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Outdoor Recreation Market Update – December 2023

Recent Large-Scale Deals Drive Outdoor Recreation Market M&A Activity

Consumer behavior in the Outdoor Recreation market continues to confound industry observers, with spending patterns showing a remarkable resilience despite occasional setbacks. In the third quarter of 2023, consumers displayed a consistent preference for outdoor recreation products, even in the face of economic fluctuations. While there was a slight dip in spending on sporting equipment and recreational goods in August, this was swiftly followed by a resurgence in September, indicating a strong underlying demand.
Despite concerns about the impact of sustained high interest rates on consumer spending, the recent trend of wage growth outpacing inflation suggests that consumers may still have the purchasing power to support discretionary spending, especially on outdoor recreation products.
While overall revenue growth has moderated for many companies in the sector, there have been some notable improvements in profitability. Companies like YETI and Johnson Outdoors have managed to increase their gross margins, despite facing challenges such as flat or declining sales. However, not all segments of the Outdoor Recreation market have fared well in public equity markets this year, with some experiencing significant declines.
To adapt to changing market conditions, industry players have been focusing on streamlining operations and concentrating on their core strengths. This has led to both acquisitions and divestitures in the sector, as companies seek to position themselves for future growth opportunities.
Looking ahead to 2024, companies with strong gross margins, healthy cash flows, and loyal customer bases are expected to attract significant interest from buyers. Market observers anticipate a resurgence in merger and acquisition activity in the first half of the year, as companies seek to capitalize on opportunities for strategic growth and expansion.

Strategic Buyers Drive M&A Activity in a Challenged Outdoor Recreation Market

Mergers and acquisitions (M&A) activity has experienced a notable slowdown in the year-to-date (YTD) of 2023, with transaction volume decreasing by 37.5% year-over-year to 70 deals announced or completed. Factors such as elevated interest rates, uncertainties surrounding consumer spending sustainability, and revenue challenges have contributed to a sense of caution among potential buyers. Strategic buyers have largely dominated the M&A landscape, accounting for 84.3% of total transactions.
Despite the subdued M&A market, industry players have remained active in pursuing target companies that offer strategic synergies, complementary products, or new revenue streams. One notable transaction during this period was Fox Factory's acquisition of Marucci Sports from Compass Diversified for an enterprise value of $572 million. This deal, valued at 3.1x EV/Revenue and 11.4x EV/EBITDA, represents a significant return for Compass Diversified, which initially purchased Marucci for $200 million in April 2020 and subsequently expanded its portfolio through acquisitions like Lizard Skins and Baum.
Fox Factory's interest in Marucci, despite experiencing revenue challenges in its Specialty Sports Group segment, suggests a strategic move to diversify its offerings and potentially mitigate revenue declines. While the acquisition is expected to bolster Fox Factory's sales in the coming quarters, successful integration and realization of synergies will be crucial. Fox's CEO, Mike Dennison, highlighted the transaction's immediate accretive impact on revenue and profitability, as well as its potential to enhance brand value and market position.
In summary, despite a slowdown in M&A activity, strategic acquisitions like Fox Factory's purchase of Marucci Sports demonstrate continued industry interest in seizing growth opportunities and strengthening market positions through strategic partnerships.
Financial buyers, particularly private equity firms, have displayed a more cautious approach in the current market environment, resulting in a slowdown in acquisition activities within the Outdoor Recreation & Enthusiasts sector in the year-to-date (YTD). Private equity firms have accounted for only a modest 15.7% of total deals, a significant decrease from comprising 22.5% of transactions in the previous year.
The shift towards selectivity among financial buyers can be attributed to several factors, including the impact of a higher interest rate environment. Increased interest rates have prompted private equity sponsors to closely evaluate the cash flows of potential targets, prioritizing those with strong capabilities to service debt obligations promptly. However, the elevated costs associated with transaction financing have necessitated larger equity contributions to complete deals, potentially affecting internal rates of return unfavorably.
Despite these challenges, certain private equity firms have identified opportunities to deploy capital into the Outdoor Recreation & Enthusiasts space, particularly towards established and scalable brands. In a notable transaction in November, Norwest Equity Partners, a prominent middle market investment platform, acquired United Sports Brands for an undisclosed sum. United Sports Brands boasts a portfolio of renowned brands, including Shock Doctor, McDavid, Cutters, Nathan, PEARL iZUMi, and Glukos.
Norwest Equity Partners' acquisition of United Sports Brands marks a strategic move to capitalize on proven and scalable brands within the sector. Notably, this acquisition follows Norwest Equity Partners' previous ownership of Shock Doctor, which was acquired in 2008 and subsequently sold to Bregal Partners in 2014, ultimately leading to the formation of United Sports Brands.
In summary, while financial buyers have exercised increased caution in the current market landscape, select opportunities continue to attract investment, particularly from firms targeting established and scalable brands in the Outdoor Recreation & Enthusiasts sector.

Vista Outdoor Sheds Sporting Products Segment, Driving Potential Valuation Expansion

The Tactical & Hunting segment within the firearms industry has been acutely aware of the heightened political and social scrutiny surrounding firearm manufacturing operations. Financial buyers, in particular, have approached investments in firearm manufacturing companies cautiously, as certain limited partner bases have firm stances against such investments. Despite this, there remains a persistent appetite for high-quality assets within this segment.
The move by Vista Outdoor to separate its outdoor products offerings from firearms operations echoes a trend seen previously with American Outdoor Brands in August 2020. American Outdoor Brands completed a spin-off of its Outdoor Products & Accessories business, creating two publicly traded companies—Smith & Wesson Brands, focusing on firearms, and American Outdoor Brands, offering rugged outdoor products.
Valuations in the market often favor outdoor products providers over firearms players, with American Outdoor Brands trading at a higher EV/EBITDA compared to Smith & Wesson. Vista hopes to replicate a similar trading multiple expansion following the completion of the sale of its Sporting Products business to CSG. The newly formed Revelyst platform may be valued as a pure-play outdoor enthusiast brand, potentially leading to an increase in trading multiples.
In comparison to similar publicly traded companies offering action sports, outdoor recreation, or outdoor accessories products, Vista's Outdoor Products gross margin is lower, indicating potential for improvement in profitability following the separation from firearms operations.

M&A Market Recovery Anticipated in 2024 for Outdoor Recreation Market

As we approach the year-end, M&A activity in the Outdoor Recreation & Enthusiasts space may continue to face challenges, but there is a growing inventory of potential transactions. Many sellers have been holding off on initiating sales processes, waiting for improved economic clarity and revenue recovery before proceeding. Despite this cautious approach, it's anticipated that strategic buyers will remain the primary drivers of the M&A market in the sector in the coming months.
The high costs associated with transaction financing and the uncertainty surrounding revenue forecasting for target companies have largely kept financial sponsors on the sidelines. However, privately-owned businesses boasting healthy gross margins, recurring revenue streams, and a strong position within their respective categories are poised to attract significant interest from potential acquirers in the new year.
For those interested in updates on our business or seeking guidance on navigating the Outdoor Recreation market landscape, we invite you to reach out to us at ESF Equity, LP. We offer a wide range of advisory services and possess in-depth knowledge of the Outdoor Recreation sector, and we are here to assist you in achieving your business goals. Please don't hesitate to contact us for further information.

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