Clarus Corporation

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Claris Corporation's financial results for the second quarter ended June 30th, 2025. Joining us today are Claris Corporation's Executive Chairman, Warren Cantus, CFO, Mike Yates, President of Black Diamond Equipment, Neil Fisk, and the company's External Director of Investor Relations, Matt Berskowitz. Following their remarks, we will open the call for questions. Before we go further, I would now like to turn the call over to Mr. Berskowitz 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. Matt, please go ahead.

Thank you. Before I begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we will make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to potential risks and uncertainties that could cause the actual results of operations or financial condition of Claire's Corporation to differ materially from those expressed or implied by the forward-looking statements. More information on potential factors that could affect the company's operating and financial results is included from time to time in the company's public reports filed with the SEC. I'd like to remind everyone this call will be available for replay starting at 7 p.m. Eastern time 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 clariscorp.com. Now I'd like to turn the call over to Clarice's Executive Chairman, Warren Kanders.

Good afternoon, and thank you for joining Clarice's earnings call to review our results for the second quarter of 2025. I am joined today by our Chief Financial Officer, Mike Yates, who will cover our overall performance and our adventure segment, as well as Neil Fisk, who will discuss our outdoor segment. During the second quarter, we experienced a mix of positive and negative trends across our individual segments, selling channels and geographies as we continue to manage through the realities of the current global consumer landscape. Overall, I am pleased with our progress against our operational initiatives as we simplify our organizational structure and streamline our product offering. We generated net sales of $55.2 million consistent with our quarterly expectations, with a slight increase over the same period last year. Mike and Neil will touch on the figures in more detail, but at a high level, the increase reflected solid performances in both European and North American wholesale at Outdoor and improvement to North American wholesale and direct-to-consumer channels at Adventure. On the other hand, our direct-to-consumer performance and overall site traffic at Outdoor softened as consumers continued to pull back following Liberation Day, and we saw continued deterioration of our legacy OEM accounts at Adventure. While the macro environment remains uncertain, particularly with respect to evolving tariff policies and consumer behavior, our focus is controlling what we can to position Claris for sustainable, profitable growth as market conditions normalize. We continue to reduce complexity at outdoor as evidenced by improved financial results year over year. Sales margins and adjusted EBITDA all increased in Q2 at outdoor by choppy consumer sentiment. We delivered on our commitment to raise our going in product margins while improving the quality of our inventory and revenue. Specifically, the team has done an outstanding job enhancing our inventory composition with less exposure to discounted merchandise and a healthy concentration in our most profitable A-Styles, which we believe will position Black Diamond to grow its full-price business in the back half of the year. I would also highlight that we completed the sale of our PEEPS no safety brand and intellectual property rights associated with Avalanche Safety Equipment in July for $9.1 million. representing a highly successful outcome after comprehensive strategic review and competitive process. The divestiture is aligned with Clarissa's simplification strategy and further bolsters our balance sheet. Turning to our adventure segment, I am pleased with our progress since we reported our last quarter amid personnel changes within the team. We've reengaged with each key customer and believe we have a good sense for where our best-in-class brands can win prospectively. We have taken key measures to simplify the cost structure and flatten the organizational reporting in light of slower demand trends. Our global wholesale and direct-to-consumer businesses increased by approximately 8%, partially driven by bike rack sales and was offset by the continued soft demand at certain legacy retailers. Our sales declined over the prior year quarter, due in part to the drop-off in customer-specific OEM sales, which were down by approximately $3.1 million. We have emphasized reducing overhead, eliminating R&D projects on lower margin categories, and supporting a handful of key product launches that we believe will yield results in the second half of 2025. As we look forward, we are focused on unlocking value at each outdoor and adventure. In connection with the development of three-year plans for our businesses, we have initiated an internal review to ensure we are evaluating all possible opportunities to create value for shareholders. This includes, but is not limited to, further simplification and further cost reductions, incremental to those taken in July, which Mike will outline. Additionally, we believe that the sum of the parts of our two segments exceeds today's market's valuation, and we are committed to seeking to maximize long-term value. In terms of near-term capital allocation priorities, we are focused on reinvesting in our existing two segments to seek to drive organic growth. Supported by a nearly debt-free balance sheet and our current cash position, Our goal is to maintain flexibility and discipline in how we deploy capital with an emphasis on the highest return opportunities. Zooming out, the primary question for CLARIS and the outdoor market as a whole continues to be how macro conditions will evolve during the remainder of the year. We have begun implementing countermeasures to mitigate a portion of the impact from tariffs as you will hear more about shortly, but uncertainty around consumer sentiment and demand in the back half of the year makes it very difficult to confidently forecast. In the face of these challenges, we continue to take decisive actions to strengthen our cash position and improve our profitability while maintaining our competitive position in the market. With that, thank you for being with us today, and I will turn the call over to Neil.

