Looking back at the first decade of the new millennium reads like a giant Bell Curve, with the decade starting and ending with two of the most devastating events in recent American history: 9/11 and The Great Recession. However, the events that transpired in between these two bookends have transformed the industry into a very different animal than it was in the 1990’s.
Perhaps the biggest change in the industry is the amount of vertical retail present today versus ten years ago. The North Face is likely the largest vertical operator in the industry, with 35 stores and outlets in the U.S. Patagonia is a close second with over 25 stores and outlets in the U.S. However, during the last decade, Cloudveil, Arc’Teryx, Horny Toad, Nau, Columbia, Mountain Hardwear, prAna, MontBell, Filson and Timberland have all launched or expanded their consumer direct retail presence. In addition, the industry has seen the rise of two new massive vertical retailers that closely border the traditional outdoor market; Lucy and Lululemon have a combined store count over 150 doors in the U.S. market.
In addition to the rapidly expanding physical retail presence, the Internet also brought brands directly closer to consumers. For every brand that opened up a retail storefront, there were several more that transformed their websites from simple brochure-ware to an e-commerce platform.
This shift into vertical retail is a double edged sword for the outdoor industry. Many analysts point out that the biggest challenge facing the outdoor industry is lack of distribution consumers just don’t know where to buy many core outdoor brands. However, specialty retailers feel that the opposite is true and the outdoor industry is actually over-retailed.
Two key events happened at the beginning of the decade that spurred the most active merger and acquisition market the outdoor industry has ever seen.
The first key event was overt, and many prognosticators at the time predicted dire consequences for the outdoor industry. After a challenging decade in the 90’s, one of the industry’s most iconic brands — The North Face – was acquired in June of 2000 by an unlikely partner VF Corporation. For many, the success of this acquisition painted the outdoor industry in a new light for the investment community.
The second key event appeared on its surface to be relatively benign. Dick Heckman, the former CEO of a water filtration conglomerate, took over as CEO of K2 , Inc. in early 2002. By 2003, Heckman had already become known as a cereal consolidator due to several acquisitions in the sporting goods arena. K2 also made its first acquisition in the outdoor industry when it bought Tubbs and Atlas snowshoes. What followed was a landslide of deals that eventually combined Marmot, Volkl, Marker, Line Skis, Dana Designs and several additional brands in the sporting goods, outdoor and snow sports industries.
Many felt that K2 was attempting to build a similar brand aggregation platform that Benetton used to create Benetton SportSystem in the early 90’s. However, Benetton’s idea was completely taken apart as the company sold off Nordica, Rollerblade and Prince/Ektelon in separate deals. In the end, the brands — which once totaled close to $1 billion in sales – were generating less in sales in 2003 than Rollerblade did by itself at its peak.
By 2004, VFC was able to turn TNF into a rapidly growing powerhouse brand that headlined it’s own division-and the industry took notice. Columbia looked to duplicate this success and acquired Mountain Hardwear, which it has successfully leveraged to address the high-end apparel and equipment market.
Investment firms also came into the outdoor specialty scene in a big way. Investment bankers from the now-defunct Bear Stearns made headlines when they acquired Camelbak for $210 million in an all-cash payment to John Bowes owner of CamelBak’s parent company The Kransco Group.
While most companies operating in the outdoor market try to keep it under wraps, it’s well-known that the industry has become a hotbed of innovation servicing the U.S. military complex, a fact quite obvious in the aisles of the Outdoor Retailer shows these days. Once the darling of the outdoor market, Camelbak has become known worldwide for its hydration units for the military in Iraq after actions by soldiers requesting the product from family members in care packages. The military, in an effort to get lighter and faster, has turned to the industry to feed off of the innovations that are perfected by the serious outdoor athlete and participant.
Cascade Designs makes no secret of its desire to capture that order for “Made in USA” product that the military requires. But for every well-publicized deal like Camelbak, or the public company revelations of the reliance that a Danner, Phoenix Footwear or Johnson Outdoors has on military orders, the industry has even more companies working behind the scenes on similar deals that boost revenues and provide much-needed RD&D dollars.
