Moody’s Investors Service changed Academy Ltd.’s outlook to negative from stable and 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.

The rating agency said 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. Declines in management adjusted EBITDA over the past five quarters accelerated in 4Q 2016, mainly reflecting execution missteps with the private label assortment resulting in clearance activities, as well as weak consumer demand in oil and gas markets, lower firearms sales following the election, and liquidation sales at bankrupt competitors. However, Moody’s 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. Moody’s anticipates that earnings should improve in 2017 as Academy corrects its private label assortment, leading to leverage reduction from 7 times to mid-6 times (Moody’s-adjusted). Moody’s expects the company to have good near-term liquidity including a return to positive free cash flow as a result of EBITDA growth and lower CapEx.

Moody’s took the following rating actions on Academy, Ltd:

  • Corporate Family Rating, affirmed at B2;
  • Probability of Default Rating, affirmed at B2-PD;
  • $1.825 billion ($1.698 billion outstanding) Senior Secured Term Loan B due 2022, affirmed at B2 (LGD4);

Outlook changed To Negative From Stable
Ratings Rationale: Moody’s said Academy’s B2 CFR reflects the company’s high leverage, aggressive financial policies and geographic concentration. In 2016, same store sales decreased in the low-single-digit range and management adjusted EBITDA was down 23 percent. 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. However, Moody’s expects performance to improve in 2017 as merchandising issues roll off and as management works to improve profitability. Moody’s 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. Academy’s scale, strong market position in its regions, good liquidity and ability to curtail new store CapEx provide key support to the rating.

The ratings 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.

Moody’s noted that Academy, Ltd. operates 228 stores under the Academy Sports + Outdoors name primarily located in Texas and the southeastern United States. The company generated approximately $4.7 billion of revenues for the twelve months ended January 28, 2017. Academy has been controlled by an affiliate of Kohlberg Kravis Roberts & Co L.P. (KKR) since 2011.

Photo courtesy Academy