Thanks, Warren. Turning to slide six, I will review the outdoor segments Q2 performance and our expectations for the remainder of 2025. Overall, we delivered solid results in Q2 that were affected by wavering consumer sentiment and a chaotic macro environment. I'm pleased with our progress, the strengthening of the Black Diamond brand, and the continued transformation of the business. Revenue, gross margin, and adjusted EBITDA were all up as we continue to simplify, move toward a more full-price model, and improve the quality of revenue along with the quality of our brand execution. We have now completed the sale of our PEEPS snow safety brand, as Warren mentioned, which will further simplify and narrow our focus. My remarks for the quarter, therefore, exclude PEEPS. In addition to the divestment of peeps, we're dealing with two unusual and somewhat unpredictable factors impacting our results, tariffs and currency. I'll address those at the top of my remarks and then turn to the operating results. First, currency. With 33% of our revenue coming from Europe, the euro-dollar exchange rate has a significant impact on our financials. We began the year at 1.035 euro to the dollar and hedged about half our revenues for the year at 1.08. Few would have predicted the rise to $1.18 following the initial April tariff announcements. That sharp rise in the euro put our hedge position underwater for the quarter and likely for the remainder of the year. For the quarter, the loss on FX contracts was about $447,000 in both reported revenue and EBITDA. For the year, assuming an exchange rate of $1.15, that loss would be $1.4 million. These FX contracts roll off by year end. On the flip side, we get a gain from the FX on the translation of our European operating results. For the quarter, FX lifted EU revenues by 1.4 million and EU EBITDA by 64,000. The net of these two factors, the negative from FX contracts and the positives of earnings translation, is a hit to earnings of 383,000 for the quarter. The second unusual factor is tariffs. In early May, we initiated our tariff mitigation plan which included raising prices, negotiating vendor concessions, air freighting products were necessary, and accelerating our exit out of China. Due to these actions and the lag effects of tariffs running through the supply chain, we did not see a material impact from tariffs in Q2. However, looking ahead for the year, we expect the current tariffs, which include the 10% reciprocal tariffs on most countries, 50 percent on steel and aluminum, and 55 percent on China, to have a $3.4 million impact on earnings, even after our mitigating measures. And of course, we are all waiting to see how the reciprocal tariff situation plays out. Should these tariffs land above the current 10 percent level, we expect to see an additional drag on earnings in 2025. Now, looking at Black Diamond operating results, Q2 revenue came in at $36.5 million, up 2.1% from prior year. Excluding the impact of FX contracts, revenue is up 3.9% from prior year in current dollars and up 2.3% in constant currency. By region and channel, excluding the impact of FX contracts, North American wholesale, our largest market, was up 1.6 percent. North America digital direct-to-consumer, which represents about 17 percent of the region's revenue, was down 20.1 percent. The result reflects our strategy to tighten up discounting in the pro channel, which was down 27.8 percent, and reducing off-price sales in e-commerce. We also saw an immediate pullback by consumers post-liberation day and then softness in May and June as we rolled out our new tariff prices ahead of much of the market. Full-price sales for digital D2C were up slightly, while discounted sales were down substantially, a mixed shift to full price we expect to build upon in the back half. Europe wholesale was up 4.8%, and flat in constant currency. Europe Digital D2C was down 10.1% year-over-year and down 14.6% in constant currency. International distributor markets, which represent about 8% of total revenue, were up 81.3%, reflecting a permanent shift in the timing of deliveries, as we discussed in our last update. Black Diamond operating gross margin for the quarter came in at 34.9 percent, up 80 basis points. Excluding the impact of FX contracts, gross margins would have expanded even more, and we expect gross margin to continue to improve relative to last year in the back half, even after absorbing the current level of tariffs. The progress we've made in simplifying the business, improving product margins, and cleaning up our inventory gives us some cushion against the tariff impacts versus our position a year ago. Black diamond operating expenses, excluding restructuring charges, were down 0.8% and down even more in constant currency. Inventories ended the quarter in good shape with much less exposure to discounted merchandise and a healthy concentration in our A styles. We ended Q2 at $64.2 million, up 4.5% to prior period due to our pull-forwards for the fall season as part of our tariff mitigation plan. As we look to the back half, we expect that our better inventory composition will position us to grow our full-price business as we continue to shrink discounted sales, both in absolute terms and as a percentage of the mix. Adjusted EBITDA for outdoor was a loss of 213,000. Excluding the adjusted EBITDA loss from PEEPS in the quarter of 516,000, adjusted EBITDA for Black Diamond in Q2 came in at 303,000 versus a small loss in the same period last year. In sum, we've made good progress this quarter. Sales, margin, and adjusted EBITDA were all up in the face of a particularly uncertain consumer and market environment. We simplified the business with the sale of our Peep Snoop safety brand. We continued to improve the quality of our inventory and revenue, progressing to a more full-price business. Our apparel initiative accelerated with 11.3 percent growth in the category and a 21 percent reduction in sales from discontinued merchandise. We continue to reduce our SG&A costs. We implemented our tariff mitigation plan to offset nearly half of the projected tariff impact in 2025 at current levels. We launched our new e-comm site on a more cost-effective and scalable Shopify platform and into a more connected digital ecosystem. And we published our annual impact report outlining our 2030 sustainability goals and our progress towards them. As we look to the second half, the greatest challenge remains uncertainty on tariffs, consumer sentiment, and macroeconomic conditions. That said, I think we're in a much better position than a year ago to deal with all those factors. I'd like to thank our teams around the world who remain focused on building the brand, serving our sports, and winning with our customers. With that, I'll turn it over to Mike.

