Camping World Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Amounts are in U.S. dollars; financial figures below are in millions unless otherwise noted.
Business context
Camping World operates Consumer Services and Plans, principally under Good Sam, and Retail, principally under Camping World. Retail includes RVs, parts and services, finance and insurance, and outdoor and active-sports businesses. At quarter-end, the company operated 141 Camping World locations, 28 Gander Outdoors locations and other specialty retail locations. Q1 results include acquisitions and expansion activity, including four Erehwon stores acquired in January.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $1,061.6 | $881.6 |
| Gross profit | $304.8 | $251.9 |
| Operating income | $49.8 | $69.9 |
| Net income | $17.3 | $49.6 |
| Net income attributable to Camping World Holdings | $3.2 | $7.5 |
| Basic / diluted Class A EPS | $0.09 / $0.08 | $0.40 / $0.38 |
| Operating cash flow | $(48.2) | $(13.0) |
| Investing cash flow | $(88.4) | $(91.1) |
| Financing cash flow | $243.8 | $164.7 |
- Revenue increased 20.4%; retail revenue rose 21.2% and Consumer Services and Plans revenue rose 7.1%. Same-store sales increased 3.9%.
- Gross margin was 28.7%, compared with 28.6%. SG&A rose 39.7% to $245.1 million and reached 80.4% of gross profit, versus 69.7%.
- Operating income declined 28.8%, and net income declined 65.2%. Interest expense increased: floor-plan interest was $10.7 million versus $5.3 million, while other interest expense was $12.8 million versus $9.4 million.
- Adjusted EBITDA, a non-GAAP measure, was $71.8 million versus $71.9 million; margin was 6.8% versus 8.2%. The 2018 figure includes a $19.7 million add-back for Gander Outdoors pre-opening costs.
- Cash and cash equivalents were $331.3 million at March 31, up from $224.2 million at year-end; working capital was $680.9 million. Operating cash use reflected inventory investment, among other factors.
- At quarter-end, term-loan principal was $1,195.0 million, floor-plan borrowings were $939.8 million, and the floor-plan revolver had $24.4 million drawn. Unencumbered floor-plan capacity was $217.5 million; the separate Senior Secured Credit Facilities revolver had $32.2 million of availability.
Changes and notable items
- Retail growth reflected higher new- and used-RV unit sales, acquisitions, and outdoor-business revenue. New-vehicle units increased 18.4% and used-vehicle units 26.6%; average gross profit per unit fell 12.0% for both categories.
- Retail segment income fell 52.3% to $22.0 million, largely due to Gander Outdoors start-up costs, acquired-business ramp-up and higher floor-plan interest. Consumer Services and Plans segment income increased 7.1% to $28.1 million.
- The March 2018 credit amendment increased term-loan principal by $250 million to $1.19 billion and reduced the LIBOR margin by 25 basis points, effective April 6, 2018. The company recorded $2.1 million in debt-restructuring loss and expense.
- Capital expenditures were $52.0 million, primarily for Gander Outdoors buildouts; the company also spent $24.4 million on real property and $12.5 million on acquisitions. Class A dividends declared were $0.1532 per share.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. The filing says the adoption did not materially affect results; reported Q1 net income attributable to the company was $0.1 million higher than it would have been without adoption.
Outlook, risks and contingencies
- Management said it expected available liquidity to support operations, growth plans, anticipated Gander Outdoors openings and regular dividends for at least the next 12 months, but warned that additional financing could be needed if operating cash flow and facility availability prove insufficient. No specific revenue or earnings guidance was provided.
- The business is seasonal, with revenue and profits generally concentrated in the second and third quarters. Inventory demand, product mix, weather, consumer financing availability and interest-rate changes are key risks. Management estimated that a one-percentage-point rate change would affect next-12-month interest expense by about $12.0 million on the term loan and $9.4 million on floor-plan debt.
- Management and the auditors’ control evaluation found disclosure controls ineffective at March 31, 2018 because of previously identified material weaknesses involving deferred-tax-asset controls, FreedomRoads accounting policies and procedures, and used trade-in inventory valuation. The company had restated prior-period financial information and was continuing remediation; it said the weaknesses were not yet remediated.
- Accounting for the 2017 Tax Act remained incomplete. The company retained a provisional $118.4 million deferred-tax expense recorded in 2017 and said later adjustments could affect 2018 tax expense. The Tax Receivable Agreement liability was $139.5 million at quarter-end.
- The company reported ordinary-course litigation and stated it did not expect pending claims to have a material adverse effect, while noting litigation outcomes are uncertain. It reported no material change to the risk factors in its 2017 annual report.
Important facts for investors to verify
- Whether Gander Outdoors openings and acquired businesses can improve retail profitability after substantial pre-opening costs and operating losses.
- Whether inventory growth, negative operating cash flow, capital spending and dividend distributions remain supportable by cash generation and borrowing capacity.
- Debt balances, variable-rate exposure, covenant compliance and the effect of the amended term-loan terms on interest and debt service.
- Progress in remediating material weaknesses and whether subsequent reporting identifies further errors or restatements.
- Final tax effects of the 2017 Tax Act and the timing and cash demands of Tax Receivable Agreement payments.