How Has COVID-19 Affected the Active Lifestyle Sector?

Houlihan Lokey One-on-One Series: What are the issues that all CEOs in the active lifestyle sector should consider during the COVID-19 environment and beyond?



In this interview, the first in our new Houlihan Lokey One-on-One series, Managing Director Nate Pund seeks to answer the following questions, among others:
  1. How should you future-proof your business?

  2. What should company owners be thinking about when considering an acquisition?

  3. What are the potential benefits and risks of distressed opportunities?

  4. How have the fundamentals of selling your business changed in the current climate?

  5. What should successful companies do to prosper in the pandemic?


View the transcript

Russell Sherman (00:15): Welcome to Houlihan Lokey One-on-One. I'm Russell Sherman. I'm joined today by Nate Pund, a Managing Director with Houlihan Lokey's Consumer, Food & Retail Group. Nate has been in investment banking for more than 20 years where he's carved out a unique niche by combining his love for sports and the outdoors with a practical and thoughtful approach to helping companies of all sizes navigate the changing business landscape. Welcome, Nate. Great to have you here to talk about this dynamic sector, how it's developed, and where it's headed.

Nate Pund (00:47): Great to be here, Russell. Thanks very much.

Russell Sherman (00:50): So talk to me a little bit about the sector. I'd say you have a pretty fun job when it comes to investment banking in the area which you get to play.

Nate Pund (00:58): Oh, absolutely. I've got the best job in all of Houlihan Lokey. I get to focus on all the fun things we do outdoors, which is a personal passion of mine. Yes, I've got a garage filled with equipment to testify to that.

Russell Sherman (01:10): What are some of the areas you think about when you think about the outdoor and leisure and recreation sector?

Nate Pund (01:16): Right. I call my industry focus the active lifestyle sector. So if you think of that, there's a number of activity subsectors underneath that, and I like to arrange those from the least intense to the most intense. So at the bottom, you've got basic recreation and leisure. Think of that as throwing a football with your kid in the backyard or tossing a Frisbee. From there, you move up the intensity scale. Next comes fitness, whether that's big box, studio equipment, what have you. Next is team sports and endurance sports—that's cycling, running, trail running, football, hockey, tennis. Then comes action sports: surfboards, skateboarding, wakeboarding. Then power sports: ATVs, snowmobiles, wakeboard, and ski boats. Then the core outdoor sector, which is the hike, climb, and backpack. Then you move over to the hook and bullet crowd—that's your hunting and fishing sector. And then ultimately we make the leap to the tactical sector: the law enforcement professional and military soldier. We like to think of those as extreme campers. The truth is that those individuals really rely on their equipment, and much of that is born from the outdoors.

Russell Sherman (02:33): Talk to me a little bit about how excited you were when you realized that you could actually make a living playing in this space.

Nate Pund (02:42): Yeah, it was a very exciting time from 2005 to 2010, when I owned Silverstein & Partners with two of my partners. We had a fantastic time, and more importantly we delivered tremendous results for our clients. We ended up closing 18 deals during that time—and we're very proud of what we accomplished—but there were a lot of ups and downs, as you can imagine. First, as a business owner, I have a much greater sense in terms of how businesses work, having had to own my own as well as having to sell my own firm. I now understand a lot of the emotions and the difficulties that you have with what is ultimately your baby, but it was a tremendous experience. And it was really rewarding to see that our thesis, that the outdoor world, could succeed, that there were transactions to be done there, and that someone who could focus specifically on that sector as a dedicated expert, someone who brought full commitment to that clientele, could really achieve tremendous results. In fact, I went back and looked over my deals. Our close rate was roughly 90% of all of our deals from the start to today. And we're very proud that we've been able to accomplish that.

Russell Sherman (03:54): Talk about the move to Houlihan Lokey. What attracted you to that platform? Obviously you have a number of options given the success that you've had over the course of your career. You choose Houlihan Lokey. What set them apart?

Nate Pund (04:08): I've clearly known of Houlihan Lokey for decades now and the success they've had. And when I got the call from Jay [Novak}, the Head of the Consumer Group, at the opportunity to join the firm, I leapt at it. I jumped on a plane and met him right away, and it's the best decision I've ever made in my entire life. In fact, it's one I wish I had made 20 years ago. And I think what makes Houlihan so unique is not only the experience it means for me as an investment banker but, more importantly, how that translates to the success of the client. So as someone who's benefited from working from a number of different firms, those firms often espouse the partnership and the cross-border connectivity that they have. But, unfortunately, that isn't always true. A lot of those firms are really designed on your success in your silo or your specific industry group or your specific product. Houlihan's completely different. Houlihan is based completely on the entire success of the firm. So if someone succeeds on a deal overseas, I get rewarded for that. If I do a lot of work in, I close a lot of deals, my colleagues get to be rewarded for that. And what that means is that we're all in this together. So we're all striving for the best result and the best outcome for a client. And it means whether we're in Milan or Japan or capital markets and corporate finance or restructuring or what have you, we're all here to deliver the best advice and the best outcome for the client. And that really is amazing to see how effective that can be.