Thank you, Neil, and good afternoon, everyone. On today's call, I'll provide some brief comments on the InVenture segment, and we'll then conclude with a detailed summary of our Q2 financial results, followed by the question and answer session. Beginning on slide seven, our second quarter InVenture results continue to be affected by near-term pressure on the business. The top-line softness at the adventures segment reflects significantly reduced demand from a global OEM customer and a challenging wholesale market in Australia for Rhino-Rack specifically. These headwinds are partially offset by higher sales in the North American market from Rocky Mounts, higher sales from D2C revenues, including our Amazon channel, and higher sales of our promotional slower-moving inventories. While overall market headwinds continue to pose a challenge, we see signs of momentum under the new leadership of Tripp Wyckoff. Tripp and his team recognize the importance of the home market to the success of our adventure business, and our teams continue to take steps with new customers in Australia and New Zealand across all product categories beyond legacy accounts. We are pleased to highlight a key win with a large new retail customer with 300 plus locations across Australia and New Zealand, which will roll out beginning in the third quarter. We've also taken important action to capitalize on our global brand awareness. In Europe, we are onboarding new OEM and aftermarket customers in the UK, Sweden, Poland, and the Netherlands for the third quarter. We have established a new legal entity and will open a third-party warehouse shortly in the Netherlands, which will allow us to better serve EU and UK customers directly. Maxtrax just won a large contract with the German military, and another bright spot has been the positive reception we received regarding our newly launched MotoBoard with BMW. Additionally, we are pleased to announce two new distribution partners in China, which also provides local access to vehicle fitments for emerging Chinese car brands that are prevalent outside the U.S. The new global opportunities are a direct result of some of the prior investments we have made in opening new markets for our adventure brands. As we have mentioned previously, the Americas is our largest addressable region, And we believe that we are only scratching the surface of potential growth opportunities in the US, Canada, and Latin America. The addition of bike racks via Rocky Bounce to our product portfolio has already provided introductions to hundreds of specialty dealers and new key accounts. Recent highlights include the opening of 172 new dealers year to date with $420,000 of revenue so far. expanding Latin American sales coverage, and adding three bicycle channel distributors and launching a nationwide rep force of independent agents to cover specialty outdoor channels. Consistent with our strategic focus on expanding our customer base, we are excited to also announce that Maxtrax products are now available in Academy Sports and Bass Pro shops online. and we are gaining ground at REI, America's largest specialty rack seller. We've taken control of our brands in the Amazon marketplace, and segment-wide revenue recently hit approximately $200,000 per month. In terms of new product development and product launches, we have tightened our funnel and our focus on foundational base racks and fits. Most importantly, we are prioritizing our highest return initiatives for MPD and increasing the number of fitments we offer. As we have discussed previously, fitments are the backbone of our go-to-market strategy. The more vehicles we can fit, the more racks we can sell. By comparison, in 2024, we delivered an incremental 113 vehicle fitments. versus year to date we have increased vehicle fitments to 579 in 2025. From an organizational standpoint, the team has undergone significant changes this year as we work towards an optimal structure to allow us to effectively scale our brands in Australia. The U.S. and international markets are also driving profitability in a lower demand environment. We've taken these steps to flatten the organization to be nimbler and more effective in these challenging times. Specifically, earlier this month, we took action to reduce headcount across Adventure with an annual run rate savings of over $1 million. But to be frank, our objective to scale the Adventure segment globally has not come to fruition. However, we are encouraged by the steps TRIP is taking to immediately improve profitability and reduce complexity moving forward. Regarding tariffs and the effects on the venture business, I would note that nearly all the venture products are sourced from Australia and China. Based on our full year 2024 revenue, over 80% of the venture's revenue is outside the United States, so the tariffs have a limited impact on a relative basis. Recently, we have imported additional Rocky Mountain inventory into the United States to ensure we have inventory to meet demand. Currently, based on information available, we estimate that the tariff impact of the venture is a half a million dollars in 2025. Let me now turn to the consolidated and segment financial review on slide 8. Second quarter sales were $55.2 million compared to $56.5 million in the prior year second quarter. The 2% decline in total sales was driven by the decrease in adventure segment of 8% and an increase in the outdoor segment of 1%. FX was a half a million dollar headwind and the acquisition impact from Rocky Mountains was a $2.1 million tailwind. The consolidated gross margin rate in the second quarter was 35.6% compared to 36.1% in prior year quarter. Gross margin was adversely impacted in the quarter by lower sales volumes and an unfavorable product mix at Adventure, driven primarily by promotional sales efforts in North America. This combined with lower wholesale volume at Rhino-Rack in Australia drove the decline in gross margins. These decreases were partially offset by higher volumes and favorable mix at outdoor. Adjusted gross margin, which reflects an inventory reserve adjustment of $490,000 at Black Diamond associated with excess inventory related to our snow safety category, was 36.5% for the quarter compared to 37.4% in the year-ago quarter. Adjusted gross margin at outdoor was 36.1 for the quarter compared to 35.8 in the