Moody’s Investors Service upgraded Academy, Ltd.’s corporate family rating (CFR) to B2 from B3, probability of default rating (PDR) to B2-PD from B3-PD and senior secured term loan rating to B3 from Caa1. Concurrently, Moody’s assigned a SGL-2 speculative-grade liquidity rating. The ratings outlook is stable.
The CFR, PDR and term loan upgrades follow the company’s October 2, 2020 initial public offering of common stock of Academy’s parent, Academy Sports and Outdoors, Inc., and better than anticipated Q2 2020 operating performance. The offering of 18 percent of the company’s common equity valued Academy at approximately $1.8 billion total enterprise value and raised $183 million in net proceeds (all numbers exclude potential over-allotment), which will be used for general corporate purposes that could include debt repayment. Moody’s expects that the IPO will result in a more conservative financial strategy, which is a key governance consideration. The IPO significantly reduces the risk of future debt-financed dividend distributions and increases Academy’s access to the capital markets. This supports Moody’s projection for gross debt/EBITDA remaining below 5 times in its base case scenario of an earnings decline in 2021 as a result of normalization of consumer spending patterns following the 2020 surge in demand for firearms, outdoor and sporting goods.
The SGL-2 speculative grade liquidity rating reflects Moody’s projections for solid positive free cash flow, high cash balances and ample availability on the $1 billion asset-backed revolver, partly offset by the 2022 term loan maturity.
Moody’s wrote, “Academy’s B2 CFR is constrained by the company’s high gross debt leverage and the highly competitive nature of sporting goods retail, including the increased focus of major apparel and footwear brands on direct-to-consumer distribution and the shift to online shopping. Moody’s projects a modest increase in leverage in 2021 as a result of more normalized consumer spending, to debt/EBITDA in the high-4 times range in 2021, compared to 4.3 times as of August 1, 2020. However, Academy’s high cash balances provide options for reducing leverage from these levels in a refinancing transaction or with future debt repayment. The rating considers governance factors, including the expectation for more conservative financial strategies following the public equity offering. Specifically, although the company remains majority-owned by private equity sponsor KKR, Moody’s views re-leveraging transactions as unlikely following the equity filing. This would constitute a significant change from aggressive financial strategies over the past several years, which have included debt-financed dividend distributions (as well as the August 2020 $257 million cash-funded distribution ahead of the IPO) and discounted debt repurchases in 2019. In addition, as a retailer, Academy needs to make ongoing investments in its brand and infrastructure, as well as in social and environmental drivers including responsible sourcing, product and supply sustainability, privacy and data protection. Academy’s ongoing offering of firearms and ammunition at a time when several large retailers have pulled back also represents a social consideration.
“At the same time, Academy’s ratings positively consider the company’s good liquidity, scale and solid market position in its regions. The turnaround strategy put in place by the current management team has started yielding results since late 2019, including initiatives in merchandising, private label credit card and digital investment. Following strong earnings growth in Q2 2020 across all product categories, Moody’s expects continued momentum in the second half of the year driven by continued strength in outdoor categories. Moody’s projects a subsequent revenue and EBITDA decline in 2021 as consumer demand in Academy’s product categories normalizes from the surge in 2020. Nevertheless, the company’s value price points and diversified product assortment should mitigate the impact of the likely shift in spending patterns.
“The stable outlook reflects Moody’s expectation that the company will successfully refinance its 2022 term loan maturity and maintain a good liquidity profile.”