Amer Sports’ Debt Ratings Upgraded By S&P

S&P Global Ratings upgraded the debt ratings of Amer Sports Holding Oy due to the company’s robust operating performance, thanks to a strong performance in China, the continuous acceleration of the Arc’teryx brand, and positive momentum in its footwear division driven by the Salomon brand.

Amer Sports’ portfolio of brands includes Arc’teryx Salomon, Wilson, Peak Performance, Atomic, Armada, ENVE Composites, ATEC, DeMarini, EvoShield, Louisville Slugger, and Luxilon. Amer Sports is owned by a consortium led by owned by Anta Sports but also includes FountainVest Partners, Anamered Investments and Tencent.

S&P noted that Amer Sports’ sales increased by 30.3 percent in the financial year ending Dec. 31, 2022 (FY2022), outperforming S&P’S original base case. The group’s S&P Global Ratings-adjusted EBITDA margin marginally improved to 12.6 percent, versus 12.5 percent in FY2021. As a result, Amer Sports’ adjusted leverage showed a clear deleveraging trend, with adjusted leverage at 7.2x for FY2022.

S&P said, “We expect the group to post solid topline growth of 17 percent-18 percent in 2023 and 8 percent to 9 percent in 2024. Alongside a continuous improvement in profitability, this will drive adjusted debt to EBITDA to around 6.0x over the same period.”

S&P raised its debt ratings to ‘B+’ from ‘B’ on Amer Sports and the company’s €1.7 billion senior secured term loan B and €315 million revolving credit facility (RCF) due 2026. S&P’s ‘B+’ rating on Amer Sports continues to embed one notch of support from its main shareholder Anta Sports.

The stable outlook on Amer Sports reflects S&P’s expectation that the group will maintain its strong operating performance, with adjusted debt to EBITDA of close to 6.0x in 2023 and below 6.0x by 2024, alongside adequate liquidity.

S&P said in its analysis, “The upgrade reflects Amer Sports’ stronger operating performance than we expected across regions and product categories. The group achieved a stronger operating performance than we originally expected, mostly thanks to its solid performance in China (close to 20 percent of total sales in the first quarter of 2023), the continuous acceleration of its Arc’teryx brand, and the positive momentum in its footwear division driven by the Salomon brand. As a result, we have revised our forecast upward and expect solid topline growth of about 10 percent-15 percent on average over the next two years, driven by favorable consumer demand for sportswear and the group’s continued penetration in China. In our view, consumers’ increasing appetite for outdoor activities, with China being one of the fastest-growing markets worldwide due to its increasing population of runners, will continue to support demand. Furthermore, we see support for Amer Sports’ revenue growth from the continuous expansion of its retail segment (15 percent of FY2022 sales) and e-commerce segment (14 percent), and its continuous investments in key brands, especially Arc’teryx and Salomon.

“We assume that Amer Sports will improve its profitability in 2023, and expect that its adjusted debt to EBITDA will remain comfortably below 7.0x over the next two years. Higher production and logistics costs than we expected in 2022, as well as an increase in input costs due to inflation, put some pressure on the group’s margin in 2022. In 2023, we expect supply chain stabilization, lower container and air freight costs, as well as a contained increase in input material costs. Coupled with the group’s channel mix and pricing strategies focused on intensifying direct-to-customer activities and reinforcing the margin-accretive Arc’teryx brand, this should improve the group’s profitability in 2023. We expect an adjusted EBITDA margin of about 12.8 percent in 2023 and 13.0 percent in 2024.

“Ongoing expansionary projects and inventory build-up should result in flat free operating cash flow (FOCF) for Amer Sports in 2023, but we expect a recovery by 2024. We expect the group’s capital expenditure (capex) requirements to remain elevated, at about €180 million-€200 million over the next two years, to support IT investments and the opening of new stores, especially in the U.S. and China. Furthermore, we expect inventory levels, which were already exceptionally high in 2022, to remain high in 2023 because of long lead times and higher accounts receivable, which should also pressurize the group’s cash generation. That said, we expect a notable improvement in FOCF to about €120 million by 2024, versus flat FOCF expected in 2023. The improvement will mainly result from higher EBITDA, progressive inventory depletion, and supply chain normalization.

“We assume that Amer Sports will benefit from growing consumer demand for sportswear and footwear over the coming years. Euromonitor estimates that the global sportswear market’s retail value will increase at an annual rate of 6 percent-7 percent over 2022-2027, mainly driven by sports footwear. We believe that e-commerce, which accounted for about 28 percent of global sportswear sales in 2021, will continue to outpace store-based retailing. In our view, the increasing popularity of outdoor activities and the ongoing relaxation of dress codes in many developed countries will continue to support demand. Geographically, China is likely to be the fastest growing market, with growth of around 8 percent-9 percent over 2022-2026. According to Euromonitor, an increasing population of runners is driving this growth, with local brands continuing to gain ground. In this context, Anta Sports, Amer Sports’ main shareholder, expanded its domestic market share in China to close to 16 percent in 2021 by retail value, demonstrating an established network in the country that could support Amer Sports’ expansionary strategy.

“Our ‘B+’ rating on Amer Sports includes one notch of uplift to reflect support from its main shareholder, Anta Sports. We see Amer Sports as moderately strategic for its main shareholder. This is because Amer Sports’ role in Anta Sports’ strategy is critical since it consists of promoting winter sports in China. We consider that the ongoing operating support from Anta Sports will back Amer Sports’ growth in China, where the shareholder can leverage its established presence in the country and consumer knowledge. Amer Sports’ sales in China have trended up over time, accounting for roughly 14 percent of total revenue in 2022, compared with 4 percent in 2019.

“The stable outlook on Amer Sports indicates our expectation that the group will maintain its strong operating performance, with adjusted debt to EBITDA close to 6.0x in 2023 and below 6.0x by 2024, alongside adequate liquidity. Furthermore, we expect that the group will generate flat FOCF, including lease payments, in 2023 to support expansionary projects. However, it should improve its FOCF generation to about €120 million by 2024, driven by higher EBITDA, progressive inventory depletion, and a supply chain stabilization.”

Image courtesy of Arc’teryx