year-ago quarter. Adventure's adjusted gross margin was 37.3% for the quarter compared to 40.3% in the year-ago quarter. Second quarter selling general and administrative expenses were 26.9 million compared to 28.1 or down 4% versus the same year-ago quarter. The decrease was primarily due to lower marketing, amortization, and employee-related costs, combined with other expense reduction initiatives to manage costs across both segments and at corporate. Adjusted EBITDA in the second quarter was a loss of $2.1 million, or an adjusted EBITDA margin of a negative 3.8%. Our adjusted EBITDA is adjusted for restructuring charges, transaction costs, stock compensation expense, impairment of indefinite lives and tangible assets, and other inventory reserves. Additionally, as noted in prior quarters beginning the first quarter of 2024, we adjusted legal costs associated with the Section 16B litigation and the Consumer Product Safety Commission DOJ matter, known as the CPSC DOJ matter. These legal costs were $1.8 million in the second quarter of 2025 and $2.5 million in total for the first half of 2025. The second quarter adjusted EBITDA by segment was $311,000 at Adventure and a negative $214,000 at Outdoor. Adjusted corporate costs were $2.2 million in the second quarter. The decline in free cash flow The adjusted corporate costs were $2.2 million in the second quarter. Next, let me shift to liquidity. Free cash flow, defined as net cash provided by operating activities plus capital expenditures for the second quarter of 2025, was a use of $11.3 million compared to a use of $744,000 for the three months ended June 30th. 2024. The decline in free cash flow is due to poor working capital performance, primarily inventory and AR in the quarter compared to the prior year. Total debt on June 30, 2025 was $1.9 million. As a reminder, this debt is related to an obligation associated with the Rocky Mountains acquisition and will be paid in December of 2025. We have no other third-party debt outstanding. As of June 30, 2025, cash and cash equivalents were $28.5 million compared to $45.4 million at December 31, 2024. We used $11 million of free cash flow in the second quarter. Additionally, we grew consolidated inventory to $91.5 million at the end of the second quarter. This increase was intentional as we pulled forward some inventory purchases to mitigate tariffs at both segments. In early July, we closed on the sales peeps, snow safety brand, and realized the cash proceeds from the sale of the brand. Finally, consistent with the seasonal nature of our cash flow, Q4 historically generates most of our positive cash flow for the year. At this point in time, the accumulation of these data points gives us confidence that our cash balance will grow during the remainder of the year. A few final words on tariffs. As I mentioned already, Adventure sources nearly all of its products from China and Australia. Black Diamond sources approximately 25% from China, 31% from Taiwan, 15% from Vietnam, and 12% from the Philippines and the remainder from elsewhere. As of today, we estimate that we have a $3.9 million consolidated headwind. net of our mitigation efforts from tariffs in 2025 compared to our original guidance issued in March of this year. Now, let me spend a moment on our outlook and guidance. Regarding guidance, we have elected to not provide guidance for the third quarter or the full year 2025 consistent with our position last quarter. Currently, based on what we know about our order book and tariffs, we are satisfied that our actions to date are consistent with market conditions. However, due to the ongoing uncertainty related to tariffs, consumer sentiment, and the overall macroeconomic conditions, we believe it is best to remain cautious and not provide guidance at this time due to the difficulty to effectively forecast in this current environment. I now would like to provide an update on the outstanding Section 16b securities litigation matters that the company is pursuing, as well as an update on the open matter with the CPSC and DOJ. We continue to proceed in our lawsuit against Hab Trading LLC and Mr. Harish Adia. In early 2025, the court granted summary judgment in favor of the defendants. We subsequently filed a notice of appeal and our opening appellate brief. App's opposition brief is due this fall with our reply brief to follow shortly after. The court is expected to schedule oral arguments once briefing is complete, likely in the first quarter of 2026. We also filed lawsuit against caption management and its related entities and control persons. the defendants filed a motion to dismiss, which we opposed, and briefing was completed during the summer of 2024. In early 2025, the court denied the motion and instructed the parties to proceed with discovery, which is currently ongoing and expected to continue through the remainder of the year. With respect to the open matters with the CPSC and DOJ, In late 2024, the company was notified by the CPSC that the unresolved matters involving Black Diamond had been referred to the Department of Justice. In early 2025, the DOJ served the company and Black Diamond with grand jury subpoenas requesting various categories of documents related to Black Diamond's avalanche beacons. We are cooperating with the DOJ in responding to discovery requests. Additionally, early 2025, the company received a letter from the CPSC requesting various categories of documents and information in connection with a new investigation into whether Black Diamond sold products that were subject to a recall. The company is cooperating with this investigation and responding to the CPSC's document request. Now, turning back to our core two segments, we remain confident that we can deliver long-term value for the Clara shareholders as we continue to progress our goal of building a smaller, more profitable outdoor business and take steps to turn the venture business around. Despite this uncertain macro environment, we see Clara today as far better structured to withstand market headwinds and emerge in a stronger position on the other side of the current disruptions. Supported by an incredibly talented team globally and a strong balance sheet, we remain focused on execution and positioning Claire's for long-term sustainable growth. At this point, operator, we are ready to take questions.

