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Clarus Corporation (NASDAQ:CLAR)
Q1 2020 Earnings Call
May 11, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the first quarter ended March 31, 2020. Joining us today are Clarus Corporation's President, John Walbrecht; Chief Administrative Officer and CFO, Aaron Kuehne; and the Company's External Director of Investor Relations, Cody Slach. Following their remarks, we'll open the call for your questions.

Before we go further, I'd 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.

Cody Slach -- External Director of Investor Relations

Thanks, Angela. Please note that during this call, the company may use words such as appears, anticipates, beliefs, 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; 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 of 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 the COVID-19 global pandemic; changes in governmental regulation, legislation or public opinion relating to the manufacture and sale of bullets and ammunition by our Sierra segment and the possession and use of firearms and ammunition by our customers; the company's ability to protect patents, trademarks and other intellectual property rights; any breaches of or interruptions in our information systems; fluctuations in the price, availability and quality of raw materials and contracted products as well as foreign currency fluctuations; company's ability to utilize its net operating loss carryforwards; changes in tax laws and liabilities, tariffs, legal, regulatory, political and economic risks; and the company's ability to declare a dividend.

More information on potential factors that could affect the company's financial results is included from time to time in the company's public reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. All forward-looking statements included in this call are based upon information available to the company as of the date of this call and speak only as of the date hereof.

The company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date of this call. I'd like to remind everyone this call will be available for replay through May 25 starting at 8:00 PM Eastern tonight. A webcast replay will also be available via the link provided in today's press release as well as on the company's Website at claruscorp.com. Any redistribution, retransmission or rebroadcast of this call in any way without the express written consent of Clarus is strictly prohibited.

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

John C. Walbrecht -- President

Thank you, Cody, and good afternoon, everyone. I'd like to open the call by recognizing the amazing efforts of each of our employees as we navigate the COVID-19 pandemic from a position of strength. Our global team has shown exceptional leadership and collaboration as we address this unprecedented event. I'm also extremely proud of how the morale of our employees has been unwavering as each person demonstrates a high degree of engagement in our various business activities.

Throughout our history in both good times and in bad, Clarus has attacked our business with a climber's mentality. In climbing, one is faced with adversity on every ascent, whether it can be unpredictable and holds can be fickle, but with experience, determination and a good belay partner, one can overcome the walls adversity. We are approaching the current business environment with the same mentality.

Focusing on our core tribe consumer will help both Black Diamond and Sierra continue to strengthen our community and drive momentum for our brands. We believe we are well-prepared as any company to weather the storm, as we continue to push toward our goals. We began 2020 with great momentum after record financial results last year. However, in the final few weeks of the quarter, our Black Diamond brand experienced a dramatic global slowdown, as our retail partners shut their doors and canceled their open orders due to COVID-19.

Leading up to that point, our revenue and earnings were trending in line with our expectations for the quarter. These declines were somewhat offset by improving demand in our Sierra business late in the quarter, which highlights our product diversity, but in no way made our results immune to the pandemic.

At the onset of the virus, we devised a plan to focus on three things: first and most importantly our people; second, the preservation of brand equity; and third, maximizing liquidity which together we believe will make us emerge as even stronger company. First is our people. Since mid-March, we have enabled all office employees to work remotely and this has minimal disruption to our overall operations. For those employees at Sierra and those that work in the distribution that have been deemed essential, we have implemented significant health checks and precautionary measures to protect their well-being.

In addition, we have reiterated our commitment to what we call our top growth [Phonetic] fund. While in existence for a while, this fund was created to help our employees dealing with hardships. Times like these represent the reason the fund was started, and we are more than happy to support our employees and their needs.

Our second focus has been the preservation of brand equity. In light of the world crisis, like the one we are facing now, moving product quickly at the expense of margin is often the strategy of less diversified and less durable brands, but one, we will not pursue. For Clarus, brand equity among the core consumer is our lifeblood. We are supporting our retail partners through a difficult period and this includes the integrity of our pricing. Our supply chain and distribution are operating well, enabling continued shipments through our wholesale and distributor partners in those channels and geographies that still remain open.

In our direct-to-consumer business, Q1 sales were up 16%. Our overall direct-to-consumer strategy, which encompasses our website and both our strategic physical locations continued to perform well, and reinforces the initiative into the future. We continue to experience improved activation in our e-commerce channel, due to more effective prospecting and retargeting in order to drive higher levels of site traffic.

We prioritized full-price selling, with a focus on storytelling, using our athletes to capture the consumers' interest during their increased time at home and online. The consumer is looking for newness and an optimism of a brand message and BD delivered. While still strong, Q1 topline growth in our direct business wasn't as robust as it could have been, due to the sudden COVID-related demand shocks, but it was also due to the overall promotional industry environment in March.

Instead of chasing the bottom of our website, we decided to only run select promotions that we were within our minimized advertised price policy, again to protect our brand equity. We expect our well-performing e-commerce business, along with third-party sites of our wholesale partners, many of which are currently operational, to carry more weight in 2020 as a percentage of our total sales, offsetting some of the weaknesses that will be felt at traditional retail.

Finally, we are focused on our liquidity, which was strong leading into the crisis. And we'll speak about this in more detail momentarily. But at the end of the first quarter, we had nearly $13 million in cash and access to approximately $28 million in incremental liquidity with a modest long-term debt balance that we are comfortable servicing.

