Camping World Holdings, Inc. Q3 FY2021 Earnings Call

Good morning, and welcome to Camping World Holding Conference Call to discuss Financial Results for the Third Quarter of Fiscal Year of 2021. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised that this call is being recorded and the reproduction of the call in whole or in part is not permitted without written authorization from the company. Participating in the call today are Marcus Lemonis, Chairman and Chief Executive Officer; Brent Moody, President; Karin Bell, Chief Financial Officer; Tamara Ward, Chief Operating Officer; and Matthew Wagner, Executive Vice President. I will turn the call over to Mr. Moody to get us started.

Thank you, and good morning, everyone. A press release covering the company's third quarter 2021 financial results was issued yesterday afternoon, and a copy of that press release can be found in the Investor Relations section on the company's website. Management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks may include statements regarding the impact of COVID-19 on our business, financial results and financial condition; our business goals, plans, abilities and opportunities; industry and customer trends; our 2019 strategic shift; increases in our borrowings; our liquidity and future compliance with our financial covenants; and anticipated financial performance. Actual results may differ materially from those indicated by these statements as a result of various important factors including those discussed in the Risk Factors section in our Form 10-K, our Form 10-Qs and other reports on file with the SEC. Any forward-looking statements represent our views only as of today, and we undertake no obligation to update them. Please also note that we will be referring to certain non-GAAP financial measures on today's call such as EBITDA, adjusted EBITDA, and adjusted earnings per share diluted, which we believe may be important to investors to assess our operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial statements are included in our earnings release and on our website. All comparisons of our 2021 third quarter results are made against our 2020 third quarter results unless otherwise noted. I'll now turn the call over to Marcus.