Thank you. At this time, we will conduct a question and answer session. To ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while I compile the Q&A roster. Our first question comes from Anna Gleesgen from B. Riley Securities. Please go ahead.

Hey, good afternoon. Thanks for taking my question. I guess I'd like to start on adventure security. You know, you talked about, you know, some actions to rationalize, you know, the headcount, but also we're growing fitments and expanding the line. I guess, where are we in terms of growing the applicable vehicles that can have the roof racks and You know, what's our line of sight into getting to, you know, a more stable platform to grow off?

Thanks. Thanks, Anna. It's Mike. Thanks for the question. Very good question. I mean, you know, we are focused on the basics, and one of the basics is fit. And in my prepared remarks, I talked about increasing the number of new fits to 579 vehicles. We're also focused on fitting the top 10 vehicles, both in the Australian market and the US market. So that is a priority that TRIP is focused on, obviously, with the goal of fitting more vehicles and fitting the vehicles that sell the most. So again, more of an 80-20 concept there that we're trying to drive into the adventure mindset, right? But again, very basic. We're also focused on rationalizing NPD. You know, over the prior quarters, we spoke a lot about investing to scale, and a lot of money was being spent on NPD. We're trying to really rein some of that in and focus on specific NPD that we believe has the highest returns. And then the other thing that we're really focused on is the team, right? We've taken some of the headcount actions that I mentioned with the annual savings rate of a million dollars. A couple of weeks ago, that was done. We're trying to really focus on instead of a professional managers and more, you know, a structure that was built or being built for a 200 million dollar business. We're trying to focus on a structure where we have player coaches, people who can telescope out and lead and then. dive into the detail and kind of bring a little entrepreneur spirit, the nimbleness back to the business and, you know, really plan for the business to be, you know, a 50, $70 million business, um, and, and, and have people, you know, getting their hands dirty in the details. So we're trying to be a little more nimbler, a little more, um, entrepreneur. So those are the real, um, um, Priorities that trip is focused on and, you know, that's what we're trying to get that reset that foundation. I think once we have that done, that's that's when we'll be in a position to really start to grow again.

Got it and then following up on 1 of the comments. It was nice to see the domestic sales and collect and adventure. Can you expand a little bit more on the promotional actions you took in the quarter and the consumer retailer response?

Yeah, sure. So if you go back and look at the fourth quarter release, we wrote off a couple million dollars of adventure inventory, you know, back at year end, right? And we've taken the effort to actually, you know, dispose of that inventory, right? You know, it's inventory that just built up over since COVID, since middle of COVID that never sold. And we wrote that off. During that process though, last December and early in January, we identified a couple million dollars of additional inventory that we said, hey, no, we're selling this stuff. We just have a lot of it. We're selling it above our cost, but we have a lot of it. So I challenged the team last last January to say, we have to move that inventory, right? Let's turn that into cash. So the team has done a great job moving some of that inventory. I think we've moved about half of it here through the first six months, a lot of it going in April and in May when the season started here in North America. And that's, that's, you know, but, but it's, it is a drag on margin. You know, we're, we're recovering our costs, but yeah, but it's not normal price inventory or full price margin.

Got it. And then just one follow-up for me on outdoor. Just trying to parse the year-over-year commentary on less discontinued merchandise sales. To what extent is that a like-for-like comparison, or was that impacted by PFAS inventory clearance in the prior year quarter?

it definitely is impacted by the PFAS, right? We sold the last, you know, we have a little PFAS inventory left, but we sold the vast majority of it, the last of it in Q1. So we didn't nearly move as much in Q2, you know, that's compared to what we sold a year ago in Q2 from PFAS. But the other point though, and I'll let Neil comment, is our mix of our inventory is in much better shape here. And as of June 30th, our DM inventory is down significantly compared to a year ago. So we're just selling less discount. And that's consistent. We're selling less discontinued merchandise. And that's consistent with Neil's statements where he's saying, hey, we're moving towards a full price model. We don't want to sell a lot of discounted inventory, obviously. our objective and the team is executing on that. Neil, anything you want to add to that? Anything you can add?

I think he captured it well, Mike. So big chunk clearly was less PFAS this year than in the prior year, but also non-PFAS DM is down year over year versus the same period. And also the depth of our promotions on things like map breaks and holiday windows are much shallower than they were a year ago. So really all three of those factors. And I think one of the things we're thinking about as we go forward in a world of higher tariffs, moving towards full price margin as much as we can is going to be really important to give us more buffer to offset any or some of the impact of tariffs.

Got it. Thanks. I'll pass it on.

Thanks, Anna.

Thank you. Our next question comes from Matt Caranda from Roth Capital. Please go ahead.