I'll now take a few moments to discuss our perspective on the macroeconomic environment and additional details of how Clarus will leverage its strength to succeed moving forward. At the moment, it is difficult to know when normalized business returns, and I doubt there will be one playbook applicable to all regions. But what we do expect is for the consumer to remain loyal to authentic brands that stay true to the core even during a crisis like this. While this has already shown in our DNA at Clarus, we believe there are other attributes of our business that play well into the dynamic environment we are currently facing.

First, given the uncertain retail landscape, we believe being a super-fan brand owners represents a distinctive advantage for Clarus. In past crises, our core tribe has shown to be very loyal to our brand. Over the last three plus years that we have been together as a team, we are focused on our innovate and accelerate playbook, regardless of the market dynamics. This playbook includes further strengthening our brands' market positioning by investing in product innovation, sales and marketing and pursuing new long-term revenue opportunities.

As an example, just last week, we announced that our new HighLine Stretch Shell for spring 2020 has been awarded the editors' Outside Magazine Gear Of The Year in their new Summer Buyers' Guide. This alongside other notable innovations include our new engineer chalk, which has an exclusive technology that allows for super-fast drying also in liquid.

Our playbook also has included bolstering our global distribution network and flexible supply chains that we have built over many decades, increasing manufacturing capabilities at Sierra, and driving efficiencies throughout our operations. We believe this provides the structural elements to benefit from what we believe will be increased staycations, higher levels of interest in health, wellness and the outdoors. We also think these mega trends play well when the consumer heads back outside after many weeks under stay-at-home ordinances.

Second, we have a diverse portfolio of products across geographies and channels with over 100 years of combined brand equity. Our offering spans 30 single product categories, and there is no single one that accounts for more than 15% of our annual sales. This diversity provides a balance of sales across both the fall and winter and spring and summer sports seasons. And our brands are truly global with nearly 50% of our sales generated in over 50 countries outside the US.

In addition, while apparel and footwear are key strategic initiatives, where we believe substantial growth opportunities still exist, it is important to note that we currently represent only 14% of our business. The remaining 86% is in equipment that is non-perishable and viewed as necessities for our activity-based consumers. These products are not driven by seasonal fads, but instead are rooted in best-in-class design, engineering, testing and functional feature sets that enable the user to have his or her best days in the mountains.

We have market-leading positions within most of our equipment categories, supported by highly engineered product that is backed by an unmatched heritage ingrained in the sports that we serve. Third, we have a strong and growing direct-to-consumer business. Our focus on the consumer through our direct business over the past two years is now providing us a competitive advantage. Consumers have started to spend even more time online and our team has done an excellent job authentically connecting with our consumers to build even stronger long-term brand affinity.

We will continue to invest in a robust direct-to-consumer sales engine to help grow the brand in key markets, and in the digital space where consumer targeting, advertising and storytelling can quickly bring relevant scale to businesses like ours with such compelling products.

Fourth, due to our discipline across the different businesses, we have been able to create operationally in both Black Diamond and Sierra brands. For Black Diamond, as part of our mitigation efforts in response to COVID-19 pandemic, we've reallocated and eliminated over $9 million in SG&A. This has accelerated our shift toward a more digital presence, sharpened our focus on key product categories and improved operational efficiencies and driven a tighter connection with our distribution and supply partners. For Sierra, during the last two years, we have focused on improving efficiencies and increased capacity. In fact, over this time, capacity has increased by approximately 30%.

Lastly, we will continue to leverage the strength of our balance sheet as we evaluate our long-term growth opportunities. As we have previously discussed, our primary focus is to maximize the organic growth and profitability of our brands. We strongly believe this will provide the highest level of returns on invested capital. We also take a strategic and disciplined approach to our capital allocation. 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 environments, as well as our leverage, we expect to target acquisitions over the long term that provide access to new product groups and consumer 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 recurring revenue, sustainable margins and strong cash flow to be accretive to our earnings. They must be well-run businesses. This will ensure we're enhancing value of the company and continue to be careful steward of the shareholder capital, along with funding our quarterly dividend and repurchasing of our common stock.

Ultimately, we believe our diversified brand portfolio, global distribution platform and fast-growing direct channel is well-positioned to navigate the current challenges and evolving consumer landscape. Above all, we have great confidence in our team's ability to ascend the unprecedented times. It is in our DNA. It is simply who we are.

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 first quarter, as well as provide more details on our game plan for the rest of the year. Thanks, Aaron.

Aaron J. Kuehne -- Chief Administrative Officer, Chief Financial Officer, Secretary and Treasurer

Thank you, John, and good afternoon, everyone. I'd like to start by reiterating John's comments regarding our team. This company is made up of committed and resilient people, and we have seen the very best of them over the last couple of months.

On today's call, I will provide more details on our first quarter results and then expand upon our priorities moving forward. The strong momentum established in Q4 of 2019, including mid-teens growth from Black Diamond, was interrupted by the onset of COVID-19.

