Compass Diversified - Earnings Call - Q4 2024

Executive Summary

• Q4 results accelerated into year-end: Net sales $620.3M (+13.8% y/y), Adjusted EBITDA $118.2M (+29.0% y/y), and Adjusted Earnings $46.6M (+34% y/y); strength concentrated in Branded Consumer (Lugano, BOA, PrimaLoft, Honey Pot) with Industrial improving sequentially.
• 2025 outlook implies another step-up: Subsidiary Adjusted EBITDA $570–$610M; company Adjusted EBITDA $480–$520M; Adjusted Earnings $170–$190M; leverage at ~3.5x with liquidity enhanced by a $300M term loan A (funded $200M, $100M delayed draw).
• Portfolio reshaping/ capital actions: Ergobaby divested (EV $104M), >400K CODI shares repurchased in Q4 at $23.19 avg, >$115M preferred raised in 2024, and management services agreement amended to reduce long-term costs and better align incentives.
• Estimate comparison unavailable: S&P Global consensus data could not be retrieved due to an API limit; we will update beat/miss analysis when accessible (see “Estimates Context”). Values are from company filings and press releases cited herein.

What Went Well and What Went Wrong

• What Went Well

  • Broad-based outperformance in Consumer: Lugano delivered exceptional growth and margin expansion (Q4 Lugano Adj. EBITDA $65.8M, +75% y/y), with BOA and PrimaLoft also strong; Honey Pot contributed as well. Management: “Growth in both revenue and adjusted EBITDA accelerated in the fourth quarter”.
  • Capital structure and liquidity improved: $300M incremental term loan A in Jan-25 (funded $200M) and ample revolver availability (~$486.6M at 12/31) support reinvestment and M&A.
  • Portfolio optimization and buybacks: Sold Ergobaby (12/27) and repurchased >400K shares in Q4 at $23.19—signaling confidence and capital discipline.

• What Went Wrong

  • 5.11 one-time PFAS impact and DTC challenges: Q4 Adjusted EBITDA includes an ~$11.8M inventory write-down at 5.11 that will not repeat; year marked as “transition” with PFAS product shifts and DTC inventory issues.
  • Cash conversion pressured by Lugano working capital: CODI generated $10.0M operating cash in Q4 but continues to fund high-return Lugano inventory; ex-Lugano operating cash >$25M in Q4.
  • Industrial remains mixed: While Q4 Industrial Adj. EBITDA improved to $36.4M (vs. $34.6M), full-year declined modestly; Altor integrating Lifoam, Arnold incurred relocation costs, and Velocity Outdoor remains subdued post-Crosman divestiture.

Transcript

Operator (participant)

At this time, I would now like to turn the conference over to Cody Slach of Gateway Group for introductions and the reading of the Safe Harbor Statement. Mr. Slach, you may now begin the conference.

Cody Slach (Senior Managing Director)

Thank you, and welcome to Compass Diversified's fourth quarter and full year 2024 conference call. Representing the company today are Elias Sabo, CODI CEO; Stephen Keller, CODI CFO; and Patrick Maciariello, COO of Compass Group Management. Before we begin, I'd like to point out that the Q4 and full year 2024 press release, including the financial tables and non-GAAP financial measure reconciliations for subsidiary adjusted EBITDA, adjusted EBITDA, adjusted earnings, and pro forma net sales, are available at the investor relations section on the company's website at compassdiversified.com. The company also filed its Form 10-K with the SEC today after the market closed, which includes reconciliations of certain non-GAAP financial measures discussed on this call and is also available at the investor relations section of the company's website.

Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income or loss from continuing operations in the company's financial filings. The company does not provide a reconciliation of its full year expected 2024 adjusted earnings, adjusted EBITDA, or subsidiary adjusted EBITDA because certain significant reconciling information is not available without unreasonable efforts. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the fourth quarter of 2024 and references to period-to-period increases or decreases in financial metrics are year over year. Throughout this call, we will refer to Compass Diversified as CODI or the company. Now, allow me to read the following Safe Harbor Statement.

During this conference call, we may make certain forward-looking statements, including statements with regard to the expectations related to the future performance of CODI and its subsidiaries, the impact and expected timing of acquisitions and divestitures, and future operational plans. Words such as believes, expects, anticipates, plans, projects, should, and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussion in the Form 10-K as filed with the SEC for the year ended December 31st, 2024, as well as in other SEC filings.

