OUTDOOR RECREATION & ENTHUSIASTS PANDEMIC A BOOM TO TACTICAL GOODS AND AT-HOME GAMING CONTACTS KEY HIGHLIGHTS Kenneth Wasik • Early in the pandemic, industry participants Managing Director, focused on internal operations to meet demand Head of Consumer & Retail • Public equity valuations have rebounded substantially following early COVID-19 headwinds Sophea Chau • Private equity buyers are searching for platform Managing Director, and add-on acquisitions in the sector Outdoor Recreation & Enthusiasts • Capstone expects M&A activity to increase in 2021 as the economy continues to open and consumer Peter Bailey confidence rises Director, Tactical & Sporting Technology October 2020 3 Outdoor Recreation & Enthusiasts Pandemic a Boom to Tactical Goods and At-Home Gaming TABLE OF CONTENTS INDUSTRY OUTLOOK Industry Outlook COVID-19 lockdowns and social distancing protocols have driven consumers COVID-19 Impacts to increasingly pursue recreation and leisure activities, contributing to heightened demand for outdoor, sporting goods, and tactical product M&A Overview manufacturers. Notably, bicycle sales have increased dramatically, rising 63% Notable Transactions year-over-year (YOY), amounting to $679 million, with mountain bikes and 1 Select Transactions road bike sales up 92% and 87% in June, respectively, according to NPD. The pandemic has also introduced a new wave of consumers into the Outdoor Public Company Spotlight Recreation & Enthusiasts industry as individuals seek new forms of outdoor Public Company Data and indoor entertainment amid lockdowns and social distancing rules. As a Key Takeaways result, demand has surged for tactical goods and gaming applications, with industry players recording strong revenue growth (see following pages). Firm Track Record However, industry participants struggled during the onset of the pandemic to meet elevated demand, evidenced by lower inventory levels, with YETI (NYSE:YETI) noting a 23% YOY decline in inventory, according to its earnings release.2 Long term ramifications may manifest into a decreased reliance on overseas manufacturing to reduce supply chain complexity and achieve greater flexibility to meet demand surges. While post-pandemic demand is likely to normalize, favorable long-term tailwinds are expected to be supported by the passing of the Great American Outdoors Act. Signed into law on August 4th, the act allocates $1.9 billion for the next five years for maintenance to critical facilities and infrastructure in CONTACTS national parks, forests, wildlife refugees, and recreation areas, according to the National Park Service.3 It also provides $900 million in annual funding for the Kenneth Wasik Land and Water Conservation Fund which invests in conservation and Managing Director, recreation opportunities across the U.S. Head of Consumer & Retail 917-434-6124 Outdoor Recreation & Enthusiasts Public Company Total Return [email protected] Tactical Products & Outdoor Recreation Sporting Goods & Active Lifestyle Gaming & Entertainment Tourism & Leisure Sophea Chau 200 Managing Director, Outdoor Recreation & Enthusiasts 150 617-619-3307 [email protected] 100 Peter Bailey = 100 Index 50 Director, 0 Tactical & Sporting Technology Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 310-740-3286 [email protected] Tactical Products & Outdoor Recreation: AAXN, BC, ELY, CWH, CLAR, DII.B, ESCA, JOUT, LAF, OLN, SWBI, SPWH, RGR, THULE, CFC, VSTO, YETI; Gaming & Entertainment: ATVI, EA, SLGG, DKNG, EGLX, PENN, SPO; Sporting Goods & Active Lifestyle: DKS, FRAS, BGFV, HIBB; Tourism & Leisure: BKNG, CCL, EXPE, HLT, MAR, RCL, MTN Source: FactSet and Capstone Research 2 Outdoor Recreation & Enthusiasts | October 2020 COVID-19 IMPACTS: TACTICAL PRODUCTS & OUTDOOR RECREATION Tactical and outdoor recreation products have products & outdoor recreation manufacturers have experienced dramatic increases in demand as consumers struggled to procure inventory to meet demand as have increasingly embraced outdoor recreation activities workforce capacity constraints and hiring freezes have led amid COVID-19 social distancing measures. This has to delays throughout the production process. Inventory been evidenced by substantial increases in camping among firearm manufacturers fell sharply, as Sturm, Ruger equipment and binocular sales which have risen 31% and & Company experienced a 127,000-unit decline in 21% YOY, respectively. Firearms and ammunition, which combined inventories in its warehouses and distributors represent a key component of this subsegment, have also during Q2. The entrance of new consumers to the Tactical benefited from heightened interest in hunting and Products & Outdoor Recreation space extends beyond shooting sports, with leading manufacturers reporting