Camping World Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; financial statements are unaudited. Camping World sells RVs, parts and services, finance and insurance products, and consumer services and plans. The company also expanded into outdoor and active-sports retail through acquisitions and store openings.
Financial performance
Amounts are in millions except per-share data. Comparisons are with the corresponding 2017 period.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,445.2 | $1,279.0 | $2,506.7 | $2,160.7 |
| Gross profit / margin | $416.2 / 28.8% | $372.6 / 29.1% | $720.9 / 28.8% | $624.5 / 28.9% |
| Operating income | $120.2 | $136.5 | $170.0 | $206.4 |
| Net income | $81.8 | $105.1 | $99.1 | $154.7 |
| Net income attributable to Camping World Holdings | $28.0 | $19.3 | $31.2 | $26.9 |
| Basic / diluted EPS | $0.76 / $0.72 | $0.84 / $0.84 | $0.85 / $0.81 | $1.28 / $1.24 |
| Adjusted EBITDA (non-GAAP) | $140.2 | $141.9 | $211.9 | $213.7 |
| Adjusted EBITDA margin (non-GAAP) | 9.7% | 11.1% | 8.5% | 9.9% |
Cash flow and liquidity: Six-month operating cash flow was $106.0 million, investing cash flow was negative $241.5 million, and financing cash flow was $123.8 million. Cash declined $11.7 million to $212.4 million. Working capital was $593.2 million, versus $478.7 million at year-end 2017.
Debt: At June 30, the term loan’s principal balance was $1.195 billion (carrying value $1.160 billion); floor-plan borrowings were $854.6 million, and the floor-plan revolver had $24.4 million drawn. The company reported $368.7 million of unencumbered floor-plan borrowing capacity and $32.2 million available under its separate senior secured revolving facility. Debt covenants were reported as satisfied. The term loan’s average interest rate was 4.61%; borrowings are generally variable-rate.
Changes versus the prior comparable period
- Q2 revenue grew 13.0%, but operating income fell 11.9% and net income fell 22.1%. For the first six months, revenue rose 16.0%, while operating income fell 17.7% and net income fell 36.0%.
- Q2 same-store sales declined 0.5%; six-month same-store sales increased 1.3%. Revenue growth included acquisitions and new locations, particularly in outdoor retail.
- Retail segment income fell 18.4% in Q2 and 27.9% for the first half. Consumer Services and Plans segment income rose 15.2% and 11.0%, respectively.
- SG&A rose 24.4% in Q2 and 31.1% for the first half. Higher costs included staffing, occupancy, property expenses and Gander Outdoors pre-opening costs. New-vehicle gross margin also declined, to 13.6% in Q2 from 15.1%.
- Term-loan principal increased following a $250 million borrowing in March 2018. Interest expense increased year over year, reflecting higher average debt and floor-plan balances.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expects continued growth through acquisitions, greenfield locations, cross-selling and expansion of outdoor retail, including anticipated Gander Outdoors openings. It stated that liquidity should be sufficient for operations, growth and dividends for at least the next 12 months, while cautioning that additional financing may be needed if cash flows or facility availability prove insufficient.
- Management cited seasonality, volatile product mix and the risk of misjudging inventory demand. It also highlighted dependence on capital availability, variable interest rates, acquisition execution and the ability to integrate and scale new businesses. A 1 percentage-point rate change was estimated to affect next-12-month interest expense by about $12.0 million on the term loan and $8.5 million on floor-plan debt.
- Gander Outdoors pre-opening costs were $15.4 million in Q2 and $35.0 million for the first half; these were excluded from Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
- The company had not completed its accounting for the 2017 Tax Act; provisional estimates could change. It reported a $131.5 million Tax Receivable Agreement liability and generally owes eligible parties 85% of certain realized tax benefits.
- Disclosure controls were deemed ineffective at June 30, 2018 because of material weaknesses involving income-tax controls, FreedomRoads accounting policies and procedures, and trade-in inventory valuation controls. Remediation was underway, but management could not estimate when it would be complete.
- The company reported ordinary-course legal matters and did not expect them collectively to have a material adverse effect, while noting litigation outcomes are uncertain. It reported no material changes to the risk factors in its 2017 Form 10-K.
Investor verification priorities
- Track whether retail profitability and margins recover as Gander Outdoors locations ramp up, and assess ongoing pre-opening and operating costs.
- Verify that revenue growth translates into stronger operating income and cash generation, given lower earnings, increased SG&A and acquisition-related expansion.
- Monitor debt balances, variable-rate exposure, floor-plan capacity, covenant compliance and funding needs for planned expansion and dividends.
- Assess remediation and testing of the disclosed material weaknesses, including the accuracy of tax allocations and used-vehicle inventory valuations.
- Review acquisition performance and integration, same-store sales trends, and the eventual final accounting for the 2017 Tax Act.