Russell Sherman (05:43): Can you talk a little bit practically how that works? Are there certain recent deals where you saw the firm come together in different ways that were really interesting and really drew on the capabilities of the firm across the organization?

Nate Pund (05:55): I think I would cite a recent deal that we advised on, and that's the sale of Jack Wolfskin, which is a technical clothing apparel manufacturer out of Europe. That business was taken through a restructuring. It had fallen onto some very difficult times. We advised, at Houlihan Lokey, through that, with the creditors ultimately taking over possession of the business. After a year or so and trying to stabilize the business, they came back to us and said, “We have a choice. We can either hold onto this business for the next several years and try to make it the success that we know it can be, or we can try to realize the transaction now on what we think the opportunity can be.” And we were hired in Corporate Finance to do that. And it was a very unique deal because we went to such a small group of buyers to drive that outcome, ultimately selling it for about a half a billion dollars to Callaway. But what was unique about that, to your point, is the collaboration that happened across Financial Restructuring, Corporate Finance, Capital Markets, Europe, United Kingdom, North America, Asia—it was really a worldwide, firm-wide deal. And it was one that I'm really proud that we were all able to deliver that advice and deliver such a superior outcome.

Russell Sherman (07:11): Talk to me a little bit about the current environment—the COVID environment—what that means for some of the companies in your area, and maybe as we move up the intensity scale how it's affected some companies versus others.

Nate Pund (07:26): For the fitness sector, it's been a very difficult time. The restrictions on operating your business, on clientele being able to partake, that's fallen on really hard times for what are still ultimately very good businesses with very good outlooks. On the other end of the extreme is the firearm sector. That has enjoyed a resurgence like I've never seen. An extraordinary sales and extraordinary time, all driven on fear of the clientele, whether that be social unrest, the pandemic, regulatory change. In the broader outdoor space, I'd say we're seeing the true worth and true merit of the outdoor space in that the business is really shining. It's really demonstrating to the customer why their products exist and why they can help them be healthier in terms of their lifestyles. Enjoy the outdoors. Participate in these activities in a socially distant framework and in compliant framework. Meet with their friends. Be more one with the outdoors and really help with your overall health and wellness. The broad outdoors is doing very, very well. It's certainly been an uncertain time and a trying time. If I had to define my sector, I think I almost refer to it as a Dickens tale. It's been the best of times and the worst of times, and I can see that across the ends of the spectrum of activities that we serve.

Russell Sherman (09:02): How are you advising companies in this environment?

Nate Pund (09:06): It's one thing to deal with bad news; it's another thing to deal with good news. But uncertain news makes things really hard to plan for and very difficult to understand. So I guess my best advice overall, without being too specific with each subsector within the active lifestyle space, is focus first and foremost on your employees. Those are the people that are going to be delivering the product and the experience to your customers. Those are your mechanism by which to succeed. So if you invest in those people, when you give them the power and the support and the information that they need, that's what's really going to drive success of your business. I see that again here at Houlihan Lokey. We've all had to move to working remotely, and the support and the leadership and the tools that we've been provided to do our job has just been extraordinary. And I think that's one of the reasons why we are so successful and so busy today in terms of what we do.

Russell Sherman (10:02): So you work with acquirers, you work with sellers. Let's start with the acquirers. What are some of the important trends that CEOs should be thinking about if they're looking to acquire other companies in this environment?

Nate Pund (10:16): If you're an acquirer, I think you need to look at a couple of things. And I start with the vulnerabilities because that's what this pandemic is really demonstrating in a lot of companies. And that is, first and foremost, where does your product get supplied from? What is your supply chain? And how reliant are you on that supply chain and the time of that supply chain and the depth of that relationship and that partnership, and how flexible are you? Some people have flexibility, and some don't. And that's important to understand what the constraints and opportunities are. Same with the distribution channels. How reliant are you on somebody else's business for your product or service to succeed? How reliant are you on that company to be open to be able to service your customers? How much connectivity and ability to deliver your product do you have directly with your customers? Those are really two important attributes that I think have been highlighted in this pandemic, both the good and the bad. From there, though, I'd say you also need to look at the competitive landscape and look at that on a global basis. If anything that this pandemic has demonstrated is that we're all in this together and that this world is a global world—not only in terms of some of the difficulties that we're facing but in terms of the marketplace that we have. And we have to think about how our products can work in that global marketplace, both from a competitive standpoint and from a performance attribute in terms of what they're designed to do.

