The Takeaway: A Q&A With Nate Pund on the Outdoor and Active Lifestyle Landscape
How has the outdoor and active lifestyle sector performed over the past year and how do you anticipate the sector to perform looking forward?
In the past year, the performance of the outdoor and active lifestyle sector has been a mix of positive and negative news, resembling a “best of times, worst of times” scenario. On the one hand, there are strong underlying industry tailwinds, fueled by increased interest in outdoor activities, which was only magnified by the pandemic. The COVID-19 lockdown represented an opportunity for many new participants to try outdoor activities, and the hope is the industry can retain the vast majority of those new entrants over the coming years. However, while the macro climate of the sector remains strong with growing levels of interest and engagement, the sector faces challenges at a micro level due to major supply chain difficulties. The market has been saturated with excess inventory, leading retailers to resort to drastic discounting and scaling back on new orders. Consequently, a liquidity crisis has emerged with tied-up capital in inventory along with limited visibility regarding future sales. Although there is ample demand for outdoor supplies and increased participation, the market is flooded with products, raising uncertainty about future consumption patterns.
What are the biggest opportunities in your sector?
The primary opportunity within the outdoor and active lifestyle sector lies in capitalizing on the newfound interest people have in the outdoors and ensuring sustained engagement from these new participants. With the emergence of curious and exploratory consumers from the pandemic, the focus should be on retaining their involvement in the market. There is a huge opportunity to actively engage and ensure these consumers are lifetime participants in the activity or sport.
What do you expect to happen to valuations, and what is currently driving M&A activity in the sector?
Valuations in the sector are currently varied due to several significant factors. Firstly, underlying economic uncertainty impacts financing availability and costs, including interest rates and banks’ willingness to provide loans for certain transactions. Secondly, the spending power of consumers is affected by the potential recession, leading to uncertainty regarding future spending power and cost-cutting. Additionally, the geopolitical environment adds another layer of unpredictability. In the short term, valuations are expected to be lower than historically, but as the market recovers, strongly performing businesses will be rewarded with improved valuations.
Much of the M&A activity in the sector is currently driven by financial restructurings—deals involving troubled businesses facing liquidity crises, requiring recapitalization, a debt refinancing, or are forced to explore a sale for other underlying reasons. In this challenging market, such businesses are unlikely to command high valuations. Consolidation, a historical trend in the industry, is slow at the moment as many strategics are busy themselves dealing with inventory issues or other challenges in the market.
What factors are going to fuel growth in both the short term and long term?
In the short term, growth in the outdoor and active lifestyle sector will be fueled largely by renewed consumer confidence in the economy and their ability to spend their discretionary dollars.
In the long term, there are several trends that will contribute to growth in the sector. The realignment of the supply chain will play a crucial role in providing brands and retailers greater visibility and confidence in product deliveries and timing. Price stabilization, including shipping costs, input costs, and logistics, will enable businesses to better understand cost strategies and better set product pricing. Lastly, the acceptance of an omnichannel approach to reaching consumers and not just a reliance on one channel strategy, but recognizing that consumers like to shop in many ways, should further extend product availability and thus foster further consumer engagement.
What attributes are buyers considering when looking at an outdoor and active lifestyle company as an acquisition target?
Buyers considering an acquisition of an outdoor and active lifestyle company prioritize several key attributes. First and foremost, they assess the significance of the brand. They look at whether the brand holds value: Is it differentiated? Does the consumer relate to the brand, and thus does the product align with and reinforce those desired brand attributes?
Secondly, buyers are now placing a strong emphasis on profitability rather than solely pursuing growth at any expense. They seek companies that demonstrate a focus on sustainable and profitable operations, ones with a good margin structure and the ability to attract customers consistently over time.
Lastly, confidence in the management team is a crucial factor. Buyers carefully evaluate the competence and capabilities of the company’s leadership, as they recognize the importance of strong management in driving success post-acquisition.
So, what’s The Takeaway?
Despite excess inventory challenges, the industry has the prospect for robust future growth and profitability as companies seek to retain new participants, realign supply chains, and build upon the increased global interest in pursuing a healthy and active lifestyle.
Nathan Pund
Managing Director