Consumer behavior has continued to perplex market participants as each pullback in spending has seemingly been followed by a resurgence of demand in the Outdoor Recreation market. That observation is one of the key points in the recent Outdoor Recreation Market Update for December 2023 from Capstone Partners.

Capstone observed that consumers have largely demonstrated category stickiness through the third quarter of 2023 even as consumer resilience appeared to be tested in August when personal consumption expenditures on sporting equipment, supplies, guns & ammunition fell 0.9 percent month-over-month (MoM). That decline was followed by a 0.7 percent MoM increase in September, according to the Bureau of Economic Analysis.

Spending on recreational goods and vehicles has followed a similar trend, Capstone noted, rising 0.8 percent MoM in September following a 0.2 percent decline in the prior month. The company said a sustained higher interest rate environment is expected to continue to challenge consumer strength in the coming quarters. However, with wage growth surpassing inflation, Capstone noted that consumers may be regaining purchasing power to fuel discretionary spending, particularly for outdoor recreation and enthusiast products.

Top-line growth has moderated for many sector players as the initial pandemic-fueled wave of new entrants has calmed, the report indicated. Still, market participants have benefited from an easing freight cost environment and cost disinflation in recent months, as evidenced by recent third-quarter earnings reports. Capstone said that while Yeti recorded flat sales growth in Q3, it grew its gross margin to 58.0 percent of sales from 51.3 percent in the prior-year corresponding quarter, according to its earnings release (read SGB Media‘s coverage here).

Johnson Outdoors experienced a similar year-over-year (YOY) profitability improvement, growing gross margin to 41.5 percent of sales from 36.1 percent despite net sales falling 8.2 percent in its third fiscal quarter, according to its earnings release in August (read SGB Media‘s coverage here). However, Johnson Outdoors had a tough go of it since reporting Q4 numbers last week as shares plunged following its release and have continued to slide and revenues were halved in the period as the fishing business struggled (read SGB Media‘s coverage here).

Capstone noted that sector players have sought to streamline operations, simplify business segments, and focus on core competencies. This has apparently spurred both acquisition appetite and divestitures of business units in the Outdoor Recreation market through YTD 2023. Moving through year-end and into 2024, Capstone said sector participants with defensible gross margins, robust cash flows, and a sticky customer base are poised to experience healthy buyer appetite. Lulls in merger and acquisition (M&A) markets are often followed by a surge in dealmaking—a forecast anticipated to materialize towards the first half of 2024, according to the report.

Firm Sees Strategic Buyers Driving M&A Activity
Mergers & Acquisition transaction volume has reportedly slowed through YTD 2023, according to Capstone’s analysis, falling 37.5 percent YoY to 70 deals announced or completed thus far. Elevated interest rates, uncertainty surrounding the sustainability of consumer spending, and challenged revenues are all factors that Capstone said have facilitated caution among buyers. Strategics have largely driven the M&A market through YTD, comprising 84.3 percent of total transactions, according to the December report.

The report suggests that financial buyers have been increasingly selective in the current market and have slowed acquisition pursuits in the Outdoor Recreation & Enthusiasts space through YTD 2023. Private equity firms are said to have accounted for a modest 15.7 percent of total deals, a steep drop from comprising 22.5 percent of transactions in 2022, according to Capstone. A higher interest rate environment has reportedly caused sponsors to increasingly scrutinize cash flows of targets, pursuing those with the ability to rapidly service debt. With transaction financing costs elevated, the increased equity contribution needed to complete deals has the potential to adversely weigh on internal rates of return, Capstone said.

“However, select sponsors have sought to deploy capital to the space towards proven, scalable brands,” the company wrote in its report. “In November, Norwest Equity Partners, a leading middle market investment platform, acquired United Sports Brands for an undisclosed sum. United Sports holds a collection of brands including Shock Doctor, McDavid, Cutters, Nathan, Pearl Izumi, and Glukos. Norwest Equity Partners had previously acquired Shock Doctor in 2008 and subsequently sold the brand to Bregal Partners in 2014; leading to the creation of United Sports Brands.”