Thanks, Brent. Good morning, everybody and thanks for joining us. Today in the room not only are the folks that the operator announced, but a dozen of our other senior leaders. And throughout the Q&A and the analyst calls, you'll be hearing from some of them if the appropriate question is asked they'll introduce themselves because you may not have heard of them before, but we're excited to have them here and plan on having them here going forward. What an amazing year it's been for all of us here at Camping World and I mean quite frankly in the RV lifestyle in general. Demand is at an all-time high. As with our prior calls, we're going to break it down into two primary sections. First, we'll take a high-level financial summary look with additional information available on our 10-Q and our earnings release; and then second, we'll do an overview of the highlights of our operational progress. Adjusted EBITDA for Q3 was a record $288 million, a 33% improvement compared to a previous Q3 that was also a record in 2020. Our adjusted EBITDA for the trailing 12 months as of September 30, 2021 reached an all-time record high of $902 million. We couldn't be more excited about that. Record Q3 revenue was $1.9 billion for the quarter, an increase of 14% over the previous record. Our balance sheet improved nicely for the quarter with $515 million of working capital. We ended the quarter with nearly $312 million of cash consisting roughly of $133 million of cash and equivalents and nearly $179 million of available cash in our floor plan offset account, and lastly, approximately $201 million of real estate without related mortgage financing. In the third quarter, we repurchased just over one million shares for about $41 million and over the last 12 months, we've purchased north of three million shares for approximately $108 million. Look, over the next three to five years, our goal is for our annual revenue to exceed $10 billion with our adjusted EBITDA surpassing $1 billion, assuming no material adverse changes in market conditions. Our plan is pretty simple: Grow our Good Sam revenue 10% plus per year, continue our brisk pace of acquisitions, and new store openings, targeting 12 to 15 per year. We've significantly increased our used sales, looking to double the annual revenue from $1.5 billion to $3 billion. We currently operate 2,600 service and collision bases, and we plan to add nearly 500 to our existing locations, not including what we'll add through acquisitions and new store openings. We believe our performance will further strengthen our balance sheet, to enable us to return meaningful dividends to our shareholders as we do today, and to continue to make opportunistic stock repurchases. As we head into the next five years, we have several short-term goals that we believe will improve our overall performance and most importantly, expand our ecosystem. As I mentioned, starting in 2022, we plan to ramp up our annual expansion goal to 12 to 15 locations per year. And again that assumes no material market condition changes. This growth should further enhance our relationships with the key and core RV manufacturers. In the last 12 months, we purchased over $2.3 billion collectively from Thor, Forest River, and Winnebago. These manufacturers will enjoy market share growth with our growth as a result of our ability to identify and grow underserved markets through our internal predictive modeling. We feel strongly that these three manufacturers have the right mindset around innovation, product discipline, and a renewed commitment to improving the industry service infrastructure. The advancements over the last five years by them have far exceeded what I had seen in my previous 15 years. The optimism for all sectors of this industry has never been higher, from the manufacturers to the suppliers, to the dealers, and to the campgrounds we are feeling an excitement that I can't remember in my 20-plus years in the industry. This growth is being driven by an expanded demographic, more sophisticated engineering, and a marketplace that has been reminded how much it moves the outdoors. I also believe that the consumer has changed. They expect transparency and value as they should. One way that value is enhanced is with tools and programs that drive it. For current customers, I believe they want their asset protected. Their value supported and they want to have an ability to monetize their investment. Over the last 15 months, we have ramped up the Good Sam RV Valuator tool, and have successfully and profitably grown our used inventory to nearly $400 million at the end of Q3. That resulted in a 29% increase in used sales for the third quarter. Our trailing 12-month basis of our used revenue is $1.5 billion. It is our plan to deploy more human capital, technological, and financial capital towards continued growth in our used business, while it complements our new. We believe that technology and processes could grow that number to $3 billion annually in the next 36 months. For context, we believe there are over 950,000 pre-owned units sold annually between private party sales and dealer sales. Our robust balance sheet, service network, procurement process, and web presence are ingredients to achieving our $3 billion in annual used revenue goal. We plan to launch multiple marketplaces to achieve this, including a fully digital and financing marketplace. We're proud to announce that we have selected rvs.com as the pre-owned fully digital experienced brand. We did this for simplicity, search optimization, and most importantly, domain authority. Today, the Good Sam branded Park network, which is the largest branded campground network in America, consists of over 2,000 parks. Our plan is to continue our expansion of this network, leveraging all the available assets of our company. This network supports the installed base of the RV community. It entices first-time buyers. And it improves our cost of acquisition for new customers and adds significantly to our overall database. Our Park network is very important both to the RV lifestyle as well as the financial performance of our company. We're in the process of exploring strategic opportunities to expand and enhance our presence in this lucrative vertical. Renting an RV through our new Good Sam RV peer-to-peer platform provides a ton of opportunity for us. We see multiple benefits from this platform ranging from expanding our Good Sam Park network, ramping up our mobile service initiative, sourcing additional used inventory through our rent-through relationships, and increased sale of Good Sam products and services. It is our current plan to operate this peer-to-peer platform and in select markets during certain times of the year to have a rental fleet of our own. That fleet not only grows our relationship with our key manufacturers through purchases, but once RV units retire from the rental fleet they will fuel our pre-owned pipeline. This company has over 55 years of experience. And we feel that the future looks way brighter than we've ever seen before. Our trailing 12 months adjusted EBITDA as of September 30th, 2021 was $902 million. We're now increasing our full year 2021 adjusted EBITDA estimates between $915 million and $930 million. We will be providing our 2022 financial guidance early next year but we are very optimistic that we will outperform 2021. Our focus as a management team is to lead the RV industry in profitability. It's well within our sights. I'd like to turn the call over to the operator for Q&A.

Thank you. We'll take our first question from Joe Altobello with Raymond James.

Thanks. Hey guys good morning. First question on demand, just an update there, are you guys still seeing an elevated level of first-time buyers coming into stores post the summer?

We are. In fact, as we manage and monitor the leads that we get and through our omnichannel approach whether they're calling in, whether we're making outbound calls, whether we're seeing foot traffic in the stores or most importantly the digital leads, we continue to see robust demand. And I think we're still surprised but encouraged that the first-time buyer halo that everybody thought would go away, just continues to be very, very solid.

Got it. And just switching over to inventories, in terms of the increase how much of that is units versus dollars? And maybe on the use side, is it still primarily trade-ins? Are you seeing a disproportionate amount of RVs that have been purchased over the past year or two coming back to your stores?

