Capstone Partners’ latest Outdoor Recreation & Enthusiasts Sector Update reports that although consumers remain under pressure managing elevated interest rates and persistent inflation, discretionary spending in the Outdoor Recreation sector has risen alongside outdoor participation rates.
Recent shifts in consumer preferences towards experiences and health and wellness activities have helped keep the Outdoor Recreation & Enthusiasts sector afloat,” the company wrote in a report summary. “Notably, spending on membership clubs, sports centers, parks, theaters, and museums grew 8.6 percent year-over-year (y/y), while purchases on sporting equipment, supplies, guns, and ammunition rose 3.3 percent in Q2 2024, according to the Bureau of Economic Analysis.
Additionally, Capstone noted Outdoor Industry Association’s research that showed the record-high U.S. outdoor participation rates in 2023 (up 4.1 percent y/y to 57.3 percent of the total U.S. population) have buoyed sector spending through year-to-date (YTD).
“However, overstocked inventory challenges have persisted, causing sector participants to pursue accretive mergers and acquisitions (M&A),” the company said. ‘Attractive targets have possessed dynamic consumer engagement systems, enabling management to keep an accurate pulse on consumer sentiment and gauge purchasing activity trends.”
Capstone suggested that financial performance across the sector is expected to improve as firms work through excess inventories, limit promotion activity, and mitigate margin pressures.
“As macroeconomic pressures weighing on discretionary spending ease, and firms rectify inventory turnover issues, Capstone expects the buyer universe to expand and drive deal volumes as more firms parlay healthier balance sheets and cash flows into more aggressive M&A strategies,” the company forecast.
Capstone reported that M&A activity in the Outdoor Recreation sector has grown 25.6 percent y/y, reversing a two-year streak of contraction, with strategic buyers continuing to drive Outdoor Recreation & Enthusiasts M&A, comprising 66.7 percent of transactions YTD.
There have been 54 sector transactions announced or closed YTD, compared to 43 in the prior-year YTD period.
“Private strategics have buoyed deal volume to-date, accounting for more than half of sector transactions,” Capstone noted. “In contrast, public strategics have pulled away from M&A (down 41.7 percent y/y), as they instead look internally, deleveraging balance sheets, re-evaluating brand portfolios, and cleaning out non-core business units via divestitures.”
Still, as high inventories and margin pressures subside, Capstone believes that public strategics are expected to resume M&A pursuits to drive growth.
“The Sporting Goods segment has seen considerable buyer attention with both strategics and financial sponsors drawn to high gross margin businesses with robust brand equity, and large and expanding addressable markets,” the firm wrote in its report summary. “Meanwhile, private equity activity has increased three-fold compared to the prior-year period. Family offices and large-scale private equity shops have re-entered the market as they aim to capitalize on a heavy inventory of targets and limited competition in the buyer universe, catalyzing the formation of new platforms.”
Simultaneously, Capstone said a strong underlying growth outlook has supported capital deployment via tuck-ins of quality businesses into existing portfolio companies as sponsors postpone exit activity amid a challenging valuation environment.
Capstone said near-term visibility into a broader market recovery has remained foggy, driving down valuations in the space. “Average transaction multiples in the sector have deteriorated, falling to 8.0x EV/EBITDA (2022-YTD) from 11.6x EV/EBITDA (2019-2021),” the firm wrote in the October 2024 report. “As public strategics re-align their brand portfolios and inventories return to normal levels, burgeoning cash flows across the sector are expected to help drive multiples toward the historical average (10.8x EV/EBITDA over the 2020 to YTD period).”
A number of the example transactions put forward in the Capstone report were covered by SGB Media, some ad nauseam.
The report also includes:
- An update on segment inventory levels and public company performance.
- A breakdown on what type of buyers are targeting pockets of the Outdoor Recreation sector, contributing to a rise in M&A activity in 2024.
- A review of the latest developments regarding bids for Vista Outdoor and its Ammunition business, its potential impact on sector M&A, and the firm’s recent divestures and buy-side activity.
- The rationale behind notable transactions and the key characteristics driving premium valuations in the sector.
Capstone Partners’ Consumer Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the consumer and retail industries. Our team partners with leading mid-to-large sized consumer businesses that serve growing end-markets.
