Moody’s Investors Service upgraded Academy, Ltd.’s debt ratings to reflect Academy’s continued outperformance relative to expectations and the overall retail industry.
The upgrade also reflects Academy’s sizable debt repayments and Moody’s expectations for balanced financial strategies, Moody’s said in a statement. Academy’s reduced debt levels support its ability to maintain stable credit metrics even in a scenario of uncertain demand in the sporting goods category. Academy has repaid nearly $1.1 billion of debt since 2018, including $100 million repaid in 2022. Moody’s estimates that debt to EBITDA will increase to about 2.0x over the next 12-18 months from 1.6x for the LTM ended 10/29/2022 and EBIT to interest will weaken to about 5.0x from 6.4x for the same time period.
The ratings agency said, “While Moody’s expects demand for the sporting goods sector to be constrained by declining consumer disposable income in 2023, Academy’s value-focused price point will allow them to maintain mostly steady operating performance in 2023 as consumers remain value-focused in the face of ongoing inflation. In addition, Academy’s operational improvements put in place under new leadership just prior to the pandemic will allow them to maintain the majority of its margin improvements which will partially mitigate any demand weakness and operating income should remain well above 2019 levels.”
Debt upgraded includes the corporate family rating (CFR) to Ba2 from Ba3, probability of default rating (PDR) to Ba2-PD from Ba3-PD, and the ratings on the senior secured first lien term loan and senior secured notes to Ba2 from Ba3. The speculative-grade liquidity rating (“SGL”) remains SGL-1. The outlook remains stable.
Moody’s said in its analysis, “Academy’s Ba2 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 consumer shift to online shopping. Sporting goods demand can also fluctuate, in part because of demand cycles in the firearms and ammunition category, which we estimate represents roughly 10 percent of Academy’s sales. As macroeconomic conditions grow increasingly uncertain and as consumer spending moderates, Moody’s expects Academy’s revenue and earnings to modestly weaken over the next 12-18 months.
“Partially offsetting these challenges is the company’s scale and solid market position in the regions within which it operates. The company’s value price points and diversified product assortment tend to result in resilient performance during economic downturns. Further, the turnaround strategy put in place by the current management team, including initiatives in merchandising, private label credit card and omnichannel investment should keep operating performance relatively stable over the next year. The company initiated a store expansion program in 2022, which will include the addition of 80-100 stores through 2026. The store expansion will be financed through free cash flow.
“Academy’s EBITDA was down roughly 5 percent at $1.1 billion for the LTM Ended October 29, 2022 reflecting softened demand and higher labor costs, partially offset by the benefits of the company’s turnaround strategy. This combined with Academy’s recent $100 million debt repayment on its term loan will result in Moody’s pro-forma adjusted debt/EBITDA of about 1.6x and EBIT/interest expense at 6.2x.
“Academy will benefit from very good liquidity over the next 12 months. The company has a largely available $1.0 billion ABL revolving credit facility expiring in July 2025. In addition, Moody’s estimates that the company will generate roughly $200-$250 million of free cash flow over the next 12 months.
“The stable outlook reflects Moody’s expectation that credit metrics will remain stable despite the pressures presented by the current uncertain macroeconomic environment including high inflation. The stable outlook also reflects that Academy will maintain very good liquidity and that shareholder returns will be measured.”
