the core enthusiasts, is exactly what we seek with super-fan brands. We have already driven numerous financial and operational synergies, and we'll continue to advance this over the coming months. In addition to the brand's outsized revenue performance, we have reestablished relationship processes and ordering cycles that were severed when Remington entered bankruptcy, and there is more to be done on this front. We expect that Barnes' industry-leading technology will help us improve our production capabilities as well as expand our current product offerings to include a comprehensive lead-free, all-copper line and facilitate future expansion into additional product categories. From a strategic standpoint, Barnes allows us to further mobilize our innovate and accelerate growth plan. In conjunction with Sierra, we are seeking to build the leading specialty premium bullet and ammunition platform. We are already quickly filling the order book of 2021, and we continue to expect that this combined platform has long-term runway to generate $100 million in sales over time, with a 25% to 30% adjusted EBITDA margins and high free cash flow conversion. As we think about 2021 in our Sierra segment, we expect to continue leveraging current demand tailwinds for bullets and ammunition and working to advance our integration of Barnes. Over the coming months, we will stay closely attuned to broader health recommendations and evolving conditions across the retail industry. The challenges the pandemic poses to our current operation -- operating environment, both from a supply chain and demand perspective, makes it difficult to gain further visibility on when our consolidated businesses will be fully normalized. But we believe our authentic, well diversified super-fan brand portfolio will continue to optimally serve its core user and benefit from strong consumer loyalty. These brand attributes and our innovate and accelerate growth playbook provides us with a solid foundation from which to navigate any further changes in our operating environment. Through this playbook, we seek to continue to build our brands, bolstering our market position through investments in product innovation and strengthen our go-to-market strategy via sales and marketing. We believe that this allows us to not only support our current portfolio but also further distinguish and diversify it across new product categories, geographies and channels. As we do so, we will continue seeking to leverage our strong balance sheet to provide us optionality for long-term growth opportunities. Our performance through 2020 has underscored the importance and success of our strategy. As we have highlighted before, internally, we drive our financial results toward a modified return on invested capital metric. We believe this best aligns profitability targets within the entire organization despite what accounting adjustments might be required during purchase accounting and representing our true invested capital in the different businesses. We calculate our internal return on invested capital by comparing adjusted EBITDA as defined in our earnings release for each of the businesses to the associated purchase prices plus or minus any additional capital required or generated on a cumulative basis. Using this calculation, on a consolidated basis during 2020, we generated more than 15% ROIC. We are very proud of this performance, and we expect that our disciplined approach to acquisitions, integration, execution and capital allocation will continue to provide the highest level of returns of invested capital and help insulate us against further market uncertainty. A few more words on our acquisition strategy. We regularly evaluate opportunities to acquire similar super-fan brands to complement our portfolio and where we can deploy our unique, innovate and accelerate brand strategy. While we will be sensitive to the market and economic environment as well as our leverage, we expect to target acquisitions over the long-term that provide access to new product groups and customer channels or can diversify us within the outdoor and consumer markets. Super-fan brands not only have leading product market share and brand strength among diehard consumers but also provide reoccurring revenue, sustainable margins and strong cash flow to be accretive to earnings. They must be well-run businesses. This will ensure we are enhancing value of the company and continue to be careful stewards of shareholder capital, along with funding our quarterly dividend and repurchasing of common stock. We anticipate that this strategy, coupled with our focus on maximizing our brand organic growth and profitability, make us well positioned to sustain our momentum into 2021 and continue to deliver strong long-term growth and shareholder value creation. With that, I'll now turn the call over to Aaron Kuehne, our Chief Financial Officer, who will provide additional commentary on our performance in the fourth quarter and full year and more details on our 2021 outlook. Thank you. Aaron?

