VIDEO: Outdoor Recreation & Consumer Enthusiasts M&A Update

Hello. I’m Ken Wasik, Head of Capstone’s Consumer Industry Investment Banking Team. Pete Bailey and I covered the Consumer Enthusiast Sector for Capstone, providing M&A advisory to privately-owned brands. Today we’re discussing the outdoor recreation sector—hiking fishing, power, sports, boating, etc.  It’s all part of our ongoing series addressing important market updates and top-of-mind concerns among business owners in the consumer market.

Let’s start off with a handful of key questions. First, consumer demand for outdoor recreation was red hot last year. Will this continue? Second, how did COVID impact sector activity last year? And how is it poised to affect performance going forward? Third, the supply chain and inflation. How will they continue to affect operations? And will they be a drag on M&A activity? Finally, and arguably most importantly, what’s happening with valuations? Is this a good time to buy or sell a company?

Let’s start with consumer demand and COVID. Two years into the COVID-19 pandemic, consumer demand remains incredibly high in the enthusiast sector, and we’ve yet to see signs of a slowdown. In other words, the COVID bump has transformed into something more sustainable and established a new baseline level of consumer demand. We credit much of this to the COVID-induced shift in consumer lifestyles. This is not a fad. People have changed the way they engage with recreation activity and the enthusiast sector as a whole.

In fact, we can see this playing out across Wall Street, this Vista Outdoor and Clarus as both recently closed their best quarters on record. We predict this trend is here to stay, and, at the very least, is going to continue deep into 2022.

As for supply chain and inflation: in the midst of elevated consumer demand, materials availability and supply chain disruptions have challenged businesses across all sub-segments of the enthusiast sector. Rising inflation and input costs have put pressure on margins, though strong consumer spending has helped category leaders maintain healthy top-line growth. Effective inventory management, efficient supply chains, and careful pricing action are proving key in navigating the current environment.

Now, stepping beyond red hot consumer demand, how will the M&A boom continue in this sector? Let’s look at a few facts. Overall, M&A volume in the sector increased nearly 19% year over year in 2021 hitting 210 closed deals last year. Strategic buyers were a large part of this increase, accounting for over 70% of all deals completed. Interestingly, private equity significantly expanded its presence in the space last year increasing deal activity by 73% year-over-year.

In other words, they really like this sector.

But where was activity the hottest? Boating and outdoor power sports saw the biggest increase in M&A volume last year at 188% and 157% over 2020 levels respectively. In fact, new powerboat sales exceeded 300,000 units in 2021 for only the second time in 15 years—likely aided by record low interest rates, the oft-mentioned flight to the suburbs, and an increase in recreation time in a work from home environments. Sporting goods M&A volume meanwhile was flat to 2020, despite significant growth in the golf and biking segments

Going into 2022, year-to-date M&A sector volumes were close to 2021 levels through early March, with 34 deals announced and private strategic buyers accounting for 62% of activity.

We believe buyer convictions are only increasing in the enthusiast sector and it proves to be experiencing a lasting demographic shift. What’s more, strong buyer appetite seems to be translating into healthy valuations. Going by subsector, sporting goods came in on top, averaging 10.6 times EBITDA valuations. Camping, hiking, and fishing, meanwhile, averaged 9.9 times, as did tactical and hunting subsectors. Outdoor power sports averaged 8 times, while boating and watercraft came in slightly under 7.9 times.

As for key valuation drivers, premium pricing is being rewarded to companies with brand strength. customer loyalty, recurring revenues, and, of course, strong financial performance—namely an increased emphasis on gross profit margins.

So, is now a good time to pursue a sale? Despite inflationary headwinds and persistent macroeconomic uncertainties, the answer appears to be yes.

All in all, 2022 is looking to be another strong year in the enthusiast sector. Healthy valuations, aggressive competition, and significant private equity dry powder will likely fuel these trends well into the future. Large strategic companies meanwhile, remain well-positioned to have robust balance sheets and are rewarded for making smart acquisitions, laying the groundwork for continued substantial consolidation activity.

Thank you for your time today. If you’re wondering what you can do to increase the value of your company and prepare for an eventual sale, we invite you to reach out to any one of us on the consumer investment banking team. In the meantime, download our full outdoor recreation enthusiast report for a deeper dive into the information we share today and subscribe to receive additional insights in the sector.

Thank you.