Camping World Holdings, Inc. quarterly report, Q2 FY2019

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Camping World Holdings, Inc. — Q2 2019 Form 10-Q

Reporting period: Three and six months ended June 30, 2019. Unaudited results are compared with the corresponding 2018 periods. Camping World sells RVs and outdoor products and provides related services, plans and financing through its Good Sam and retail businesses.

Financial performance

  • Revenue: Q2 revenue was $1.474 billion, up 2.3% year over year; first-half revenue was $2.539 billion, up 1.6%.
  • Profit: Q2 consolidated net income was $52.6 million, down from $77.1 million. Net income attributable to Camping World Holdings was $18.0 million versus $24.8 million. First-half consolidated net income was $25.8 million versus $90.7 million; the amount attributable to the company was a loss of $1.4 million versus income of $26.6 million.
  • EPS: Q2 basic/diluted EPS was $0.48/$0.46 versus $0.67/$0.67. First-half basic and diluted loss per share was $0.04 versus earnings per share of $0.72. Q2 diluted EPS reflects assumed conversion of LLC units; the filing reports a diluted weighted-average share count of 88.9 million.
  • Margins: Gross margin fell to 27.8% in Q2 from 28.6%; operating margin fell to 6.1% from 8.2%. For the first half, gross margin was 27.9% versus 28.6%, and operating margin was 4.2% versus 6.5%. Management’s non-GAAP Adjusted EBITDA was $99.2 million in Q2 versus $137.6 million, and $120.6 million for the first half versus $205.3 million.
  • Cash flow: First-half operating cash flow was $100.2 million, down from $109.1 million. Investing cash outflow was $80.5 million versus $244.6 million; financing cash outflow was $57.0 million versus inflow of $123.7 million. Cash declined $37.3 million to $101.3 million.
  • Liquidity: Working capital was $498.9 million, compared with $583.0 million at year-end 2018. Current assets were $1.911 billion and current liabilities $1.412 billion.
  • Debt and leases: At June 30, long-term debt carrying value was $1.176 billion, floor-plan notes payable were $813.6 million and the floor-plan revolving line had $52.8 million outstanding. Operating lease liabilities totaled $877.8 million, recognized following adoption of lease accounting; the company reported $821.0 million in lease assets. Cash and borrowing capacity should be considered alongside these obligations.

Material changes and drivers

  • Retail sales were pressured by a weak RV market: industry wholesale RV shipments declined 20.3% in the first half, and management said it expected industry softness to continue at least through year-end 2019.
  • Q2 new-vehicle revenue declined 3.5%; same-store new-vehicle revenue fell 11.3%. First-half same-store revenue across RV and Outdoor Retail declined 8.3%. Used-vehicle and Good Sam revenue grew, partly offsetting lower new-vehicle sales.
  • Profitability deteriorated as discounts and inventory-reduction programs, product mix and competition weighed on margins. Q2 new-vehicle gross margin declined to 12.5% from 13.6%; products, service and other margin fell to 36.2% from 40.9%. SG&A rose 7.2% in Q2 and 7.9% in the first half.
  • RV and Outdoor Retail segment income fell 24.2% in Q2 and 39.4% for the first half. Good Sam Services and Plans segment income increased modestly in both periods.
  • The company reorganized its reporting segments in Q1, combining former dealership and retail segments and moving Good Sam Club and co-branded card activities into RV and Outdoor Retail. Comparative segment data was recast.
  • Adoption of lease accounting on January 1, 2019 added substantial lease assets and liabilities to the balance sheet; management said the impact on operations and cash flows was not significant and debt covenants were not affected.

Outlook, risks and unusual items

  • Management said competitive pricing and marketing programs, used to respond to soft demand and competitors’ low-priced RVs, have hurt gross and operating margins and increased SG&A. The filing provides no numerical full-year earnings or revenue guidance.
  • Management believed liquidity sources would be sufficient for operations, growth and dividends for at least the next 12 months, but cautioned that additional financing may be needed if operating cash flow and facility availability prove inadequate.
  • Senior secured and floor-plan debt covenants were reported in compliance. However, the company said it would not have met the senior secured leverage covenant if the facility had crossed its activation threshold; the threshold limited additional senior revolver borrowing capacity to $9.4 million. The floor-plan facility had $343.4 million of unencumbered borrowing capacity.
  • First-half income tax expense included an estimated $14.4 million deferred tax charge related to transferring Good Sam Club and co-branded credit-card assets to a corporate subsidiary. An $8.5 million reduction in the Tax Receivable Agreement liability was recorded as other income. The first-half effective tax rate was 54.7%.
  • The company disclosed ineffective disclosure controls as of June 30 due to material weaknesses involving cancellation reserves, asset activity and valuation reviews, accounting resources and financial-statement review, and income-tax controls. Remediation was underway but not yet considered complete.
  • Several securities class actions and shareholder derivative actions were pending. The company disputed the claims and said related liability was not currently probable or reasonably estimable; adverse litigation outcomes could nevertheless materially affect results.
  • Camping World reported 227 retail locations at June 30, 2019, after openings, closures and conversions. It acquired RV dealerships for $38.6 million during the first half; preliminary acquisition accounting included $24.6 million of goodwill.

Most important facts for investors to verify

  • Whether RV demand, same-store sales and competitive discounting continue to weaken, and whether inventory reductions restore margins.
  • Cash generation and facility availability relative to debt service, floor-plan financing, lease obligations, dividends and Tax Receivable Agreement payments.
  • Progress and independent validation of remediation of the disclosed material weaknesses, including any effect on future filings or covenant capacity.
  • Developments and potential exposure in the securities and derivative litigation; the filing does not provide a clear estimate of possible damages.
  • The sustainability and comparability of adjusted results, including the substantial gap between GAAP and non-GAAP earnings and the Q2 diluted-share treatment of LLC units.