S&P Global Ratings raised its debt ratings on Amer Sports on its expectations that the sporting goods giant would report a “resilient” operating performance in 2021 with estimated €2.5 billion revenue, up 7 percent to 8 percent above pre-pandemic levels.
The rating agency expects the performance will enable Amer Sports to reduce its debt load. It anticipates that S&P Global Ratings-adjusted debt to EBITDA will be reduced to near 9.0x (including a €1.3 billion intercompany loan) from 12.5x in 2020.
The rating agency added that although Amer Sport’s ongoing investments to further develop its direct-to-consumer distribution channel mainly in China and U.S. are expected to lead to negative free operating cash flow of €80 million to €90 million (including lease payments) in 2022; it thinks its liquidity profile will adequately finance the expansion.
S&P raised to ‘B’ from ‘B-‘ its ratings on Amer Sports and the company’s €1.7 billion senior secured term loan B and €315 million revolving credit facility due 2026. The stable outlook reflects S&P’s view that Amer Sports’ gradual EBITDA expansion will underpin deleveraging to 7x-8x in 2022 despite the increase in input costs and logistical constraints.
Amer Sports is majority controlled by Anta Sports but still has outstanding debt. Amer Sports brands include Salomon, Arc’teryx, Peak Performance, Atomic, Suunto, and Wilson.
S&P wrote in its analysis, “Amer Sports’ resilience amid COVID-19-related challenges yielded solid cash management and accelerated deleveraging to below 10x. We estimate Amer Sports reduced materially its leverage in 2021, reaching S&P Global Ratings-adjusted debt to EBITDA of almost 9.0x from 12.5x in 2020. This is thanks to solid increments in sales of highly profitable product segments such as footwear and apparel (about 55 percent of sales estimated in 2021), as well as strict working capital and capital expenditure (Capex) management over 2020/21. The divestiture of non-strategic assets, such as Precor in the fitness segment, also fueled the deleveraging, enabling the company to repay the drawn portion of its €315 million revolving credit facility (RCF) maturing in 2026 and €100 million add-ons to the term loan B. Our net debt calculation at the end of 2021 considers cash on the balance sheet of about €500 million. Adjusted debt includes a €1.3 billion intercompany loan that has been funded with proceeds from the €1.3 billion term loan A issued by Amer Sports Holding (Cayman) Ltd., outside the restricted group. Amer Sports services the interest payment due on the term loan A through regular cash interest payments on the intercompany loan.
“For the full year 2021, we expect Amer Sports sales to approach €2.5 billion, a growth of about 15 percent year-on-year. Our estimates exclude revenue from Suunto (manufacturer of sports watches, dive computers and precision instruments) because this division was reported as discontinued operations in 2021. Amer Sports recently agreed to sell the Suunto business to Dongguan Liesheng Electronic Technology Co. Ltd., a Chinese technology company focused on smart and sport wearables. We anticipate that Suunto had dilutive effects on margins and required a relatively high Capex to support new product development. We expect the transaction to conclude in the first half of 2022. The sale is in line with Amer Sports’ commitment to focus on footwear and apparel, direct-to-consumer expansion—via store openings (mainly in China and the U.S.) and e-commerce—as well as the development of core brands such as Salomon, Arc’ Teryx, Wilson and Peak Performance. Considering the same scope of consolidation (excluding the fitness segment, since it was sold in 2021, and the upcoming Suunto disposal), Amer Sports’ revenue will likely rise about 20 percent in 2021 compared with 2020 and exceed 2019 (before the pandemic) by 7 percent to 8 percent. We anticipate footwear and apparel led the growth mainly thanks to strong consumer demand from China (representing an estimated 12 percent of total sales 2021). Although COVID-19-related mobility restrictions and social distancing measures reduced store traffic, new shop openings have contributed significantly to the company’s top-line growth, as has increased demand on e-commerce platforms.