Thank you, John, and good afternoon, everyone. Jumping right into it. For the fourth quarter of 2020, total sales increased 24% to $75.9 million. We experienced sustained momentum in our brands and within our industry as a whole. By brand, Black Diamond sales were flat to $55.8 million and share sales were up 167% to $13.5 million. Our fourth quarter sales also include approximately $6.6 million of revenue contribution from Barnes, which as John mentioned, outperformed our expectations in its first few months on our platform. Excluding Barnes, our sales were up 14% organically for the quarter. The performance within Black Diamond was primarily due to 10% growth in Europe, particularly in our apparel, climb and mountain products. This sharp demand increase was driven by the reopening of certain markets and retail accounts in preparation for the winter season. In addition, our apparel business was up 19% with strong growth in Europe and domestically due to our approach of treating apparel as equipment, bringing to market award-winning products that are highly functional and developed around leading sustainable features. As John mentioned, sales growth at Black Diamond was also aided by a 12% increase in our direct-to-consumer business. 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 the UK and Spain. We started selling directly in the UK in the fourth quarter of 2020, but Spain will transition in Q2 of this year. This transition reduced Black Diamond sales by approximately $1.4 million in the fourth quarter, but we would expect to more than make this up in the future once it is fully internalized. The $8.4 million year-over-year increase in Sierra was due to continued strong growth across domestic green box, OEM and ammo due to the robust demand environment for bullets and ammunition. Roughly $2.4 million of this increase was driven by growth in our ammunition business. At Barnes, we experienced solid progression with our integration efforts throughout the fourth quarter as we reestablish customer and vendor relationships, while relaunching the brand, building up capacity, enhancing supply chain capabilities and beginning to implement systems and processes expected to drive higher levels of output in order to fulfill increased demand. Consolidated gross margin in the fourth quarter remained flat at 35.5% compared to the year ago quarter. Improvements in product mix, lower levels of discounting and foreign exchange benefits offset unfavorable impacts on our supply chain and logistic activities due to the COVID-19 pandemic. Excluding a fair value inventory step-up associated with the Barnes acquisition, adjusted gross margin in the fourth quarter increased 50 basis points to 36%. During the quarter, we experienced an 80 point -- 80 basis point margin tailwind from foreign exchange. Overall, our sales and gross profit in the fourth quarter were positively impacted by foreign currency changes on a transactional basis by $900,000. As a reminder, with 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. At Sierra, approximately 45% of our product costs comprise materials such as copper and lead. We have continued seeking to actively manage the impact that commodity costs have on our business, specifically on gross margins with our vendor partners. We remain confident in the sound process we currently have in place, which enables us to mitigate this risk for a period of 6 to 9 months out. Selling, general and administrative expenses in the fourth quarter were $20.9 million compared to $17.5 million in the year ago quarter, primarily due to the inclusion of Barnes, which contributed $1.7 million and an increase in stock-based compensation, given Clarus' stock price appreciation during the quarter. Black Diamond brand SG&A was down slightly due to cost-saving initiatives and Sierra SG&A was up 14% due to the aforementioned sales growth. We continue to be quite pleased with the expense management of both brands, given their respective performance. Net income in the fourth quarter was $7.1 million or 22% -- $0.22 per diluted share compared to net income of $12.4 million or $0.40 per diluted share in the year ago quarter. The decrease included $3.5 million of non-cash charges and $600,000 in transaction costs compared to $5.6 million of non-cash benefits at minimal transaction costs in the same year ago quarter. In addition, net income in the fourth quarter of 2019 included $10.4 million of net benefit associated with the partial release of our valuation allowance on our deferred tax assets. Adjusted net income in the fourth quarter increased 64% to $11.2 million or $0.34 per diluted share compared to an adjusted net income of $6.8 million or $0.22 per diluted share. In the same year ago quarter. Adjusted EBITDA in the fourth quarter increased 56% to $11 million compared to $7 million in the same year ago quarter. Let me shift now to our liquidity. At December 31, 2020, cash and cash equivalents increased significantly to $17.8 million compared to $1.7 million as of December 31, 2019. During the fourth quarter, we generated free cash flow, defined as net cash provided by operating activities less CapEx of $6.5 million compared to $2.6 million in the fourth quarter of last year. During 2020, free cash flows increased nearly 350% to $24 million. Total debt was $34.6 million and we have remaining access to roughly $44.4 million on our revolving line of credit. Our net debt leverage ratio as of December 31 was 0.6 times versus a covenant requirement of 4 times. We are comfortable servicing our debt requirements at our attractive rate of LIBOR plus 150 basis points 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. Inventory levels continued to decline and were $5.1 million below where we ended 2019, even while adding $5.9 million of inventory associated with Barnes. We have further 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. Echoing John's earlier remarks, we will keep working closely with our suppliers as part of our efforts to keep pace with heightened levels of demand and improve our supply of necessary component parts. Within our own operations, we remain committed to increasing capacity with our own bullet manufacturing and ammo -- ammunition loading where possible across our Sierra and Barnes manufacturing facilities. As evidenced by today's results, we have maintained our focus on strong liquidity, the health of our balance sheet and maximizing operating cash flow. The proactive cost reduction measures we took in response to the pandemic have accelerated our shift towards a more digital presence, sharpened our focus on key product categories, improved operational efficiencies and tightened our connections with our distribution and supply partners. With consumer demand remaining strong and retail orders gradually getting back in seat, we continue to believe Clarus is well positioned both strategically and financially to benefit from the tailwinds we are experiencing in our brands, and to adeptly navigate an evolving retail environment. While our visibility remains challenged by the possibility of future changes in consumer confidence, buying behavior and the status of COVID-19-related lockdowns across our geographies, we remain cautiously optimistic about current trends in our business. To reiterate some of John's earlier comments, we believe robust consumer demand for outdoor activities and increased operational stability among our retailers will drive continued growth for Black Diamond. We also believe that the growth in recreating outdoors as well as lingering social and political factors will continue to accelerate our momentum across the combined Barnes and Sierra platform. With this as context, we are pleased to announce our financial outlook for fiscal year 2021. For the full year, we are expecting sales to grow 25% to $280 million compared to 2020. By segment, we expect Black Diamond to increase 17% to $200 million. And we expect Sierra, which includes Barnes, to increase 52% to $80 million. For the first quarter of 2021, we expect consolidated sales of approximately $70 million, representing an increase of 30% compared to 2020. On a consolidated basis, we expect adjusted EBITDA in 2021 to grow approximately 56% to $35 million compared to 2020. In addition, we expect capital expenditures of approximately $7.5 million and free cash flow of approximately $15 million in 2021. We are proud of the strong operational and financial foundation we have built as an organization over the years and of the actions we took to bolster it against a difficult operating environment in 2020. Our proven innovate and accelerate playbook has preserved our brand's equity and provided us the optionality needed to manage our brands from a position of strength in the most challenging of market conditions. Across our organization, we are grateful for our team's dedication, to executing on our strategic priorities and generating the highest possible returns on invested capital, and we will work to continue delivering on these fronts throughout the year ahead. Operator, we are now ready for Q&A.

