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Clarus Corporation (NASDAQ:CLAR)
Q3 2020 Earnings Call
Nov 9, 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 Third Quarter ended September 30, 2020. Joining us today for Clarus Corporation, 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 would like to turn the call over to Mr. Slach as he reads the Company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. That provides important cautions regarding forward-looking statements. Cody, please go ahead.

Cody Slach -- External Director of Investor Relations

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

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

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

I would like to remind everyone, this call will be available for replay through November 16 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 expressed written consent of Clarus Corporation is strictly prohibited.

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

John C. Walbrecht -- President

Thank you, Cody and good afternoon, everyone. I hope everyone is staying healthy. Though 2020 has been a challenging year, our portfolio of super-fan brands has consistently shown us that through any difficult environment, whether it'd be a bad winter, an economic recession, or now a global pandemic, we will continue to perform. This was proven again in our third quarter results. As indicated in our pre-announcement a few weeks ago, our Q3 results showed the strength of our well diversified brand portfolio. Total sales increased 7% with record results for our Sierra brand.

We generated $9.1 million in adjusted EBITDA and $5 million in free cash flow which build our cash balance to $17 million. These results ultimately tie back to our well-defined strategy of preserving brand equities while continuing to execute our innovate and accelerate playbook across all the brands portfolios. Let me address this further by speaking about our specific brand and business performance. Black Diamond sales continued to improve and ended the quarter down only 8%. COVID-19 is still hampering the returns of the normalized retail order patterns particularly domestically, so much of our sales were in the form of replenishment or at-once orders. This is despite otherwise strong consumer demand as people thought the outdoors during the pandemic related restrictions or concerns.

In fact in Europe, Black Diamond sales actually increased 11% with growth in every category. In our international distributor business, we made the decision to transition two more markets, Spain and the United Kingdom through our in-house direct agency model. We are always looking to drive more direct contact with both our retailers and our consumers, and this move is fully aligned with this strategy. The transition reduced Black Diamond sales by approximately 2.5 million in the third quarter. But actually, we'd expect to more than make this up in the future, once it is fully internalized. We expect to start selling directly in the UK in the fourth quarter of 2020 and then in Spain in Q2 of next year.

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

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

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

Last but certainly not least, we experienced strong traction in our ammunition business with sales up $2.7 million or more than 3,200% increase since last year. We are extremely pleased with the roll out of our ammunition initiative supported by game changer Prairie enemy, sport master and now the outdoor master collections, each of these new collections highlights the super-fan falling within the Sierra brand creating unmatched precision and accuracy in a full ammo cartridge.

We are not only pleased with our top line growth, but also our ability to still the extraordinary level of demand. At this time, we feel confident that just demand for our new ammunition collections will continue to deepen to 2021. In early October or October, we added the Barnes Bullets brand, our newest super-fan brands to our platform. Barnes has been the industry leader in both technology and innovation since the early 1930s and hold strong brand awareness among the core hunting enthusiast a complementary consumer to those of the Sierra brand, much of which are focused on long range precision and accuracy.

Consumers have long trust bonds to be the ammo of choice for their hunting needs they are the leader in LED 3 monolithic copper bullets and ammunition and have what we believe to be an untapped market potential. In fact Barnes is already developing a strong pipeline of new technology to be launched in 2021 already catalyzing our innovate and accelerate growth plan. Early retail response to the acquisition has been very encouraging and we are quickly fill in the order book. We expect numerous financial and operational synergies to rise during the integration, and we will use our strong balance sheet to execute upon the upon these, most effectively.

Together with Sierra, Barnes gives us a leading specialty board [Phonetic] in ammunition platform targeting our sights on this segment being more than $100 million in sales over time in generating 20% to 30% adjusted EBITDA margins with high free cash flow conversions. The acquisition caps off our strategy to build the leader in specialty premium bullets and ammunition and also demonstrates our ability to patiently wait for strategic assets to attract value that we expect to drive growth and maximize our returns on invested capital. We look forward to seeking further acquisition efforts been similarly accretive strategic areas, but outside of the bullet and ammunition market. We expect to continue to drive our wave of momentum into the fourth quarter, generating revenue of approximately $67.5 million to $69 million.