Thanks, guys. Just trying to get a better sense for the outdoor revenue trend and maybe trends and growth for the rest of the year for outdoor. So I guess if I pick it apart for the second quarter, It sounds like the bulk of the growth was probably driven by the international distribution shift, the core direct channels are maybe down high single digits, the low double digits year over year, just given sort of the lower promotional posture. But you're getting, I guess, lift in... full price selling. Could you confirm that that's sort of the right way to think about what happened in the second quarter? And then for the back half of the year, as we think about getting back to growth in those cores, how do we think about that? And sort of, I guess, what's the reaction from your wholesale customers then in terms of your price actions that you've taken recently?

Yeah, a lot of questions. Yeah, I'm back there.

Go ahead, Neil. Yeah, thanks, Matt.

Good questions. I think maybe let me just break down the channels and sort of our view of H1 and H2. Really zooming out for a little bit, the business is still primarily a wholesale-based business, and roughly 80% of our business is wholesale and distributor markets. And so start there. Wholesale is in very good shape. Wholesale was up for the first half, and we expect wholesale to be up low single digits in the second half. In particular, if you look at North America wholesale, which is kind of our largest wholesale segment, So pretty good growth there, 1.9% year over year. Europe was flat on a constant currency basis. And then IGD, as you pointed out, the distributor markets had a little bit of a shift from Q3 into Q2, but that's not really the factor driving the overall growth in wholesale. It's a relatively minor impact, about half a million. So we feel pretty good about the return to organic growth in a bull sell. And then as we look forward, based on the order book that we're seeing, we feel pretty confident in the order book as it stands now versus a year ago. So the order book in Europe is up about 5% year over year to the same point last year. and up double digits in North America. Now, the order books, one thing, what we actually realized from that order book is another, and that latter factors, particularly in North America, critically dependent on how the market plays out, how the consumer holds up. But I would say the wholesale business is quite healthy. The margins are up, and we feel good about the back half based on the the order book, um, with regard to the, and I'll come back to DTC in a minute with regard to how the wholesale channel has reacted to our price changes. Um, our, you may recall our philosophy on this was to be transparent, get out early, uh, give the wholesale channel enough time to adjust. So we went with our price increases in early May, which was, uh, well ahead of most of the competition. And I think in the end that was a good move and benefited us with our wholesale accounts. I think it's been as well received as it could possibly have been. And while they didn't all take prices up immediately, that extra bit of time gave them time to plan, adjust, and also confirm their faults. 2025 orders. Whereas now, I think with a lot of our peer group, they've taken prices up in July, and there's quite a bit of commotion now in the wholesale channel about how to adjust to those price changes right at the beginning of the season. So all in all, I think the price increase has have gone as well as we could have hoped. But we really are at the beginning of the beginning to see how that plays out. And frankly, we remain cautious about the price increases in this consumer environment. Nobody has a crystal ball on that. But at least from an underlying order book across all the regions, we feel confident that we can deliver some low single-digit organic growth in the back half. Then turning to D2C, it's quite a different story with D2C, one, from a strategy standpoint, two, from a timing perspective. From a strategy standpoint, we have moved D2C even more aggressively to a full price position, and we rolled out prices higher. new prices early in North America on D2C. And so the combination of less discounting and less promotion and higher prices, we saw a pretty sharp pullback in the D2C channel, 20% in North America, a little bit more modest in Europe. And it's always difficult to gauge how much volume you're going to lose when you take prices up and you reduce discounting. I think that because we went ahead of the market with our prices and Amazon and other retailers didn't go as quickly, that naturally tended to suppress the sales in our D2C channel. That being said, I think the outlook for the back half in D2C It's still going to be soft, likely will be down year over year, but deliberately so as we really try to move that channel to much more full price. And then lastly, within D2C, as you know, there's a pretty big component of that that is our pro channel, and we've really tightened up the discounting in the pro channel, giving that discount out to fewer pros and then shallowing out the amount of discounting overall that goes to anybody who's in the program. So quite a different set of dynamics, I think, in D2C versus wholesale. But again, in kind of an 80-20 perspective, where wholesale is still 80% of our business, we feel quite good about the strength of our relationships with key retailers, our growth in big accounts as well as specialty, and our position heading into what we think is going to be a pretty turbulent second half.

Okay. I appreciate you unpacking a pretty complicated question there, Neil. So thank you for that. Very clear. The, the other thing I was curious about was just on the peeps front, was that included in first and second quarter results remind me sort of what was included for this year? before the sale? And then what's the full year headwind, I guess, if we were to think about what it contributed in 24, what we're missing out on for 25? Yeah.

Hey, Matt's Mike. So in the 10Q, the published results today in our press release and earnings release, that all includes PEEPs. Okay. So the assets and liabilities have been pulled out of the balance sheet and added as of June 30th and are presented as assets held for sale and liabilities held for sale on the balance sheet. But the P&L for the quarter and for the six months includes PEEPS. Neil's commentary today, you know, prepared remarks, you know, he spoke just to BD because that's the way he's been managing the business, right? So, but the official filings in the numbers presented include PEEPS. From a headwind perspective, there is no headwind. The sale of peeps is accretive. I think in my prepared remarks, I highlighted that peeps lost $600,000 of EBITDA in the quarter. So it will be accretive by addition through subtraction. And in 24th numbers, we lost money as well.