[Operator Instructions] We do have a question from Randy Konik from Jefferies.

So just I want to talk a little bit about the outlook, very impressive outlook, especially on the EBITDA dollar growth relative to the strong sales growth. So just to get a little more clarity there. Is that more of a mix item where the higher-margin Barnes and Sierra are impacting the EBITDA growth? Or is there -- and if it's something beyond that, is it also a potential SG&A leverage versus gross margin expansion? Because I think gross margin might be impacted a little bit by the supply chain. So I just want to get more clarity on the drivers of the EBITDA outperformance relative to the strong sales growth.

Yes. Randy, this is Aaron. Great question, and thank you. It's a multifaceted approach here, and this really highlights the benefit and strength of our overall portfolio. In that, the EBITDA growth will be a function of not only the strong performance that we expect to see within Sierra and Barnes, but also the recovery of the Black Diamond brand and the achieving or getting back to that magical milestone of 10% EBITDA within Black Diamond this year. So as a result, what we're seeing is a highlighted element of how this portfolio comes together, highlighting the strong performance and EBITDA profile of that, of Sierra and Barnes, while also being able to continue to leverage the SG&A and seeing some modest gross margin improvements associated with that of -- with Black Diamond as we continue to grow and scale the business.

Super helpful. And then I guess, John, a question for you, when you're talking to your wholesale account partners, just how are they feeling about the environment? And how are they thinking about their order trends for the balance of the year? It seems like things are strong out there, I just want to get your perspective on what your counterparts or your partners are telling you about what they see.

Yes. So both for spring '21, which is now, and fall '21, which will start for us, typically end of July, beginning of August, we are seeing strong bookings going into the year from our retail partners. Now in addition to that, what they are all seeing is currently the positive side of vaccinations around the United States, a warmer spring, the outdoors continue to explode and grow. And I think they're all optimistic that all those trends will carry into a very strong summer and fall business. And by the strength in economy, a very strong and robust Black Friday, Cyber Monday, holiday window. And so that -- their view is right now is the market is strong, both for outdoor-ism and the economy has got some upside.