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

In our Sierra business, we would expect domestic trends to continue the strong trajectory given the broader social and political environment. We also expect to benefit modestly from the acquisition of Barnes in the fourth quarter as we continue to work through the integration efforts as we work to establish their relationships processes and ordering cycles that were severed when Remington entered bankruptcy. We expect to have these activities completed by the end of the year or in early 2021. It is still difficult to tell on our consolidated businesses will be fully normalized, but we do believe consumers will continue to be loyal too authentic brands that focus on their core users. Being the business made up of super-fan brands, we feel well positioned to handle the uncertainty in the future. As noted in our Growth Playbook includes seeking to further build our brands, our marketing position by investing in product innovation, strengthening in our go-to-market strategy via sales and marketing and pursuing new long-term revenue opportunities. The diversification of our portfolio across new product expansions, geographies and channels has been one of our highlighted stream that is proving to be unique to the market.

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

Lastly, we will continue to seek to leverage the strength of our balance sheet as we evaluate our long-term growth opportunities. Our primary focus is to maximize the organic growth and profitability of our brands. We believe this focus along with taking a strategic and disciplined approach to our capital allocation will provide the highest levels of return on invested capital. And as demonstrated this quarter, we regularly evaluate opportunities to acquire similar, well-positioned super-fan brands to add to our portfolio. We believe the growing demand in our brands, our fast growing direct-to-consumer channel and our team's ability to execute our innovate and accelerate strategy through the course of the pandemic has positioned us well for the future.

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

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

Thank you, John and good afternoon, everyone. Jumping right into it, for the third quarter of 2020, total sales increased 7% to $64.5 million. By brand Black Diamond sales were down 8% and Sierra were up 135%. The decrease in Black Diamond was primarily due to lower levels of retail demand due to COVID-19. John touched on the factors that are offsetting this such as strong brand equity, product with less shelf instability or fashion risk, our ability to fulfill orders and return to growth in Europe [Phonetic] and a strong e-commerce business that is tailored to today's consumers needs. The 135% increase in Sierra was due to strong growth across the Board. OEM, green box, international, domestic and ammunition.

Consolidated gross margin in the third quarter decreased 50 basis points to 33.6% compared to 34.1% in the year ago quarter, due to unfavorable impacts on supply chain and logistics. As a result, as a result of COVID-19. During the quarter, we experienced a 30 basis point margin tailwind from foreign exchange. Overall, our sales and gross profit in the third quarter were positively impacted by foreign currency changes on a transactional basis by $279,000. With 30% of our global sales being denominated in foreign currencies, we attempt to manage our foreign currency risk on a continuous basis through natural hedges and foreign currency hedge contracts. At Sierra approximately 40% of our product cost consist of materials such as copper and lead, we seek to actively manage the impact, the commodity costs have on our business, specifically on gross margins, with our vendor partners.

We believe that we have a sound process in place that enables us to mitigate this risk for a period of six to nine months out, another point on gross margin specifically surrounding the impact from the trade war. Our cost of goods sold were negatively impacted by approximately $220,000 in the third quarter. Our efforts to mitigate the negative tariff impacts continue to be on plan, as we continue to decrease the amount of Black Diamond product source to outer China from 38% to now 27%. Selling, general and administrative expenses in the third quarter increased 14% to $18.7 million compared to $16.4 million in the year-ago quarter, primarily due to higher stock-based compensation.

Black Diamond brand SG&A was down 11% due to cost saving initiatives and Sierra SG&A was up 14% due to the 135% sales growth. We are quite pleased with the expense management at both brands, given the respected performance. Net income in the third quarter was $1.2 million or $0.04 per diluted share compared to net income of $3.5 million or $0.11 per diluted share in the year-ago quarter. The decrease included $6.6 million of non-cash charges and $1.4 million in transaction costs. Compared to $2.5 million of non-cash charges and minimal transaction and restructuring costs in the same year-ago quarter. Adjusted net income in the third quarter was $9.2 million or $0.30 per diluted share, compared to an adjusted net income of $6 million or $0.19 per diluted share in the same year-ago quarter. Adjusted EBITDA in the third quarter increased 34% to $9.1 million compared to $6.8 million in the same year-ago quarter.

