Analysts said Vista Outdoor’s agreement to sell its Sporting Products segment business to Czechoslovak Group (CSG) for $1.91 billion appeared largely in line with the businesses’ valuation. Vista’s 24 percent stock drop on Monday was attributed to Vista’s sharp guidance cut tied to the deteriorating Outdoor Products business.
Share on Monday fell $7.78, or 23.7 percent, to $25.02. On Wednesday, shares closed at $24.65, down 22 cents on the day.
The sale of the Sporting Products segment (including CCI, Federal, HEVI-Shot, Remington and Speer) essentially replaces the previously planned spin-off of the Outdoor Products segment into a separately-traded entity, to be called Revelyst. The deal is expected to close in the current calendar year, subject to shareholder and regulatory approvals and other customary closing conditions.
Vista expects that Revelyst will earn a higher trading multiple similar to pure-play outdoor products-focused firms with Vista’s stock currently trading at a lower valuation, in line with ammunition peers.
However, Vista also slashed its guidance as part of Monday’s announcement largely due to weakness in the Outdoor Products’ segment. The reduction was blamed on below-plan results for the fiscal second quarter ending September as well as indications from Vista’s Outdoor Products’ retail partners that they’ll continue to focus on destocking efforts and conversative buyign stances in the near term.
The Outdoor Products segment includes Bell, Bushnell, Bushnell Golf, CamelBak, Camp Chef, Foresight Sports, Fox Racing, Giro, QuietKat, Simms Fishing, and Stone Glacier. Guidance for the Sporting Products segment was reduced modestly.
Under the updated guidance for Vista’s fiscal year ended March 31, 2014, companywide sales are now expected in the range of $2.725 billion to $2.825 billion, down from previous guidance between $2.85 billion to $2.95 billion. EPS is now projected between $3.37 and $3.77 against previous guidance between $4.38 to $4.88.
For the Outdoor Products segment, sales are now projected in the range of $1.275 billion to $1.325 billion, down from previous guidance between $1.375 billion to $1.425 billion. EBITDA margin range for the Outdoor Products segment is expected between 7.75 percent to 8.25 percent, sharply down from 12.00 percent to 13.00 percent previously.
For the Sporting Products segment, sales for the fiscal year are now expected in the range of $1.450 billion to $1.500 billion against previous guidance in the range of $1.475 billion to $1.525 billion. Sporting Products’ EBITDA margins are expected in the range of 26.50 percent to 27.50 percent, down slightly from the previous guidance of 26.75 percent to 27.75 percent.
Among sell-side analysts covering Vista, Eric Wold, at B. Riley, kept his “Buy” rating while reducing his price target from $47 to $38.
Wold said the $1.91 billion deal with CSG represents an “upside valuation” from his team’s latest sum-of-the-parts analysis of the business. In a research note published in early September, B. Riley had concluded that the Sporting Products segment should be valued between $1.58 billion (using a target multiple of 4.5 times on B. Riley’s estimated CY24 stand-alone adjusted EBITDA target) and $1.76 billion (using a dividend yield analysis).
Wold said, “We believe this higher valuation being paid by CSG reflects an expectation for stabilizing ammunition demand and margins, continued shelf space gains, and an elevated shooting sports participation base coming out of the pandemic.”
The sharp reduction in sales and earning guidance for the Outdoor Products segment indicates that “retailer sentiment has worsened in recent weeks.”
Wold noted that Vista’s management indicated that while point-of-sales trends, while still down, had been “relatively stable recently,” their discussions with retail partners indicate elevated concerns heading into holiday selling. Wold wrote, “Not only have retailers noted that they are unlikely to return to noticeable inventory replenishment as early as previously expected but increased promotional spending (from both retailers and VSTO) will be needed to drive sales and further reduce inventory levels. We would not be surprised if retailers overshot to the downside on inventory reductions, which would eventually help those brands that have gained shelf space recently.”
Wold, reiterating his “Buy” rating, said he still remains optimistic for improvements in both market share, underlying product demand, and contribution margins in the coming years “and for a pivot to revenue growth and margin expansion in FY25.”
Matt Koranda, at Roth MKM, maintained his “Neutral” rating and lowered his price target to $25 from $29.
The analyst described the sale of the Sporting Products business as “a decent outcome for shareholders, although not really value accretive,” given the levels Vista’s stock was trading at prior to the news.
He still believes there “real hurdles” to closing the transaction, including gaining approvals by the Committee on Foreign Investment in the U.S. (CFIUS) “at a time of heightened geopolitical risk.”
Koranda noted that Vista’s management “appears confident” the approval process can be completed by the end of the calendar year. He also noted that CSG last November was able to acquire a 70 percent stake in Fiocchi Munizioni, a maker of small-caliber ammunition with CFIUS approval. He noted that Fiocchi is smaller and based in Italy but has a U.S. presence.
On the guidance reduction, Koranda noted that while his team had expressed concerns about Vista’s ability to reach sales and EBITDA targets, “we were surprised at the timing and magnitude of the cut.”
He added that the steep reduction in earnings expectations suggests that the remaining standalone Outdoor Products’ public entity, Revelyst, “is likely going to take a few years to show normalized margins.”
Jim Chartier, at Monnes Crespi Hardt, maintained his “Buy” rating on Vista while lowering his price target to $30 from $38.
“While the meaningful revision to sales and EBITDA makes Vista a ‘show me’ story, we maintain our Buy rating given the attractive implied valuation, the meaningful margin opportunity and the long-term opportunity to grow in a fragmented market,” said Chartier in a note.
Accounting for the transaction and the revised outlook, he estimates the Outdoor Products business is trading at 9 times the mid-point of the company’s FY24 EBITDA guidance and 7 times FY25 EBITDA guidance. Given the 10 times average EBITDA valuation for other outdoor products companies and “likely trough margins” for in FY24, he thinks the business is undervalued, particularly given its “potential for meaningful EBITDA growth next year” with reduced promotional activity as inventory de-stocking should be complete.
He further noted that the company indicated that it had engaged a consultant to identify cost-saving opportunities and Outdoor Products’ CEO, Eric Nyman, said that, based on early indications, a significant increase to the previously announced $50 million cost reduction was expected.
Chartier said, “Guidance implies an EBITDA margin of 5 percent this year vs. management’s mid-teens long-term target. We see a meaningful margin opportunity over the next two years, driven by significantly lower product costs (driven by lower ocean freight), a return to more normalized promotional levels and a significant cost-cutting initiative that will be detailed over the next few months. Given these drivers, we think our FY25 estimate could ultimately prove conservative.”
Photo courtesy Remington