Got it. Let me -- if I could sneak in one more, so sorry. The apparel business really took off in the quarter leading the way. Obviously, a lot of opportunity to get a higher percent -- higher penetration of that product category. What are you guys working on there in that -- in apparel in terms of SKU count proliferation or anything in that segment to kind of continue to drive strength in that part of the business -- in Black Diamond?

Yes. So obviously, I think what Aaron called out in the script was correct. We started to see real momentum for BD as a difference in the apparel market when we approached apparel as equipment for the first part. And that -- both award-winning product, but then also what we would call category killers, things like Stretch Rainwear, bottoms, stretch denim, backcountry ski apparel, those are the things that we have seen strong surge of growth and demand on, and they don't seem to be slowing down because those activities and choice of products aren’t slowing down. I think the other side that we've done really well is really start to look at this, we -- our line grows less in SKUs than it grows in growth. And the real focus is on that is getting deeper penetration with these category killers across our specialty national and key accounts as well as the surge that we're seeing in D2C and retail.

Next on the queue is Jim Duffy from Stifel.

Aaron, John, well I just have a question for you guys on the guidance. Hope you guys are doing well. Digging in on the guidance, so the BD guide calls for a return to 2019 levels essentially, which seems conservative, given some of the participation trends. Guys, if we're thinking about BD 2021 versus 2019, can you talk about how the mix of the business will be different? Is it seasonality differences, geographic differences, category channel differences? What's really going to be different looking at '21 over that 2019, $200 million base?

Yes. So we anticipate -- Jim, this is Aaron. We anticipate seeing greater acceleration within North America, both through the key accounts, but also our direct-to-consumer channel. We do anticipate seeing some softness in the international side through our international global distribution network that typically services the APAC region. And then also we'd like to be able to see some further acceleration within Europe. But currently with the lockdowns that are taking place, there's a little bit of uncertainty around how that continues to shake out. From a categorical standpoint, we anticipate seeing growth and continued progression within apparel. And then key categories such as lights, trekking poles, gloves, et cetera. And obviously, climbing will continue to be a mainstay, but those are where we're seeing the primary movers within those categories as we think about the future and in particular '21 versus that of '19.

So it's challenges in international markets to maybe holding back a more optimistic view in the guidance.

And we're also seeing a little bit -- what we saw in the fourth quarter in Europe is a surge because they came out of it earlier, because of the vaccine in the United States and the opportunities here, we're seeing faster surges in North America, as Aaron said, both in the wholesale side, but also the D2C side.

And then another point on that, Jim, is something that we highlighted in the script, and that's just related to the continued logistical or supply chain challenges that most of the globe is experiencing and we're not immune to it. We feel that we have really good supply chain partners. We are managing our working capital dynamically. We've been ramping up our supply chains really since October, November-ish, but some of the unforeseen challenges associated with the ports, et cetera, are causing us just to be a little bit more tempered in terms of how we're looking about the year, just recognizing that there's still a few things that we just need to iron out and continue to work through as we look to accelerate the business in the outer years.

Yes. Unfortunately, demand is not 100% translatable because of what's taking place either in factories or more importantly, frankly, in shipping.

And then -- I was going to ask about that. Should we consider that just a push from 1Q to 2Q within the spring season business? Or are you expecting these challenges that linger throughout the year?

Right now, it does appear that we should expect to continue to see some challenges, at least through Q2, if not into Q3. Unfortunately, that's something that is continuing to be part of the discussion as it relates to just not single a whole lot of relief over the next 3 to 4 months.

Okay. And then I wanted to ask on the Sierra and Barnes business. Can you guys talk a little bit about what capacity is in each of those? Sierra, I believe, on bullets alone, you've been doing kind of in the $14 million to $15 million range in capacity. Barnes, it sounds like you're already realizing some efficiencies there. And then I'm trying to think about how to consider revenue, the Barnes capacity gives you some incremental ammo revenue capabilities within Sierra. Is there a way to frame like that $80 million guide, what -- how that fits within the context of the total production capacity of the entities?