firearm and ammunition purchases. Notably, leading significant revenue increases. Notably, leading firearm boat manufacturer Brunswick (NYSE:BC) reported that manufacturer Sturm, Ruger & Company (NYSE:RGR) has 40% of its new boat sales in June 2020 were to first-time experienced a YOY revenue increase of 35.2% in Q2 2020, boat purchasers, according to its earnings release.7 according to its earnings release.4 In addition, during the However, heightened boating usage has also been met spring 2020 hunting season, license and tag sales with production challenges as Brunswick experienced its increased 35%, according to Vista Outdoor. Elevated lowest mid-season pipeline levels in nearly 20 years with demand can also be seen in the number of National 34% fewer boats in dealer inventory YOY. As supply chain Instant Criminal Background Check System (NICS) firearm challenges mounted throughout the industry in Q2 2020, background checks, which serve as a nationwide proxy for brand recognition and customer retention remained gun sales, which have increased nearly 72% YOY with a critical aspects to drive sales growth. With many record 3.9 million background checks conducted in June consumers hesitant to visit physical stores, e-commerce 2020, according to NICS.5 capabilities have emerged as a crucial channel for tactical products & outdoor recreation providers. Notably, Vista In recent months, civil unrest across the U.S. has also Outdoor experienced a 40% increase in its e-commerce fueled gun sales. Through July 2020, five million new business compared to the prior year, according to its Americans purchased a gun for the first time, according to earnings release.8 National Shooting Sports Foundation.6 The significant increase in new gun buyers, who accounted for 40% of Public companies in the Tactical Products & Outdoor firearm sales, represents a notable shift in the Firearms Recreation subsegment have displayed resilience through and Ammunition industry, expanding the demographics Q2 2020 following headwinds at the onset of the and range of buyers in the gun-owning community. The pandemic. EBITDA multiples have rebounded nearly 60% influx of consumers and heightened backlog has driven since the World Health Organization (WHO) declared strong sales growth among industry players but has also COVID-19 a pandemic on March 11, standing at 14.2x as presented formidable supply chain challenges. Tactical of August 31st. products Peter Bailey, Director, Tactical & Sporting Technology “A new and increasingly diverse base of consumers that is purchasing firearms, ammunition, and outdoor products may have a significant impact on the industry for years to come after the 2016 election. While the industry slumped after the 2016 election, many expect that consumers will continue to have strong demand to purchase additional firearms, ammunition, and shoot at ranges after the 2020 election. Many consumers expect political and social tensions to continue after the 2020 election and have increasingly become attentive to their personal safety and security. Business owners and executives in the industry have acknowledged that the 2016 election year was an optimal year to sell their company or raise capital and have shown increased interest in M&A as a strategic goal in 2020 that is expected to extend into 2021 given the current environment." 3 Outdoor Recreation & Enthusiasts | October 2020 COVID-19 IMPACTS: SPORTING GOODS & ACTIVE LIFESTYLE The Sporting Goods & Active Lifestyle subsegment has Dick’s Sporting Goods Q2 2020 Key Metrics garnered heightened demand as health and fitness has become paramount amid the pandemic. As consumers have sought socially distant activities, sporting goods equipment has experienced increased sales, with paddle 250% board sports and golf equipment witnessing YOY 194.0% increases of 56% and 51%, respectively, according to 200% NPD. While the pandemic closed many retail locations, sporting goods providers with robust omnichannel 148.0% capabilities were able to capture increased revenue as a 150% result of elevated consumer interest. Notably, leading % Change Year - sporting goods retailer DICK’s Sporting Goods (NYSE:DKS) 100% over recorded a 20.1% increase in net sales in Q2 with e- - commerce sales rising 194%, according to its Q2 Year 50% earnings release.9 20.1% Trading metrics among public companies in the Sporting 0% Goods sector have improved since the onset of the Revenue E-Commerce Sales EPS pandemic, with EBITDA multiples trading slightly below year-end 2019 levels. Effective inventory management is likely to remain key as companies look to forecast Source: Company press release financial performance and increase budget clarity. COVID-19 IMPACTS: GAMING & ENTERTAINMENT While outdoor