In particular, the domestic and global political and economic environment, disruption in the global supply chain, labor disruptions, inflation, changes to U.S. tariff and import-export regulations, risks associated with the company generally due to natural disasters or social, civil, and political unrest, and changing interest rates as well as difficulties in integrating acquired businesses all may have a significant impact on CODI and our subsidiary companies. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise. At this time, I would like to turn the call over to Elias Sabo.

Elias Sabo (CEO)

Thank you, Cody. Good afternoon and welcome to Compass Diversified's fourth quarter earnings call. I am very pleased to report that, once again, we delivered strong financial results. For the full year 2024, we achieved double-digit sales growth and increased our adjusted EBITDA by more than 30%. Growth in both revenue and adjusted EBITDA accelerated in the fourth quarter, exceeding our expectations for both the quarter and for the full year. Before I hand it over to Pat and Stephen to provide more details on our performance in the fourth quarter and for the full year, I want to take this opportunity to reflect on the progress we made in 2024 and also provide a little more color on both our long-term strategy and our current operating environment. 2024 was a transformational year for CODI.

We took concrete steps to shift our focus to more innovative and disruptive businesses that can grow faster and drive long-term value creation for all stakeholders. In 2024, we acquired The Honey Pot, a purpose-driven business focused on disrupting the feminine hygiene market by educating consumers and providing plant-derived, better-for-you feminine care solutions. Further, our Altor subsidiary acquired Lifoam, a leading manufacturer of temperature-controlled packaging products that will expand our presence in the cold chain sector and diversify our customer base with additional blue-chip cold chain accounts. We also strategically divested our Ergobaby subsidiary, a global leader in premium juvenile products, and further streamlined our Velocity Outdoor business by divesting the Crosman Airgun business. Both transactions were aimed at optimizing our long-term focus while ensuring these businesses are well-positioned for their next phase of development under new ownership.

Outside of our strategic M&A activity, we continued to focus on improving our capital structure. For the full year 2024, we raised more than $115 million in preferred equity. Adding this flexible, non-dilutive capital helps us deleverage our balance sheet and reduces our overall weighted average cost of capital, supporting our long-term strategy. As we discussed at our Investor Day last month, we also bought back more than 400,000 shares of CODI common stock in the fourth quarter. While our preference remains to use our capital to fund our long-term strategic plan, the large discount between our share price and what we believe to be the intrinsic value of our shares encouraged us to return capital to shareholders.

As we move forward, we will continue to look for ways to drive shareholder value and expect to reinvest in our businesses to accelerate earnings growth while also looking for efficient ways to return capital to shareholders. Consistent with our goal of driving shareholder value, earlier this year, we revised our management services agreement. While we discussed this in detail during our Investor Day, I want to reiterate it here as we believe this will have a meaningful impact on our shareholders. The key changes include implementing a sliding scale for base management fees, introducing an incentive management fee, eliminating integration services fees on acquisitions, and excluding excess cash from the management fee calculation.

Collectively, these changes will significantly reduce long-term costs for shareholders, further align management compensation with shareholder interests, increase the oversight of our board's compensation committee, and focus any performance rewards on active members of our management team. Organizationally, we are also excited about our emerging centers of excellence. These centers of excellence will focus on critical areas such as internal audit and financial controls, sustainability, AI, and business automation. These are areas that our individual subsidiaries may not have the resources or bandwidth to tackle independently. By helping to develop foundational frameworks and best practices, we enable our businesses to identify opportunities and ensure that our businesses stay ahead of industry shifts. Whether it's improving financial compliance, strengthening sustainability principles to bolster corporate citizenship, or leveraging AI to improve operations, our centers of excellence represent a major opportunity to drive value and further differentiate both CODI and our subsidiaries.

Looking ahead, we remain cautiously optimistic about CODI's prospects for 2025. The CODI Momentum Index, our proprietary gauge of economic activity based on booking and sales activities from our subsidiaries, currently reads 1.06. While this is a slight decline from year-end levels, it remains consistent with a stable outlook. Although we have observed a modest slowdown in economic activity in recent weeks, we continue to expect resilience and growth in the economy throughout 2025. Consumer spending remains steady, with higher-income consumers standing out as a key driver. Given our portfolio's focus on innovative and differentiated solutions, many of which ultimately cater to more affluent consumers, we believe our businesses are well-positioned to outperform the broader market. Obviously, geopolitical uncertainty driven by tariffs and the potential for a trade war create incremental risk for 2025.