Yes. One of my favorite statements, as we always talk about is, obviously, as we look at this business, we continue to drive capacity as you're putting out. But at the same time, we're cautious to make sure that we don't line up for every single opportunity at bat to be a home run. So to your point, we continue to push capacity at Sierra, and we continue to see that strong. Obviously, much like we are seeing headwinds in BD with logistics, the difficulty in accelerating that business to the order book that we completely have is a function of components, not so much copper and lead from the bullet perspective, but if you want to build out the ammo side, which as you recall, is worth anywhere between 5 times to 8 times the revenue, you have to have bullets, which we make; plus primers, which we don't make; plus propellant, which we don't make; plus brass, which we don't make. In a Rubik's cube, that if you have 20 SKUs of ammo that you want to build, you have a Rubik's cube of 80 because the propellant, the primers and the brass is different by every bullet caliber. So it's a bit of a mathematical piece as we accelerate this. Obviously, right now, limiting part of that acceleration. We continue to maximize our capacity wherever possible on the bullet side. We have very strong order books on both Barnes and Sierra. We see lots of strength on the Barnes brand, and it's just a matter of accelerating that brand. But frankly, we believe that brand has as much value and importance in the market as the Sierra brand does. Though, despite today, Sierra is a brand that's on trend for 300 million to 350 million bullets of production and Barnes is in the 80 million to 100 million bullets of production range. So we continue to accelerate those. Obviously, our goal always is to maximize every single input to maximize every output. But at this point, like I said, we cannot -- our order books are strong, but we cannot deliver everything we would like because of constraints mainly on supply chains.

Next one on the queue is Laurent Vasilescu from Exane BNP Paribas.

Aaron, I appreciate that you broke out the Barnes revenues for the fourth quarter, I think, $6.6 million. Can you -- in terms of the guidance for 1Q of $70 million, how much should we assume comes from Barnes? And then how much should we assume for the full year? Would $25 million for the full year be the right estimate?

Yes, you're in the ballpark. Mainly, Laurent, we're going to view these 2 as a combined business. This is the strength of bringing these 2 businesses together is that with some shared capacity and manufacturing capabilities, et cetera, we may see some left pocket, right pocket type activity, but from here on out, we're going to really be focused more on what the combined business looks like versus trying to split the hairs, if you will, between the 2 brands.

Okay. Helpful. Okay. And then on gross margin, I understand there's lots of puts and takes, but you're obviously hearing a lot of companies talking about freight pressure. How do we think about the gross margin for 1Q? And assuming that this is just really one -- maybe potentially 2-quarter event, but could we see you guys get back to your 1Q '19 gross margin of 36% for the quarter?

It's going to be a little bit tough to get there just because of the compression on the supply chain side or on the logistics side. By way of context, as we talked about it, we saw a nice favorable mix when it comes to product and channel in Q4. We even were able to eliminate some of the value leakages associated with DM and discounting, and then also FX as a tailwind. But Q4, as an example, some of those challenges had a negative impact of close to about 200 basis points. And I would anticipate that we'll continue to experience some of that. I believe that we've been able to work through a good portion of that, but considering that it's still where we are today, I'd prefer to keep it a little bit more tempered on the gross margin side of things for Q1.

Absolutely. Okay. And then really nice to hear about the apparel side to Randy's question. Remind me, but Aaron, I think back 2 years ago, in the March 2019 call, it was called out, maybe things have changed with COVID. But the apparel business was about 10% of your Black Diamond business and footwear was a very low single-digit percent. Can you remind us where it stood for 2020? And where do you think the long-term potential is for these 2 categories?

Yes. So for 2020, we're sitting at, call it, 13% to 15% apparel as a function of the BD business. So we...

[And above our portfolio].

But as we discussed before, the way that we think about both of these opportunities over time is that we view these as needle movers. And in particular with apparel and the progression that we're seeing, long-term, we have a target of at least $100 million for this category for the brand, and it's going to evolve over the next couple of years, the way that it does. But that's how we're targeting at least the opportunity in the near term.

But even then, if you think about our business long term, to your point, and where we would be at that point, apparel, we believe apparel, especially the way in which we approach it as an equipment side of the business and accessories is probably worth 25% of our sales at some point.

Next one on the queue is Matt Koranda from ROTH Capital Partners.

For Matt. Just wanted to unpack the guidance a little bit. Just taking your comments around the return of a -- last time in back to around 10% EBITDA margin suggests some heavy compression there for Sierra. I understand the bunch of it will be tied to supply chain issues. Is there anything in OpEx that's coming up from the Barnes acquisition? I think I saw an incremental $1.7 million in the quarter.