On the new side, we started to see an increase in our inventory in the latter part of the quarter, almost like the last three weeks of the quarter and have continued to see some level of stability, but we would expect that this time of year, because of retail seasonality it's not as good as it is in peak selling season. And so we're starting to get some normalization, but we are still very far off from where we want to be, not only as an industry but as a company as well on the new side. Manufacturers in our opinion are doing an unbelievable job of procuring the parts, and the pieces and securing the labor, dealing with COVID issues and they have done a spectacular job not only servicing us, but servicing the rest of the dealer community that we need to be healthy for this industry to be healthy. On the pre-owned side, as we've talked about before, we use proprietary tools to secure our used inventory. And while we've seen an uptick in the number of trades that we saw a year ago on a new unit, our largest source of procurement, while it still is trades has been accelerated in other areas where we buy at auctions, where we buy from private parties, through classifieds, where we're buying at our stores, and that's all being driven by a digital initiative, the way we go out and look for new opportunities. And so when we talk about our relationships with campgrounds, our relationships in the rental business, our relationships with our Good Sam members, each one of those represents an opportunity to continue to grow our used inventory. As we continue to put our systems in place on the used side, consistent with what we did years ago on the new side, looking at every single market, every single type code, the seasonality that adjusts with it, we really have gotten this down to a science and I would expect potentially additional used inventory growth in 2022, but more importantly, used revenue for growth in 2022. It's always been an important part of our business. But as we realized through this pandemic, the funnel of people wanting to be in the lifestyle has widened dramatically, and we're seeing people with different budget constraints, some on the high side, some wanting to buy a unit for $5,000 with cash. And we need to make sure that in each individual market at each location, we're servicing every one of those potential customers because we know that when they buy an RV from our company or they buy an RV in the RV industry, it now sets them up nicely to be part of that installed base, which is ultimately where our company really makes its money in the short and long-term through service, through F&I and through our Good Sam products and services. So that's why you see this huge drive towards used. I think the obvious answer behind why we're growing our used is we want to find some balance and we noticed that through that, through COVID and through the supply chain crunch the manufacturers are put in a tough spot. Subsequently dealers were put in a tough spot. And it's our opinion that we as a retailer can't put customers in a tough spot. So we need to provide alternatives for them, and we're going to continue to do that in years to come.

Got it. Thank you, Marcus.

Thank you. Our next question comes from Mike Swartz with Truist Securities.

Hey, good morning everyone. Maybe just first question. Obviously a lot of concern around some of the retail numbers we've seen in the summer and maybe the impact of the dearth of inventory on that. Maybe Marcus now that we've seen some improvement in inventory, I know it's come later in the quarter, maybe give us a sense of how you saw new vehicles trend through the quarter and maybe in October?

I'd like to have Matt Wagner answer that please.

We have been very systematic in collaborating with all manufacturers to gain a comprehensive understanding of each segment and type code of what we will receive. Consequently, we ensure fair market pricing on the back end. We keep an eye on our competitors' websites to gauge marketplace dynamics and customer satisfaction. We can also enhance our acquisition of used inventory, which addresses previous questions about our procurement strategies and inventory spread. We've noticed a significant decrease in reliance on trade-ins and a notable increase in acquiring used assets from the open market. As Marcus mentioned, we aim to meet specific segments and price points for all used consumers. In the early part of Q3, we had less inventory than desired. However, as trends evolved throughout the quarter, we adjusted our pricing to meet consumer demand as we moved into the latter part of Q3. We feel well-positioned going into Q4, but we will remain cautious about expectations, especially since manufacturers typically shut down around Thanksgiving and Christmas, causing us to lose some production days. While we are optimistic about the supply chain stabilizing, we want to be realistic as we plan for Q2 of next year, anticipating a return to normal seasonal volume trends.

The positive aspect to highlight is related to the trade rates. The number of new transactions we have and the percentage of those transactions that have traded is significant, and we're not relying on that as much now because it has decreased. This is actually great news for our industry since the decline in trade rates indicates more first-time buyers are entering the market. Additionally, we are observing a nice increase in previous RV owners returning to upgrade their units. The limited supply has primarily been taken up by first-time buyers, and our installed base has grown without any indication that these first-time buyers are anything but satisfied with the lifestyle. We are spending more time training and orienting them with the marketplace, supported by manufacturers, campground owners, and other entities who are assisting these new buyers. We are excited about the return of the installed base looking to upgrade their units, similar to their historical behavior every 3.5 to 4 years. However, we are concerned about our inventory levels for 2022. We do not anticipate a rapid recovery in inventory levels, but we appreciate the efforts of manufacturers to help stabilize that situation.

Thank you. And maybe just a follow-up Marcus, I think you mentioned that you're now targeting 12 to 15 door acquisitions a year going forward. Maybe help us understand how much capital you're looking to commit to acquisitions going forward? And then, maybe how we think about the additional revenue and maybe even EBITDA coming from those acquisitions each year?