Let me now shift to our liquidity. At September 30, 2020, cash and cash equivalents totaled $17 million compared to $21.5 million last quarter and $1.7 million as of December 31, 2019. During the third quarter the third quarter, we generated free cash flow defined as net cash provided by operating activities less capex of $5 million compared to a cash outflow of $4.9 million in the third quarter -- in the third quarter last year. We also raised $11.5 million, then three of our top 10 investors to bolster our financial strength and support our growth. Total debt was $41.1 million and we have remaining access to roughly $38.9 million on our revolving line of credit. Our net debt leverage ratio, as of September 30 was 1.3 times. We are comfortable servicing our debt requirements at our attractive rate of LIBOR plus 150 basis points to 225 basis points. Based on our current projections, we expect to be well within our leverage at fixed charge coverage ratio requirements and in full compliance with our current debt covenants for the remainder of the year.

Please note, our balance sheet as of September 30 reflects the full purchase price of the Barnes for this acquisition of $30.5 million, even though we closed the acquisition a few days after quarter close. As expected, inventory levels continued to decline and were $8.5 million below where we ended 2019. We have adjusted the flow of goods in line with expected future demand and continue to maintain strong relationships with our supply chain partners where we can dynamically manage our inventory levels with demand. On the Sierra side, the business continues to experience significant output and greater efficiencies. So we remain in a strong position there.

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

We did decide to convert our recent quarterly dividend back to a cash dividend. As we continue to recover from the height of the pandemic, we believe that we have made great progress stabilizing the business across our diversified portfolio of brands and today's results are proof. We continue to believe Clarus is well positioned both strategically and financially to navigate the COVID pandemic. We remain optimistic, the consumer demand and retail orders will get back in sync as our partners get more confident about the shape of an extended recovery. But the current uncertainty created by the virus and the second wave means that visibility to a recovery path is limited. There are many factors outside of our control, like consumer and retail buying behaviors, which makes it difficult to provide specifics beyond 2020. But I'd like to reiterate some of John's comments on our current business conditions and our priorities for the rest of the year.

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

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

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] And our first question will come from Randy Konik with Jefferies.

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

Hello, Randy.

Randy Konik -- Jefferies -- Analyst

Hey, guys, good afternoon. How are you?

John C. Walbrecht -- President

Good. How are you?

Randy Konik -- Jefferies -- Analyst

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

John C. Walbrecht -- President

I think we're positive about spring '21. We've seen momentum moving in spring '21. I think we -- as we've said with watching retailers very closely. We not only monitor sales per week, but more importantly inventory positions at each of our REIT, retailers. And consistently, the theme that we have seen, the bookings continue to move up the business leans more and more toward ASAP and those sales are increasing in the market. Inventory positions that our retailers are way down. And so as we said, sometime between now and as people load into spring '21, which effectively is probably, March, given the expectations of this winter, sometime between now and then retailers will have to kind of refit all their inventory levels to keep up, obviously you can keep running negatives on inventory growth on sales and eventually you know not -- not get separated too far. So we're seeing that. I think retailers are still little conservative as to how they plan this out now that there is a second wave, maybe today's announcement by Pfizer on a vaccine will give confidence on that, maybe the holiday season which seems to be kicking off strong at some point here, retailers and brands will come to a new norm of normalization, and inventory levels and demand will start to align with consumer demand. Hope that helps it.

Randy Konik -- Jefferies -- Analyst

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

John C. Walbrecht -- President

Okay. So obviously everybody would tell you that in the bullets and ammo world that demand is far and exceeding what its capacity out there, and that's from everybody. So I think you have to look at capacity and break them down separately. If you look at the Sierra model, we've been investing in machinery as well as being smarter and smarter about our lean manufacturing in placements and the way in which we're really driving long runs. And so our goal there is to continue to keep the pace we're at on the bullet side and increase our capacity both through machines as well as through efficiency. On the ammo side, through partners with OEMs, as well as our own boding [Phonetic] to keep chasing that. But to be honest with you, we doubt in 2021, we will be able to catch up to what that full demand is. And we're accelerating it, as fast as I think anybody else is in the market or faster.

