Amer Sports: Solid Demand Momentum (NYSE:AS)

Investment summary

My recommendation for Amer Sports (NYSE: AS) is a buy rating. The solid demand momentum seen in 2Q24 was very encouraging and I believe this momentum may persist in the near term, allowing AS to meet consensus EPS estimates for FY24 and FY25. This should lead to a positive multiple revaluation as the market begins to offset AS against peers with lower EPS growth but trading at a higher multiple.

Business overview

AS has several sports and outdoor brands in its portfolio, such as Arc’teryx, Salomon, Wilson, Atomic and Peak Performance. The company develops, markets and sells to consumers products of these brands, whose products include apparel, footwear and equipment. AS sells through two main channels: wholesale and direct-to-consumer (“DTC”) (through owned stores and e-commerce). As of FY23, wholesale is 64% of total sales and DTC is 36%. Brand revenues are divided into three segments: Technical Apparel (“TA”) (includes Arc’teryx & Peak Performance brand); outdoor performance (“OP”) (includes Salomon and Atomic brands); and Ball and Racket (“B&R”) (includes the Wilson brand). Geographically, AS sells everywhere the globe, with a major focus on the Americas (71% of FY23 revenue), EMEA (17%), Greater China (6%) and APAC ex-China (8%).

2Q24 results update

Released on August 20^thAS saw adj. EBITDA of $81 million, beating the consensus estimate of $49 million. This beat was driven by strong revenue growth of 16% (consensus est. ~11%), with strength driven by strong TA growth of 34.3% (38% organic) and OP growth of 11, 1% (13% organic). Coupled with the strong top line growth is a robust gross margin expansion of 220 bps y/y to 55.8% (this also beat the consensus expectation of 54.5%), which translated into a EBIT adj of 2.9% (much higher than consensus expectations for 0.3%).

FY24 guidance is achievable

The solid 2Q24 results led management to raise its FY24 EPS target to a range of $0.40 to $0.44, a major upgrade from the previous guidance of $0.30 to $0.40. The reason for the strong EPS growth is revenue growth of 15 to 17%, FY24 gross margin guidance of mid-range 54.5% and adjusted EBIT margins of 10.5-11% (versus prior guidance of 10.5-11% ). I think the guidance is achievable given the solid demand momentum so far.

As mentioned above, the business reported extremely robust reported revenue growth of 16% (well above the consensus estimate of 10.7%). The standout performer is the TA segment, where I expect strong growth to continue for the foreseeable future. Digging deeper into the segment, we noticed an accelerating trend that provides very strong insight into the underlying demand momentum. Specifically, two-year stack growth for both wholesale and DTC accelerated for the second consecutive quarter. This indicates no sign of momentum slowing (the two-year stack is a better measure as FY23 is a strong base), contrary to what the reported y/y growth suggests. Importantly, growth was driven by volume and pricing growth. In terms of volume, AS has seen double-digit new customer growth y/y, which lends credibility to the point that AS is doing well in building brand awareness and is able to convert these new customers into sales. For pricing, AS was also able to generate an increase in average spend per customer.

In addition, solid wholesale growth also sends a strong message about the profile of underlying demand. The 24% reported revenue growth tells me that wholesalers/distributors are stocking up and this suggests that AS brands are likely to see strong demand. My views above align very well with what management is seeing in terms of consumer trends as well. Especially for the Arc’teryx brand, which is seeing very solid demand momentum. With this amount of power, I think AS should be able to keep riding it for the foreseeable future.

Our global end markets are healthy and growing, and we are taking market share, positioning ourselves to deliver another record year in 2024.

Both new stores have performed extremely well in the first few months and represent the high demand consumers have to engage with the Salomon brand in their own environment.

When you think about it, the Arc’teryx Kragg shoe and sometimes what we do are — we sell out quickly. We have very, very strong relationships with our supply partners, so we feel good about being able to meet the increased demand. Transcript of 224 quarter results

Outside of the TA segment, growth should also remain robust as the business has strong product output at Wilson in 2H24. For example:

1. Collaborations with Roger Federer and Caitlin Clark and the launch of the Intrigue shoe. The latter should be in strong demand as it is the first tennis shoe designed explicitly by Wilson for female tennis players).
2. The continued expansion of the Tennis 360 collection, ie seeing already strong demand since the Chinese player won gold at the Olympics

Solid balance sheet to support growth

There should be no problem for AS to finance its growth given the solid balance sheet it has coming out of 2Q24. According to the results, AS exited 2Q24 with $256 million in cash and about $2 billion in debt, which comes to about $1.75 billion in net debt. This implies a net debt to LTM EBITDA ratio of ~2.8x, which is manageable given the EBITDA growth outlook (cons. est. ~$910m adj EBITDA in FY25, which implies the leverage ratio to go

On the inventory side, while inventory as a percentage of sales increased from 93% in 1Q24 to 125% in 2Q24, I believe this is the right call as revenue growth outpaced inventory growth by 14%, an acceleration from 6% seen in 1Q24. Given this strength of demand, it makes sense for AS to load up its inventory so it can meet this demand.

ASSESSMENT

Peers I think AS should face include Lululemon Athletica (LULU), DICK’S Sporting Goods (DKS), Academy Sports and Outdoors (ASO), Nike (NKE), Under Armor (UAA), and adidas (OTCQX:ADDYY) . The stock is currently trading at ~23x forward PE, in line with where peers are trading (on average); however, I think there is potential for the valuation to rerate higher if AS can grow EPS at the rate consensus expects ($0.41 in FY24 and $0.70 in FY25). For comparison, Nike is expected to post a 21% decline in EPS in FY25, followed by 15% growth in FY26, but trades at 26x forward PE. Even looking at Under Armour, EPS growth is expected to fall by 36% (FY26 vs. FY24) but still trades at 27x forward PE.

Assuming AS sees a positive revision in multiples of 1x (let’s say it trades at a discount to NKE since NKE is a better known brand), this means the stock should trade at ~$17 (24 * 0 .70 USD), which translates to 23% up.

Risk

Consumer preference for brands and fashion is difficult to predict and track. Current product offerings may lose their appeal over the next few months, even if current data suggests otherwise. If this happens, it would be bad for the business as the management has loaded the stocks to meet the expected demand. Lower-than-expected demand, along with high inventory levels, would also mean pressure on gross margin, as the business likely needs to run more promotions to offset inventory.

Conclusion

My view on AS is a buy rating given the strong demand momentum. Given 2Q24 results, new customer growth, wholesaler demand for AS products, and upcoming product launches, I see a solid path for AS to continue to grow. While the current valuation is in line with peers, if EPS can grow as expected, I see the potential for a positive revaluation multiple.