“We assume Amer Sports will benefit from the positive consumer demand for sportswear and footwear over the coming years. Euromonitor estimates the global sportswear market will grow at a 7 percent to 8 percent annual rate over 2022-2026 by retail value mainly driven by sports footwear. We believe that e-commerce (about 28 percent of global sportswear sales in 2021) will continue to outpace store-based retailing. In our view, demand will continue to be supported by consumers’ increasingly participating in outdoor activities and the ongoing relaxation of dress codes in many developed countries. Geographically, China is likely to be the fastest-growing market, at around 12 percent over 2022-2026; according to Euromonitor, an increasing population of runners is driving the market’s growth. We also believe the 2022 Winter Olympics in China will spark more interest in winter sports in the region, supporting the recovery of sales in the winter sport equipment segment. In China, local brands are gaining ground, mainly after the March 2021 controversy around Xinjiang cotton caused a decline in Western brands’ sales. In this context, Anta (Amer Sports’ main shareholder) has expanded its domestic market share in China to close to 16 percent in 2021 by retail value, demonstrating an augmenting and established network in the country, which could support Amer’s expansionary strategy.
“We expect Amer will increase its profitability in 2022 despite increased market volatility. In 2021 Amer achieved an S&P Global Ratings-adjusted EBITDA margin of 12.0 percent-12.5 percent, compared with 11.8 percent in 2020, despite a surge in input and transportation costs during the year and non-recurring costs of €30 million-€35 million mainly related to group reorganization. Although inflation pressure and logistic disruption will likely persist, at least in the first half of 2022, we believe the company could increase profitability to close to 13 percent in 2022, supported by a material reduction of non-recurring costs, its ability to increase sales prices, and an improved product mix thanks to faster growth in highly profitable categories such as footwear and apparel. Also, Amer Sports’ ongoing direct-to-consumer penetration will support profitability because of better sales price control in directly operated stores and online sales as well as the launch of new products with a higher price.
“Anticipated negative free operating cash flow (FOCF) in 2022 constrains Amer Sports’ stand-alone creditworthiness. We assume Amer Sports will post 10 percent sales growth in 2022 and mid-single-digit expansion per year in 2023-2024 on the back of a greater portion of sales in the direct-to-consumer channel through selected new store openings, ranging between 40 and 50 openings per year, mainly in China and the U.S. This will lead to significant investments in working capital in 2022 that result in approximately €100 million cash outflow. At the same time, Capex will likely peak over the next two to three years to support the acceleration of new shop openings and IT investments. We assume Capex will reach €120 million-€130 million in 2022, a material increase from the expected €70 million-€75 million at end-2021. That said, we believe the company has enough liquidity to support its expansionary strategy thanks to about €500 million cash on the balance sheet expected at end-2021 and full availability under its €315 million RCF due in 2026. A sizable portion of the existing cash derives from proceeds from the Precor sale (about €367 million in 2021). We didn’t factor into our assumptions the proceeds expected from the announced divestiture of Suunto since we expect them to be immaterial.
“Our ‘B’ rating on Amer Sports embeds one notch of support from its main shareholder Anta Sports. We see Amer Sports being moderately strategic to its main shareholder, and this is because Amer Sports has a critical role in Anta’s strategy to promote winter sports in China. We consider the ongoing operating support from Anta Sports to back Amer Sports’ growth in China, where the shareholder can leverage its established presence in the country and consumer knowledge. We note that Amer Sports’ sales in China trended up over the past three years, accounting for roughly 12 percent of total revenue in 2021 compared with 4 percent in 2019. We also observed limited financial support received from Anta materialized in the agreement to delay about €12 million interest payments on the €1.3 billion intercompany loan in 2020; they were then paid in 2021.
“The stable outlook reflects our view that, despite higher input costs and logistic challenges, Amer Sports will continue to benefit from favorable consumer demand for sportswear goods, particularly apparel and footwear, and ongoing direct-to-consumer expansion, mainly in China and the U.S., of its core brands.
“We expect the company’s gradually strengthening EBITDA will support deleveraging to 7x to 8x in 2022 from 9x in 2021; this is despite negative FOCF of €80 million to €90 million (including lease payments) to support expansionary projects.”
Photo courtesy Amer Sports/Arc’teryx
