Camping World Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. Camping World sells new and used RVs, related products and services, and Good Sam services and plans. It reported 5.2 million active customers and 209 retail locations at quarter-end, down from 227 a year earlier.
Financial performance and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,388 (+6.0%) | $1,309 | $3,927 (+3.1%) | $3,810 |
| Gross profit / margin | $338 / 24.4% | $373 / 28.5% | $1,047 / 26.7% | $1,087 / 28.5% |
| Operating income (loss) | $(32) | $81 | $75 | $244 |
| Net income (loss) | $(65) | $46 | $(39) | $137 |
| Net income (loss) attributable to Camping World Holdings | $(31); $(0.82) per share | $14; $0.38 per share | $(32); $(0.86) per share | $41; $1.10 per share |
| Adjusted EBITDA (non-GAAP) | $61 | $97 | $181 | $302 |
- Margins and segment results: Q3 RV and Outdoor Retail segment income was a loss of $42.8 million, compared with income of $68.9 million a year earlier. Good Sam Services and Plans segment income was $18.2 million, versus $18.7 million. Same-store RV and Outdoor Retail revenue fell 5.0% in Q3 and 7.1% for the nine-month period.
- Cash flow: Nine-month operating cash flow was $323 million, up from $254 million. Investing used $92 million and financing used $240 million; cash declined by $8 million to $130 million. Management attributed much of the operating cash flow increase to lower inventory purchases, alongside noncash impairment and lease expenses.
- Liquidity: Working capital was $471 million, including $130 million cash, versus $583 million and $139 million at December 31, 2018. The company said it believed available liquidity was sufficient for at least the next 12 months, while cautioning that additional financing could be needed if cash flows or facility availability prove insufficient.
- Debt and leases: Long-term debt carrying value was $1.17 billion; floor-plan notes payable were $694 million and the floor-plan revolving line had $46 million outstanding. The company reported $474.6 million of unencumbered floor-plan borrowing capacity, but only $9.4 million of additional capacity under its separate $35 million revolving credit facility. Operating lease liabilities totaled $909 million. The company reported compliance with applicable debt covenants, but said it would not have met the leverage covenant if the threshold for applying it had been exceeded.
Material changes and unusual items
- Revenue increased, but profitability deteriorated sharply. New-vehicle revenue fell 2.4% in Q3 and 4.6% year to date; used-vehicle revenue rose 25.0% and 15.9%, respectively. Pricing pressure, weaker demand, and a shift in product mix weighed on new-vehicle margins.
- Products, service and other gross profit fell 44.1% in Q3 and 18.8% year to date. The company cited markdowns and promotions to reduce inventory, plus a $27.3 million inventory reserve charge tied to its 2019 Strategic Shift.
- Q3 included $50.0 million of long-lived asset impairment, of which $48.3 million related to the strategic shift, and $7.1 million of asset-disposal losses. The impairment was noncash; the company estimated total strategic-shift costs of $42.3 million to $49.3 million, with $15 million to $22 million expected to require future cash expenditures.
- Nine-month results included an $8.5 million benefit from reducing the Tax Receivable Agreement liability, partly offsetting other pressures. Income tax expense was $37.5 million for the period, including $14.4 million of estimated deferred tax expense related to an internal asset transfer.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing substantial operating lease assets and liabilities. It said the adoption did not materially affect results or cash flows and did not affect debt covenants.
- The filing corrected errors in 2018 comparative financial information that management deemed immaterial. The correction reduced reported opening 2018 equity by $19.1 million and revised certain comparative revenue, earnings and cash-flow amounts.
Outlook, risks and contingencies
- Management cited industry softness: wholesale RV shipments declined 18.2% in the first nine months of 2019, according to the RV Industry Association. Competitive discounting and the company’s own pricing and inventory-reduction programs pressured gross and operating margins. Management expected these trends to continue through at least year-end 2019.
- The 2019 Strategic Shift will move the business away from locations where RV sales or service are not feasible. The company expected most related closures or divestitures to be completed by January 31, 2020, and anticipated fewer acquisitions during the remainder of 2019 and in 2020. It expected lower future revenue from affected stores and product categories, alongside reduced headcount and labor costs.
- On October 8, 2019, after quarter-end, the floor-plan facility commitment was reduced to $1.38 billion and its maturity extended to March 2023. The filing states the amendment was entered into after September 30.
- Risks include prolonged RV-industry weakness, consumer demand and financing availability, inventory and product-mix decisions, execution and costs of the strategic shift, potential further asset impairments, debt restrictions, and litigation. Multiple securities class actions and derivative suits were pending; the company said it believed it had defenses, but could not estimate certain potential losses beyond expected insurance coverage.
- Management concluded disclosure controls and procedures were not effective as of September 30, 2019 because of material weaknesses involving finance-and-insurance cancellation reserves, asset valuation and financial reporting review, and income-tax accounting. Remediation was underway, but the weaknesses were not yet considered remediated.
- The filing provided no numerical full-year earnings or revenue guidance. It described liquidity and operating expectations but cautioned that forward-looking results could differ materially.
Investor verification points
- Track subsequent RV demand, same-store sales, new-vehicle unit volumes, inventory levels, and gross-margin recovery.
- Verify actual closure, divestiture and conversion progress, total strategic-shift charges and cash costs, and realized savings.
- Monitor borrowing availability, covenant headroom, debt service, floor-plan facility terms, and the company’s cash generation.
- Review progress in remediating internal-control weaknesses and the effects of the 2018 comparative-period corrections.
- Follow developments in securities and derivative litigation, including any settlement, insurance coverage or potential exposure.
- Confirm the dividend policy and distributions: the filing reports different regular and special dividend amounts in its disclosures.