Academy Sports debt ratings have been improved


S&P Global Ratings raised its debt ratings on Academy Sports + Outdoors, Inc. as the sporting goods chain “continues to post strong sales and EBITDA gains, translating into better leverage”.

S&P has assigned its issuer credit rating of ‘BB-‘ to Academy and raised all other ratings, including the issuer credit rating of New Academy Holding Co., from ‘B+’ to ‘BB-‘. The rating agency also raised the issue’s rating to “BB-”, based on the issuer’s credit rating. S&P announced that it was withdrawing ratings from New Academy Holding Co. LLC following its upgrade. The outlook for stable ratings reflects S&P’s expectation of maintaining adjusted leverage in the 2x range as performance normalizes from current high levels.

S&P said in its analysis, “Our ratings reflect better-than-expected sales and EBITDA generation, contributing to a significant improvement in credit metrics, which we expect the business to maintain despite subdued performance in 2022. Academy’s operations over the past year benefited from its market position as a value-driven retailer as well as increased customer traffic and demand for sporting goods and equipment. Sales growth increased 20% for the 12 months ended October 30, 2021, while S&P Global Ratings Adjusted EBITDA increased more than 80% to more than $950 million. At the same time, adjusted EBITDA margins improved in the teen zone as Academy benefited from sales leverage, relatively lean inventory levels and aided cost containment efforts not r a decrease in product promotions. As a result, we expect revenue growth to approach 20% for fiscal 2021, compared to our previous expectations of high single-digit increases. Additionally, we expect significant improvement in EBITDA and credit metrics, including leverage in the high 1x to low 2x range for the end of fiscal 2021.

“Additionally, we expect the company to maintain adjusted leverage in the 2x range over the next 12 months, even after forecasting a modest performance slowdown; this includes an expectation of a low single digit decline in sales and adjusted EBITDA margins falling into the low to mid 15% range. We expect revenue and margin trends to moderate in 2022, reflecting our expectations for higher levels of product promotions, increased competition between direct and indirect sports retailers and inflation-amplified cost pressures. raw materials and wages. Our performance expectations also envision a slowdown in consumer spending on sporting and outdoor goods, with customers likely reviewing their spending habits and rebalancing funds toward travel and outings as COVID-related concerns take hold. gradually attenuate. Nonetheless, we believe the company’s initiatives will help support performance over the next few years; this includes good inventory management and promotional cadence as well as in-store and omnichannel investments. We also believe that initiatives such as the assortment of regional products, continuous improvement of merchandise and the development of new stores will help support the business.

“We believe the Academy will maintain a relatively conservative financial policy, supporting upgrades. Academy has steadily reduced debt since its IPO in October 2020, deleveraging approximately $800 million in debt. This deleveraging and continued growth in operating performance has resulted in improved adjusted credit metrics, including leverage in the mid to high range of 1x recently compared to the low 4x range prior to the IPO. Going forward, we expect the company to continue to generate healthy cash flow, with meaningful free operating cash flow of over $400 million. While we expect the company to use most of its excess cash flow for shareholder initiatives, noting the recently announced $500 million share buyback program, we also expect that The Academy funds these initiatives using internally generated cash and maintains leverage within the 2x range. We are therefore revising our assessment of the financial risk profile to intermediate from significant.

“Short-term performance volatility and the scale of operation of Academy remain a risk. We continue to view Academy as a regional sports and outdoor retailer with physical stores primarily in Texas and southern states. The company positions itself as an everyday low-cost player and competes with significantly larger and better capitalized competitors, companies that focus on the mass market or supply specialist sporting goods; this includes specialist retailers such as Dick’s Sporting Goods Inc., (BBB/Stable) and Great Outdoors Group LLC (BB-/Positive) or mass merchants like Walmart Inc. (AA/Stable).We believe this places the company in a potentially long-term disadvantage as the industry remains prone to product promotions and competitive pricing as well as changing customer habits. e sporting goods and related products remain a highly fragmented industry with increasing competition, including both brick-and-mortar retailers and pure e-commerce competitors.

“We also believe that the Academy and the sports retail industry may experience more volatile performance in the near term. After years of relatively modest and flat performance, the EBITDA base and cash flow generation Academy’s cash flow has grown significantly over the past two years, in part due to favorable consumer trends during the pandemic.We estimate that Adjusted EBITDA will approach $1.2 billion in fiscal 2021, or more than double its 2019 base of $499 million. consumption.; this will, in our view, lead to short-term performance volatility and an overall decline in EBITDA of around 15% to a new pl us standardized in the future in 2022.

“Academy remains largely a brick-and-mortar retailer despite continued omnichannel investments. We expect Academy’s digital sales penetration to remain below 10% of total sales, which is lower than its esports peers. and retail, such as 30% of Dick’s Sporting Goods Inc. Additionally, nearly half of its stores are in Texas, which is far more geographically concentrated than its peers. online capabilities and expanding its store base, we continue to view the business as a regional brick-and-mortar retailer operator in a highly competitive space.These factors, in addition to what we view as performance uncertainty at term, lead us to apply a negative comparative ratings analysis modifier.

“The stable ratings reflect our expectation that Academy will remain a regional player in the highly competitive sports and outdoor retail industry. It also reflects our projection of relatively stable credit protection metrics, including adjusted leverage in the 2x zone as performance normalizes in fiscal 2022.”

Photo courtesy of Sports + Outdoors Academy


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