S&P Global Ratings upgraded its debt ratings on Academy Sports + Outdoors, Inc. as the sporting goods chain “continues to post strong gains in sales and EBITDA, resulting in better leverage.”
S&P assigned its ‘BB-‘ issuer credit rating to Academy and raised all other ratings, including the issuer credit rating on New Academy Holding Co., to ‘BB-‘ from ‘B+.’ The rating agency also raised the issue-level rating to ‘BB-‘ commensurate with the issuer credit rating. S&P said it is withdrawing New Academy Holding Co. LLC ratings following its upgrade. The stable ratings outlook reflects S&P’s expectation for adjusted leverage to sustain in the 2x range, while performance normalizes from current elevated levels.
S&P said in its analysis, “Our ratings reflect better-than-expected sales and EBITDA generation, contributing to a significant improvement in credit metrics, which we expect the company to sustain despite moderating performance in 2022. Academy’s operating performance over the past year benefited from its market position as a value-oriented retailer along with increased customer traffic and demand for sporting goods and outdoor equipment. Sales growth increased 20 percent for the 12-month period ended October 30, 2021, while S&P Global Ratings adjusted EBITDA increased more than 80 percent to more than $950 million. At the same time, adjusted EBITDA margins improved to the high-teens area as Academy benefitted from sales leverage, relatively lean inventory levels and cost-containment efforts helped by lower product promotions. As a result, we expect revenue growth to approach 20 percent for the fiscal year 2021 compared with our previous expectation of high single-digit increases. In addition, we expect a meaningful improvement in EBITDA and credit metrics, including leverage in the high-1x to the low-2x range for fiscal year-end 2021.
“Moreover, we expect the company to sustain adjusted leverage in the 2x area over the next 12 months even after projecting a modest slowdown in performance; this includes an expectation for a low single-digit decline in sales and adjusted EBITDA margins falling to the low- to mid-15 percent range. We forecast revenue and margin trends to moderate in 2022, reflecting our expectations for higher levels of product promotions, increased competition among direct and indirect sports retailers, and cost pressures amplified by commodity and wage inflation. Our performance expectations also consider slowing consumer spending on sporting and outdoor goods, with customers likely scrutinizing spending habits and rebalancing funds toward travel and going out as COVID concerns gradually subside. Still, we think company initiatives will help support performance over the next several years; this includes good inventory management and promotional cadence along with in-store and omnichannel investments. We also believe initiatives like regionally-based product assortment, continued merchandise improvement, and new store development will help support business.
“We think Academy will maintain a relatively conservative financial policy, supporting the upgrades. Academy has consistently reduced debt since its initial public offering in October 2020, deleveraging by about $800 million in debt. This debt deleveraging and ongoing operating performance growth resulted in an improvement in adjusted credit metrics, including leverage in the mid- to high-1x range recently compared with the low-4x area prior to the initial public offering. Looking ahead, we expect the company to continue to generate healthy cash flow, with meaningful free operating cash flow of more than $400 million. While we expect the company to use most of its excess cash flow for shareholder initiatives, noting the recently announced $500 million share buyback program, we also expect Academy to fund these initiatives using internally generated cash and maintain leverage in the 2x range. We accordingly revise our financial risk profile assessment to intermediate from significant.
“Near-term performance volatility and Academy’s operating scale remains a risk. We continue to view Academy as a regional sports and outdoor retailer with physical stores primarily in Texas and adjacent southern states. The company positions itself as an everyday low price value player and competes with significantly larger and better-capitalized competitors, companies that include a focus on the mass market or provide specialized sports products; this includes specialized retailers likes Dick’s Sporting Goods Inc., (BBB/Stable) and Great Outdoors Group LLC (BB-/Positive) or mass merchants like Walmart Inc. (AA/Stable). We think this puts the company at a potentially long-term disadvantage, as the industry remains prone to product promotions and competitive pricing along with changing customer habits. We also believe sporting goods and related products remain a highly fragmented sector with increasing competition, including both physical retailers and pure-play e-commerce competitors.
“We also believe Academy and the sports retailing industry may experience more volatile performance over the near term. Following years of relatively modest and stagnant performance, Academy’s EBITDA base and cash flow generation expanded significantly during the past two years, partly driven by favorable consumer trends during the pandemic. We estimate adjusted EBITDA will approach $1.2 billion in fiscal 2021, more than double its base of $499 million in 2019. While we expect sports and outdoor goods product categories will continue to see longer-term tailwinds, we also think customers will likely scrutinize spending habits; this will, in our view, result in near-term performance volatility and an overall EBITDA decline of about 15% to a more normalized new base going forward in 2022.
“Academy remains largely a physical retailer despite continued investments in omnichannel. We project Academy’s digital sales penetration will remain less than 10 percent of its total sales, which is below that of sports and retail peers such as the 30 percent at Dick’s Sporting Goods Inc. Moreover, nearly half of its stores are in Texas, significantly more geographically concentrated than its peers. While the company further invests in its online capabilities and expands its store base, we continue to view the company as largely a brick-and-mortar, regional retailer operator in a highly competitive space. These factors, in addition to what we consider near-term performance uncertainty, lead us to apply a negative comparative ratings analysis modifier.
“The stable ratings outlook reflects our expectation that Academy will remain a regional player in the highly competitive sports and outdoor retailing industry. It also reflects our projection for relatively stable credit protection metrics, including adjusted leverage in the 2x area as performance normalizes in fiscal 2022.”
Photo courtesy Academy Sports + Outdoors
