The downgrade of the term loan reflects its lower estimated recovery rate as a result of the recent asset-based revolver upsize. At the same time, the affirmation of the CFR and PDR reflects Moody’s view that while leverage is likely to remain elevated, Academy’s good liquidity provides it with flexibility to turn around its operating performance. Moody’s expects roughly flat earnings results in the next 12-18 months, reflecting a challenging operating environment, potential tariff impact and investment spending mitigated by improved merchandising, inventory allocation, customer service and omnichannel capabilities.
The stable outlook incorporates Moody’s expectations for roughly flat earnings performance over the next 12-18 months and good liquidity.
Moody’s took the following rating actions for Academy Ltd. :
- Corporate Family Rating, affirmed B3
- Probability of Default Rating, affirmed B3-PD
- $1.825 billion ($1.644 billion outstanding) Senior Secured Term Loan B due 2022, downgraded to Caa1 (LGD4) from B3 (LGD4)
- Stable outlook
Academy’s B3 CFR reflects the company’s high leverage with Moody’s adjusted debt/EBITDA of 6.4 times, aggressive financial policies and need for investment to differentiate its value proposition amid increased competition in the sporting goods sector. The rating is also constrained by Academy’s geographic concentration and its long-term lease commitments to large-format stores, which limit its ability to respond to declining bricks-and-mortar traffic.
The company’s good liquidity, including modestly positive expected free cash flow, ample revolver availability and lack of near-term debt maturities, provide key credit support. Academy’s scale, solid market position in its regions and the relative stability of its business through recessionary periods due to its value focus and broad assortment also support the rating.
The ratings could be downgraded if liquidity deteriorates for any reason, including negative free cash flow generation and increased revolver usage. Further revenue and earnings deterioration could also lead to a downgrade. Quantitatively, the ratings could be downgraded with expectations of EBIT/interest expense (Moody’s-adjusted) below 1.0 time.
The ratings could be upgraded if the company exhibits sustained positive same-store sales and earnings growth while maintaining good liquidity. Quantitatively, an upgrade would require debt/EBITDA (Moody’s-adjusted) maintained below 6 times and EBIT/interest expense above 1.5 times.
Academy operates 249 stores under the Academy Sports + Outdoors banner, which are primarily located in Texas and the southeastern United States. The company generated approximately $4.9 billion of revenue for the twelve-month period ended August 4, 2018. Academy has been controlled by an affiliate of Kohlberg Kravis Roberts & Co L.P. since 2011.