For the first quarter of 2020, sales of $53.6 million were on plan for the first two months of the quarter before the impact of the pandemic. By brand, Black Diamond sales were down 13% and Sierra sales were down 12%. The decrease at Black Diamond was solely due to the COVID-related demand freeze in the final weeks of the quarter. Widespread shutdown of retail stores in many key markets, including North America, Europe and Asia, had a significant impact on March sales. Also included in these sales results was the deferral of $1.3 million in revenue shipped to our UK distributor during Q1. We agreed to take back inventory due to our transition to an in-house model one quarter early. This was planned to take place in Q2 and Q3, but due to the global pandemic, we decided to accelerate all of this into Q1 to ensure there was no lapse in coverage. Somewhat offsetting the declines, as John mentioned, our direct-to-consumer business was up 16% and our apparel business was essentially flat.

While sales in Sierra were also down 12%, the demand environment has improved since the beginning of 2020. At the start of the year, the industry was still experiencing softness which [Phonetic] Sierra felt most prominently in its domestic and international OEM businesses.

With COVID spreading in the international markets earlier in the quarter before arriving in the US, and those retail markets not being deemed essential, as they have been here, we do not benefit internationally from some of the stockpile buying trends we experienced in the US. We began to see this demand lift domestically in mid-March, particularly in our green box business. And this positive trend has continued into our second quarter.

Consolidated gross margin in the first quarter was 34.6%, compared to 36% in the year ago quarter. The decline was due to inefficiencies in our supply chain and logistics activities due to COVID-19. In addition, foreign exchange headwinds reduced year-over-year gross margin by approximately 55 basis points, while tariffs reduced year-over-year gross margin by 35 basis points. Excluding these two impacts, gross margin was nearly flat, which we feel is a win given the sales deleverage late in the quarter.

Overall, our sales and gross profit in the first quarter were negatively impacted by unfavorable foreign currency changes on a transactional basis by $400,000. The primary costs of our inventories denominated in US dollars, while 30% of our global sales are denominated in foreign currencies, primarily the euro, Canadian dollar, Norwegian krone and Swiss franc. We attempt to manage our foreign currency risk on a continuous basis through natural hedges and foreign currency hedge contracts. But these hedges will never be a perfect offset to the actual currency movements, especially with recent currency volatility.

In our reported sales and gross profit, our hedges offset approximately $300,000 of foreign currency exposure in the first quarter. At Sierra, approximately 45% of our product costs consist of materials such as copper and lead. We seek to actively manage the impact that commodity costs have on our business, specifically our gross margins with our vendor partners. We believe that we have a sound process in place that enables us to mitigate this risk for a period of six to nine months out.

Approximately 60% of our 2020 consumption is locked in at predetermined rates. The remaining 40% is benefiting from today's attractive commodity pricing. Another point on gross margin, specifically surrounding the impact from the trade war, our cost of goods sold were negatively impacted by approximately $300,000 in the first quarter. Our efforts to mitigate the negative tariff impacts continue to be on plan. We continue to decrease the amount of Black Diamond products sourced out of China from 38% to now 27%.

Selling, general and administrative expenses in the first quarter declined to $17.4 million compared to $17.6 million in the year ago quarter, reflecting our ability to adjust quickly to an unplanned downturn in the business in the final month of the quarter. Soon after the pandemic hit, we implemented a set of majors to bolster our financial strength. Most of these will show in our results going forward, so I'll address our actions shortly.

On the collections front, we have evaluated our accounts receivable on an account by account basis, and do not believe we have much exposure, which is a testament to the durability of our account base and our industry. But our Q1 SG&A includes a conservative increase of $400,000 in our allowance for doubtful accounts to roughly $900,000, which is a modest step-up to our historical write-offs of around $200,000 per year.

Net income in the first quarter was $36,000 or $0.00 per diluted share, compared to $3.8 million or $0.12 per diluted share in the year ago quarter. The decrease included $2.4 million of non-cash charges and $300,000 in transaction costs, compared to $3.1 million of non-cash charges and minimal transaction and restructuring costs in the same year ago quarter.

Adjusted net income in the first quarter was $2.7 million or $0.09 per diluted share, compared to $6.9 million or $0.23 per diluted share in the same year ago quarter. And adjusted EBITDA in the first quarter was $3.6 million compared to $7.3 million in the same year ago quarter. The decline was primarily due to the aforementioned COVID-driven demand freeze for Black Diamond in the final weeks of the quarter.

Let me shift to our liquidity. Our balance sheet was strong entering 2020, including a clean inventory position. At March 31, 2020, cash and cash equivalents totaled $12.8 million compared to $1.7 million at the end of 2019. Breaking this down, during the quarter, we drove approximately $9 million in cash from our line of credit and generated free cash flow, defined as net cash provided by operating activities less capital expenditures, of $2.2 million. We ended the quarter with inventory down roughly $4.3 million from the end of 2019, and have adjusted the flow of goods in line with the expected future demand.

We will likely see our inventory go higher in Q2, due to the cliff nature of the COVID-19 pandemic. However, we have strong supply chain partners where we can dynamically manage our inventory levels appropriately with demand. As such, we anticipate that it will rightsize in Q3 and Q4, and we feel comfortable where we are heading.

On the sheer [Phonetic] inventory side, we prepaid for a portion of our copper needs at the beginning of the year. So, it was still a bit elevated at quarter end. But that business is currently experiencing significant output and great efficiencies. So, we are in a strong position there.