In the case of Barnes, because of it, the management and ownership with Remington, there is more capacity and opportunity there and we are staffing up in terms of people are looking at additional machinery as well as how do we utilize the current capacity. We have to reaccelerate that business. Fortunately the super-fan nevertheless that brand and we think there is significant capacity upside if well manage both in bullets, but also in ammo in 2021. And so that's part of the integration and transition that we're doing is ramping that up. And as Aaron said in the report using our balance sheet to help accelerate that brand here in the short term.

Randy Konik -- Jefferies -- Analyst

Super helpful. Thanks, guys.

Operator

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

Jim Duffy -- Stifel -- Analyst

Thank you. Good afternoon. Hope you guys are doing well.

John C. Walbrecht -- President

We're good.

Jim Duffy -- Stifel -- Analyst

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

John C. Walbrecht -- President

Yes. So to answer all your questions, one, I think obviously each market is dealing with COVID and either shutdowns or mandates a little differently. Without question, the overall global theme is outdoor is on a rise, in each market, it's slightly different, given the climate or whatever it is, but I would say in the third and fourth quarter. We are seeing a surge for outdoorism [Phonetic] that has been translated into things like headlamps, trekking poles, gloves, even outdoor climbing equipment. Obviously to your next question, we are seeing the surge in back country, and it snowed in Utah this weekend, in the valley probably about four inches about 27 inches in the mountains were already out with many, many people. So we are expecting as have the trends, a very strong backcountry market, we are -- we have been chasing this in every aspect from skis, poles, gloves, outerwear, snow safety equipment, skins you name it by means, we will do our best to achieve maximum opportunity this winter in servicing that market. I think the -- one of the things we are learning with BD, and this was kind of one of our expectations of coming out of COVID, is that a rising tide raises all ships, suffice it that all those ships can chase it. If they can't chase it then obviously it really throws things into whack [Phonetic] and we've seen that and I think one of our dictates has always been deliver on time, have good fulfillment, be easy to do business with, be the easiest partnership fulfill for someone, and you will gain that business. And now it's literally chasing and Aaron and the team have done a great job of managing our supply chain and maximize it to this opportunity.

And then your final piece. Yes, all the retailers are running extremely lean and inventory going into holiday and we need more on whether it's drop ship from us or just ASAP orders and we are seeing ASAP orders surge dramatically. Obviously it makes a little tougher to forecast, because it's not planned in the model. For spring '21, we're seeing that take a turn. We're seeing ASAP orders continue big into spring we think and obviously we are even seeing pre-season orders now coming back and being revisited. And we do believe as I said to Randy in the earlier call, that sometime between now and March, retailers are going to have to load insignificantly on inventories to keep up with consumer demand. You can only run that lean quick turn mentality on inventory, so long.

Jim Duffy -- Stifel -- Analyst

Okay. That's great, thanks for all that perspective John. And I wanted to ask on the Sierra Barnes business. How does that business split between ASAP and forward orders and can you comment on your visibility into 2021? How far out into '21 is capacity spoken for the orders?

John C. Walbrecht -- President

I would say that right now because demand so far exceeds capacity for the whole industry as a whole. That -- it really doesn't matter between what we would call pre-season orders are ASAP orders at this point. It's totally based on availability in the market. You continue to -- we continue to receive orders from retailers as well as OEM, but they believe it's all predicated on your ability to get manufacturers to the Bullet demand, which they all know is more than supply. And then on the ammo, it's just all down to the components. We see positive trends going on and we lively keep track of pre-seasons, but like I said, in this business, it's really all moved to ASAP, especially now that there is not even a SHOT Show moving on in January.

Jim Duffy -- Stifel -- Analyst

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

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

I did not, but it's based on how things are trending, we do anticipate that inventory levels will be very consistent with what we're seeing today.

Jim Duffy -- Stifel -- Analyst

Okay.