We are monitoring the situation closely but believe that our subsidiaries have taken the right steps to diversify our supply chains and limit risk. We believe that our subsidiaries are positioned as well or better than our competition, and we expect to be able to successfully navigate the evolving tariff landscape. Our focus remains on acquiring and managing high-quality companies for long-term success. We are committed to identifying, owning, and actively supporting strong businesses with innovative and sustainable business models. Guided by our buy, build, and grow philosophy, we seek to create lasting value for all stakeholders. While M&A activity has increased recently, the overall market remains subdued. Nevertheless, we continue to cultivate relationships with entrepreneurs, bankers, and private equity firms to identify and acquire great companies at appropriate valuations.

Our goal is to be the buyer of choice for exceptional businesses that can benefit from our long-term capital, strategic guidance, and hands-on support to unlock their potential. Despite macroeconomic and geopolitical uncertainties, we believe our values-driven approach, diverse group of subsidiaries, unique business model, and disciplined capital allocation position us well for continued growth in 2025 and beyond. With that, I will now turn the call over to Pat.

Patrick Maciariello (COO)

Thanks, Elias. In 2024, our subsidiaries continued to perform well and exceeded our expectations. We remain confident in our strategy and believe we are well-positioned for a successful 2025. For the full year 2024, our consumer vertical saw pro forma revenues grow double digits and pro forma adjusted EBITDA increased by greater than 27% versus prior years. This is despite the one-time impact of an approximately $12 million write-down of inventory at 5.11 related to PFAS regulations. Excluding this impact, our pro forma adjusted EBITDA on the consumer segment grew over 30%, and our adjusted EBITDA margin was greater than 27%, representing a more than 400 basis point improvement over 2023. Lugano continues to post exceptional results, with annual sales growth of more than 50%. For the full year 2024, Lugano delivered adjusted EBITDA of $195 million, an increase of 76.4% versus the prior year.

This performance is a direct result of the company's disruptive business model, redefining the greater than $160 billion luxury collectibles market. As we've discussed, Lugano continues to consume significant amounts of working capital as they invest in their long-term growth. Lugano plans to open one new salon in the first half of the year and two more in the second half of 2025. We are excited about the continued growth potential at Lugano and believe the momentum will continue. Outside of Lugano, BOA continues to perform exceptionally well, delivering more than 20% growth in revenue and greater than 30% growth in adjusted EBITDA for the full year. In addition, Honey Pot performed well in 2024, and we believe it is well-positioned for long-term growth. From an adjusted EBITDA perspective, 5.11 had a challenging year due to PFAS regulations.

These challenges are now behind us, and we believe the company is well-positioned for an improved 2025 with a focus both on growth from new product introductions and continued penetration in the direct-to-consumer segment. Turning to our industrial businesses, 2024 saw flat sales and a modest decline in adjusted EBITDA as we focused on repositioning our businesses for the long term. Performance in Q4 improved significantly as we saw immediate benefit from Altor's acquisition of Lifefoam. We're very excited about this acquisition as we believe it significantly bolsters Altor's operations and strategically positions it in the faster-growing segments of the market as demand for temperature-controlled packaging grows due to emerging drugs and drug development. The integration is progressing well, and we anticipate it will drive meaningful synergies over the next several quarters.

Overall, our industrial subsidiaries continue to make progress, and while there have been challenges, we believe performance in this segment will improve as we move through 2025. Before wrapping up, I want to take a moment to address the evolving tariff landscape. While the situation remains fluid, we believe we are well-positioned to navigate any potential challenges that may arise. Over the past few years, we've proactively taken steps to geographically diversify our sourcing operations, strengthening our global supply chains. As Elias noted earlier, we believe our supply chain capabilities are as good or better than those of our competitors, and as a result, we do not anticipate being at a competitive disadvantage as we adapt to the changing tariff environment. That said, we recognize the broader risk lies in the potential economic impact of escalating trade tensions on both the U.S. and global economies.

A few of our subsidiaries do have exposure to Mexico and Canada. However, we have been working closely with our suppliers to mitigate potential disruptions, strategically building inventory stockpiles in certain instances and identifying alternative sourcing strategies. With these measures in place, we expect to be able to manage through potential tariff-related headwinds while continuing to drive long-term value. I will now turn the call over to Stephen, who will provide more details on CODI's consolidated performance in Q4 and the outlook for 2025.

