Camping World Holdings, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results and restates 2016 financial statements. Dollar amounts below are in U.S. dollars.
Business context
The company operates Consumer Services and Plans and Retail segments, centered on RV sales, service, parts, financing and insurance, roadside assistance, memberships, and related products. Retail generated 95.4% of 2017 revenue. The company had 140 Camping World locations in 36 states and approximately 3.6 million RV Active Customers at year-end.
Financial performance and liquidity
| Metric | FY2017 | FY2016, restated |
|---|---|---|
| Revenue | $4.285 billion | $3.519 billion |
| Gross profit / margin | $1.246 billion / 29.1% | $996.4 million / 28.3% |
| Operating income / margin | $361.4 million / 8.4% | $279.2 million / 7.9% |
| Consolidated net income | $233.0 million | $201.1 million |
| Net income attributable to Camping World Holdings, Inc. | $28.4 million | $191.1 million |
| Adjusted EBITDA, non-GAAP | $399.6 million; 9.3% margin | $289.2 million; 8.2% margin |
| Net cash from operating activities | $(9.1) million | $215.7 million |
| Net cash used in investing activities | $(475.7) million | $(115.7) million |
| Net cash from financing activities | $594.7 million | $(77.8) million |
- Revenue rose 21.8%. New-vehicle revenue increased 30.8%, parts, services and other revenue 20.9%, and finance and insurance revenue 45.2%; used-vehicle revenue declined 4.9%.
- Gross margin improved 80 basis points. Consumer Services and Plans gross margin was 58.2%; Retail gross margin was 27.7%. SG&A increased 23.3% to $853.2 million, while SG&A as a share of gross profit improved to 68.5% from 69.4%.
- Reported consolidated net income includes a $99.7 million gain from remeasuring the Tax Receivable Agreement liability. Income tax expense was $157.0 million, including $118.4 million of provisional deferred tax expense related to the 2017 Tax Act. Increased non-controlling interests also meant only $28.4 million of consolidated net income was attributable to the public parent, versus $191.1 million in 2016.
- Operating cash flow turned negative mainly because inventory increased substantially; the cash-flow statement reports a $342.8 million inventory use of cash. Investing outflows included $393.0 million for acquisitions and $66.8 million of capital expenditures.
- Year-end cash was $224.2 million and working capital was $478.7 million. Long-term term-loan debt, net of discount and fees, was $916.9 million; floor-plan notes payable were $974.0 million. These are separate facilities. Unencumbered floor-plan capacity was $226.4 million, and $31.8 million was available under the revolving credit facility.
Fourth-quarter results
Fourth-quarter 2017 revenue was $889.0 million, compared with $668.9 million in Q4 2016; gross profit was $266.6 million versus $194.5 million. The company reported a consolidated net loss of $5.5 million, including a $128.7 million quarterly income-tax expense, compared with net income of $11.5 million a year earlier. Adjusted EBITDA was $65.3 million versus $37.1 million. The filing attributes the unusual tax impact principally to the tax reform remeasurement and related accounting effects.
Material changes, outlook and risks
- Expansion and acquisitions: 2017 acquisitions broadened the company into outdoor and active-sports retail, including Gander Mountain/Overton’s, TheHouse.com, W82 and Uncle Dan’s. Erehwon Mountain Outfitter was acquired in January 2018. Management planned to operate 74 Gander Outdoors stores by May 2018, with measured growth thereafter.
- Costs and funding: The company incurred $26.4 million of Gander-related pre-opening costs in 2017 and expected approximately $30.0 million of incremental pre-opening costs in 2018. Management anticipated longer ramp-up periods and near-term pressure on Retail margins, and said it intended to increase borrowing to fund store openings and dealership acquisitions. It stated that liquidity sources were expected to support operations and growth for at least 12 months, while cautioning that additional financing might be needed.
- Restatement and controls: The Audit Committee concluded that 2016 and 2017 interim financial statements should no longer be relied upon. The 2016 statements were restated to establish a $102.7 million valuation allowance against an outside-basis deferred tax asset; the filing says this restatement did not affect 2016 net income or cash flows. Other identified errors were described as immaterial to previously issued statements. Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end; the auditor issued an adverse opinion on ICFR. Remediation was underway, with no completion date stated.
- Other risks: The business is seasonal and cyclical, depends on consumer and inventory financing, and has significant variable-rate debt and floor-plan exposure. Three manufacturers supplied approximately 96% of new RV inventory. Management also cites acquisition and Gander integration risks, store-opening execution, competition, weather, leases, regulatory and product-liability exposure, and reliance on third-party lenders and service providers.
- Governance and tax obligations: Marcus Lemonis and other continuing equity owners have substantial voting and board-designation rights; the company relies on controlled-company governance exemptions. The Tax Receivable Agreement generally requires payment of 85% of specified realized or deemed tax benefits to certain continuing owners, creating potential cash-flow demands.
- Contingencies: The company said ordinary-course litigation was not expected to have a material adverse effect, but noted outcomes are uncertain. It also disclosed potential litigation relating to products associated with the Gander business, including firearms and ammunition.
Key facts investors should verify
- Reconcile the unusually high 2017 tax expense, the $99.7 million Tax Receivable Agreement remeasurement gain, and the resulting gap between consolidated net income and parent-attributable income.
- Review the restatement disclosures and track whether the three material weaknesses are remediated and controls operate effectively for a sufficient period.
- Assess whether Gander store openings, associated costs, inventory needs and ramp-up performance match management’s plan, and whether additional borrowing is required.
- Monitor inventory growth, operating cash flow, floor-plan availability, term debt, variable interest costs and covenant compliance.
- Evaluate acquisition integration and performance, including whether the acquired outdoor businesses contribute sustainable margins and cash flow.
- Consider the ownership, voting, dilution and Tax Receivable Agreement implications, alongside the company’s dividend discretion and debt restrictions.