S&P Global Ratings raised the debt ratings of Academy Sports + Outdoors, Inc. due to its recent better-than-expected performance, including S&P Ratings’-adjusted EBITDA margins of almost 19 percent over the last six quarters.
S&P raised its issuer-credit rating on Academy Sports to ‘BB’ from ‘BB-‘. The stable outlook reflects its expected good performance over the next 12-to-18 months and S&P adjusted leverage at or near current levels.
S&P said, “Academy’s recent performance trends, including improved EBITDA margins, indicate a better competitive position. Over the last year, Academy’s operating performance, especially margin generation, has been ahead of our forecast. Importantly, S&P Global Ratings’-adjusted EBITDA margins remain elevated compared with historic results and have meaningfully beat our forecast. For the trailing months through July 2022, Academy’s S&P Global Ratings’-adjusted EBITDA margins were 18.2 percent compared with our prior projection of 15 percent. In addition, these margins were around 19 percent or more in the first half of this year. This is also better than our expectations, a forecast that assumed margin drag due to significant competition and promotions.
“While the economic environment remains uncertain, Academy has benefited from its market position as a value-oriented retailer, leading to elevated customer traffic and demand for sporting goods and outdoor equipment, along with demand from trade-down consumers. At the same time, adjusted EBITDA margins have improved versus the year-ago period because of relatively lean inventory, cost-containment efforts, better promotional cadences, and operating initiatives over the last few years. While we believe economic and competitive risks will persist, we believe Academy’s S&P Global Ratings’-adjusted EBITDA margins will remain around 18 percent.
“That said, company sales were generally in line to slightly ahead of our projections, as revenue declined at a mid-single-digit rate for the first half of the year. We think this represents a modest normalization in the company’s sales performance as it laps more than 20 percent growth in the prior period. We expect revenue declines to moderate in the second half of the year before expanding in the fiscal year in 2023. We believe changes in consumer habits, including more people working from home and continuing outdoor hobbies, will provide structural tailwinds to sporting goods demand. We also expect an acceleration in new store opening to boost sales over the next 12-to-18 months.
“We believe management’s operating initiatives will help Academy maintain good, long-term performance. Academy’s management team has strategically employed operating initiatives that have helped the company maintain growth and sustain S&P Global Ratings’-adjusted EBITDA margins. This includes improved in-store customer service by increasing customer-facing hours, modifying the store layout, enhancing the assortment, and increasing store localization efforts. Moreover, assortment and store layout updates, along with good vendor relations, have helped Academy maintain good inventory levels, up just 17 percent as of the second quarter ending July 2022 versus the 2021 period.
“In addition, we believe implemented and planned omni-channel initiatives will help maintain and increase customer engagement. Technology management has increased and will likely continue to improve check-out speeds, improve in-store and online search capabilities, and expand payment options. This includes continual improvements of the company’s website and enhancements to the mobile app.
“We think these initiatives and others like data-driven markdown and merchandising optimization have allowed management to refocus on expansion strategies. We believe Academy will prudently and profitably expand its store base over the next few years, where we project around 10 to 15 new stores annually. We think operating initiatives enacted over the last few years will position Academy for good long-term growth and have accordingly revised our business risk assessment to fair from weak.
“Academy remains a relatively smaller, but growing, competitor in the sporting goods retail industry. 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 like Dick’s Sporting Goods Inc. (BBB/Stable/–) and Great Outdoors Group LLC (BB-/Positive/–), mass merchants like Walmart Inc. (AA/Stable/A-1+), and e-commerce competitors like Amazon (AA/Stable/A-1+). In addition, online penetration remains lower than some peers, comprising around 10 percent of total sales. We think this creates potentially long-term risks for Academy, as the industry remains prone to product promotions and competitive pricing along with evolving 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.
“Academy and the sports retailing industry may experience more volatile performance over the near term because of macroeconomic uncertainty. We project inflation will remain elevated well into 2023 and for an overall economic slowdown to persist through 2023. We acknowledge a degree of risk related to an unforeseen decline in Academy’s performance that could arise from increased competition and heightened promotions. Moreover, increased competitor price promotions could also have a negative effect on near-term projections beyond what we already consider in our base-case forecast.
“The stable rating outlook reflects our expectation for good performance over the next 12 months, including low- to mid-single-digit percent sales growth, S&P Global Ratings’-adjusted margins around 18 percent, and S&P Global Ratings’-adjusted leverage at or near recent levels.”
Photo courtesy Academy Sports And Outdoors
