Description

SUMMARY THESIS        

Amer Sports (NYSE: AS or “the Company”) is a February IPO of a levered roll-up of retail brands (Arc’teryx, Salomon, Wilson, Atomic, Peak Performance) by Cayman-domiciled (foreign private issuer), Helsinki-headquartered (formerly Helsinki Stock Exchange-listed) and China-run by ANTA Sports. The assumptions underlying the Company’s growth plan are massively overcapitalizing its potential in China. The core Arc’teryx brand, supported by new store openings in China, are expected to account for the majority of revenue and >100% of EBIT growth. The Company has been aggressively opening new Arc’teryx stores and expanding from outwear to apparel. This is a highly competitive category where its innovation and technical/ performance attributes are undifferentiated. It should be worth noting two facts up front: 1) Arc’teryx annual revenue is already 50% higher than that of competitor Canada Goose (GOOS) and 2) Arc’teryx already has 125 locations in China vs North Face (VF Corp) which has reached maturity in that market with 184 stores having opened its first retail outlet there 15 years ago.

AS is facing tough comps as it will be lapping a series of high growth quarters that it reported into the IPO. Growth has moderated in 1H’24 with expectations of a reacceleration in 2H. Contrast this with peers who have guided to flat or -LSD growth in 2H’24 with spending on luxury goods in China widely reported to be under increasing pressure. The Company is levered 3.2x at Q2’24 (ex-leases) with limited FCF. This will constrain investments in regional expansion (store buildouts, marketing support) and product development and R&D. AS trades at 42x 2024 EPS vs closest peers Columbia Sportswear (COLM) and VFC (35% North Face) at 20x, GOOS at 12x with much smaller but close comp CLAR at 13x. The aggressive recent PRC stimulus will likely have limited fundamental benefit to AS but has spiked the stock price and created an attractive entry point. Sell-side is universally bullish on the stock (25 Buy, 2 Hold), positioning themselves for the inevitable follow-on offerings. AS is currently GC with $25M ADV.

Upcoming Catalysts:

• Follow-on offering: Lock-ups have expired (2/2/24 IPO effectiveness).
• ANTA International Group (China-based, higher-end sportswear apparel brands owner) owns 43% of S/O, Chip Wilson 16% and Ding Family insiders holding 10%.
• Q3’24 or Q4’24 earnings miss given high expectations.
• Sell-side earnings revisions. Consensus 2025 numbers are mis-modeling 2025 tax expense which will result in 8-10% lower earnings estimates.

BACKGROUND & SEGMENTS

In December 2018, ANTA Sports (HESK: 2020) led a consortium of investors, which included FountainVest and Tencent acquired Amer Sports for $5.2B. In 2020 James Zheng was appointed CEO (formerly led Adidas China) who built out management and expanded the product assortment and footprint. The Company was previously listed on the Nasdaq Helsinki and subsequently de-listed following its US IPO (F-1).

Revenue breakdown by geography as of Q2’24: 37% Americas (predominately US), 29% China, 23% Europe and 11% APAC (skewed to Japan). Regional growth has been led by APAC and China with the majority of future growth anticipated to come from China and APAC (+40% sales growth in 2H’24 and +25% in 2025). This is a region with relatively limited skiing and mountain sport activity. Channel growth and margin expansion has been fueled by DTC increasing from 15% of total sales in 2019 to 35% in 2023. This has principally been from new store opening versus online.  

Arc’teryx

The brand’s category mix has shifted from almost exclusively outerwear to 55% apparel with hard shell jackets now accounting for 18%, insulation jackets at 25% and soft-shell jackets at 12%. Apparel brings them into a highly competitive category where its innovation and technical/ performance attributes are less relevant. North Face, Black Diamond (CLAR) and Marmot sought market expansion into apparel and ultimately compromised the product quality and lost original customers seeking high-performance gear. Arc’teryx appears to be falling victim to this issue. Among its core outdoor users, there has been an increasing number of complaints of such a drop-off in quality under Arc’teryx’s new ownership. The winter sports category itself is crowded and stagnating as evidenced by recent peer performance and a host of new entrants over the last several years (Stio, Vuori, etc.).

Arc’teryx customer demographic is skewed male. Its jackets are priced at a 30-50% premium to North Face and Columbia, in-line with Patagonia and Stio and ~30-50% below comparable GOOS offerings. AS has been aggressively opening new stores (17 net openings in 1H’24, expected to grow from 111 in FY23E to 214 in FY27E) and continuing to increase the assortment profile from outwear to apparel. Arc’teryx (Technical Apparel = 33% of sales, 75% of EBIT) is expected to account for the majority of total Company revenue growth and 108% of EBIT growth. VFC’s North Face revenue has been declining LSD. North Face is a mature brand with $3.7B in LTM revenue thus Arc’teryx would have to grow to nearly that size to achieve expectations. In the US market alone analysts are expecting +20% revenue growth in Q4, a growth rate far higher than any retail brand with +$1B in revenue of which we are aware. VFC Outdoor segment generates 11-12% operating profits with Arc’teryx running at nearly twice that level. As noted, Arc’teryx annual revenue is already 50% higher than GOOS.

