Amer Sports, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Amer Sports is a global designer, manufacturer, and marketer of sports equipment, apparel, footwear, and accessories, offering a diversified portfolio of brands primarily focused on performance and outdoor activities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Amer Sports’ financial performance and strategic direction are currently undergoing a transformation, with recent data and management discussions reflecting a complex mix of challenges and opportunities. The company is navigating a rapidly evolving market landscape, driven by changing consumer preferences, technological advancements, and shifts in global economic conditions.

Business Overview

Amer Sports operates across three key segments: Technical Apparel, Outdoor Performance, and Ball & Racquet Sports. The Technical Apparel segment, which includes brands like Arc’teryx and Salomon, focuses on technical outerwear, footwear, and gear designed for specific activities like hiking and climbing. Outdoor Performance is associated with trail running, skiing, and other outdoor sports. Ball & Racquet Sports encompasses brands that produce tennis, racquetball, and badminton equipment as well as equipment for team sports like baseball, softball, and football.

While the company has a diverse geographic reach, Europe and the Americas constitute the bulk of its revenues, with China being a particularly fast-growing market.

Looking at the business’s financials, it has demonstrated growth in some areas, particularly in direct-to-consumer sales and e-commerce channels, yet faces issues with rising costs, fluctuating demand, and supply chain disruptions.

  • Revenue Distribution: The company’s revenue is distributed across its key segments, with strong performance from Technical Apparel and Outdoor Performance. There are variations in revenue performance due to currency fluctuation and regional demand. For instance, the China market is showing high growth whereas North America’s market is stable.

  • Trends in the Industry: The sports equipment and apparel industry is characterized by continuous innovation, product differentiation, and an emphasis on sustainability. Technological advancements in materials and manufacturing techniques are playing a key role in enhancing product performance. The emphasis on health and wellness continues to drive demand for sporting and outdoor gear. Moreover, the trend towards more sustainable and eco-friendly products is influencing consumer preferences, creating a need for companies to improve practices in manufacturing and sales. The rise of e-commerce and shift from traditional retail towards online sales channels, in the last few years, has meant that companies need to have excellent online presence, fast delivery and low return rates to remain relevant.

  • Competitive Landscape: The competitive landscape is intensely competitive. Some competitors are well-established multinationals. They are also facing rising competition from smaller companies in particular niche or sub-industry that may be more agile or may be providing products with unique capabilities. Overall, the industry faces a number of pressures that make it difficult to achieve and maintain a competitive edge.

Given the nature of the industry and market, a core strategy for Amer Sports is understanding these trends and positioning their brands and products to benefit.

Moat Analysis: 2 / 5

Amer Sports’ moat is weak and relatively narrow, which is apparent from the above business overview and its financials. The company has some clear strengths, but its ability to maintain those over long periods is not very certain. Here’s why:

  • Intangible Assets (Brands):
    • While Amer Sports does possess well-known brands, such as Arc’teryx, Salomon, and Wilson, these are all largely commodity brands.
    • These brands are generally viewed as durable, but don’t generate enough pricing power to call them truly durable moats.
    • Many of the product are essentially a commodity without any differentiator and can be copied by others. This is the reason why a higher price point might not be maintained.
  • Switching Costs:
    • Switching costs appear to be minimal for their consumers, since there are substitutes from competitors, so the ability of them to extract value or profit is lower.
    • Customers might switch from the equipment and products provided by AS to another company without significant cost or disruption. This is a major sign of lack of moat.
  • Network Effects:
    • There is no evidence of any network effects in AS’s business.
  • Cost Advantages:
    • The company doesn’t have any durable cost advantages, other than scale economies which are also not a great sign of durable moat.
    • Production of clothing, equipment, etc can be easily replicated or copied without significant barriers of entry.
  • Overall:
    • Their ability to produce profits in the long run, that too in excess of other competitors, is limited.
    • A lot of their success is based on product quality and innovation, which is easy for other companies to replicate or leapfrog, due to the commoditized nature of these products.
    • Also, their markets are also intensely competitive, making it much harder for AS to have a durable competitive advantage.

Given all these factors, I am giving a moat rating of 2/5. A narrow moat for having popular brands and distribution, but not wide or resilient because of easily copiable products in a fiercely competitive market.

Legitimate Risks That Can Harm The Moat While the company is a leader in some segments, it faces the risk of weakening moats due to external and internal pressures:

  • Intensified Competition: Increased competition, especially from new entrants in both developed markets and the emerging market, could erode market share and profitability. Also, some niche players might gain a competitive edge and take business away.
  • Supply Chain Disruptions: Global supply chain fragility, exacerbated by geopolitical events or economic uncertainties, may raise input costs and threaten the company’s cost structure and profits.
  • Changing Consumer Preferences: Shifting consumer tastes, technology innovations, and a move away from established brands could lead to diminished pricing power and brand value of AS. The company may need to do significant amounts of innovation to keep up, which will incur costs.
  • Economic Downturn: Slowdowns in the global economy can reduce consumer spending on non-essential items like sporting equipment and products, leading to reduced revenues and profits. A recession might significantly decrease people’s willingness to spend on expensive brands.
  • Technological Disruption: Rapid changes in technology and new trends in manufacturing can make its products or manufacturing processes obsolete or less competitive, resulting in a loss of advantage.
  • FX Risk: Since they have considerable sales in international markets, there may be a drop in value if the foreign currency declines. Also, their sales will decline when translated back to the parent currency, and this is hard to forecast.

