Capstone Partners’ latest update on the Outdoor Recreation and Enthusiasts sector highlights a notable increase in discretionary spending, despite ongoing challenges from high interest rates and inflation. The report indicates that consumer interest in outdoor activities has contributed to this growth.
The report states, “Recent shifts in consumer preferences towards experiences and health and wellness activities have helped keep the Outdoor Recreation & Enthusiasts sector afloat.” Spending on membership clubs, sports centers, parks, theaters, and museums rose by 8.6 percent year-over-year. Additionally, sales of sporting equipment, supplies, guns, and ammunition increased by 3.3 percent in the second quarter of 2024, according to the Bureau of Economic Analysis.
Capstone referenced research from the Outdoor Industry Association, which revealed that outdoor participation rates in the U.S. reached record highs in 2023. The participation rate increased by 4.1 percent year-over-year, with 57.3 percent of the U.S. population engaging in outdoor activities. This rise in participation has positively impacted spending in the sector year-to-date.
Despite these positive trends, Capstone acknowledged that overstocked inventories remain a challenge. As a result, companies in the sector are increasingly pursuing mergers and acquisitions (M&A) to navigate these issues. “Attractive targets have possessed dynamic consumer engagement systems, enabling management to keep an accurate pulse on consumer sentiment and gauge purchasing activity trends,” the report notes.
Capstone anticipates that financial performance across the sector will improve as companies address excess inventory, reduce promotional activities, and alleviate margin pressures. “As macroeconomic pressures weighing on discretionary spending ease, and firms rectify inventory turnover issues, we expect the buyer universe to expand and drive deal volumes,” the report suggests.
M&A activity in the Outdoor Recreation sector has increased by 25.6 percent year-over-year, reversing a two-year decline. Strategic buyers have led this resurgence, accounting for 66.7 percent of transactions year-to-date. So far, there have been 54 transactions announced or completed this year, compared to 43 during the same period last year.
“Private strategics have buoyed deal volume to-date, accounting for more than half of sector transactions,” Capstone highlighted. In contrast, public strategics have pulled back from M&A activities, decreasing by 41.7 percent year-over-year. Instead, they are focusing on internal strategies, such as deleveraging balance sheets and reassessing brand portfolios.
As inventory levels and margin pressures stabilize, Capstone believes that public strategics will likely resume M&A activities to foster growth. The report notes, “The Sporting Goods segment has seen considerable buyer attention from both strategics and financial sponsors drawn to high gross margin businesses with robust brand equity and large, expanding markets.”
The report also indicates a threefold increase in private equity activity compared to the previous year. Family offices and large private equity firms are re-entering the market, looking to take advantage of a surplus of acquisition targets and limited competition among buyers.
Despite these positive developments, Capstone cautions that the near-term outlook for a broader market recovery remains unclear, leading to declining valuations. The report states, “Average transaction multiples in the sector have deteriorated, falling to 8.0x EV/EBITDA from 11.6x EV/EBITDA.” However, as public strategics realign their portfolios and inventories normalize, increased cash flows in the sector are expected to help restore multiples toward historical averages.
Capstone’s report includes additional insights, such as inventory levels in the segment, public company performance, and an analysis of buyer types targeting the Outdoor Recreation sector, which have contributed to the rise in M&A activity in 2024. It also reviews recent developments regarding bids for Vista Outdoor and its ammunition business, along with their potential impact on sector M&A.
Capstone Partners’ Consumer Investment Banking Team specializes in M&A, capital formation, and financial advisory services for middle-market businesses in the consumer and retail sectors. They work with leading mid-to-large sized companies serving expanding markets.
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