Russell Sherman (11:45): Staying on the acquisition side of the equation, we see a lot across a number of different industries, a lot of money being raised to go after distressed assets—companies that aren't performing particularly well, maybe even on the verge of bankruptcy, and people seeing an opportunity in those types of areas. Are you seeing that in the outdoor rec space, as well?

Nate Pund (12:11): Yes, absolutely. We've been working on several of those in the different subsectors, and the way I think I look at those businesses is I like to look at the opportunity. I like to be glass half full. No doubt that they've had their challenges, or they wouldn't be in restructuring if they weren't. But from an acquiror’s perspective, it's all about looking about what can that business do. But it comes from a fundamental understanding of what mistakes were made so those same mistakes aren't repeated. But we think there's a lot of potential in what people can do with certain distressed opportunities and where they can take it.

Russell Sherman (12:47): How about the sellers? What are they thinking about? What can companies be doing right now? What are the smart moves to make them as attractive as possible in the marketplace?

Nate Pund (12:58): If I will give any advice to sellers, I think I would stick to the fundamentals. And I would really think about three components. I would think about your brand. What does your brand mean? What do you want it to mean? How does the customer understand you? We look at that from both an analytical standpoint and a subjective standpoint. So from an analytical, we like to break down brand value into a mathematical equation, and we think a brand value is the sum of brand identity. What does that brand actually mean? What are you trying to convey? Brand loyalty? Did you perform in terms of what you said you're going to do? Is the customer loyal to you and trusting you? And with that loyalty, then you have brand permission. Are they looking to get more from you in terms of the product experience and grow with you? That's what we see on an analytical standpoint. On the opposite, from a subjective standpoint, we do something that we call quite humorous—we call it the hat test. Would you be willing to wear that brand on a baseball cap? Is that something that you feel proud that you want to walk around and show? And not every brand has to meet that test, but it's an important one for you to understand where you fall in the world or what you're trying to accomplish. And with that brand, we would then say you've got to look at the core of your product or your service. Is what you're providing differentiating enough to support that identity that you're trying to convey across? Is it designed to function where you are, or meet a price point where you are, or a segmentation, or a customer? And then the last attribute I look at, back to the fundamentals, is the employees. Who are the managers, who are the coworkers, who are the colleagues that are helping you accomplish that mission? And how have you empowered them and allowed them to do that? We often find with a lot of entrepreneurs, as you can imagine, they have a lot of personal pride in their business and take a lot of control of the business. That's all well and good until you want to sell and walk away from your business. A buyer's going to say, “Well, wait a second. You're so important. I can't just let you leave.” So it really comes down to your ability to delegate and empower your coworkers to help you succeed. So I think I would give those three fundamental attributes to really think about your business. And from there, the rest of the success should come easily.

Russell Sherman (15:14): What are the smart moves in this environment that companies should be making to better position themselves when we get through the coronavirus and we're on the other side?

Nate Pund (15:24): I think the smart move now is all about customer communication and that connectivity to that customer. So how are you ultimately relating to that customer? Do you have to rely on a retail or somebody else's website to sell your goods, or do you have that connectivity directly with them? And that doesn't mean that all of your sales or the majority of your sales have to come from your own e-commerce website. There's a great ability to communicate through your website directly to the consumer or other channels, where they come to customer service and they need help with a problem or try and understand how something works. Making sure that you have that connectivity I think is really key because the customer wants to be part of it. The customer has a lot of great choices these days; that's the conundrum in the outdoor spaces. There's a lot of great things out there. So the customer has choice, and you have to make that choice for that customer easy. And once that customer has chosen your product or your service and selected to be with you, you want to hold onto them as long as you possibly can. So I would really think about how you relay the message, how you make it interactive, and how you're there to support and grow with that customer through this time period and many years to come.

Russell Sherman (16:40): And, finally, let me ask you about Houlihan Lokey and your vision and your team's vision for continuing to grow the business and where you guys hope to be down the line.

Nate Pund (16:53): We've been really fortunate, as I said, in terms of the success that we've had here at Houlihan Lokey. And, as I mentioned, it's not only born out of 20-plus years of focusing on this active lifestyle sector and the expertise that we deliver and true commitment to the client, but also what we've been provided here at Houlihan—its reputation and the support they've provided. So for us, it is all about what we believe is a great future, and that great future is about helping our clients succeed one deal at a time.

Russell Sherman (17:25): Nate, thanks for joining us on Houlihan Lokey One-on-One. Fascinating story. Really appreciate the time.

Nate Pund (17:32): Thanks very much, Russell. Really appreciate the conversation.

Contact

If you would like to discuss the active lifestyle sector further, please do not hesitate to get in touch with the team member listed below.

Nathan Pund Managing Director

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