Stephen Keller (CFO)

Thank you, Pat.

Before we begin, I would like to remind you that we sold our Ergobaby subsidiary in late 2024 for an enterprise value of $104 million. The results of Ergobaby have therefore been reclassified as discontinued operations and are not included in the results we will discuss today. In the fourth quarter, we delivered consolidated net sales of $620.3 million, representing an increase of about 13.8% over the prior year. Normalizing for the impact of the Honey Pot acquisition, our pro forma sales grew 8.9% in the quarter. As mentioned, growth in the quarter was primarily driven by our consumer businesses with Lugano, BOA, Primaloft, and the Honey Pot, all delivering double-digit growth. The acquisition of Lifoam further accelerated growth. Reported growth in the quarter was partially offset by the previously completed divestiture of Velocity's Crosman Airgun business.

Our consolidated net income in the fourth quarter was $11.9 million, which is down versus Q4 of 2023 when we recorded a large gain on the sale of our Marucci business. Adjusted EBITDA in the quarter was $118 million, representing a 29% increase over the same period in 2023. While our year-over-year performance benefited from the acquisitions of the Honey Pot and Lifefoam, growth in our adjusted EBITDA was primarily driven by strong operational performance across most of our subsidiaries, with Lugano, BOA, Primaloft, and Sterno all significantly expanding adjusted EBITDA margins in the quarter. It's important to note that our adjusted EBITDA includes a one-time charge of $11.8 million related to the write-down of inventory at 5.11 due to the PFAS regulations. This is a one-time cost that will not repeat. Public company costs and corporate management fees were $22.7 million in the quarter.

Adjusted earnings in the quarter were $46.6 million, which is up 34% versus Q4 of 2023. Turning to our cash flow, in the fourth quarter, we generated $9 million of consolidated cash flow from operations. As Pat mentioned, Lugano continues to be a user of cash as we fund long-term growth. Excluding the impact of Lugano, other businesses generated greater than $25 million in the quarter. In terms of capital expenditures, we invested $22.9 million in the quarter, an increase of $6 million over the prior year. The increase in capital investments was primarily related to a plant relocation at Arnold. Our balance sheet is strong, and we ended the fourth quarter with $60 million in cash and approximately $490 million available on our revolver. As discussed at our Investor Day in early January, we further raised $300 million in an incremental term loan A.

We funded $200 million of this facility immediately and have an additional $100 million available to us via a six-month delayed draw. Our total leverage ratio declined to 3.58 times at the end of the quarter. It's important to note that the calculation of our leverage ratio includes greater than $20 million of one-time costs associated with the 5.11 PFAS write-off and the facility move at Arnold. Excluding these one-time non-recurring costs, our leverage ratio would have been significantly below our 3.5 times target, actually closer to 3.4 times. We remain focused on deleveraging and believe that we are well-positioned to both fund the growth of our subsidiaries as well as act on attractive acquisitions as they become available. Turning to our outlook for 2025, as Elias mentioned earlier, we see positive momentum across our businesses, and our establishing our full-year guide as follows.

We expect our consolidated subsidiary adjusted EBITDA to be between $570 million and $610 million. We expect our branded consumer vertical to deliver adjusted EBITDA between $440 million and $465 million. Adjusted EBITDA for our industrial vertical is expected to be between $130 million and $145 million for the full year. On a consolidated basis, we expect our adjusted EBITDA to be between $480 million and $520 million, inclusive of corporate costs and management fees. Our full-year adjusted earnings are expected to be between $170 million and $190 million. Our CapEx in 2025 is expected to be between $80 million to $90 million, driven by growth investments at Lugano as well as other businesses. We also make some productivity-related investments at Altor. Obviously, our outlook does not include the impact of any potential acquisitions or divestitures and assumes no significant impact from tariffs and/or trade war.

With that, I will now turn the call back over to Elias.

