Camping World Holdings, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Camping World operates Good Sam consumer services and plans and Camping World retail businesses. At quarter-end it operated 126 retail locations in 36 states; the company owned 22.6% of CWGS, LLC and consolidated its results, with the remainder reported as non-controlling interests.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $883.8 million | $797.7 million; up 10.8% |
| Gross profit / margin | $251.8 million / 28.5% | $222.3 million / 27.9% |
| Operating income / margin | $69.8 million / 7.9% | $56.0 million / 7.0% |
| Net income / margin | $49.4 million / 5.6% | $37.8 million / 4.7% |
| Net income attributable to Camping World Holdings | $7.5 million | $37.8 million; not directly comparable because the post-IPO ownership and non-controlling-interest presentation differed |
| Adjusted EBITDA / margin | $71.7 million / 8.1% | $57.4 million / 7.2% |
| Operating cash flow | $14.8 million provided | $64.1 million used |
| Cash and working capital at quarter-end | $174.7 million cash; $332.2 million working capital | Cash was $114.2 million and working capital $266.8 million at December 31, 2016 |
Revenue growth was led by new vehicle sales and finance and insurance. New vehicle revenue rose 23.2%; used vehicle revenue fell 18.1%. SG&A increased 9.4% to $175.5 million, but declined as a share of gross profit to 69.7% from 72.2%.
At March 31, 2017, term-loan carrying value was $719.2 million and floor-plan borrowings were $695.5 million, or about $1.415 billion combined. The term-loan principal was $740 million; $31.8 million of revolving capacity and $469.5 million of floor-plan capacity were available. The company reported compliance with debt covenants. Class A dividends paid during the quarter included a regular $0.08 per share and a special $0.0732 per share.
Material changes versus the prior comparable period
- Retail revenue rose 10.7%; same-store sales increased 9.6% to $771.7 million. New vehicle unit sales increased 30.9%, while used vehicle unit sales declined 18.8%.
- Consumer Services and Plans revenue increased 11.7%, and segment income increased 21.6%, supported by acquired and newly launched shows, growth in policies and contracts, and lower roadside-assistance claims.
- Retail segment income increased 28.4%. Finance and insurance revenue rose 29.9%, and its share of new and used vehicle revenue increased to 10.2% from 8.7%.
- Other interest expense decreased 26.2% to $9.4 million. In March, the company increased its term-loan facility by $95 million to $740 million, with proceeds intended for dealership purchases.
- Operating cash flow improved by $78.9 million year over year, while investing cash outflow increased to $91.1 million, including $75.4 million for dealership acquisitions. Financing provided $136.9 million, including term-loan and floor-plan borrowings; cash increased $60.5 million.
Outlook, commentary, risks and unusual items
- Management described growth plans centered on growing active customers, cross-selling, opening greenfield locations, acquiring dealerships, and adding products. It cited favorable RV-usage and customer-demographic trends but gave no quantified earnings or revenue guidance.
- On April 28, 2017, Camping World was selected as winning bidder for certain Gander Mountain and Overton’s assets for $37.8 million, subject to adjustments; anticipated Overton’s inventory was approximately $15.6 million. Court approval was received May 4, and closing was expected in May. Management expected the purchase to extend the business into marine and watersports.
- Management expects pronounced seasonality, with revenue and profits generally highest in the second and third quarters. Inventory misjudgment, severe weather, volatile sales mix, and higher expenses could pressure margins or cash flow.
- Risks include variable-rate debt exposure, dependence on financing availability for the company and customers, restrictive debt covenants, acquisition and expansion execution, and the need for adequate capital. A 1% rate increase was estimated to raise next-12-month interest expense by $7.4 million on term debt and about $7.0 million on floor-plan borrowings.
- The company reported ordinary-course litigation and did not expect pending claims to have a material adverse effect, while noting outcomes may be uncertain. It reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
- Adjusted EBITDA and other non-GAAP measures are supplemental, not substitutes for GAAP results or cash available for discretionary spending. Deferred revenue includes advance customer payments and is recognized over service periods.
Important facts for investors to verify
- Assess the sustainability of new-vehicle-led growth, the decline in used-unit sales, and the reported same-store sales performance.
- Track acquisition integration, financing, purchase-price adjustments, and the eventual results and liabilities associated with the Gander Mountain and Overton’s transaction.
- Review debt, floor-plan utilization, variable-rate exposure, covenant headroom, and cash needs for inventory and expansion.
- Distinguish consolidated net income from income attributable to Camping World Holdings; post-IPO non-controlling interests materially affect the comparison.
- Confirm the impact of seasonality, revenue-recognition implementation, and the tax receivable agreement, under which the company generally owes eligible parties 85% of realized or deemed tax benefits.