From a retail footprint perspective, it's important to note that we own our own campus here in Salt Lake, which also houses one of our six retail locations. For our other five stores, we have favorable lease agreements that we are comfortable servicing.

At the end of the quarter, we have $32.1 million drawn on our revolving line of credit, with remaining access of $27.9 million. As a result, total debt was $32.1 million compared to $22.7 million at the end of 2019. This equates to net debt to trailing 12 months' adjusted EBITDA of roughly 1.36 versus a covenant of 3.06. And we are comfortable servicing our debt requirements at 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.

Now turning to future mitigation efforts. From a financial perspective, we are focused on strong liquidity, the health of our balance sheet and generating maximum operating cash flow. We have taken the following steps. As John mentioned, first, we planned operating expenses will be reduced by an estimated $9 million for the remainder of 2020, including organizational changes.

As John also mentioned, this has also accelerated our shift toward more of a digital presence, sharpened our focus on key product categories, improved operational efficiencies and driven a tighter connection with our distribution and supply partners. Overall, these cost reductions are expected to recalibrate our SG&A, primarily within Black Diamond to levels we experienced heading into 2018.

It is also important to call out Black Diamond topline results around this time frame. Sales for Black Diamond in 2017 and 2018 were $160.3 million and $176.7 million respectively. Second, we postponed approximately $2 million of non-essential capital expenditures of the $5 million scheduled for 2020 until business conditions stabilize. Part of the capital expenditures that we will continue forward with will include the planned investments in our high-growth direct-to-consumer business.

Finally, we temporarily replaced the company's quarterly cash dividend with the stock dividend. We expect these disciplined actions will result in over $13 million of cash preservation in 2020. Subsequent to the first quarter end, we borrowed $20 million under the term loan portion of our credit agreement, and used the proceeds to partially pay down amounts outstanding on our revolver. We had a draw down deadline on our term loan of May 3rd. So, we took the opportunity to access the capital as it provides the company an incremental $20 million of liquidity for a total of $80 million.

In addition, as previously disclosed on March 10, 2020, we entered into a stock purchase agreement to acquire SKB Corporation. Given the recent events surrounding the COVID-19 global pandemic and the economic uncertainties in the United States and globally as a result, each of the parties to the purchase agreement agreed that the purchase agreement had expired on April 30, 2020, and was no longer effective. While we believe Clarus is well-positioned both strategically and financially to navigate the COVID pandemic, the current uncertainty created by the virus means that visibility to our recovery path is limited. There are many factors outside of our control, like when people return to work and what their buying behaviors will reflect, which makes it difficult to provide specifics on our 2020 outlook. As a result, we are withdrawing our guidance issued on March 9th, and we'll revisit this when conditions stabilize.

But I would like to comment on our current business conditions and our priorities for the rest of the year. As I mentioned earlier, the demand environment in our Sierra business improved significantly in the final two weeks of our first quarter, particularly in our domestic green box retail business. We would expect this heightened demand to continue for the remainder of the year both in our domestic green box business and as some of our domestic OEM partners begin to restock as their inventory depletes.

As for the rest of 2020, strategic decisions will be prioritized around maximizing the organic growth and profitability of our brands. We strongly believe this will provide the highest levels of return on invested capital. But we will prioritize our strong balance sheet, liquidity and the preservation of shareholder capital first and foremost.

Before turning the call back to the operator for Q&A, I want to reiterate our comments and praise for the performance and commitment of our great team at Clarus. And our thoughts continue to be with those around the world suffering from the virus.

Operator, we are now ready for Q&A.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Our first question is from the line of Randy Konik with Jefferies. Please go ahead, sir.

Randy Konik -- Jefferies -- Analyst

Yes. Thanks a lot. And good afternoon guys.

John C. Walbrecht -- President

Hey, thanks Randy.

Randy Konik -- Jefferies -- Analyst

Hey, John. I guess a question for Aaron. Can you just maybe walk again through the dynamic of the inventory in terms of you kind of, you said obviously near term the inventory will be a little elevated. Maybe give us some perspective on, give just some thoughts on gross margin impact on that or not. And then how do you think about the long range management of inventory as you kind of transition more toward the DTC [Phonetic] side? Just give us a little bit more flavor, that'd be really helpful to start. Thank you.

Aaron J. Kuehne -- Chief Administrative Officer, Chief Financial Officer, Secretary and Treasurer

You bet. So coming into the year one of our focuses was continuing to focus on the optimization of our inventory levels, while also ensuring a higher level fulfillment, especially for our DTC business. This is something that we commented on even during our Q4 earnings call. As COVID-19 hit, it became apparent that we'd have to start to recalibrate some of the inventory demand planning or buys to accommodate the decline in demand that we were forecasting. So as a result, we started immediately interacting with our supply partners and dynamically worked through how we'd be able to manage through this process. And so, overall, I feel extremely proud with what we've been able to do so far through the quarter, being able to bring down our inventory levels by $4.3 million.

