BB Stock – Vista Outdoor’s Debt Ratings Upgraded
Vista Outdoor’s brands include Federal Premium, CamelBak, Bushnell, Camp Chef, Remington, Primos, Blackhawk, Bell, Giro, Bushnell Golf, Primos, Eagle, RCBS, CCI, HEVI-Shot, and Speer.
S&P raised its issuer credit rating to ‘BB-‘ from ‘B+’. Concurrently, S&P raised its rating on the company’s unsecured debt to ‘BB-‘ from ‘B+’. S&P revised its recovery rating to ‘3’ from ‘4’, reflecting its expectations for improved profitability at emergence, resulting in a higher valuation.
The stable outlook reflects its expectation that the company will maintain net leverage below 2.5x over the next 12 months.
S&P said in its analysis, “Heightened consumer demand for ammunition for personal protection and hunting drove increased sales. During the pandemic, consumers turned to outdoor sports as a form of entertainment, and though we expect a slight decline in fiscal 2022 as consumers reallocate discretionary spending, we still expect the segment to be substantially larger than what it was pre-pandemic with retention of some new users. The company’s adjusted EBITDA margin improved to 16.7 percent in fiscal 2021 versus 7.2 percent in fiscal 2020, resulting in gross leverage of 1.6x (1x on a net basis) for fiscal 2021 versus gross leverage of 5.1x in the year prior.
“We now expect total sales to grow to $2.4 billion in fiscal 2022, driven by continued growth in the shooting sports segment. Vista’s increased production scale and capabilities along with a significant ammunition order backlog boosted its pricing ability and market share. Additionally, its e-commerce strategy will continue to build loyalty across its broad portfolio of brands and unlock cross-selling and subscription revenue opportunities.
“Profitability should improve with increasing demand for ammunition and greater operating leverage. U.S. commercial wholesale ammo sales have been increasing since the back half 2019. The company holds roughly 35 percent share in the domestic commercial ammunition segment. In the near term, we expect ammunition demand to continue trending positive given the company’s growing order backlog, increased firearm adoption by first-time users, pickup in hunting licenses, and increased gun range participation. There were 8 million new firearm buyers in 2020 and the U.S. Fish and Wildlife Service reported hunting license sales increased by 8 percent in 2020 versus a decline of 3 percent in 2019.
“The company continues to win ammunition contracts with major police departments and the military, which provide greater demand stability. The increased demand for ammunition has driven stronger operating leverage as gross profit for the shooting sports segment grew to 28 percent in fiscal 2021 from 18 percent in fiscal 2020. The acquisition of Remington Arms Co. Inc.’s ammunition and accessories businesses in the third quarter of fiscal 2021 further bolstered the company’s ammunition production capacity and accelerated sales growth. Although we expect the Remington acquisition to cause temporary margin disruption, the business ramp is happening faster than expected and we expect it will contribute in excess of $200 million of sales in fiscal 2022. We expect EBITDA margins to decline to 14.3 percent in fiscal 2022, driven by a combination of Remington inefficiencies and rising commodity, labor, and freight costs. However, we expect the company will have the ability to pass on most of the costs to consumers, particularly on the ammunition side, as demand continues to outweigh supply.
“Cyclicality in the ammunition industry is an inherent risk to the company’s profitability, though its portfolio has become more robust to navigate a down cycle. Despite the rapid increase in ammunition demand, our visibility into end-user ammunition stockpiles is limited, and as such there is a risk of a substantial downturn if the market stockpiles grow too large. During the previous ammunition downturn in 2016-2019, consumers had stockpiled ammunition in the years prior, and as a result demand collapsed. The problem was further exacerbated by Remington and distributor bankruptcies that led to excess product and cheap inventory flooding the market, depressing pricing.
“We believe the company is better positioned today as its ammunition is more robust with more exposure to comparatively less cyclical types of calibers. Additionally, the company’s outdoor portfolio has also grown with a strong rebound in demand through the pandemic, and as such the outdoor segment’s gross margins increased to 29 percent in fiscal 2021 versus 26 percent in fiscal 2020. Despite these moderating factors, we still believe a substantial decline in the ammunition market driven by stockpiling, coupled with increasing commodity, freight, and labor costs, could drive a material decline in EBITDA, since the majority of the company’s profitability is in the shooting sports segment. Additionally, we believe there are political and social risk factors related to shooting sports that could hurt the company’s portfolio. For instance, retailers could destock the company’s products or retailers could choose to not stock the company’s outdoor products because of negative press or social pressures.
“We expect Vista to manage net leverage at 2.5x or below on an S&P Global Ratings’ adjusted basis. Adjusted net leverage for fiscal 2021 was about 1x and we expect the company to manage net leverage below 2.5x. We expect the company to generate at least $200 million free cash flow in fiscal 2022 and 2023. We expect it will use proceeds for reinvestment in the business, tuck-in acquisitions, or share repurchases in the longer term, though in the shorter term some cash could remain on the balance sheet. The company recently announced a $100 million share repurchase program over the next two years and made a few tuck-in acquisitions. If the company does increase net leverage above 2.5x for an acquisition, we would expect it to quickly reduce debt over a 12-month period to below 2.5x. However, if the company is more aggressive with its financial policy, we believe it could leave little leverage headroom for the rating category if there is a substantial downturn in demand for the company’s products, such as an ammunition downcycle.
“The stable outlook reflects our expectation that the company will continue growing sales and earnings while maintaining net leverage below 2.5x over the next 12 months, despite our expectations for continued bolt-on acquisitions.”