Our leverage is currently close to one time, and we have a substantial amount of cash on our balance sheet, along with accessible cash for future needs, including our floor plan and other credit lines that we can tap into. This gives us a significant amount of resources for acquisitions, likely the most we’ve ever had in our history given our low leverage. The senior team has established a target of 12 to 15 acquisitions because we believe those are realistic. However, I want to stress that if an opportunity arises that exceeds this range and aligns with our strategy and market conditions, we could pursue larger deals. If market conditions unexpectedly change in the future, we might need to pause our plans to ensure our financial stability. While we currently have no intention of doing so, we acknowledge the importance of being flexible. From what we have already signed in letters of intent and what is currently under construction, we are confident that achieving 12 to 15 acquisitions is more than feasible, and we aim to surpass that when possible. We want to align market expectations with historical figures, which were around eight to ten, but we also recognize that our growing business allows us to take on more now than we could a few years ago, with 14,000 employees supporting this growth.

Okay. Thank you.

Thank you. We'll take our next question from Bret Jordan with Jefferies.

Hi, good morning. This is Ethan Huntley on for Bret. Thanks for taking my questions. Just one on the serious side of the business, it looks like gross margins were down about 740 basis points or so. Can you just sort of provide some color on what the drivers of that was?

Are you talking about the Good Sam plans and services business?

Yes.

Yes. So we in the quarter intentionally accelerated the expense of certain marketing that we historically had deferred. It was about $3 million. And so we want to be clear that the Good Sam business is healthier than it's ever been, but we did make a decision to accelerate some marketing expenses. And historically, where Good Sam records their marketing expenses is in the cost of goods line. Unlike our retail business, where it's an SG&A item, it is in the cost of goods. So it creates a false sense of margin compression, when in fact we actually had a really great performance for the quarter, but we did accelerate about $3 million of marketing expense in the quarter. So nothing to be anything more than excited about that particular business.

Okay. Good. That's helpful. Thank you. And maybe just sort of on the M&A front. We've had a fair amount of talk here on the call about it, but how are the multiples looking out there? Are we still seeing fairly reasonable multiples, or have they fluctuated at all given how well the business has been doing?

The same strategy – well, the industry is doing well. It's obviously good for every RV dealer, including the ones that have made the decision that it's time for them to exit the industry for whatever reason, but it hasn't really changed the multiples surprisingly enough. And I think our strategy of looking at every single market, and doing that with really a combination of proprietary information and public information, to make that assessment. We look at a market and we say should we build a store, or should we buy a store? What does it look like in that particular marketplace, and who are the players that are there? And historically, we have been pretty good at finding acquisitions between one and four times. Are there the exceptions sometimes when we buy it at zero? Yes. Is there also the exception where sometimes we buy it at five? Yes. But for the most part, we're operating on the lower side of that one to four average. And I want to be clear that's a multiple based on their historical earnings, not some pro forma model, not some heavily adjusted model, and that is before we impute our own efficiencies and whether that's our floor plan financing, or our rebates, or our retail F&I numbers, or anything of the sorts. That's before that number. It's also before any upside that the retail business would gain, or Camping World would gain through the distribution of its products through that business. If you really are looking at the math of it all, and you take a look at the fully affected multiple in a 12-month to 24-month forward-looking piece after you impute all of our efficiencies and all of our savings and all of our rebates et cetera, we think that multiple comes down anywhere between one and two times. We don't report it that way, because we think investors should hear what the true multiple is, and the true cash outlay is for that acquisition, but the truth be told, we actually know that we're going to improve on that materially, which is what allows us to continue to make these at such a rapid pace.

Great. Thank you very much for taking my questions.

Thank you. Our next question comes from Rick Nelson with Stephens.

Hi. Thanks. Good morning. Marcus, we're hearing concerns about a flood of used RVs coming into the market. I'm curious, if you can comment there. And are you seeing any weakening of demand at all for used products?

