Unable to shrug off the many challenges facing the sporting goods channel, Academy Sports + Outdoors’ same-store sales slid in the low-single-digit range and management-adjusted EBITDA dropped 23 percent in 2016.
That’s according to Moody’s Investors Service, which lowered the debt ratings of the Texas-based chain, with 228 stores in Texas and the southeast, to negative from stable due to recent deteriorating results.
“The negative outlook reflects the risk that Academy may not be able to reverse its 2016 earnings declines in the near term, resulting in continued high leverage and diminished free cash flow generation,” the debt rating agency wrote in its report.
Sales last year reached $4.7 billion, up from $4.6 billion in 2015.
The report indicated that like the rest of the industry, Academy has been hurt by a number of bankruptcies over the last year, many of which led to liquidation. Sports Authority, Gander Mountain and Golfsmith all had stores in its markets as well as Luke’s Locker, the Austin-based run specialty chain that is undergoing a reorganization in bankruptcy proceedings.
Moody’s also said it believes that ongoing general weakness in bricks-and-mortar retail, particularly within apparel, has also been a factor in the company’s weak recent performance.
The chain was also hurt by its exposure to weaker economies in oil and gas markets as well as the drop-off in firearms sales following the election. Internally, Academy was impacted by “execution missteps with the private label assortment resulting in clearance activities.”
Moody’s said declines in management adjusted EBITDA over the past five quarters accelerated in the fourth quarter of 2016, mainly reflecting the clearances of private label items, weak consumer demand in oil and gas markets, lower firearms sales, and liquidation sales at bankrupt competitors.
“Operating risk remains elevated given weak traffic trends and pricing pressure in apparel and footwear, which represent a little less than half of Academy’s revenue and a slightly greater portion of merchandise margin dollars,” Moody’s analysts wrote.
Academy has been controlled by an affiliate of Kohlberg Kravis Roberts & Co L.P. (KKR) since 2011.
On the bright side, Moody’s expects Academy’s performance to improve in 2017 as the company corrects its private label assortment and management works to improve profitability. Moody’s expects Academy to be able to reduce its leverage reduction from 7 times to mid-6 times (Moody’s-adjusted) while returning to positive free cash flow as a result of EBITDA growth and lower capital expenditures.
Academy’s scale, strong market position in its regions, good liquidity and ability to curtail new store capital expenditures provide key support to the rating.
Moody’s also said it believes that sporting goods stores are better protected than apparel retailers from the consumer shift to e-commerce, as a result of the need for a physical location visit for gun purchases and preference for physical locations for large hard goods items.
The debt ratings, according to the report, could be downgraded if same-store sales continue to decline, earnings do not recover in the next few quarters, or free cash flow does not improve meaningfully. Quantitatively, debt/EBITDA sustained above 6.5 times (Moody’s-adjusted) or EBIT/interest below 1.25x could lead to a downgrade.
The outlook could revert to stable if the company regains a large majority of the earnings lost in 2016. While a ratings upgrade is currently unlikely, the ratings could be upgraded if the company exhibits sustained positive same store sales growth and employs conservative financial policies such that adjusted debt/EBITDA (Moody’s-adjusted) is sustained below 5 times and EBIT/interest is sustained above 1.75 times.
While lowering the outlook, Moody’s affirmed all of the company’s ratings, including the B2 Corporate Family Rating, B2-PD Probability of Default Rating (“PDR”) and B2 senior secured term loan rating.
Photo courtesy Academy Sports + Outdoors