Yes. Good question. And the guide that we're providing for '21 is very consistent with how we've outlined the combined business, being this 25% to 30% EBITDA business. So what you saw is that during 2020, Sierra obviously performed extremely well, and we'll continue to find ways to improve upon that, recognizing that there are some modest headwinds related to commodities and some other pressures. But what you're seeing in the guide is really a function of the combined business for a full year including that of Barnes and continue to ramp that up and integrate it into the system and making some investments into the operations and some key personnel and also the rebranding activities. And so for us, it's right in line with that target as it relates to how we're thinking about the year coming together and provides us with an opportunity to be able to continue to progress from there as well.

Got you. Helpful. And then for the cash flow outlook for the year. Just the $15 million, if I bridge that with CapEx, there's some modest working capital build suggesting in there. Anything else to think of or I might be missing out?

No, it's really the working capital. We want to have some optionality. With the cost of debt being what it is with our existing facility, the strength of our balance sheet is a great -- no pun intended, but it's a great asset. It's a great position to be in. It provides us with a lot of optionality, especially as it relates to how we think about managing inventory availability and also offsetting any noise associated with the cost of copper, as an example, we've been pretty open about how we manage the cost of copper and how we tend to go a little bit heavier on in certain windows of time to be able to insulate ourselves from such volatility. But then also on the Black Diamond side, this is a view for us to be able to utilize our balance sheet to ensure higher levels of availability, recognizing that it would come as a negative on the free cash flow side of things versus what we saw in last year. With that being said, we're going to continue to take a very disciplined approach here. We're not going to get over the tips of our skis, but we do recognize that there's an opportunity here amongst the volatility to take market share. And part of our playbook is product availability, on-time deliveries being easy to do business with, et cetera, et cetera. And we want -- we feel like we're in a really good position coming out of 2020 in the COVID side of things to be able to flex our muscles a little bit and try to put ourselves in a better position compared to that of our competition.

And counter to what everybody kind of came out of 2020, believing relative to COVID, what we've learned, despite that the world slammed into the marketplace, had we been sitting on $10 million worth of lights, we have sold those. Had we been sitting on $10 million worth of ammo, we would have sold that, right? And those are both functions of using our balance sheet to ensure availability of key product categories. And if it continues like it is, great, it will pay off in spades.

Next one is Linda Bolton-Weiser from D.A. Davidson.

Could you talk about -- I seem to recall that when you announced the Barnes acquisition that you talked about, some kind of innovation coming this year? I don't know. I guess it was in the Barnes side of things. Could you kind of comment on whether that's the case?

Yes. So to innovate and accelerate is a constant strategy, which is continue to innovate new bullets all the time, while at the same time, accelerating what you have now, both the existing as well as the new. And to be frank, we have lots of innovations that we could launch in '21 and beyond at this moment. But if I went out to a retailer right now and said to them, "Hey, guess what, I've got this new thing to show you," what he would say to me is "Love you, John, love the new products. But can you deliver me more of just the basics?" Right? And so this is a unique opportunity for the brand and something that Aaron focused on during our script is really focusing on maintain -- continue to gain market share with existing products while innovating but being ready for those of the future, deliver on time, have good fulfillment, be easy to do business with and steal market share through your on-time deliveries and fulfillment as fast as you can, which is great. We'll continue to innovate. And when the market isn't chasing us like crazy, we'll use that innovation to continue to drive the industry forward.

Great. And then can you remind us, you had taken some cost reduction actions in 2020. How much did you achieve for the full year? And then will any of those costs come back in 2021?

Yes. So we outlined a cost savings program of about $9.5 million, and we did not only achieve that but exceeded it modestly. And then as we think about those cost reductions coming back into 2021, there will be some level of that, that will come into play. One of the things that we highlighted before that we anticipated about $1.5 million to $2 million worth of those cost savings to be permanent in nature, which were committed to and consistent with in terms of our guide, but there are certain costs that we feel are necessary to continue to accelerate the business and support our long term initiatives. And so we've provided for those expenses for the year.

Next one on the line is Ryan Sundby from William Blair.

Just had, I guess, a follow-up on guidance as well. As we think about the sequencing for the year, in the past, I think like Black Diamond sales have been more of a 45% first half, 55% second half kind of slow. I know that wasn't the case last year due the COVID and some of the store closures. But should we expect to see BD look more like historical trends in 2021?

Yes, that 45-55 type split, spring/summer, fall winter?

Yes.

