Outdoor Recreation Market Update – October 2022

Customer Stickiness Drives a Resilient Outdoor Recreation & Enthusiasts Market

Capstone Partner’s October 2022 Outdoor Recreation Market Update shows persistent spending on outdoor products, an expanded consumer base, and prioritization of health and wellness have driven enduring demand in the Outdoor Recreation & Enthusiasts sector. The pandemic-induced wave of new entrants to the space have continued to pursue outdoor recreation activities—creating lasting habits that have fueled sector growth. While near-record levels of inflation have challenged sector participants, the stickiness of consumer purchases has been apparent in the robust level of recreational personal consumption expenditures. In July 2022, expenditures on recreational goods & vehicles increased 9.6% year-over-year (YOY) to $616 billion, according to the U.S. Bureau of Economic Analysis.¹ Personal consumption expenditures in the space have also registered month-over-month increases in the last six out of seven months—easing concerns that the sector would face a drop-off in demand post-pandemic.

Outdoor recreation and enthusiast pursuits have proven to be relatively non-discretionary amid economic uncertainty. A widened customer base that has placed increased focus on overall wellness has also contributed to the sector's resilience from broader economic headwinds. Notably, 164.2 million Americans participated in outdoor recreation activities in 2021, a 2.2% YOY increase, which marked the highest number of participants on record, according to Outdoor Foundation.² As consumers continue to spend on outdoor products, sector players with brand strength, customer retention, and favorable product mixes are poised to attract healthy demand. In addition, brands with entrenched customer loyalty and an affluent consumer base are particularly well-positioned to weather recessionary headwinds. As strategics look to bolster product offerings and sponsors continue to build sector platforms, privately-owned businesses in high-growth segments, such as Powersports and Technology (Tech)-enabled Sporting Goods, are expected to attract ample merger and acquisition (M&A) interest.

COVID brought many new participants to the Outdoor space, especially casual users. It was unclear whether it would be sustainable. Current data indicates these consumers have changed and incorporated outdoor recreation into their lifestyles going forward. Despite problems with retail inventory, demand continues to rise for outdoor product and services. This should bode well for M&A trends in the sector.

Ken WasikManaging Director and Head of Consumer Investment Banking, Capstone Partners

M&A Volume Moderates, Valuations Remain Healthy for High-Quality Businesses in Outdoor Recreation Market 

Merger and acquisition volume has slowed through year-to-date (YTD) 2022 when compared to the prior year, falling 28.3% YOY to 115 announced or completed transactions. While 2021's record M&A volume creates a difficult comparison, YTD 2022 deal count has remained in line with historic transaction levels. The precarious economic environment has facilitated caution among buyers, with intense scrutiny being placed on financial performance consistency. COVID-induced bumps in revenue have clouded what normalized operating performance looks like for select sector participants, which has placed increased emphasis on sustained growth amid challenging business conditions. Anecdotally, dealmakers have noted the use of earnouts and structure in purchase price negotiations as downside protection for buyers. However, the diverse mix of transactions in YTD 2022, ranging across all sector segments, have demonstrated the health of the overall Outdoor Recreation & Enthusiasts M&A market. Top brands have continued to attract strong valuation multiples, with the average sector M&A EV/EBITDA multiple standing at 10.2x from 2017 to YTD 2022.

Strategic buyers have continued to drive transaction activity, accounting for 73.9% of YTD deal volume. Sector players with healthy balance sheets have remained active acquirers and sought accretive assets with loyal customers and healthy growth rates. Notably, Vista Outdoor (NYSE:VSTO) acquired Simms Fishing in July for an enterprise value of $192.5 million, equivalent to ~1.8x EV/Revenue and ~11.5x EV/EBITDA. Simms is a leading fishing products brand, offering high-quality gear and equipment for anglers. The acquisition provides additional scale to Vista's Outdoor Products business and is expected to be accretive to earnings in fiscal year 2024, excluding transaction, transition, and inventory step-up costs, according to a press release.³ The transaction highlights the robust appetite category leaders have drawn from large strategic buyers, who are often willing to pay premium multiples for high-quality businesses.