Yeah. I would assume when you say you're hearing that it must be from private dealers, and traditionally, around this time of year, when their working capital is not as robust, because as private dealers, they take money out of the business on a regular basis to feed their families, and do whatever they need to do on a personal level that they find themselves wanting to exit used inventory as they go into the winter. And so it's not anything abnormal for you to hear that certain dealers want to sell. What they want to sell is to generate cash. We have seen absolutely the opposite from a consumer demand standpoint about their appetite for used. And we know that the overall supply of used inventory in the marketplace is actually materially constrained because if you increase dramatically the number of people that are in the lifestyle, and you have constraints on how many new RVs could be made, then you don't have a bunch of new units sort of generating trades, and all these other things. The overall marketplace has more interest in it, with the overall supply, only increasing by the number of new RVs manufactured. We believe that the demand for people wanting to come into the lifestyle exceeds the number of new RVs that are being made at this time. And so, we don't really know where that's coming from. From our perspective, we would love the phone numbers of all of those folks who would like to get out of their used inventory because we would like to buy it.

Thanks for that color. So also, you're guiding to record profits here in 2021. You mentioned you're targeting growth in 2022. If you could cover some of the puts and takes that you see in 2022 and the GPUs that you're enjoying now, where do you see those going?

Well, we always expect that our used GPUs will continue to maintain as they have for over a decade within a very tight range. There are moments in time where we choose to flush them inventory and there's some ebbs and flows. But on a four or five-year average, we feel like we're in that range and don't feel like anything is going to change. In fact, we continue to be excited about it. Sure, we expect that there's going to be some fluctuation in new margins over the next 24 months. Where in that 24 months it happens? We don't know. But we also know that because demand is so robust that any drop in margin would result in an increase in volume and as the investor community knows, we excel in other areas of that transaction other than just the front-end growth. Our finance and insurance numbers continue to be strong at north of 12%. Our products and service business continues to be strong with reconditioning and things of that nature. And so, we love volume because volume feeds our entire business. We don't ever want to trade profitability for volume but we love volume. And so we expect that there'll be some puts and calls on, maybe margin comes down a little bit but volume goes up, but we don't expect to see that in the next six, eight, ten months. Maybe there'll be a slight compression, but we don't think it's material. When we talk about achieving or exceeding from our internal forecasting, our 2021 results, it really is a foundational statement about where we think our business is and where our mix is in our business. I want to remind everybody that the bulk of our earnings come from more predictable sources and every single day we wake up we want to take and put more predictability in our business. That's why you see this push to used. That's why you see us expanding 500 service spaces on top of acquisitions. That's why you see us focusing on our Good Sam business because 10% growth there really just falls through to the bottom line. Increased used revenue, in most cases, falls to the bottom line because we're starting to truly get scale in our business. So as we think about 2022, we're expecting positive increases in all revenue lines at this point and obviously positive increases on the bottom line. And if margins do come down in one area, well, we'll tighten our belt on SG&A a little bit. And remember that the bulk of our cost structure is variable on the compensation side. So when growth goes down, so does compensation. Our goal is to keep revenue up, keep our gross profit dollars up, so that everybody can continue to make really good money.

Thanks for that. Good luck as to push forward.

Thank you.

Thank you. We'll take our next question from Ryan Brinkman with JPMorgan.

Hi, thanks for taking my question. Another one on the new vehicle retail side. I thought I'd ask on the sequential trend in new RV sales and what might be driving that? It looks like over the last seven years, you've averaged a 13% sequential 2Q to 3Q decline in new vehicle unit sales with the largest supposed declines being in 2018 and 2019 at 20% and 19% respectively relative to the 28% sequential decline. It looks like you just posted there in 3Q. So, I just wanted to check in how you're thinking about that? How should we be thinking about it? If the seemingly greater than seasonally expected decline whether you think demand remains just as strong and it's really just a function of the low inventory environment or some other factor? And in the past, I think you've alluded directionally at least to the number of orders placed with you by customers that you're waiting to receive from the manufacturers. I don't know if you're able to provide an update there even directionally whether that number has remained as high as it was previously, which could confirm that there hasn't really been any deceleration in demand.

The retail sale order position has remained relatively stable since April 2020, as we effectively source inventory from our existing stock. This is a luxury we have as a larger multi-dealership entity. I wouldn't say I've noticed a significant decline or increase; our focus is on satisfying customers as quickly as possible. Regarding the seasonal trends you've mentioned, it's important to closely monitor our new inventory levels each quarter and compare them to the turnover rate. This turnover will provide a static point to project sales seasonality. I acknowledge that there have been some fluctuations in typical seasonal trends, as we manage our inventory and anticipate future incoming stock. As we mentioned earlier, we expect fewer production days available in November and December, so we are planning very carefully for the upcoming year. However, we are also seeing our margins holding steady and have the opportunity to boost demand to match the inventory we possess, as we continue sourcing used inventory to meet that demand. Our approach is agnostic to whether the inventory is new or used; our goal is to achieve our revenue targets while ensuring profitability.

