Camping World Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Financial statements are unaudited. Unless stated otherwise, amounts are in millions of dollars.
Business context
Camping World sells RVs, RV parts and services, outdoor products, and consumer services and plans, principally through its Camping World, Gander Outdoors, and Good Sam brands. It reports three segments: Consumer Services and Plans, Dealership, and Retail. The filing recast prior-period segment results to reflect this structure. The company’s expansion into outdoor retail, including the Gander Outdoors rollout and acquisitions, materially increased Retail revenue and costs.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,312.7 | $1,235.6 | $3,819.5 | $3,396.3 |
| Gross profit / margin | $376.3 / 28.7% | $355.2 / 28.7% | $1,097.2 / 28.7% | $979.7 / 28.8% |
| Operating income / margin | $83.9 / 6.4% | $110.7 / 9.0% | $253.9 / 6.6% | $317.1 / 9.3% |
| Net income | $47.9 | $83.8 | $147.0 | $238.5 |
| Net income attributable to Camping World Holdings | $14.0 | $19.6 | $45.2 | $46.5 |
| Basic EPS | $0.38 | $0.66 | $1.22 | $1.95 |
| Adjusted EBITDA (non-GAAP) / margin | $100.1 / 7.6% | $120.6 / 9.8% | $312.0 / 8.2% | $334.3 / 9.8% |
| Operating cash flow | — | $251.1 | $173.4 |
Q3 SG&A rose 17.8% to $278.3 million; SG&A was 74.0% of gross profit versus 66.5%. For the nine months, SG&A rose 26.2% to $807.7 million and was 73.6% of gross profit versus 65.3%. Adjusted EBITDA is a company-defined non-GAAP measure and includes $5.8 million of Q3 and $40.8 million of nine-month Gander Outdoors pre-opening costs.
Material changes versus prior periods
- Q3 revenue grew 6.2%, while net income fell 42.8%; nine-month revenue grew 12.5%, while net income fell 38.4%.
- Retail revenue increased 52.6% in Q3 and 57.4% for nine months, largely reflecting the Gander Outdoors rollout and acquisitions. Retail segment losses widened to $20.7 million in Q3 and $79.7 million for nine months, from $5.1 million and $4.5 million, respectively.
- Dealership revenue was nearly flat in Q3 and rose for the nine-month period, but vehicle margins weakened. Q3 new-vehicle revenue fell 2.2%, and new-vehicle gross margin declined to 12.6% from 14.3%; same-store sales fell 6.6% overall. Nine-month aggregate same-store sales declined 1.4%.
- Consumer Services and Plans remained a source of growth: Q3 revenue rose 12.7% and segment income rose 20.0%.
- Interest costs increased: Q3 other interest expense rose to $16.8 million from $11.0 million; nine-month floor-plan interest expense rose to $28.8 million from $19.3 million.
Balance sheet, debt, and liquidity
- At September 30, 2018, cash was $125.4 million, down from $224.2 million at year-end 2017. Working capital was $594.5 million, compared with $478.7 million.
- Long-term debt, net of discounts and costs, was $1,161.4 million; floor-plan borrowings were $734.0 million; and $24.4 million was drawn on the floor-plan revolving line. The filing reported $434.5 million of unencumbered floor-plan borrowing capacity and $32.2 million available under the senior secured revolving facility.
- Nine-month cash flow was $251.1 million provided by operations, $286.8 million used in investing, and $63.1 million used in financing. Investing included $105.4 million of capital expenditures, $82.2 million for business acquisitions, and $100.1 million for real property. Cash declined by $98.8 million over the period.
- The company said it expected liquidity sources to be sufficient for at least the next 12 months, while noting that additional financing might be needed if operating cash flows and facility availability prove inadequate. It estimated approximately $104 million of incremental liquidity from potential borrowings and real-estate sale-leasebacks in Q4; these were expectations, not completed funding as of September 30.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided. Management described plans to expand through acquisitions, new locations, marketing, and cross-selling, and expected the initial Gander Outdoors rollout to be substantially complete by December 31, 2018, with additional openings anticipated.
- Management cautioned that new Retail locations may take longer to reach profitability and may pressure margins and SG&A efficiency during ramp-up. Seasonality, volatile product mix, consumer demand, inventory management, financing availability, and rising interest rates are also identified risks.
- The company’s variable-rate debt creates material rate exposure: it estimated that a 1 percentage-point rate change would alter annual interest expense by about $12.0 million on the term loan and $7.3 million on floor-plan borrowings, based on September 30 balances.
- Disclosure controls were deemed ineffective because of continuing material weaknesses involving income-tax review, dealership accounting procedures, and trade-in inventory valuation controls. Remediation was underway, but the company could not estimate when it would be complete.
- Two securities class actions filed in October 2018 allege misleading statements concerning the company’s business, operations, and management. The company disputes the claims; potential liability was not considered probable or reasonably estimable.
- The company had not completed its accounting for the 2017 Tax Act and reported provisional estimates. Adoption of the new lease standard was expected to significantly increase reported balance-sheet assets and liabilities because much of its real estate is leased.
- On November 2, 2018, after quarter-end, a real-estate facility with a maximum principal amount of $21.5 million was established; $4.2 million was borrowed to acquire a distribution facility.
Most important facts for investors to verify
- Whether Gander Outdoors and other Retail operations improve profitability after rollout costs, and how reported store counts and opening plans reconcile across the filing.
- Whether weaker dealership and Retail same-store sales and vehicle gross margins persist, and whether revenue growth translates into improved operating income and cash flow.
- Debt balances, borrowing availability, interest-rate exposure, planned real-estate financing or sale-leasebacks, and the assumptions supporting management’s 12-month liquidity assessment.
- Progress and independent testing of remediation for the material weaknesses, along with any subsequent restatements or control disclosures.
- Developments in the securities litigation and the final tax effects of the 2017 Tax Act, lease-standard adoption, and Tax Receivable Agreement obligations.