Expansive levels of dry powder, favorable market growth prospects, and the scalability of sector businesses have encouraged private equity investment in the Outdoor Recreation & Enthusiasts space. Financial buyers accounted for 26.1% of YTD transaction volume, slightly below the 30.5% of deals in full-year 2021. Rising interest rates have encouraged greater analysis of the sustainability of a target company's cash flows, as successful leveraged buyouts are often predicated upon the target's ability to rapidly service debt. As economic conditions remain uncertain, sponsors are expected to focus on players with healthy gross margins and a recurring revenue profile. High-growth segments are poised to serve as valuable platforms for add-on acquisitions, as seen by Ronin Equity Partners’ acquisition of Detail K2 (transaction details outlined below).

Outdoor Powersports & Equipment Segment Draws Robust Consumer Demand

The Outdoor Powersports & Equipment segment has drawn substantial consumer interest over the past two years with products including all-terrain vehicles (ATVs), trailers, and motorcycles in high demand. Top segment players have garnered healthy revenue growth, although inventory shortages have often led to missed sales opportunities. Leading snowmobile, ATV, and neighborhood electric vehicle manufacturer Polaris (NYSE:PII) recorded a 7.9% YOY revenue increase in Q2 2022, driven by a resilient and affluent consumer base, according to its earnings call.⁴ However, supply chain challenges have constrained its product availability with fiscal year 2022 dealer inventory expected to be down ~70% compared to 2019—2.5x lower than its optimal level. The easing of supply chain constraints and port congestion are expected to provide significant tailwinds to sector players that have struggled to fill inventory channels. Polaris has already noted an improvement as the number of suppliers with part shortages impacting more than 100 units fell ~50% in Q2 2022 from Q1 2022. Notably, the refilling of channel inventory represents a $750 million revenue opportunity for Polaris.

Public company valuations in the Outdoor Power Sports & Equipment segment have remained healthy through Q3 2022, recording the highest last twelve-month (LTM) average EBITDA trading multiple among all Outdoor Recreation & Enthusiasts segments at 12.2x EV/EBITDA. M&A demand has persisted for segment leaders, with strategic and private equity buyers actively pursuing the space. Recent notable segment transactions are outlined below.

• Dorman Products Acquires SuperATV (August 2022, Undisclosed) - Dorman Products (Nasdaq:DORM) has entered into a definitive agreement to acquire SuperATV, a leading independent supplier to the Powersports Aftermarket, for an enterprise value of $590 million, equivalent to 2.8x EV/Revenue. The enterprise value is inclusive of a $100 million two-year earnout based on achievement of 2023 and 2024 performance targets. The acquisition is expected to be immediately accretive to margins and adjusted earnings per share (EPS), excluding one-time charges and acquisition-related intangible assets amortization, according to a press release.⁵

The addition of SuperATV provides Dorman with a category leader, forming a robust Powersports Aftermarket platform with vertically integrated development, manufacturing, and fulfillment capabilities. “This combination aligns with our strategy to diversify our customer base and product offering by providing a compelling entry point to the large and rapidly growing Powersports industry," commented Kevin Olsen, Dorman’s President and Chief Executive Officer, in the press release.

• Ronin Equity Partners Acquires Detail K2 (July 2022, Undisclosed) - Ronin Equity Partners has acquired Detail K2 (DK2) and simultaneously completed the add-on acquisitions of Curahee Trailers and SnowBear. Terms of the transactions were not disclosed. Operating under the DK2 name, the three companies create a diversified outdoor power equipment and utility trailer platform with more than 250 products. The merged entity has recorded an excess of $60 million in total revenue and has achieved annual sales growth of more than 40% over the past five years, according to a press release.⁶

“These three firms are helping to create a new category of high-end consumers and small-scale professional users for outdoor power equipment and utility trailers. We see significant growth in this prosumer demand for years to come,” said David Feierstein, Managing Partner of Ronin, in the press release.