I think the most important takeaway from Q3 from our perspective is that in an environment where new sales were not as robust as we wanted them to be because of supply constraints, we were able as a management team to anticipate that in the middle of Q2 to make decisions that would set us up for Q3 with making sure that we kept our eye on the prize which was delivering a forecast that we said we were going to do. We had some SG&A tightening to do. We had more focus on service. We had more focused on used. And what that should tell you about our business is that we're better than anticipating what's going to happen next and making the corrective decisions or anticipatory offensive moves to account for that. At the end of the day, we are all paid on this call we serve at the pleasure of the investors and we are paid to deliver financial results that give them a return on capital and a return on their cash. And so from our perspective, we went into the quarter and said, where do we think we can maximize our profitability the most considering the fact that there are supply constraints. Not complaining about and pointing fingers we knew we needed to adjust. As we head into 2022 and we feel optimistic that we can beat our performance in 2021 we're making those same kind of assessments. What do we need to do? What do we need to eliminate? What do we need to improve? How do we resolve things? How do we change our mix? And every single person in the room with me today has their own respective area over a dozen people in the room have their own respective areas to know what their contribution needs to be from an improvement standpoint to make up for anything that may change in the marketplace, rising interest rates whatever it may be. And that is really the single biggest maturation tipping point for our company compared to where we were 10 years ago or even when we went public. We've really learned how to work better as a team. We understand the marketplace better and I think more than anything else we're utilizing proprietary internal data like we never have before to make really good decisions both predictive and real time.

That's encouraging. Thank you. You successfully delivered on and exceeded the previous EBITDA outlook despite the supply constraints. I have a couple of questions related to that, including what you believe those supply constraints are. In the light vehicle industry, you've been impacted by semiconductor shortages, and manufacturers have raised concerns about a reduced supply of other components, like foam. You've mentioned how you're assisting them with these challenges, which is an interesting role for a retailer to take in supporting manufacturers. Any update on that? Additionally, can you provide an update on Happier Camper? It seems like Happier Camper could be a way for you to acquire new vehicle inventory independently from traditional manufacturers. I believe you own Happier Camper entirely, so will you receive 100% of their production? Is there any news on when they might start production and when you could begin receiving those units? Also, have you shared any estimates on how many campers you might be able to procure from them annually? Thank you.

So we are a minority shareholder in Happier Camper and our investment in that business was not to acquire additional new inventory. We really enjoy the sales process that Happier Camper has in selling direct-to-consumer today. And while we have the optionality of selling it in certain markets, we really believe that that business has it figured out from a consumer experience and quite frankly, we enjoyed learning from some of the things that they do. Our investment in that business was 100% around the adaptive technology that they've developed and their ability to create parts and pieces that go inside of shelves. And our exploitation of that knowledge and that proprietary development is what we hope to not only put into our business but potentially even lend to our manufacturing partners that we already have today. If there are ways for this industry to work together to help each other grow and find a larger base so that we can sell one million new RVs as an industry, as opposed to 500,000, we are a direct benefactor of that because of how much we feed off of the installed base. So the Happier Camper business, we love the management team there, we love their performance. I wish, I could tell you that I wanted to order one today, it would probably take me two years to get it for myself. And so that's how robust demand is there. And we're working with them to look at how we can improve production there but in a profitable manner, really smartly and profitably to not change the consumer experience. I want to go back to your, first question, because it's probably the most exciting part of our business. And we have a team member Ryan Biren, who oversees not only our retail business but he oversees our vertical opportunities there, to not only grow our margins internally, through sourcing in our retail business, through adding value to our own units that we partner with manufacturers but also to be a continued supplier to the manufacturers. And we enjoy very healthy relationships with Lippert, amazing company, Patrick's Industries, amazing company, but we feel like there's room for us to play in that space to find other niche opportunities and whether that's on the furniture side or whether that's on the phone side or whether that's on the air conditioning side or whether that's in understanding the aftermarket space better than anybody and developing things that fit as a complement to what Lippert does, as a complement to what Patrick does. More importantly as an added value to our relationship with Thor, Forest River, and Winnebago, if we can develop something at the same time that other people are working on other things, then the boat rises for everybody. And so you would continue to expect to hear Ryan Biren's name for many years to come and expect our dominance in certain parts of our business to be supported by little twists and turns and improvements that we're making on sourcing, innovation, engineering, product development and then with all those the distribution of those products.