But naturally not all of the inventory purchase orders that we have in place for not only spring '20, but also fall '20 we've been able to recalibrate immediately. And so as a result, as we head into Q2, I don't anticipate that we'll see an increase in inventory, especially in June, but then as we're able to continue to manage through that process, I do believe that those inventory levels will be properly recalibrated or rightsize for the size of the business that we expect to have as we head into Q3 and Q4. Part of that, though, is ensuring that we also are properly positioned for a recovery, and not only so that we can satisfy demand for our direct to consumer business but also for our retail partners. And so that really sheds light or highlights the strength that we have within our supply chains, and also the great partnerships that we have with our supply partners. If this dynamic ability to be able to manage us through the ups and downs and also to ensure that we can continue to maintain a certain level of inventory, while also not missing out on the opportunity that may present themselves.

John C. Walbrecht -- President

And Randy, the second part of the question that you asked was about margins. The great thing for BD is that because 86% of our business is equipment, a carabiner in April and a carabiner in October hasn't changed in valuation than the market, since footwear and apparel only represents 14% of our business. And it's really focused on more equipment apparel. And the amount of product that we have in inventory in those products is part of the reason why early on we were able to make the strategic decision, not to chase pricing and the retail market down the bottom of the rabbit hole in discounting. So to your long-term question, our goal is to maintain our margins through this process by not changing our brand equity or the positioning of our products from a price perspective.

Randy Konik -- Jefferies -- Analyst

Very helpful. Then my last question, I guess back to -- would be for your John. You brought the word process, so can you give us so many perspectives on -- and process changes that have come about because of COVID that you envision being more permanent in the way you're kind of managing the business or running the business? And how do you kind of communicating that to the troops? Just give us some perspective on those -- any process changes that are kind of going to be taking -- have been taking place that are going to become potentially more permanent in nature? Thanks.

John C. Walbrecht -- President

Yes. The first thing I would say is that during these crises, you get super smart to focus on the things you can control, and not worry about the things you can't control. So you don't waste time. I would say second to that we're very much about the positive in the integration with our core consumers this whole time, and thus we communicate early and often both to our employees as well as to the market, clearly reaching out to many of our accounts, either at the rep or the management or even the senior team level.

And then, as Aaron has stated, being very smart about your partnerships in a bigger way. Most of the times brands only talk about partnerships as in their retail partnerships. And for us, our supply chain and our global distributed market is just as important to us, and being able to reach out to our long-term partners, where in certain categories, we own the lion share of market, and work with them to ensure that we are making prudent plans in our movement of inventory to ensure that we're not sitting on too much inventory, and that we're planning these things out in a prudent way and level setting.

And I would say that clearly the way in which we've managed with our accounts from a financial perspective on the accounts receivable, and how we've been managing that, and our goal to be the easiest to do business with our accounts, and being very engaged and upfront with them on a regular basis. I think our sales team has stayed very, very engaged with all of our accounts along the way. And that process won't change. I think the way in which our social media has maintained its engagement with our super-fan brands. In fact, we've been seeing 1% to 2% a week increase in our social media in Instagram, Facebook, which is just unheard of, and the level of engagement. And a lot of that has translated both into a very strong community statement, a statement that we came out with, which was live now climb later, live now run later, live now ski later, whatever, and engaging our athletes in that statement.

I would also say that the way in which we've engaged at an even higher level, I -- what Aaron said and that our employees -- you always measure character by how people respond when either they don't have to or when they're put under extreme strain. And this crisis is proved to be very true of BD and what we call the climbers mentality. And the team engaged at a level unseen before and passionate about BD is about our core consumers, about the sports we serve, about the retail partners and our factory partners. And really worked super hard in this process, and it shows in every area of the business financially, as well as the communication level.

So hopefully that gives you some, I'm sure, I've missed a few more in there. But I think the same approach we've always said to you, Randy, is you maximize the whole by maximizing every individual input. And that we literally -- from a team perspective looked at every single team, whether there is finance, supply chain, logistics, B2C, manufacturing, innovation, R&D, sales, marketing. You name it and said guys, new times, new pause, what is the best way we can react as a brand and continue to build brand equity, while driving a profitable business. And that's how we approached it. And I think that's worked really well for our team.

Randy Konik -- Jefferies -- Analyst

Really helpful. Thank you. Thanks, guys.

Operator

And your next question is from the line of Mark Smith with Lake Street Capital. Please go ahead.

Mark Smith -- Lake Street Capital -- Analyst

Hi guys. First one for me, you talked a lot about apparel and footwear and kind of what percentages of sales. Can you talk about the inventory levels within those categories and kind of your comfort level with that?

John C. Walbrecht -- President

Yes, we can. Obviously and it's in -- you can read it in the current reports from retailers and/or brands. There is enormous amount of apparel in the marketplace and will be for the next, I would guess at least 12 to 18 to 24 months. I think we've seen that in the athletic shoe business in the drop off. Currently, we're still seeing a positive on the outdoor footwear side of the business. But I would also say that because our product is equipment focused Mark, that -- and we've managed our inventories in line with our business and been very good about that.

And, I would say some criticize the last ball because it actually meant that we sold out early in times, when maybe we could have had more and we put more risk into it, that our equipment approach to apparel will actually sustain in this process. And we've actually seen in a time when some of our retailers have been in bloodbath or pricing wars with brands, we've actually continued to see good growth with our online retailers with apparel during this process. Now that's in a microcosm of those who are online retailers as opposed to those without closed doors. But, as you all know, a deploy jacket that you enjoy is the same deploy jacket whether it's spring or fall.