Ideally and obviously, that's the only caveat to that is just how much product coming out of Asia or sitting in containers, how long that takes. If you could ship anything today, yes, 100%.

Okay. And then I guess my follow-up on that was just to that point exactly is, given your guidance calling for an acceleration in sales in 2021, do you have any concerns about supply chain or port congestion or whatever impacting your ability to meet demand this year? I just want to make sure that was clear.

Yes, 100%. So as someone brought up earlier on the questions on this, our goal is to get back to -- into 2019 levels, both in revenue and also in EBITDA performance. Do we think that there's more outdoor-ism and demand for the brand than that today? Potentially, yes. And do we think that will continue to surge? Yes. The driver is not on order books or demand right now, it is as you -- as well brought up in this call, it's really more predicated on how fast can factories keep up with the demand with components being the supply chain shortage and then just the elongated logistics issues that we're facing, what used to be 6 weeks has turned into 12 weeks or longer. And port congestion and inability to either airfreight or boat freight because containers or planes aren't available, and it's just become a real challenge, not just for us, I suspect it's every industry trying to move things to the United States or to Europe right now.

Next question comes from Mark Smith from Lake Street Capital.

First one, just a clarifying question. I don't know if I missed it. On apparel, obviously, you had fantastic growth here in Q4. Can you give us what the number was for the year as far as kind of growth?

So it was 13% to 15% of total BD sales.

Perfect. And then second, looking at Barnes within kind of the guidance, 2 things. First, on Barnes, it doesn't sound like you're building that into the guidance at 100% capacity. Can you kind of discuss that, kind of what you're looking at for this year? And then I don't think you guys have typically quantified it, but can you talk at all about kind of the backlog of orders within the full Sierra segment?

No. So let me give you the perspective on that. Within Sierra, one of the fastest-growing categories has been that of ammo, right? And our goal, remember, as we talked about, was to get ammo when we launched it to be 10% of our business. And we think, as you saw in the fourth quarter, it became more than that, right? In Barnes, ammo represents more than 50% or 60% of the business opportunity within the segment and maybe more, given demand. And the reality is that Barnes only produces the bullet and can only load the ammo, but is at the mercy of the market for primers, propellant and brass. And so that literally -- it's not a function of what the order books are for Sierra and Barnes. When we put our guidance for 2021, it's really about how we can manage as scrappy as we are, how can we manage the component side of the business to accelerate this. Now as we get better in the year and manage it, we hope that we could meet or exceed the expectations. But we're being conservative because at this moment, like I said, the component availability is a real challenge.

Yes, absolutely. Next, just direct-to-consumer was really strong, continuing to see growth there. Can you break out at all the BD stores, kind of how those are performing? And kind of your outlook and thoughts on continued growth?

Yes. I think we were pleased given what COVID did in 2020 to retail. We were pleased with retail as a division of our D2C. As of today, we have 5 stores. Traffic was down in these stores, anywhere between 60% to 80%. But conversion rates jumped from the low 20s to 50% to 60%, which goes in sense, you're not going to go to the store, given the environment unless you really want to buy something. We continue to see opportunities to expand retail in 2021 and we'll probably add anywhere between 3 to 5 doors potentially. But again, you have to watch the market because not every market is responding or rebounding exactly the same. Like I said, we see as a long-term initiative. In the short-term, our focus has been more on the -- e-comm side of the D2C because it doesn't have closures. Unfortunately, even in markets like Big Sky, which we opened in November, we've had to close the store twice due to COVID restrictions. I think the other side that was really impressive and point out again about the growth in e-comm is that we did it without being off-price. And in a market that was very promotional driven, which we believe both proof of a super-fan brand, but also the discipline that long-term, the value of BD is in the product itself, not in its ability to short-term promote.

Okay. And last one for me real quick. Looking back when we have seen stimulus checks, any idea kind of any bump that those have put in demand for your products? And do you feel like you should get some bump and some piece of those checks that comes to you?

I don't know if we see it directly. Obviously, I think it has the potential to impact retail. I'd be honest with you right now, given our demand for our products, I don't think that will change it dramatically. Frankly, 1 or 2 deliveries out of Asia will have more impact than the stimulus check.

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.

Okay. We'd like to thank everyone for listening to our call today, and we look forward to speaking to you again when we report on the first quarter of 2021 results. Be safe everyone, all the best.

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