That's great. Color. Thank you.

The next question comes from Gerrick Johnson with BMO Capital Markets.

Good morning, Marcus. Two questions. First on adjusted SG&A, as a percent of gross margins up 240 basis points year-over-year. Can you just talk about that increase?

No. We're being more proactive in expanding our used business, rental business, and Good Sam business, which requires investment. We recognize that growing different areas of our business involves costs. We've also given one-time bonuses to outstanding performers at the field level, who have achieved remarkable results over the past 15 to 18 months despite the pandemic. We've allocated about $5 million more than usual to specific field operators, including general managers, service teams, and call center staff, to ensure we support them. Additionally, we've increased our marketing efforts to launch our rental business later in the quarter, and we're just beginning in that area. The remaining expenses pertain to enhanced compensation for team members who deserve the acknowledgment that they hadn't received before.

Okay. Congratulations to the team. My next question I think Marcus, might irritate you but if I'm not irritating you I don't think I'm doing my job. But can you talk about the decision not to attend the Hershey RV show? And there are basically two questions embedded here: The first is what was the direct impact to the quarter? How much could you save by not going? And how did you replace the revenue that you may have missed? And then the second part is as a result of your experience, how do you feel about shows going forward? Will you be attending Cleveland and Tampa?

We evaluate our shows as part of our company's operations, and this segment is profitable. However, we've had to make some strategic decisions about which shows to continue. I'll have our colleague Josh Erickson, who manages our dealerships and has had meaningful discussions with me on this topic, provide further insights.

Sure. I believe the decision not to attend Hershey was based primarily on our concern that we wouldn't be able to secure cash contracts from that event. Most of the sales we anticipated over those five days would have been orders that wouldn't arrive until around March. Therefore, we chose to stay home and sell what we had available. While most dealers returned from Hershey with a backlog of orders, we were able to secure cash contracts and achieved a record September. Ultimately, we felt that attending Hershey wouldn't have delivered any meaningful results for us.

I think if you really looked at the financials, as we did internally and you look at the cost associated with transporting units and transporting people and all the marketing that goes into it and the distractions coupled with some of our continued COVID concerns and exposing both our employees, our manufacturers and our customers to an environment that we just weren't comfortable with, it made more sense for us to stay home, spend a considerable amount of money, but a fraction of what we used to driving business to our own locations in that region. And the financial results of that particular area, that region that historically has been the largest benefactor of Hershey were materially greater than they had been. Simply stated, we decided to stay home to make more money and to control the customer experience. Our decisions about going to shows are a market-by-market decision based on where we think we can penetrate the market and ultimately can we be more profitable staying home or going to shows. Then we haven't made any decisions about what we're going to be doing going forward because we want to really do the analysis on what is our opportunity to stay home and drive repetitive traffic to our existing locations, drive repetitive traffic to our existing retail business, drive repetitive traffic to our service space. And when you go to shows, you miss some of those opportunities and we are a different company than just a company that sells new RVs. And so, our financial results for September were exceptional better than any September we had ever had even when we sold 700 units at Hershey. And just to clarify, our volume is exceptional in those markets as well.

Yeah. And then we geo-fenced the show with the intention of pursuing all of those deals that are just deposits. So we are actively chasing down those deals that are in the marketplace based on our availability of product. Again, most of those units won't deliver still sometime in March, which means every one of those deals is vulnerable right now for another dealer to come in and pick up those deals. So that is our game plan. We geo-fenced the whole show all 50,000-some-odd people and we're pursuing that marketplace now.

Thank you, Marcus. Thank you.

Yeah.

Thank you. The next question comes from Craig Kennison with Baird.

Sorry. Thanks for taking my question. Good morning. Just looking at your new and used average selling prices you're at record levels. Is there a point at which you become concerned about affordability for your RV consumer?