Mark Smith -- Lake Street Capital -- Analyst

Yes. Absolutely. And then...

John C. Walbrecht -- President

And managing our inventory so that we don't create excess DM, making sure that our retailers are able to carry over the products and maintain those margins has been a very smart strategy for our side.

Mark Smith -- Lake Street Capital -- Analyst

Okay. Looking at retailers, can you just give us a big picture view of what you kind of saw late in the quarter and then maybe where we're at today? On percent of retailers closed, talk a little bit about the stores that you have? And if you're starting to see some movement on some of these retail locations opening?

John C. Walbrecht -- President

Yes. So if you look at our account base, it really breaks down into four segments. So you have our national accounts, which may be guys like an REI and MEC [Phonetic]. And of course, right when this hit, they did the right thing and closed their doors. You have some of our accounts which I would call key accounts, which may be playing in other areas. We're able to stay open during this time period, though in maybe less traffic and maintain their business. Then you have retailers that I would call key accounts or specialty online retailers, guys like a backcountry.com, as an example, that we're able to maintain and continue to drive their business during this as best as possible.

And then you had specialty retailers and obviously a lot of specialty retailers due to their state logistics or ordinances closed their doors. And so that started as a referred to early, mid-March and then got really heavy by the end of March as everything got to quarantine. Some of those as we said, online retailers and some of the big multi-hunt and fish and outdoors. We're able to stay open some.

Now coming back, it's just some specialty accounts in certain states have been able to start opening, more will start to open over the next two to four weeks. And then some of the national accounts have started with either curbside or doors and locations. I think today, Dick's will say they have about maybe close -- approaching 200 retail stores will be open through May. And then ultimately working toward more as the year goes on -- as the months go on. REI is probably targeting sometime in early June, with some curbside pickup in May.

So I think each retailer dependent upon their saturation of accounts by certain states will change that. Obviously, Montana has a little different effect maybe than New York City. But I think people are seeing demand. For example, we've opened up our stores here in the Rocky Mountains in Utah and Colorado and our store in Anchorage. And we're getting a very positive warm response by those consumers. Obviously, we are social distancing in those stores being very surgical in our approach to cleanliness and all the details associated with it. But where the environment has opened up, we're engaging with the consumer and there's clearly some pent-up consumer demand to get back out in the outdoors and use outdoors as the new social distancing.

Mark Smith -- Lake Street Capital -- Analyst

Okay. And then last one for me. Maybe talk about the importance of indoor climbing gyms, it's been a great growing segment? How important is that to your sales? And any insight that you may have on how far out before we start to see some openings potentially there?

John C. Walbrecht -- President

Yes. So climbing gyms and we've talked about this in many of our meanings. Climbing gyms have always been one of this great anomalies of the business. Without question climbing gyms boomed over the last three to five years and introduced a new consumer to the model of climbing, what we all jokingly called vertical yoga became extremely popular.

Climbing gyms through the COVID-19 closed down almost immediately in mid-March and going into the beginning of April. Some of the gyms have started now opening up or plan to here in May. I think it'll be a little bit of a slower process as they figure out how to engage with the consumer the demand it had before while maintaining social distancing that best cases.

I will tell you that climbing gyms help drive the awareness for climbing but as we've often said, climbing gyms don't represent a lot of retail. It's the in and out and the experience on the wall or in the bouldering. Obviously chalk and then interesting chalk sales and our new engineer chalk using, an alcohol base to provide some sort of antibacterial while climbing is kind of started to kick-off and we'll see some movement from that. I think fortunately, because outdoor is on we're going to see a growth in outdoor climbing here rapidly going into the summer months. And it may not be until social distancing or fall or a little more separation from this starts to take off in the fall of climbing gyms. That's, that's my prediction.

Mark Smith -- Lake Street Capital -- Analyst

Okay, great. Thank you guys.

Operator

[Operator Instructions] And your next question is from the line of Jim Duffy with Stifel. Please go ahead.

Jim Duffy -- Stifel -- Analyst

Thanks. Good afternoon guys.

John C. Walbrecht -- President

Hey, Jim.

Jim Duffy -- Stifel -- Analyst

A couple questions for you. John, just to start, can you talk about the products that are selling well few in the B2C business that being your view to consumer appetite? Currently, is it those categories that are more applicable to staycation type demand?

John C. Walbrecht -- President

Yes. I think one of the things where we've seen starting with in April, we started with our April fools around all the initiative of outdoor climb though we want live now climb later. Interesting enough, I would say helmets, cams, carabiners, quick draws, ropes, harnesses have all seen demand as people go to the outside world for sport climbing where the gym is missing. Clearly, more and more people have done trail and so we're seeing it in backpacks and trekking poles and headlamps and those things.

But we've been able to maintain in the apparel piece. It's not as higher percentage as it was, but we've opened up our retail. And to our surprise retail has done well, but in a lot more equipment. And I think that's been our story on this is that the super fan has to come to us. There is no alternative for a cam other than BD carabiners, harnesses, helmets things where we own a lot of the market share. And I think people are really focusing on that. It's interesting, I think the market would have reacted a lot different than this happened. And we've been quarantined in October, November December than now and people coming out of it in December versus now coming out of it in May with the summer activities.