Yeah, okay. No, I understand. I was just trying to make sure we didn't, I guess, overmodel revenue in the back half as we kind of compared to last year. Any help on what peeps, I guess, contributed from a sales perspective in the second half of 24? That way we can kind of strip that out. It's a couple million dollars. Yeah, okay. Not a huge contribution. Got it. Understood. And then maybe just if I could ask another one. on the adventure segment. I guess we've been going through this downturn, especially in the Australia market with the OEM customer. And then, you know, I think a retailer, you guys have called out a few times as sort of a bit of a headwind on result in the Australian market. Just remind us, when does that headwind, when do we start to lap that headwind? It's been a few quarters now, I think. I'm trying to remember if it was third quarter from last year where it started or if it was more of a fourth quarter event. I'm just trying to get a beat on sort of when we kind of see inflection in the Australian market.

I think you're done. At this quarter, we anniversary, meaning the third quarter, we anniversary the OEM sales. So just to be specific, the OEM sales Q2 of 25 versus Q3, through of 24, we're down $3.1 million. In the third and fourth quarter OEM sales last year were, you know, less than a million dollars, I believe. So, you're not going to see nearly as large impact. So, I think we've essentially anniversary that here as of June 30, right? Okay. With regards to the weakness in the other large customer, you know, we probably will anniversary that here in the back half of this year, right? You know, that was a very significant customer in 22 and 23, shrunk 24. It's getting even smaller here in 25. Yeah.

Okay. All right. Got it. So that anniversary is probably a third into the fourth quarter, I would assume. Yep. Okay. That helps a bit. And then maybe just lastly, just can you talk about sort of cash flow for the remainder of the year. It sounds like the message was working capital source of cash for the back half, most likely. So that seems like an opportunity to flush some inventory and build a little cash from working capital. Then you get the net proceeds from PEEPS, which I assume there's not too much friction from the total amount that you guys quoted from the press release, but maybe just talk about if there's any gap in terms of the headline number and maybe some net cash proceeds from that and maybe just lastly if you could speak to sort of priorities for the rest of the year in terms of cash it sounds like organic reinvestment was kind of the main message from the prepared remarks but any consideration given this sort of share buyback more deployment on that just kind of given you guys talked about the sum of the parts being undervalued maybe just thought process there okay so from a um

cash standpoint, yes, cash is a priority for us. We'll be very, I don't anticipate us doing a buyback because we want to protect our cash and invest it organically back into the business in the best opportunities. So, with regards to the sales proceeds from PEEPS, there is a little bit of friction there, about a million and a half dollars. So the 9.1 probably feels a little bit more like 7.5 million actual hitting the account here in July because some of that cash was on their balance sheet and that got sold as part of the transaction. With regards to working capital being used in the second quarter, it was, right? About $4 million working capital was negative. It was directly a result of inventory. I highlighted that inventories are over about $91 million. We pulled some inventory in at both Adventure for Rocky Mount and at Black Diamond in advance to mitigate some of the tariff impact on both those businesses. So it's more of a timing that we receive some inventory in June that we would normally get in July or August. So with that being said, I think cash is a priority. We'll be very disciplined around CapEx, right? We'll invest in CapEx that will help grow the business, you know, necessary CapEx, you know, CapEx that would be nice to have, we're going to be very prudent with. So going forward, like consistent with the prepared remarks, our objective is to definitely see cash grow in the back half of the year. Okay. Very clear. Appreciate you guys. I'll leave it there.

Thank you. One moment for our next question. Our next question comes from Mark Smith from Lake Street. Please go ahead.

Hi, guys. First, Mike, just wondering if you could just clarify and go through quickly the country exposure on tariffs, again, and kind of your mix. Sure, sure.

In Adventure, They source everything from China with a little bit coming from Australia, made in region in Australia. For Black Diamond, the majority of our inventory comes from Southeast Asia. I'm looking for the exact piece here. 25% from China. 31% from Taiwan, 15% from Vietnam, and 12% from the Philippines, with the remainder coming from elsewhere. You know, we've moved all manufacturing essentially out of the U.S. effective the beginning of this year. So, you know, the team is still focused on moving inventory out of China, like we talked about in our last call, our production out of China, sourcing out of China, but that won't take place until 2026.

Okay, and that was my next question, just if there's any other near-term moves in the mitigation plans that we should expect, or is this just kind of wait and see where things end up for everybody before we see any movement?

Right, I think that is our strategy. The stuff that we make in China is mostly our electronics, I think our VD headlamps are You know, we're waiting for that to – everything to settle to see what the proper move is with regards to that because the – you know, with the update – with the air update on Vietnam, we thought that was going to be a solution. As we dug into that further, I think we're less enamored with that as a solution, but we're waiting to see.

Okay. Okay. And then the other question I had was just on Rocky Mountain, just curious thoughts here on that performance, how that business has been operating.

