Camping World Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results compare with the corresponding 2016 periods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Camping World operates Consumer Services and Plans (Good Sam) and Retail (Camping World, including RV dealerships and parts and services). At quarter-end it operated 137 Camping World locations and two Overton’s locations. The company consolidated CWGS, LLC despite owning 32.9% of it; the remaining 67.1% was reported as non-controlling interest.
Financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $1,282.7 | $1,067.9 | $2,166.5 | $1,865.6 |
| Gross profit | $372.8 | $299.5 | $624.6 | $521.8 |
| Gross margin | 29.1% | 28.0% | 28.8% | 28.0% |
| Income from operations | $136.8 | $103.4 | $206.5 | $159.4 |
| Consolidated net income | $105.3 | $83.4 | $154.8 | $121.2 |
| Net income attributable to Camping World Holdings, Inc. | $19.4 | $83.4 | $26.9 | $121.2 |
| Adjusted EBITDA (non-GAAP) | $142.1 | $104.5 | $213.8 | $161.9 |
| Adjusted EBITDA margin (non-GAAP) | 11.1% | 9.8% | 9.9% | 8.7% |
- Revenue rose 20.1% in Q2 and 16.1% in the first half. New-vehicle unit sales increased 38.2% and 35.3%, respectively; finance and insurance revenue increased 44.5% and 38.3%.
- Used-vehicle revenue fell 9.2% in Q2 and 13.2% in the first half, which management attributed primarily to fewer trade-ins and the prior-year AutoMatch business disposition. Parts, services and other revenue grew, though margins were pressured by online markdowns and distribution costs.
- Operating income and consolidated net income increased in both periods. The attributable-income comparison is not like-for-like: after the October 2016 IPO, earnings were allocated to non-controlling owners. For additional comparison, management reported pro forma fully exchanged diluted EPS of $0.91 for Q2 2017 versus $0.65 in Q2 2016, and $1.29 for the first half versus $0.91.
- Class A diluted EPS was $0.84 for Q2; first-half basic and diluted EPS were $1.28 and $1.24. Q2 2016 EPS was not presented because it preceded the IPO.
Cash flow, liquidity and debt
- First-half operating cash flow was $127.2, compared with $114.4 in 2016. Investing cash outflow was $280.0, including $252.1 of business acquisitions and $23.2 of capital expenditures. Financing cash inflow was $290.7, largely from floor-plan borrowings, long-term debt and the public offering. Cash increased to $252.2 from $114.2 at year-end.
- Working capital was $393.6 at June 30, 2017, versus $266.8 at December 31, 2016. Current assets were $1,541.7 and current liabilities $1,148.1.
- Floor-plan borrowings, net of the offset account, were $780.9, with $384.1 of stated additional borrowing capacity. The term loan principal outstanding was $736.3; carrying value of long-term debt was $718.0, net of discount and finance costs. The $35.0 revolving facility had no borrowings and $31.8 available, after letters of credit.
- The term loan was variable-rate debt with a 4.84% rate at June 30. Management estimated a 1 percentage-point rate increase would add about $7.4 of term-loan interest and $7.8 of floor-plan interest over the next 12 months, based on quarter-end debt levels. The company reported compliance with debt covenants.
Material changes, outlook and risks
- The company completed its acquisition of certain Gander Mountain and Overton’s assets on May 26 for $35.4 cash plus $1.0 of contingent consideration. The acquired operations contributed $8.4 of revenue and a $1.6 pre-tax loss from acquisition through quarter-end. Purchase-price allocations were preliminary.
- Management planned to open 15–20 Gander Outdoors stores by year-end 2017, another 15–20 in early 2018, and 15–30 more during the remainder of 2018, subject to lease negotiations. The company committed to assume at least 15 Gander Mountain leases by October 6, 2017. Management expected meaningful incremental costs as the business ramps up, before full revenue benefits.
- Management said liquidity and capital were expected to be sufficient for operations, growth, the Gander acquisition and regular dividends for at least 12 months, while cautioning that future cash flows and financing availability were not assured. It also expected SG&A to rise with expansion and public-company costs. The business is seasonal, with sales and profits generally strongest in spring and summer.
- The company recorded a $93.3 Tax Receivable Agreement liability at June 30; the agreement generally requires payment of 85% of specified realized or deemed tax benefits. These payments may reduce cash otherwise available to the company.
- Risk factors were unchanged from the 2016 Form 10-K. The filing highlights variable-rate debt, inventory and demand volatility, seasonal exposure, acquisition and store-opening execution, financing availability, and obligations under the Tax Receivable Agreement. Management did not expect ordinary-course litigation to have a material adverse effect, but noted litigation outcomes are uncertain.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new-vehicle sales growth, same-store sales and finance-and-insurance penetration can be sustained, and whether used-vehicle inventory availability improves.
- Actual Gander Outdoors lease commitments, opening schedule, ramp costs and operating contribution versus the preliminary acquisition estimates.
- Cash generation after acquisition spending, dividends and member distributions; available revolver and floor-plan capacity; and compliance with debt covenants.
- Exposure to interest-rate increases and the amount and timing of Tax Receivable Agreement payments.
- How reported consolidated earnings, attributable earnings and non-GAAP adjusted results reconcile; adjusted measures are not substitutes for GAAP results or cash flow.