No, that's a good question. I think a combination of factors, including our focus on higher-priced used vehicles due to concerns about chip shortages affecting new motor homes, contributed to that. You're also seeing higher margins, which played a role as well. We operate at a lower average price point compared to most competitors, primarily because our presence in the new diesel market is not as strong. However, we’re not worried about it yet. With financing terms ranging from 180 months to 240 months and current interest rates, we see no immediate cause for concern. We will continue to focus on our average selling price, but, more importantly, on our average stocking price, where we see opportunities. As we move into the spring selling season, it's important to note that our inventory drop was most significant in first-time buyer expensive travel trailers, which we were short on in Q3. If we had those units, they would have sold and likely lowered our average selling price by a good amount, perhaps $4,000 or $5,000, because we may be offering vehicles in the $22,000 to $25,000 range. The lack of units in that category is what may have exaggerated our average selling price issue, but we are monitoring it closely and appreciate that others are as well.

Thanks for that. Regarding the stocking side, what level of cost increases are you experiencing from manufacturers who are also facing cost pressures from suppliers due to inflation and commodity issues?

We're seeing on average anywhere between 14% and 20%. It really depends on the type of unit from last year. And obviously, we know that the manufacturers have even taken in some cases sometimes more than that but, we haven't seen any resistance there. And we don't know how long that will last. Obviously, when you look at the parts and pieces that are accumulated whether it's wood, or aluminum, or foam, or whatever it may be, even in our own furniture business, when we look at trying to build a couch from a year ago it is more expensive. We don't see anything in the industry that is alarming, but we do hope, that over time, as the supply and demand curve sort of normalize that will normalize as well.

Great. Thank you.

Thank you. We'll take our next question from Jim Chartier with Monness Crespi Hardt.

Good morning. Thanks for taking my questions. First one to ask about the gross margin decline in product services and other, I think it was down over 700 basis points. Any color there? And then, the EBITDA reconciliation had $17 million plus of restructuring costs. Curious where those were in the P&L?

Yes. We made a decision a couple of years ago to exit certain segments of the business, completing that exit in the third quarter of 2021. We liquidated approximately $40 million worth of product, mostly at or below cost. Our primary focus has been on evaluating all aspects of our business, marking a strategic shift in this case. In other areas, we aim to eliminate any elements that do not offer strong margins. For instance, when assessing our Good Sam business separately from our retail business, we consistently evaluate the profitability of each product and service we offer. A notable example is our ESP warranty business, where our partnerships with some new auto manufacturers did not yield desirable margins, alongside SG&A and acquisition costs. Our responsibility is to utilize the capital provided by the investment community effectively, ensuring we maximize every dollar and deliver a return. When we fail to do this, we must alter our course of action. That encapsulates the situation on the retail side.

Okay. And then on F&I, I think it's the first time in five quarters that F&I rate was up, despite a big mix shift towards used which I think historically carries lower F&I. So just wondering what was behind that?

So our used business was a real focus for us as everybody knows in the quarter and we did a lot of extra training on the used sale F&I process and really making sure that we slowed everybody down and we reinforced our training on what the proper presentation is on unused. I think historically we made some assumptions that we shouldn't have made and we now are looking at it very differently. Historically most dealers including us looked at new and used and sort of just dumped it into a bucket and we've made the decision, Josh and Matt and the rest of the team who made the decision to really look at used as a stand-alone department and really look at every piece from the way we recondition it to the way we desk get it on the sales process to the way that we even sell it in F&I to the way we think about it in service. And so, I think you're seeing just continued excellent execution on the training side and on the process side.

Great. And then just lastly, you mentioned a record September. Did that include new vehicle sales? Is that also a record in September?

No. Our new vehicle sales weren't a record in terms of volume, but they did set a record in terms of gross profit. Though we didn't achieve record volume, we were pleased with the gross profit, which helps us manage our expenses. We're very optimistic about these trends continuing for the foreseeable future, and we've already seen similar results again in October. We're feeling positive, which is why we've increased our guidance for the year from $915 million to $930 million, moving up from a lower figure, and we're confident that in 2022, we will exceed our financial performance from 2021.

All right. Thank you.

It appears there are no further questions at this time. I'd like to turn the call back to the management for any additional or closing remarks.

On behalf of our team members, we hope the investment community is pleased with our execution. We recognize that there are always areas for improvement, and we will continue to seek them out. As we look at 2022, we are eager to complete our budgeting process and return to you with a realistic estimate for the year, which we believe will exceed 2021's performance. Thank you, and we look forward to sharing our Q4 results and our 2022 forecast in February. Take care.

This concludes today's call. Thank you for your participation. You may now disconnect.