Tech-Enabled Sporting Goods Segment Continues to See Substantial Investor Appetite

Heightened interest in health tracking applications and personalized fitness solutions have contributed to robust adoption of tech-enabled sporting goods products. Consumers, recreational enthusiasts, and athletes have increasingly incorporated user-friendly wellness solutions and equipment into their daily routines. As sophisticated technology continues to penetrate the Sporting Goods segment, the global Smart Sports Equipment market size is expected to reach $5.4 billion in 2030, growing at a compound annual rate of 9.2%, according to Research and Markets.⁷ Venture capital funding has also flooded the broader Sports Technology space, with nearly $6.5 billion in capital raised in 2021, according to estimates from SportsTechX.⁸ As early-stage companies in the segment reach scale and maturity, M&A sale processes are expected to serve as an attractive liquidity option to founders of privately-owned businesses.

Consumers are increasingly valuing tech-enabled sporting goods that provide personalized data and feedback, provide system integration and interoperability to maximize performance on a holistic level, and enhance social networking and community experience.

Peter BaileyDirector, Capstone Partners

Tech-enabled sporting goods equipment providers have drawn strong appetite from leading strategic buyers in recent years. In September 2021, Vista Outdoor acquired Foresight Sports, a leading provider of golf launch monitors and simulation solutions, for an enterprise value of $499 million, equivalent to 5x EV/Revenue and 10x EV/EBITDA. The Golf segment of the Tech-Enabled Sporting Goods space has continued to attract buyer interest in 2022, evidenced by Golftec's acquisition of SkyTrak in August 2022 for an enterprise value of $65 million. SkyTrak offers a launch monitor and simulator for consumers, golf teachers, club fitters, and professionals.  The addition of SkyTrak bolsters Golftec's data and insights capabilities for its users. The transaction also aligns with broader sector trends of consumers gravitating toward more personalized fitness and recreation solutions, which has extended beyond the Golf segment. Venture capital funding and M&A activity is expected to grow in the near-term as tech-enabled and smart sports equipment is increasingly adopted by consumers and athletes. Privately-owned businesses with proven revenue growth and healthy levels of customer engagement are forecasted to attract robust investment and acquisition attention.

To discuss sector M&A activity, provide an update on your business, or learn about Capstone's wide range of advisory services and Outdoor Recreation & Enthusiasts sector knowledge, please contact Head of Consumer Investment Banking Ken Wasik and Director Peter Bailey.

Endnotes

1. U.S. Bureau of Economic Analysis, "Personal Income and Outlays," https://www.bea.gov/data/income-saving/personal-income, accessed September 27, 2022.

2. Outdoor Foundation, "2022 Outdoor Participation Trends Report," https://floridadep.gov/parks/ogt/documents/2022-outdoor-participation-trends-report, accessed September 27, 2022.

3. Vista Outdoor, "Vista Outdoor Enters into Definitive Agreement to Acquire Simms Fishing Products," https://news.vistaoutdoor.com/2022-07-27-Vista-Outdoor-Enters-into-Definitive-Agreement-to-Acquire-Simms-Fishing-Products, accessed September 28, 2022.

4. Polaris, "Polaris Q2 2022 Earnings Call & Webcast," https://ir.polaris.com/home/default.aspx, accessed September 27, 2022.

5. Dorman, "Dorman Products to Acquire SuperATV, a Leading Supplier to the Powersports Aftermarket," https://investors.dormanproducts.com/news-and-events/news-details/2022/Dorman-Products-to-Acquire-SuperATV-a-Leading-Supplier-to-the-Powersports-Aftermarket/default.aspx, accessed September 28, 2022.

6. Business Wire, "With Three Simultaneous Acquisitions, Ronin Creates a Diversified Platform in Outdoor Power Equipment and Utility Trailers," https://www.businesswire.com/news/home/20220711005066/en/With-Three-Simultaneous-Acquisitions-Ronin-Creates-a-Diversified-Platform-in-Outdoor-Power-Equipment-and-Utility-Trailers, accessed September 27, 2022.

7. Research and Markets, "Smart Sports Equipment Market By Product Type, By Distribution Channel, By End-use, and By Region Forecast to 2030," https://www.researchandmarkets.com/reports/5623664/smart-sports-equipment-market-by-product-type, accessed September 28, 2022.

8. SportsTechX, "North American SportsTech Report 2022," https://sportstechx.com/nastr/,
   accessed September 27, 2022.