Elias Sabo (CEO)

Thank you, Stephen. As we have discussed, 2024 was a great year for CODI. With a strengthened portfolio of businesses, a well-capitalized balance sheet, and a clear strategic vision, we believe we are well-positioned to continue to deliver for all stakeholders. Before beginning the Q&A portion of the call, I want to quickly reiterate what I think is at the core of what sets CODI apart: our unwavering commitment to purpose. Unlike some of our competitors, where financial engineering and short-termism often drive decisions, we are focused on long-term value creation and are guided by our values. This is not rhetoric. Our values and long-term orientation drive every decision we make. We are cultivating a culture of innovation across our organization and are committed to empowering our businesses to succeed. At CODI, our ethos is to challenge conventions and push boundaries, to be and do better.

Our long-term focus enables us to acquire and actively support innovative and disruptive businesses that challenge the status quo and deliver outsized growth. We believe that our approach generates superior returns without compromising our values. We are not constrained by fund life or limited time horizons, allowing us to manage our businesses for the long term. We utilize our permanent capital base and are here to drive innovation, accelerate market-leading businesses, and deliver long-term shareholder value in a way that is transparent, responsible, and fundamentally different from the status quo. With that, operator, please open the lines for Q&A.

Operator (participant)

As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Lawrence Solow from CJS Securities`

Lawrence Solow (Partner)

Great. Thanks, guys. Good to hear a lot of consistency from, I guess, what we heard at the analyst day. I guess first question, just on the guidance, so breaking out between Branded and Industrial, it looks like Branded, you have growing like 15% to 20%, maybe a little bit less than 15%, but around there. Can you just give us just like a—I know you don't guide by holding, but I know Lugano, from what you said at the analyst day, sounds like that's still going to grow very rapidly. Is that driving the majority of that growth in Branded as you look at 2025? How should we kind of look at that?

Elias Sabo (CEO)

Yeah, Larry, it's Elias. Welcome. Good afternoon. I would say that with Lugano, as we said, we are funding Lugano and expect Lugano to grow consistent with sort of the growth rates we've experienced over the last couple of years, but we do not forecast that. We have a much more modest expectation for growth that we forecast. As Lugano hopefully exceeds and kind of meets growth rates that are consistent with the past couple of years, we are able to beat and raise guidance. I would say some of the growth is coming from Lugano, but a good portion of growth is coming from other companies as well.

Lawrence Solow (Partner)

That's fair. It sounds like if you hit—not to put words in your mouth—but if Lugano kind of does what continues to grow, it's probably hard to forecast that things are going to grow 30% to 40% every year. If it does do that, or even 25% on an EBITDA basis, you're going to probably be at the high end of your range, if not higher, at least on the Branded side, even assuming the other—

Elias Sabo (CEO)

I think that's a fair assumption.

Lawrence Solow (Partner)

Okay. Specifically, I guess, just on 5.11, I want to ask a couple of things. I guess the PFAS, the charge, that $11 million charge, you're showing that in the $11 million EBITDA this quarter would actually have been $22 million if we add back that charge, right?

Elias Sabo (CEO)

That's correct.

Lawrence Solow (Partner)

Is that correct?

Elias Sabo (CEO)

That's correct, Larry.

Lawrence Solow (Partner)

Gotcha. And Pat.

Elias Sabo (CEO)

It's closer to—yeah, it's closer to $12 million, but go ahead.

Lawrence Solow (Partner)

Closer to 12, right, right, right. With that add-back, 5.11, even in a challenging year, actually, was pretty fine. I think it actually even grew a little bit, driven more by the professional side. Without giving us numbers on what you think we're going to be in 2025, just give us a little bit better look at how things have been improving on Detroit's new leadership on the consumer side, what kind of initiatives you've been doing beyond sort of the PFAS challenges, and what we should look for in 2025 from 5.11.

Patrick Maciariello (COO)

Sure. Larry, this is Pat, but I think I would kind of focus on three things. We're sort of reinvigorating the DTC through marketing is one and through sort of more effective execution. We will have a brand refresh at some point this year that we're really excited about, and we think will drive further sales. We also have what I believe is some really exciting new product that will come out sort of in Q3 and will further refresh our DTC strategy. There are three prongs or three things that I would look for this year at 5.11, and I'm excited about each of them.

Lawrence Solow (Partner)

Thanks, Pat. Appreciate the call.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Lance Vitanza from TD Cowen.

Lance Vitanza (Analyst)

Thanks, guys. Great quarter. I have a couple of questions, if I could. The first is going back to the tariffs, and I appreciate the prepared remarks, but could you talk a little bit more about what you've done to date versus what, if anything, still kind of remains a work in progress or perhaps work that remains ongoing? I know this is tough to sort of talk about, but how do you feel about how your portfolio companies in the main are kind of exposed to tariffs versus the competitors of those platforms?