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

What we reported at the end of Q3. As John mentioned, one of our focus is just making sure that we continue to fill in the gaps where appropriate. I would say on the CRE side, we'll continue to focus on increasing our overall capacity not necessarily from a machinery standpoint but from a personnel or from a direct labor side of things. We'll be doing the same thing out of Barnes. And then on for Black Diamond, we feel that we have a steady flow of inventory that's properly calibrated for not only the recovery that we're seeing, but also the increased demand, especially with the backcountry and also making sure that we don't see any hiccups associated with the New Year and the way that the logistics and the ports are coming together with Chinese New Year and what people are expecting there. But overall, we anticipate that the inventory levels will be fairly consistent with what you saw at the end of Q3.

Jim Duffy -- Stifel -- Analyst

Thank you, guys. Appreciate it.

Operator

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

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

Good afternoon and thank you very much for taking my questions gentlemen. Congrats on the acquisition of Barnes. I'd love to hear any commentary high level about your M&A strategy going forward? Would you be interested in potentially pursuing further acquisitions in the Bullet to ammunition space or do you think that business is set from organic standpoint? And are there any verticals you would really like to touch upon going forward?

John C. Walbrecht -- President

Yeah, I would say we have been watching Barnes for over two years and that was always a hope in our strategy believing that Sierra plus Barnes would literally Pinnacle the top two premium bullet ammo manufacturers in the marketplace and that we could build long-term strategic growth opportunities off those two brands. For us that chapter today is closed in terms of the brand perspective of it. For future acquisitions, our real focus is on more super-fan brands in the outdoor space, activity based that align with our consumers and/or our retail partners and our understanding and our strategy to innovate and accelerate. Brands that we know have a super core consumer, but haven't really focused on the go-to-market opportunity, and we see more opportunities there than maybe they're able to see or able to exercise. But ideally we'll stay in the outdoor space. And like you said more mountain based when possible.

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

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

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

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

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

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

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

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

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

That's great to hear. Thank you for all the color.

Operator

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

John C. Walbrecht -- President

Hey Matt.

Matt Koranda -- ROTH Capital -- Analyst

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

John C. Walbrecht -- President

Yes, I think the only thing we've said and everyone is -- adding to the markets anticipation in some cases may be surprised, but the second wave of COVID and just how that plays in, one part you could be very positive about the growth of backcountry and be very positive that you're moving into the fourth quarter, which normally represents a strong surge because of holiday shopping, because of the retail growth, to see opportunities, our own retailers catching up on inventory. Conservatively and we -- our goal is to always under promise over-deliver. And our view is that look, in perhaps to these write-ups during these write-ups here in Utah in the last night Governor Herbert came out and had to put new gauge lines on Utah relative to mask mandate, socializing the whole team because we've been surging not only in Utah, but obviously around the country. So that, we just put that in a conservative view. We have no idea what occurs over the next six weeks as this goes on in the marketplace. And obviously we've already seen that in Europe as well and have to be careful, obviously Q2 results would be extremely tough and we don't think it's that far, but as you know, the UK, other markets have already shut down for weeks, we see it surging in Central Europe in the [Indecipherable] countries and just not sure ultimately how that impacts the consumers' ability to get out, to shop and transition through the holiday window. So is there is some upside? Yes, potentially. Is there some risk? Yes and unbeknown of managing in a pandemic.

Matt Koranda -- ROTH Capital -- Analyst

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

John C. Walbrecht -- President

Yes. So in fairness to all those questions, good reading in the numbers and the key leads. Obviously there is a conservative view on COVID. When it comes to Sierra, we anticipate Sierra to maintain flat to where we're at right now and what we're projecting and what we saw in the back half of the second quarter and in the third quarter. And we don't see that changing given demand today. In the Barnes suite in fairness, we acquired a business an asset transaction out of a bankruptcy, and a lot of things that would have been put into place in the second and third quarter in order to maximize the fourth quarter, we're not put into place in the second and third quarter because of either financial limitations, strategy vision, ordering components, you name it. And so you're obviously chasing toward that.

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

Matt Koranda -- ROTH Capital -- Analyst

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

John C. Walbrecht -- President

Yes, lots of trick questions in there, in a positive way. So is the capacity, yes. As the brand been held down without question. If you extrapolate that business out, it's probably a mid 20s to low 30s number on today's trajectory or whatever it was. One of what drives next year is in the ammo business is not just the bullets you can make, but it's the componentry to make all the ammo in demand at the marketplace and projecting that out and securing the timeline and the vendor support for all those items. Do we know long-term we can accelerate this brand, similar to the performance we've done with Sierra, that is our expectation and our goal. A lot of that is going to be determined in the next three to six months on how demand continues in the market and then our ability to secure both the commodities as well as the components to accelerate that as quickly as we'd like.

