S&P Global Ratings upgraded Academy Sports + Outdoors, Inc.’s debt rating due to recent better-than-expected performance, including S&P Ratings’ adjusted EBITDA margins of nearly 19% over the past six quarters .
S&P raised Academy Sports’ issuer credit rating from “BB-” to “BB”. The stable outlook reflects its expected good performance over the next 12-18 months and S&P’s adjusted leverage at or near current levels.
S&P said, “Academy’s recent performance trends, including improving EBITDA margins, indicate an improved competitive position. Over the past year, Academy’s operating performance, particularly margin generation, has exceeded our expectations. Importantly, adjusted EBITDA margins from S&P Global Ratings remain high relative to historical results and have significantly exceeded our guidance. For the last months to July 2022, adjusted EBITDA margins by S&P Global Ratings Academy were 18.2% compared to our previous projection of 15%. Moreover, these margins were around 19% or more in the first half of this year. It’s also better than our expectations, a forecast that assumed lower margins due to heavy competition and promotions.
“While the economic environment remains uncertain, Academy has benefited from its market position as a value-driven retailer, which has led to increased customer traffic and demand for sporting goods and equipment. outdoor equipment, as well as lower consumer demand.At the same time, Adjusted EBITDA margins improved compared to the prior year period due to relatively lean inventory, cost containment efforts, improved promotional tempos and operational initiatives in recent years.While we believe economic and competitive risks will persist, we believe the S&P Global Ratings Academy Adjusted EBITDA margins will remain around 18%.
“That said, the company’s sales were generally in line with our guidance, with revenue declining at a mid-single digit rate in the first half of the year. We believe this represents a modest normalization in the performance of company’s sales as it outpaces the growth of more than 20% in the prior period We expect the decline in revenue to moderate in the second half of the year before expanding into the fiscal year 2023. We believe changes in consumer habits, including more people working from home and pursuing outdoor recreation, will bring structural tailwinds to demand for sporting goods. also an acceleration of new store openings to drive sales over the next 12 to 18 months.
“We believe management’s operational initiatives will help Academy maintain strong long-term performance. Academy’s management team has strategically employed operating initiatives that have helped the company maintain growth and support S&P Global Ratings Adjusted EBITDA margins. This includes improving in-store customer service by increasing customer contact hours, changing store layout, improving assortment and increasing store location efforts. Additionally, assortment and store layout updates, along with good supplier relationships, helped Academy maintain good inventory levels, up just 17% in the second quarter ending in July 2022 compared to the 2021 period.
“Furthermore, we believe that implemented and planned omnichannel initiatives will help maintain and increase customer engagement. Technology management has increased and will likely continue to improve checkout speeds, improve in-store and online search capabilities, and expand payment options. This includes ongoing enhancements to the company’s website and improvements to the mobile app.
“We believe these initiatives and others like data-driven markdown and merchandising optimization have allowed management to refocus on expansion strategies. We believe Academy will cautiously and profitably expand its store base over the next few years, where we expect approximately 10-15 new stores per year. We believe that the operational initiatives adopted over the past few years will position Academy for good long-term growth and have therefore revised our business risk assessment to just low.
“Academy remains a relatively smaller, but growing, competitor in the sporting goods retail industry. We continue to view Academy as a regional sports and outdoor retailer with physical stores primarily in Texas and adjacent southern states.The company positions itself as an everyday low-cost value player and competes with significantly larger and better capitalized competitors, companies that focus on the mass market or provide specialty sporting goods This includes specialty retailers like Dick’s Sporting Goods Inc. (BBB/Stable/–) and Great Outdoors Group LLC (BB-/Positive/–), mass merchants like Walmart Inc. (AA/Stable/ A-1+) and e-commerce competitors like Amazon (AA/Stable/A-1+). Additionally, online penetration remains lower than some competitors, accounting for around 10% of total sales. We believe that that is There are potential long-term risks for Academy as the industry remains prone to product promotions and competitive pricing as well as changing customer habits. We also believe that sporting goods and related products remain a highly fragmented industry with growing competition, including both brick-and-mortar retailers and pure e-commerce competitors.
“The academy and the sports retail industry may experience more volatile performance in the near term due to macroeconomic uncertainty. We expect inflation to remain elevated through 2023 and an economic slowdown overall will persist through 2023. We recognize a degree of risk associated with an unforeseen decline in Academy performance that may result from increased competition and increased promotions. could also have a negative effect on near-term projections beyond what we already consider in our baseline forecast.
“The stable rating outlook reflects our expectation of strong performance over the next 12 months, including low to mid-single digit sales growth, S&P Global Ratings adjusted margins of approximately 18% and adjusted leverage. S&P Global Ratings at or near recent levels.
Photo courtesy of Sports and Outdoors Academy