Outdoor Recreation & Enthusiasts Sector Update – October 2024

Growing Participation Rates Support Outdoor Recreation Sector Sales and M&A

Capstone’s latest Outdoor Recreation & Enthusiasts Sector Update reports that although consumers remain under pressure managing elevated interest rates and persistent inflation, discretionary spending in the Outdoor Recreation sector has risen alongside outdoor participation rates.

Recent shifts in consumer preferences towards experiences and health and wellness activities have helped keep the Outdoor Recreation & Enthusiasts sector afloat. Notably, spending on membership clubs, sports centers, parks, theaters, and museums grew 8.6% year-over-year (YOY), while purchases on sporting equipment, supplies, guns, and ammunition rose 3.3% in Q2 2024, according to the Bureau of Economic Analysis. Additionally, record-high U.S. outdoor participation rates in 2023 (up 4.1% YOY to 57.3% of the total U.S. population) have buoyed sector spending through year-to-date (YTD), according to the Outdoor Industry Association. However, overstocked inventory challenges have persisted, causing sector participants to pursue accretive mergers and acquisitions (M&A). Attractive targets have possessed dynamic consumer engagement systems, enabling management to keep an accurate pulse on consumer sentiment and gauge purchasing activity trends. Financial performance across the sector is expected to improve as firms work through excess inventories, limit promotion activity, and mitigate margin pressures. As macroeconomic pressures weighing on discretionary spending ease, and firms rectify inventory turnover issues, Capstone expects the buyer universe to expand and drive deal volumes as more firms parlay healthier balance sheets and cash flows into more aggressive M&A strategies.

M&A activity in the Outdoor Recreation sector has grown 25.6% YOY, reversing a two-year streak of contraction. Strategic buyers have continued to drive Outdoor Recreation & Enthusiasts M&A, comprising 66.7% of transactions YTD. Private strategics have buoyed deal volume to-date, accounting for more than half of sector transactions. In contrast, public strategics have pulled away from M&A (down 41.7% YOY), as they instead look internally, deleveraging balance sheets, re-evaluating brand portfolios, and cleaning out non-core business units via divestitures. However, as high inventories and margin pressures subside, public strategics are expected to resume M&A pursuits to drive growth. The Sporting Goods segment has seen considerable buyer attention with both strategics and financial sponsors drawn to high gross margin businesses with robust brand equity, and large and expanding addressable markets. Meanwhile, private equity activity has increased three-fold compared to the prior year period. Family offices and large-scale private equity shops have re-entered the market as they aim to capitalize on a heavy inventory of targets and limited competition in the buyer universe, catalyzing the formation of new platforms. Simultaneously, a strong underlying growth outlook has supported capital deployment via tuck-ins of quality businesses into existing portfolio companies as sponsors postpone exit activity amid a challenging valuation environment.

Also included in this report:

• An update on segment inventory levels and public company performance.
• A breakdown on what type of buyers are targeting pockets of the Outdoor Recreation sector, contributing to a rise in M&A activity in 2024.
• A review of the latest developments regarding bids for Vista Outdoor and its Ammunition business, its potential impact on sector M&A, and the firm’s recent divestures and buy-side activity.
• The rationale behind notable transactions and the key characteristics driving premium valuations in the sector.

Capstone Partners’ Consumer Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the consumer and retail industries. Our team partners with leading mid-to-large sized consumer businesses that serve growing end-markets. For more information on the outdoor recreation market trends featured in this report or to speak with one of our Consumer Investment Banking Team members about how to grow, value, and/or sell your company, we are here to help. Contact us today to start a conversation.