Moody’s Investors Service changed its outlook for Academy, Ltd. to positive from stable. Concurrently, Moody’s affirmed all of the company’s ratings, including the B1 corporate family rating (CFR), B1-PD probability of default rating (PDR) and B2 ratings on the senior secured term loan and notes. The speculative-grade liquidity rating remains SGL-1.
The change in outlook to positive from stable reflects Academy’s outperformance relative to expectations since the IPO, and the potential for the company to maintain solid credit metrics as demand in the sporting goods category moderates.
The affirmation of the ratings reflects Moody’s expectations for solid near-term earnings performance. The pandemic-driven pivot in consumer spending towards the sports and outdoors categories is likely to continue over the next several quarters. However, demand is likely to weaken once health and safety concerns abate, prompting consumers to return to more normalized spending patterns including on leisure and entertainment. The support from government stimulus checks is also unlikely to continue when the pandemic subsides. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. However, there is a potential for any demand weakness to be materially mitigated by Academy’s operational improvements, including its omnichannel and digital initiatives, better inventory management, growth in private label credit card penetration, as well as customer gains during the pandemic when the company’s store remained open as it was deemed an essential retailer.
Moody’s took the following rating actions for Academy, Ltd.:
- Corporate Family Rating, Affirmed B1
- Probability of Default Rating, Affirmed B1-PD
- Senior Secured Bank Credit Facility, Affirmed B2 (LGD4)
- Senior Secured Regular Bond/Debenture, Affirmed B2 (LGD4)
- Outlook, Changed To Positive From Stable
Ratings Rationale
Moody’s wrote, “Academy’s B1 CFR reflects the competitive nature of sporting goods retail, including the increased focus of major apparel and footwear brands on direct-to-consumer distribution and the shift to online shopping. In addition, sporting goods demand can fluctuate, in part driven by demand cycles in the firearms and ammunition category. Moody’s expects revenue and earnings to decline in 2021-2022 following strong growth in 2020, as consumers return to more normalized spending habits. This could drive an increase in leverage to 3.2-3.5x compared to 2.8x as of January 30, 2021. In addition, as a retailer, Academy needs to make ongoing investments in its brand and infrastructure, as well as in social and environmental drivers including responsible sourcing, product and supply sustainability, privacy and data protection.
“At the same time, Academy’s rating positively considers the company’s very good liquidity, scale and solid market position in its regions. The turnaround strategy put in place by the current management team in 2018, including initiatives in merchandising, private label credit card and omnichannel investment, has been driving improved operating performance since the second half of 2019. In addition, Academy’s value price points and diversified product assortment tend to result in resilient performance during economic downturns. The rating also considers governance factors, including the expectation for balanced financial strategies. Specifically, although the company remains majority-owned by private equity sponsor KKR, Moody’s believes re-leveraging transactions are unlikely following the company’s 2020 public equity offering and over 40 percent debt reduction.”
Photo courtesy Academy Sports + Outdoors