Vista Outdoor Sheds Ammo Business
Capstone suggested in the December report that Tactical & Hunting segment players have been cognizant of the political and social scrutiny surrounding firearm manufacturing operations. On the M&A front, the company said financial buyers, in particular, have been wary of pursuing firearm manufacturing companies as select limited partner bases often have firm stances against investment in the space.

“However, appetite has persisted for quality segment assets,” Capstone said. “Notably, in September, Warren Kanders, who owns 15.4 percent of Clarus’ shares, submitted a non-binding bid to acquire Clarus’ Precision Sports segment for $160 million.”

Kanders advocated that the bid would provide financial flexibility for Clarus and allow it to focus on its Outdoor and Adventure segments, according to a press release (read SGB Media‘s coverage here).

Established firearms and ammunition providers have remained active buyers of tactical products assets in the current market. In October, Vista Outdoor announced a definitive agreement to sell its Sporting Products (ammo) segment to Czechoslovak Group (CSG) for an enterprise value of $1.9 billion, equivalent to 5.0x EV/EBITDA. Vista’s Sporting Products segment comprises Ammunition brands including Remington, Hevi-Shot, CCI, and Speer. Upon completion of the sale, Vista’s Outdoor Products business would become an independent public company, Revelyst, with brand categories including Fishing, Bike Hydration, Golf GPS, and Motocross.

Since the announcement, Vista received an unsolicited offer from Colt CZ Group in which Colt CZ and Vista Outdoor would be combined in a cash and stock transaction (see SGB Media coverage here). The offer valued Vista Outdoor at $30 per share, or $1.7 billion, according to a press release. Vista rejected the merger offer, communicating that it had undervalued the company. “We think Revelyst will likely resume add-on acquisitions of outdoor brands after the sale of Vista Outdoor’s Sporting Products segment is complete,” commented Pete Bailey, director at Capstone Partners.

This week, Vista Outdoor and Czechoslovak Group a.s. (CSG) reported that their deal had cleared the antitrust clearance period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction still remains subject to receipt of the required regulatory approvals, including approval from the Committee on Foreign Investment in the United States, the approval of the company’s stockholders and other customary closing conditions. The companies believe the merger will close during the calendar year 2024.

Capstone noted that Vista is not the first large sector player to look to separate its outdoor products offerings from firearms operations.

“In August 2020, American Outdoor Brands completed its spin-off of its Outdoor Products & Accessories business to create two publicly traded companies—Smith & Wesson Brands, which focuses on firearms, and American Outdoor Brands which provides rugged outdoor products. Valuations often favor outdoor products providers over firearms players, with American Outdoor Brands trading at 13.0x EV/EBITDA compared to 6.9x EV/EBITDA for Smith & Wesson, as of November 2023,” the report said.

“Vista hopes to experience similar trading multiple expansion following an assumed completion of the sale of its Sporting Products business to CSG,” the report continued. “Vista has historically traded around 5.0x EV/EBITDA, however, the newly formed Revelyst platform may be valued as more of a pure-play outdoor enthusiast brand. In comparing similar publicly traded companies offering action sports, outdoor recreation, or outdoor accessories products, average EBITDA multiples have amounted to 13.4x. However, Vista’s Outdoor Products gross margin of 28.8 percent is notably lower than the index average of similar public companies, which stands at 42.1 percent.”

Capstone Sees Outdoor Recreation M&A Market Recovery Anticipated in 2024
Moving through year-end, Capstone suggests that sector M&A volume may “remain strained, but transaction inventory has been building.”

“Many prospective sellers have waited for greater economic transparency and recovery of revenues before launching a sales process,” the investment banking firm wrote. “Strategics are forecasted to continue to drive the M&A market in the Outdoor Recreation & Enthusiasts space in the coming months as high transaction financing costs and uncertain target company revenue forecasting have largely kept sponsors on the sidelines. Privately-owned businesses with healthy gross margins, recurring revenue, and category leadership are expected to garner strong acquirer interest in the new year.”

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