Matt Koranda -- ROTH Capital -- Analyst

Excellent, guys. Great job and I'll jump back in queue.

Operator

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

Ryan Sundby -- William Blair -- Analyst

Yeah, hi guys thanks for taking my question. With the DTC channel up 24% during the quarter, I think it's up 31% online. Is there a way to help us think about how that took out between BD and Sierra just given kind of how different the growth rate slipped during the quarter? And then I guess more broadly just given the broader uptake we are seeing in e-commerce under COVID-19 and some of the growth, you've done today. Is there a way you can kind of help us understand where you're DTC penetration sits today and where you think that would go overtime?

John C. Walbrecht -- President

Yeah, so just to back up and define that one, that is all under the BD brand. So 24% when you combine retail, which is obviously had an impact during COVID, still very positive and then online up 31%, that does not include anything from Sierra Barnes, online B2C revenue. The second side of that and there is a fine line we walk here within our GDT, our goal is to continue to create super fans in the community and combination of new website, better interaction, more content we've seen that, but it's also at the same time to keep a level playing field with our best retailers and not erode our retail partnerships by off price competition from our own brand. Today B2C represents about 10% to 12% of our business. We believe long-term with the consumer trends that probably should represent 25% to 30%. We will continue to add flagship stores, which we think support the omnichannel, which obviously has a positive impact that the flagship retail store, but also has a long-term impact of the consumer on -- through e-com, we also believe that a rising tide of brand awareness through e-com, through flagship retail actually helps our retailers, our retail partners perform better with the brand. Just more demand more products.

And then, we've already said, if you've been to the Trade Show, we have a booth that's ballpark 6,000 square feet, 7,000 square feet of product and it doesn't even fit everything we make within the brand of the 600 pages plus of the catalog. There is not a retailer in the country who will allocate rightfully 7,000 square feet. We don't even do that within our own flagship stores. So clearly there is a lot of product opportunities out there that allow us to have channel management as well as product segmentation to the consumers. Some things online, some things through wholesale, some things available on retail and only online as such. So we will continue to accelerate that. I think the most exciting for us, is that through this the interaction of our super-fan consumer to our website has seen very strong growth in the number of visits, time conversion on our site. And that's just a function of interacting with the brand at a higher cadence.

Ryan Sundby -- William Blair -- Analyst

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

John C. Walbrecht -- President

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

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

Ryan Sundby -- William Blair -- Analyst

Got it. Makes sense. Thanks.

Operator

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

John C. Walbrecht -- President

Hey, Mark.

Mark Smith -- Lake Street Capital Markets -- Analyst

Hey guys, how are you? I'll apologize if some of this has been asked already. But just if you look at it -- as we look at Barnes and capacity. Can you just talk about increasing kind of ramping, is most of that investments in kind of people and processes or how much of that comes down to capital equipment and investments that you need and kind of machinery and tooling there?

John C. Walbrecht -- President

Yeah, I mean we always will look at that, Mark. But that's only -- that's the third solution. The first solution, you have to look at is do you have the right people to maximize machines you have today, and obviously that's a function of how many shifts, how many people, how faster they churn in the efficiencies. The second is, are you maximizing from a lean perspective the machines you have. And A, are you picking the right demand? Are you maximizing? Are you doing long runs versus short runs and changeovers? And then finally if you maximize both of those and cannot create any more opportunity then by default you have to look at buying an additional machine. At the Sierra level we've worked on all three of those simultaneously, as you know from previous discussions with us literally for the last 18 plus months in prep to this, knowing that none of these things come on fast and you have to have very disciplined long-term approaches to this.