This new reality is one more reason why the private equity guys saw so much upside in the outdoor specialty market following 9/11.
Spyder was acquired in 2004 by private equity firm Apax partners in an August deal worth $100 million and then management turned heads with plans to take the business to $300 million over the next few years, mainly on the prospect of developing a summer apparel business which has yet to actually materialize. Apax also went on to acquire Cloudveil in 2008 with similar growth promises.
Two big retail deals altered the landscape in the market. First, in 2003 TSA and Gart, merged into a huge coast-to-coast sporting goods chain and shifted all banners under The Sports Authority name. The other came in 2004 as Dick’s Sporting Goods picked up Galyan’s after a not-so-subtle pounding on their home turf. The move made Dick’s a far bigger threat to TSA as they moved into their backyard out West while still maintaining growth plans for the North and South.
These back-to-back deals essentially created two nation-wide sporting goods chains within two years whereas previously there were none.
With inexpensive capital at hand, Eastern Mountain Sports was able to execute a management buyout from American Retail Group in 2004. The buyout was led by Eastern Mountain Sports President and CEO Will Manzer. Since then, EMS has gone through a complete re-organization which culminated in a much more productive and profitable footprint and business plan.
The M&A market peaked in 2005 with a series of massive deals that saw major brands change ownership. First, VF Corp. acquired Reef Holdings, adding a surf lifestyle brand to their mix. Shortly thereafter, Quiksilver made the near-fatal error of acquiring Rossignol which it more recently sold off to a private equity firm at a huge loss. The third deal was Amer Sports’ acquisition of the Salomon business from Adidas-Salomon AG. Timberland acquired Smartwool for one of the biggest multiples ever paid for an outdoor company; Liz Claiborne acquired prAna from the company’s founders, who later bought the company back when Liz changes its expansion strategy. Finally, Confluence acquired all of the boat and paddlesports accessories businesses from Watermark Holdings, Inc.
In 2006, price tags for premier outdoor brands had been pushed so high that the pace of acquisition began to slow somewhat. However, that did not stop VF Corp. from acquiring Eagle Creek and Columbia acquiring the Montrail brand.
In 2007, the industry took a collective breather from mergers and acquisitions and focused on integration. The only exceptions were a trio of deals in the retail sector and a deal that saw K2 Inc. acquired by Jarden Inc.
The three retail deals involved Moosejaw Mountaineering, which brought Parallel Investment Partners in as a private equity partner; Liberty Media Corporation acquired control of Backcountry.com; and finally, North Castle Partners, a private equity firm, acquired controlling interest in Performance, Inc.
Between the years of 2004-2007, the sports and outdoor markets out-performed the S&P 500 index by a 2 to 1 margin and the S&P saw double-digit growth. The industry was booming and saw a period of unparalleled investment illustrated graphically by a frenetic pace in mergers and acquisitions.
2008 represented a year of fundamental shift in all commercial markets and marked the beginning of the end of the decade. Until September of 2007, the specialty consumer seemed-for the most part- unaffected by the increased cost of gasoline or the foreclosures that were crippling the lower end of the market. In fact, the jump in fuel prices simply prompted many to buy a more expensive Hybrid vehicle or new bike. The specialty business actually improved.
Now, more of these consumers may run a few more miles in their current running shoes, forego a new tent or perhaps hold off on purchasing any new climbing equipment for the foreseeable future. Kids will get new gloves and goggles for skiing and other items they “need,” but the market for products they “want” was heavily impacted.
Looking back at 2009, most of the M&A activity involved fire sales of brands which had run out of financing. These deals included Chaco jumping under Merrell and Wolverine’s umbrella, Ahnu finding shelter with Deckers, and most recently, Yakima finding a partner in its Taiwanese sub-contractor, Kemflo International Co. Ltd.