So, today, it's been highly equipment driven. Footwear, to our surprise, outdoor footwear, even though, I know athletic footwear has taken a hit, outdoor footwear is holding its own, but that's again because people are getting out where we live specifically, getting out to the mountains is their way of social distancing, but being active.

Jim Duffy -- Stifel -- Analyst

Makes a lot of sense. And can you talk for a moment how you plan merchandise receipt for the balance of the year? And concentrated the buys more to core item categories where you think there's even more shelf life?

Aaron J. Kuehne -- Chief Administrative Officer, Chief Financial Officer, Secretary and Treasurer

Yes, that's exactly how we've been planning is really focusing on those core items where the items that you would expect BD to have in stock, and to make sure that we have sufficient availability, but also curtailing some of the fringe type items just to protect the downside, but also just to continue to optimize the inventory position in our cash conversion cycle.

John C. Walbrecht -- President

And this is a real blessing that that during this time, that we have an inventory that when everything's been slow to put on pause that 85% plus of our inventory is non-perishable. And it doesn't change. The harness in black or navy blue or bright blue doesn't really have a change of value regardless of the color of the process. Whereas, as you probably are very aware you start building up spring '20 products that didn't go to retail or get sold out plus fall '20 products plus spring '21 that's now in the weeks away from starting to sell. And you quickly find you've got 3 times the inventory going into a market that has maybe one-third or half of one-third of the demand at the moment.

Jim Duffy -- Stifel -- Analyst

Got it. And then shifting gears to corporate development for a moment. Moving beyond the SKP opportunity seems wise, given the circumstances that gives you some dry powder for opportunities that may come along in disruption from the crisis. How do you guys think about being in the market for new opportunities? When might we be able to see that? Would you like to see better visibility?

John C. Walbrecht -- President

Your guess is good as ours. I don't think Aaron mentioned it in his words, where we've always been very clear about the focus on super fan brand, because again, super fan brands and we believe this will have the highest value because it's going to play out two-fold. One, they have the most loyal consumer that is going to be loyal to that brand irregardless of the crisis, irregardless of recession or other things. I may not go out to eat, but I'm definitely going to keep climbing even if it means I'm going to build some sort of climbing apparatus in my basement.

The other side of that is that, we literally believe that super fan brands maintained their most protected business during these crisis times. And so we're going to keep our eyes engaged on this. We still love the SKP business. We just, for all the right reasons said, this wasn't the appropriate moment in time, though it may be the right brand. And we'll continue to look at all others that open into this. And like you, we hope there's not, but we expect there will be opportunities.

Jim Duffy -- Stifel -- Analyst

Very good. I'll leave it at that, guys. Thank you.

Operator

And your next question is from the line of Matt Koranda with Roth Capital. Please go ahead.

Matt Koranda -- Roth Capital -- Analyst

Hey guys, thanks. Just wanted to start off with another question on inventory surprise, surprise. So, I think you guys did a nice job talking about sort of what you're doing to control inventory at the BD level and then the apparel as well. But just wondering if you could comment on sort of equipment inventory at the retailer and distributor level and your comfort levels there? I know you don't want to dilute brand equity with sort of deep price cuts. But what are you seeing in terms of sort of early POS data from retailers that have opened it, if at all? And then in terms of willingness for retailers and distributors restock for falling beyond, what's the environment like?

John C. Walbrecht -- President

I think two-fold. I would say first off that, our retailers are probably, I would say medium to high stocked at this point on BD. But as they open up, just as we did with our store, I think the demand for equipment over excess inventory and other categories will be to our benefit. I think the other side is that retailers appreciate that equipment. If you want to maximize at once business while limiting the future of having to go off price on a product that may become perishable, either in one, three or six months, equipment becomes a safer bet. And equipment, within BD speaks to 30 plus categories. So, it's all over the spectrum. If you lived in the Rockies, right as soon as COVID hit, we saw ski business and the Backcountry, beacons jet packs, all that kind of stuff take off as people decided that social distancing meant Backcountry skiing. So I think retailers are going to be super smart. I think they're going to a, I think, I would conclude that retailers are going to focus on fewer brands, because those brands are going to be the ones that represent more and more important. The 80-20 rule is going to become evident and maybe it becomes 90-10.

And I think then they're going to work -- they're going to focus their buys on products where just like you as an investor or, they're going to look at it and say, am I investing in products that where my opportunity to be successful in attaining margin through this product is going to be high. And I think that's going to both lead to BD and its success, both prior to this and through this. And we've started to see that, as we now are entering May and people are opening it up. We're seeing ASAP orders coming back, which I'm not sure that's consistent across the whole industry.

Matt Koranda -- Roth Capital -- Analyst

Right. Good to hear. And then shifting gears this year really quickly. I know you guys mentioned green box sort of outperforming toward the latter part of the quarter. But I'm curious, just on the sort of the OEM bullet business, what's the environment like in terms of ramp up for you guys to meet sort of some of the ramp-up for your customers and OEM? And do we see, sort of order levels increasing through the rest of the year? How does it play out on that front? And, is it possible, I mean, I'm not asking for guidance here. But is it possible to kind of reach the I guess the high watermark that you guys hit in 2018 with Sierra with the bullet business doing better?