Patrick Maciariello (COO)

Sure. This is Pat. I'll take a shot at it, and then Elias can jump in. I would say it's really been sort of a several-year process as far as preparing our companies. There was a Trump one, and we were sort of made aware that these were possibilities. At the same time, there were also tensions with China, etc. All of those things kind of—I would say it's several of our most single geography-dependent subsidiaries. We sort of mitigated and diversified our geographic supply chain or our supply chain geographically, I should say, over the last three or four years, right? It's not to say it's perfect. It's not to say we're not exposed at all. Of course, we are. That's number one. It's been a long-term process at many of our subsidiary businesses, if that makes sense.

As far as how we think we'll handle, we went company by company. We spent a long time sort of strategically working with our CEOs, understanding tariff impact at each business. There are some benefits. There are some competitors of ours that may import when we produce domestically in several instances, right? I wouldn't say there's as many benefits as costs, but there are some benefits. Those costs that we have will be shared by everybody in the industry. We feel like we're pretty well-positioned.

Lance Vitanza (Analyst)

Thanks. That's helpful. Maybe could you talk about—and maybe Elias, could you talk a little bit about the environment for buying and selling companies in 2025? Do you expect to be more or less active over the coming 12 months versus the prior 12 months? Here I'm thinking about macro factors on the one hand, sure, but also the specific dynamics of kind of where your platform companies are these days.

Elias Sabo (CEO)

Sure. I would say on a macro basis, Lance, the market is a little better than where it was over the last couple of years. 2021 was really a banner year, and then starting in 2022, 2023, and unfortunately now three years into 2024 have been relatively muted years. 2024 picked up a little bit, did not have the quality that we were looking for in terms of meeting some of the innovative and disruptive nature of businesses that we want to buy. That being said, at the beginning of the year, we closed on Honey Pot, and we were also successful in closing on Lifefoam as an acquisition into Altor. We felt pretty good. We were able to deploy, call it, around $500,000,000 of capital, which I think is kind of a reasonable expectation for us.

Some years we can hopefully be better than that. If the market comes back, I think we can be significantly better than that. I would say the market is recovering slightly. Now, the question you just asked, which has kind of what is the impact of tariffs? There are other federal policies that right now I think are having the effect of creating some uncertainty just generally in the economy, and that can quell M&A activity. The initial read coming into 2025 is that activity should pick up a little bit. In terms of specific to our companies, we feel really good about the portfolio that we have right now. We have reoriented the portfolio and become much more aligned with our strategic vision of innovation and disruption and being able to significantly outgrow the underlying markets in which our companies participate in.

We feel great about that. We feel great about how our leverage has come down. At 3.58, which is the actual number, a little bit of that I think is misleading because we have some one-time costs that are obvious in there. I'm going to quote the number of 3.4 because that's kind of how we think about it, and our lenders kind of think about it similarly with us. We feel really good about our progress on leverage. I mean, a year ago we were at four times. Now we're back within our leverage parameters. Our company portfolio, the portfolio is positioned well.

Our companies within the portfolio, even given that positioning, feel like they have positioned themselves well vis-à-vis their competitors and barring some type of economic kind of slowdown that's unanticipated right now, we feel pretty good about their ability to grow, and our balance sheet is strong. All of those things coalesce to create a really good environment for us to be on the acquisition hunt. With deals becoming a little bit more than they were over the last couple of years, we would anticipate picking up the pace from where we were over the last year or two.

Lance Vitanza (Analyst)

Great. Thanks so much for your help.

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our next question comes from the line of Matt Korenda from Roth Capital Partners.

Joseph Reagor (Analyst)

Good afternoon, guys. It's Joseph on for Matt. I just wanted to talk about Lugano for a second. We see that flow-through on EBITDA is greater than the 60% zone in Q4. It's quite a bit higher than the 30% and 40% you guys have spoken on in the past calls. Excuse me. Is there any callouts to why this is so strong and any update on longer-term flow-through goals for your incremental revenues?