Solomon

Salomon (30% of sales) is a well-regarded ski equipment and apparel brand. Hardware has a longer useful life/ replacement cycle. These are durable big-ticket items tracking to interest in skiing activity and consequently weather conditions. Solomon has been pushing into a very competitive shoe category which has been intensified by newer entrants HOKA, ONON, etc. Salomon’s shoes are focused on niche trail running. Solomon has already nearly fully penetrated the North American wholesale channel with its products currently sold in all the top 10 North American sporting goods retailers.

Other Brands

The Company’s Ball & Racquet segment (25% of sales) is led by Wilson (tennis racquets, baseball gloves and balls) and also includes smaller brands ATEC, EvoShield, Louisville Slugger and DeMarini. The group is marginally profitable with MSD sales growth and ~90% US channel penetration. This is a low multiple business.

FINANCIAL EXPECTATIONS & VALUATION        

The Company’s operating model is reliant on its DTC channel, generates solid gross margins (greater than 50%) but SG&A expenses associated with shift to DTC and marketing support to build global brand awareness, suggest little cash flow for the foreseeable future. AS is levered 3.2x (3.8x inclusive of lease liabilities). While the growth of the core Arc’teryx has been impressive, for the previously discussed reasons, we believe expectations are too high and the performance is set to fall short in 2H’24 and next year.

Street valuations are all based on multiple of EBITDA relative to peers. While this may better account for leverage, AS reports under IFRS while most of the comparable companies are GAAP reporting thus the AS numbers are significantly overstated given rent is amortized rather than expensed. Ironically, GOOS, VFC (North Face), LULU, COLM and DECK, do not even report Adj. EBITDA. AS focuses investors on its EBITDA for this reason and because it has a 35% tax rate. Importantly, management cited the Street’s FY25 effective tax rate estimate of 29.2% as being mis-modeled too high. Applying management’s 35% effective rate to consensus FY25 pre-tax profit of $508M translates to FY25 EPS of $0.65 (8% below current consensus FY25 EPS).

AS’s current market cap is $8.7B (505.3M fd s/o) and EV is $10.4B (excluding $330M of lease liabilities). LTM adjusted earnings are negative. Based on FY2024 consensus numbers, AS is trading at 42x EPS (note IFRS accounting). The stock’s recent run-up and valuation would imply that investors’ expectations are likely higher than that of the sell-side. Closest peers VFC (North Face = 35% of revenue), COLM, GOOS and Montcler (MONC.IM) trade at 12-22x forward EPS. Applying a premium 25x multiple to 2024 EPS ($0.40) = $10.00 per share or 40% below the current stock price. This is arguably generous given the leverage and fact that 25-30% of the Company’s sales are related to low multiple equipment brands. Consensus financials below (2025 unadjusted for the discrepancy in the tax rate as noted above).

OTHER CONSIDERATIONS, RISKS & BULL THESIS 

• There are a host of related party arrangements with legacy parents and affiliate, ANTA Sports. This includes licensing agreements, contract manufacturing, shared middle-office services and other services. ANTA could provide the Company with below market rate manufacturing and enable in order to bolster margins.
• Amer Sports paid KPMG $10M in 2022 and $15M last year. This is higher than anything we have seen before. Deckers Outdoors paid KPMG $2.7M in audit fees last year. Recently IPO’ed CAVA ($15B market cap) reported $1.3M in audit fees during the equivalent period. Not to insinuate malfeasance but the magnitude of the variance is worth noting considering all the other issues surrounding the Company.
• 30% of its products are manufactured in mainland China which could adversely affect margins should new US tariffs be implemented.
• Mix shift from 15% DTC in 2019 to 35% 2023 has been the largest driver of margins. Clearly the Company has been a covid beneficiary but a continuation of this trend above expectations would translate to higher margins and potentially multiple expansion.
• Bulls cite revenue potential for Arc'teryx as large as that of LULU. The brands expansion could continue at elevated levels. North Face growth in APAC has been running at 30% over the last three quarters (LTM APAC sales of $640M).
• CEO Zhang is viewed as “a thought leader and innovator in China retail” and reported to have led successful Chinese market expansions for Adidas and Proctor & Gamble. Under Zhang, Arc’teryx has refreshed its go-to-market strategy, nearly doubling sales in three years.
• China stimulus could boost consumer spending and bolster AS sales.
• Technical: Small float % of S/O (15%). Chinese retail ownership.

Catalyst

1. Follow-on offering: Lock-ups have expired (2/2/24 IPO effectiveness).
2. ANTA International Group (China-based, higher-end sportswear apparel brands owner) owns 43% of S/O, Chip Wilson 16% and Ding Family insiders holding 10%.
3. Q3’24 or Q4’24 earnings miss given high expectations.
4. Sell-side earnings revisions. Consensus 2025 numbers are mis-modeling 2025 tax expense which will result in 8-10% lower earnings estimates.