Camping World Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results; amounts below are in U.S. dollars. Camping World operates Consumer Services and Plans and Retail businesses, with Retail accounting for about 96% of Q3 revenue.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,239.0m | $991.1m | $3,405.5m | $2,856.7m |
| Gross profit | $356.7m | $280.2m | $981.3m | $802.0m |
| Gross margin | 28.8% | 28.3% | 28.8% | 28.1% |
| Operating income | $112.1m | $87.7m | $318.6m | $247.1m |
| Net income | $85.3m | $68.4m | $240.0m | $189.6m |
| Adjusted EBITDA | $122.1m | $90.3m | $335.9m | $252.1m |
- Revenue increased 25.0% in Q3 and 19.2% year to date. New-vehicle sales, finance and insurance, and acquired locations were principal drivers. Same-store sales rose 9.4% in Q3 and 9.9% year to date.
- Q3 new-vehicle revenue rose 31.2%; new unit sales increased 33.3%. Finance and insurance revenue grew 50.0%. Year-to-date used-vehicle revenue declined 7.9%, while used-vehicle gross profit increased as margins improved.
- Q3 operating margin was 9.0% and net margin 6.9%; year-to-date operating margin was 9.4% and net margin 7.0%. Adjusted EBITDA margin was 9.9% for both Q3 and the first nine months, compared with 9.1% and 8.8%, respectively, in 2016.
- Net income attributable to Camping World Holdings, Inc. was $20.1m in Q3 and $47.0m year to date, versus $68.4m and $189.6m in 2016. The comparison is affected by the post-IPO non-controlling interest: 2017 consolidated net income includes earnings attributable to other CWGS, LLC owners. Q3 basic and diluted Class A EPS were each $0.68; year-to-date basic and diluted EPS were $1.97 and $1.92. Adjusted pro forma diluted EPS was $0.77 for Q3 and $2.06 year to date.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $208.1m, down from $316.0m, primarily reflecting working-capital investment, including a $150.7m increase in inventory on the cash flow statement. Investing cash use was $405.1m, including $345.1m for acquisitions and $49.8m of capital expenditures. Financing provided $246.0m; cash increased $49.0m to $163.2m.
- At September 30, cash was $163.2m and working capital was $343.7m. Floor-plan borrowings, net of the offset account, were $799.7m; long-term debt was $716.9m net on the balance sheet, representing $740.0m principal before discounts, costs and repayments. Revolver borrowing capacity was $31.8m. The company reported compliance with debt covenants.
- In October, after quarter-end, the term loan was increased to $939.5m outstanding principal; the LIBOR margin was reduced from 3.75% to 3.00%, while quarterly amortization increased to $2.4m. The filing identifies variable-rate exposure: a 1 percentage-point rate change was estimated to affect next-12-month interest expense by about $7.4m on the term loan and $8.0m on floor-plan debt.
- Cash dividends declared were $0.1532 per share in Q3 and $0.4596 year to date. The company reported $109.9m of Tax Receivable Agreement liabilities at quarter-end.
Material developments, outlook and risks
- Acquisitions expanded the retail and outdoor businesses, including Gander Mountain/Overton’s, TheHouse.com and W82, alongside dealership and consumer-show acquisitions. Acquired Gander Mountain and Overton’s generated $22.3m of revenue and an $11.3m pretax loss from acquisition through September 30; TheHouse.com and W82 also reported small pretax losses over their partial-period contributions.
- Management planned to rebrand Gander Mountain stores as Gander Outdoors, targeting 15–20 openings by the end of Q1 2018 and another 40–45 in Q2–Q3 2018, subject to lease negotiations. Management warned that meaningful costs would precede full revenue and that additional financing might be needed. The filing provides no numerical full-year earnings or revenue guidance.
- Management said liquidity sources were expected to support operations and growth for at least the next 12 months, but cautioned that financing may be needed if operating cash flow and available facilities are insufficient. The business is seasonal, with demand and revenue generally concentrated in spring and summer.
- Key risks include execution, integration and funding of Gander Outdoors; lease and inventory availability; variable interest rates; inventory and product-mix volatility; seasonal demand; and potential product-liability litigation, particularly relating to firearms and ammunition. The company did not expect pending ordinary-course litigation to have a material adverse effect, while noting that litigation outcomes are uncertain.
- The October 2017 public offering was a secondary sale by existing holders; Camping World received no proceeds. The related unit redemptions were expected to increase Tax Receivable Agreement liabilities and deferred tax assets.
Important facts for investors to verify
- How much 2017 growth reflects same-store performance versus acquisitions, and whether acquired businesses can become profitable.
- Gander Outdoors opening pace, lease terms, startup costs, inventory funding and any additional capital requirements.
- Cash conversion and inventory levels, given lower operating cash flow and increased floor-plan debt.
- Interest-rate sensitivity and the effects of the October term-loan amendment on debt service and covenant headroom.
- The distinction between consolidated net income, earnings attributable to the public company, and adjusted/pro forma non-GAAP measures; also review ongoing Tax Receivable Agreement obligations.