Elias Sabo (CEO)

We don't guide, again, company by company. The strength this year was just driven by a strong market and the continued—I would say the continued acceptance of what we believe is a really unique disruptive business model by its consumers. You see that as far as average purchase size. You see that as far as repeat purchases. You see it on almost every metric. While we don't guide, again, and I'll say that again, specifically by company, we did mention that we do have at least one large salon opening that's been publicized in Chicago, likely in Q2 of this year. We have a couple other in the works as well for later on in the year. We're confident that we'll once again have a good growth here at Lugano.

Joseph Reagor (Analyst)

Got it. And then just on 5.11, if you could, now that Troy's had a year under the helm, what's a store strategy for a store growth strategy now? If you could provide any details on that.

Elias Sabo (CEO)

We're going to likely, towards the end of this year, we'll likely launch a couple, a few sort of stores with sort of a different profile. We're not getting into specifics about that profile right now, but we're going to potentially change things up a little bit and sort of test and learn. I would say test and learn is our retail strategy in 2025.

Joseph Reagor (Analyst)

Okay. I appreciate you guys answering the questions. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Randy Binner from B. Riley Securities.

Randy Binner (Managing Director)

Hey, thanks. I have a couple—and they've kind of been addressed in different ways. I might ask it just a little more directly. That is that with Lugano, the EBITDA margin was at least quite a bit better than we thought it would be in the fourth quarter. Setting aside kind of the revenue comments there, was there anything unusually good from an EBITDA margin perspective at Lugano this quarter that wouldn't necessarily be something I'd run rate in the model?

Elias Sabo (CEO)

No, I would just say you do get the benefit of operating leverage clearly. When revenue growth accelerates, you would expect to have some kind of margin accretion as a result of that. The other component is we do usually have a little bit of wholesale revenue in there. That was much smaller in the fourth quarter than what we've had before. That creates some margin accretion. Lastly, the team is just executing at an exceptional level. That is on kind of buying. It's on gross margin that they're able to generate, which is directly attributable to buying. I would say our buying efforts and sourcing became quite a bit stronger over the course of 2025, and that flowed through to margin. There's nothing that I would look at and say was unusual.

That being said, we are opening three new salons in 2025, and we are going to have significant cost increases that come along with that. Before those salons come fully up to scale, there's going to be some margin kind of dilution that comes from that. I would keep that in mind. It will be dollar gross profit and EBITDA accretive, but margins can come down a little bit, especially when we accelerate from a historical rate of one to two salon openings to three this year. That will have an even slightly more dilutive effect on gross margin percentage. I would say the business just continues to execute at such an extraordinary level. These are some of the things that happen. You find gross margin and profit upside when companies are executing this well.

Randy Binner (Managing Director)

All right. That's fantastic. If you covered this at Investor Day, I apologize. I don't recall. The three new salons are being opened in what cities?

Elias Sabo (CEO)

At Chicago, we've announced we're going to let the company announce the other two.

Randy Binner (Managing Director)

Okay. Yeah, I was kind of thinking through your comment on the health of the high-end consumer. Is it the regionality of that? And maybe that's not really a word, but we know Texas has done well. There's areas of the country that are—is any of that changing with kind of the more economic noise so far this year, or is it just too early to tell?

Elias Sabo (CEO)

Yeah. I mean, with respect to Lugano, this customer.

Randy Binner (Managing Director)

I mean, it is all in the context of Lugano. Yeah. Yeah.

Elias Sabo (CEO)

Yeah. In that context, you have to understand this customer is a highly, highly affluent customer. Remember, our average ticket price approaches $500,000. When you're at that kind of level, you're dealing with a different customer set than the broad macro the economy touches. In general, we're not really seeing anything through our other companies in terms of the affluent customer region by region. With respect to Lugano, this is a very economically, I would say, A-sensitive customer base. If the economy does well, they buy. If the economy doesn't do well, they buy. I mean, this is just someone who buys based on more kind of want. I think that it is very well insulated. We're seeing nothing from region to region, international versus U.S., but I would anticipate that with the customer base that we approach there.

Randy Binner (Managing Director)

Okay. Got it. Those comments are helpful. Thank you.

Operator (participant)

Thank you. At this time, I would now like to turn the conference back over to Elias Sabo for closing remarks.

Elias Sabo (CEO)

Thank you, operator. As always, I'd like to thank everyone again for joining us on today's call and for your continued interest in CODI. Thank you for your support.

Operator (participant)

This concludes Compass Diversified's conference call. Thank you and have a great day.