S&P Global Ratings raised Academy Sports And Outdoor Inc.’s debt rating because the retailer has sustained S&P’s adjusted leverage well below the 2x area despite modest EBITDA margin contraction.

S&P said, “We believe expense management initiatives will help Academy maintain relatively steady operating margins and healthy free cash flow generation over the next 12 months despite our expectation for sales contraction of roughly 4 percent in fiscal 2024 on softer industry demand trends.”

Academy’s issuer credit rating was raised to ‘BB+’ from ‘BB.’ At the same time, S&P affirmed its ‘BB+’ issue-level rating on the company’s senior secured debt. The outlook is stable, reflecting S&P’s expectation for steady operating performance over the next 12 months despite softer consumer demand within its segments, leading to S&P Global Ratings-adjusted leverage in the mid-1x area.

S&P wrote in its analysis, “The rating reflects our expectation that Academy’s S&P Global Ratings-adjusted leverage will remain below 2x despite softer operating performance in fiscal 2024. During the second quarter ended August 3, 2024, the company’s S&P Global Ratings-adjusted leverage ticked up slightly to roughly 1.4x due to lower sales volume and modestly lower-than-expected EBITDA margin. We now project Academy’s S&P Global Ratings-adjusted leverage will be roughly 1.6x at year-end fiscal 2024 and 2025 as it continues to navigate a challenging operating environment. However, we expect operating income and EBITDA margins to improve modestly in fiscal 2025 as the company prioritizes strategic expense management initiatives to reduce costs and drive profitability.

“We anticipate Academy will continue focusing on managing robust inventory levels, leverage and utilize its supply chain more efficiently, and drive labor costs down through enhanced labor scheduling systems. Furthermore, we expect reduced freight expenses and a normalized supply chain environment will improve margins in fiscal 2025.

“We continue to apply a negative comparable rating analysis modifier to Academy due to its smaller and more geographically concentrated sales base as well as weaker online penetration relative to peers in the highly fragmented outdoor and sporting goods sector, which continues to face significant competition.

“We expect Academy’s sales growth to remain pressured in fiscal 2024, improving modestly in fiscal 2025. In the second quarter ended August 3, 2024, Academy’s total revenues decreased 2.2 percent year-over-year, with comparable same-store sales down 6.9 percent as discretionary spending within the sporting goods and outdoor recreation market remained pressured.

“We project total sales will be down roughly 4 percent in fiscal 2024 as Academy continues to navigate through a challenging operating environment. However, we anticipate the company will improve traffic and sales volumes in fiscal 2025 as it continues to implement ongoing promotional initiatives, open new store locations and refresh its existing store fleet.

“Furthermore, we expect customer disposable income levels will likely improve toward the second half of 2025 as inflationary pressures continue to abate, supporting sales growth of roughly 2 percent for the company in fiscal 2025. Academy has consistently grown its store count over the past several years, primarily through organic growth initiatives. We expect it will continue to grow its store count to 297 to 299 by the end of this year (from 285 currently), expanding its locations further toward 310 to 315 by the end of fiscal 2025.

“We expect Academy’s conservative financial policy and solid free operating cash flow (FOCF) generation to support the ratings. During the second quarter, Academy revised its 2024 capital spending guidance downward by roughly $50 million as it benefitted from optimizing and reducing costs around its new store openings. As such, we forecast reported FOCF of about $278 million and $289 million after roughly $225 million and $250 million of capital spending in fiscal years 2024 and 2025, respectively. We expect the bulk of expenditures will go toward new store openings, store refreshes and remodels, and new technology investments.

“We believe Academy’s consistent FOCF provides the company with ample room to fund its growth initiatives, maintain its dividend policy, and continue to execute on its share repurchase program. As of the end of the second quarter of 2024, Academy had $325 million of cash on hand with an undrawn balance under its $1 billion asset-based lending (ABL) facility. In addition, Academy has no near-term maturities, with its $400 million senior secured notes and $400 million term loan facility (of which $90 million is outstanding) both maturing in November 2027 and its $1 billion ABL facility maturing in March 2029. Furthermore, we do not anticipate the company will need to take on additional debt over the next 12 months given its ability to fund its growth and operations through its cash generation.”

Image courtesy Academy Sports + Outdoors