Business Resilience

The business resilience score of AS is somewhere between moderate to good, meaning its resilience to the above mentioned risks can be moderate to good. Here’s why:

  • Brand strength: With well established brands in their segments, they might be able to retain some of their market share, even if they become less competitive.

  • Geographic Diversification: A wide reach across various markets reduces their reliance on a single market, somewhat insuring them against region specific problems.
  • Strong Distribution: Their extensive distribution network might enable them to reach consumers that could withstand a financial crisis better, and hence they can try to diversify to such markets.

Financials Deep Dive Here’s an analysis of the financial metrics of the company. Please note that the last reports, mainly for September 2023 has been taken into consideration here, which is the latest data available.

  • Revenue Growth:
    • The company has seen moderate revenue growth. They have seen an improvement from 2021 to 2023, where revenues have gone from roughly USD 3 billion to 3.6 billion.
    • They have seen growth in all segments, but specifically in the Chinese region.
  • Profitability:
    • Gross profit margin is quite stable in the 40s, and adjusted operating profit is around 10 to 15 percent. While these are very strong numbers in general, there are fluctuations and variations depending on the segments.
  • EBITDA:
    • EBITDA has been decreasing during the last three quarters, down from a high of USD 145 million to a more recent value of USD 100. This is not unexpected, and is mainly due to cost increases, reduction in sales in some segments, and increasing competition.
  • Net Income:
    • Their net income has been widely inconsistent, and is not a metric that can be fully relied upon.
  • Cash flows:
    • Cash flows from operations have also been largely inconsistent, indicating potential risk with management of cash.
    • Net cash flow from operating activities has declined considerably from 2021 to 2023. This is mainly because of increased investments and inventory.
  • Capital Structure:
    • Debt is more than 50% of total capitalization, and the company is relying significantly on leverage.
    • This is still manageable, given its size, but something to keep an eye on.
  • Liquidity and Solvency: * Their current ratio is 1.4, implying that its current assets cover current liabilities, but they have less liquid reserves than some of their competitors.

Understandability Rating: 3 / 5

The business model of Amer Sports is fairly easy to understand, but some nuances require knowledge of the retail industry and brand marketing. Here’s the justification:

  1. The main aspect of their business is simple to understand: they manufacture and sell sporting equipment, apparel and footwear.
  2. Their portfolio of brands, while requiring some knowledge of their specific industries, is still relatively easy to follow.
  3. The financials, although sometimes complicated by impairments and restructuring costs, are not too hard to follow, and are usually reported correctly.
  4. Their target customers are the general population, for active and recreational users, with a focus on quality and performance. This is a simple segmentation, and there is nothing special to remember.
  5. While the general business model is understandable, how their distribution, pricing and competition work in different markets would be harder to follow without detailed study. Therefore, I am giving a rating of 3 / 5. They have a fairly simple business model, but it is not trivially obvious to anyone, and requires more thought to properly understand, thus the 3/5 rating.

Balance Sheet Health: 4 / 5 The company’s balance sheet is overall healthy, but a tad bit leveraged:

  • It has sufficient assets to cover it liabilities, both short and long term, making its balance sheet healthy.
  • Its debt ratio is on the higher end, creating significant financial burden if they default or get downgraded, but is still manageable.
  • Their cash is decreasing, and if they don’t make structural changes quickly, they might run into issues of not being able to pay their bills.
  • They may need to cut down on expenses or increase their prices to generate more cash. Given all these, I am giving a rating of 4/5 here. It’s a healthy balance sheet, but needs a bit of correction in its debt and cash flows, and hence, not perfect.

Recent Concerns and Controversies

  • Impact of Acquisitions: Their acquisition of smaller brands is increasing the amount of goodwill and intangibles, which are subject to further impairments and writedowns in the future. This might hurt their bottom line and profitabilities.
  • Geopolitical Issues: They have had supply chain problems and revenue issues stemming from geo-political tensions in Europe, due to the ongoing conflicts and Russia’s invasion of Ukraine. These disruptions have caused inflation and high input costs for the company, further decreasing profits.
  • High Debt: Their debt levels are quite high, which is concerning because interest rates have been on the rise recently. Any further rate hike may cause their earnings to be severely reduced by interest expenses.

The management has responded by focusing on the fundamentals of value creation, investing in product development, and streamlining operations, which may improve their margins and ROIC. Moreover, they are increasing efforts to mitigate supply chain disruptions and have started to explore new emerging markets to reduce reliance on existing markets. They acknowledge the importance of innovation and technology in a competitive environment.

In conclusion, Amer Sports is facing a dynamic and challenging market environment. Their brand recognition is somewhat good and will give them some cushion, but they will need to improve their cost structure and margins to really perform well over the long run, and generate meaningful investor returns.