Aaron J. Kuehne -- Chief Administrative Officer, Chief Financial Officer, Secretary and Treasurer

So I'll take first of all that capacity side of things, and then John will talk about the market dynamics a little bit more. As mentioned, though, as it relates to the overall capacity of Sierra, when we bought the business, or since the time that we bought the business we've been able to increase capacity by 30%. We've also started and we've also been able to increase our operational efficiencies in a dramatic way over that period of time as well. And so as we're starting to see the market stabilize and come back in terms of higher levels of demand. We feel like we're in a really good position to be able to satisfy once again, dynamically the demand that may come our way over the rest of the year. In fact, we're getting to the point where it's time to start adding some additional direct labor within the plant to ensure that we have that capacity, not only from an equipment standpoint, but also from a labor standpoint.

John C. Walbrecht -- President

Thanks. So on the second half of that, so as you look at our business and we'll give a little bit idea what's taking place and what is the driver. And this is true of the first quarter -- the end of the first quarter, but also true running into the second quarter a little bit. A third of our business is international. International is impacted by COVID, even sooner than North America was. And so that's where we saw the softness in Sierra bullets in the first quarter. In fact, though the market was soft, green box and OEM for Sierra was flat in the first quarter and negative was impacted by the International. So we were already in our belief beating the market at the moment. We've continued to keep that gap down on bullets and ammo. And those are important both of those initiative for us. On the green box side we've continued to see strong growth in both green box bullets and green box ammo in the retail format. And that's retail at both the distributor level but also at the retail level with Mastro, Kabbalah, Academy, Gander you name it in the mix.

On the OEM level, as Aaron said, our capacity is there and been primed, knowing that at some point the inventory levels of the OEMs which represents guys like federal, BHA, FIG you name it would get pressured on. And that has happened coming out of the end of the first quarter and well into the second quarter. And we anticipate that's going to continue up. Now, are we ready to tell you that means we're going to hit the whole high watermark of the past. Well, that's got a both COVID impact on it as well as a political discussion later in the fall yet to be determined. But I can tell you that we see positive momentum. And more importantly, from a financial result, our capacity is up but even more important is the profitability at the efficient level at Sierra ready for both the increased demand, but also to be more at the contribution margin of it. And we've seen strong sell-through growth, better than anticipated from a market perspective in both bullets, and even more exciting in the ammo side of our business. And again, we have a goal to continue to grow our ammo side of the business, ultimately to 10%. It is nowhere close to that at this point, but it's gaining momentum equally at the pace that we were hoping or expecting going into 2020.

Matt Koranda -- Roth Capital -- Analyst

Very helpful guys. Can I sneak one more and just on opex? I know you mentioned savings expected of $9 million. And it'll be helpful just to get a little bit more color on where some of that comes from. I would imagine there's a significant amount of marketing and discretionary travel expense that you can cut down on. So maybe just bucket it out for us in terms of where the savings is coming from? And then, just in terms of cadence of when you fully realize the $9 million. It sounds like you said you're already done with the actions. So can we just sort of chop off an annualized number of $9 million for the rest of the year, by quarter? Or what's the right way cadence wise to model it?

Aaron J. Kuehne -- Chief Administrative Officer, Chief Financial Officer, Secretary and Treasurer

Yes. So, you're exactly right. We have identified the $9 million and have already put that into action with most of it being fairly evenly spread over the course of the remainder of the year. When we looked at the different levers available to us, some of it naturally is discretionary in nature, such as some of the marketing spend and also some savings associated with trade show cancellations that have taken place. But we've also taken opportunities to scale back, certain levels of compensation as it relates to new hires that we had planned where we'd put those on pause for now.

But then also, some other variable type expenses, whether it be through the commission side of things due to lower demand, but also reduced travel. But more importantly, we've really looked at some of the organizational operational side of things where we felt that, this was a good catalyst to reset some of the components that came into -- some of the initiatives that we're looking out for the year. Now, as we came into the year, we felt extremely comfortable with the way that we were allocating the dollars. However, obviously considering COVID-19 that's a need for us to just revisit some of that. And so through a variety of different activities and it's not one function department was immune to it, everyone participated in the cost saving program in one form or fashion.

But we've been really focused on, as we mentioned in the script, refocusing on the digital side, refocusing or sharpening our focus on the innovation side of things as well, the operations, and just driving continuous improvement programs throughout the organization, and ensuring that the organization structure is recalibrated accordingly based on how we're viewing the business today.

Matt Koranda -- Roth Capital -- Analyst

Okay. Very helpful. I'll leave it there. Thank you, guys.

John C. Walbrecht -- President

Thank you.

Operator

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

John C. Walbrecht -- President

Thank you very much. We'd like to thank everyone for listening to today's call. And we look forward to speaking with you when we report our second quarter of 2020 results in August. Thanks again for joining today.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Cody Slach -- External Director of Investor Relations

John C. Walbrecht -- President

Aaron J. Kuehne -- Chief Administrative Officer, Chief Financial Officer, Secretary and Treasurer

Randy Konik -- Jefferies -- Analyst

Mark Smith -- Lake Street Capital -- Analyst

Jim Duffy -- Stifel -- Analyst

Matt Koranda -- Roth Capital -- Analyst

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