We're thrilled with it. We think it's $2.1 million of revenue here in the quarter. It's a fantastic product. It's just a matter of getting more traction with the specialty distributors. specifically the bike shops, because historically we haven't had that relationship, but we're building on that. I highlighted that in the prepared remarks. So we think there's, you know, we're excited about what that can bring in the coming years.

Excellent. Thank you.

Thank you. Our next question comes from Peter McGoldrick from Stifel. Please go ahead.

Hi, this is Alex Douglas on for Peter. A couple for me. I think the first one's on gross margin. You know, this is down close to 100 bits of gross margin in 2Q. You mentioned tariffs didn't really impact the second quarter. You know, so then is it fair to assume that there would be you know, more gross margin headwinds in the back half than the first half? Or, you know, are there other kind of like tailwinds that would, you know, kind of like offset some of that? I know you said you can mitigate some of the tariff exposure, but not all of it. I would just like your thoughts there.

Sure. Sure. So if you look at our gross margin, our consolidated gross margin was down. I gave the details by segment. I think the adventure segment was down 300 basis points on an adjusted basis, quarter over quarter. Black diamond was up 30 basis points on adjusted basis. I should say outdoor. The full segment was up 30 basis points, inclusive of the drag from peeps. Part of the included in that 30 basis points up is a half a million dollar loss from FX. So it would have been up even more if he kind of had a constant currency without the FX headwind that Neil mentioned. Over at Adventure, so tariffs didn't hit yet in Q2, but we did have that headwind from FX. We also had a headwind from Peeps in the published results. Over at Adventure, we're down 300 basis points. And that is volume, volume specifically from the OEM business in Australia and the wholesale business in Australia, compounded, frankly, by some of the lower margin sales that Anna had just asked about, the promotional sale activity in North America that occurred. Like I mentioned, we sold that above cost, but not much above cost. So those things all combined brought sales. adjusted margins at adventure down 300 basis points so that's the headwind going forward um you know yes we have the tariff impact in the back half but we don't have the peeps um et cetera so so um you know gross margin will be challenging compared to our original plan at the beginning of the year and you know prior to uh the you know liberation day but um All of the work that we had done in advance of, you know, tariffs being announced in April, you know, a lot of that good work is going to be offset by the tariffs. But I believe, and I think in Neil's prepared remarks, we still believe margins on a year-over-year basis in the back half for Black Diamond will be up regardless of that. Got it.

Sorry, the only point I have to add to that. Yep, one other point just to add. So the other factor here is we pushed pretty hard to get inventory clean in the first half, and we were actually ahead of our pace in terms of clearing discontinued merchandise. So that obviously was a little bit of a drag on the margin in H1, but we should get some pickup from that in H2. So that would be, I think, the other thing to keep in mind.

More so in the first quarter than the second quarter. But, yes, I totally agree with that.

And then just kind of a question on the longer-term margin structure. You know, it looks like pre-COVID, you know, you guys, gross margin was kind of like around 35, adjusted EBITDA margin, you know, like high singles. Once we get past some of these transitory headwinds, you know, is that kind of the right way to think about kind of the margin structure in the midterm?

It's reasonable. It might be, I would think it's a little higher than that, but it's reasonable. Okay, got it. That's a point or two, a point higher, right? That's kind of how, you know, like I said, I would have thought we'd be closer to the high 39, 39%, but some of the tariff pressure is bringing us back down to that 36, 36 and a half type percent.

Okay. That's something helpful. And then I guess my last question, if there's time, would just be on inventory. You know, as we're kind of modeling inventory, how should we think about inventory growth through the remainder of the year and specifically, like, related to sales?

Well, I'll comment on inventory with regards to, you know, I mentioned it was over $91 billion here at the end of June. I expect that to be, you know, $10 million lower by the end of the year, right? Got it. That's what we're managing towards, right? So, that will help drive the positive cash flow I've mentioned. That's also consistent with historical performance, including our historical performance where our revenue is much stronger in the back half of the year. You know, of course, we are a little cautious on revenue, right? Consumer sentiment, the macroeconomic, you know, all the reasons we're not giving guidance, right? But I would add, I still, we still believe that the historical trends on the top line hold, right? We did, you know, we still believe that there's a 45, 55% split between first half and second half in revenue. So, you know, so I think as you look at your model or as you kind of look at the business, you know, those historical truths I think are still reasonable as we progress here in 2025, the 45-55 split, first half, second half, on a consolidated basis and actually by segment basis. Both these businesses, adventure and the outdoor, the second half of the year is 55% of the full year revenue.

All right. Okay. That's definitely a helpful cover. Thank you. I'll pass it on.

The question and answer session is now closed. I will now turn it over to Mike Yates for closing remarks.

Thank you. Thank you, everyone. Thank you very much. I want to express our appreciation for your continued interest in CLARIS and spending this time this afternoon on the call. We look forward to updating you on our results again next quarter. in Cedia and out at the conferences and any other questions. We look forward to spending time with you. So take care and thank you again. Bye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.