In the case of Barnes, this is the difference between these two brands. In the case of Sierra, when we acquired Sierra, we would say it was in a very neutral position. Did it have back quarter? Yes. Was there opportunity? Yes. Was the brand held down? No brand. Brand actually performed well and the retailers only request is more innovation more acceleration. Perfect. That's a super-fan brand. In the case of Barnes, Remington probably didn't treat it the same way the super-fan brand and financially couldn't make the investments in order to innovate and accelerate at the same pace we would like. And so, therefore, it's kind of been held down a lot harder than Sierra. It will take a little bit more to get it going, but once it gets going out of the station, it will have a lot of upside in momentum.

So we're going to focus on the first two. We're going to focus on maximizing the people and we're going to focus on maximizing the current capacity when those two in our plans get to where we believe the opportunity is and the opportunity isn't driven by our vision of it, it is really driven by the demand of the orders from our retailers our OEM partners. They set the pace, because they tell us specifically each month what they want from us, and our goal as a brand is a super-fan brand is to deliver that. And people get confused. It's not a financial plan. The financial results are just the outcome of the strategy is just live up to the expectation to retailers. If at that point we can't reach their goals and their demand. Then we will look at what that comes out from a machinery or capex issue, But that's not our first and foremost role and we don't think that's the lowest hanging fruit at this moment.

Mark Smith -- Lake Street Capital Markets -- Analyst

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

John C. Walbrecht -- President

Yeah, I think two things that we continue to see is that BD as a brand continues to gain momentum, and that's what we've always expected as the equipment house would start to translate with more and more super-fan brand consumers into new category opportunities, which has led us to footwear apparel, packs, gloves as opportunities, and we're seeing those surges in the business. Obviously you got to caveat that with that we're still seeing surges in our equipment so that the growth is not solely on the apparel, footwear, packs, gloves side. Obviously winter is surging and we're seeing that. Already we expect it to be a big winter year. Backcountry ski probably represents about 7% of the industry. It will probably double this year. But it will feel like it represents 50% of the industry, because the amount of attention it will get.

And our goal is to maximize all the opportunities of that in the short term, but realize this a long-term pipe for this brand, continue to gain market share as rapid use you can, good years and bad years, continue to innovate to celebrate that, maximize our opportunities to deliver on time and have good similar with our retailers and so obviously chasing inventory in segment as fast as we can, but there will come a point this season that we will probably run out of skin beacons, avi sets, binding, skis, you name at no matter how many reorders we put in the season has a window. I think the same is true of Asia. Asia has been a little bit behind because of COVID and it's had longer impacts over there and they'll start to see these surges come back. I just think you're going to like these things. It really started off and opened up in Europe and then came to the United States and it will eventually come to the IGD markets. It just be three to six month lag as all this starts to come back.

Mark Smith -- Lake Street Capital Markets -- Analyst

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

John C. Walbrecht -- President

Yeah. So I think what we have learned is that our expectation is that our super-fan brand by experiences and that consumer wants to buy equipment in order to have the best days in the mountains or do something he's never been able to do or have an experience. And retail flagship stores in destination markets, Park City, Bozeman, Montana, Jackson, Wyoming places like that, the consumer gets to it not only learn about the product but get the instruction and engagement with the brand and allows him to have the best days out there and that's what's critical for us. The amount of, event and engagement. Now obviously during COVID that's been lessened, but to our surprise, though traffic has been way down, our conversion has been a lot higher and consumers getting out and our learning online or through other opportunities Instagram, YouTube order about our products. We are positive on it. Obviously we're very cautious about where we put stores, our negotiation on the space of the stores because that's obviously the biggest cost. How well we manage that communication and the cadence? We like what we're doing. We're going to be super smart about as we continue to expand and look for opportunities not only domestically but internationally.

Mark Smith -- Lake Street Capital Markets -- Analyst

Okay, great. Thank you.

Operator

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

John C. Walbrecht -- President

Okay. Thank you guys for today's meeting. We really appreciate the time you've taken with us. We look forward to speaking to you again after the 4th quarter and our thoughts on moving forward in 2021 and beyond. Thank you.

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

Jim Duffy -- Stifel -- Analyst

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

Matt Koranda -- ROTH Capital -- Analyst

Ryan Sundby -- William Blair -- Analyst

Mark Smith -- Lake Street Capital Markets -- Analyst

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